2019 (2) TMI 34 - AT - Income Tax

Attribution of profit to Indian entity - remuneration paid by the assessee to the Indian entity - whether at arm s length price or not? - PE in India - India Mauritius DTAA - business connection - agent of independent status in terms of the provisions of Article 5(5) of the DTAA - assessee is engaged in the business of acquiring and allotting advertisement time and programme sponsorships in connection with ESPN and Star Sports channel in Television, which it acquires the advertisement time from ESPN Star Sports Singapore - Indian entity is also carrying out many other activities relating to transmission of all the assessee s channel and also providing access to the cable operators to the downlink the channel through access code - Held that - Indian entity has been appointed as independent representative for soliciting TV ad on the channels and to collect and remit advertisement charges to ESS Mauritius. It is only authorized to solicit television advertisement for the Indian Territory. The compensation part clearly shows that the commission would be paid @10% of net billed advertisement actually collected by it or received by ESS Mauritius for the advertisement solicited by the Indian entity. From the perusal of the transfer pricing order, in the case of ESPN India, it is seen that it carried various functions of other entities for the ESPN group like, distribution of ESPN Star Sports Channel in India for which it collects subscription fees from the cable distributors. This activity of function is not carried out for the assessee but for different group entity. Only function carried out by the Indian entity is that it is doing solicitation and collection of advertisement revenue and remitting the same to the assessee. Qua this function, the remuneration paid by the assessee to the Indian entity which is subjected to tax in India is @10% which has been accepted to be at arm s length. No other functions are carried out or there are any other transaction by the Indian entity vis- -vis the assessee and all other functions of the ESPN India relate to distribution of the channel of other entities for which it is paid subscription fee . If one goes by the overall revenue earned by the Indian Entity, then transaction with the assessee is much less than 5%, as noted by the TPO in his order. The receipt of advertisement commission only has been received from the assessee. Thus, if the Indian entity has been remunerated at arm s length price, then no further attribution of profit can be made. Thus as relying on DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) VERSUS MORGAN STANLEY AND COMPANY INC. 2007 (7) TMI 201 - SUPREME COURT once the payment made by the assessee to the Indian entity have been accepted to be at arm s length price then no further attribution is required to be done. Accordingly, the addition made on account of attribution of profit is directed to be deleted. - Decided in favour of assessee

Issues Involved:
1. Liability of the appellant to be assessed under the Income-tax Act, 1961.
2. Existence of a business connection in India.
3. Determination of a fixed place permanent establishment (PE) in India.
4. Status of ESPN India as a dependent agent PE (DAPE).
5. Attribution of profits to the alleged PE.
6. Allowance of provision for doubtful debts.

Detailed Analysis:

1. Liability to be Assessed under the Income-tax Act, 1961
The appellant denied its liability to be assessed under the Income-tax Act, 1961, arguing that the Learned Commissioner of Income-tax (Appeals) XXIX erred in appreciating the facts and circumstances of the case, leading to factually incorrect findings.

2. Existence of a Business Connection in India
The CIT(A) upheld the Assessing Officer’s (AO) decision that the appellant had a business connection in India through ESPN Software India (P) Ltd. (ESPN India), thus earning income from sources in India as per Section 9(1)(i) of the Act. The appellant argued that the revenue from advertisements, being business profits, were not subject to tax in India under Article 7 of the India-Mauritius DTAA, as it did not have a PE in India.

3. Determination of a Fixed Place Permanent Establishment (PE) in India
The CIT(A) and AO concluded that the appellant had a fixed place PE in India under Article 5(1)/5(2) of the India-Mauritius DTAA. The AO cited the Special Bench of Delhi ITAT’s decision in M/s. Nokia Networks OY vs. DCIT, attributing 70% of the profit from the Indian PE to the appellant.

4. Status of ESPN India as a Dependent Agent PE (DAPE)
The CIT(A) and AO held that ESPN India was a dependent agent PE of the appellant under Article 5(4) of the DTAA. They argued that ESPN India was not an agent of independent status as it was wholly devoted to ESPN group activities and did not enjoy autonomy in decision-making. The appellant contended that ESPN India was an independent agent, economically independent, and bore its own business risks.

5. Attribution of Profits to the Alleged PE
The CIT(A) attributed 50% of the profits of the appellant to its Indian operations. The appellant argued that once the transactions with the Indian company were held at arm’s length by the Transfer Pricing Officer (TPO), no additional profits could be attributed. The CIT(A) rejected this, stating that the TPO had not analyzed all functions carried out by the Indian entity for the appellant.

6. Allowance of Provision for Doubtful Debts
The appellant argued that the CIT(A) erred in not allowing the provision for doubtful debts while considering the net profits for the purpose of attribution to the alleged PE, as allowable under Article 7(3) of the DTAA.

Judgment Summary:
The Tribunal held that the remuneration paid by the appellant to ESPN India was at arm’s length, as accepted by the TPO. Therefore, no further attribution of profits was required. The Tribunal referred to several judgments, including DIT vs. Morgan Stanley & Co., where it was established that if the agent is remunerated at arm’s length, no additional profit can be attributed to the PE. Consequently, the Tribunal directed the deletion of the addition made on account of attribution of profit.

The Tribunal found that the issue of PE became purely academic given the acceptance of arm’s length remuneration. The appeals for both Assessment Years 2003-04 and 2004-05 were allowed, and the order was pronounced in the open court on 20th August 2018.

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