2020 (3) TMI 500 - HC - Income Tax

Income accrued in India - Permanent Establishment under the terms of Article 5(4) of the DTAA - assessee had given distribution rights to Taj India for promoting and distributing TV channel in India on principal to principal basis - Eligible reason why Taj India should be treated as agency Permanent Establishment for the purpose of distribution income as per Article 5(4) of the DTAA - HELD THAT - Tribunal noted that the first appellate authority, after due deliberation, had returned a finding of fact that Taj India was not acting as agent of the assessee but it had obtained the right of distribution of the channel for itself and subsequently, it had entered into contracts with other parties in its own name in which the assessee was not a party. The distribution of the revenue between the assessee and Taj India was in the ratio of 60 40 and the entire relationship was on principal to principal basis. Tribunal noted that this finding by the first appellate authority is corroborated by the terms and conditions of the distribution agreement as well as the sub-distributor agreement. After examining the requirement of Article 5 of the DTAA to constitute agency Permanent Establishment, Tribunal as a matter of fact held that none of the conditions as stipulated in Article 5(4) was applicable because Taj India was acting independently qua its distribution rights and the entire agreement was on principal to principal basis. Therefore, it was held that the distribution income earned by the assessee cannot be taxed in India because Taj India does not constitute an agency Permanent Establishment under the terms of Article 5(4) of the DTAA. The order of the first appellate authority was accordingly upheld. On thorough consideration of the matter, we are in agreement with the views expressed by the Tribunal. In fact, there is concurrent finding of fact between both the appellate authorities on this point. Learned standing counsel Revenue has not been able to show any perversity in such finding returned by the appellate authorities. In the absence thereof, we see no good reason to interfere with the finding of the Tribunal affirming the order of the first appellate authority.

Summary

Issues Involved:
1. Whether the Tribunal erred in holding that there was no agency Permanent Establishment (PE) in the form of Taj India.

Detailed Analysis:

Background and Facts:
The Revenue filed two appeals against a common order passed by the Income Tax Appellate Tribunal (Tribunal) regarding the assessment years 2004-05 and 2005-06. The focus was on the assessment year 2004-05. The respondent, a Mauritius-based company, engaged in telecasting "Ten Sports," had appointed Taj Television (India) Private Limited (Taj India) as its advertising sales agent and distributor in India. The key question was whether Taj India constituted an agency Permanent Establishment (PE) under Article 5 of the India-Mauritius Double Tax Avoidance Agreement (DTAA).

Issue 1: Advertising Revenue and Agency Permanent Establishment:
The assessing officer concluded that Taj India had the authority to conclude contracts in the name of the assessee, thus constituting a PE in India under Article 5.4(i) of the DTAA. The first appellate authority agreed, finding Taj India to be a dependent agent, thus sustaining the assessing officer's conclusion that the advertising revenue was taxable in India.

Issue 2: Distribution Revenue and Agency Permanent Establishment:
The assessing officer also held that distribution revenue collected through Taj India was taxable as business income, as Taj India was seen as having the exclusive right to represent the assessee. However, the first appellate authority found that Taj India acted independently and entered into contracts in its own name, thus not constituting an agency PE for distribution income. This finding was upheld by the Tribunal, which noted that Taj India was acting on a principal-to-principal basis and did not meet the conditions stipulated in Article 5(4) of the DTAA.

Legal Provisions:
- Article 5 of the DTAA: Defines 'Permanent Establishment' and includes a person acting in a contracting state for an enterprise of the other contracting state, provided they habitually exercise authority to conclude contracts in the name of the enterprise or maintain a stock of goods for regular fulfillment of orders.
- Section 260A of the Income Tax Act, 1961: Allows appeals to the High Court from orders of the Tribunal.

Tribunal's Findings:
The Tribunal noted that the first appellate authority had thoroughly examined the agreements and found that Taj India was not acting as an agent but had obtained distribution rights for itself. The revenue distribution was on a principal-to-principal basis, and Taj India acted independently in its distribution rights. Thus, none of the conditions in Article 5(4) were applicable, and the distribution income could not be taxed in India.

High Court's Conclusion:
The High Court agreed with the Tribunal's findings, noting that there was a concurrent finding of fact by both appellate authorities that Taj India did not constitute an agency PE under Article 5(4) of the DTAA. The Revenue failed to show any perversity in these findings. Consequently, the High Court dismissed the appeal, stating that no substantial question of law arose from the Tribunal's order.

Final Judgment:
Both appeals by the Revenue were dismissed, and the Tribunal's order was upheld, confirming that Taj India did not constitute an agency Permanent Establishment for the distribution income under the DTAA, and thus, the income was not taxable in India. No order as to costs was made.