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TMI Blog2017 (11) TMI 2017X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AO that the assessee had Agency PE,but nothing has been brought on record to prove that the agreements between the assessee and Set India was not on Principal to Principal basis. Set India had no authority to conclude any contract on behalf of the assessee in India.On the other hand,while selling the airtime inventory distributing AXN and ANIMAX channels in India,Set India would act on its own right and not on behalf of the assessee. It was not dependent on the assessee economically or legally.It is also a fact that Set India also carried out significant marketing and estimation activities for other channels namely Set, Set Max and HBO (till 31/12/2004). Therefore, set India has to be treated as an independent entity which carried out its own business employing its own capital and bearing connected risks. It cannot be treated an agent, a dependent agent,of the assessee. We find that the revenue earned by Set India was not on behalf of the assessee,that it was making payment to the assessee for the purchases made by it,that it was not subject to any control of the assessee as far as conducting of business in India was concerned,that the activities of Set India were not devote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed appeals for the above-mentioned assessment years (AY.s). The AO has filed appeals for two AY.s. As most of the issues in the appeals are similar, so, we are adjudicating all the appeals together. The details of dates of filing of returns, returned incomes, dates of assessments, assessed incomes, dates of orders of the CIT (A)/Directions of DRP can be tabulated as under: A. Y. ROI filed on Returned Income Asst. dt. Assessed Income Order of DRP-II/CIT (A) 10-11 29/03/12 Nil 26/11/13 Rs. 7. 15crores 29/10/13 09-10 29/09/09 Nil 17/08/12 Rs. 5. 73 crores 09. 07. 12 08-09 30/09/08 Nil 19/05/11 Rs. 4. 97, crores 28/03/11 07-08 26/10/07 Nil 21/10/10 Rs. 415, crores 24/09/10 06-07 27/11/06 Nil 01/12/08 Rs. 36. 02, crores 01. 10. 12 05-06 31/10/05 Nil 20/12/07 Rs. 27. 33, crores 01. 10. 12 ITA/522/Mum/2013-(AY -2005-06): 2. Assessee-company was incorporated in April, 2004 and is a resident of USA. It is engaged in the business of operating satellite television channels, marketing and distribution of the television channels and related activities During the year under consideration, it operated two channels namely ANIMAX and AXN. 2.1. Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable to such PE and was subject to tax in India, that due to the encompassing nature of Article 5(4)(b) of the Article of the tax treaty the activities of the assessee would be liable for taxation purposes in India, that Set India was maintaining stock of goods/merchandise in India, that the same was advertisement space belonging to the assessee, that set India would enter into contract with the parties on be of the assessee and would also market and book all available airtime, that Set India was an exclusive agent of the assessee, that apart from Set India no one had authority to work for the assessee, that entire activities of the assessee was wholly carried out by Set India in India, that Set India was dependent agent of the assessee and constituted its PE as per Article 5 (8) of the tax treaty, that Set India habitually exercise its authority to conclude the contract, that such authority proved existence of a PE of the assessee in India. Referring to the provisions of Article 5 (5) of the agreement, he held that the activities of Set India were devoted wholly or almost wholly on be of the assessee, that the transactions between the assessee and Set India were not at arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head to maintain the IRD in term of the agreement, that assessee conducted quarterly meetings with Set India and their subcontractors for growth of business, that rate card of the assessee was determined in consultation with Set India, that set India provided regular collection updates, finance and accounting reports to the assessee on monthly basis, that it had the right to audit the accounts of Set India and reconcile the accounts, that assessee had retained its commercial interests in the activities of Set India. Referring to the order of Satellite Television Asia Region Ltd. (supra), the FAA held that assessee was a resident of treaty country, that existence of a business connection was a question of fact, that it was dependent on the real nature and activity of the non-resident in India and the manner in which the business was conducted by the non-resident entity, that the facts of the case under consideration were similar to the facts of the case of Satellite Television Asia Region Ltd. (supra), that the assessee had a business connection in India. 