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TMI Blog2023 (5) TMI 1299X X X X Extracts X X X X X X X X Extracts X X X X ..... MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER For the Assessee : Shri Ketan Ved Shri Abdul Kadir Jawadwala For the Department : Shri Kunal Haver ORDER PER S. RIFAUR RAHMAN (AM) 1. These appeals are filed by the assessee against different directions of the Dispute Resolution Panel of Learned Commissioner of Income Tax (DRP-3), Mumbai-2 [hereinafter in short Ld.DRP ] dated 21.06.2022 for the A.Ys. 2018-19 and 2019-20, passed u/s. 144C(5) of Income-tax Act, 1961 (in short Act ). 2. Since the issues raised in both these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 2425/MUM/2022 for Assessment Year 2018-19 as a lead year. 3. Assessee has raised following grounds in its appeal: - 1. That the order of the Learned Deputy Commissioner of Income-tax, Circle 3(2)(2) International Taxation, Mumbai ( the learned Assessing Officer or the the learned AO ) passed pursuant to the directions of the learned Dispute Resolution Panel3 Mumbai ( the learned Panel or the learned DRP ) is bad in law and liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the Ground No. 1 to Ground no. 6, on the facts and in the circumstances of the case and in law, the learned AO/learned DRP erred in attributing the revenues of INR 14,18,01,254 as per Form 26AS as business activity through PE from MFSIPL. However, the income earned from MFSIPL during AY 2018-19 is INR 13,84,73,189 which is claimed as exempt as per return of income. 8. Without prejudice to the Ground No. 1 to Ground no. 7, on the facts and in the circumstances of the case and in law, the learned AO/learned DRP erred in attributing the revenues of INR 35,23,717 from sale of Software products made by MFSI directly to third parties to the alleged DAPE without appreciating the fact that such sale made to third parties were not affected through MFSIPL and taxing it as business income by applying the arbitrarily profit. 9. Without prejudice to the Ground No. 1 to Ground no. 8, the learned AO/learned DRP erred in taxing the total assessed income of INR 5,78,93,810 at the rate 40% along with surcharge and education cess. Without appreciating the fact that interest on refund of INR 54,471 (as per return of income) is offered to tax at the flat rate of 15% as per beneficial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised in this appeal, as learned representatives fairly agree, are covered in favour of the assessee, by a decision of coordinate bench dated 31st August 2021, in assessee own cases for the assessment year 2016-17, wherein the coordinate bench has inter alia observed as follows:- 3. So far as taxability of software sale by the US entity to Indian entities is concerned learned representatives fairly agree that the said issue is now covered by Hon ble Supreme Court s judgement in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax [2021] 125 taxmann.com 42 (SC). As learned representatives fairly agree, the other issues raised in this appeal are covered in favour of the assessee, by the decision of coordinate bench dated 3rd May 2021, in assessee own cases for the assessment year 2014-15, wherein the coordinate bench has inter alia observed as follows:- 3. Learned representative fairly agree that the issue in appeal is covered in favour of the assessee by a co-ordinate bench decision in the case of ADIT vs Asia Today Ltd [(2021) 124 taxmann.com 1 (Mum)], inasmuch as the very basis of taxability in the impugned appeal is existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, requires that there should be a physical location at which the business is carried out. However, mere existence of a physical location is not enough. This location should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well. A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice . Even a case is not made out for the satisfaction of this condition by the Assessing Officer, and, as such, there is no case for the existence of a permanent establishment under Article 5(1). As for the permanent establishment under Article 5(2), even by definition, there cannot be a permanent establishment under Article 5(2) unless it is at least alleged to be covered by one of the specific clauses in article 5(2). As we discuss the case made out by the Assessing Officer, it is also important to note that the Assessing Officer concludes his relevant analysis by adding that In the case of other telecasting channels also it is held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement ; b) a branch ; c) an office ; d) a factory ; e) a workshop ; f) a warehouse, in relation to a person providing storage facilities for others g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; h) a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on ; i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months. j) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 90 days within any 12 month period. 3. Notwithstanding the preceding provisions of this article, the term permanent establishment shall be deemed not to include : a) the use of facilities solely for the purpose of storage or display of merchandise belonging to the enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) shall not, of itself, constitute either company a permanent establishment of the other. 11.The case of the Revenue is thus clearly confined to the existence of DAPE on the facts of this case. The question thus arises as to what are the tax implications of the existence of a dependent agent permanent establishment (DAPE) under Article 5(4). The DAPE is, after all, a type of permanent establishment, and the very concept of permanent establishment is a compromise between source rule and residence rule inasmuch as it provides justification to trigger source jurisdiction taxation over business activities of a foreign enterprise. Unless there is a PE in the source jurisdiction, there cannot be taxation of business profits of the foreign enterprise in the source jurisdiction, and when there is a PE in the source jurisdiction, only so much of profits of the foreign enterprise, as are attributable to a PE, can be taxed in the source jurisdiction- as is the unambiguous mandate of Article 7(1). It is in this context one has to examine the tax implications of DAPE, and that tax implication is that the profits attributable to the DAPE are brought to tax in the source jurisdiction. