India: Relationship Between Foreign Broadcaster And Indian Distributors Is Of ‘Principal-Agent': Tribunal Limits Applicability Of Supreme Court's Judgment In Morgan Stanley

Last Updated: 13 January 2016
Article by Shashwat Sharma, Ashish Sodhani and Rajesh Simhan
  • Tribunal holds that "advertisement airtime" cannot be classified as "goods" as its use cannot be separated from the owner of the television channel on which it is broadcasted.
  • Indian distributor of "advertisement airtime" cannot be an independent agent as the telecast of the "advertisement airtime" is contingent on the assent of the owner of the television channel concerned.
  • The applicability of the Supreme Court's judgment in the case of Morgan Stanley limited to only those cases where a foreign company makes payments to its associated enterprise in India.


Recently, the Mumbai Bench of the Income Tax Appellate Tribunal ("ITAT") in the case of NGC Network Asia LLC v. Joint Director of Income Tax1 held that "advertisement airtime" of a television channel cannot be considered to fall under the category of "goods" as it is not capable of being independently used in the absence of consent from the owner of the television channel. The ITAT distinguished this case from the Supreme Court judgment in DIT (International Taxation), Mumbai v. Morgan Stanley & Co. Inc.2 on facts and held that the rule propounded in this landmark judgment only applied to cases where a foreign company was making payments to its associated enterprise in India and not vice versa.


NGC Network Asia LLC ("NGC Asia"/"Taxpayer"), is a company based in Delaware, US and is engaged in the business of broadcasting its two television channels in various countries, including India. The Taxpayer has a wholly owned subsidiary in Mauritius, NGC Network (Mauritius) Holding Limited, which holds 99% of the shares of NGC Network India Private Limited ("NGC India").

NGC India has been appointed as the distributor of the television channels owned by the Taxpayer and to procure advertisements for telecasting on these television channels. As consideration, NGC India has been paying the Taxpayer (i) fees for distribution rights; and (ii) revenue from advertising. The Transfer Pricing Officer ("TPO") had found this transaction to be at arms' length.

For the Assessment Year in question, the Assessing Officer ("AO") considered NGC India as a dependent agent Permanent Establishment ("PE") of the Taxpayer and attributed a portion of the revenue from advertising to India. Further, the AO held that the fees for distribution rights were in the nature of "royalty" and hence, taxable in India as per Article 12 of the India US Double Taxation Avoidance Agreement ("Treaty"). The Dispute Resolution Panel ("DRP") confirmed the draft order passed by the AO. Aggrieved by the order, the Taxpayer preferred an appeal to the ITAT.


Whether the revenue earned by the Taxpayer was subject to income tax in India as per the provisions of the Income Tax Act, 1961 ("ITA") read with the Treaty?


"Advertisement air time" is not goods: The Taxpayer drew attention to the judgments of the Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh3 and CST v. Madhya Pradesh Electricity Board,4 wherein it was held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc., should be classified as "goods" and argued that "advertisement air time" is one such property. The ITAT, however agreed with the contention of the AO that "advertisement air time" cannot be considered to be "goods". It held so on the basis that while "goods" can be used/consumed by anyone independent of, or without any support from, the manufacturer, it was not the case with "advertisement air time". "Advertisement airtime" distributed by NGC India had no value with regard to other television channels and thus, was not capable of universal use. The Taxpayer's concurrence to telecast advertisements and actual telecasting alone brings value to the "advertising airtime" and hence, it cannot be separated from the Taxpayer.

Nature of relationship between the Taxpayer and NGC India: The Taxpayer submitted that the agreement between the Taxpayer and NGC India explicitly stipulated that it was on a principal-to-principal basis. Further, as per the agreement, NGC India had been given full right to use its own sales personnel to sell the airtime, solely decide the price for the airtime and enter into contracts with customers at its own risk. On this basis, the Taxpayer submitted that NGC India did not act on behalf of the Taxpayer but rather in its own right and hence, the basic ingredient of an agency contract was not fulfilled in the present case. The Taxpayer also contended that NGC India was getting a fixed fee for distributing the "advertisement airtime" and not a commission and this should be a determining factor in deciding the nature of relationship between NGC India and the Taxpayer.

The ITAT, however, held that the relationship between the Taxpayer and NGC India is not one of principal-to-principal but of principal-agent. In coming to this conclusion, it relied on the case of the Delhi High Court in CIT v. Idea Cellular Limited,5 wherein it was held that in a principal-to-principal relationship the ownership passes to the distributor from the manufacturer and the manufacturer has no further role. The ITAT had already established that "advertising airtime" is not in the nature of "goods" and hence, the concept of purchase and sale of goods could not be applied to the facts of the present case. The involvement of the manufacturer, i.e., the Taxpayer was essential even after the distribution of the "advertisement airtime" by NGC India in order to give value to the airtime and there was thus, a continuing dependence on the manufacturer/Taxpayer. As a result, despite the agreement between the two parties explicitly stating that the relationship was one of principal-to-principal, NGC India can only be considered to be an agent enabling the Taxpayer to procure advertisements for telecasting, and not as an independent seller of "advertisement airtime". The methodology of payment to NGC India was not accepted as the determining factor in this regard.

