Arm's length remuneration and treaty attribution left no further Indian tax on a non-resident's profits and related interest

Where a non-resident enterprise's Indian agent or permanent establishment is remunerated at arm's length, Article 7 attribution leaves no further profits taxable in India. The Tribunal also noted that subscription revenue already assessed in the hands of the Indian entity could not be brought to tax again in the enterprise's hands, as the same receipt cannot be assessed twice and the related payment to the agent would be an allowable outgoing. On the non-resident's receipts, interest under section 234B was not chargeable because no underlying Indian tax liability survived.

---

---

Issues: (i) Whether payment of arm's length remuneration to the Indian agent extinguished the foreign enterprise's tax liability in India and left no further profits attributable to any permanent establishment; (ii) whether subscription revenue could be taxed again in the assessee's hands when the same income had already been assessed in the hands of the Indian entity; (iii) whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Issue (i): Whether payment of arm's length remuneration to the Indian agent extinguished the foreign enterprise's tax liability in India and left no further profits attributable to any permanent establishment.

Analysis: Under Article 7(2) of the treaty, only profits attributable to the permanent establishment can be taxed in the source State, and attribution is to be made on an arm's length basis. The Tribunal noted that the agent had been remunerated at an amount exceeding the arm's length price found by the Transfer Pricing Officer. It also relied on the principle that once the associated enterprise constituting the permanent establishment is remunerated at arm's length, nothing further remains to be attributed to the foreign enterprise.

Conclusion: The issue was decided in favour of the assessee; no further profit was taxable in India on the ad revenue.

Issue (ii): Whether subscription revenue could be taxed again in the assessee's hands when the same income had already been assessed in the hands of the Indian entity.

Analysis: The Tribunal accepted that the character of the receipt had already been treated as business income and that the Revenue had not challenged that finding. It further held that if the amount was to be regarded as the assessee's business income, then the payment to the Indian agent was an allowable outgoing, leaving no taxable surplus. In any event, the same receipt could not be assessed twice in the hands of two different entities.

Conclusion: The issue was decided in favour of the assessee; the subscription revenue addition could not stand.

Issue (iii): Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Analysis: Since the assessee was held not liable to tax in India on the disputed receipts, the foundation for charging interest under section 234B was absent. The Tribunal also followed binding jurisdictional authority holding that such interest was not leviable in the facts of a non-resident assessee's case.

Conclusion: The issue was decided in favour of the assessee; interest under section 234B was not leviable.

Final Conclusion: The Revenue's challenge failed on all substantive issues, and the assessee obtained complete relief on the taxability disputes, while the connected cross appeal and cross objection did not survive.

Ratio Decidendi: Where a non-resident enterprise's Indian agent or permanent establishment is remunerated at arm's length, no further profits are attributable to the enterprise in India under the treaty attribution rule.

---