3.1. The FAA directed the assessee to explain the details of other activities of Set India to decide the issue of PE. After con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in consultation with Set India, that the bad debts were to be borne by both the parties, that arguments of the assessee were not tenable on facts, that the assessee was utilizing the services of SET India extensively for monitoring and controlling of sale of advertisements and distribution of channels, that activities of both the entities were inter-laced, inter-connected , inter-dependent and inter-linked, that the agreement was not for purchase and sale of advertisement air time, that it was a revenue sharing arrangement depending upon the gross advertisement airtime revenue, that the relationship between the assessee and SET India was that of a principal and an agent. He also referred to the case of ARMEX International Logistics Pvt. Ltd. and held that facts of both the cases were similar. The appellant had a PE in India in terms of Article -5 of the treaty. He further held that the rate of 10% applied on gross collection to estimate the taxable income was in effect rate of 16. 67% of net advertisement and distribution revenue, that rate of 15% on the net revenue, received by the assessee from SET India was to be taxed in India. 4. Before us, the Authorised Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable by the assessee was USD 7,65,000 determined by a resale price minus method and adjustable on the basis of final net advertisement sales, that additional 50% of net advertisement sales was paid to the appellant in addition to forecasted advertisement sales of USD 9 lakhs, that the monthly distribution fee receivable by the assessee was 75% of gross distortion revenue collected by Set India in respect of AXN channel, that in addition to it a sum of USD 3,08,660 was also payable as bonus fee, that in the case of ANIMAX channel Set India had to pay USD 2,32,500 as per resale price minus method, that the sum payable to the assessee was restricted to 75% of final achieved gross distribution revenue by Set India, that the bad debts of Set India up to 3% was to be borne by the assessee for determination of its revenue recoverable, that the final revenue from sale of advertisement airtime and distribution of channels collected by Set India was relevant for the assessee to determine its tax liability, that the AO applied of Rule 10 of the Rules and determining the income of the assessee at Rs. 2.37 Crores, that the FAA upheld the order of the AO, that he held that the assessee had busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not devoted wholly or almost wholly for the assessee. We have also taken note of the facts that the revenue of the assessee was not entirely dependent on the earning of set India, that the employees of set India would work only for Set India and not for any other entity of the group, that the departmental authorities have not alleged that the transaction between the assessee and Set India were not at arm's length, that in the TP orders the TPO.s (AY.s. 2005-06, 2006-07, 2007-08, 2008-09 and 2010-11) have held that no TP adjustments were required to be made to the income of the assessee on account of advertisement revenue or distribution revenue. 5.2. Regarding applicability of the provisions of section 40(a)(ia) of the Act, we want to state that we have already held that assessee did not have any PE in India and that it had no business income arising India. It is also a fact that it has not claimed any deduction for expenses incurred in India. Therefore, the FAA was not justified in holding that provisions of section 40 (a) were applicable in the case under consideration. As the assessee did not have business connection India as well as Agency PE/Base BE and Set India was not agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his file for adjudicating the other grounds also. 4. In pursuance of the order of the Tribunal, the FAA initiated appellate proceeding. Before him, the assessee made elaborate submissions about PE, provisions of Indo-Netherland Tax-treaty, Circular 742 issued by the CBDT and levying of interests u/s. 234 of the Act etc. 4.1. After considering the submissions of the assessee and the original order passed by the AO, the FAA held that STAR Ltd. , IGN BV, STAR India were part of the same group, that STAR India had been incorporated primarily to promote business activities of other entities. He referred to the case of DHL Operations NV(142 taxmann. 137)and held that due to close proximity between companies operating in India and outside India if it was found that foreign company was substantially conducted its business in India then it had to be held that Indian company was a PE. Finally, he observed that the AO had rightly held that the assessee had a PE in form of STAR India, in India. With regard to payment of arm's length remuneration to STAR India the assessee had argued that no further attribution of income should be made in the hands of the assessee. The FAA also held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicit advertisement in India for Channels, that the agent had to solicit the advertisement at the rates fixed by the assesee, that it could not enter in to any agreement with any client independently, that the even after agreement the assessee was the final and deciding authority to decide the fate of the advertisement, that the agent was to receive fix percentage of the invoiced amount as commission. The agent was free to carry out any other business. If all these facts are considered cumulatively, it becomes clear that the agent had no power to bind the assessee in any legal obligation. 