In this blog post, Tanmayee Sahoo, a BA LLB student from Bangalore Institute of Legal Studies pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the tax treatment of channel placement fees.  

In the broadcasting sector in India the TV channels are placed or distributed by the broadcasters or many a times through their authorized distribution agencies to the platform where it is distributed. As according to the regulations and guidelines issued by the Telecom Regulatory Authority of India (TRAI), every broadcaster is required to pay a certain carriage fee and placement fee to the distributor of the particular TV channel. This occurrence of carriage fee and placement fee is a recent incident in the multi system operator business. Earlier the traditional cable services used to consist of signals, carried in analog form thus restricting the capacity of the cable. As the number of channel present in the market is in excess of the capacity, the Multi system operators started charging carriage and placement fee for the channels to be carried on their networks.

Channel placement fee in India is essentially a fee paid by the broadcaster to the distributor of a TV channel. The fee is paid to a distributor of TV channels for setup and placement of the channels of the broadcaster vis-à-vis channels of other broadcasters on the distribution platform owned and operated by such distributor of TV channels. It is also a fee paid by the broadcasters towards the placement of such channels on a particular frequency or bandwidth in a manner in which it would ensure more viewership for the channel. The broadcaster in India pay channel or band placement fees to multi system operators (MSOs) or the cable operators for placing their channel on a preferred frequency or band to augment viewership of the channel. Carriage and placement fee precisely provide the broadcasters of the channel access to multi service operators network. These fees including the advertising revenue and the collection of subscription revenue from the consumer are the major financial transactions and the revenue generated by Indian Television Industry.

Owing to the revenue generated every year the Indian Broadcasting industry, the industry is at the forefront of paying a major share of Tax. The broadcasting sector is always amongst the most litigious sector in India due to its cross-border transitions and the tax controversies. The payment in this sector is made as Royalty or otherwise and the same is taxable.

Royalty as defined under the Income Tax Act is any consideration for:

1. the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
2. the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
3. the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
4. the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
5. the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]
6. the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films 

As this comes under the preview of granting of license and technical services, it falls precisely under the preview of the above section and is thus taxable under the Income Tax Act 1961.

Tax treatment of the Royalty or placement fee

The Tax authorities has contended that the placement fee paid to the broadcasters are in the nature of Royalty. The royalty paid to the broadcasters are taxable under section 194J of the Income Tax Act. The Revenue authorities have adopted a position that as the band placement fees are in the nature of royalty will fall under Section 194J. Section 194C of the Income Tax Act is the provision that deals with broadcasting and telecasting specifically. Accordingly, it is necessary to deduct withholding tax at 10%. .

The Tribunal observed that the Punjab and Haryana High Court in the case of Kurukshetra Darpans (P) Ltd. v. CIT had held that as the expression ‘work’ as used in Explanation to Section 194C included inter alia broadcasting and telecasting including production of programmes for such broadcasting and telecasting, payments for obtaining TV signals would be liable for TDS under Section 194C of the Act. The Tribunal also observed that the Delhi High Court in the decided case of CIT v. Prasar Bharati had held that as the work of broadcasting and telecasting of the programmes specifically falls under the ambit of provisions of section 194C it had to be preferred over the provisions of Section 194J of the Act.

In view of these decisions the Tribunal held that placement fee paid by the taxpayer to the cable operators should be subjected to TDS as per provisions of Section 194C of the Act. The Honorable Income Tax Tribunal in the year July 9, 2014 clarified its ruling in the landmark case of NGC Network (I)Pvt Ltd that if tax has been deducted at source on channel placement fees at 2% prior to the expansion of the definition of royalty under income Tax Act 1961. 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. The Income Tax tribunal has upheld the contentions stated by the taxpayers that it will withhold tax to 2% as contractual payment but this issue is still pending for litigation.

In cases where the distribution rights is granted by foreign broadcasters are in fact termed as ‘royalty’, the same would be taxed in case of foreign companies under section 115A (1)(b) at the rate of 30%, 20% or 10% based on date on which such agreement was entered into.

Service Tax on Band Placement Fee

In the broadcasting industry service provided by the cable operators or the Multi System Operators (MSO) to the broadcasters for placing their channels on a frequency as preferred by them falls under the category and are subject to service tax. It is not negated or exempted under any law and is taxable.

Conclusion  

The issues with broadcasting industry is resolved typically by judicial precedents and decisions, however as this sector is emerging and the laws are not yet settled. In the absence of judicial precedents, the parliament by way of law and the apex court by way of guidelines clarify the legal position in this regard. It is need of the hour that the policy makers and the government should take quick steps which will be adequate enough to clear the ambiguities in the tax framework and facilitate the growth of this industry by avoiding unnecessary litigation.