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Regulatory developments in M&E space

As OTT platforms and other digital media companies gain traction, the players will need to be prepared to pay taxes even where they do not have PE.

The Indian media and entertainment (M&E) industry is at an inflection point as the industry progresses toward achieving the Make in India dream. India is witnessing a significant change in content generation with the emergence of varied platforms, distribution mechanisms, and marketing strategies playing a vital role in redefining the reach of the Indian content globally.

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Recent major developments
In M&E sector. Foreign direct investment (FDI) restricted to 26 percent in digital media.

The Ministry of Information and Broadcasting (MIB) seeks suggestions on Cable TV Networks (Regulation) Amendment Bill, 2020.

In television broadcasting and distribution. TRAI amends the New Tariff Order on January 1, 2020. TRAI issued a consultation paper on platform services offered by DTH operators. TRAI released the Telecommunication (Broadcasting and Cable) Services Register of Interconnection Agreements and All Such Other Matters Regulations, 2019. TRAI issued a consultation paper on entry level net-worth requirement of MSOs in cable TV services.

In digital media. OTT platforms signed the Internet and Mobile Association of India (IAMAI) Code for Self-Regulation.
Other important regulatory. MIB constituted three-member committee for implementation of Supreme Court guidelines on content regulation of government advertising. The Delhi High Court passed an order on global take-down orders. TRAI issued a consultation paper on cloud services.

Dawn of the New Tariff Order 2.0
The regulatory regime for TV broadcasting had different tariff orders and regulations for the analog and addressable systems. This created multiple avenues for stakeholders to arbitrage. It also made the sector highly prone to disputes. To remove multiplicity of regulations, and to create an enabling environment for orderly growth of the TV broadcasting sector in light of digitization and various developments related to technology in the sector, TRAI had initiated the process of revamping the regulatory framework in 2016. Accordingly, the NTO was notified in 2017. It sought to give consumers more choice and make the value chain transparent.

Cyril Shroff
Managing Partner, Cyril Amarchand Mangaldas
“The M&E sector has been witnessing high growth over the last decade, and the past year was no exception. On the legal and regulatory front, there were significant developments. To name a few, in January 2020, the TRAI made substantial amendments to the New Tariff Order, leading to a complete overhaul of the regulatory framework, roughly 10 months after the 2017 regime came into effect. In the absence of clarity on FDI in digital media, many online publishing houses and news streaming companies have witnessed 100 percent FDI under the automatic route. However, with the release of Press Note No. 4 on September 18, 2019, the government has restricted FDI in digital media at 26 percent. Some OTT platforms have also signed the Code on Self-Regulation, drafted by IAMAI, in a bid to establish standards to self-regulate OTT content.”

Understanding the New Tariff Order
(Post-January 1, 2020)

The amendments to the NTO were brought about after TRAI issued the two consultation papers on tariff-related issues for broadcasting and cable services, and Issues related to Interconnection Regulation, 2017 in 2019. Some of the major issues identified were the cap on maximum discount permissible to broadcasters while forming a bouquet, number of channels permitted in NCF applicable NCF for multi-TV homes, flexibility to DPOs in offering long-term subscription plans, and carriage fee payable by broadcasters to DPOs.

The amendments enacted by TRAI were: It re-introduced the twin-condition to address the issue of huge discounts in the formation of bouquets by broadcasters vis-à-vis sum of a-la-carte; the MRP per month of a pay-channel cannot exceed the maximum retail price per month of the bouquet containing that pay channel; only those channels priced at `12 or less will be permitted to be part of the bouquet offered by broadcasters; number of free channels under NCF of `130 (plus taxes) has been increased to 200; channels declared mandatory by MIB will not be included while calculating the 200 channels; DPOs cannot charge more than `160 per month; in case of a multi-TV home, a maximum fee of 40 percent of the declared NCF will be charged for the additional connections; DPOs may offer discounts on connections for 6 months or more; TRAI has mandated MSOs, HITS operators, and IPTV service providers will not have target market bigger than states or union territory; TRAI has also proposed a cap of Rs 4 lakh per month on carriage fee payable by a broadcaster to a DPO for carrying a channel.

Dilip Chenoy
Secretary General, FICCI
“Technological revolution that we are currently witnessing across content generation and the emergence of different platforms, along with the advent of globally distributed OTT platforms, has proved to be very impactful in increasing accessibility, especially with the increased use of sub-titling and dubbing capabilities. With the large pool of talent and a very strong back-end system, India is on its way to being recognized as a hub of content creation and ideation. India has the potential of becoming a high-quality and cost-effective content-creation hub for the world.”

Impact of the new tariff order
Over a period of 15 years, TRAI has issued more than 36 tariff orders and ancillary regulations to exercise greater control on news and entertainment broadcast content. The change in the NTO framework has undoubtedly attracted mixed reaction from stakeholders, given the significant nature of the amendments. The amendments have been introduced barely 10 months after the 2019 framework came into effect. The Indian Broadcasting Foundation (IBF) has expressed its disapproval of the amendments because the previously notified framework was in the works for just 10 months. Yet, it had necessitated an absolute overhaul of the distribution ecosystem.

