TMI Blog2021 (5) TMI 1074X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that as the dependent agent has been paid an arm s length remuneration, nothing survives for taxation in the hands of the DAPE and therefore even existence of DAPE is wholly infractuous and tax neutral. To this extent, we uphold the plea of the assessee and delete the impugned taxability of advertisement sale revenues. The assessee gets the relief accordingly. Taxability of distribution revenues under article 12 of the Indo-US tax treaty - The first settled proposition is that the distribution rights cannot be treated as copyrights, as consistently held by the co-ordinate benches, e.g. in the case of the DDIT vs SET India Pvt. Ltd. [ 2012 (4) TMI 604 - ITAT MUMBAI] as stated that the assessee submitted before him that the cable operator only retransmits the television signals transmitted to it by a broadcaster without any editing, delays, interruptions, deletions, or additions and, therefore the payment made by the assessee to the Non-resident company is not for use of any copyright and consequently cannot be characterized as Royalty. CIT(A) has held that Broadcasting Reproduction Right is not covered under the definition of Royalty under section 9(1)(vi) of the Income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2007-08) 1. Ground 1 a. The learned AO has erred in determining a sum of Rs 7,263,019 as payable by Appellant. b. The learned AO has erred in determining the total income of the Appellant to be Rs 176,087,745. 2. Ground 2 The learned AO/ DRP has erred in holding that the Appellant has a Permanent Establishment ('PE') in India as per the provisions of the India-US Double Tax Avoidance Agreement ('India - US tax treaty') and accordingly, holding the ad sales revenue earned by the Appellant as taxable in India. The Appellant prays that the AO be directed to treat the ad sales revenue as not taxable in India in the absence of PE in India. 3. Ground 3 The learned AO/ DRP has erred in holding that the distribution revenues earned by the Appellant falls within the meaning of the term 'Royalty' under Article 12 of the India- US tax treaty and the Act and accordingly, such distribution revenues are taxable in India. ITA No. 5826/Mum/2012 (directed against order dated 14.02.2012 passed by the Assessing Officer passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant has a Permanent Establishment ('PE') in India as per the provisions of the India-US Double Tax Avoidance Agreement ('India - US tax treaty') and accordingly, the advertisement sales revenue earned by the Appellant are taxable in India. The Appellant prays that the learned AO be directed to treat the advertisement sales revenue as not taxable in India in the absence of PE in India. 4. Ground 4 Without prejudice to Ground 2 3 above the learned AO/DRP erred in attributing additional profits to the Appellant in India without appreciating that the alleged PE has been remunerated at arm's length. 5. Ground 5 The learned AO/ DRP has erred in holding that the distribution revenues earned by the Appellant falls within the meaning of the term 'Royalty' under Article 12 of the India-US tax treaty and the Act and accordingly, such distribution revenues are taxable in India. The Appellant prays that the learned AO be directed to treat the distribution revenues as not taxable in India, as the distribution revenues are not in the nature of royalty. 6. Ground 6 The learned AO/DRP has erred in taxing the content sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion fee earned by the Appellant is taxable as Royalty in India; Ground 5 erred in granting short credit of taxes deducted at source amounting to Rs.38,13,375; Ground 6 erred in adding an amount of Rs.17,96,79,470 to the tax liability, being refund for AY 2011-12 alleged to be received by the Appellant, without appreciating the fact that the Appellant has never received any refund for AY 2011-12; Ground 7 erred in levying interest under Section 234D of the Act; Ground 8 erred in initiating penalty proceedings under Section 271(1)(c) of the act without appreciating the fact that the Appellant has not concealed any income nor furnished any inaccurate particulars of its income; Ground 9 erred in initiating penalty proceedings under Section 271A of the Act without appreciating the fact that the Appellant is a non-resident and is not required to maintain India specific books of accounts; Ground 10 erred in initiating penalty proceedings under Section 271B of the Act without appreciating the fact that the Appellant is a non-resident and is not required to get its accounts audited; ITA No. 2079/Mum/2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution revenues, while calculating the income tax liability for Assessment Year 2012-13; Ground 11 Erred in granting short credit of taxes deducted at source amounting to Rs.70,719; Ground 12 Erred in initiating penalty proceedings under section 271(1)(c) of the Act without appreciating the fact that the Appellant has neither concealed any income nor furnished any inaccurate particulars of its income; Ground 13 erred in initiating penalty proceedings under section 271A of the Act without appreciating the fact that the Appellant is a non-resident and is not required to maintain India specific books of accounts; Ground 14 erred in initiating penalty proceedings under section 271B of the Act without appreciating the fact that the Appellant is a non-resident and is not required to get its accounts audited; ITA No. 528/Mum/2018 (directed against order dated 27.11.2017 passed by the Assessing Officer passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act 1961, for the assessment year 2013-14) On the facts and in the circumstances of the case and in law, the learned AO based on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Appellant has neither concealed any income nor furnished any inaccurate particulars of its income; 3. Grievance of the assessee is thus two fold-first-that the authorities below erred in holding that the assessee had a dependent agency permanent establishment (DAPE) in India and that the profits of the DAPE on account of advertisement sale revenues were liable to be taxed as such, and, second-that the distribution revenues earned by the assessee are taxable under article 12 of the Indo-US tax treaty. These are some small peripheral legal issues, raised by the assessee, but then these issues admittedly do not call for any adjudication by us inasmuch as so far as levy of interest under section 324A, B C and cess etc are concerned these issues will be rendered infructuous and so far as not granting tax credit is concerned, these issues were not pressed. 