The IT department is also expecting to tax these companies on their advertising revenues. The foreign television channels were paying tax only on 10 per cent of their advertising revenues by claiming that they did not have any permanent establishment in India. But the IT department has gathered evidence from its recent surveys to show that "a part of the business of foreign telecasting companies has been conducted from the country by virtue of close and exclusive relationships between them and their Indian agents."

The IT department officials recently carried out a survey on the Indian agents of the three television channels to find out the possibility of raising additional revenues. According to IT sources, the foreign telecasting companies were not offering subscription receipts (receipts from cable operators for their pay channels) as their own income. "The companies were not offering this subscription income in their annual returns and were instead passing them on to their Indian agents by entering into a contract. The Indian agents, in turn, were claiming huge expenses against this subscription income which we feel would not have been allowable if the income had been offered by the foreign telecasting companies as their own," a senior IT official said.

The department will treat such subscriptions as `royalty income' and a flat rate of 20 per cent would be applicable on such gross receipt. The IT officials also noticed that none of the channels were deducting TDS on commissions payed by them to their Indian agents. As per the trade practice, 15 per cent of the advertisement revenues are to be paid to the Indian agents for rendering `technical and professional services.' Such payment attracts the provisions of section 194J whereby TDS has to be deducted at the rate of 5.5 per cent. The non-deduction of TDS attracts interest and penalty.

IT sources said Star TV does not have a double taxation treaty as it operates from Hong Kong. The network will have to pay tax on its Indian income. Zee TV and Sony, however, have a double taxation treaty and would not be required to pay tax if they had no permanent establishment in the country.

But IT officials have evidence to show that they have a "close and exclusive relationship between the foreign telecasting companies and their Indian agents." When contacted, Star TV and Zee TV said they would not like to comment till they "received something in writing from the IT department."