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2016 (12) TMI 1291
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....inst the final assessment order dated 18-10-2010 passed u/s 144C (13) read with section 143(3) passed in pursuance of the direction given by the Dispute Resolution Panel-II, Mumbai (in short DRP) vide order dated 30-09-2010. In the grounds of appeal, the assessee has raised following grounds:- "1.0 Ground -1 "On the facts and in circumstances of the case, the Additional Director of Income Tax (International Taxation) Range-2 [hereinafter referred to as learned ADIT] has erred in law and in facts in concluding that Taz TV Ltd. („Taz‟) has income chargeable to tax in India on the ground that it has Permanent Establishment in India and other relevant aspects specified in the assessment order." Without prejudice to above, on the facts and in circumstances of the case, the ADIT has erred in law and in facts in concluding that Taz TV Ltd. („Taz‟) has the income chargeable to tax in India without rebutting the fact that it has remunerated its agent in India at the arms length consideration." 2.0 Ground -2 On the facts and in the circumstances of the case, the learned ADIT has erred in law and in facts in holding that the....
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....been entered into on „principal to principal basis‟. For acting as a distributor Taj India is entitled to 25% share of the total distribution revenue collected by it. Taj India entered into sub-distribution agreement independently with other parties in India under which it shares the distribution revenue with such sub-distributors. For the assessment year 2006-07, the assessee filed its return of income declaring „NIL‟ income on the ground that advertisement and distribution revenue earned by it, is not taxable in India. Without prejudice to the said claim, it was stated that the assessee company had prepared books of account pertaining to its Indian Operation and got them audited u/s 44AB. As per the profit & loss account, there was a profit of US $ 6529102. During the course of assessment proceedings, the AO rejected the assessee‟s claim and assessed the income for the year under consideration at Rs. 48,22,36,506/- which has been done after detailed reasoning, the sum and substance of his reasoning are summarized as under:- (i) In relation to advertising income, he held that Taj India is a Dependent Agent of the assessee, therefore, the asse....
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....sessee‟s own case for the assessment years 2003-04 to 2005-06, the Tribunal held that so far as the income from „distribution activities, is concerned, Taj India does not constitute assessee‟s PE in India. However, he submitted that even if, it is presumed that Taj India is a PE of the assessee in India, then also, no income can be said to be attributable to India, because the assessee has remunerated its so-called agent (Taj India) in India at „arm‟s length‟ consideration. After referring to the transfer pricing order of the TPO for the current assessment year to whom international transaction between the assessee and Taj India was referred to included advertisement and distribution income, which has been found to be at arm‟s length. The copy of the TPO‟s order in the case of the assessee as well as Taj India has been filed before us in support. Once, the payment to Taj India has been accepted to be at arm‟s length, therefore, there cannot be any question of distribution of any further income at the hands of the assessee on account of the alleged/presumed PE in India. In support, he strongly relied upon the said decisions:- ....
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.... to S.9(1)(vi), inserted by the Finance Act 1976 w.e.f 01-06-1976. iv) The agreements under consideration in the case of Siemens AG, supra which gave rise to the impugned income were entered into before 01-064976 when there was no definition of "Royalty" both under the I.T. Act and under the DTAA. The A.Y. under consideration in Siemens AG, supra was A.Y.1979-80. V) Section 9(1) (vi) up to and including Explanation 2 are substantive provisions as inserted by Finance Act 1976 and thereafter, Explanation 3 to 6 and explanation below S.9(2) are only clarificatory provisions inserted subsequently. vi) For the purpose of the present appeal, the definition of "royalty" as applicable has been defined both under the DTAA as well as l.T. Act and the issue is regarding the application of Explanations (clarificatory provisions) inserted in the Act into the DTAA by virtue of article 3(2) of the DTAA. vii) The said decision in the case of Siemens AG, supra was rendered in 2008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act 2007 doing away with the requirement of PE for Roya....
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....r as the issue relating to PE regarding "distribution revenue/income is concerned, "which was raked up in Revenue‟s appeal, it has been held that Taz India does not constitute "agency PE" in terms of India Mauritius DTAA. However, on the issue of "advertisement revenue/income" the finding was left open, because that issue was in assessee‟s appeal and the assessee‟s appeal was dismissed on the ground of limitation. Before us, only limited point which has been argued before us is that, even if for the argument sake, it is presumed that Taj India constitutes a PE of the assessee in India, then no further income can be attributed in the hands of the assessee, because the transaction between the assessee and Taj India has been found to be at arm‟s length and in support the TPO‟s order u/s 92CA (3) dated 30-09-2009 has been filed in the case of Taj TV India Pvt. Ltd. as well as Taj TV Ltd. (India Operation). Application of arm‟s length principle on the attribution of income in the case of a PE was first clarified and adjudicated by the Hon‟ble Supreme Court in the case of DIT Vs Morgan Stanley & Co. reported in [207] 292 ITR 416, wherein the Hon&....
