HIGH COURT OF BOMBAY
Merely because tax on income was paid for some assessment years would not estop the non-resident assessee from contending that its income is not liable to tax in India.
SET Satellite (Singapore) Pte. Ltd.
DDIT (Int’l Taxation)
ITA NO. 944 of 2007
August 22, 2008
HIGH COURT OF BOMBAY
SET Satellite (Singapore) Pte. Ltd.
DDIT (Int’l Taxation)
ITA NO. 944 of 2007
August 22, 2008
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10. From a reading of Article 7(1) of the DTAA it is clear that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. The profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment, in para.2 while determining the profits attributable to the permanent estab1ishment the expression used is "estimated on a reasonable basis". The DTAA does not refer to arms length payment. The principles contained in the matter of income from international transaction on an arms length price are contained in Section 92 of the Income Tax Act. The principles have been clarified by the Finance Act,, 2001 as also Finance Act, 2002. From the order of the CIT, which has been accepted it is clear that the Appellant herein has paid to its P.E. on arms length principle,, It recorded a finding of fact that the Appellant had paid service fees at the rate of 15% of gross ad revenue to its agent, SET India,, for procuring advertisements during the period April 1998 to October, 1998. The fact that 15% 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% 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% 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 advertisements received by the Appellant were not liable for being taxed in India based on the CBTD 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 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 CI"I"(A) had recorded a specific finding in favour of the Appellant in the affirmative on all three counts. It is in these circumstances that it was held that the advertisement revenue received by the Appellant may be from the customers in India is not liable for tax in India. That C.B.T.D. Circu1ars are binding needs no repetition. If authorities need be cited. We may now refer to the judgment of the Supreme Court in Uco. Bank vs. Commissioner of Income Tax, 237 ITR 889. In that judgment the issue was whether Circular of October 9, 1984 was inconsistent or whether there was contradiction in the circular and Section 145 of the Income Tax Act. The Supreme Court observed that :—
"In fact, the circular clarifies the way in which these amounts a. re to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and is, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department.”
See also Commissioner of Income Tax vs. Hero Cycles Pvt. Ltd. & Ors, 228 ITR 463. It would thus be clear that the Circu1ar No. 23 wou1d be binding on the Assessing Officer and had to be considered while assessing the tax liability of an assessee.
The Tribunal in its judgment has not considered the effect of the finding recorded by the C.I.T. (Appeals) based on the Circular and which circular was relevant for the purpose of deciding the controversy in issue. This circular read with Article 7(1) of the DTAA would result in holding that the income from advertisement if 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 arms 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 C.T.T. (Transfer Pricing-II), Mumbai in the matter of determination of arm's length price with reference to all the transactions reported in Form No. 3CEE filed by the asses see. 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 Pvt. Ltd. The assessee distributes these channels to the Indian cable operators and that the assessee has applied the TNM method to determine the arms length price for its international. Transaction. It, however, clarified that the order is in respect of reference received for assessment year 2002-03 and not for subsequent assessment years.
12. We may now consider the judgment in DIT (International Taxation) vs. Morgan Stanley and Co. inc. (2007) 292 ITR 416 (S.C. ). The Appeals dealt with the Double Tax Avoidance; Agreement. (DTAA) between Indict and United States. That treaty advocated application of the arm's length principle or provided a mechanism for avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, "MSCo.) and one of the group companies of Morgan Stan ley, Morgan Stanley advantages Services Pvt. Ltd. (for providing certain support services to MSCo.MSCo outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support center to MSCo. On May 5, 2005 MSCo. filed its advance ruling application. The basic question related to the transaction between the MSCo and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having P.E. in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated April 14, 2008 and if so (ii) the amount of income attributable to such P.E. It was ruled that MSAS should be regarded as constituting a service P.E. under Article 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the arm’s length price (ALP) in respect of the service agreement dated April 14, 2005 and it meets the test of arm's length as prescribed under Section 92C of the 1961 Act. and no further income was attributable in the hands of MSAS in India. The said ruling of AAR on the question of income attributable to the P.E. was the subject matter of challenge by the Department. In so far as the issue of P.E- is concerned the Supreme Court was pleased to hold that it agreed with the Ruling of the AAR that stewardship activities would fall under Article 5(2)(1). Dealing with the question of deputation,, the Court held that on the facts that there is a service P.E. under Article 5(2)(1) and as such held that the Department was right in its contention that there exists a P.E. in India. Considering Article 7 of that treaty the Court observed that what, is to be taxed under Article 7 is income of the M.NE attributable to the P.E. in India and what is taxable under Article 7 is profits earned by the MNE. Under the In come--tax Act the taxable unit is the foreign company, though the quantum of income taxable is income attributable to the P.E. 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 P.E. 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 MSA'3 was remunerated for its services at arm's length, there should be no additional profits attributable to the applicant or to MSAS in India. After considering the various methods by which arm's length price can be determined the Court observed as under:-
“As regards determination of profits attributable to a P.E. in India (MSAS) is concerned on the basis of arm's length principle we have quoted Article 7(2) of the DTAA. According to the AAR where there is an international transaction under which a non-resident compensates a P.P. at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by the Central Board of Direct Taxes. This is the key question which arises for determination in these civil appeals,”
After discussing the various issues the Court in its conclusion held under:-
“As regards attribution of further profits to the P.E. of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a P.E.) is remunerated on arm's length basis taking into account all the risk-"taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise,. In such a case, there would be need to attribute profits to the P.E. for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the P.E. has obtained services from the multinational enterprise at lower than the arm's length cost,"
In our opinion considering the judgment, if the correct arm's length price is applied and paid then nothing further would be left to be taxed in the hands of the Foreign Enterprise.
13. Considering the above principle as may be discerned from the judgment in DIT (International Taxation) (supra) it would be clear that:-
(1) Considering, the CBTD Circular No. 742 it would be fair and reasonable that the taxable income is computed at 10% 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% 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 estop the assesses from contending that its income is not liable to tax. The order of C.I.T. 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.