2008 (8) TMI 96 - HC - Income Tax

Appellant, resident of Singapore - Appellant through its dependent agent in India is carrying on marketing activities - in view of treaty & Circular No.23 of 1969, in so far as marketing services are concerned by the arm s length principle what has been paid is more than 10%, advertisement revenue received by the appellant are not taxable in India - Merely because tax on income was paid for some assessment years would not estop the assessee from contending that its income is not liable to tax

Issues Involved:
1. Taxability of advertisement revenues from the appellant's own channels.
2. Taxability of advertisement revenues from third-party channels.
3. Application of the arm's length principle and its effect on the tax liability of the appellant.
4. Imposition of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Advertisement Revenues from the Appellant's Own Channels:
The appellant, a resident of Singapore, contended that only income attributable to its Indian operations, specifically marketing of ad time slots, can be taxed in India. The Commissioner of Income Tax (Appeal) held that the ad revenues earned were not attributable to the appellant's Indian operations as the contracts to sell were made outside India and the sales were on a principal-to-principal basis. The Commissioner relied on Circular No.23 dated July 23, 1969, which states that where a non-resident's sales to Indian customers are secured through an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit attributable to the agent's services. The Tribunal, however, disagreed, stating that the tax liability of a foreign enterprise is not extinguished by making an arms-length payment to the dependent agent.

2. Taxability of Advertisement Revenues from Third-Party Channels:
The Commissioner of Income Tax (Appeal) found that the distribution income from the AXN channel belonged to SET India and not the appellant. This income had already been taxed in the hands of SET India. The Commissioner also held that distribution rights are a commercial right distinct from a copyright, and thus there was no question of payment of royalty. The Tribunal, however, allowed the Revenue's appeal, stating that advertisement revenue pertaining to the AXN channel is taxable in India.

3. Application of the Arm's Length Principle and Its Effect on the Tax Liability of the Appellant:
The appellant argued that since it had remunerated its dependent agent, SET India, on an arm's length basis, no further profits should be taxed in its hands. The Tribunal, however, held that the arm's length payment to the dependent agent does not extinguish the tax liability of the appellant in India. The Tribunal relied on international guidelines and literature, including the OECD and IFA, to support its view. The appellant cited the Supreme Court judgment in DIT (International Taxation) vs. Morgan Stanley & Co. Inc., which held that if a dependent agent is remunerated on an arm's length basis, no further profits would be attributable to the foreign enterprise.

4. Imposition of Interest under Sections 234A, 234B, and 234C of the Income Tax Act:
The Commissioner of Income Tax (Appeal) directed the Assessing Officer to delete the interest levied under Sections 234B and 234C of the Income Tax Act. The Tribunal upheld this view, agreeing that the interest should be deleted.

Conclusion:
The High Court allowed the appellant's appeal, setting aside the Tribunal's order. The Court held that the advertisement revenue received by the appellant is not taxable in India as long as the treaty and Circular No.23 of 1969 stand. The Court also reiterated that if the correct arm's length price is applied and paid, nothing further would be left to be taxed in the hands of the foreign enterprise. The order of the Commissioner of Income Tax (Appeal) was restored, except for the part where it stated that it could not interfere because the appellant had paid the tax.

← Previous Next →