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.... further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to the PE)." The aforesaid principle laid down by the Hon‟ble Supreme Court has been reiterated and applied by the Hon‟ble Bombay High Court in the case of „Set Satellite (Singapore) Pte Ltd. reported in [2008] 307 ITR 205. In this case, the Hon‟ble High Court was dealing with Article 5(8) and 5 (9) of India-Singapore DTAA which deals with Agency PE and after analyzing Article 7,observed i....
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....n the CBDT Circular No. 23, dt. 23rd July, 1969 which clearly sets out that where a non-resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent's services; provided that (i) the nonresident principal's business activities in India are wholly channelled through his agent; (ii) the contracts to sell are made outside India and (iii) the sales are made on a principal-to-principal basis. The CIT(A) had recorded a specific finding in favour of the appellant in the affirmative on all three counts. It is in these circumstances that it was held that the advertisement revenue received by the appellant may be from the customers in India is not liable for tax in India. The Tribunal in its judgment has not considered the effect of the finding recorded by the CIT A) based on the circular and which circular was relevant for the purpose of deciding the controversy in issue. This circular read with art. 7(1) of the DTAA would result in holding that the income from advertisement if neither directly nor....
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....g application. The basic question related to the transaction between the MSCo and MSAS. The advance ruling was sought on two counts (I) whether the applicant was having PE in India under art. 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dt. 14th April, 2005 and if so (ii) the amount of income attributable to such PE. It was ruled that MSAS should be regarded as constituting a service PE under art. 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the arm's length price in respect of the service agreement dt. 14th April, 2005 and it meets the test of arm's length as prescribed under s. 92C of the 1961 Act, and no further income was attributable in the hands of MSAS in India. The said ruling of AAR on the question of income attributable to the PE was the subject-matter of challenge by the Department. Insofar as the issue of PE is concerned the Supreme Court was pleased to hold that it agreed with the ruling of the AAR that stewardship activities would fall under art. 5(2)(1). Dealing with the question of deputation, the Court held t....
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....the PE. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost." In our opinion considering the judgment, if the correct arm's length price is applied and paid then nothing further would be left to be taxed in the hands of the foreign enterprise." This principle was again reiterated by the Hon‟ble Bombay High Court in the case of "DIT Vs B4U International", reported in [2015] 374 ITR 453 (Bom.) which was recorded in the context of India- Mauritius DTAA only. The relevant observations and findings of the Hon‟ble Bombay High Court reads as under:- 8. After h....
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....te merely because it carries on business in that State through a broker, general commission agent, or any other agent of independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. The Tribunal noted the findings of the Assessing Officer and found that the Commissioner held that the assessee carries out the entire activities from Mauritius and all the contracts were concluded in Mauritius. The only activity which is carried out in India is incidental or auxiliary / preparatory in nature which is carried out in a routine manner as per the direction of the principal without application of mind and hence B4U is not an dependent agent. Nearly 4.69% of the total income of B4U India is commission / service income received from the assessee company and, therefore, also it cannot be termed as an dependent agent. As far as the alternate contentions are concerned, the First Appellate Authority held that the assessee and B4U India were dealing w....
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....s in the Supreme Court judgment are strictly on the alternate argument canvassed by the assessee. That alternate argument was that assuming that B4U India is a dependent agent of the assessee in India it has been remunerated at arm's length price and, therefore, no profits can be attributed to the assessee. Mr. Tejveer Singh would submit that the Tribunal failed to note that the situation would be different if the transfer price analysis did not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the permanent establishment for those functions / risks that had not been considered. Mr. Tejveer Singh's argument is that the assessee had not subjected itself to the transfer price regime. Therefore, no assistance can be derived by it from this judgment. 12. In this regard, Mr. Mistri has rightly pointed out that the requirement and in relation to computation of income from international transactions having regard to arm's length price has been put in place in Chapter-X listing special provisions relating to avoidance of tax by substituting section 92 to 92F by the Finance Act....
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....id to PanAmSat International Systems Inc. USA for providing facility of 29 transponder for telecasting 'Ten Sports' channel in various countries including India. The assessee entered into an agreement with PanAmSat to utilize the transponder facility providing by the said US based company for telecasting its sports channel which are on the footprint of transponder of PanAmSat. The Revenue's case before us is that, firstly, it is taxable under section 9(1)(vi) as 'royalty' and also under Article 12(3)(b) of Indo-US-DTAA. Similarly, the up linking charges paid for up linking the channels to PanAmSat Satellite for delay in transmission and for up linking signals for live events from the venue of the events to the satellite have been treated to be 'royalty'. Since, the assessee had not deducted TDS under section 195, disallowance under section 40(a)(i) has been made. The assessee's case before us is that, firstly, PanAmSat is a USA based company, therefore, Indo-US IDTAA is applicable and since it does not have any PE or business connection in India, therefore, the payment made to a non-resident outside India for availing service of equipment placed outs....
