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2020 (8) TMI 318 - AT - Income TaxTDS u/s 195 - Default u/s 201(1) 201(IA) - Production Services Agreement - Permanent Establishment (PE) in India - India-UK DTAA - commissioning agreement with another UK based non-resident corporate entity namely M/s Desi Boyz Production Ltd. (in short DBPL ) on 01/09/2010 to produce, complete and deliver a feature film namely Desi Boyz (in short film ) - responsibility to produce the film was on M/s DBPL against certain lump-sum consideration - DBPL entered into one production services agreement on same datewith another resident entity namely Eros International Films Private Limited (EIFPL / service company) as a producer of the proposed film, with a view to avail certain specific and limited production services from M/s EIFPL, entered into this contract. HELD THAT - M/s DBPL could not said to be solely dependent upon the assessee for finance requirements. In financial year 2011-12, the revenue earned by M/s DBPL from the assessee on account of commissioning of film has been reflected as its turnover. M/s DBPL has reflected loss of 1.67 million pounds as loss on ordinary activities before taxation. This is sole activity being carried out by M/s DBPL. Therefore, the provision of Article-10 of the treaty, in our considered opinion, could not be applied in such a situation since it could not be said that the assessee participated directly or indirectly in management, control or capital of M/s DBPL. Further, M/s DBPL was a loss-making entity coupled with the fact that the assessee was assessed u/s 143(3) on 27/01/2014 wherein its returned income was duly accepted by the revenue and there was no allegation of over / under payment to M/s DBPL. Therefore, the assessee could not be said to be Associated Entity of M/s DBPL in terms of Article-10 of the Treaty. Hence, the conclusion drawn by Ld. AO, in this regard, could not be sustained as per the Treaty terms. In our considered opinion, M/s DBPL was acting as an independent entity which was required to carry out the assigned work independently and the assessee could not said to be PE of that entity in India. So far as the terms of service agreement between M/s DBPL and M/s EIFPL are concerned, we have concluded that the contract between the two entities was primarily that of a principal and agent. M/s EIFPL, acting on behalf of producer, was required to provide limited production services against lump sum fee of ₹ 300 Lacs. The said services were to be provided under control, supervision as well as the direction of the producer. Status of M/s EIFPL would be that of independent agent and not a dependent agent as alleged by AO. We concur with AR s submissions that the said agreement was merely to assist the production of the film and to provide limited services in relation to delivery of a feature film. M/s EIFPL was entrusted with the responsibility of arranging the crew and the requisite equipment which were to be procured from India. The said contract was given to the Indian entity in order to perform the Indian part of the production services and M/s DBPL was to pay the requisite fees. M/s EIFPL carried out its activities as an independent agent. Therefore, it could not be termed as Permanent Establishment for M/s DBPL in terms of Article-5 of the Treaty. This view, as taken by lower authorities, could not be concurred with. On the facts and circumstances, we hold that the assessee and M/s DBPL could not be held to be Associated Enterprises in terms of Article-10 of the Treaty. The assessee could not be treated as PE of M/s DBPL in India. Further, the status of M/s EIFPL vis- -vis M/s DBPL would be that of an independent agent and M/s EIFPL could not said to be PE of M/s DBPL. No profit could be said to have accrued to M/s DBPL in India as alleged by the revenue. As a logical consequence, the assessee could not be treated as assessee-in-default in terms of Sec.201(1) 201(1A) of the Act. Therefore, by deleting the impugned demand, we allow the appeal of assessee.
Issues Involved:
1. Applicability of Section 195 of the Income Tax Act, 1961 on foreign remittances. 2. Determination of the assessee as "assessee-in-default" for non-deduction of tax. 3. Charging of interest under Section 201(1A) for non-deduction of tax. 4. Relationship and roles of the entities involved (assessee, DBPL, EIFPL) and whether they constitute Permanent Establishment (PE) or Associated Enterprises (AE). Detailed Analysis: 1. Applicability of Section 195 of the Income Tax Act, 1961 on Foreign Remittances: The assessee, a resident corporate entity, entered into a commissioning agreement with a UK-based non-resident entity, DBPL, to produce a feature film. The assessee remitted funds to DBPL without deducting tax at source, arguing that DBPL had no Permanent Establishment (PE) in India and the services were rendered outside India. The Assessing Officer (AO) disagreed, stating that the entire film production was managed by EIFPL, an Indian entity, making it a PE of DBPL in India. The Tribunal concluded that the contract between the assessee and DBPL was on a principal-to-principal basis, and DBPL acted as an independent service provider. Therefore, the provisions of Section 195 did not apply. 2. Determination of the Assessee as "Assessee-in-Default" for Non-Deduction of Tax: The AO issued a show-cause notice to the assessee, asserting that the assessee and DBPL were Associated Enterprises (AE) and that EIFPL was a PE of DBPL in India. The AO concluded that the assessee should have deducted tax at source under Section 195. The Tribunal found that DBPL operated independently and was not financially dependent on the assessee. Therefore, the assessee could not be considered an AE of DBPL, and the assessee was not in default for non-deduction of tax. 3. Charging of Interest under Section 201(1A) for Non-Deduction of Tax: The AO raised a demand for tax liability and interest under Sections 201(1) and 201(1A), respectively, for the assessment years 2011-12 and 2012-13. The Tribunal, having concluded that the assessee was not required to deduct tax at source, also held that the interest charged under Section 201(1A) was not applicable. 4. Relationship and Roles of the Entities Involved: The AO argued that the assessee, DBPL, and EIFPL were Associated Enterprises, and EIFPL was a PE of DBPL in India. The Tribunal analyzed the agreements and found that: - The commissioning agreement between the assessee and DBPL was on a principal-to-principal basis, with DBPL responsible for producing and delivering the film independently. - The production services agreement between DBPL and EIFPL was primarily that of a principal and agent, with EIFPL providing limited production services under DBPL's control. - EIFPL had substantial independent business activities and could not be considered a dependent agent or PE of DBPL. Conclusion: The Tribunal held that the assessee and DBPL were not Associated Enterprises under Article 10 of the India-UK DTAA, and the assessee could not be treated as a PE of DBPL in India. Consequently, no profit accrued to DBPL in India, and the assessee was not liable for tax deduction at source under Section 195. The appeals for both assessment years were allowed, and the demands raised by the AO were deleted.
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