TMI Blog2010 (1) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... correct in principle, provided that an associated enterprise, which also constituted a PE, was remunerated on arm's length basis, taking into account all the risks-taking functions of multinational enterprises and that in such a case, nothing further would be left to attribute to the PE. Assessee has also sought to place reliance on the decision of SET Satellite (Singapore) Pte. Ltd. vs. Dy. Director of IT (International Taxation)[ 2008 (8) TMI 96 - BOMBAY HIGH COURT] wherein as commission of 15 per cent of gross advertisement revenue paid by SET Singapore, the foreign company, to its agent, SET India, which agent was held to constitute SET Singapore's dependent agent PE, was held to represent price computed at arm's length. The facts in the present case are found to be at parity with those present in SET Satellite. As such, we hold that SET Satellite has rightly been relied on behalf of the assessee and that it is directly applicable to the assessee's case. It is seen that CBDT Circular No. 765, extended Circular No. 742. As per CBDT Circular No. 742, it was needed to be established, for the applicability of the circular, that the assessee or a non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a under an airtime sales agreement dt. 15th Sept., 2000, effective from 13th Nov., 1998, for dollar denominated deals, to solicit orders for the sale of advertising airtime on the Channel at the rates and on the terms and conditions provided by the assessee and to pass on such orders Lo the assessee for acceptance and confirmation. The payment from the Indian advertisers for airtime sales and sponsorship was to be received directly by the assessee under this agreement, through EEFC account or specific RBI permission. In consideration for the services provided by BWIPL, it was to receive a 15 per cent marketing commission of the advertisement revenues received by the assessee from Indian advertisers. A second airtime sales agreement dt. 1st Feb., 1999 was entered into between the assessee and BWIPL for rupee denominated deals for soliciting orders for Channel airtime sales, as under the first agreement. The second agreement was executed so as to enable BWIPL to collect payments from Indian advertisers on sales of airtime on behalf of the assessee and remit the same to the assessee, after deducting its commission @ 15 per cent. While filing its return of income for the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as provided by the assessee, to pass on such orders to the assessee for acceptance and under the rupee agreement to collect advertisements/sponsorship revenues from the advertisers/advertising agencies and to remit the net proceeds to the assessee after deducting its agreed commission; that under the agreement. the assessee reserved the right to reject any order passed on to it for acceptance by BWIPL, which was not authorized to create obligation of any kind, whether express or implied, in the name of or on behalf of the assessee; that in consideration, BWIPL was paid commission @ 15 per cent on the airtime sales/sponsorship revenues generated by the assessee from India; that BWIPL was in fact merely canvassing for the orders for sale of airtime payment on the Channel for its principal; that the activities of BWIPL were of soliciting orders resulting in the Indian advertisers making offers for availing airtime; that however, the right to accept or reject the order lay solely with the assessee; that therefore, no business connection was constituted for the assessee in India; that since the assessee did not have any place for business in India, whether fixed or temporary, the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this being so, art. 5(4)(c) of the treaty was also not attracted; that merely due to there being business transactions/dealings between the holding and the subsidiary company would not make a business connection or PE between the Indian company, i.e., BWIPL and the assessee; and that hence, there was no business connection in India under s. 9(1) of the IT Act and the assessee did not have any PE in India under art. 5 of the treaty. 5. The learned CIT(A), however, did not agree with the argument of the assessee and vide the impugned order, it was held that the assessee had a business connection/PE in India. Further, the learned CIT(A) estimated the profits of the assessee @ 10 per cent of the total advertisement revenue allocable to India, placing reliance on CBDT Circular No. 742, dt. 2nd May, 1996 [(1996) 132 CTR (St) 9]. 6. Challenging the order under appeal, the learned counsel for the assessee has canvassed that without prejudice to the contention that the assessee has no business connection or PE in India, its Indian agent, i.e., BWIPL is remunerated on an arm's length business which extinguishes any further tax liability on the assessee; that BWIPL has been remunerated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR (SC) 419 : (2007) 292 ITR 416 (SC), wherein the foreign company was held to have a PE in India on account of certain employees deputed to the Indian affiliate company; that the Hon'ble Supreme Court was considering the question as to whether the AAR was right in ruling that once the transfer pricing analysis had been undertaken there was no further need to attribute profits to a PE; that it was held that where the transactions are held to be at arm's length, the ruling is correct in principle provided that an AE (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise and that in such a case, nothing further would be left to attribute to the PE; that even though the transfer pricing guidelines were not applicable to the assessee's case for the year under consideration, the ratio laid down in Morgan Stanley Co. Inc. is fully applicable; that the Hon'ble Bombay High Court in the case of SET Satellite (Singapore) Pte. Ltd. for the asst. yr. 1999-2000, was examining the issue of computing the "profit of the fictional PE"; that undisputedly, in that case, the assessee had a dependent agent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver and above the fair value of profit attributed to the service rendered by BWIPL; and that as such, in no manner has any further tax liability for the assessee has accrued in the income for the year under consideration. 