TMI Blog2021 (11) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... or even indicate, that the remuneration paid to the agents is not arm's length remuneration. Under these circumstances, we see no reasons to remit the matter to the file of the Assessing Officer, for 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 existence of a DAPE on the facts of this case is wholly academic. 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 tax neutral, 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 existence of dependent agency permanent establishment, i.e. under article 5(4), is a wholly academic question. - Decided in favour of assesse. - ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , on 24th May 1992, name of the company was changed to Asia Today Limited . This company appears to have been re-domiciled in Mauritius on 29th June 1998 when Registrar of Companies issued a certificate of incorporation by continuation stating that Asia Today Limited in on and from 29th day of June 1998, incorporated by continuation as a private company limited by shares and that this certificate will be effective on the date of deregistration of the company in its place of incorporation . It is only upon issuance of this certificate that the company is discontinued in the British Virgin Islands, vide certificate dated 30th June 1998 that states that The Registrar of Companies of the British Virgin Islands hereby certifies that Asia Today Limited, an international business company incorporated under section 3 of the International Business Companies Act of the law of British Virgin Islands has discontinued its operations in the British Virgin Islands on 30th June 1998 . As a net result of these actions, a company originally incorporated in the British Virgin Islands stands migrated to, and, to use the expression employed in the parlance of offshore entities business, re-do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 with the discontinuance of registration by the Registrar of Companies in Mauritius but the tax residency certificate was issued on 29th June 1998 itself, the very concept of treaty entitlements, on account of situs of incorporation, seems to be much less conceptually justifiable- particularly so far as these taxpayer friendly offshore jurisdictions are concerned. Obviously, there was nothing more than the fact of registration of a company which has been taken as treaty entitlement. The attachment with the jurisdiction of incorporation in these cases appears to be as ephemeral as required by the exigencies of treaty shopping, and this concept of re-domiciliation of the companies also appears to be an antithesis of the very justification of the situs of incorporation of a company being linked with the treaty entitlements. All this is, however, purely academic so far as the present assessment years are concerned. It is almost after the end of two decades from the relevant financial period that the issue regarding treaty benefit entitlement is being raised for the first time, and that too without any specific ground of appeal in that respect. Such an inordinate lapse of time does e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of tax at source and directing the Assessing Officer to delete interest charged u/s. 234B and 234C of the I.T. Act, 1961. 5. On the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in holding that provisions of Circular No. 742 were prejudicial to the interest of the assessee and therefore, not binding on it. 6. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that the assessee does not have a PE in India and accordingly its business profits are not taxable in India. (A.Ys 2000-01 2001-02) *Assessment u/s. 143(3) r.w.s. 147 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that Zee Telefilms Limited (ZTL) does not constitute a Permanent Establishment (PE) of the assessee in India. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that, in the absence of a permanent establishment (PE), income of the assessee is not taxable as per article 7 of the DTAA. (A.Y 2001-02) **Original Assessment u/s. 143(3) 7. There are two departmental appeals for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue raised in the cross objection remained the same, but with the benefit of Hon'ble Bombay High Court's judgment in the case of Set Satellite Pte Ltd Vs CIT [(2009) 307 ITR 205 (Bom)] in the meantime, wordings of the grievances have become a little more elaborate as follows: Without prejudice to the judgment of Hon'ble CIT(A), wherein it is held that the assessee has no PE in India and hence income is not taxable in India, even if it is held that the assessee has a PE in India, the income of the assessee is not taxable in India as it has paid remuneration/ commission to agent in India on arm's length basis, as held by Hon'ble Supreme Court in the case of Morgan Stanley 292 ITR 416 {i.e. DIT (International Taxation) v. Morgan Stanley Co. Inc. [2007] 292 ITR 416 (SC)]} and Hon'ble Bombay High Court in the case of Sony Entertainment Television (Singapore) Limited (173 Taxman 475) {i.e. Set Satellite Pte Ltd Vs CIT [(2009) 307 ITR 205 (Bom)]} 5. Learned counsel's contention is that the issue is covered, in favour of the assessee and in assessee's own cases, by a series of orders of the coordinate benches- such as order 12th January 2018 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame as that of its agent in India, that is, ZEE. Thus, for persons desirous of doing business with the assessee in India, there is no difference between ZTL/EI Zee and Asia Today Ltd. it is seen that in a number of TDS certificates issued to the assessee, the name 'Zee TV' or 'Zee ZTL/EI Zee Cinema' or 'Zee Telefilms' were used. There terms were therefore, used interchangeably. The income stream of the assessee is from selling of advertising time and these are 'sold' by ZTL/EI Zee. Almost all the advertisers are from India and the advertisements are solicited by the Indian company. The advertisers book the slots on the channel by coming into contact with employees of ZTL/EI Zee at their office. The other stream of revenue is 'subscription revenue' which is also collected by ZTL/EI Zee on behalf of the assessee. The payments are collected by ZTL/EI Zee and the same is remitted to Mauritius by it. The employees of ZTL/EI Zee are employees of Zee group as a whole and they perform functions as required by ATL also. In the case of other telecasting channels also it is held by the revenue authorities that their agent in India co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d through its agents in India, was confirmed. However, when he carried the matter in appeal before the learned CIT(A), he held that the assessee does not have any permanent establishment in India. Therefore, the assessee cannot be taxed in respect of its income from Indian operations. The relevant facts for the other assessment year are, as learned representatives fairly agree, materially similar. The Assessing Officer is aggrieved and in appeal before us. The assessee's cross-objections, however, deal with an even more fundamental aspect. That aspect is that given the fact that the assessee has paid arm's length remuneration to its Indian agents, no further taxability can be attributed to its income earned through the agents in India. 