STAR Hong Kong has agreed to pay almost Rs 1,000 crore (Rs 10 billion) to the Income-Tax department as part of its dues since assessment year 2000-01.
Pending a final decision of the Bombay high court in the long-drawn case, STAR will, by the next financial year, pay the entire sum, of which Rs 300 crore (Rs 3 billion) will be paid by March 31, 2006.
The company has already paid Rs 163 crore (Rs 1.63 billion). In case the I-T department loses the cases, either STAR will get a refund or the department has to move the Supreme Court.
The broadcasting major had filed an appeal in the HC, challenging the tax claim and seeking a stay on the order. No stay has, however, been granted yet. The hearing is scheduled for March 21.
STAR's move comes as a relief to the department just when it is struggling for tax collection from the oil and banking sector that used to be the cash cows in earlier years.
But the development holds huge tax implications for those television companies, which are broadcasting in India but are based in countries with which India does not have a double taxation treaty.
If the final court decision is in favour of the department, companies set up in non-DTA countries but operating in India through subsidiaries, will be required to pay taxes on revenues collected from India.
In this case, STAR India Pvt will collect advertising revenues from India and pay it to parent STAR Hong Kong after deducting its commission. The parent will then pay to channel companies, three of which are based in the British colonies Virgin islands, a tax haven.
India does not have DTA with British Virgin Islands.
The I-T department is of the view that STAR India is collecting advertising revenues and getting paid for time slots in India. There is a business connection between the two entities, the parent and STAR India, under Section 5 and 9 of the I-T Act.
Thus, the income-tax tribunal had in 2005 ruled that STAR Hong Kong ought to have deducted tax deductible at source payments before paying its channel companies - Star Plus, Channel V and Star News.
However, STAR Hong Kong had appealed stating that the provisions of TDS are not applicable to a company where payments are made by one non-resident to another outside India.
In this case, two non-residents are situated in Hong Kong and Virgin islands.
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