TaxTMI 
TaxTMI 
2008 (8) TMI 96
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.... return of income declaring business income of Rs.13,58,43,976/-. Along with the return it was submitted that it did not have any tax liability in India as it did not have a permanent establishment and that its dependent agent was remunerated on an arm's length basis. As this income from various activities had been assessed to tax in the hands of SET India, there could not be further assessment of income in the hands of the Appellant on account of the said activities. Reliance was placed on Circular No.23 dated July, 23, 1969 issued by the CBDT. Whilst filing revised return on March 5, 2001 it computed its taxable income at Rs.13,58,43,976/- as per the formula prescribed in the CBTD Circular No.742 without prejudice to its contention that they do not have any income which is taxable in India. Whilst filing its revised returns it was its contention that there was no income which was assessable to tax in India. The Assessment Officer by his order dated 20^th March, 2002 was pleased to assess the Assessee's income which included income from marketing fees as also advertisement collected from India and further the subscription fees received from cable operators of its dependent a....
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....ingly, the Assessing Officer was directed to delete the portion of Rs.1,27,89,154/- earned by SET India while computing the taxable income of the Appellant. In so far as interest under Sections 234A and 234-B is concerned considering various authorities and contention advanced directed the Assessing Officer to delete the interest of Rs.3,52,39,785/- and Rs.49,39,278/- levied under Section 234B and 234C of the Act respectively. 3. Both the assessee and the Revenue aggrieved by the order of the Commissioner (Appeals) dated 1^st October, 2003 preferred appeal before the Income-tax Appellate Tribunal. Appeal filed by Revenue was numbered as I.T.A. No.535/Mum/ 04 and Appeal filed by Assessee was numbered as I.T.A. No.205/Mum./04. It was contended as can be seen from para.3 of the order of the Tribunal on behalf of Revenue that Commissioner of Income Tax (Appeal) erred in holding that as SET India had been remunerated on arm's length basis no further profit could be taxed in India in respect of advertisement revenue from its own channel. Similarly it was contended that Commissioner of Income Tax (Appeal) erred in holding that advertisement revenue pertaining to AXN channel are not tax....
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....and not what the law ought to be. It also relied on the report in the proceedings of the International Fiscal Associations 2006 Congress at Amsterdam as also International Fiscal Association Congress Report 2008 and went on to hold in paragraph 31 that the tax liability of a foreign enterprise, in respect of its dependent agency permanent establishment, is not extinguished by making an arms length payment to the dependent agent and consequently the relief given by the Commissioner by holding that the taxability of arms' length remuneration to the dependent agent extinguishes the tax liability of dependent agent permanent establishment as well, is unjustified and accordingly allowed the Appeal of Revenue on the question framed and consequently allowed Ground No.1. For the reasons while allowing Ground 1 it also allowed ground No.2. In so far as Ground No.3 is concerned, in the matter of liability under Sections 234B and 234C for payment of interest it upheld the view taken by Commissioner of Income Tax (Appeal) . 6. It then dealt with the contention raised by the assessee appellant in its Appeal, that Commissioner of Income Tax (Appeal) had erred in holding that as the Appellant ....
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.... (P.E.), in India. If there be no permanent establishment then notwithstanding Section 9 of the Income Tax Act the income would not be liable to tax in India. An additional fiction is created of a deemed permanent establishment - i.e. where a person does not have a permanent establishment, but has a dependent agent. The object being to ensure that where the fair share of income attributable to the operations in India (carried out through an agent, instead through a permanent establishment) is not taxed in India in the hands of the agents, the differential would be liable to tax in India. Thus when the remuneration of the Indian Agent is on the basis of a fair transfer price i.e. on an arms length price, nothing further remains to be taxed in India. It is submitted that the Assessing Officer has applied Article 5(8) of the DTAA to treat SET India as dependent agent permanent establishment of the Appellant in India. This has been accepted by the Tax Department in para.1 of Ground No.1 and para.3 of Ground No.3 in the grounds of Appeal filed in the Tribunal. As per Article 7(1) of the DTAA if foreign resident carries on business in India through a P.E. then only so much of its profits....
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....ndent agent enterprise Dependant agent permanent establishment (DAPE) (2) Does dependant agent performs functions on behalf of the foreign principal that cause attribution of risks or assets of foreign principal to host country, i.e. country of source. (3) If so, profits (or losses) may be attributed to DAPE by host country based on those assets used, risks assumed and functions performed. 4. DAPE is entitled to deduction in host country for arm's length compensation/remuneration to dependant agent enterprise. It is further submitted that the judgment in Morgan Stanley (supra) would not have the effect of setting aside the order of Income-tax Appellate Tribunal. 10. For answering the issue we may firstly refer to some of the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. Articles 5(8) and (9) read as under:- "5(8). Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies-- is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the f....
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....pendently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. (3). In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State." 12. We may now gainfully refer to paragraph 6(c) of Circular No.23 dated July 23, 1969, which reads as under;- "6(c). 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, pro....
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....ent." 14. The Assessing Officer has refused to rely on the Circular No.742 on the basis that it applies only to those companies which do not have any branch office in India or are not maintaining countrywide operations in India. 15. From a reading of Article 7(1) of the DTAA it is clear that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. The profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. In para.2 while determining the profits attributable to the permanent establishment the expression used is "estimated on a reasonable basis". The DTAA does not refer to arms length payment. The principles contained in the matter of income from international transaction on an arms length price are contained in Section 92 of the Income Tax Act. The principles have been clarified by the Finance Act, 2001 as also Finance Act, 2002. From the order of the Commissioner of Income Tax which has been accepted it is clear tha....
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....horities need be cited. We may now refer to the judgment of the Supreme Court in UCO. Bank vs. Commissioner of Income Tax, [1999] 237 ITR 889. 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 Supreme Court observed that (page 901): "In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and is, therefore, validly issued under Section 119 of the Income-tax Act. As such, the circular would be binding on the Department." 18. See also Commissioner of Income Tax vs. Hero Cycles Pvt. Ltd. & Ors, [1997] 228 ITR 463(SC). It would thus be clear that the Circular No.23 would be binding on the Assessment Officer and had to be considered while assessing the tax liability of an assessee. 19. The Tribunal in its judgment has not considered the effect of the findin....
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....vices to MSCo. MSCo outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo. On May 5, 2005 MSCo. filed its advance ruling 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 permanent establishment in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated April 14, 2005 and if so (ii) the amount of income attributable to such permanent establishment. It was ruled that MSAS should be regarded as constituting a service P.E. under Article 5(2)(l). 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 (ALP) in respect of the service agreement dated April 14, 2005 and it meets the test of arm's length as prescribed under Section 92C of the 1961 Act and no further income was attributable in the hands....
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....on which arises for determination in these civil appeals." 21. After discussing the various issues the Court in its conclusion held as under (page 443):- "As regards attribution of further profits to the P.E. of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a P.E.) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. 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 P.E. 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 P.E. has obtained services f....