ASIA TV (UK) LTD,MUMBAI vs. DDIT 1(1), MUMBAI

ORDER PER N.K. PRADHAN, A.M. The captioned appeals filed by the assessee are directed against the order passed by the Asstt./Deputy Director of Income Tax (International Taxation)-1(1), Mumbai (hereinafter ‘the AO’) u/s 143(3) r.w.s. 147 & 144C(13) of the Income Tax Act 1961, (the ‘Act’) for AY 2006-07 and u/s 143(3) r.w.s. 144C(13) for AY 2007-08. As common issues are involved, we & 8012/2010 2 Asia TV (UK) Ltd. are proceeding to dispose them off through a consolidated order for the sake of convenience. We begin with the AY 2006-07.

1. The DRP erred in law and facts in upholding reopening the case u/s 143(3) r.w.s 148 of the Act. The reasons given by them for doing so are wrong, contrary to the facts of the case and against the provisions of law.

2. The DRP erred in law and facts in directing the AO to assess the income on accrual basis instead of cash basis. The reasons given by them for doing so are wrong, contrary to the facts of the case and against the provisions of law. 3. The DRP erred in law and facts in upholding that the assessee has a permanent establishment in India. The reasons given by them for doing so are wrong, contrary to the facts of the case and against the provisions of law. 4. The DRP erred in law and facts in upholding that income of the assessee is taxable in India even though it has paid commission to its Indian agent on arm’s length basis which has extinguished the tax liability of the assessee. 5. The DRP ought to have held that assessee has no PE in India and its income is not taxable in India. 6. The DRP ought to have held that income of the assessee is not taxable in India even if it has PE in India as it has paid commission to its Indian agent on arm’s length basis. 7. Without prejudice to other grounds of appeal the DRP ought to have held that the income of the assessee is taxable in India it should be on cash/ collection basis instead of accrual basis.

3. Briefly stated, the facts of the case are that the appellant is a resident of United Kingdom, country with which India has DTAA. It is engaged in the business of telecasting, broadcasting via Satellite in UK and rest of Europe. & 8012/2010 3 Asia TV (UK) Ltd.

It is having income from subscription and advertisement mainly from UK and Europe. For getting business from Indian advertisers, M/s Zee Telefilms Ltd. (M/s ZTL) was appointed as canvassing agent by the appellant in India. The appellant disclosed the gross revenue on advertisement from India on cash basis but noted that its income is not taxable in India, as it has no Permanent Establishment (PE) in India and claimed refund of tax deduct at source. It declared income of Rs.13,36,204/- being interest on income tax refund/sale on equipment in installment. The return was processed u/s 143(1) of the Act. Subsequently, on receipt of information gathered during the course of assessment proceedings for AY 2005-06, the AO knew that the appellant has an exclusive agent in India in the form of M/s ZTL, which is soliciting advertisement on behalf of the appellant and collecting advertisement revenue in India. The AO held M/s ZTL to be the dependent agent of the appellant and constituting a PE of the assessee in India under Article 5(4)/5(5) of the DTAA between India and UK. Observing thus, the AO reopened the assessment by issuing notice u/s 148.

The AO did not agree with the basis of accounting followed by the appellant i.e. cash basis of accounting. The reasons given by the AO are that the canvassing agent i.e. M/s ZTL is booking the advertisement in India to be broadcasted on Zee (UK) Channel, and the commission which M/s ZTL is liable to get on the advertisement revenues is reported by M/s ZTL on accrual basis. Stating that the advertisement revenues of the appellant are already shown as accrued in the accounts of its canvassing agents, the AO came to a finding that the gross receipts of the assessee on accrual basis amounts to Rs.1,70,19,092/-. & 8012/2010 4 Asia TV (UK) Ltd.

