Payment of commission to Indian agent at arm’s length price does not relieve non-resident from further attribution of profits to PE in India
MTV Asia LDC Vs. DCIT (ITAT Mumbai) – ITA Nos. 3530/Mum/2006 and others, order dated 31 January 2012
Assessee had appointed MTV India (P) Ltd. as its advertising agent in India by agreement dated 25-06-1996 for promoting and selling advertising time of MTV channels to prospective advertiser and advertisement agencies in India. It was also noted by the AO that MTV India (P) Ltd. was entitled to 15% commission of the gross advertisement revenue secured for the assessee company. After having noted all these factual aspects of the assessee’ s case as well as the modus operandi followed, the AO held that the assessee company could not have earned any income from India but for its Indian agent MTV India (P) Ltd. According to him, the brand name used by the assessee company was the same as that of its agent in India, the income stream of the assessee company was only from selling of advertising time which were sold by MTV India (P) Ltd. and even the payments were also collected by MTV India (P) Ltd. for further remittance to Singapore. The AO held that the case of the assessee thus was covered by Article 5(1) of India Singapore Treaty since its business was carried out through a fixed place in India wherein the agent was to carry all the functions in India and in effect was a virtual projection of the assessee in India. The AO held that the assessee company thus had an agency PE in India during the years under consideration. He also held that even if arm’s length remuneration was paid by the assessee company to dependant agent, further profits could be attributed to the agency PE in India being the “Source country”. He noted in this context that the only source of revenue of the assessee in India was through sale of advertising time wherein the Indian dependant agent had a major role. For this reason as well as the other reasons given in the assessment order for assessment year 2002-03, the AO held that 40% of the total revenue generated by the assessee in India was attributable to the agency PE in India and the same was chargeable to tax in India. In assessment year 2003-04, he estimated such profit at 30% and in assessment years 2004-05 and 2005-06 at 25%.
On Appeal ITAT Held that The taxpayer did not provide any documentary evidence to substantiate various expenses incurred as well as no separate books of accounts were maintained for Indian operations. Therefore, application of Rule 10 of the Income-tax Rules 1962 prescribing computation of income on reasonable basis in case of non-resident is justifiable. Copies of tax computations filed with Singapore tax authorities reflect substantial losses to the taxpayer in respect of Global Operations. Therefore, margin applied by the AO are high. The transponder charges and programme charges constitute 95.88% of the revenue. This allocation cannot be said to have been from Indian operations only. The purchase of programmes for telecasting cannot be said to have not been viewed in other countries where the Channel was being telecasted. It was also possible that these programmes could have been used for telecast in other countries. Similarly, the use of transponder charges as the footprint covers other neighboring countries. The erstwhile circular no. 742 of 1996 issued by the CBDT provided for presumptive taxation for foreign telecasting companies by considering 10% of the advertisement revenue from India meant for remittance abroad as its income.
Even after acknowledging that the Indian agent had been remunerated on an arm’s length basis, the Tribunal estimated 10% of revenue as being profits attributable to the PE in India which is chargeable to tax in India. The Tribunal has neither followed nor distinguished the judgement of the jurisdictional Bombay High Court in the case of SET Satellite (Singapore) rendered under a similar set of facts. Also, no reference has been made to the recent decision of the Delhi High Court in the case of DIT v. BBC Worldwide Ltd.  203 Taxman 554 (Del) wherein, under similar facts, it was held that if the correct arm’s length price is applied and paid to the Indian agent, nothing further would be left to be taxed in the hands of the foreign enterprise — following the principle laid down by the Hon’ble Supreme Court in the case of DIT v. Morgan Stanley and Company Inc.  292 ITR 416 (SC). After the decisions of two High Courts (the HC), including one by the jurisdictional HC, on the similar issue of attribution of profits to the PE of foreign telecasting companies, this decision seems to be a misapplication of law.