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this transaction is the DA itself, but this taxability is in respect of the remuneration of the DA. The provisions of the tax treaty are silent on this issue, and rightly so, because the taxability of the DA is quite distinct of the taxability of the enterprise of the contracting state which is in respect of PE of such an enterprise. At the cost of repetition, it is not the DA who constitutes PE of the GE, but it is by the virtue of a DA that the GE is deemed to have a PE, a DAPE though, in the other contracting state. We are of the considered view that in addition of the taxability of the DA in respect of remuneration earned by him, which is in accordance with the domestic law and which has nothing to do with the taxability of the foreign enterprise of which he is dependent agent, the foreign enterprise is also taxable in India, in terms of the provisions of Article 7 of the tax treaty, in respect of the profits attributable to the dependent agent permanent establishment. As we have elaborated earlier in this order, a dependent agent permanent establishment is distinct from the dependent agent. While computing the profits of this dependent agent permanent establishment, a deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany or not. As regards 'B' above, it represents the earnings of the foreign company attributable to the dependent agent permanent establishment, on account of its having a dependent agent in source country. This income is taxable in the hands of the foreign company in the source country and the tax credit in respect of such taxability will be available to the foreign company in residence country. If, in this example, we are to assume that the income of the PE is only the remuneration earned by the agent on net basis, we will end up in a situation that while profits of Sing Co. attributable to India operations will be $ 5,00,000, the taxability of the profits will be confined to only $ 1,000. What is to be taxed under Article 7 is income of the foreign enterprise attributable to the permanent establishment in the host country. The income attributable to the permanent establishment in the host country is the income attributable to foreign company's operations in the host country, which, in turn, implies the income attributable to the activities carried on the foreign enterprise in the host country. That income, as shown in 'B' above is the income arrived at by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment situated therein . Agency remuneration paid by the foreign enterprise is not an income of the foreign enterprise but an expenditure of the foreign enterprise. The taxability of any profit under Article 7 has to be in the hands of the foreign company and not the host company of which dependent agent is resident. Therefore, in it is patently erroneous to suggest that by payment of tax liability by the dependent agent, tax liability of the foreign principal is discharged. So far as Article 7 is concerned, it deals with the taxability of the foreign company. 15.Under the scheme of the Act, the taxable unit is the foreign company, though the quantum of income taxable is such income as may be held to be attributable to the permanent establishment of the foreign company in India. The tax liability of the foreign company and not the Indian dependent agent. However, in case we are to uphold the stand of the learned counsel, we will end up in a situation that taxability of Indian company is to be allowed to extinguish tax liability of the foreign principal. 16.Learned counsel has relied upon the commentaries of various authors including Phillip Baker, Prof. Roy Rohtag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t state. If the drafters of a treaty or model treaty want to provide this, they must notionally attribute it to a contact in that state. This does not mean that they must attribute it to a person or an object in the real world. In the world of law, a legal concept, a figure of thought, will do. The agency permanent establishment is such a figure of thought which makes it technically possible to connect the surplus profit to the agent's state. Thus, it is not only possible, but it is the rule that a profit exceeding the agent's compensation will be submitted to the agent's state . Philip Baker, another eminent international tax expert whose work in referred to, with approval and respect, in many of the judicial precedents from Hon'ble Courts above, did not agree with this approach. In his editorial comments in the International Tax Law Reports, he has favoured the other alternative approach to this issue, i.e., the single taxpayer approach. He observed that, One view (to which editor of these law reports subscribes) is that if the dependent agent is being remunerated on a correct arm's length price for the function he performs, risks he assumes, and the assets h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss ad revenue to its agent, SET India, for procuring advertisements during the period April 1998 to October, 1998. The fact that 15 per cent service fee is an arm's length remuneration is supported by Circular No. 742 which recognizes that the Indian agents of foreign telecasting companies generally retain 15 per cent of the ad revenues as service charges. Effective November 1998, a revised arrangement was entered into between the parties whereby the aforesaid amount was reduced to 12.5 per cent of net ad revenue (i.e., gross ad revenues less agency commission). Simultaneously, the Appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenues. 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. 