In response to a show cause notice issued by the AO to explain why it would not be deemed to have a PE in India as per Article 5(4)/5(5) of the India-UK DTAA and why its income should not be held as taxable, the appellant filed a reply before the AO stating that it had no PE in India and also it is not covered under Article 5(4)/5(5) of the said DTAA. Accordingly, the appellant stated before the AO that no part of the advertisement revenue arising from India is taxable in India. However, the AO was not convinced with the said reply for the reason that the appellant had an exclusive agent in India in the form of M/s ZTL, which is soliciting advertisement on behalf of the assessee and collecting advertisement revenue in India. As noted by the AO the Agreement dated 01.10.1997 with Ambience Space Sellers Ltd. (ASSL), which was later supplanted by M/s ZTL clearly mentions that ASSL, then M/s ZTL is its exclusive agent in India for the provision of information to it regarding advertisers and to help arrange for sale of advertisement and sponsorship on the TV Channel (clause 2.1), which means that apart from M/s ZTL, no one has any authority to work in India for the assessee. The AO noted that the assessee’s contentions that M/s ZTL’s income from working as an agent for the assessee is a small percentage of its overall income should be viewed in the context that M/s ZTL is working only for the same group. Relying on the order of the Tribunal in the case of ACIT v. DHL Operations B.V. Netherlands (ITA No. 7987 & 7988/Bom/92), the AO came to a finding that since the entire activities of the appellant is wholly carried out by M/s ZTL in India, it is the dependent agent of the assessee and constitutes a PE of the assessee in India under Article 5(4)/5(5) of the DTAA between India and UK. Accordingly, the AO referred to Article 7 of the DTAA and estimated the profit & 8012/2010 5 Asia TV (UK) Ltd.

@ 10% of gross receipts of Rs.1,70,19,092/- which comes to Rs.17,01,909/- and thereby brought to tax the total income of Rs.30,38,113/- by including the interest income of Rs.13,36,204/- shown by the assessee in its return of income.

Elaborating further, the Ld. counsel submits that M/s ZTL is an independent agent since the revenue earned by it from the appellant are a meagre 0.033% of the total revenues of M/s ZTL; in terms of Article 5(5) of the Treaty, an agent of the assessee would not be an independent agent, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control). & 8012/2010 6 Asia TV (UK) Ltd.

Without prejudice to the above, the Ld. counsel submits that M/s ZTL can constitute a PE of the assessee in India only if the tests laid down in Article 5(4) are satisfied; M/s ZTL has no authority to conclude contract on behalf of the appellant, hence it cannot constitute a dependent agent PE. Referring to para 4.3 of the said agreement, it is stated by the Ld. counsel that there is an express provision in the Agreement prohibiting M/s ZTL from concluding contracts on behalf of the appellant. It is stated that the assessee had submitted sample advertisement invoices before the Dispute Resolution Panel (DRP) to demonstrate that the sale of advertisement slots is concluded directly by the appellant and not by M/s ZTL.

The Ld. counsel submits that the Transfer Pricing Officer (TPO) in M/s ZTL’s case has found the fees paid by the assessee for earning advertisement revenues to be at arm’s length. In this regard, he refers to page 20 (for AY 2006-07), and 21-22 (for AY 2007-08) of the Paper Book. Therefore, it is stated by him that no further attribution of income to PE can be made. Referring to the order of the Tribunal in the case of another entity of the group i.e. Zee TV USA Inc. v. ADIT (IT) (ITA No. 8862/M/10), it is stated by him that the Tribunal has held that the remuneration paid to M/s ZTL by Zee TV USA for advertisement revenues collected from India (which was similar to the remuneration paid by the assessee to M/s ZTL), being at arm’s length price, extinguishes any tax liability in the hands of Zee TV USA. Also reliance is placed by him on the decision in ADIT v. E-Funds (399 ITR 34) (SC), DIT v. Morgan Stanley (292 ITR 416) (SC), Set Satellite (Singapore) Pte. Ltd. v. DDIT (307 ITR 205) (Bom), DDIT (IT) v. Asia Today Limited (4346/Mum/2009), DIT (IT) v. Delmas France (232 Taxman 401) (Bom), International Global Networks & 8012/2010 7 Asia TV (UK) Ltd.

BV v. ADIT (IT) [84 taxmann.com 188, DDIT v. B4U International Holdings Ltd. (23 taxmann.com 372) and DIT v. B4U International Holdings Ltd. (374 ITR 453) (Bom. HC).

Further, it is stated by him that the AO has rightly relied on the decision in DHL Operators B.V. Netherlands (supra) to arrive at a finding that the appellant has a PE in India in terms of Article 5(4)/5(5) of the Indo-UK DTAA. Also it is explained by him that the assessee has a PE in India in terms of Article 5(2)(c) and 5(2)(f) of the DTAA.

