TMI Blog2024 (2) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Counsel in the instant appeal. In this factual matrix, we have no hesitation in upholding that the assessee has Business Connection in India. Taxability of revenue from operations in India - Explanation 1(a) to section 9(1)(i) of the Act contemplates that a where a non resident has business connection in India and his business operations are carried out partly abroad and partly in India, in such a situation revenue only from operations in India shall be taken into account and a reasonable portion thereof shall be treated as income accruing or arising in India. As relying on Set Satellite (Singapore) PTE Ltd. [ 2008 (8) TMI 96 - BOMBAY HIGH COURT] where the overseas entity has remunerated PE in India at arm s length nothing further is liable to be taxed in the hands of non-resident entity. It is not the case of Revenue that the assessee has not compensated it s India agents viz. ZTL and El Zee at arm s length. The ld. Counsel for the assessee made a categoric statement that remuneration paid to ZTL and El-Zee is commensurate to industry rates. This fact has not been rebutted by the Department. Therefore, the rate at which the assessee has remunerated ZTL and El-Zee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its operations in India as under: (A) Business Income - Advertisement revenues - Rs. 6,09,38,912/- (B) Royalty subscription income - Rs. 15,00,07,646/- Total Taxable Income - Rs. 21,09,46,558/- Rounded off to - Rs. 21,09,46,560/- Aggrieved by the assessment order dated 31/03/2005, the assessee carried the issue in appeal before the CIT(A). 2.1 The First Appellate Authority vide impugned order applied global profitability rate of 9.36% to the income earned from advertisement and subscription revenue from India and restricted the addition to Rs. 3,38,14,897/- as against Rs. 21,09,46,560/- assessed by Assessing Officer. Further, the CIT(A) did not concur with the Assessing Officer in holding subscription revenue in the nature of royalty and held it to be Business Income. Against the aforesaid findings of the CIT(A) both, the assessee and the Revenue are in appeal before the Tribunal. 3. The assessee in its appeal has assailed the order of CIT(A) on following grounds: 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the assessee no part of the advertisement and subscription revenue is taxable in India. 5. The assessee vide agreement dated 01/06/2000 appointed ZTL as its exclusive agent in India for sale of advertising and sponsorship on the channels. In lieu thereof, the assessee would compensate ZTL by way of fee equal to 8.5% of the advertisement tariff paid by the advertiser to the assessee. ZTL was appointed as independent agent with no authority to enter into contract on behalf of assessee. The Assessing Officer held the advertisement revenue taxable on accrual basis and estimated income from advertisement stream @15% of the net advertisement revenue. 5.1. The assessee entered into Distribution Agreement dated 01/7/2000 with El-Zee. El-Zee was granted exclusive rights of distribution/marketing of satellite channels broadcasted by the assessee within the territory of India. In consideration thereof, EL-Zee was allowed to retain 20% of the subscription fees charged by the assessee from the affiliates /subscribers of the channels in India. The Assessing Officer held subscription fee in the nature of royalty u/s. 9(1)(vi) of the Act, taxable @20%. 5.2 In proceedings b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the operations carried out in India. In the instant case ZTL and El-Zee are remunerated at arm s length, revenues have been reasonably attributed to operations carried out in India, therefore, tax liability of the assessee on this count stands extinguished. The assessee remunerated ZTL for advertisement related services at 8.5% and for distribution of channels the assessee has remunerated El-Zee at 20% in line with the industry standards. Similar remuneration was held to be at arms length by the Tribunal in the case of assessee s group concern Asia Today Ltd., 124 taxmann.com 1 (Mum-Trib). The ld.Counsel for the assessee pointed that though in the said decision the transaction was to be at arms length based upon the provisions of the treaty , the principles laid down would equally apply under the provisions of the Act. As pointed earlier, the provisions of Article-7 are pari-materia to the provisions of section 9(1)(i) of the Act. The ld.Counsel for the assessee further submitted that CBDT in Circular No.23 of 1969 (supra) while dealing with scope of Section 9 explained that if, agent s commission fully represents the value of the profits attributable to its service, it shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has no business connection in India, therefore, the revenue from advertisements and subscription of channels is not taxable in India. The alternate plea of the assessee is, assuming, the assessee has business connection in India, only that part of the revenue is chargeable to tax in India, which is reasonably attributable to the operations carried out in India. The case of assessee is that since assessee has remunerated Indian agents i.e. ZTL and El-Zee at arm s length, no further income is attributable to the assessee from operations carried out in India. 14. The Assessing Officer during the assessment proceedings estimated 15% of the net advertisement revenue as Business Income of the assessee u/s. 9(1)(i) of the Act as attributable to India. Further, the Assessing Officer held subscription income as royalty under section 9(1) (vi) of the Act and has taxed the same @20%. The CIT(A) in the First Appellate proceedings held that subscription revenue to be Business Income of the assessee and not royalty. The CIT(A) upheld the findings of the Assessing Officer that the assessee has business connection in India and that Circular No.23 is not applicable to the appellant. For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia-Mauritius DTAA were in operation, whereas in the instant case there is no DTAA between India and BVI. The contention of the assessee is that provisions of Article-7(1), which deals with business profits of DTAA are pari-materia to provisions of Explanation 1 (a) to Section 9(1)(i) of the Act. For the sake of ready reference, the relevant extract of Article 7(1) of the DTAA and relevant provisions of section 9(1)(i), as they were applicable to Assessment Year under appeal are reproduced herein below: ARTICLE -7 BUSINESS PROFITS 1. 