Income Tax dept planning to challenge ITAT ruling on ZEE-Sony merger

The Income Tax (I-T) department will likely appeal a tribunal decision barring capital gains tax in India on the sale of Ten Sports to Sony Pictures Network India by a Mauritius-based company connected to Zee Entertainment Enterprises (ZEE), The Economic Times reported.

The sale’s capital gains, which date back seven years, amount to about Rs 1,800 crore, it added.

In March, the Income Tax Appellate Tribunal (ITAT) granted a plea filed by ZEE’s step-down subsidiary, concluding that it lacks a permanent establishment and thus is not entitled to the treaty benefit provided by the Double Taxation Avoidance Agreement (DTAA).

It also stated that gains derived from the alienation of property would be taxed only in the alienator’s state of residence, in this case Mauritius.

Gains of about Rs 1,790 crore “on the sale of the sports broadcasting undertaken by the assessee is not chargeable to tax in India,” the ITAT had ruled.

A permanent establishment under I-T parlance means a presence in the form of a fixed place or service based outside the company’s home state.

Section 260 A of the Income Tax Act allows the department to file an appeal with a high court in the territory of the assessing officer.

In October 2016, the deputy commissioner of income tax, international tax circle, Mumbai issued a certificate authorising Taj TV, a step-down subsidiary, to pay Rs 2,267 crore to Aqua Holding Investment, a Mauritius-based company affiliated with Sony. This came after the company disclosed that it had sold its global sports broadcasting business to Aqua Holding in a slump sale during FY17.

A contract was signed on August 31, 2016 between Sony Pictures Network India as the buyer and ZEE as the seller.

Since the 2017 play-out agreement was entered more than eight months after Sony had acquired the sports broadcasting company, the I-T department has argued that ZEE is not a service provider to Taj TV.

Taj TV had argued that ZEE provided play-out services, while Taj TV India provided specific services for distribution and advertising. These are merely service providers, and each one of them is compensated in accordance with the agreements, it said.

The ITAT had claimed that the I-T’s contribution to play-out facilities was an afterthought.

“It is to be noted that ZEE is carrying out play-out facilities …for many other broadcasters. It is not for this year but for the past several years, ZEE is providing the service of play-out stations,” the tribunal bench had ruled.

The tribunal held that the tax department had also failed to demonstrate that the Indian entity had routinely used its authority to conclude contracts, which is a prerequisite for establishing a permanent establishment.