TaxTMI 
TaxTMI 
TaxTMI 
2021 (5) TMI 1074
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....d 2 The learned AO/ DRP has erred in holding that the Appellant has a Permanent Establishment ('PE') in India as per the provisions of the India-US Double Tax Avoidance Agreement ('India - US tax treaty') and accordingly, holding the ad sales revenue earned by the Appellant as taxable in India. The Appellant prays that the AO be directed to treat the ad sales revenue as not taxable in India in the absence of PE in India. 3. Ground 3 The learned AO/ DRP has erred in holding that the distribution revenues earned by the Appellant falls within the meaning of the term 'Royalty' under Article 12 of the India- US tax treaty and the Act and accordingly, such distribution revenues are taxable in India. ITA No. 5826/Mum/2012 (directed against order dated 14.02.2012 passed by the Assessing Officer passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act 1961, for the assessment year 2004-05) 1. The Appellant has disclosed, fully and truly all material facts, necessary for completion of original assessment proceedings under Section 143(3) of the Act, and there is no indication either in the notice issued under Section 147....
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....ent sales revenue as not taxable in India in the absence of PE in India. 4. Ground 4 Without prejudice to Ground 2 & 3 above the learned AO/DRP erred in attributing additional profits to the Appellant in India without appreciating that the alleged PE has been remunerated at arm's length. 5. Ground 5 The learned AO/ DRP has erred in holding that the distribution revenues earned by the Appellant falls within the meaning of the term 'Royalty' under Article 12 of the India-US tax treaty and the Act and accordingly, such distribution revenues are taxable in India. The Appellant prays that the learned AO be directed to treat the distribution revenues as not taxable in India, as the distribution revenues are not in the nature of royalty. 6. Ground 6 The learned AO/DRP has erred in taxing the content syndication income earned by the Appellant at the rate of 42.23% rather than at the rate of 10.56% as per section 115A of the Income Tax Act, 1961. The Appellant prays that the learned AO be directed to tax such content syndication income on gross basis at 10.56% as per section 115A of the Act as the same being in the nature of royalty. ITA No. 1254/Mum/2014 (....
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....est under Section 234D of the Act; Ground 8 erred in initiating penalty proceedings under Section 271(1)(c) of the act without appreciating the fact that the Appellant has not concealed any income nor furnished any inaccurate particulars of its income; Ground 9 erred in initiating penalty proceedings under Section 271A of the Act without appreciating the fact that the Appellant is a non-resident and is not required to maintain India specific books of accounts; Ground 10 erred in initiating penalty proceedings under Section 271B of the Act without appreciating the fact that the Appellant is a non-resident and is not required to get its accounts audited; ITA No. 2079/Mum/2017 (directed against order dated 31.12.2016 passed by the Assessing Officer passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act 1961, for the assessment year 2012-13) On the facts and in the circumstances of the case and in law, the learned AO based on the directions of the DRP: Ground 1 erred in determining the total income of the Appellant at Rs 63,47,74,373; Ground 2 erred in holding that NGC Network (India) Private Limited/ Fox Channels (India....
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....ed to maintain India specific books of accounts; Ground 14 erred in initiating penalty proceedings under section 271B of the Act without appreciating the fact that the Appellant is a non-resident and is not required to get its accounts audited; ITA No. 528/Mum/2018 (directed against order dated 27.11.2017 passed by the Assessing Officer passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act 1961, for the assessment year 2013-14) On the facts and in the circumstances of the case and in law, the learned AO based on the directions of the DRP: Ground 1 erred in determining the total income of the Appellant at Rs 69,55,17,788; Ground 2 erred in holding that NGC Network (India) Private Limited/ Fox Channels (India) Private Limited constitute Permanent Establishment ('PE') of the Appellant in India as per the provisions of Article 5(2) and Article 5(4) of the India-USA Double Tax Avoidance Agreement ('India - US tax treaty') and accordingly holding that the advertisement sales revenue earned by the Appellant are taxable in India; Ground 3 Without prejudice to Ground 2 above, erred in attributing additional ....