7. The learned Departmental Representative, on the other hand. besides heavily relying on the impugned order has submitted that in the case of BWIPL, the transfer pricing order is that of a dependent agent; that as per the learned CIT(A), i.e., the observations made in para 3.6 of the impugned order, no India specific accounts were maintained by the assessee; that the assessee did have a PE in India and the averment that BWIPL was only soliciting orders, is only a facade; that BWIPL is only a wholly subsidiary of the assessee and the sole advertisement concessionaire for the AIR Channel was dependent on the assessee for earning revenues in India; that as per FIPB approval, BWIPL were virtually carrying out all activities of sales promotion of airtime and sponsorship, identifying new clients, potential distributors, publishers, practices, providing advertising support services to Indian advertisers etc., it constituted a PE of the assessee in India; that the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumed) analysis, nothing more can be attributed to PE over and above the remuneration paid to dependent agent; that in the assessee's case, no FAR analysis has been got done by the assessee to prove that nothing more is required to be attributed to the PE; that no such case having been made out by the assessee during the assessment proceedings, no FAR analysis was got done at that stage also; that thus, there is no way to satisfy the conditions laid down in Morgan Stanley; that from the TPO's order in BBC Worldwide (I) (P) Ltd., it is evident that the FAR analysis got done in that case resulted in additional income of Rs. 3.60 crores; that this shows that payments made to the dependent agent did not meet the test of transfer pricing analysis; that it is evident that assessee did not furnish any information about status of appeal filed, if any, in the case of BBC Worldwide (I) (P) Ltd.; that if such an exercise had been carried out in the present case, the payment made to the dependent agent would have revealed its character as to its arm's length price status; that the assessee has wrongly equated the assessment of the Indian agent with the assessment of the dependent agency PE; th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt agency PE in India in such a situation; that the assessee has given different sets of figures of receipts and expenditure on different occasions before the AO and the CIT(A), as is available from their respective orders; that the assessee wants to claim the expenses relatable to airing over the Indian sub-continent, but does not want to include the corresponding revenue relatable to the same; that evidently, the assessee itself is not sure about the figure of revenue attributable to the Indian operations; that the alleged audited statement furnished by the assessee is not at all relevant or significant in view of the comments made by auditors the selves therein; that it was in these circumstances, that the assessing authorities were left with no option other than to resort to estimation of profits attributable to the PE in India, as per r. 10(i) of the IT Rules, 1962; that as such, the learned CIT(A) has correctly assessed the profits attributable to the foreign enterprise PE in India @ 10 per cent of gross revenue receipts from India; and that in this view of the matter, the assessee's appeal be dismissed. 9. We have heard the parties and have perused the material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee claimed not to have any other income chargeable to tax in India. In the notes to the return filed, the assessee contended that no income accrued or arose to the assessee from any business connection in India, either under the Indian IT Act or under the treaty between India and UK; that even if BWIPL was considered to be a business connection/PE of the assessee in India, the commission paid to it constituted adequate compensation for its activities in India; that it was subject to tax in India and no further income of the assessee was liable to tax in India; that even otherwise, the sale of airtime in India having resulted in a net loss to the assessee, even if it were to be held that the assessee had a PE in India, there could be no taxable income; that the airtime sales activity of the assessee was a part of the activity of the BBC World Division which ran the Channel; that the BBC World Division having incurred losses worldwide during the year, there would be a loss even if any income or loss on a proportionate basis were to be held to be attributable to the assessee's Indian operations; and as such, the assessee would legally be entitled for carry forward of such loss fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee's trade was fairly uniform and almost everyone was charging the same rate of commission in the sale of airtime on TV channels and FM channels; and that it was therefore, that the arm's length price determined by BWIPL was not being disturbed. The learned counsel for the assessee has also sought to place reliance on the decision of the Hon'ble Bombay High Court in the case of SET Satellite (Singapore) Pte. Ltd. vs. Dy. Director of IT (International Taxation). In that case, commission of 15 per cent of gross advertisement revenue paid by SET Singapore, the foreign company, to its agent, SET India, which agent was held to constitute SET Singapore's dependent agent PE, was held to represent price computed at arm's length. The Hon'ble High Court held, inter alia, that it was clear from reading art. 7(1) of the treaty, that the profits of an enterprise of the Contracting State shall be taxable only in that State, unless the enterprise carries on business in the other Contracting State through a PE constituted therein; that the profits of the enterprise may be taxed in the other State, but only so much of them, as are directly or indirectly attributable to that PE; that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, it has been contended that the commission paid by the assessee to BWIPL @ 15 per cent being the value of profit attributable to the services rendered by BWIPL, further income from advertisement revenues ought not to be taxed in India. CBDT Circular No. 23 of 1969 has been relied on in this regard. As per this circular, 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 non-resident's business activities in India are wholly channeled through its agent, the contracts to sell are made outside India and sales are made on a principal-to-principal basis. As per this circular, in the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agent's commission, in making the sales and if the agent's commission fully represents the value of the profit attributable to his service, it should prima facie extinguish the assessment. 17. CBDT Circular No. 23 of 1969 is eloquently clear, providing that if the value of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited accounts showing the losses suffered by the Channel; 2. The computation of loss as per r. 10(ii) of the IT Rules, 1962; and 3. Allocation statements of income and expenses of India Footprint. 20. As pointed out, it is seen that all these statements reflect a loss. It was the foreign exchange rate and India Footprint which gave rise to difference in the figures submitted before the taxing authorities. 21. So far as regards the Department's assertion that CBDT Circular No. 742 has wrongly been relied on, it is seen that CBDT Circular No. 765, dt. 15th April, 1998 extended Circular No. 742. As per CBDT Circular No. 742, it was needed to be established, for the applicability of the circular, that the assessee or a non-resident foreign telecasting company and that it did not have a branch office or a PE or did not maintain country-wise accounts of its operations. The circular would not apply in the event of any of the said conditions being not satisfied. All the conditions are not to be cumulatively satisfied so as to apply the circular. In the assessee's case, the assessee had filed before the AO its country accounts for India, wherein the total revenues and expenses o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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