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1997 (3) TMI 607 - AAR - Income TaxWhether, the agent appointed by the applicant to solicit orders from the purchasers of air-time and to pass on those orders to the applicant for acceptance, could be construed as a permanent estab- lishment of the applicant in India ? whether any part of the business profits earned by the applicant could still be deemed to accrue or arise in India and, therefore, liable to tax in India, if the answer to above question is negative?
Issues Involved:
1. Taxability of business profits in India. 2. Determination of Permanent Establishment (PE) status. 3. Attribution of business profits to India in absence of PE. Issue-Wise Detailed Analysis: 1. Taxability of Business Profits in India: The primary issue was whether the business profits earned by TVM from the sale of air-time on the television channel broadcast in India would be liable to tax in India. The judgment hinged on the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius, specifically Article 7(1), which states 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. Since TVM is a Mauritian enterprise, its profits are prima facie taxable in Mauritius and can be taxed in India only if it has a permanent establishment in India. The judgment concluded that since TVM did not have a permanent establishment in India, its business profits could not be taxed in India. 2. Determination of Permanent Establishment (PE) Status: The crux of the issue was whether TVM's agent, TVI, could be construed as a permanent establishment of TVM in India. The judgment referred to Article 5 of the DTAA, which defines a permanent establishment as a fixed place of business through which the business of the enterprise is wholly or partly carried on. The judgment examined various clauses of the DTAA, particularly paras. 1, 3, 4, 5, and 6 of Article 5. It was determined that TVM had no fixed place of business in India. Even if TVI's presence was considered, para. 3(e) of Article 5 excluded the possibility of it being considered a permanent establishment. The judgment also noted that the close relationship between TVM and TVI, including the common shareholding, was insufficient to constitute TVI as a permanent establishment of TVM. The judgment emphasized that TVI acted merely as an agent for the collection of advertisements for TVM and did not have the authority to conclude contracts independently, which is a key criterion under para. 4 of Article 5 for establishing a permanent establishment. 3. Attribution of Business Profits to India in Absence of PE: The judgment addressed whether any part of the business profits earned by TVM could still be deemed to accrue or arise in India and, therefore, be liable to tax in India if TVI was not considered a permanent establishment. The judgment concluded that since TVM did not have a permanent establishment in India, none of its business profits arising from its activities in India through TVI could be brought to tax in India. The judgment also referred to Circular No. 742, which provided guidelines for the taxation of foreign telecasting companies, but clarified that these guidelines were general in character and could not override the provisions of the DTAA. Additional Considerations: The judgment also addressed the eligibility of TVM to claim benefits under the DTAA, contingent upon TVM being liable to pay income tax in Mauritius. The applicant was required to establish its tax liability in Mauritius, which was not conclusively demonstrated during the hearing. The judgment noted that if TVM was an offshore company opting for a zero rate of tax, it would be ineligible for relief under the DTAA. Conversely, if TVM opted to be subjected to tax and provided proof, relief under Article 7 would be granted. Conclusion: The Authority ruled that TVM did not have a permanent establishment in India and, therefore, its business profits could not be taxed in India. The ruling was conditional upon TVM establishing its liability to pay tax in Mauritius and demonstrating that only TVM, not TVI, exercised the power to conclude advertisement contracts for the sale of air-time. The application was disposed of accordingly.
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