ESPN STAR SPORTS MAURITIUS S.N.C. ET COMPAGNIE,MAURITIUS vs. ACIT CIRCLE-1(2)(2) (INTERNATIONAL TAXATION), NEW DELHI
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI SAKTIJIT DEY
PER SAKTIJIT DEY, JM:
Captioned cross appeals arise out of a common order dated
18.01.2019 of learned Commissioner of Income Tax (Appeals)-42,
New Delhi, pertaining to assessment year 2014-15.
Grounds raised by the assessee are as under:
On the facts and in the circumstances of the case, Ld. CIT(.4) has erred in reducing the profit attribution rate from 50% of net profit to 20% of net profit despite clearly agreeing with the AO that there are two different taxpayer enterprises viz (i) the Foreign company (ESPN Star) through its dependent agent PE, and (ii) the subsidiary company (ESPN India), both having different FAR, different taxable profits, and that the profit attributable to PE of foreign company are not merely arm's length profit for the subsidiary company. 2. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in reducing the profit attribution rate from 50% of net profit to 20% of net profit without giving any basis or working for the same? 3. On the facts and in the circumstances of the case. Ld. C17(A) has erred in reducing the profit attribution ate from 50°/0"of net profit to 20% of net profit after holding rightly that FAR of DAPE is distinct from FAR of the ass ociated enterprise (AF) in India and also after clearly holding that the facts regarding the FAR assigned to PE for the subject y e a r w i t h o u t y e a r corresponding compensation were not available with Hon'ble 1TAT for A.Y. 200304 & 2004-05?
2 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
The appellant craves leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.
Ground no. 1, being a general ground, does not required
specific adjudication.
In ground nos. 2 and 3, the assessee has challenged the
decision of learned Commissioner (Appeals) in holding that the
assessee has business connection and Permanent Establishment
(PE) in India under Article 5(4) and 5(5) of India – Mauritius
Double Taxation Avoidance Agreement (DTAA).
Briefly the facts, relevant for deciding this issue are, the
assessee is a non-resident partnership form incorporated under
the laws of Mauritius and is a tax resident of that country. The
Mauritian Tax Authorities acknowledging the residential status of
the assessee have also issued Tax Residency Certificate (TRC). As
observed by the Assessing Officer, the assessee is engaged in the
business of selling advertisement/air time and programme
sponsorship from Mauritius in connection with programming via
non-standard television on ESPN, Star Sports and Star Cricket
programming services. The assessee has entered into an
agreement with ESPN Software India Pvt. Ltd. (ESPN India), an
Indian corporate entity, for procuring advertisement/airtime on 3 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
behalf of the assessee and for such services remunerates ESPN
India with commission of 10% on the invoice value. In course of
assessment proceeding, the Assessing Officer noticed that in the
year under consideration, the assessee has received revenue of
Rs.1,53,41,84,296/- from ESPN India towards advertisement
sales. Noticing the above, the Assessing Officer made a reference
to the Transfer Pricing Officer (TPO) to examine the arm’s length
nature of such transaction. As admitted by the Assessing Officer,
the TPO vide order dated 13.06.2017 has accepted the
transaction between the associated enterprises to be at arm’s
length. However, referring to the assessment order passed for
assessment year 2012-13 in case of the assessee and past
assessment years, the Assessing Officer held that ESPN India
constitutes a Permanent Establishment (PE) of the assessee in
India both in the nature of fixed place PE and dependent agent PE
(DAPE).
Having held so, he attributed 50% of the net profits to the
PE. As a result, he made an addition of Rs.3,95,55,855/-. The
assessee contested the aforesaid addition before learned
Commissioner (Appeals). While deciding the appeal, though,
learned Commissioner (Appeals) agreed with the Assessing Officer 4 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
that ESPN India constitutes fixed place PE and DAPE of the
assessee in India, however, he reduced the rate of attribution of
profit from 50% to 20% of the net profit. Accordingly, he decided
the appeal.
Before us, learned counsel appearing for the assessee
submitted that the issue is squarely covered by the decision of the
Coordinate Bench in assessee’s own case in assessment year
2012-13. In this context, he drew our attention to order dated
20th October, 2021 in ITA No. 1219/Del/2017.
Though, learned Departmental Representative agreed that
the Tribunal has decided the issue in favour of the assessee in
earlier years, however, she relied upon the observations of the
departmental authorities.