Arguing against the contentions of the Ld. counsel for the assessee that since it has paid arm’s length remuneration, its profits are not liable to tax in India, the Ld. DR explains that in Morgan Stanley & Co. Inc. (supra), the Hon’ble Supreme Court has clearly laid down that arm’s length remuneration can extinguish the assessment only if the price is determined taking into account all the risks and functions of the assessee-company and not only the risks of its agent in India; in fact, the 15% remuneration paid to the agent in India is only with respect to risks and functions of the agent activities in India and it does not cover in its ambit the risks and functions of the assessee-company in so far as they relate to the business of the assessee-company in India. Similarly, reliance is placed by the Ld. DR on the order of the Tribunal in the case of M/s Rolls Royce PLC v. DDIT (2009-TIOL-103-ITAT-Del).

It is stated by him that accrual of income is to be determined in terms of the agreement between the assessee and the agent and as per it, the agent is due to collect its commission @ 15% and remit the remaining portion. Thus the Ld. DR supports the order passed by the AO.

In the instant case, the AO reopened the assessment which was processed u/s 143(1) on the ground that the assessee had an exclusive agent in India in the form of M/s ZTL which is soliciting advertisement on its behalf and collecting advertisement revenue in India. Further, it was the contention of the AO that M/s ZTL was held to be dependent agent of the assessee and also held to be constituting a PE of the assessee in India under Article 5(4)/5(5) of the DTAA between India and UK. In ACIT v. Rajesh Jahveri Stock Brokers P. Ltd. 291 ITR 500 (SC) it is held that intimation u/s 143(1)(a) is not an assessment and notice u/s 148 is validly issued. In the instant case, as the AO has reopened the assessment by issuing notice u/s 148 on the return which are processed u/s 143(1), following the above decision of the Hon’ble Supreme Court, we hold the reopening as valid. Accordingly, the 1st ground of appeal is dismissed.

6.1 Then we turn to the remaining grounds of appeal. It would be apposite to refer to the relevant decisions on the matter.

In E-Funds IT Solutions Inc. (supra), the Hon’ble Supreme Court has held that where transactions between assessees (two US Companies) and Indian Entity were at ALP, no further profits could be attributed even if there existed a PE in India.

6.2 In Set Satellite (Singapore) Pte. Ltd. (supra), the assessee-company was a resident of Singapore. It was carrying on marketing activities in India through its Dependent Agent [DA] for advertisement slots by canvassing advertisements in India. For the relevant assessment year, it had filed return of income declaring certain business income. However, it did not admit any & 8012/2010 10 Asia TV (UK) Ltd. tax liability on the said income on the pleas that it did not have a PE in India and its dependent agent was being remunerated on an arm's length basis; and that since income from various activities had been assessed to tax in the hands of DA, there could not be further assessment of said income in its hands. The Assessing Officer did not agree with the assessee and assessed its income to tax, which included income from marketing fees as also advertisement income collected from India, and the subscription fees received from cable operators of its DA.

On appeal, the Commissioner (Appeals) held that insofar as the ad revenues were concerned, para 6(c) of the Circular No. 23, dated 23-7-1969 was applicable to the assessee as (1) its business activities in India were wholly channelled through its agent; (2) the contracts to sell were made outside India; and (3) the sales were made on a principal-to-principal basis. He further proceeded to examine whether profits arising to the assessee out of its DA's marketing activities in India were sufficiently taxed in India and considering article 7(2) of the India-Singapore DTAA, held that as the assessee had remunerated the DA on an arm's length basis, no further profits should be taxed in the hands of the assessee. He, however, held that as the assessee itself had filed the return of income and had offered the income to tax, there was no reason to interfere with the order of the Assessing Officer. Insofar as distribution of revenue from AXN channel was concerned, the Commissioner (Appeals) held that distribution income belonged to the DA and not to the assessee; and that since said income had been offered to tax by the DA and had already been taxed in its hands same income could not be subjected to tax in the hands of the assessee. He, therefore, directed the Assessing Officer to & 8012/2010 11 Asia TV (UK) Ltd. delete the portion of income earned by the DA while computing the taxable income of the assessee.

