FICCI-KPMG-Report-13-FRAMES

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190 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. —— Service fee earned by Indian agents of foreign broadcasters Typically, an Indian agent collects advertisement and subscription revenue from customers in India and remits this to foreign broadcasters after retaining a service fee. This service fee retained by Indian agent was also subject to service tax. Thus far, this led to taxation of the same service fee twice, firstly as part of the revenues collected by the Indian agent from the customers and secondly as service fee. However, it was argued that if the service fee retained by Indian agents qualified as export of service, then service tax should not have been levied. Now, under the negative list regime, the Export of Services rules have been replaced by the Place of Provision of Service Rules, 2012 (POPS). One of the conditions for a service to qualify as an export is that the place of provision of service must be outside India. The place of provision of service for an intermediary/ agent is the location of service provider. Since the broadcasting agent/ representative, in this regard, is an agent who arranges or facilitates provision of service from the foreign broadcaster to the recipient of broadcasting services, and is located in India, the place of provision of service is within India and accordingly one of the conditions to qualify as an export is not fulfilled. Hence, service tax will be leviable on the service fee received by the Indian agent / representative. Effective 1 July 2012, foreign broadcasters without a presence in India will now be liable to register in India and discharge the service tax liability on subscription revenue, advertisement revenue, etc. earned for the services provided in India; further the service tax on service fee recovered by the agent will be available as credit to such broadcasters, subject to conditions prescribed under the CENVAT Credit Rules, 2004. —— Transponder hire charges For the purpose of providing services, broadcasters hire satellite transponders. In cases where licensors (of transponders) are located in India, service tax on the hire charges recovered from the broadcasters is discharged by the service providers in India (i.e. the licensors). However, in cases where licensors are situated outside India, the liability to discharge the service tax falls on the service recipient in India on a reverse charge basis. Thus far, the service tax authorities have been seeking to levy service tax on Indian service recipients, i.e. the broadcasters, on such transponder hire charges. However, Indian broadcasters contend that such services can at best be covered under the taxable service category of “Supply of Tangible Goods services” in which case, as the transponder is located outside Indian territory, this should be exempt from service tax in India. This conflicting position resulted in protracted litigation with the service tax authorities. However, effective 1 July 2012, Import Rules have been replaced by POPS. As per POPS, service tax will be applicable on import of services only if the place of provision of service is taxable territory (i.e. whole of India other than the state of Jammu & Kashmir). The place of provision of services in case of transponder hire service will be determined based on the location of service recipient i.e. broadcasters. Since 04. ACIT v Shri Balaji Communications – 30 taxmann.com 100 ( Chennai Tribunal) Indian broadcasters are located in taxable territory, transponder hire charges paid by them will be liable to service tax in their hands. Hence, the ambiguity prevailing in the erstwhile regime has been dispelled. • Judicial decision —— Payment for acquiring satellite rights of films is ‘royalty’, liable to withholding tax The Chennai Tribunal recently dealt with the issue of withholding of tax from payments made for acquisition of satellite rights in the case of Shri Balaji Communication 4 (‘Balaji Communication’). In this case, Balaji Communication had made payment for acquiring ‘satellite broadcasting’ rights of films and programs without deducting any tax on the grounds that this was towards exhibition of cinematograph films, covered under the exclusion to the definition of the term ‘royalty’. The Tax authorities contended that tax needs to be deducted under section 194J of the IT Act as these payments were in the nature of royalty. In this regard, the Tribunal observed that as long as transfer is of any right relatable to a copyright of a film or video tape which is to be used in connection with television, the consideration paid would be royalty. Accordingly, it held that Balaji Communication was liable for withholding of tax and failure to do so would attract disallowance of expenditure under the IT Act. KPMG in India’s comments There was some doubt as to whether the exclusion in the definition of royalty for sale, distribution or exhibition of cinematograph films applies only to acquisition of rights for theatrical distribution/ exhibition of cinematographic films or also to acquisition of satellite rights of a film. The Tribunal has clarified that the exclusion does not apply to acquisition of satellite rights. Thus, in terms of this decision, payment for acquisition of satellite rights of film will be treated as royalty. —— Payment by TV broadcaster towards hiring charges for transponder does not amount to royalty The Mumbai Tribunal in the case of B4U International Holdings Ltd (‘B4U’) has held that payment made for transponder hire charges would not amount to royalty. In this case, B4U made payments to a US company towards transponder hire charges. The Tax authorities held that such payments were in the nature of royalty. The Tribunal referred to the decision of the Delhi HC in the case of Asia Satellite Communications Co. Ltd wherein the Delhi HC had held that such payments do not constitute royalty. The Tribunal also held that the retrospective amendment to the definition of royalty in the IT Act (introduced by Finance Act, 2012) had no effect, as the provisions of tax treaty between India and USA would prevail over the IT Act. The Tribunal held that under the tax treaty, the payment would not amount to royalty.
