TMI Blog2017 (11) TMI 2017X X X X Extracts X X X X X X X X Extracts X X X X ..... act on behalf of the assessee in India.On the other hand,while selling the airtime inventory distributing AXN and ANIMAX channels in India,Set India would act on its own right and not on behalf of the assessee. It was not dependent on the assessee economically or legally.It is also a fact that Set India also carried out significant marketing and estimation activities for other channels namely Set, Set Max and HBO (till 31/12/2004). Therefore, set India has to be treated as an independent entity which carried out its own business employing its own capital and bearing connected risks. It cannot be treated an agent, a dependent agent,of the assessee. We find that the revenue earned by Set India was not on behalf of the assessee,that it was making payment to the assessee for the purchases made by it,that it was not subject to any control of the assessee as far as conducting of business in India was concerned,that the activities of Set India were not devoted wholly or almost wholly for the assessee.We have also taken note of the facts that the revenue of the assessee was not entirely dependent on the earning of set India,that the employees of set India would work only for Set India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als for the above-mentioned assessment years (AY.s). The AO has filed appeals for two AY.s. As most of the issues in the appeals are similar, so, we are adjudicating all the appeals together. The details of dates of filing of returns, returned incomes, dates of assessments, assessed incomes, dates of orders of the CIT (A)/Directions of DRP can be tabulated as under: A. Y. ROI filed on Returned Income Asst. dt. Assessed Income Order of DRP-II/CIT (A) 10-11 29/03/12 Nil 26/11/13 Rs. 7. 15crores 29/10/13 09-10 29/09/09 Nil 17/08/12 Rs. 5. 73 crores 09. 07. 12 08-09 30/09/08 Nil 19/05/11 Rs. 4. 97, crores 28/03/11 07-08 26/10/07 Nil 21/10/10 Rs. 415, crores 24/09/10 06- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l ultimate delivery was made in Indian by way of telecast being made available on the TV screen of the ultimate viewers, that the delivery of advertisement airtime was made in India, that the sale was concluded in India, that what was agreed and concluded outside India was the sale in a conceptual state, that what was delivered and executed in India was the actual sale, that services/entertainment provided by the general companies through the telecasting was metallised, crystallised, delivered and used in India, that the assessee had depended PE in India as per article 5 (4) of the Double Tax Avoidance Agreement (DTAA), that the income of the assessee was attributable to such PE and was subject to tax in India, that due to the encompassing nature of Article 5(4)(b) of the Article of the tax treaty the activities of the assessee would be liable for taxation purposes in India, that Set India was maintaining stock of goods/merchandise in India, that the same was advertisement space belonging to the assessee, that set India would enter into contract with the parties on be of the assessee and would also market and book all available airtime, that Set India was an exclusive agent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of sharing the actual revenue collected by Set India, with the assessee, from the advertisers and the cable operators, that it shared the advertisement and distribution revenue collected by Set India as per the agreements, that it retained its financial interest in the final sale of advertisement airtime and distribution of channels, that sale of airtime and distribution of channel was dependent on final sale of both items by Set India, that it was the responsibility of the assessee to arrange for the delivery of general and to be carriage fee, that Set India was responsible to maintain stock of IRDs as well as successful installation of each IRD, that Set India head to maintain the IRD in term of the agreement, that assessee conducted quarterly meetings with Set India and their subcontractors for growth of business, that rate card of the assessee was determined in consultation with Set India, that set India provided regular collection updates, finance and accounting reports to the assessee on monthly basis, that it had the right to audit the accounts of Set India and reconcile the accounts, that assessee had retained its commercial interests in the activities of Set India. Refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... telecasting business of the assessee, that there was no real sale of advertisement airtime inventory, that gross revenue of the assessee from Set India was dependent upon net advertisement revenue and also net distribution revenue actually collected by Set India that assessee was factually incorrect argued that risks and rewards under the sale and purchase agreement between it and Set India got transferred on acquisition of advertisement inventory by MSM India, that the sale price of the items realised by Set India for both the items would have been fixed irrespective of the sale price of these items realised by Set India, that the sale price was decided by the assessee in consultation with Set India, that the bad debts were to be borne by both the parties, that arguments of the assessee were not tenable on facts, that the assessee was utilizing the services of SET India extensively for monitoring and controlling of sale of advertisements and distribution of channels, that activities of both the entities were inter-laced, inter-connected , inter-dependent and inter-linked, that the agreement was not for purchase and sale of advertisement air time, that it was a revenue sharing arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith an Indian company namely Set India (now known as MSM India), that the agreements were called sales and purchase agreement for sale of advertisement airtime and distribution agreement