On cross appeals, the Tribunal, on the issue as to whether the DA was PE of the assessee, recorded a finding of fact that the DA was a PE of the assessee and, as such, the assessee was deemed to have a PE. It further held that in addition to the taxability of the DA in respect of the remuneration earned by it, which was in accordance with the domestic law and which had nothing to do with the taxability of the assessee of which it was a dependent agent, the assessee was also liable to tax in India in terms of the provisions of article 7 in respect of the profits attributable to the dependent agent's permanent establishment. The Tribunal further held that the assessee, in respect of its dependent agency's permanent establishment, was not extinguished of tax liability by making an arm's length payment to the dependent agent and, consequently, the relief given by the Commissioner (Appeals) by holding that the taxability of arm's length remuneration to the dependent agent extinguished the tax liability of dependent agent's permanent establishment as well, was unjustified.

On appeal by the assessee, the Hon’ble Bombay High Court held :

“From a reading of article 7(1) of the DTAA, it is clear that the profits of an enterprise of a Contracting State shall be taxable only in that State, unless the enterprise carries on business in the other Contracting State, through a permanent establishment situated therein. The profits of the enterprise may be taxed in the other State but only so much of profit as directly or indirectly attributable to that permanent establishment. In para 2 of article 7, while determining the profits attributable to the permanent establishment, the expression used is 'estimated on a & 8012/2010 12 Asia TV (UK) Ltd. reasonable basis'. The DTAA does not refer to arm's length payment. The principles contained in the matter of income from international transaction on an arm's length price are contained in section 92. From the order of the Commissioner (Appeals), it was clear that the assessee had paid to its PE on an arm's length principle. He recorded a finding of fact that the assessee had paid service fees at the rate of 15 per cent of gross ad revenue to its DA for procuring advertisements during the period April, 1998 to October, 1998. The fact that 15 per cent service fee was an arm's length remuneration was supported by Circular No. 742, which recognizes that the Indian agents of foreign telecasting companies generally retain 15 per cent of the ad revenues as service charges. Effective from November, 1998, a revised arrangement was entered into between the assessee and DA, whereby the aforesaid amount was reduced to 12.5 per cent of the net ad revenue, i.e., gross ad revenue less agency commission. Simultaneously, the assessee had also entered into an arrangement entitling the DA to enter into agreements, collect and retain all subscription revenues. Considering all those aspects and the fact that the agent had a good profitability record, the Commissioner (Appeals) held that the assessee had remunerated the agent on an arm's length basis.

That finding of the Commissioner (Appeals) had not been disputed by the revenue. The entire contention of the revenue was that the advertisement revenues pertaining to its own channel and AXN channel were also taxable in India. [Para 10] The Commissioner (Appeals) had dealt with the issue as to why the advertisement revenues received by the assessee were not liable for being taxed in India based on the CBDT Circular No. 23, dated 23-7-1969, which clearly set out that where a non- resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent's services, provided that : (i ) the non-resident principal's business activities in India are wholly channelled through his agent; (ii) the contracts to sell are made outside India; and (iii) the sales are made on a principal-to-principal basis. The Commissioner & 8012/2010 13 Asia TV (UK) Ltd.

