An entity cannot be disregarded merely because it is a tax resident of a country with which India has a favourable Tax Treaty

The Mumbai Income-tax Tribunal (“the Tribunal”), in a recent judgment in the case of Satellite Television Asia Region Vs. ADIT [2010-TII-58-ITAT-MUML-INTL] held that the Assessing Officer (“AO”) cannot consider the assessee a Permanent Establishment (“PE”) blocker or conduit company when there are commercial reasons for its existence. This means that they cannot tax the entire advertisement revenues in the hands of parent company.

Facts

Ø The assessee, a company incorporated in the Netherlands, is a wholly-owned subsidiary of Satellite Television Asia Region Ltd. (“STAR Ltd.”) based in Hong Kong, which in turn is a subsidiary of a British Virgin Island based company, Star Television Ltd.

Ø The assessee was granted exclusive rights for the sale of advertising time in India on the channels of the STAR TV network, which is owned by STAR Ltd. The assessee engaged an Indian company, Star India Pvt. Ltd. (“SIPL”) to procure business from Indian advertisers, at a commission rate of 15% of the receipts from such business.

Ø The assessee filed the tax return on the basis of Central Broad of Direct Taxes (“CBDT”) Circular No. 742, which was then applicable and according to which revenue was taxed at 10%. This circular was withdrawn on 31 March, 2001.

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