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2017 (11) TMI 2017 - AT - Income TaxIncome deemed to accrue or arise in India - Taxability of income in India - business connection in India - whether it had any PE in India ? - HELD THAT - From the perusal of the agreements it becomes clear that the assessee was carrying out its operation from USA and not from India that both the activities i.e. sale of advertisement inventory and distribution of AXN and ANIMAX channels were not carried out in India that it did not have any office premises or a fixed place of business in India at its disposal that none of its employees were based in India through whom it could render the services in India. Thus it can safely be held there was neither fixed base PE nor service PE in India of the assessee for the year under appeal.Though the FAA has endorsed the view of the AO that the assessee had Agency PE, but nothing has been brought on record to prove that the agreements between the assessee and Set India was not on Principal to Principal basis. Set India had no authority to conclude any contract on behalf of the assessee in India.On the other hand, while selling the airtime inventory distributing AXN and ANIMAX channels in India, Set India would act on its own right and not on behalf of the assessee. It was not dependent on the assessee economically or legally.It is also a fact that Set India also carried out significant marketing and estimation activities for other channels namely Set Set Max and HBO (till 31/12/2004). Therefore set India has to be treated as an independent entity which carried out its own business employing its own capital and bearing connected risks. It cannot be treated an agent a dependent agent, of the assessee. We find that the revenue earned by Set India was not on behalf of the assessee, that it was making payment to the assessee for the purchases made by it, that it was not subject to any control of the assessee as far as conducting of business in India was concerned, that the activities of Set India were not devoted wholly or almost wholly for the assessee.We have also taken note of the facts that the revenue of the assessee was not entirely dependent on the earning of set India, that the employees of set India would work only for Set India and not for any other entity of the group, that the departmental authorities have not alleged that the transaction between the assessee and Set India were not at arm s length, that in the TP orders the TPO.s(AY.s.2005-06, 2006-07, 2007-08, 2008-09 and 2010-11)have held that no TP adjustments were required to be made to the income of the assessee on account of advertisement revenue or distribution revenue. Regarding applicability of the provisions of section 40(a)(ia) of the Act, we want to state that we have already held that assessee did not have any PE in India and that it had no business income arising India. It is also a fact that it has not claimed any deduction for expenses incurred in India. FAA was not justified in holding that provisions of section 40 (a) were applicable in the case under consideration. As the assessee did not have business connection India as well as Agency PE/Base BE and Set India was not agent of the assessee, so, we hold that the AO had wrongly invoked the provisions of Rule 10 of the Rules. Thus Assessee did not have a PE in India that it was not carrying out any business activities in India and therefore no part of its revenue was attributable to India, that SIPL was an independent agent under Article 5(6)of the tax treaty between India and Holland that the activities of the agent were carried out in its ordinary course of business that the agent was not wholly and exclusively devoted to the assessee that payments made to SIPL were at arm s length, that provisions of Circular 742 were applicable for determining the tax liability of the assessee.In short, the assessee was not liable to pay tax in India in any of the AY.s. mentioned above.Effective ground of appeal is decided in favour of the assessee.
Issues Involved:
1. Existence of business connection in India. 2. Taxability of income under section 9(1) of the Income-tax Act, 1961. 3. Existence of Permanent Establishment (PE) in India. 4. Applicability of Rule 10 of the Income Tax Rules, 1962. 5. Applicability of section 40(a) of the Income-tax Act, 1961. 6. Attribution of profits to PE. 7. Arm’s length principle and transfer pricing. 8. Applicability of Circular No. 742 issued by the CBDT. 9. Tax credit and interest under sections 234B and 244A of the Income-tax Act, 1961. Detailed Analysis: 1. Existence of Business Connection in India: The assessee, a US resident company, engaged in operating satellite television channels, appointed SET India as a non-exclusive advertising and sales agent. The Assessing Officer (AO) concluded that the arrangement was not on a principal-to-principal basis but involved sharing actual revenue collected by SET India. The AO determined that the assessee had a business connection in India, making its income taxable under section 9(1) of the Act. The First Appellate Authority (FAA) upheld this view, noting the interdependence and revenue-sharing nature of the arrangement. 2. Taxability of Income under Section 9(1) of the Income-tax Act, 1961: The AO held that the income attributable to the assessee's business operations in India was taxable. The FAA agreed, emphasizing the revenue-sharing arrangement and the fact that the assessee retained financial interest in the final sale of advertisement airtime and distribution of channels. 3. Existence of Permanent Establishment (PE) in India: The AO and FAA concluded that SET India constituted a dependent agent PE of the assessee in India under Article 5 of the Indo-American DTAA. The FAA noted that SET India’s activities were devoted wholly or almost wholly to the assessee, fulfilling the criteria for a dependent agent PE. 4. Applicability of Rule 10 of the Income Tax Rules, 1962: The AO applied Rule 10 to estimate the income of the assessee at 10% of gross advertisements and subscription revenue received by SET India. The FAA upheld this estimation, applying a profit rate of 15% on the net revenue. 5. Applicability of Section 40(a) of the Income-tax Act, 1961: The AO applied section 40(a) to disallow certain payments made by the assessee. However, the Tribunal held that since the assessee did not have a PE in India and no business income arose in India, section 40(a) was not applicable. 6. Attribution of Profits to PE: The Tribunal concluded that the assessee did not have a PE in India and therefore, no part of its revenue was attributable to India. The Tribunal emphasized that SET India acted independently and was not economically or legally dependent on the assessee. 7. Arm’s Length Principle and Transfer Pricing: The Tribunal noted that the transactions between the assessee and SET India were at arm's length, as confirmed by the Transfer Pricing Officer (TPO) for several assessment years. The Tribunal cited the case of Morgan Stanley and Co. Inc. to support the view that if transactions are at arm's length, no further profits should be attributed to the PE. 8. Applicability of Circular No. 742 issued by the CBDT: The Tribunal referred to Circular No. 742, which recognizes 15% commission as a standard rate for agents of foreign telecasting companies. The Tribunal held that the assessee was entitled to the benefits of this circular, which had been consistently applied in previous assessment years. 9. Tax Credit and Interest under Sections 234B and 244A of the Income-tax Act, 1961: For the assessment years 2009-10 and 2010-11, the Tribunal directed the AO to verify the assessee’s claims for tax credit and interest under sections 234B and 244A and to grant the appropriate relief if the claims were found to be genuine. Conclusion: The Tribunal allowed the appeals filed by the assessee for the assessment years 2005-06 to 2008-09 and partly allowed the appeals for the assessment years 2009-10 and 2010-11. The appeals filed by the AO were dismissed. The Tribunal concluded that the assessee did not have a PE in India, and its transactions with SET India were at arm's length, thus no further income was attributable to the assessee in India.
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