4. So far as the first core issue is concerned, i.e. whether or not the assessee had a dependent agent permanent establishment (DAPE) in India and whether or not any profits on account of advertisement sale revenues can be brought to tax in the hands of such a DAPE, we find that it is not even revenue s case tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 constitute a Permanent Establishment. 5.2.4. The above stated factual position clearly brings out that the assessee's case falls under Article 5(1) of the Indo-Mauritius treaty when the business of the assessee is carried out through a fixed placed in India and in effect, is a virtual projection of the assessee in India. 7. The Assessing Officer further observed that, without prejudice to the above analysis, the assessee has an agency permanent establishment in India, under article 5(4) of India Mauritius DTAA, inasmuch as its Indian agents are the dependent agents. As for the plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 case of Vishakhapatnam Port Trust (supra), 'permanent establishment' postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country and it should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country [Emphasis, by underlining, supplied by us, here as also elsewhere in this order]. What is equally important is in the fundamental analysis justifying the existence of permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dding 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 projections even without a fixed place of business, such as in the case of a dependent agency permanent establishment, but such cases will be covered by article 5 (4) rather than article 5(1) and 5(2). The detailed analysis by the Assessing Officer, as extracted earlier in this order, also makes that position evident. At best, therefore, it is a case of dependent agency permanent establishment under Article 5(4), and learned Departmental Representative also accepts that. There is no conflict between 'virtual projection of a foreign enterprise' and the 'dependent agency perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, (ii) for the supply of information, (iii) for scientific research, or (iv) for similar activities, which have a preparatory or auxiliary character for the enterprise. 4. Notwithstanding the provisions of paragraphs (1) and (2) of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph (5) apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 International Taxation (November 2007 at page 475) and given his approval for two taxpayers approach . The latter is also in consonance with Authorised OECD Approach of the OECD. On materially similar facts of dependent agency permanent establishment for a similarly placed foreign telecasting company as in this case, in the case of DDIT Vs Set Satellite (Singapore) Pte Ltd [(2007) 106 ITD 175 (Mum)], a coordinate bench, speaking through one of us, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 projects his business in India through an Indian Co. by the name of Ind. Co. There is no dispute that Ind. Co. is a dependent agent of the Sing Co. In consideration of the services rendered by Ind. Co., Sing Co. pays Ind. Co. commission @ 30 per cent on sales plus reimbursement of expenses. Sing Co., however, procures the electronic equipment from China, shipped directly to India and sells it in India after a mark up of 200 per cent. We further assume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try. 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 expenditure incurred by the foreign enterprise to earn those revenues. However, it is open to the foreign enterprise to claim appropriate adjustment for the foreign enterprise's overheads and even a reasonable charge, on account of activities of the foreign enterprise carried on outside the host country, by treating the foreign enterprises as a fictionally separate entity. 12. Learned counsel, however, contends that since the profit attributable to the PE are the profits which the PE 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 permanent establishment , the taxable profits of the foreign enterprise cannot extend beyond the profit earned by the dependent commission agent. The line of reasoning adopted by the learned counsel is that PE is nothing but the dependent agent, and, the taxability of PE can only, therefore, be in respect of the earnings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commentaries of various authors including Phillip Baker, Prof. Roy Rohtagi and Prof. David R. Davies. It is contended that according to these distinguished authors, payment of arms length remuneration by a foreign company to its agent extinguishes tax liability of the foreign principal. With respect, and for the reasons we have set out above, we are of the considered view that in the dependent agency permanent establishment situation, this proposition does not hold good. In any event, this approach proceeds on the assumption, which turns out to be fallacious assumption on the facts of the present case, that dependent agent and dependent agent permanent establishment are one and the same thing. 