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....C and cess etc are concerned these issues will be rendered infructuous and so far as not granting tax credit is concerned, these issues were not pressed. 4. So far as the first core issue is concerned, i.e. whether or not the assessee had a dependent agent permanent establishment (DAPE) in India and whether or not any profits on account of advertisement sale revenues can be brought to tax in the hands of such a DAPE, we find that it is not even revenue's case that the dependent agent has not been paid an arm's length remuneration. As a matter of fact, the assessee has filed the evidences in support of the stand that these transactions have been held to be arm's length transactions. Given this factual position, we find that this issue is squarely covered in favour of the assessee by a co-ordinate bench decision in the case of ADIT vs Asia Today Ltd [(2021) 124 taxmann.com (Mum-Trib)] wherein the co-ordinate bench has observed as follows:- 6. To adjudicate on these appeals, at this stage, only a minimal facts need to be taken note of. The assessee before us is a foreign telecasting company incorporated in Mauritius and having a tax residency certificate of Mauritius. It sells adve....
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.... the Indo-Mauritius treaty when the business of the assessee is carried out through a fixed placed in India and in effect, is a virtual projection of the assessee in India. 7. The Assessing Officer further observed that, without prejudice to the above analysis, the assessee has an agency permanent establishment in India, under article 5(4) of India Mauritius DTAA, inasmuch as its Indian agents are the dependent agents. As for the plea that in case the assessee is held to have a dependent agent permanent establishment, as was held by the Assessing Officer, no further profits can be attributed in the hands of the assessee as the agent has been paid arm's length remuneration services rendered, the Assessing Officer rejected the said plea, and observed as follows: 5.3.3 No Further Profits can be taxed in view of Article 7(2) of the Treaty: The next submission of the assesses is that even if it is assumed that there is a PE in India, as per Article 7(2) of the Treaty, where an enterprise carries on business in India through a PE, the profits attributable to such PE shall be the profits that the PE would have made, if it were a distinct and separate enterprise dealing independe....
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....erprise in another country which can be attributed to a fixed place of business in that country" and "it should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country" [Emphasis, by underlining, supplied by us, here as also elsewhere in this order]. What is equally important is in the fundamental analysis justifying the existence of permanent establishment under Article 5(1) and 5(2), as we have reproduced earlier, there is not even a whisper of a mention about any fixed place of business. All this analysis points out is that "The assessee could not have earned any income from India but for its Indian agent, ZTL/EI Zee" and that "The employees of ZTL/EI Zee are employees of Zee group as a whole and they perform functions as required by ATL also", but then the agent and the principal being from the same business group would not obliterate their separate legal existence. It is only elementary that there cannot be a permanent establishment under the basic rule, i.e., 5(1), unless there is a fixed place of business. It is by now well settled in law that in order to constitute a fixed place permanent est....
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....er than article 5(1) and 5(2). The detailed analysis by the Assessing Officer, as extracted earlier in this order, also makes that position evident. At best, therefore, it is a case of dependent agency permanent establishment under Article 5(4), and learned Departmental Representative also accepts that. There is no conflict between 'virtual projection of a foreign enterprise' and the 'dependent agency permanent establishment', and it's in this light that we have to take note of the analysis of legal position. There can be simple situations in which a foreign enterprise operates through an agent, acting as a franchise, and such a franchise can virtually project business of the foreign enterprise on the soil of another country. Clearly, therefore, just because there is virtual projection of business, as the case is made out by the Assessing Officer, it is to be inferred that that there is a permanent establishment under the basic rule, i.e., Article 5(1) an 5(2), and negate the existence of a dependent agency permanent establishment, as would at best emerge out of the facts marshalled out by the Assessing Officer. As we are examining this aspect of the matter, it ....
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.... 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 whom the provisions of paragraph (5) apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if: (i) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (ii) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an 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 b....