We have considered rival submissions and perused
materials on record. The short issue arising for consideration in
this appeal is, whether the assessee had any business connection
or PE in India under the India – Mauritius Tax Treaty, so as to,
attribute a part of the profits earned from the advertisement
revenue to the PE. The observations of the Assessing Officer in
the assessment order itself makes it clear that the decision taken
by him with regard to the existence of fixed place PE and DAPE is 5 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
based on the view taken by the Assessing Officer in the preceding
assessment years. Notably, in the latest order passed for the
assessment year 2012-13, as referred to above, the Tribunal while
deciding identical issue has held as under:
“14. As mentioned elsewhere, the Assessing Officer and the ld. CIT(A) have proceeded on the findings given in Assessment Year 2011-12 wherein the quarrel travelled upto the Tribunal and the Tribunal in ITA No. 3760 and 4242/DEL/2016 for Assessment Years 2009-10 and 2011- 12 has decided the quarrel as under:
"12. We have heard the rival contentions and perused the record. The assessee is a partnership firm established under the laws of Mauritius on March 29, 2002. The assessee is engaged in the business of acquiring and allotting advertisement time ('Airtime') and programme sponsorship in connection with programming via non-
standard television from Mauritius on ESPN, Star Sports and Star Cricket Programming services. The assessee had entered into agreement with ESPN Software India (P) Ltd., incorporated under the laws of India which was engaged in the business of acquiring the airtime from assessee and allotting it to various Indian advertisers and advertising agencies. The sale of airtime by the assessee to ESPN India is outside India. Further, the assessee has no office in India and/or any operations in India. The plea of the assessee before the lower authorities was that ESPN India purchased airtime from the assessee on Principal to Principal basis. The assessee claimed that the income arising from advertisement airtime is business income and in the absence of a PE of the assessee in India, the same is not taxable. The Assessing Officer relying upon the orders of Assessment Years 2003-04 and 2004- 05 held the transaction to be principal to agent and not on Principal to Principal basis. Further, ESPN India was constituted to be dependent agent as per Article- 5(4) and not an independent agent as defined by Article 5(5) of the India- Mauritius DTAA. The Assessing Officer attributed part of the gross profits to the PE. The CIT(A) also held that ESPN India constitutes PE under the India-Mauritius DTAA. However, he allowed partial relief to the assessee on the attribution of income to the DAPE in India.
The case of the assessee before us is that without prejudice to its contention on there being PE or dependent agent PE or not, when 6 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
ESPN India is remunerated at arm's length basis then no further attribution of profits can be made in the hands of the assessee in India. The TPO in the order relating to Assessment Years 2009-10 and 2011-12 has held that the international transaction of payment of advertising sales inventory cost to be at arm's length price. Copies of the orders of the TPO in the case of the assessee and also ESPN India have been filed during the course of hearing. Once, the transactions are demonstrated to be in accordance with arm's length principle then the question which arises is whether there can be any attribution of profits, even if, assessee has PE in India. We are not going in to the aspect of whether the assessee has PE or dependent agent PE in ESPN India for deciding the present issue raised before us. We are limiting our decision to further attribution of profits, in case, where once arm's length principle has been decided then, the Hon'ble Supreme Court has laid down the proposition that there can be no further profit attribution to a person, even if, it has a PE in India. The Hon'ble Supreme Court in Honda Motors Co. Ltd. vs ADIT in Civil Appeal Nos.2833 to 2840 of 2018, judgement dated 14.03.2018, reported in [2018] 92 taxmann.com 353 (SC) held as under:-
In the judgment of this Court dated 24.10.2017 in Asstt.DIT vs E- funds IT Solutions Inc. [2017] 86 taxmann.com 240/251 Taxman 280/399 ITR 34 (SC) and connected matters, it has been held that once arm's length principle has been satisfied, there can be no further profit attributable to a person even if it has a permanent establishment in India. 4. Since, the impugned notice for the reassessment is based only on the allegation that the appellant(s) has permanent establishment in India, the notice cannot be sustained once arm's length price procedure has been followed. 5. Accordingly, the impugned order(s) is set aside and the appeals are allowed."
Similar proposition has been laid down by the Hon'ble Apex Court in Asstt. DIT vs E-funds IT Solutions Inc. [2017] 86 taxmann.com 240/251 Taxman 280/399 ITR 34 (SC) as in Honda Motors Co. Ltd. vs ADIT (Supra). The Hon'ble Supreme Court in DIT vs Morgan Stanley and Co. (supra) have also held as under "33. To conclude, we hold that the AAR was right in ruling that MSAS would be a Service PE in India under Article 5(2)(1), though only on account of the services to be performed by the deputationists deployed by MSCo and not on account of stewardship activities. As regards income attributable to the PE (MSAS) we hold that the Transactional Net Margin Method was the appropriate method for determination of the arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark-up worked out at 29% on the operating 7 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
costs of MSAS. This position is also accepted by the Assessing Officer in his order dated 29.12.06 (after the impugned ruling) and also by the transfer pricing officer vide order dated 22.9.06. As regards attribution nof further profits to the PE of MSCo where the connection, the department has also to examine whether the PE has obtained services from the multinational 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 basis taking into account all the risktaking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represents the value of the profit attributable to his service. In this enterprise at lower than the arm's length cost? Therefore, the department has to determine income, expense or cost allocations having regard to arm's length prices to decide the applicability of the transfer pricing regulations" (emphasis supplied)."