9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We find that it's an admitted position that the assessee does not have any office or place of management of its own, and its presence in India is only through its agents. Undoubtedly, in terms of Hon'ble Andhra Pradesh High Court's path-breaking judgment in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of place does not suffice . Even a case is not made out for satisfaction of this condition by the Assessing Officer, and, as such, there is no case for 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 the revenue authorities that their agent in India constitute a Permanent Establishment , but in none of these cases the permanent establishment is said to be under basic rule, i.e., Article 5(1) and Article 5(2), and in all these cases, the permanent establishment is dependent agency permanent establishment, i.e., under Article 5(4). Even the case of the Assessing Officer thus hinges on the applicability of Article 5(4). There can be permanent establishments through the presence of the agency, for example. There can be virtual pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise ; (e) the maintenance of a fixed place of business solely- (i) for the purpose of advertising, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 next logical point, therefore, as to how to compute profits attributable to a DAPE, and it is this aspect of the matter which has been a subject matter of academic debates and controversies. There are two approaches to it i.e.,, to borrow the terminology employed by International Tax Law Reports (see 2007, Volume 9; Part 5; at pages 963-964), first- a single taxpayer or zero-sum approach , and, second- two taxpayers or non zero-sum approach . While Philip Banker, a well known international tax lawyer, has all along advocated zero-sum approach, late Klaus Vogel touched a different chord, in his column Tax Treaty Monitor in the Bulletin for Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 deduction is to be allowed for the remuneration paid to the dependent agent as that is cost of operation of the dependent agent permanent establishment and as it has been incurred for generating the revenues attributable to such hypothetical permanent establishment. Let us take a very simple example to understand the mechanism of this approach. Let us assume that there is an electronic equipment distributor by the name of Sing Co. based in Singapore. He sources the electronic equipment from all over the globe and sells the same to its customers in India. Instead of having a regular office in India, and instead of carrying out the marketing activity in India, he proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 taking into account revenues generated by the PE and deducting therefrom the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rohtagi and Prof. David R. Davies. It is contended that according to thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that 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, does not agree with this approach. In his editorial comments in the International Tax Law Reports, he favoured the other alternative approach to this issue, i.e., 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 he employs in his agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 CBDT Circular No. 23, dated 23-7-1969 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 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 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 assessment year 2002-03 and not for subsequent assessment years. 12. We may now consider the judgment in Morgan Stanley Co. Inc's case (supra). The Appeals dealt with the Double Tax Avoidance Agreement (DTAA) between India and United States. That treaty advocated application of the arm's length principle or provided a mechanism for avoiding do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 PE 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 PE 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 Court's judgment in the case of Set Satellite (supra), so far as profit attribution of a DAPE is concerned, the legal position is that as long as an agent is paid an arm's length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment. Viewed thus, the existence of a dependent agency permanent establishment is wholly tax neutral. 14. An interesting offshoot of this legal position is that, as on now, existence of dependent agency permanent establishment is of no tax consequence. Whether there is a DAPE or not, the taxation is only of the agent s remu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enches 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 taxation in the hands of the DAPE which, at best, can be brought to tax in the hands of the assessee. In any event, whatever be the academic justification for an alternative approach to the issue, the law laid down by Hon'ble Courts above is to be deeply respected and loyally followed. Respectfully following the law laid down by Hon'ble Courts above and consistent with the stand of the coordinate bench decisions, we uphold the plea of the assessee for the present years as well. We, therefore, hold that even if there is held to be a dependent agency permanent establishment on the facts of this case, as at best the case of the Assessing Officer is, it is wholly tax neutral inasmuch as the Indian agents have been paid arm's length remuneration, and nothing further can, therefore, be taxed in the hands of the assessee. 15. It has not been the case of the revenue authorities at any stage that the remuneration paid to the Indian agent is not an arm's length r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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