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. 11 We may firstly point out that CIT has dealt with the issue as to why the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither directly nor indirectly attributable to that of the permanent establishment, would not be taxable in India. The Tribunal in fact in para 10 has recorded a finding that Article 7(2) provides that the arm's length price is the criterion for computation of these hypothetical profits. In our opinion the entire rational or reasoning 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 CIT (Transfer PricingII), 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 audio-visual television content and also acts as an advertising agent of Set Satellite Singapore Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the question of deputation, the Court held that on the facts that there is a service PE under Article 5(2)(1) and as such held that the Department was right in its contention that there exists a PE 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 PE 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 PE of the said foreign company in India. The Court observed that the important question which arises for determination is whether the AAR 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 PE. 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 AAR was right in ruling that as long as MSAS was remunerated for its services at arm's length, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is computed at 10 per cent of the gross profits. In the instant case insofar 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 CIT(A). This was not disputed by the revenue in its Appeal before the ITAT. (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 CIT(A) 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 Circular stands. 14. In the light of the above Appeal filed by the Appellant herein is allowed and the order of the ITAT is set aside. Merely because tax on income was paid for some assessment years would not stop the assessee from contending that its income is not liable to tax. The order of CIT is restored except to the extent that it has said that it cannot interfere because the Appellant had paid the tax. That part is set aside. 13.In the light of Hon'ble jurisdictional High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE', but then in an agency PE situation, unlike a service PE situation which was the case before the Hon'ble Supreme Court, a DAPE assumes the entrepreneurship risk in respect of which agent can never be compensated because even as DAPE inherently assumes the entrepreneurship risk, an agent cannot assume that entrepreneurship risk. To this extent, there may clearly be a subtle line of demarcation between the dependent agent and the dependent agency permanent establishment. The tax neutrality theory, on account of existence of DAPE, may not indeed be wholly unqualified- at least on a conceptual note . However, these issues are wholly academic before this forum because Hon'ble jurisdictional High Court has taken a specific call on the issue to the effect that the Morgan Stanley decision of Hon'ble Supreme Court covers the DAPE situations as well. In a series of decisions of the coordinate benches, the same view is reiterated. The successive coordinate benches in assessee's own case for different assessment years have upheld the contentions of the assessee and held that once an arm's length remuneration is paid to the agent, nothing further survives for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the remuneration paid to the agents is not arm's length remuneration. In any case, the agent has been paid a remuneration at the rate of ten percent of the related revenues which is accepted as an arm's length price, in similar circumstances, in a large number of cases- including assessee's own cases for the assessment years, other than the assessment years in which this aspect of the matter is requested to be sent back for specific adjudication. Learned Departmental Representative himself submits that so far reliance of the assessment on the coordinate bench decisions for the assessment years 2006- 07 to 2012-13 are concerned, in the other cases relied upon by the assessee, the transfer pricing adjudication was made while in the present case, no such adjudication was made, and hence the decisions are not applicable as distinguishable on facts . We have also noted that the matter has come up for specific consideration of the Assessing Officer, and yet he has not found any deficiencies on the specific issue of adequacy of arm's length remuneration. It is not that this aspect was not examined. It was examined but the Assessing Officer did not find specific fault ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and, on the same set of findings, the coordinate benches have disapproved the stand of the Assessing Officer. Under these circumstances, we see no reasons to remit the matter to the file of the Assessing Officer for a fresh round of ALP ascertainment proceedings, as prayed by the learned Departmental Representative. The plea of the assessee, as raised in the cross-objections, therefore, merits acceptance. Whether there is a DAPE or not, there are no additional profits to be brought to tax as a result of the existence of the DAPE, and, therefore, the question about the existence of a DAPE on the facts of this case is wholly academic. 16. Once we hold, as we have held above, that in the light of the present legal position, existence of dependent agency permanent establishment in wholly taxneutral, unless it is shown that the agent has not been paid an arm's length remuneration, and when it is not the case of the Assessing Officer, as we have noted earlier, that the agents have not been paid an arm's length remuneration, the question regarding the existence of dependent agency permanent establishment, i.e., under article 5(4), is a wholly academic question. We humbly b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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