The said proposition have been also followed by the Hon'ble Delhi High Court in BBC Worldwide Limited (supra) and it has been held that if arm's length remuneration is paid to the dependent agent, nothing further remains to be attributed. In the case before Hon'ble Delhi High Court, the assessee was foreign telecasting company similar to the assessee, which had appointed its subsidiary in India to solicit orders for the sale of advertising airtime to different channels. The Assessing Officer held that the company had a DAPE under Article 5 of the DTAA and attributed 20% of the total advertisement revenue to India. The relevant extract of the decision is as under:-
"16. When the aforesaid factual position is kept in mind, the judgment of the Bombay High Court in Set Satellite (Singapore) Pte. Ltd's. case (supra) is clearly attracted. In that case the High Court has held that if correct ALP is applied and paid, nothing further would be left to be taxed in the hands of the foreign enterprise. In the said case, Morgan Stanley & Co. Inc.'s case (supra) as well as Circular NO.23 issued by the CBDTwas taken into consideration. The Court was also pleased to record that the commission paid to the agent was 15% services performed by the Assessee's agent in India was in line with the existing industry standards in India at the prevalent time. Reliance was also placed on Para 3 of Circular NO.742 dated 02.5.1996 issued by the CBDT, which referred to the 8 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
fact that the agent's commission from foreign telecasting companies is 15% or so of the gross sum, to contend that the CBDT itself had considered 15% as the normally accepted commission rate payable to agents of the telecasting companies." (emphasis applied)
In applying the aforesaid proposition to the issue raised before us and without deciding the issue of whether ESPN India constitutes PE of the assessee in India under DTAA between India and Mauritius on the principle that ESPN India was remunerated at arm's length by the assessee, which has been accepted by the Assessing Officer/TPO of ESPN India and also the assessee, then no further attribution of profits is to be made in the hands of the assessee. Similar proposition has also been laid down by the Tribunal in assessee's own case for Assessment Years 2003-04 and 2004- 05. Accordingly, we hold so. Ground of appeal no.5.1 is thus decided and other grounds of appeal become academic."
Though the co-ordinate bench has not touched upon the issue whether ESPN Star Sports constitutes PE of the assessee in India under DTAA between India and Mauritius, howeve, we find that the Hon'ble Supreme Court in the case of E-funds IT Solutions Inc. 399 ITR 34 had an occasion to consider the test for whether there is fixed place PE. The relevant extracts read as under:
"5. As against this, Shri S. Ganesh, learned senior counsel for the respondents, has argued that the tests for whether there is a fixed place PE have now been settled by the judgment of this Court in Formula One (supra), and that it is clear that for a fixed place PE, it must be necessary that the said fixed place must be "at the disposal" of the assessees, which means that the assessees must have a right to use the premises for the purpose of their own business, which has not been made out in the facts of this case. He further argued that, on the facts of this case, both the US companies as well as the Indian company pay income tax, and the Transfer Pricing Officer by his order dated 22nd February, 2006, has specifically held that whatever is paid under various agreements between the US companies and the Indian company are on arm's length pricing and that, this being the case, even if a fixed place PE is found, once arm's length price is paid, the US companies go out of the dragnet of Indian taxation. He also adverted to Article 5(6) to state that the mere fact that a 100% subsidiary may be carrying on business in India does not by itself means that the holding company would have a PE in India. Further, according to learned counsel, so far as the service PE is concerned, even the assessing officer did not find that such a PE existed.
According to him, under Article 5(2)(l), it is necessary that the foreign enterprises must provide services to customers who are in India, 9 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
which is not Revenue's case as all their customers exist only outside India. Further, according to the learned counsel, the entire personnel engaged in the Indian operations are employed only by the Indian company and the fact that the US companies may indirectly control such employees is only for purposes of protecting their own interest. Ultimately, there are four businesses that the assessees are engaged in, namely, ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. Since all these businesses are carried on outside India and the property through which these businesses are carried out, namely ATM networks, software solutions and other hardware networks and information technology infrastructure were all located outside India, the activities of e- Funds India are independent business activities on which, as has been noticed by the High Court, independent profits are made and income assessed to tax under the Income Tax Act. According to the learned counsel, "agency PE" was never argued before the assessing officer and even before the ITAT. Therefore, no factual foundation for the same has been laid. Equally, according to the learned counsel, the settlement procedure availed for the assessment years in question cannot be said to be binding for subsequent years as they were without prejudice to the assessees' contention that they have no PE in India. He also relied upon the OECD Commentary, paragraph 3.6 in particular, to demonstrate that the so-called admissions made and relied upon by the three authorities below were correctly overturned by the High Court.