The IBF believes that the amendments will severely impair the broadcasters’ ability to compete with other unregulated platforms, and adversely affect the viability of the pay-TV industry. A challenge to the amendments has been filed in the Bombay High Court by IBF, along with a few broadcasters and The Film and Television Producers Guild of India. Sun TV has filed a separate writ in the Madras High Court; All India Digital Cable Federation, the apex body of MSOs, too, has filed a petition in the Kerala High Court; the Maharashtra Cable Operators’ Foundation has filed a case against TRAI for capping NCF in the amended NTO; and lastly, a group of consumers has filed a case against TRAI in the Gujarat High Court. The DPOs are also seemingly unsatisfied with the new framework as certain contours of the regulation arbitrarily and without any basis isolates them, leading to higher costs. On the other hand, many stakeholders believe that the TRAI amendments have empowered customers and introduced transparency in the previously opaque framework.

Content regulation for OTT platforms
The fact that average digital video consumption in India has grown phenomenally in a span of just 3 years is a testament of the massive potential of the Indian OTT Industry. Based on the nature of the service and the origination of media content, OTT platforms can either be those that curate the content completely or those that partially curate their content, that is user-generated. Sources of revenue for these OTT platforms can either be the conventional way of using advertisements in between videos or the subscription model wherein the viewer pays an amount upfront and watches the content available on that OTT platform.

While making such content available, OTT platforms need not obtain certifications, which may be required for broadcasting the same content on traditional platforms. Traditional platforms need to obtain certification from the Central Board for Film Certification or comply with guidelines like the IBF (Content Code and Certification) Rules, 2011, to broadcast content. However, currently, there exists no such requirements for OTT platforms. Since OTT platforms fall out of the purview of public exhibition, there is no statutory pre-screening checks or certifications required with respect to the content being generated or circulated. Also, viewing content on OTT platforms vis-à-vis the medium of traditional television is different as the viewers in the former medium can choose the content that they wish to watch rather than being able to watch only what has been subjected to network scheduling.

The way ahead
In jurisdictions such as the UK, which have sought to specifically define and regulate ODPS/OTT platforms, there appears to be a tendency to rely on statutory certification standards for censorship of content. In India, while self-regulation of OTT platforms has been encouraged due to the inclusive definition of intermediaries, OTT platforms may be required to undertake due diligence for sharing of third-party content under the IT Act and its rules. Therefore, besides self-governance of content, OTT platforms may consider suitably categorizing sensitive content, display relevant information in relation to any content made available on such platform for the benefit of its users, and employ technological measures to control accessibility of content to sensitive users like minors. There is also a need for a complaints redressal council to address the grievances of the consumers with respect to the content available on OTT platforms. It is, therefore, critical that the industry, through a framework, is able to balance the needs of carriage as well as content. With the increase in demand for smartphones, cheaper smart TVs, cheaper data, fresh content, and liberty of convenience, the industry is bound to grow leaps and bounds.

Tax challenges
The existing tax regimes of developing countries were originally designed to tax business activities being conducted physically on their soil. Digitization of businesses, while increasing their reach, has also brought to light loopholes in tax laws as these businesses do not leave physical footprints while tapping newer markets in most countries. This has enabled such businesses to shift their profits from countries of their revenue source to countries where tax is nil or low. This also raises concerns of tax erosion in the source countries. This discord between existing tax laws and the idea of a fair tax allocation amongst jurisdictions has triggered a need to tax digital transactions in the source country by changing international tax laws.

Indian scenario
The Indian authority’s attempts to tax digital business models have not succeeded in most cases as the courts did not accept the existence of PE under the extant principles and rules. Characterization of payments to search engines for advertisements is an example, where the authorities sought to tax this as royalty or fees for technical services (FTS). However, Indian courts on various occasions have been quick to grant relief to tech giants, ruling in all cases that the payment could not be characterized either as royalty or FTS within the definition of these terms under the tax treaties. They consistently characterized these payments as business income of these MNEs, and could not hold them taxable in India in the absence of physical presence and PE. This issue of characterization of payments assumes relevance even with respect to OTT platforms as payments toward advertisements, and subscriptions in the absence of a physical presence, would not be taxable in India under the conventional PE rule, unless they qualify as royalty or FTS under the applicable tax treaty.

Moving forward
The international tax regime and network of tax treaties work on the principle of international comity, and pacta sunt servanda under the Vienna Convention on Law of Treaties, 1969 (VCLT). While India has introduced the concept of SEP in its domestic law, its tax treaty network has remained unchanged. Thus, it is critical that SEP or the above proposals are included in the form of a multilateral instrument or in tax treaties post bilateral negotiations to be in line with the VCLT. As the world moves to recognize the right to tax income in a country where market exits, it is clear that the OTT platforms and other digital media companies will need to examine these developments carefully, and be prepared to pay taxes even where they do not have PE.

Based on Entertainment Law Book 2020, a FICCI-CAM report.

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