TMI Blog2008 (8) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant it is a resident of Singapore and has business activities in India. Undisputed fact is that, the Appellant through its dependent agent in the form of SET India (P) Limited, is carrying on marketing activities in India for advertisement slots by canvassing advertisements in India. It filed its return of income on 30 th December, 1999 declaring its income at Nil. On 5 th March, 2001 they filed revised return of income declaring business income of Rs.13,58,43,976/-. Along with the return it was submitted that it did not have any tax liability in India as it did not have a permanent establishment and that its dependent agent was remunerated on an arm's length basis. As this income from various activities had been assessed to tax in the hands of SET India, there could not be further assessment of income in the hands of the Appellant on account of the said activities. Reliance was placed on Circular No.23 dated July, 23, 1969 issued by the CBDT. Whilst filing revised return on March 5, 2001 it computed its taxable income at Rs.13,58,43,976/- as per the formula prescribed in the CBTD Circular No.742 without prejudice to its contention that they do not have any income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said income had been offered to tax by SET India and had already been taxed in its hands. That distribution rights it was held is a commercial right which is distinct and different from a copyright and consequently there was no question of payment of royalty as had been held by the Assessing Officer and the income belongs to SET India which cannot be subject to tax in the hands of the Appellants. Accordingly, the Assessing Officer was directed to delete the portion of Rs.1,27,89,154/- earned by SET India while computing the taxable income of the Appellant. In so far as interest under Sections 234A and 234-B is concerned considering various authorities and contention advanced directed the Assessing Officer to delete the interest of Rs.3,52,39,785/- and Rs.49,39,278/- levied under Section 234B and 234C of the Act respectively. 3. Both the assessee and the Revenue aggrieved by the order of the Commissioner (Appeals) dated 1 st October, 2003 preferred appeal before the Income-tax Appellate Tribunal. Appeal filed by Revenue was numbered as I.T.A. No.535/Mum/ 04 and Appeal filed by Assessee was numbered as I.T.A. No.205/Mum./04. It was contended as can be seen from para.3 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multilateral bodies like OECD (Organization of Economic Co-operation and Development, Paris) as also prominent organizations like IFA (International Fiscal Association, Amsterdam). It then proceeded to consider the Australian Tax Office guide-lines and the view expressed by O.E.C.D. It was submitted on behalf of the Assessee that what has to be considered is what is the liability according to the applicable law and not what the law ought to be. It also relied on the report in the proceedings of the International Fiscal Associations 2006 Congress at Amsterdam as also International Fiscal Association Congress Report 2008 and went on to hold in paragraph 31 that the tax liability of a foreign enterprise, in respect of its dependent agency permanent establishment, is not extinguished by making an arms length payment to the dependent agent and consequently the relief given by the Commissioner by holding that the taxability of arms' length remuneration to the dependent agent extinguishes the tax liability of dependent agent permanent establishment as well, is unjustified and accordingly allowed the Appeal of Revenue on the question framed and consequently allowed Ground No.1. For the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oc basis, a sum for taxation as being liable to tax in India, without prejudice to its claim that its income is not liable to tax in India. 8. On behalf of the Appellant it is submitted that as a general rule the DTAA between India and Singapore provides that profits from business of a person, resident in Singapore can be taxed in India only if it carries on business in India through a permanent establishment (P.E.), in India. If there be no permanent establishment then notwithstanding Section 9 of the Income Tax Act the income would not be liable to tax in India. An additional fiction is created of a deemed permanent establishment - i.e. where a person does not have a permanent establishment, but has a dependent agent. The object being to ensure that where the fair share of income attributable to the operations in India (carried out through an agent, instead through a permanent establishment) is not taxed in India in the hands of the agents, the differential would be liable to tax in India. Thus when the remuneration of the Indian Agent is on the basis of a fair transfer price i.e. on an arms length price, nothing further remains to be taxed in India. It is submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Tribunal that the compensation payable to the dependent agent represents only remuneration for the services rendered and does not take into account the profit or any part of it arising with its non-resident principal based on the functions performed, risks assumed and assets used will necessarily have to be determined. This means that:- (1) There are two tax payers in the source country: Dependent agent enterprise Dependant agent permanent establishment (DAPE) (2) Does dependant agent performs functions on behalf of the foreign principal that cause attribution of risks or assets of foreign principal to host country, i.e. country of source. (3) If so, profits (or losses) may be attributed to DAPE by host country based on those assets used, risks assumed and functions performed. 4. DAPE is entitled to deduction in host country for arm's length compensation/remuneration to dependant agent enterprise. It is further submitted that the judgment in Morgan Stanley (supra) would not have the effect of setting aside the order of Income-tax Appellate Tribunal. 10. For answering the issue we may firstly refer to some of the provisions of the Double Taxation Avoidanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall, in each Contracting State, be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. (3). In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the cases of the foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining countrywise accounts by adopting presumptive profit rate of 10% of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, i.e. 55% at present." 14. The Assessing Officer has refused to rely on the Circular No.742 on the basis that it applies only to those companies which do not have any branch office in India or are not maintaining countrywide operations in India. 15. 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 establishment the expression used is "estimated on a reasonabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -principal basis. The Commissioner of Income Tax (Appeal) 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. Circulars 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, [1999] 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 (page 901): "In fact, the circular clarifies the way in which these amounts are 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia 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 Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short "MSAS). An agreement was entered into 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 centre 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 permanent establishment in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated April 14, 2005 and if so (ii) the amount of income attributable to such permanent establishment. It was ruled that MSAS should be regarded as constituting a service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple 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 permanent establishment 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." 21. After discussing the various issues the Court in its conclusion held as under (page 443):- "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 attr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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