FICCI-KPMG-Report-13-FRAMES

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188 The power of a billion: Realizing the Indian dream © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. —— Tax withholding on acquisition of copyright Under the IT Act, payments to Indian residents towards acquisition of copyright in content (for example, satellite rights, home video rights, music rights, etc.) attracts a 10 percent withholding tax (under section 194J) This withholding rate is excessive considering the profit margins prevelant in the industry and has an adverse impact on taxpayers’ cash flows. It would be worthwhile for the Government to consider a lower withholding tax on such payments. • Recent developments —— Service tax on services of actors and technicians Actors and certain technicians who were not liable to service tax thus far, now fall within the purview of service tax and are liable to service tax effective 1 July 2012 upon introduction of the negative list regime of service tax. —— Temporary transfer, permitting the use or enjoyment of copyright in cinematographic films Licensing of copyright in cinematographic films formed part of the Mega Exemption Notification under the negative list regime and was exempt from service tax. Finance Bill 2013, with effect from 1 April 2013, proposes to restrict service tax exemption to copyright in cinematographic film only for films exhibited in cinema hall/ theaters. Therefore, if enacted, licensing of copyright in cinematographic films (other than exhibition in cinema hall / theatres) will be subject to service tax, effective 1 April 2013. Accordingly, CENVAT credit on inputs / input services, not attributable to theatrical revenue, will be available for set-off against output service tax liability. However, there will still be CENVAT credit loss to the extent the same is attributable to revenue earned from exhibition of cinematographic film in cinema hall / theatres. —— Levy of service tax on distributors / sub distributors / exhibitors of movies Producers, distributors, sub distributors and exhibitors of movies enter into different kinds of arrangements for exhibition of movies. These arrangements are either entered into on a principal-to-principal basis (where the movies are exhibited by the exhibitor on his own account) or on behalf of the distributor / sub distributor / producer or on a revenue sharing basis. The Service Tax authorities issued a Circular in December 2011 which clarified that the levy of service tax would not depend upon the nature of such arrangements but upon the nature of the transaction involved. Thus, service tax was applicable on the exhibition of movies by the exhibitor, regardless of whether the arrangement with the distributors was on a principal-to-principal basis or on behalf of the distributor / sub distributor / producer or on a revenue sharing basis. This had the impact of taxing the activity of movie exhibition and the tax was ultimately passed on to viewers by way of increase in ticket prices. Further, effective 1 July 2012, licensing of copyright in cinematographic films was made exempt from service tax. Accordingly, revenue earned from exploitation of copyrights in cinematographic films was exempt from service tax. 01. Yash Raj Films Pvt Ltd v ITO – 28 taxmann.com 247 (Mumbai Tribunal) However, Finance Bill 2013, with effect from 1 April 2013, proposes to restrict the service tax exemption only to licensing of copyright in cinematographic films for exhibition in cinema hall /theaters. The above mentioned Circular categorically mentions that the arrangements mentioned in the Circular will apply to similar situations across all the taxable services. Hence, the applicability of said Circular will have to be evaluated in all types of revenue sharing arrangements other than the ones pertaining to licensing of copyright in films for exhibition in cinema hall /theatres. • Judicial decision —— Services provided by overseas entities in connection with making logistic arrangements for the shooting of different films of taxpayers outside India were held to be commercial services and not Fees for Technical Services (FTS) Recently, the Mumbai Tribunal in the case of Yash Raj Films Pvt Ltd 1 (‘Yash Raj Films’) held that the services provided by an overseas entity in connection with making logistic arrangement for shooting of different films of the taxpayer outside India were in the nature of commercial services and not FTS. The production unit of Yash Raj Films used to shoot films abroad and avail services required in connection with shoots from various overseas providers. Services mainly included arranging for extras, arranging for the security, arranging for locations, accommodation of cast and crew, obtaining necessary permissions from local authorities as well as arranging for makeup of the stars, insurance cover, etc. The Tax authorities contended that payments made by Yash Raj Films to the overseas service providers were in the nature of FTS and Yash Raj Films was required to deduct tax at source from the said payments. The Tribunal held that the nature of services rendered by overseas service providers to Yash Raj Films such as, (i) arranging for shooting locations (ii) obtaining necessary permits for the assessee (iii) arranging shipping & custom clearances (iv) arranging for ‘extras’, shooting equipment, meals, transport etc. (v) rendering help in obtaining visas (vi) arranging for makeup of casts(vii) coordinating for necessary licenses, cannot be treated as technical services under section 9(1)(vii) of the IT Act. Such services are in the nature of commercial services and amount to business profit for the service providers, not chargeable to tax in India in the absence of any Permanent Establishment (‘PE’) in India of the service providers in India. KPMG in India’s comments This is a welcome judgment for taxpayers availing of logistic arrangement services in overseas jurisdictions, as such services will not attract withholding tax in India. Withholding tax in India on such services would have resulted in additional costs to taxpayers in case of net of tax contracts, more so where overseas service provider does not have Indian Permanent Account Numbers (PAN). Local logistic service providers should also be exempt from withholding tax under section 194J of the IT Act.