17. Learned counsel has then relied upon the order of this Tribunal in the case of Dy. CIT v.Roxon OY [2006] 103 TTJ (Mum.) 8911 which was authored by one of us. This decision, however, did not deal with the peculiarities of a dependent agent permanent establishment. This decision dealt with the taxability of the installation PE, and, the principles dealing with computation of profits of installation PE, in our considered view, do not have any bearing on the computation of profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price for the function he performs, risks he assumes, and the assets he employs in his agency, there is no basis for attributing any further profits to the DAPE over and above the arm's length remuneration to the agent , and reasoned the same by observing that As soon as one abandons the single taxpayer approach, one needs to start attributing the DAPE functions that were not performed by the agent, assets that were not employed by it and the risks that were not assumed by it. In other words, the two taxpayer approach requires an abandonment of reality and entirely hypothetical attribution which, in arm s length world which must have some basis in reality, is simply a licence for arbitrary allocation of profits. Ultimately, that s what Tribunal did here . There is thus a cleavage of academic opinion on the approach to the DAPE profit attribution and that is a highly contentious issue on the first principles. When the matter travelled before Hon'ble High Court, however, these views of the coordinate bench did not find favour with Their Lordships. Rejecting the theory about separate profit attribution for the dependent agency permanent establishment vis- -vis the depen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a principal-to-principal basis. The CIT(A) 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 CBDT 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 v. CIT [1999] 237 ITR 889. In that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SAS 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 by the Central Board of Direct Taxes. This is the key question which arises for determination in these civil appeals. After discussing the various issues the Court in its conclusion held as under : As regards attribution of further profits to the PE 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 PE) is remunerated on arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. 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, the 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 remuneration, which is taxed anyway dehors the existence of a DAPE. Such an approach may sound somewhat incongruous from an academic point of view inasmuch as what was considered to be a threshold limit for source taxation ceases to have any relevance for source taxation, and as, on a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emuneration 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 remuneration for the services rendered by the agents concerned, yet a prayer is now made that the matter should be sent back to the assessment stage f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer did not find specific fault in the agent s remuneration not being in accordance with the FAR analysis. He has rather proceeded to, in a way, disregard the foreign entity altogether by suggesting that no business risk is assumed by the foreign company, i.e. the assessee, as the content is provided by the Indian agent and the viewership is Indian, and, for that reason, the viewership is linked to the Indian PE. We have noticed that the Assessing Officer has specifically picked up the aspect of functions and risk taken by the PE under that heading and title of the paragraph 5.3.4, in the assessment year 2002-03 for example at page 31 of the assessment order, noted that there is no reason as to why the assessee should assume risk after having acquired the content in a working state from the content provider , that all risks for up linking and finally relaying the signals in India is borne by the transponder company and not the assessee , and, therefore, concluded that in view of the above discussions, it can be seen that major part of the risk in terms of market risk and technology risks are borne by the ZTL/El Zee and that almost 85% to 90% revenues from advertiseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. We humbly bow to the law laid down by Hon'ble Courts above. The limited argument before us is that here is a case of dependent agency permanent establishment, and the existence of a DAPE, in the light of these discussions, is wholly tax-neutral- particularly in the light of the legal position regarding profit attribution to the DAPE. We need not, therefore, deal with the question about the existence of a DAPE, as it is an academic exercise with no tax effect involved. The related grounds of appeal are thus infructuous. 17. In view of the above position, the issue raised in the departmental appeals is wholly academic and does not call for any adjudication at this stage. 5. We see no reasons to take any other views of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we hold that as the dependent agent has been paid an arm s length remuneration, nothing survives for taxation in the hands of the DAPE and therefore even existence of DAPE is wholly infractuous and tax neutral. To this extent, we uphold the plea of the assessee and delete the impugned taxability of advertisement sale revenues. The assessee gets the relief accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of business income. 8. The second issue is the reliance on definition of term process as defined by the Finance Act 2012 w.e.f. 1st June 1976. So far as assessment years prior to 2012-13 are concerned, the issue is now settled by Hon ble Supreme Court s judgement in the case of Engineering Analysis Centre of Excellence Ltd vs CIT [(2012) 125 taxmann.com 42 (SC)] wherein their Lorships have held that the insertion of explanation 6, dealing with definition of process, is not retrospective in nature. Even so far as subsequent years are concerned, it is well settled in law, as was also held by Hon ble jurisdictional High Court in the case of CIT vs Siemens [(2009) 3170 ITR 320 (Bom)] and by Hon ble Delhi High Court in the case of DIT vs New Skies Satellite BV [(2016) 382 ITR 114 (Del)] a mere amendment in domestic law will not override the provisions in the applicable tax treaties. Revenue thus derives no advantage, so far as present case is concerned, from amendment by way explanation 6 to section 9(1)(vi). There is one more argument, as adopted by the authorities below, in support of taxability on royalty and that is for the assessee having given licence for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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