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2010 (1) TMI 55 - AT - Income TaxIncome accrued in India - business connection in India u/s 9 - Profits attributable to the foreign enterprises PE in India - profits of the assessee were estimated at an ad hoc rate of 20 per cent of the total advertisement revenue attributed to India - whether the ld CIT(A) has correctly assessed the assessee's profits attributable to the foreign enterprises PE in India @ 10 per cent of the gross revenue receipts from India - AO held that the income of the assessee company from the advertisement revenues accrued or arose in India u/s. 9(1). It was held that BWIPL constituted a business connection of the assessee as well as a PE under art. 5(4)(a) and art. 5 (4)(c) of the DTAA between India and the UK. The profits of the assessee were estimated at an ad hoc rate of 20 per cent of the total advertisement revenue attributed to India. HELD THAT - Where the transaction was held to be at arm's length, the ruling of the AAR was correct in principle, provided that an associated enterprise, which also constituted a PE, was remunerated on arm's length basis, taking into account all the risks-taking functions of multinational enterprises and that in such a case, nothing further would be left to attribute to the PE. Assessee has also sought to place reliance on the decision of SET Satellite (Singapore) Pte. Ltd. vs. Dy. Director of IT (International Taxation) 2008 (8) TMI 96 - BOMBAY HIGH COURT wherein as commission of 15 per cent of gross advertisement revenue paid by SET Singapore, the foreign company, to its agent, SET India, which agent was held to constitute SET Singapore's dependent agent PE, was held to represent price computed at arm's length. The facts in the present case are found to be at parity with those present in SET Satellite. As such, we hold that SET Satellite has rightly been relied on behalf of the assessee and that it is directly applicable to the assessee's case. It is seen that CBDT Circular No. 765, extended Circular No. 742. As per CBDT Circular No. 742, it was needed to be established, for the applicability of the circular, that the assessee or a non-resident foreign telecasting company and that it did not have a branch office or a PE or did not maintain country-wise accounts of its operations. The circular would not apply in the event of any of the said conditions being not satisfied. All the conditions are not to be cumulatively satisfied so as to apply the circular. In the assessee's case, the assessee had filed before the AO its country accounts for India, wherein the total revenues and expenses of the assessee were allocated to its Indian activity. A copy thereof has been placed before us. Before the CIT(A), the assessee also filed its audited accounts containing allocation of revenues and expenses to its Indian activity. A copy thereof has also been furnished before us. The ld CIT(A) remanded these to the AO. Therefore, evidently, CBDT Circular No. 742 does not apply. Apropos reliance on the TPO's order in BWIPL, it does not make a difference if the order of the TPO in that case was that of a dependent agent. The TPO had accepted that the transaction was at arm's length price. It was observed that almost everyone in the assessee's line of business was charging the same rate of commission on the sale of airtime on TV channels or FM channels. In view of the above, the case made out by the assessee is found to be justified. Its grievance is thus accepted.
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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