The power of a billion: Realizing the Indian dream 189 Broadcasting industry • Key tax issues —— TDS on various payments by TV channel companies TV channel companies make significant payments to software production houses towards production of TV programs. They also pay placement / carriage fees to DTH operators, multi system operators and various cable operators towards placement / carriage of the channels. The channel companies are of the view that such payments attract TDS under section 194C of the IT Act at the rate of 2 percent. However, the Tax authorities contend that such payments are liable for TDS at 10 percent on the ground that the payments are towards technical services / royalty. This has resulted in protracted litigation. A suitable clarification by the Government to the effect that tax needs to be deducted on the above payments at the rate of 2 percent and not at the rate of 10 percent is much needed to put the above controversy to rest. —— Taxation of Foreign Telecasting Company (‘FTC’) The two primary sources of revenue for FTCs are income from sale of advertising airtime on the TV channel and subscription revenues. Taxation of advertisement revenues Under the IT Act, advertisement revenues of FTCs are taxable in India in case FTCs have ‘business connection’ in India. In case an FTC operates from a country with which India has a tax treaty, the advertisement revenues would be taxable in India only if the FTC has a permanent establishment in India. The taxability in such cases is only on the income which is attributable to the PE / operations carried out in India. The circumstances in which the FTCs constitute a PE / business connection in India and the determination of income attributable to such PE / operations carried out in India, continues to be a contentious issue between the FTCs and the Tax authorities. FTCs generally appoint agents in India for marketing advertisement airtime slots. Agents also facilitate collection of advertisement revenues from advertisers and its remittance abroad. The Tax authorities contend that the agent of the FTC, who concludes contracts on behalf of FTC or secures orders wholly or almost wholly for FTC in India, constitutes its PE in India. The Bombay High Court (HC) in the case of SET Satellite (Singapore) Pte. Ltd 2 . has held that where an FTC has an Agency PE in India (i.e. PE on account of its agent), a payment of arms length remuneration by the FTC to its Indian agent extinguishes its tax liability in India. A similar view has been taken by the Delhi HC in the case of BBC Worldwide Ltd. with the matter now pending before the Supreme Court. Taxation of Subscription revenues Subscription revenues are generally collected by the Indian distributors and subsequently paid to the FTCs. 02. Set Satellite (Singapore) Pte. Ltd v DDIT(IT) – 173 Taxman 475 (Bombay HC) 03. Asia Satellite Telecommunications Co. Ltd – 197 Taxman 263 (Delhi HC) FTCs are of the view that the payment for grant of distribution rights is not for any copyright and hence, is not in the nature of royalty (taxable on gross basis at a specified rate). FTCs have been taking a view that the payment is in the nature of business income and is not taxable in India in the absence of a PE in India. However, the Tax authorities hold a divergent view and contend that the subscription revenues are liable to tax as royalties. The issue is pending adjudication at appellate levels. —— Taxation of Transponder charges Broadcasting companies make payments for transponder charges. The Tax authorities contend that payments made towards transponder charges are in the nature of royalty. However, in the case of Asia Satellite Telecommunications Co Ltd 3 (Asia Sat), the Delhi HC has held that such payments do not constitute royalty and are not liable to tax in India. With a view to override the above decision, the definition of royalty under the IT Act has been amended vide the Finance Act 2012 to bring within its ambit payments made for transmission of signals by satellite. However, non-resident taxpayers can continue to take the benefit of tax treaties entered into with India to contend that such payment is not in the nature of royalty under the treaty and hence not liable to tax in India. • Recent developments —— Service tax on services of actors and technicians As is the case in the film industry, actors and technicians who were not liable to service tax in the Broadcasting industry thus far, will now fall within the service tax net and are liable to service tax effective 1 July 2012. —— Taxability of broadcasting charges earned by foreign broadcasters Hitherto, service tax payable on selling of airtime slots, subscription revenue, etc earned by foreign broadcasters was discharged by agents of these broadcasters in India. The agents were defined as deemed broadcasters and were accordingly made liable to service tax. Thus, any charges that were collected by Indian agents or representatives with respect to broadcasting by the foreign broadcasters were liable to service tax in the hands of the Indian agents or representatives under the taxable service category of ‘broadcasting services’. However, under the negative list regime, effective 1 July 2012, the service categories are done away with and accordingly, the definition of taxable service pertaining to broadcasting services and definition of broadcasting agency or organization no longer form part of the service tax law. In view of this, instead of the Indian agent or representative, the foreign broadcasters (for the broadcasting services provided in India), will now be liable to obtain service tax registration in India and discharge the service tax liability on these activities. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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42 Print Regional to the rescue 58
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01 The power of a billion: Realizin
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02 Introduction The power of a bill
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Music The success of the iTunes mod
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06 Round up of the year that was Th
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Page 201 and 202: Acknowledgement We acknowledge the
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