The Taxpayer has a PE in India: Once the ITAT had concluded that NGC India is a dependent agent of the Taxpayer by rejecting the contention that NGC India had been acting in its independent capacity, it proceeded to examine whether NGC India constituted a PE of the Taxpayer in India. The ITAT examined various clauses of the agreement between the Taxpayer and NGC India to conclude that NGC India had been given authority to conclude contracts on behalf of the Taxpayer and thus, being resident in India, it should be considered a Dependent Agent PE of the Taxpayer as per Article 5(4)(a)6 of the Treaty.

On the question of attribution of profits, the Taxpayer relied upon a catena of cases7 including the judgment of the Supreme Court of India in Morgan Stanley8 to argue that that since the TPO had found the transaction between the Taxpayer and NGC India at arm's length there was no need for further attribution of profits to any PE of the Taxpayer. However, the ITAT distinguished these judgments on the basis of facts and held that the judgment in the case of Morgan Stanley9 only applied to cases where a foreign company was making payment to its associated enterprise/PE in India. In the instant case, payments were being made by an Indian company to its associated enterprise abroad and hence, further attribution was necessary.

Fresh examination of treatment of fee received by Taxpayer as "royalty": The Taxpayer submitted that "broadcast distribution right" did not fall under the definition of "copyright" as provided under the Copyright Act, 1957 and relied upon a plethora of cases10 to distinguish that "broadcast distribution right" was separate from "copyright". It contended that payment received from NGC India was not towards copyright and hence, not in the nature of "royalty". It was argued by the Taxpayer that NGC India had no rights in the underlying copyright of the Taxpayer but just a right to use the copyrighted article (i.e., the channel) and therefore, the consideration paid by NGC India for this right should not be considered as "royalty". The AO, however, argued that payments made by NGC India in consideration for this right is in the nature of "royalty" as the Taxpayer is the owner of the copyright and NGC India is paying consideration for use of this copyright.11 Such license fee payment is covered under "royalty" as per Article 12 of the Treaty. It was further submitted that the US considered broadcast reproduction rights as "copyright".

The ITAT observed that the word "process" had been used in the Treaty as well as the ITA and the Finance Act, 2012 has inserted Explanation 6 to Section 9(1)(vi) of the ITA, which provides that "process" includes the transmission by satellites. Since the case law cited by the Taxpayer were decided prior to this insertion, the question of applicability of Explanation 6 had not been examined in these judgments. Accordingly, the ITAT did not rule on the above submissions and directed the AO to re-examine this issue in light of the amendment.


This judgment may lead to adverse tax consequences for television channel owners as the engagement of a distribution agent with respect to the same may lead to the characterization of the agent as a PE of the channel owner. Even a careful wording of the agreement between the foreign broadcaster and the Indian distributor may not be enough to mitigate the PE risk. Further, the relationship between the foreign broadcaster and the Indian distributor will always be considered one of 'principal-agent' which may lead to parties becoming devoid of other benefits which would have been otherwise available.

This ruling has clearly limited the application of the landmark judgment in Morgan Stanley12 to exclude those cases where the payment is being made by an Indian company to an associated enterprise abroad. In such cases, if the foreign company has a PE in India, attribution of profits may be made to the PE despite the transaction being at arms' length.

On a separate note, it should be noted that the broadcasting sector is a rapidly evolving one and since most of the issues in this sector have emerged only recently in the past few years, the law has not yet been settled by higher courts. In the absence of judicial precedent, the parliament, by way of a law and the Central Board of Direct Taxes, by way of notification under section 295 of the ITA, have the power to clarify the legal position in this regard. Pending the resolution of such issues, there is bound to be significant litigation around disputes with the tax authorities.


1 ITA No. 7994/Mum/2011. Order dated December 19, 2015.

2 292 ITR 416.

3 271 ITR 401.

4 (1969) 1 SCC 200.

5 325 ITR 148.

6 Article 5(4)(a) of the Treaty is stated as follows:

"Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if :

(a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;"

7 DIT (International Taxation- II v. B4U International Holdings Ltd. (2015) (57 146); SET Satellite (Singapore) Pte Ltd. v. DDIT 307 ITR 205 (Bom).

8 Supra note 2.

9 Ibid.

10 ESPN Star Sports v. Global Broadcast News Limited & Ors. (RFA(OS)No. 25/2008)(Del); Star India Pvt Ltd v. Piyush Agarwal & Ors. (CS(OS) Nos.2722/2012, 3232/2012 and 2780/2012)(Del); DDIT v. SET India Private Limited (ITA No.4372/Mum/2004); SET Satellite (Singapore) Pte Ltd (2008)(307 ITR 205)

11 CIT v. Ahmedabad Manufacturing & Calico Printed Co. (139 ITR 806); ABC, In Re (1999) 238 ITR 296 (AAR).

12 Supra note 2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Shashwat Sharma
Ashish Sodhani
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.