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....nance with Authorised OECD Approach of the OECD. On materially similar facts of dependent agency permanent establishment for a similarly placed foreign telecasting company as in this case, in the case of DDIT Vs Set Satellite (Singapore) Pte Ltd [(2007) 106 ITD 175 (Mum)], a coordinate bench, speaking through one of us, (i.e. the Vice President), had upheld the "two taxpayer approach", in computation of DAPE profits, and observed as follows: 11. The particular difficulty in the case of a dependent agent permanent establishment is that DAPE itself is hypothetical because there is no establishment - permanent or transient- of the GE in the PE state. The hypothetical PE, therefore, must be visualized on the basis of presence of the GE as projected through the PE, which in turn depends on functions performed, assets used and risks assumed by the GE in respect of the business carried on through the PE. The DAPE and DA has to be, therefore, be treated as two distinct taxable units. The former is a hypothetical establishment, taxability of which is on the basis of revenues of the activities of the GE attributable to the PE, in turn based on the FAR analysis of the DAPE, minus the paymen....
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....the Sing Co. In consideration of the services rendered by Ind. Co., Sing Co. pays Ind. Co. commission @ 30 per cent on sales plus reimbursement of expenses. Sing Co., however, procures the electronic equipment from China, shipped directly to India and sells it in India after a mark up of 200 per cent. We further assume that the reasonable handling costs of Sing Co. for souring the merchandise is 60 per cent on cost. In a particular year, Sing Co. sells goods worth $ 3 million in India. Let us further assume that expenses incurred by Ind. Co., to earn the agency remuneration, is $ 8,99,000. The profits taxable in India, in such a case and based on the treaty provisions before us, should be as follows : A. Commission earned by Ind. Co. $9,00,000 Less : Deductible expenses of Ind. Co $ 8,99,000 Taxable in the hands of the Ind. Co. $ 1,000 B. Profits attributable to Sing Co.'s DAPE in India Sales consideration 30,00,000 Less : Commission paid to Ind. Co. 9,00,000(-) : Cost of purchases 10,00,000(-) : Sing Co.'s handling charges 6,00,000(-) 25,00,000 Profit of the DAPE or, in other words, profits Attribute to India operations of the Sing Co. $ 5,00,000 As ....
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.... of the foreign enterprise cannot extend beyond the profit earned by the dependent commission agent. The line of reasoning adopted by the learned counsel is that PE is nothing but the dependent agent, and, the taxability of PE can only, therefore, be in respect of the earnings of the agent. Learned counsel has, with his inimitable oration, erudition and legal skills, woven a complex web of arguments to support this legal proposition. However, as it sometimes happens, the quality of arguments in support of a legal proposition is inversely proportional, proportional if it is, to the merits of the proposition sought to be advanced. This is one such occasion. Let us set out the reasons why we think so, and, in the process, deal with various arguments of the learned counsel one by one. 13. At the outset, we must reiterate that a dependent agent (DA) and a dependent agent permanent establishment (DAPE), in our humble understanding, are two distinct things. As we have stated earlier, it is as a result of existence of a dependent agent that the foreign enterprise is 'deemed to have' a permanent establishment in the country in which dependent agent is situated. 14. Under Article....
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.... of a dependent agent permanent establishment. This decision dealt with the taxability of the installation PE, and, the principles dealing with computation of profits of installation PE, in our considered view, do not have any bearing on the computation of profits of the dependent agency PE. We are, therefore, not persuaded by this reasoning either. 12. Late Prof Klaus Vogel, one of the very eminent international tax scholars of our times, had favoured the path adopted by the coordinate bench. In his last in Tax Treaty Monitor (Bulletin for International Taxation, November 2007, page 475), referring to the above coordinate bench decision, he had this to say: "One can understand that many have problems imagining how profits should arise to a permanent establishment which, as the Tribunal itself repeatedly stated, does not exist in reality and is a non-entity "wholly hypothetical and fictional". Such sceptics should consider, however, that the parent enterprise as a rule will aim to realize receipts from the contracts concluded by the dependent agent which, in addition to compensating the agent's fee, include a surplus profit, for otherwise the parent would lack any commercial ....
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....n the matter travelled before Hon'ble High Court, however, these views of the coordinate bench did not find favour with Their Lordships. Rejecting the theory about separate profit attribution for the dependent agency permanent establishment vis-à-vis the dependent agent, Their Lordships have, in the judgment reported as Set Satellite Pte Ltd Vs CIT [(2009) 307 ITR 205 (Bom)], observed as follows: 10. 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 arm's length payment. The principles contained in the matter of income from international transaction on an arm's length price are contained in section 92 of the Income-ta....
