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2017 (8) TMI 912 - AT - Income TaxAssessment of income in India - P.E. in India - whether an agent satisfies conditions laid down in paragraph-5? - determination of tax ability of advertisement revenue earned by foreign companies - estimation of profit @ 20% of gross advertising revenues - assessee company was located in Hong Kong - India-Holland DTAA - Held that - We find that agency agreement was entered into between Star Advertising Sales BV and News Television India Private Ltd on 31/05/1994, as per the agreement between SIPL and the assessee, SIPL was required to solicit advertisement in India for Channels, that the agent had to solicit the advertisement at the rates fixed by the assessee, that it could not enter in to any agreement with any client independently, that the even after agreement the assessee was the final and deciding authority to decide the fate of the advertisement, that the agent was to receive fix percentage of the invoiced amount as commission. The agent was free to carry out any other business. If all these facts are considered cumulatively, it becomes clear that the agent had no power to bind the assessee in any legal obligation. The 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. Determination of Permanent Establishment (PE) in India. 2. Applicability of Circular 742. 3. Attribution of Income and Arm's Length Principle. 4. Tax Liability of the Assessee. Issue-wise Detailed Analysis: 1. Determination of Permanent Establishment (PE) in India: The core issue was whether the assessee, a Netherlands-based company, had a PE in India through its agent, STAR India Pvt Ltd (SIPL). The Assessing Officer (AO) contended that the income should be assessed in the hands of STAR Limited, Hong Kong, and that the assessee was merely a conduit company due to the favorable tax treaty between India and the Netherlands. The First Appellate Authority (FAA) upheld the AO's view, stating that the assessee had a PE in India through SIPL. However, the Tribunal found that SIPL was an independent agent acting in its ordinary course of business and was not wholly or exclusively devoted to the assessee. The Tribunal concluded that SIPL did not constitute a PE for the assessee in India under Article 5(6) of the India-Netherlands DTAA. 2. Applicability of Circular 742: The AO denied the benefit of Circular 742 to the assessee, arguing that it was not a telecasting or broadcasting company. The FAA agreed, stating that Circular 742 was issued for telecasting companies and was not applicable to the assessee. However, the Tribunal noted that the AO had granted the benefit of Circular 742 to the assessee in previous years (1995-96 and 1997-98). The Tribunal held that there was no substantial change in facts for the year under appeal and thus, Circular 742 was applicable. The Circular provided a mechanism for determining the taxability of advertisement revenue earned by foreign companies, and the Tribunal found that the assessee had filed returns as per the guidelines of Circular 742. 3. Attribution of Income and Arm's Length Principle: The AO estimated the profit at 20% of gross advertising revenues, while the assessee argued that SIPL was remunerated at arm's length, with a commission of 15%, which was the industry norm. The Tribunal agreed with the assessee, stating that the commission rate was at arm's length and no further attribution of income was necessary. The Tribunal referred to CBDT Circular 5 of 28/09/2004 and Circular 23 of 1969, which supported the arm's length principle. The Tribunal also cited the case of Set Satellite (Singapore) Pte Ltd, where it was held that if the agent is remunerated on an arm's length basis, no further profits should be taxed in the hands of the foreign principal. 4. Tax Liability of the Assessee: The Tribunal concluded that the assessee did not have a PE in India and was not carrying out any business activities in India. Consequently, no part of its revenue was attributable to India, and the payments made to SIPL were at arm's length. The provisions of Circular 742 were applicable, and the assessee was not liable to pay tax in India for the assessment years in question. The Tribunal allowed the appeals filed by the assessee for all the assessment years (1998-99 to 2004-05), stating that there was no justification for any further addition on account of payments made to SIPL. Conclusion: The Tribunal held that the assessee did not have a PE in India, and the payments made to SIPL were at arm's length. The provisions of Circular 742 were applicable, and the assessee was not liable to pay tax in India for the assessment years in question. All the appeals filed by the assessee were allowed.
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