The power of a billion: Realizing the Indian dream 191 Thus, it was held that B4U was not liable to deduct tax at source from the payments made to the US company and consequently, there cannot be any disallowance of the payment under the IT Act. KPMG in India’s comments Despite retrospective amendments to the definition of royalty, the above decision has held that payment made for transponder hiring charges is not in the nature of royalty under the tax treaty. This is a welcome ruling which will help avert protracted litigation on the issue. consideration for the same. While there should be no VAT applicable on such a transaction effected without consideration, the VAT authorities of various States are seeking to levy VAT on such transactions on the ground that the installation and activation charges recovered from the customers include the price of STBs. This leads to double taxation of the same consideration (i.e. VAT and Service Tax) thereby causing significant damage to the industry. Since installation and activation charges are service revenues and service tax is being levied on these, the same should be kept outside the purview of VAT. DTH industry • Key tax issues —— Withholding tax on discount on sale of Set-topboxes (‘STBs’) / Recharge Coupon Vouchers (‘RCVs’) From an income tax perspective, an issue arises vis-à-vis applicability of withholding tax on the amount of discount given to distributors on the sale of STBs / RCVs. The Tax authorities are of the view that discount on sale of STBs / RCVs is in the nature of commission, subject to withholding tax at the rate of 10 percent under section 194H of the IT Act. However, the industry is of the view that the discount is not in the nature of commission and hence, section 194H is not attracted thereon. This view is supported by the recent decision of the Supreme Court in the case of Ahmedabad Stamp Vendors Association 5 where stamp vendors had bought stamps from State Government on discount. The tax department claimed that the vendors were ‘agents’ of the State Government and the discount was nothing but ‘commission or brokerage’, liable to withholding tax under section 194H. The Supreme Court held that tax need not be withheld on the vendor’s discount since it is not in the nature of commission or brokerage. The ratio of this decision should equally apply to discount given to distributors for sale of STBs / RCVs. It would benefit the industry if the Government releases a suitable clarification that discount on sale of STBs / RCVs is not in the nature of commission / brokerage and not subject to withholding tax, so as to avoid unnecessary litigation across the DTH sector. —— Dual levy of tax on DTH service The DTH industry is subject to variety of taxes on various transactions, such as Value Added Tax (‘VAT’) on sale of STBs, Service Tax and Entertainment Tax on subscription revenues, etc. Customers are charged STB installation charges and activation charges, on which service tax is being levied. Providing DTH services is the predominant objective of DTH operators. Therefore, to build their subscriber base, a majority of DTH players have shifted from the model of selling STBs to the customers to providing the STBs on entrustment basis, without charging any 05. CIT v Ahmedabad Stamp Vendors Association – 25 taxmann.com 201 (Supreme Court) 06. Tips cassettes & Record Co. v ACIT – 82 ITD 641 (Mumbai Tribunal) 07. Gramophone Co. of India Limited v DCIT – 48 ITD 145 (Calcutta Tribunal) —— Taxability of RCVs Taxability of RCVs for subscriptions has long been a matter of dispute, particularly around whether this qualifies as a good or a service. The industry has been adopting a position that the RCVs are in the nature of actionable claims and cannot qualify as goods. Moreover the intrinsic value of the same is insignificant and the same is used in the course of provision of services. However, the VAT authorities of various States have been seeking to levy tax (VAT as well as Entry tax) on such RCVs on their face value, treating them as goods. While there are judicial precedents which have held that RCVs do not qualify as goods, it would benefit the industry if the Government released a clarification and made suitable amendments to VAT schedules, so as to avoid litigation across India. • Recent developments —— Imports duty on STBs Pursuant to Finance Bill 2013, import of set-top-boxes have become costlier, with effect from 1 March 2013, since the Basic Customs Duty on import of the set-top boxes has been increased from 5 percent to 10 percent. An increase in duty at the critical phase of the digitization process may impact set-top-box penetration and add to the financial burden of DTH and Cable companies. Music industry • Key tax issues —— Deductibility of cost of music rights Deductibility of acquisition costs of music rights has been a controversial issue. Issues arise whether such costs are entitled to depreciation (at the rate of 25 percent on written down value basis), or are in the nature of revenue expenditure deductible in the first year or to be amortized over the period of license. The Mumbai Tribunal in the case of Tips Cassettes & Record 6 and the Calcutta Tribunal in the case of Gramophone Company of India 7 held the view that payment for acquiring music rightsare in the nature of acquiring raw material and hence deductable as revenue expenditure. Given that it is a timing issue, it would help the cause of the industry and avoid litigation if the Government can issue a circular / clarification confirming this position. © 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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57 Hiring and retaining talent The
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05 The power of a billion: Realizin
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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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