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....ppellant may be from the customers in India is not liable for tax in India. That CBDT 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 v. CIT [1999] 237 ITR 889. In that judgment the issue was whether Circular of 9-10-1984 was inconsistent or whether there was contradiction in the circular and Section 145 of the Income-tax Act. The Supreme Court observed that :- "... 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, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the department." (p. 901) See also CIT v. Hero Cycles (P.) Ltd. [1997] 228 ITR 463 (SC). It would thus be clear that the Circular No. 23 would be binding on the Assessing Officer and had to be considered while assessing the tax liability of an assessee. The Tribu....
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....ing certain support services 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 5-5-2005 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 PE in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated 14-4-2005 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 Article 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 (ALP) in respect of the service agreement dated 14-4-2005 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 of MSAS in India. The ....
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....he PE 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 PE) 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 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 ta....
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....nd as, on a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway dehors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may seem incompatible with the underlying scheme of taxation of cross border business profits under the tax treaties. These aspects, however, cannot come in the way of the binding force of judicial precedents from Hon'ble Courts above. The SLP against this decision is said to pending before Hon'ble Supreme Court, but that does not, in any way, dilute the binding nature of this binding judicial precedent. In all fairness to the learned Departmental Representative, however, we may take refer to observations in another coordinate bench decision in the case of Delmas France vs ADIT [(2012) 17 taxmann.com 91 (Mum)], to the effect, "Similarly, before accepting DAPE profit neutrality theory, we will still have to deal with learned Departmental Representat....
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....neration paid to the Indian agent is not an arm's length remuneration for the services rendered by the agents concerned, yet a prayer is now made that the matter should be sent back to the assessment stage for detailed findings in this regard. In a written note filed by the learned Departmental Representative, it has been submitted that, " it is humbly submitted that in the case of DIT Vs Morgan Stanley (292 ITR 416 (SC) The Hon'ble Apex Court in para 32 of its order (page 124 of PB II) has carved out an exception. It has held that '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 corporates on the basis of the concept of Economic Nexus is an important feature of Attributable Profits (profits attributable to the PE)'. Taking into conside....
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....hat "in view of the above discussions, it can be seen that major part of the risk in terms of market risk and technology risks are borne by the ZTL/El Zee" and that "almost 85% to 90% revenues from advertisement and subscription of the assessee comes through Indian viewership which is undoubtedly linked with the PE i.e., ZTL/El Zee". This is not the Indian viewership which is relevant in this context. What was relevant was the role played by the agent in India and whether the remuneration paid by the assessee company, for the services of the agent, was a fair and arm's length remuneration vis-à-vis the functions performed, assets employed and risks assumed by the Indian agent. No issues are raised on the inadequacy of agent's remuneration by the Assessing Officer, and now a fresh inning is sought to find these inadequacies and improve the case of the revenue. That is impermissible. In his analysis, while the Assessing Officer has proceeded on sweeping generalizations about the risks assumed by the PE but there is no specific FAR analysis which could support that the agent's remuneration not being an arm's length remuneration, and the Assessing Officer has proceeded on the ba....
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....istence of DAPE is wholly infractuous and tax neutral. To this extent, we uphold the plea of the assessee and delete the impugned taxability of advertisement sale revenues. The assessee gets the relief accordingly. 6. The second issue in appeal is with respect to taxability of distribution revenues under article 12 of the Indo-US tax treaty. 7. To adjudicate on this issue it is sufficient to take note of a few facts and on that all these aspects, as learned representative fairly agree, the matter is covered in favour of the assessee. The first settled proposition is that the distribution rights cannot be treated as copyrights, as consistently held by the co-ordinate benches, e.g. in the case of the DDIT vs SET India Pvt. Ltd. [ITA No. 4372/Mum/2004, order dated 25.04.2012] wherein the co-ordinate bench has held as follows:- 6. Having heard both the sides, we observe that ld CIT(A) while examining the issue has stated that the Non-resident company has granted non-exclusive distribution rights of the channels to the assessee and has not given any right to use or exploit any copyright. The assessee is no way concerned whether the programs broadcast by the Non-resident company are ....