6.1. Before proceeding further, we would like to refer to paragraph(v)and(vi)of Article 5 of the India-Holland DTAA and same read as under: "5. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 6 applies is acting in one of the States on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first State if, 6. An enterprise of one of the States shall not be deemed to have a permanent establishment in the other State merely because it carries on b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of revenue from the assessee for the AY. 1999-2000 which was 13. 59%, whereas in the assessment year 2004- 05 the percentage was as low as 0. 003%. Clearly, SIPL has to be treated as an independent agent, acting in its ordinary course of business. 6.2. One more aspect in this regard has to be considered and that is the payment made by the assessee to SIPL are at arm's length. The assessee had paid commission to SIPL at the rate of 15% and the rate was as per the norms of the industry. Therefore, there cannot be further attribution of income in the hands of the assessee. From the AY.s 1998-99 to 2001-02 transfer pricing provisions were not applicable to the international transactions entered in to by the assessees with their AE. s. Besides, industry specific competitive data were not available in the public domain. Therefore, what is to be seen is the commission rate considered normal for the industry. It is a settled position that where the Indian agent is remunerated on an arm's length basis by foreign principal there would not be any further attribution of profits in the hands of the foreign principal. Circular 5 of 28/09/2004 stipulates that amount of profits attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of circular 742 were applicable to the facts of the case under consideration. 6. 4. We find that in the case of Set Satellite Singapore PTE Ltd. (supra)similar issues have been considered by the Hon'ble High Court. Facts of the case were that the assessee, a resident of Singapore, was having business activities in India, that through its dependent agent, namely SET India (P. )Limited, it carried on marketing activities in India for advertisement slots by canvassing advertisements in India, that it claimed that it did not have any tax liability in India as it did not have a PE in india, that it was also argued that its dependent agent was remunerated on an arm' s length basis, that income from various activities had been assessed to tax in the hands of SET India, that there could not be further assessment of income in the hands of the assessee on account of the said activities. Reliance was placed on Circular No. 23, dated 23/07/1969, issued by the CBDT. While filing revised return on 05/03/2001, it computed its taxable income as per the formula prescribed in the Circular No. 742 without prejudice to its contention that, it did not have any income which was ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the dependent agent permanent establishment. Deciding the matter the Hon'ble High Court held as under: "…. in the matter of tax what has to be considered and more so in international transactions if there be a treaty, are the provisions of the treaty and if the provisions of the treaty are more advantageous to an assessee, then that construction will have to be given which is advantageous to the assessee. Circular No. 23, dated July 23, 1969, sets out that where a non-resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent's services, provided that (i) the non-resident principal's business activities in India are wholly channelled through his agent ; (ii) the contracts to sell are made outside India ; and (iii) the sales are made on a principal-to-principal basis. The Commissioner of Income-tax (Appeals) had recorded a specific finding in favour of the appellant in the affirmative on all the three counts. Circular No. 23 would be binding on the Assessing Officer and had to be considered wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. of net ad revenue (i. e. , gross ad revenue less agency commission). Simultaneously, the appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenue. Considering all these aspects and the fact that the agent has a good profitability record, it held that the appellant has remunerated the agent on an arm' s length basis. 16. This finding of the Tribunal has not been disputed by the Revenue. The entire contention of the Revenue is that the advertisement revenue pertaining to its own channel and AXN channel are also taxable in India. 