(Appeals) had recorded a specific finding in favour of the assessee in the affirmative on all three counts. It was in those circumstances that it was held that the advertisement revenue received by the assessee, might be from the customers in India, was not liable for tax in India. The fact that CBDT circulars are binding needs no repetition. The Tribunal, in its judgment, had not considered the effect of the finding recorded by the Commissioner (Appeals) based on the circular which was relevant for the purpose of deciding the controversy in issue. This circular, read with article 7(1) of the DTAA, would result in holding that the income from advertisement, if it is neither directly nor indirectly attributable to that of the permanent establishment, would not be taxable in India. The Tribunal, in fact, had recorded a finding that article 7(2) provides that the arm's length price is the criterion for computation of these hypothetical profits. The entire rationale or reasoning given by the Tribunal deserved to be set aside. In matters of tax what has to be considered and more so in international transactions if there be a treaty, are the provisions of the treaty and if they are more advantageous to the assessee, then the construction which is advantageous to the assessee will have to be given. The assessee had produced an order passed by the Additional Commissioner (Transfer Pricing-II), Mumbai in the matter of determination of arm's length price with reference to all the transactions reported in Form No. 3CEB filed by the DA. The order recorded that the DA was engaged in the business of providing audio-visual television content and also acted as an advertising agent of the assessee; that the DA distributed those channels to the Indian cable operators; and that the DA had applied the TNM method to determine the arm's length price for its international transactions. The order was in respect of reference received for the assessment year 2002-03 and not for the subsequent assessment years. [Para 11] If the correct arm's length price is applied and paid, then nothing further would be left to be taxed in the hands of the foreign enterprise. [Para 12] Therefore, considering the CBDT Circular No. 742, it would be fair and reasonable to compute the taxable income at 10 per cent of the gross profits. In the instant case & 8012/2010 14 Asia TV (UK) Ltd. insofar as marketing services were concerned, what had been paid by the arm's length principle was more than 10 per cent. The only contention advanced and which found favour with the Tribunal was that the advertisement revenue received by the assessee was also income liable to be taxed in India. The Commissioner (Appeals) had relied upon Circular No. 23 of 1969. That circular, read with article 7(1), would result in holding that advertisement revenue received by the assessee was not taxable in India as long as the Treaty and the circular were valid. [Para 13] Therefore, the impugned order of the Tribunal was not justified and deserved to be set aside. Merely because tax on income was paid for some assessment years would not stop the assessee from contending that its income was not liable to tax. Therefore, the order of the Commissioner (Appeals) deserved to be restored, except to the extent he had said that he could not interfere because the assessee had paid the tax. That part was liable to be set aside. [Para 14]”

6.3 In a recent decision in the case of Addl. DIT International Taxation 1(1), Mumbai v. Asia Today Ltd. (ITA No. 1878, 1879/Mum/2008 & CO No. 124- 125/Mum/2008) for AY 2002-03 & AY 2004-05) and other related assessment years, the assessee is a foreign telecasting company incorporated in Mauritius and having a tax residency certificate of Mauritius. It sells advertising time and collects subscription revenues through its Indian affiliates Zee Telefilms Ltd. and Ei Zee, but its claim was that since it does not have any permanent establishment in India, no part of its income was taxable in India. The AO did not accept the claim. He was of the view that its Indian agent constitutes virtual projection of the foreign company, and therefore, it has a permanent establishment in India, in the light of Hon’ble Madras High Court judgment in the case of CIT v. Vishakhapatnam Port Trust (144 ITR 146). Without prejudice to the above, the AO observed that the assessee has an & 8012/2010 15 Asia TV (UK) Ltd. agency PE in India, under Article 5(4) of the India Mauritius DTAA, in as much as its agent or the dependent agents. As per the plea that in case, the assessee is held to have a dependent agent PE, as was held by the AO, no further profits can be attributed in the hands of the assessee as the agent has been paid arm’s length remuneration services rendered, the AO rejected the said plea. The Tribunal held that in the light of the judgment of the Hon’ble Bombay High Court in the case of Set Satellite (supra), so far as profit attribution of a DAPE is concerned, the legal position in fact as long as an agent is paid an arm’s length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency PE and viewed thus, the existence of a dependent agency PE is wholly tax neutral. The Tribunal further held that whether there is a DAPE or not, there are no additional profits to be brought to tax as a result of the existence of the DAPE, and, therefore, the question about the existence of the DAPE on the facts of this case is wholly academic. In para 16, the Tribunal concluded that :

“16. Once we hold, as we have held above, that in the light of the present legal position, existence of dependent agency permanent establishment in wholly tax- neutral, unless it is shown that the agent has not been paid an arm's length remuneration, and when it is not the case of the Assessing Officer, as we have noted earlier, that the agents have not been paid an arm's length remuneration, the question regarding the existence of dependent agency permanent establishment, i.e., under article 5(4), is a wholly academic question. We humbly bow to the law laid down by Hon'ble Courts above. The limited argument before us is that here is a case of dependent agency permanent establishment, and the existence of a DAPE, in the light of these discussions, is wholly tax-neutral- particularly in the light of the legal position regarding profit attribution to the DAPE. We need not, therefore, deal with & 8012/2010 16 Asia TV (UK) Ltd. the question about the existence of a DAPE, as it is an academic exercise with no tax effect involved. The related grounds of appeal are thus infructuous.”

