Case Law Details

Case Name : Satellite Television Asia Region Vs. ADIT (ITAT Mumbai)
Appeal Number :
Date of Judgement/Order :
Related Assessment Year :
Courts : All ITAT (5374) ITAT Mumbai (1672)

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.


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 This circular was withdrawn on 31 March, 2001.

Ø The AO disregarded the status of the assessee, stating it to be a conduit company, and held that the income actually belonged to STAR Ltd., the owner of STAR TV Network.

Ø The AO also disregarded the tax residency certificates. As a protective measure, the AO estimated that 20% of the gross advertising revenue was taxable profit in the hands of the assessee. The benefit of Circular no. 742 was also denied on the premise that the assessee is not a telecasting or broadcasting company.

Ø The Commissioner of Income-tax (Appeals) (“CIT(A)”) upheld the decision of the AO, stating that it would be more appropriate that income from advertising sales is taxed in the hands of STAR Ltd. under the provisions of Circular no. 742. He also affirmed the AO’s view that the assessee was merely a conduit company of STAR Ltd.

Assessee’s Contention

· The assessee contended that it is registered, domiciled and conducts all its business, in the Netherlands. It is also assessed for tax in that country. The tax residency certificates issued by the Netherlands tax authorities were also filed.

· The assessee earns revenue not only from business in India but also from other countries.

· The assessee explained the commercial justification for routing advertising sales through the assessee, citing the trade dispute settlements of STAR Ltd.

Revenue’s contentions

· The assessee was appointed to sell advertising time in India because there is a favorable tax treaty between India and the Netherlands, whereas there is no such treaty with Hong Kong, where STAR Ltd, the parent company is based. The revenue contended that this is a clear case of “treaty shopping”.

· The assessee company was floated only for the purpose of tax planning and avoidance.

· STAR Ltd., Hong Kong has a PE in India by way of SIPL which was ostensibly the agent of the assessee.

· The fact that the tax residency certificates have been issued did not mean that the assessee was not created for the purpose of avoiding Indian taxes. The tax authorities have the power to determine where the assessee in fact has residency.

· The Treaty between India and the Netherlands was entered into in order to give benefits and relief to bona fide and genuine companies and not to encourage the creation of non-genuine companies or conduit companies for the purposes tax avoidance.

Tribunal Ruling

Ø The revenue was incorrect in its perception that STAR Ltd. was deriving a tax advantage by using the assessee as a link in the chain of entities to obtain advertising revenue.

Ø The advertising revenue was generated through the commission agent, SIPL, which was fairly remunerated for its services. Since such income was already taxed in the hands of SIPL in the terms of CBDT Circular no. 23, nothing further remained to be taxed. The Tribunal followed the decision of the Mumbai High Court in the case of SET Satellite (Singapore) Pte. Ltd. v. DCIT 307 ITR 205 (Mum), which referred to the terms of CBDT Circular no. 23 dated 23 July, 1969. Hence, where a non-resident’s sale to an Indian customer is secured through an agent, the assessment in India of the income arising from the said transaction will be restricted to the profits which are attributable to the agent’s services.

Ø Circular no. 23 was withdrawn with effect from October 22, 2009, but the withdrawal of the circular was only prospective in nature.

Ø The STAR Group, of which assessee is a part, had chosen to centralize its advertisement sales operations on a global basis, as was evident from the fact that assessee was procuring business not only from India but from other countries as well. Such centralization was not governed by Indian tax considerations alone.

Ø There is no reason to ignore the commercial justification for the existence of the assessee and proceed to tax the entire advertising revenues in the hands of STAR Ltd.

Ø The observation of CIT(A) that it would be “more appropriate” to tax the advertising revenues in the hands of STAR Ltd. was also criticized. The tax ability of STAR Ltd. would depend on the status of STAR Ltd. and there can be no finding on its tax ability without hearing the assessee’s case.

Ø For matters not adjudicated by the CIT(A), the case was remitted to the CIT(A).

Ø The assessee was taxable in respect of the advertising revenue earned in India.


Ø The decision has touched upon the concept of ‘PE blocker’ entities or conduit companies which are established to block the exposure of an entity to the domestic tax laws of a country, when a treaty does not exist. It has also emphasized the importance of commercial reasons for the existence of such entities in tax havens. After due process, the Tribunal reached the conclusion that there were commercial reasons for such restructuring and tax authorities cannot ignore such commercial rationale when making decisions on this issue.

Ø The second important observation is the affirmation that the withdrawal of circulars is prospective and the assessee can continue to rely on such circulars for the period prior to their withdrawal.

Ø While the Tribunal has followed the Mumbai High Court’s decision in the case of SET Satellite (Singapore) Pte. Ltd. which has relied on Circular no. 23 on the principles of attribution of income, there are other decisions on the same issue. The Supreme Court in the case of DIT Vs. Morgan Stanley and Company Inc. 292 ITR 416 (SC) has expressed a similar view.

Ø The decision of the Supreme Court and the Mumbai High Court has been followed in the case of BBC Worldwide Ltd. Vs. DDIT 2010-TIOL-59-ITAT-Del wherein it was held that if the correct arm’s length price is applied and paid, nothing further would be taxed in the hands of the foreign enterprise.

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Category : Income Tax (28058)
Type : Judiciary (12277)

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