2015 (5) TMI 277 - HC - Income Tax

Permanent establishment - business of telecasting of TV channels such as B4U Music, MCM etc - Dependent agent of assessee - AO observed that affiliated entities of the assessee are basically an extension in India and constitute a permanent establishment of the assessee within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA). - TDS liability u/s 195 - transponder charges - Held that - The Tribunal concluded that after referring to the clauses in the agreement between the assessee and B4U that B4U India is not a decision maker nor it has the authority to conclude contracts (see paragraph 29). Further, the Revenue has not brought anything on record to prove that agent has such powers and from the agreement any such conclusion could not have been drawn. Barring this agreement, there is no material or evidence with the Assessing Officer to disprove the claim of the assessee that the agent has no power to conclude the contract. This finding is rendered on a complete reading of the agreement. Thereafter Indo-Mauritius DTAA has been referred to and particularly paragraphs 5.4 and 5.5. and the Tribunal concludes that the requirement that the first enterprise in the first mentioned State has and habitually exercised in that 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 is a condition which is not satisfied. Therefore, this is not a case of B4U India being an agent with an independent status. This finding is rendered of the order under challenge. We do not find that the Tribunal s order and which also refers to the Hon ble Supreme Court decision in Morgan Stanley & Co. (2007 (7) TMI 201 - SUPREME Court ) can raise any substantial questions of law. 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 of 2001 with effect from 1st April, 2002. Therefore, such compliance has to be made with effect from assessment years 2002-03 relevant to which is the previous year commencing from 1st April, 2002. In any event, we find that the Tribunal has rightly dealt with the alternate argument by referring to the Revenue Circular 742. There, 15% is taken to be the basis for the arm s length price. Nothing contrary to the same having been brought on record by the Revenue before the Commissioner as also the Tribunal, it rightly concluded that the judgment of the Hon ble Supreme Court in Morgan Stanley & Co. and the principle therein would apply. Similarly, the Division Bench judgment of this Court in the case of Set Satellite (Singapore) Pte. Ltd. v. Deputy Director of Income Tax (IT) & Anr. 2008 (8) TMI 96 - BOMBAY HIGH COURT would conclude this aspect. Therefore, we are of the opinion that the Tribunal s conclusions and which are consistent with the factual materials and the principles of law laid down above are neither perverse nor vitiated by any error of law apparent on the face of the record. - Decided in favour of the assessee.

Issues Involved:
1. Whether B4U can be treated as a dependent agent of the assessee under Article 5(4) and Article 5(5) of the Indo-Mauritius Treaty.
2. Whether remuneration at arm's length to the agent precludes further profit attribution despite agent dependency.
3. Whether the assessee is required to deduct tax under section 195 and face disallowance under section 40(a)(i) for transponder charges.
4. Whether the amount in question is liable to tax in India as a consideration for royalty under section 9 of the IT Act.

Issue-wise Detailed Analysis:

1. Dependent Agent Status of B4U:
The Revenue contended that B4U should be treated as a dependent agent of the assessee, invoking Article 5(4) and Article 5(5) of the Indo-Mauritius Treaty. The Tribunal, however, held that B4U India is not a decision-maker nor does it have the authority to conclude contracts on behalf of the assessee. The Tribunal found no evidence from the Revenue to prove otherwise. The Tribunal concluded that the activities carried out by B4U India were incidental or auxiliary, and thus, B4U India could not be considered a dependent agent. The Tribunal's findings were based on the clauses in the agreement between the assessee and B4U and the lack of material evidence from the Revenue to disprove the claim of the assessee.

2. Arm's Length Remuneration:
The Tribunal upheld the Commissioner's view that even if B4U India were considered a dependent agent, it was remunerated at arm's length. The Tribunal referred to Circular No.742, which supports a 15% fee as the norm for advertising agencies. The Tribunal concluded that no further profits should be taxed in the hands of the assessee, as the transactions were conducted at arm's length. The Tribunal also referred to the Supreme Court's decision in Morgan Stanley & Co., which supports the principle that no further profits need to be attributed to a permanent establishment if the transactions are at arm's length.

3. Obligation to Deduct Tax under Section 195:
The Revenue argued that the assessee was obliged to deduct tax under section 195 of the IT Act for transponder charges, which they considered a "process" under Explanation (6) to section 9. The Tribunal, however, found that in light of its findings on the main issue of permanent establishment and dependent agent, this ground did not require a separate answer. The Tribunal noted that the payments made to a US-based company by the Mauritius-based assessee could not be brought to tax under Indian tax laws. The Tribunal concluded that the assessee was not liable to deduct tax at source under section 195, and thus, no disallowance under section 40(a)(i) was warranted.

4. Tax Liability in India for Royalty Consideration:
The Tribunal addressed whether the amount in question was liable to tax in India as a consideration for royalty under section 9 of the IT Act. The Tribunal found that the core finding was that B4U India could not be termed as a dependent agent and that the transactions were at arm's length. Consequently, the Tribunal held that the amounts were not taxable in India, and the question of deduction of tax at source under section 195 did not arise. The Tribunal's conclusions were consistent with the factual materials and the principles of law laid down in the case.

Conclusion:
The Tribunal's order was upheld, and it was concluded that none of the questions raised by the Revenue constituted substantial questions of law. The appeals were dismissed without any order as to costs.

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