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2010 (1) TMI 55 - AT - Income Tax


Issues Involved:
1. Business connection in India under Section 9 of the IT Act.
2. Permanent Establishment (PE) in India under Article 5 of the DTAA between India and the UK.
3. Attribution of profits to the PE.
4. Arm's length remuneration to the Indian agent.
5. Applicability of CBDT Circulars.

Detailed Analysis:

1. Business Connection in India under Section 9 of the IT Act:
The assessee, a company incorporated under the laws of England and Wales, operated as an international consumer media company. It had an indirect subsidiary in India, BWIPL, which was appointed as the authorized agent for soliciting orders for the sale of advertising airtime on the BBC World Channel. The AO held that the assessee had a business connection in India under Section 9(1) of the IT Act, as BWIPL was acting as an agent and rendering services on behalf of the assessee. The learned CIT(A) confirmed this view, stating that BWIPL constituted a business connection of the assessee.

2. Permanent Establishment (PE) in India under Article 5 of the DTAA between India and the UK:
The AO also held that BWIPL constituted a PE of the assessee in India under Article 5(4)(a) and Article 5(4)(c) of the DTAA between India and the UK. The assessee contended that BWIPL was merely canvassing for orders and did not have the authority to enter into contracts on behalf of the assessee. The learned CIT(A) disagreed, holding that the assessee had a PE in India.

3. Attribution of Profits to the PE:
The AO estimated the profits of the assessee at an ad hoc rate of 20% of the total advertisement revenue attributed to India. The learned CIT(A) reduced this rate to 10%, placing reliance on CBDT Circular No. 742. The assessee argued that BWIPL was remunerated on an arm's length basis, which should extinguish any further tax liability. The Department contended that the assessee did not maintain India-specific accounts and that the profits had to be estimated.

4. Arm's Length Remuneration to the Indian Agent:
The assessee argued that the commission of 15% paid to BWIPL was a fair transfer price, as accepted by the Department in the transfer pricing order for BWIPL for the assessment year 2002-03. The assessee relied on the decision of the Bombay High Court in SET Satellite (Singapore) Pte. Ltd., where a similar commission was held to be at arm's length. The Department argued that no FAR analysis was conducted to prove that nothing more was required to be attributed to the PE.

5. Applicability of CBDT Circulars:
The assessee argued that CBDT Circular No. 742 was not applicable as it maintained country-specific accounts. The Department contended that the circular was applicable, as the assessee did not maintain such accounts. The Tribunal held that the circular was not applicable, as the assessee had filed its country accounts for India.

Conclusion:
The Tribunal found that the assessee's case was justified. It held that the commission of 15% paid to BWIPL was at arm's length and that nothing further was required to be taxed in India. The Tribunal relied on the decisions in SET Satellite and Morgan Stanley, which supported the assessee's contention. The appeal filed by the assessee was allowed.

 

 

 

 

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