for distribution of the two channels, that the consideration for sale of advertisement airtime receivable by it was not fixed, that the same depended on net advertising revenue collected by Set India that in the case of AXN channel the assessee was entitled to receive 50% of night advertising revenue collected by Set India over and above USD 33,44,288 in addition to initial share in advertising revenue of USD 14,88,000, that in case of ANIMAX channel the initial advertisement revenue receivable by the assessee was USD 7,65,000 determined by a resale price minus method and adjustable on the basis of final net advertisement sales, that additional 50% of net advertisement sales was paid to the appellant in addition to forecasted advertisement sales of USD 9 lakhs, that the monthly distribution fee receivable by the assessee was 75% of gross distortion revenue collected by Set India in respect of AXN channel, that in addition to it a sum of USD 3,08,660 was also payable as bonus fee, that in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill 31/12/2004). Therefore, set India has to be treated as an independent entity which carried out its own business employing its own capital and bearing connected risks. It cannot be treated an agent, a dependent agent, of the assessee. Set India would purchase airtime from the assessee and would sell the same in India in its own right and the assessee had no control over it. We find that the revenue earned by Set India was not on behalf of the assessee, that it was making payment to the assessee for the purchases made by it, that it was not subject to any control of the assessee as far as conducting of business in India was concerned, that the activities of Set India were not devoted wholly or almost wholly for the assessee. We have also taken note of the facts that the revenue of the assessee was not entirely dependent on the earning of set India, that the employees of set India would work only for Set India and not for any other entity of the group, that the departmental authorities have not alleged that the transaction between the assessee and Set India were not at arm s length, that in the TP orders the TPO.s (AY.s. 2005-06, 2006-07, 2007-08, 2008-09 and 2010-11) have held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a protective measure, he also assessed the income in the hands of the assessee. He declined benefit of Circular 742 to the assessee, on the ground that it was not a telecasting or broadcasting company. Invoking the Rule 10 of the Income Tax Rules, 1962(Rules), he estimated profit @ 20% of gross advertising revenues. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA, who confirmed the action of the AO. He did not adjudicate the various grounds raised by the assesse, as he had endorsed the view of the AO that the assessee company was only a conduit. The assessee challenged the order of the FAA before the Tribunal and matter was restored back to his file for adjudicating the other grounds also. 4. In pursuance of the order of the Tribunal, the FAA initiated appellate proceeding. Before him, the assessee made elaborate submissions about PE, provisions of Indo-Netherland Tax-treaty, Circular 742 issued by the CBDT and levying of interests u/s. 234 of the Act etc. 4.1. After considering the submissions of the assessee and the original order passed by the AO, the FAA held that STAR Ltd. , IGN BV, STAR India were part of the same group, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Company in India. Client Requisition After having solicited the advertisements as above, the Agent shall forward, by facsimile or Telex, each clients requisition for telecast of the advertisement (s) to the Company and the Company reserves the right to accept or reject the aforesaid requisition at its sole discretion. Commission The Agent shall be entitled to retain fifteen percent (15%) of the net invoiced amount paid by the clients at commission. The agent was to follow the company s procedure and standard terms and conditions for soliciting advertisements from the clients in India. A perusal of the above terms indicates that as per the agreement between SIPL and the assessee, SIPL was required to solicit advertisement in India for Channels, that the agent had to solicit the advertisement at the rates fixed by the assesee, that it could not enter in to any agreement with any client independently, that the even after agreement the assessee was the final and deciding authority to decide the fate of the advertisement, that the agent was to receive fix percentage of the invoiced amount as commission. The agent was free to carry out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce in the argument advanced by the assessee that activities of SIPL were no different from other agents of foreign telecasting companies operating in India. The India-Netherlands DTAA provides that when the activities of the agent are devoted wholly or almost wholly on behalf of the enterprise it would not be considered to be an agent of an independent status unless it was shown that the transactions between the agent and the principal were made on arms length conditions. We would like to discuss the arm s length payment issue in the succeeding paragraph. We had gone through the chart submitted by the assessee showing the percentage of revenue earned by SIPL from the assessee (Pg. 196 of the PB). On perusal of the same is clear that SIPL had received the highest percentage of revenue from the assessee for the AY. 1999-2000 which was 13. 59%, whereas in the assessment year 2004- 05 the percentage was as low as 0. 003%. Clearly, SIPL has to be treated as an independent agent, acting in its ordinary course of business. 