17. We may firstly point out that the Commissioner of Income-tax has dealt with the issue as to why the advertisements received by the appellant were not liable for being taxed in India based on the Central Board of Direct Taxes Circular No. 23, dated July 23, 1969, which clearly sets out that where a non-resident' s sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent' s services, provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng given by the Tribunal has to be set aside. In matters of tax what has to be considered and more so in international transactions if there be a treaty, the provisions of the treaty and if the provisions of the treaty are more advantageous to an assessee, then the construction will have to be given which is advantageous to the assessee. At this stage we may note that on behalf of the assessee learned counsel has produced an order passed by the Additional Commissioner of Income-tax (Transfer Pricing-II), Mumbai in the matter of determination of arm' s length price with reference to all the transactions reported in Form No. 3CEB filed by the assessee. The assessee is SET India, the depending agent. The order records that the assessee is engaged in the business of providing audiovisual television content and also acts as an advertising agent of SET Satellite Singapore Pvt. Ltd. The assessee distributes these channels to the Indian cable operators and that the assessee has applied the TNM method to determine the arm' s length price for its international transaction. It, however, clarified that the order is in respect of reference received for the assessment year 2002-03 and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that on the facts that there is a service permanent establishment under article 5(2)(l) and as such held that the Department was right in its contention that there exists a permanent establishment in India. Considering Article 7 of that treaty the court observed that what is to be taxed under article 7 is income of the MNE attributable to the permanent establishment in India and what is taxable under article 7 is profits earned by the MNE. Under the Income-tax Act the taxable unit is the foreign company, though the quantum of income taxable is income attributable to the permanent establishment of the said foreign company in India. The court observed that the important question which arises for determination is whether the Authority for Advance Ruling is right in its ruling when it says that once the transfer pricing analysis is undertaken there is no further need to attribute profits to a permanent establishment. The court further noted that the computation of income arising from international transactions has to be done keeping in mind the principle of arm' s length price. The court further reiterated that the main point for determination is whether the Authority for Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then nothing further would be left to be taxed in the hands of the foreign enterprise. 23. Considering the above principle as may be discerned from the judgment in DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007ANIMAX 292 ITR 416 (SC) it would be clear that : (1)Considering the Central Board of Direct Taxes Circular No. 742 it would be fair and reasonable that the taxable income is computed at 10 per cent. of the gross profits. In the instant case in so far as marketing services are concerned by the arm' s length principle what has been paid is more than 10 per cent. as can be seen from the order of the Commissioner of Income-tax (Appeals). This was not disputed by the Revenue in its appeal before the Income-tax Appellate Tribunal. (2) The only contention advanced and which found favour with the Tribunal was that the advertisement revenue received by the assessee was also income liable to tax in India. The Commissioner of Income-tax (Appeals) relied upon Circular No. 23 of 1969. That Circular read with article 7(1) would result in holding that advertisement revenue received by the appellant are not taxable in India as long as the treaty and the Circul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XN with Set India dated 01/07/2004 and 01/05/2004 (Pg. 133 to 154 of the Paper book and the terms of agreement of NGC Network Asia Ltd. We find that ANIMAX Sales and Purchase Agreement under the heading contracting party stipulates as under: "All advertising agreement shall be entered in to by SET, on its own account. In its dealing with third parties, SET shall not represent itself as an agent of SPE" The assessee had veto rights over advertisements. (Pg. 140 of the PB). Similar arrangements find place in other agreements. A comparison of the agreement of NGC Network Asia Ltd. and the agreements of the assessee reveal that both are similar. Considering the above, we decide the effective ground of appeal in favour of the assessee. ITA/510 /Mum/2013-AY. 2005-06: 6. Solitary ground of appeal, raised by the AO, deals with profit rate of 15% as against 16. 67% adopted by the AO. While deciding the appeal the FAA had directed the AO to tax the assessee at a lower rate (15%), as stated earlier. While deciding the appeal of the assessee, we have already held that the assessee was not liable to pay tax in India, for the year under consideration. As no income is to taxed, so, questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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