Learned counsel also stated that the ground of adverse inference was never argued or put before any of the authorities below, and the only place that it could be found is in the assessment order for the year 2003-04, which order became non est as it was substituted by the agreement entered into between the parties ending in withdrawal of appeals before the CIT (Appeals). Thus, according to the learned counsel, the view of the High Court is absolutely correct and should not be interfered with. Learned counsel also argued that the cross- appeals of the Revenue were correctly dismissed in that, even though the ITAT decided the case in law against the assessees, yet it found on facts, differing from the calculation formula by the authorities below, that nil tax was payable. This is the only part of the ITAT judgment upheld by the High Court, and should not, therefore, be disturbed in any case.
Before we deal with the submissions made on both sides, it is necessary to first set out the statutory background. This is contained in Section 90 of the Income Tax Act, before it was amended in 2009. Section 90(1) and 90(2) of the Income Tax Act, as it then stood, read as under:
10 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
"Section 90. Agreement with foreign countries.--
1) The Central Government may enter into an agreement with the Government of any country outside India--
(a) for the granting of relief in respect of--
(i) income on which have been paid both income-tax under this Act and income-tax in that country; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub- section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
xxx
xxx
xxx
xxx
xxx
Thus, it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the 11 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. The High Court has dealt with this aspect in some detail in which it held:
"49. The Assessing Officer, Commissioner (Appeals) and the tribunal have primarily relied upon the close association between e-Fund India and the two assessees and applied functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business. This is not a proper and appropriate test to determine location PE. The fixed place of business PE test is different. Therefore, the fact that e-Fund India provides various services to the assessee and was dependent for its earning upon the two assessees is not the relevant test to determine and decide location PE. The allegation that e-Fund India did not bear sufficient risk is irrelevant when deciding whether location PE exists. The fact that e-Fund India was reimbursed the cost of the call centre operations plus 16% basis or the basis of margin fixation was not known, is not relevant for determining location or fixed place PE.
Similarly what were the direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE. Assignment or sub-contract to e-Fund India is not a factor or rule which is to be applied to determine applicability of Article 5(1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not the relevant criteria/test. e-Fund India was/is a separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayers. Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between the Indian subsidiary and the foreign Principal under Article 5(1). Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place PE exists."
It further went on to hold that the ITAT's finding that the assessees were a joint venture or sort of partnership with the Indian subsidiary was wholly incorrect. Also, none of these arguments have been invoked by the Revenue and such a finding would, therefore, be perverse. After citing Klaus Vogel on Double Taxation Conventions, Arvid A. Skaar in Permanent Establishment: Erosion of 12 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
a Tax Treaty Principle and Bollinger vs. Commissioner, 108 S.Ct. 1173, the High Court found against the Revenue, holding that there is no fixed place PE on the facts of the present case. We agree with the findings of the High Court in this regard.
Reliance placed by the Revenue on the United States Securities and Exchange Commission Form 10K Report, as has been correctly pointed out by the High Court, is also misplaced. It is clear that the report speaks of the e-Funds group of companies worldwide as a whole, which is evident not only from going through the said report, but also from the consolidated financial statements appended to the report, which show the assets of the group worldwide.
15 xxxx
This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score."
Considering the past history of the assessee in light of the decision of this Tribunal [supra] read with the decision of the Hon'ble Supreme Court in the case of E-funds IT Solutions Inc. [supra], we hold that the assessee has no business connection in India in terms of section 9(1) of the Act and has no PE under Article 5(2), 5(4) and 5(5) of India Mauritius DTAA.
Since we have held that there is no PE, we are of the considered view that there cannot be any attribution of profit as held by this Tribunal in assessee's own case in A.Ys 2009-10 and 2011-12.
For the sake of completeness of the adjudication, and as mentioned elsewhere, the TPO has accepted the international transactions at Arm's length and no adverse inference was drawn. We have also gone through the TP assessment order and find no adjustment.
Facts being identical, respectfully following the decision of
the Coordinate Bench in assessee own case, as referred to above,
we hold that since the assessee had no PE, either fixed place or
13 | P a g e
ITA No.3016/Del/2019 & 3089/Del/2019
DAPE in India, no part of its profit can be attributed to the PE.
Accordingly, the addition made is deleted.
As far as Revenue’s appeal is concerned, in view of our
decision hereinabove, it has become infructuous, hence,
dismissed.
In the result, assessee’s appeal is allowed, whereas,
Revenue’s appeal is dismissed.
Order pronounced in the open court on 21st November, 2022
Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER
Dated: 21st November, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
14 | P a g e
