2008 (8) TMI 96 - HC - Income Tax

Taxpayer's agent fees deemed arm's length; marketing could create deemed PE under Article 5/7 but ad revenue non-taxable

The HC held that the taxpayer's payments to its Indian agent were at arm's length (15% of gross ad revenue, later 12.5% of net) and that marketing ... Taxability of marketing activities in India for advertisement - No permanent establishment - activities of the non-independent agent - Article 5 would be treated as the activities of the 'deemed' permanent establishment and thereby the amount taxable under Article 7 in respect of the deemed permanent establishment would be the income attributable in these activities - fair value of the activities in India - non-resident's business activities in India where wholly channelled through its agent​​​​​​​ - taxable income as per the formula prescribed in the CBTD Circular No.742 without prejudice - deduction at source - remuneration of the agent on arm's length price (ALP) - interest under Section 234A, 234B and 234C - HELD THAT:- From the order of the Commissioner of Income Tax which has been accepted it is clear that the Appellant herein has paid to its permanent establishment on arms length principle. It recorded a finding of fact that the Appellant had paid service fees at the rate of 15% of gross ad revenue to its agent, SET India, for procuring advertisements during the period April 1998 to October, 1998.The fact that 15% service fee is an arm's length remuneration is supported by Circular No.742 which recognizes that the Indian agents of foreign telecasting companies generally retain 15% of the ad revenues as service charges. Effective November 1998, a revised arrangement was entered into between the parties whereby the aforesaid amount was reduced to 12.5% of net ad revenue (i.e. gross ad revenues less agency commission). Simultaneously, the Appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenues. Considering all these aspects and the fact that the agent has a good profitability record, it held that the Appellant has remunerated the agent on an arm's length basis. This finding of the Tribunal has not been disputed by the Revenue. The entire contention of the Revenue is that the advertisement revenue pertaining to its own channel and AXN Channel are also taxable in India. That C.B.T.D. Circulars are binding needs no repetition. If authorities need be cited. We may now refer to the judgment of the Supreme Court in UCO. Bank vs. Commissioner of Income Tax,[1999 (5) TMI 3 - SUPREME COURT]. In that judgment the issue was whether Circular of October 9, 1984 was inconsistent or whether there was contradiction in the circular and Section 145 of the Income Tax Act. The assessee is SET India, the depending agent. The order records that the assessee is engaged in the business of providing audio-visual television content and also acts as an advertising agent of Set Satellite Singapore Pvt. Ltd. The assessee distributes these channels to the Indian cable operators and that the assessee has applied the TNM method to determine the arms length price for its international transaction. It, however, clarified that the order is in respect of reference received for assessment year 2002-03 and not for subsequent assessment years. Considering the principle as may be discerned from the judgment in DIT (International Taxation) vs. Morgan Stanley and Co. Inc., [2007 (7) TMI 201 - SUPREME COURT] it would be clear that:- (1) Considering the CBTD Circular No.742 it would be fair and reasonable that the taxable income is computed at 10% of the gross profits. In the instant case in so far as marketing services are concerned by the arm's length principle what has been paid is more than 10% as can be seen from the order of C.I.T. (A). This was not disputed by the Revenue in its Appeal before the ITAT. (2) The only contention advanced and which found favour with the Tribunal was that the advertisement revenue received by the assessee was also income liable to tax in India. The C.I.T. (A) relied upon Circular No.23 of 1969. That Circular read with Article 7(1) would result in holding that advertisement revenue received by the appellant are not taxable in India as long as the treaty and the Circular stands. Thus, the Appellant herein is allowed and the order of the ITAT is set aside. Merely because tax on income was paid for some assessment years would not estop the assessee from contending that its income is not liable to tax. The order of C.I.T. is restored except to the extent that it has said that it cannot interfere because the Appellant had paid the tax. That part is set aside. Issues Involved:1. Taxability of advertisement revenues from the appellant's own channels.2. Taxability of advertisement revenues from third-party channels.3. Application of the arm's length principle and its effect on the tax liability of the appellant.4. Imposition of interest under Sections 234A, 234B, and 234C of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Advertisement Revenues from the Appellant's Own Channels:The appellant, a resident of Singapore, contended that only income attributable to its Indian operations, specifically marketing of ad time slots, can be taxed in India. The Commissioner of Income Tax (Appeal) held that the ad revenues earned were not attributable to the appellant's Indian operations as the contracts to sell were made outside India and the sales were on a principal-to-principal basis. The Commissioner relied on Circular No.23 dated July 23, 1969, which states that where a non-resident's sales to Indian customers are secured through an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit attributable to the agent's services. The Tribunal, however, disagreed, stating that the tax liability of a foreign enterprise is not extinguished by making an arms-length payment to the dependent agent.2. Taxability of Advertisement Revenues from Third-Party Channels:The Commissioner of Income Tax (Appeal) found that the distribution income from the AXN channel belonged to SET India and not the appellant. This income had already been taxed in the hands of SET India. The Commissioner also held that distribution rights are a commercial right distinct from a copyright, and thus there was no question of payment of royalty. The Tribunal, however, allowed the Revenue's appeal, stating that advertisement revenue pertaining to the AXN channel is taxable in India.3. Application of the Arm's Length Principle and Its Effect on the Tax Liability of the Appellant:The appellant argued that since it had remunerated its dependent agent, SET India, on an arm's length basis, no further profits should be taxed in its hands. The Tribunal, however, held that the arm's length payment to the dependent agent does not extinguish the tax liability of the appellant in India. The Tribunal relied on international guidelines and literature, including the OECD and IFA, to support its view. The appellant cited the Supreme Court judgment in DIT (International Taxation) vs. Morgan Stanley & Co. Inc., which held that if a dependent agent is remunerated on an arm's length basis, no further profits would be attributable to the foreign enterprise.4. Imposition of Interest under Sections 234A, 234B, and 234C of the Income Tax Act:The Commissioner of Income Tax (Appeal) directed the Assessing Officer to delete the interest levied under Sections 234B and 234C of the Income Tax Act. The Tribunal upheld this view, agreeing that the interest should be deleted.Conclusion:The High Court allowed the appellant's appeal, setting aside the Tribunal's order. The Court held that the advertisement revenue received by the appellant is not taxable in India as long as the treaty and Circular No.23 of 1969 stand. The Court also reiterated that if the correct arm's length price is applied and paid, nothing further would be left to be taxed in the hands of the foreign enterprise. The order of the Commissioner of Income Tax (Appeal) was restored, except for the part where it stated that it could not interfere because the appellant had paid the tax.