Tax treatment of channel placement fees: Is there a “Then and Now”?
The Income Tax Appellate Tribunal, Mumbai (“Tribunal”) on July 9, 2014, clarified in its ruling in M/s. NGC Networks (I) Pvt. Ltd. v. Assistant Commissioner of Income Tax, that if tax has been deducted at source (“TDS”) on channel placement fees at 2% prior to the retroactive expansion of the definition of ‘royalty’ under the Income Tax Act, 1961 (“ITA”), it should not result in a disallowance of the expenditure on the ground that TDS ought to have been deducted at a higher TDS of 10% (applicable for royalties). However, the Tribunal has not clearly dealt with the question as to whether channel placement fees would be characterized as royalty post the retroactive amendments to the definition of ‘royalty’ and the issue still remains open.
In the instant case, the assessee company, NGC Networks (I) Pvt. Ltd. (“NGC”) paid certain channel placement fees to distributors of TV channels (in this case, cable operators) on which it withheld tax at 2% in the Assessment Year 2009-10.
As per the interconnect regulations (including amendments) issued by the Telecom Regulatory Authority of India (“TRAI”), broadcasters are required to pay “carriage fees” as well as “placement fees” to distributors of TV channels. “Placement fees” have been defined by TRAI to mean “any fee paid by a broadcaster to a distributor of TV channels, for the placement of the channels of such broadcaster vis-à-vis channels of other broadcasters, on the distribution platform owned or operated by such distributor of TV channels”. It is, essentially, a fee paid by the broadcasters towards the placement of such channels on a particular frequency or bandwidth in a manner that would ensure more viewership for such channels. Carriage fees, on the other hand, are paid for the carriage of channels or bouquets of channels of a broadcaster on the distribution platform owned or operated by the distributor of TV channels, without specifying the placement of various channels vis-à-vis the channels of other broadcasters.
However, the Revenue, in this case, claimed that since placement of a particular channel on a particular frequency is an integral part of the transmission and broadcasting process, the fees paid by NGC was in the nature of royalty post the retroactive amendment introduced by the Finance Act, 2012, which had expanded the definition of royalty. Therefore, these payments were to be retrospectively characterized as royalty payments. Tax for royalty payments is deducted at source at 10% under Section 194J of the ITA. NGC, on the other hand, had deducted tax at 2%, which is applicable on payments made to residents for carrying out any “work”1. The Revenue, thus, contended that there was a shortfall of TDS due to which the expenditure claimed towards the payment of placement fees was to be disallowed under Section 40(a)(ia) of the ITA.
This matter was then referred by NGC to the Dispute Resolution Panel (“DRP”), an alternative dispute resolution mechanism set up to provide speedy disposal to foreign companies and in transfer pricing cases. The DRP concluded that channel placement fees do not fall within the ambit of the definition of “royalty” since they are not tantamount to the payment of fees for transmission purposes. On this ground, the DRP held that disallowance under Section 40(a)(ia) on account of short deduction of tax was unwarranted. The Revenue then appealed before the Tribunal.
Decision of the Tribunal
The Tribunal agreed with the DRP on the statement that channel placement fees paid to the cable TV operator / DTH service provider cannot be regarded as royalty since according to Tribunal too “it does not fall within the definition of ‘royalty’ under Explanation 2 to Section 9(1)(vi) of the ITA”. However, instead of using the same line of reasoning as the DRP, it went on to state that though there had been a retrospective amendment in the provision and the newly inserted Explanation 6 expanded the scope of ‘process’ to include transmission by cables, uplinking and downlinking of signals, etc., an assessee could not be held to be liable to deduct tax at source relying on the subsequent amendments made in the ITA with retrospective effect. Therefore, it relied on the principle that the law cannot compel a person to do something which is impossible to perform, which has previously been applied under similar circumstances (but in different contexts) in M/s. Channel Guide India Limited v. ACIT2; CIT v. SK Tekriwal3 and SKOL Breweries Ltd. v. ACIT4; and held that Section 40(a)(ia) of the ITA refers only to the statutory duty to deduct tax and that shortfall due to a retrospective amendment should not result in a disallowance of the expenditure under the provision.
The ruling is a welcome clarification to the extent that it emphasizes that a retrospective amendment cannot result in a disallowance of expenditure under Section 40(a)(ia) of the ITA as this would penalize the deductor for a tax liability that was not contemplated at the time of deduction.
Having said that, the treatment of placement fees subsequent to the amendment of the definition of ‘royalty’ under Section 9(1)(vi) of the ITA has not been brought out clearly in the ruling, even as it acknowledges NGC’s contention that the DRP had considered the amendment to the definition of ‘royalty’ before holding that placement fees should not be considered to be ‘royalty’ and ultimately dismissed the Revenue’s appeal. The language used by the Tribunal in the ruling appears to accept that channel placement fees are not contemplated by Explanation 2 to Section 9(1)(vi) of the ITA, but distinguishes the facts of the instant case in the post amendment scenario on the ground that the retrospectivity of the amendment should not take away from the bona fides of the deductor for the purposes of Section 40(a)(ia). While this clarification is pertinent, it is also important to understand that since placement fees are paid as a premium for placement of the channels on a particular frequency/bandwidth to ensure maximum viewership, and are not, in any manner, connected to the process of transmission by cables, the fees should not, in the first place, be considered to be royalty even post the amendment to the definition of ‘royalty’ under Section 9(1)(vi) of the ITA.
With the onset of digitization, the TRAI, through amended interconnect regulations issued in 2012, brought about restrictions on the cable operators from charging placement fees from broadcasters. This was, however, challenged before the Telecom Disputes Settlement and Appellate Tribunal which eventually set aside this restriction, essentially implying that broadcasters need to continue paying placement fees to cable operators/DTH service providers. In view of the digitized regime, while the payment of carriage fees is likely to continue to be mandated under the regulations, it remains to be seen if, in future, the obligation of placement fees continues. Further, while the retrospective expansion of the definition of ‘royalty’, which taxes payment for transmission through cables, has been challenged on the ground that it is not in line with internationally accepted principles of taxation, there have no steps taken towards the repeal of the relevant provisions. Until clarifications are issued by the relevant government authorities on either front, keeping in mind the changing the industry requirements and prevalent business models, characterization of such fees under the ITA remains ambiguous.
1 The definition of ‘work’ as envisaged in this provision is inclusive in nature and has been considered to be wide enough to include any service rendered to another person in a variety of contexts, including advertising contracts, telecasting contracts, labour contracts, works contracts, etc.
2 (2013) Tax Corp (INTL) 6702 (ITAT-Mum)
3 (2013) 260 CTR (Cal) 73.
4 (2013) 29 taxmann.com 111 (Mumbai-Trib.)