The Delhi High Court has ruled in favour of ESPN Mauritius and upheld the order of the Delhi Income Tax Appellate Tribunal (ITAT), which had earlier ruled that ESPN Mauritius does not have a permanent establishment (PE) in India through ESPN Star Sports and ESPN Software India, both of whom are designated as distributors for ESPN Mauritius under separate agreements.

Assessees ESPN Star Sports Mauritius S.N.C ET Compagnie and ESS Distribution (Mauritius) S.N.C. ET. Compagnie entered into agreements with ESPN Star Sports (the distributor) and ESPN Software India (the distributor) for the distribution of Star Sports and ESPN channels in India.

The tax authorities had held that the assessees had a fixed place PE in India or a dependent agent PE by virtue of the distribution agreements with the Indian entities. The subscription and distribution revenue was considered taxable as royalties. The Delhi ITAT, however, reversed the findings on royalty and PE.

PE means a fixed place of business through which the business of the enterprise is wholly or partly carried on. It includes a place of management, a branch, office, factory, or workshop.

The ITAT had found that the Indian entities stood conferred with an independent right to enter into contracts with cable operators for channel distribution and that ESS Distribution (Mauritius) was not privy to those agreements. The Indian entities bore associated distribution costs and expenses in terms of those agreements.

The Delhi High Court observed that the contract stipulations pointed towards a manifest absence of a right having been conferred or an authority granted to conclude contracts in the name of ESS Distribution (Mauritius).

“The agreements unequivocally establish that ESS Distribution (Mauritius) is in no manner connected with the contracts executed by the Indian entities with cable operators and other intermediaries. Even the right to initiate legal action by the latter is available to be exercised only against the Indian entities,” the HC stated in its 27-page order on Friday.

It added that since there was no PE, the issue of profit attribution would not arise.

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The distribution revenues paid by the Indian entities to ESPN Mauritius were held not to be in the nature of royalty under the India-Mauritius tax treaty by the ITAT. The High Court has upheld this view, stating that there was no transfer of copyright from ESS Distribution (Mauritius) to the Indian entities.

“As is evident from a reading of the agreement conditions, there was no transfer of copyright. The agreement that ESS Distribution (Mauritius) came to execute conferred no right with respect to copyright upon the Indian entities,” the order said.

The High Court relied upon the Supreme Court decision in Engineering Analysis Centre of Excellence Private versus Commissioner of Income Tax and Another, which recognised the distinction between broadcasting rights and copyright.

“The High Court’s ruling doesn’t come as a surprise after the detailed order by the tribunal. However, the ruling does serve as a reminder for the tax department to rethink its strategy when it comes to tax assessments and scrutiny. In the present case, the tax department was not able to adduce any evidence to support its arguments,” said Ashish Sodhani, Partner, Parakram Legal.

The tax department is likely to appeal the order of the High Court before the Supreme Court.