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....c equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8". The article gives exhaustive definition of the term 'royalty' and therefore, the definition and scope of 'royalty' is to be seen from the Article alone and no definition under the domestic Act or law is required to be considered or seen or any amendment made in such definition whether retrospective or prospective which can be read in a manner so as to extend any operation to the terms as defined or understood in the Treaty. The Legislature or Parliament while carrying out amendment to interpret or define a given provision under the Domestic Law of the country cannot supersede or control the meaning of the word which has been expressly defined in a Treaty negotiated between executives of two sovereign nations. The payment of transponder charges to PanAmSat and up linking charges cannot be treated as a consideration for 'use' or 'right to use' any copyright of various terms used in para 3(a) like copyright of a literary, artistic, or scientific work, includi....
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.... Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today, supra note 22 recognizes that the question will have to be decided and the submission argued, Verizon, supra note 23 cites no reason for the extension of the amendments to the DTAA. enlarged by Finance Act, 2012 with retrospective effect will not have any affect in Article 12 of DTAA. 20. Otherwise also, now it is quite trite position that, at the time of making the payment when there is no amendment in the statute, then assessee cannot be expected to withhold the tax, especially when under the old provision or by virtue of any judicial precedent such payment does not fall or has been held to be not falling within the ambit and scope of 'royalty'. In these kinds of cases there were various decisions including that of the Hon'ble ....
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.... at all times lies with the Assessee Company and are never made available with the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute 'royalty'. 22. So far as the reliance placed by the Ld. DR on the decision of ITAT Mumbai Bench in the case of NGC Network (supra), we find that in that case the issue of distribution income was set aside to the file of the AO to examine whether it falls within the ambit of 'royalty' as defined under the Income-tax Act or not. Here in this case, as pointed out by the Ld. Sr. Counsel, the AO himself has treated the income from distribution activity as business income for the period of 9 months and in the subsequent years. The same income cannot have two treatments, one as royalty and other as business income. Thus, the said decision will not apply on facts of the present case." In view of the findings given above, we hold that no disallowance u/s 40 (a) (i) can be made on account of "programming cost" paid to various non-residents and also payments made to PanAmSat and other n....
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....of live programming even if taken as royalty would not be deemed to accrue or arise in India as per Article 12 (7) of the relevant treaty and accordingly would not be taxable in India." 12. As regards the grounds raised in assessee‟s appeal, it is seen that the same is similar to ground No.1 as raised in assessee‟s appeal for assessment year 2006-07. The finding given therein will apply mutatis mutandis here also. For this year also, the learned Counsel has filed the copy of the orders of the TPO passed in the case of the assessee as well as Taj India which have been placed on record. Thus, we hold that no further income can be held to be attributable to the assessee once, the transaction between the assessee and Taj India has been found at arm‟s length price. Thus, the assessee‟s grounds are allowed. 13. As regards grounds of appeal raised by the Revenue, we find that so far as, the issue relating to PE in respect of "distribution income" is concerned, the same have become purely academic in view of the findings given in assessee‟s appeal that, the PE has been remunerated at arm‟s length price and, therefore, no further income should be at....
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.... the assessee is not party. The distribution of the revenue between the assessee and Taj India has been allocated in the ratio of 60:40 and the entire relationship is principal to principal basis. The Ld. CIT(A) has also noted that, there is no evidences on record to show that, Taj India was acting as agent of the assessee for the distribution business in any manner. This finding of fact of the Ld. CIT(A) is corroborated by the terms and conditions of the distribution agreement as well as sub-distributor agreement as placed in the paper book. Thus, such a finding of fact by the Ld. CIT(A) without there being any rebuttal by way of any contrary material, is affirmed. Even if we independently examine the facts of the case vis-a-vis the provisions contained in Article 5(4) to 5(6) which deals with the agency PE, it can be seen that there is no agency PE of the Assessee in India. Relevant Article 5 dealing with the agency PE is reproduced here under:- "4. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State (other than an agent of an independent status to wh....
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....is case, none of the conditions as stipulated in Article 5(4) is applicable because Taj India is acting independently qua its distribution rights and the entire agreement ostensibly is on principal to principal basis as analyzed and found by id. CIT (A). When the entire relationship qua the distribution revenue is that of principal to principal basis and the Taj India is acting independently, then it moves out from the conditions laid down in Article 5(4). Thus the distribution income by the assessee cannot be taxed in India, because Taj India does not constitute an agency PE under the terms of Article 5(4). Thus, the order of the CIT (A) is upheld and ground No.1 as raised by the revenue is dismissed. In view of the above, ground No.1 raised by the Revenue is dismissed. 14. As regards ground Nos. 2 and 3 are concerned, admittedly they are similar to the issue involved in assessee‟s own case for the assessment year 2003-04 to 2005-06. Therefore, in view of the findings given therein, ground Nos. 2 and 3 of the Revenue are dismissed. 15. In the result, the assessee‟s appeal is allowed and that of the Revenue is dismissed. 16. Now, we will take up cross ....