2021 (11) TMI 804 - AT - Income Tax

Income taxable in India - PE in India - whether Zee Telefilms Limited (ZTL) does not constitute a Permanent Establishment (PE) of the assessee in India? - CIT(A) held that, in the absence of a permanent establishment (PE), income of the assessee is not taxable as per article 7 of the DTAA? - HELD THAT - As decided in own case 2021 (2) TMI 95 - ITAT MUMBAI even if there is held to be a dependent agency permanent establishment on the facts of this case, as at best the case of the Assessing Officer is, it is wholly tax neutral inasmuch as the Indian agents have been paid arm's length remuneration, and nothing further can, therefore, be taxed in the hands of the assessee. It has not been the case of the revenue authorities at any stage that the remuneration paid to the Indian agent is not an arm's length remuneration for the services rendered by the agents concerned. There is no material whatsoever before us to show, or even indicate, that the remuneration paid to the agents is not arm's length remuneration. Under these circumstances, we see no reasons to remit the matter to the file of the Assessing Officer, for fresh round of ALP ascertainment proceedings, as prayed by the learned Departmental Representative. The plea of the assessee, as raised in the cross objections, therefore, merits acceptance. Whether there is a DAPE or not, there are no additional profits to be brought to tax as a result of the existence of the DAPE, and, therefore, the question about existence of a DAPE on the facts of this case is wholly academic. Once we hold, as we have held above, that in the light of the present legal position, existence of dependent agency permanent establishment in wholly tax neutral, unless it is shown that the agent has not been paid an arm's length remuneration, and when it is not the case of the Assessing Officer, as we have noted earlier, that the agents have not been paid an arm's length remuneration, the question regarding existence of dependent agency permanent establishment, i.e. under article 5(4), is a wholly academic question. - Decided in favour of assesse.

Issues Involved:
1. Treaty entitlements and re-domiciliation of the assessee company.
2. Taxability of income from Pay Channel Subscription Agreement.
3. Classification of subscription revenue as business income or royalty.
4. Applicability of interest under sections 234B and 234C for non-residents.
5. Binding nature of Circular No. 742.
6. Existence of a Permanent Establishment (PE) in India.
7. Attribution of profits to the PE and arm's length remuneration.

Detailed Analysis:

1. Treaty Entitlements and Re-domiciliation of the Assessee Company:
The primary issue was whether the assessee, initially incorporated in the British Virgin Islands and later re-domiciled in Mauritius, could claim benefits under the Indo-Mauritian tax treaty. The Tribunal noted that the company was re-domiciled in Mauritius on 29th June 1998 and issued a tax residency certificate (TRC) by the Government of Mauritius. Despite the Departmental Representative's objections, the Tribunal held that the re-domiciliation process and the issuance of the TRC justified the treaty entitlements. The Tribunal emphasized that the re-domiciliation of offshore companies is a recognized practice and does not inherently disqualify treaty benefits.

2. Taxability of Income from Pay Channel Subscription Agreement:
The Tribunal addressed the Assessing Officer's grievance that no income accrued to the assessee from the Pay Channel Subscription Agreement. The Tribunal found that the CIT(A) correctly held that the subscription revenue collected was business income of the telecasting company and not royalty. This classification was crucial in determining the taxability of the income under the relevant tax treaties.

3. Classification of Subscription Revenue as Business Income or Royalty:
The Tribunal upheld the CIT(A)'s decision that the subscription revenue collected by the assessee was business income and not royalty. This distinction was significant because it influenced the tax treatment of the revenue under the Indo-Mauritian tax treaty, which provides different provisions for business income and royalties.

4. Applicability of Interest under Sections 234B and 234C for Non-Residents:
The Tribunal examined whether the assessee, being a non-resident with income subject to tax deduction at source, was liable to pay interest under sections 234B and 234C of the Income Tax Act, 1961. The CIT(A) had directed the Assessing Officer to delete the interest charged under these sections, and the Tribunal found no error in this decision, affirming that non-residents whose total income is subject to tax deduction at source are not liable for such interest.

5. Binding Nature of Circular No. 742:
The Tribunal considered the CIT(A)'s finding that Circular No. 742 was prejudicial to the interest of the assessee and not binding. The Tribunal agreed with the CIT(A) that the gross receipt mentioned in the circular should be interpreted on a cash basis, aligning with the assessee's method of accounting.

6. Existence of a Permanent Establishment (PE) in India:
The Tribunal reviewed the Assessing Officer's claim that the assessee had a PE in India through its agents, Zee Telefilms Limited (ZTL) and El Zee. The Tribunal found that the CIT(A) correctly held that the assessee did not have a PE in India. The Tribunal emphasized that for a PE to exist under Article 5(1) of the Indo-Mauritius DTAA, there must be a fixed place of business, which was not the case here. The Tribunal noted that the agents' activities did not constitute a fixed place of business or a dependent agent PE under Article 5(4).

7. Attribution of Profits to the PE and Arm's Length Remuneration:
The Tribunal addressed the issue of profit attribution to the PE, if one were to exist. It referred to the Supreme Court's judgment in the case of Morgan Stanley, which established that if an agent is remunerated on an arm's length basis, no further profits can be attributed to the PE. The Tribunal found that the assessee had paid arm's length remuneration to its agents, and therefore, no additional profits could be taxed in the hands of the assessee. This position was consistent with the Tribunal's previous decisions and the Bombay High Court's ruling in Set Satellite Pte Ltd Vs CIT.

Conclusion:
The Tribunal dismissed the revenue's appeals as infructuous and allowed the cross-objections filed by the assessee. The Tribunal upheld the CIT(A)'s findings on all issues, including the treaty entitlements, classification of income, applicability of interest, binding nature of Circular No. 742, and the existence and tax implications of a PE in India. The Tribunal's decision was consistent with established legal principles and judicial precedents, ensuring that the assessee's income was taxed appropriately under the relevant tax treaties.

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