6.4 We find that the TPO in M/s ZEEL’s case (M/s ZTL subsequently changed its name to ZEEL ) has found the fees paid by the assessee for earning advertisement revenues to be at arm’s length. In this context, we refer to page 20 of the P/B for AY 2006-07 and page 21-28 of the P/B for AY 2007-08.

For AY 2006-07, the TPO has accepted the arm’s length price of transactions as reported by M/s ZEEL.

For AY 2007-08, the TPO has made a transfer pricing adjustment of Rs.137,46,33,244/-. During AY 2007-08 M/s ZEEL has reported the following international transactions with its AEs :

S. No. Nature of transaction F.Y. 2006-07 Method used by Assessee 1 Sale of TV programs and films 837,860,756 TNMM

2 Performance fee (received) 932,200 CUP 3 Agent for Space Selling (received) 54,011,514 CUP 4 Playout facility charges (received) 21,375,379 CPM 5 Distribution of Pay TV (Received) 143,241,930 CUP 6 Distribution of Pay TV (Paid) 28.648,386 CUP 7 Interest received 16,361,769 CUP 8 Interest Paid on Instalments - CUP 9 Transmission Services paid 49,824,563 CUP 10 Reimbursements Received 71,759,644 Actuals 11 Purchase of Assets/Rights - CPM & 8012/2010 17 Asia TV (UK) Ltd.

Total 122,40,16,141 The TPO has made the above adjustment with regard to sale of TV programs and films, which the assessee has shown at Rs.83.78 crores. It is noted by the TPO that the assessee has purchased television programs and sold these programs (which are already exploited by M/s ZEEL on its Indian Channels) to various broadcasters overseas at a pre-determined price.

6.5 It is recorded by the AO, the canvassing agent i.e. M/s ZTL is booking the advertisements in India to be broadcast on ZEE (UK) Channel and the commission which M/s ZTL is liable to get on the advertisement revenues is reported by M/s ZTL on accrual basis. The AO has estimated @ 10% of gross profits which comes to Rs.17,01,909/- and brought it to tax as income from advertisement.

As mentioned earlier, in the order u/s 92CA(3) dated 29.10.2010, the TPO was concerned with sale of TV programs and films which ZEEL has shown at Rs.83.78 crores. In the instant case, we are concerned with the gross revenue received by the appellant from advertisement from India. The above order passed by the TPO does not deal with the gross revenue received by the assessee from advertisement from India. It is not the case of the revenue authorities that the gross revenue received by the assessee from advertisement from India is not at arm’s length remuneration. Therefore, once we hold that in the light of present legal position, existence of dependent agency permanent establishment is wholly tax neutral, the question regarding existence of DAPE is a wholly academic in question. We need not therefore & 8012/2010 18 Asia TV (UK) Ltd. deal with the question about the existence of the DAPE, as it is an academic exercise with not tax effect involved.

Section 92F(ii) of the Act defines arm’s length price as a price which is applied or proposed to be applied in the transaction between persons other than associated enterprises (‘AE’) in uncontrolled transactions.

As rightly held in E-Funds (supra), that “where transactions between assessees (two US Companies) and Indian entity where at arm’s length price, no further profits could be attributed even if they are existed a PE in India.

It is aptly held in Set Satellite (Singapore) Pte. Ltd. (supra) “if the correct arm’s length price is applied and paid, then nothing further would be left to be taxed in the hands of the foreign enterprise”.

Similarly, in Asia Today Ltd. (supra), it is held that “in the light of Hon’ble Jurisdictional High Court’s judgment in the case of Set Satellite (supra), so far as profit attribution of a DAPE is concerned, the legal position is held as long as an agent is paid an arm’s length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment. Viewed thus, the existence of a dependent agency permanent establishment is wholly tax neutral.”

In the result, the appeal for the AY 2006-07 is partly allowed. & 8012/2010 19 Asia TV (UK) Ltd.

Order pronounced in the open Court on 15/02/2021.