6.2. One more aspect in this regard has to be considered and that is the payment made by the assessee to SIPL are at arm s length. The assessee had paid commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id dow n in the guidelines contained in Circular No. 742 dated May 2, 1996 issued by the Central Board of Direct Taxes, New Delhi. Pages 109-111 of the PB are the orders of the AO. s passed u/s. 197 of the Act on 08/05/1998, 19/ 05/1999 and 18/04/2000. In all these orders, the they have referred to the Circular 742 and had applied the rates for deduction of tax for advertisement revenue. Thus, it is clear that the AO himself had accepted the applicability of the Circular. Nothing was brought on record to prove that because of substantial and material changes in the facts and circumstances for the year under appeal the Circular had no application. In our opinion, there was no difference in the facts for the earlier year and the year under appeal. Therefore, we hold that the provisions of circular 742 were applicable to the facts of the case under consideration. 6. 4. We find that in the case of Set Satellite Singapore PTE Ltd. (supra)similar issues have been considered by the Hon ble High Court. Facts of the case were that the assessee, a resident of Singapore, was having business activities in India, that through its dependent agent, namely SET India (P. )Limited, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that same were commercial right and were distinct and different from a copyright and consequently there was no question of payment of royalty. Cross appeals were filed by the AO and the assessee before the Tribunal. After considering the rival submissions, the Tribunal held SET India was a dependent agent and as such the assessee was deemed to have a permanent establishment, that in addition to the taxability of the dependent agent in respect of the remuneration earned by it, which was in accordance with the domestic law and which had nothing to do with the taxability of the foreign enterprise of which it was a dependent agent, the foreign enterprise was 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. Deciding the matter the Hon ble High Court held as under: . in the matter of tax what has to be considered and more so in international transactions if there be a treaty, are the provisions of the treaty and if the provisions of the treaty are more advantageous to an assessee, then that construction will have to be given which is advantageo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the order of the Commissioner of Income-tax, which has been accepted it is clear that the appellant herein has paid to its permanent establishment on the arm' s length principle. It recorded a finding of fact that the appellant had paid service fees at the rate of 15 per cent. of gross 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 revenue less agency commission). Simultaneously, the appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenue. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on the Assessing Officer and had to be considered while assessing the tax liability of an assessee. 19. The Tribunal in its judgment has not considered the effect of the finding recorded by the Commissioner of Income-tax (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 paragraph 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actional 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 Authority for Advance Ruling on the question of income attributable to the permanent establishment was the subject-matter of challenge by the Department. In so far as the issue of permanent establishment is concerned the Supreme Court was pleased to hold that it agreed with the Ruling of the Authority for Advance Ruling that stewardship activities would fall under article 5(2)(l). Dealing with the question of deputation, the court held that on the facts that there is a service permanent establishment under article 5(2)(l) and as such held that the Department was right in its contention that there exists a permanent establishment 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 permanent establishment in India and what is taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituation would be different if the transfer 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 permanent establishment 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 permanent establishment has obtained services from the multinational enterprise at lower than the arm' s length cost. 22. 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. 23. Considering the above principle as may be discerned from the judgment in DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007ANIMAX 292 ITR 416 (SC) it would be clear that : (1)Considering the Central Board of Direct Taxes Circular No. 742 it would be fair and reasonable that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e discussion, we hold that the assessee did not have a PE in India, that it was not carrying out any business activities in India and therefore no part of its revenue was attributable to India, that SIPL was an independent agent under Article 5(6)of the tax treaty between India and Holland, that the activities of the agent were carried out in its ordinary course of business, that the agent was not wholly and exclusively devoted to the assessee, that payments made to SIPL were at arm s length, that provisions of Circular 742 were applicable for determining the tax liability of the assessee. In short, the assessee was not liable to pay tax in India in any of the AY.s. mentioned above. Effective ground of appeal is decided in favour of the assessee. 5.4. We have compared the terms of agreements entered in to by the AXN with Set India dated 01/07/2004 and 01/05/2004 (Pg. 133 to 154 of the Paper book and the terms of agreement of NGC Network Asia Ltd. We find that ANIMAX Sales and Purchase Agreement under the heading contracting party stipulates as under: All advertising agreement shall be entered in to by SET, on its own account. In its dealing with third parties, SET shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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