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Income from distribution rights is not royalty: ITAT

Income from distribution rights is not royalty: ITAT

Mumbai: In what could provide clarity for several companies, the Delhi bench of Income Tax Appellate Tribunal (ITAT) has ruled that income generated from distribution rights cannot be treated as royalty.

As per the details of the case a US based company had provided exclusive distribution rights to an Indian company. The Indian company could generate revenues on the back of these elusive rights towards advertising.

The rights specifically included satellite delivered television services; and other television, interactive and / or telecommunications service for which the taxpayer holds or acquires advertising and distribution rights for the relevant territory in the future, a Deloitte tax research note said.

The tax department said that the US company had provided license to the Indian company for distribution of the channel in India. This is nothing but transfer of rights or granting of license similar to copyrights, and should be subjected to royalty. The taxpayer declared 10% of the advertisement and subscription revenue received from Indian sources as net profit chargeable to tax in India.

The dispute reached the ITAT following this. The ITAT ruled that as per the agreement between the taxpayer and the I Co, the taxpayer had the sole right to determine the content of the products and also the right to change such content from time to time and all the copyrights and other priority rights in the products and in any promotional material vested in the taxpayer alone. The copyright in the product always remained with the taxpayer and was never transferred. The ability to initiate legal action against the infringer of the copyright by I Co was merely a commercial term incorporated in the agreement to safeguard the interest of the taxpayer situated in the USA.

“Taxability of distribution income as royalty has been a subject matter of litigation. This ruling reaffirms the principle that payment received on grant of distribution rights is not taxable as royalty under the provisions of the India-USA tax treaty,” the Deloitte tax research note added.

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