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. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. Section 9 - Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to sell advertisement time and collect subscription revenue. The case of assessee was that the assessee was not having PE in India, hence, no part of its income is taxable in India. The Revenue held that ZTL and El-Zee are the PE of assessee. The assessee claimed that even if they are held to be PEs, the assessee has remunerated the PEs at arm s length, hence, the assessee is not liable for further tax on remaining revenue. The Co-ordinate Bench after placing reliance on the decision in the case of SET Satellite (Singapore)PTE Ltd. vs. CIT(supra) held that where assessee had Dependent Agency PE (DAPE), if Indian agent was paid arm s length remuneration, nothing further could be taxed in the hands of assessee. 19. We may now advert to the decision of Hon ble High Court in the case of Set Satellite (Singapore) PTE Ltd.(supra). The issue before the Hon ble High Court for adjudication was:- On the facts and circumstances of the case the learned CIT(A) erred in holding that since the assessee has remunerated the agent on arm s length(ALP) no further profits of the assessee could be taxed in India other than the profits so earned by the dependent agent(DA)? Answering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its judgment has not considered the effect of the finding recorded by the CIT (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 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 Pricing-II), Mumbai in the matter of determination of arm's length price wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid ruling of AAR on the question of income attributable to the PE was the subject-matter of challenge by the Department. Insofar as the issue of PE 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 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 computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e left to be taxed in the hands of the Foreign Enterprise. From the aforesaid decision it is unambiguous that where the overseas entity has remunerated PE in India at arm s length nothing further is liable to be taxed in the hands of non-resident entity. 20. It is not the case of Revenue that the assessee has not compensated it s India agents viz. ZTL and El Zee at arm s length. The ld. Counsel for the assessee made a categoric statement that remuneration paid to ZTL and El-Zee is commensurate to industry rates. This fact has not been rebutted by the Department. Therefore, the rate at which the assessee has remunerated ZTL and El-Zee are considered at arm s length. Thus, in facts of the case and decisions discussed above, we find merit in ground No.2 of appeal by the assessee. The Assessing Officer is directed to delete addition of Rs. 3,38,14,897/- confirmed by the CIT(A) on account of assessee s income from operations in India. 21. No submissions were advanced by the assessee on ground No.1, 3 4 of appeal, hence, they are dismissed. 22. In the result, appeal of the assessee is partly allowed. Department s Appeal: 23. The Revenue has assailed the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not apply to the facts of the present case. The assessee in support of his submissions placed reliance on the decision in the case of CIT vs. MSM Satellite (Singapore) Pte Ltd., 106 taxamann.com 353 (Bombay). 26. We have heard the submissions made by rival sides and have examined the orders of authorities below. In ground No.1 of appeal, the Revenue has assailed the findings of CIT(A) in accepting assessee s cash system of accounting. We find that this issue is squarely covered by the decision of Co- ordinate Bench in assessee s own case in ITA No.4630/Mum/2006, appeal by the Revenue. The Coordinate Bench upheld the order of CIT(A) in accepting cash basis of accounting by the assessee. The facts in the impugned assessment year are identical. The assessee has been consistently following the practice of accounting on cash basis. In the past the same has been accepted. The CIT(A) in impugned order accepted assessee s cash system of accounting following its own decision in Assessment Year 2001-02. We see no reason to interfere with the findings of CIT(A) on this issue, hence, ground No.1 of appeal is dismissed. 27. In ground No.2 of appeal, the Revenue has assailed the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecipient chargeable under the head Capital gains ) for' 13. In our opinion, these provisions would in no manner change the position. Only if the payment in the present case by way of a royalty as explained in explanation (2) below sub-section (1) of Section 9 of the Act, the question of applicability of clause (vi) of sub-section (1) of Section 9 would arise. Learned counsel for the revenue placed considerable tress on clause (v) of explanation (2) by virtue of which the transfer of the rights in respect of copyright of a literary, artistic or scientific wok including cinematograph film or films or tape used for radio or television broadcasting etc. would come within the fold of royalty for the purpose of Section 9(1) of the Act. We do not see how the payment in the present case could be covered within the said expressions. As noted, this is not a case where payment of any copyright in literary, artistic or scientific work was being made. [Emphasised by us] Thus, in facts of the case and the decision referred above, ground No.2 of appeal is dismissed sans-merit. 29. In ground No.3, the Revenue has assailed the finding of CIT(A) in applying global profi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
