Satellite Television Asia Region Advertising Sales BV (Taxpayer) [2010-T11-58-ITAT-MUML-INTL]: Mumbai Income Tax Appellate Tribunal:- The Tax Authority sought to disregard the existence of the Taxpayer and taxed the income in the hands of the Taxpayer’s Hong Kong-based shareholder company. However, the ITAT ruled in favor of the Taxpayer and held that the Tax Authority could not treat the Taxpayer as a conduit as there was commercial justification for the Taxpayer’s existence.
Facts
The Taxpayer, a company incorporated in The Netherlands, is a wholly-owned subsidiary of Satellite Television Asia Region Ltd. (STAR Ltd.) based in Hong Kong. STAR Ltd. is a subsidiary of Star Television Ltd., a company based in British Virgin Islands.
The Taxpayer has been granted the exclusive right to sell advertising time in India on the channels of the STAR TV network, which is owned by STAR Ltd. The Taxpayer has engaged an Indian company, Star India Private Ltd. (SIPL), to procure business from Indian advertisers on a commission of 15% of the receipts from such business.
Based on an administrative circular issued by the Indian tax administrative body that was applicable for the tax year in question, the Taxpayer offered 10% of the advertisement revenues earned in India for tax.
The Tax Authority, holding the Taxpayer to be a conduit company and not a resident of The Netherlands, held that the advertisement revenues are taxable in the hands of STAR Ltd. However, as a protective measure, the Tax Authority also assessed the revenues in the hands of the Taxpayer, by estimating 20% of the revenues as income earned in India.
In the appeal filed by the Taxpayer before the first appellate authority, the Tax Authority’s order was upheld.
Aggrieved by the first appellate authority’s order, the Taxpayer appealed to the ITAT.
Taxpayer’s contentions:- The Taxpayer is registered, assessed to tax, domiciled in and conducts all its businesses from The Netherlands. The tax residency certificates issued by The Netherlands tax authorities were filed. The Taxpayer earns revenues not only from India, but also from other countries.
Tax Authority’s contentions
The Taxpayer was appointed to sell advertising time in India because The Netherlands had a favorable tax treaty with India, whereas there is no tax treaty entered into between India and Hong Kong, where the parent company i.e., STAR Ltd. is located. Appointment of the Taxpayer is a clear case of treaty shopping.
STAR Ltd. has a permanent establishment (PE) in India in the form of SIPL which acts as an agent of the Taxpayer.
Tax residency certificates are not sufficient to indicate that the Taxpayer was not created with a motive to avoid taxes. The Tax Authority in India has the power to lift the corporate veil to locate the real residency of the Taxpayer.
The tax treaty between India and The Netherlands is entered into to give benefit and relief to bonafide taxpayers and not to encourage creation of non-genuine taxpayers for the purpose of tax avoidance.
ITAT’s ruling
The Tax Authority’s position is based on an incorrect perception that STAR Ltd. is deriving a tax advantage by interposing the Taxpayer. The advertisement revenues are derived through a commission agent, SIPL. As SIPL has been paid a fair remuneration for its services, following another administrative circular (Circular) issued by Indian tax administrative body, no further income is taxable in India, regardless of the entity that is determined as the Taxpayer.
Even though the Circular has been withdrawn, with effect from 22 October 2009, the withdrawal is only prospective and does not impact the tax year in question.
The STAR group to which the Taxpayer belongs had chosen to centralize the sale of advertisement time to the Taxpayer on a global basis and the choice was not driven solely by tax considerations.
Based on the evidence produced by the Taxpayer, which commercially justified its appointment for selling advertising time, the existence of the Taxpayer cannot be disregarded to tax the advertisement revenues in the hands of STAR Ltd. Hence, the Taxpayer is taxable in respect of the advertisement revenues earned in India.
In the assessment proceedings of the Taxpayer, the first appellate authority cannot determine the tax ability of the advertisement revenues in the hands of STAR Ltd., which can be decided after taking into account the material on records in the case of STAR Ltd.
As the first appellate authority had not passed an order on issues pertaining to quantification of the taxable income and other consequential issues, the matter has been remitted back to the first appellate authority for fresh determination.
Comments
The present ruling refers to the concept of ‘PE blocker’ entities which are usually formed to restrict the exposure of another group company to local country taxation. This ruling suggests the need for having adequate business purpose and commercial rationale in such entities.
This ruling also affirms that withdrawal of the Circular would operate only prospectively and that taxpayers could continue to rely on the same for prior tax years.
