THE DY. DIT (IT) 1(2), MUMBAI vs. ATL MEDIA LIMITED (AS A SUCCESSOR TO EXPAND FAST HOLDINGS LTD.), MUMBAI

(b) The CIT(A) erred in law and facts in holding that the relationship Zee Telefilms Ltd. (hereinafter referred to as "ZTL") and El-Zee Television Limited (hereinafter referred to as "El-Zee") constitutes a business connection.

2. The CIT(A) failed to appreciate that the income is not liable to be taxed in India, even if it is considered that the assessee has a business connection as the income which is attributable to such business connection has already been taxed in India as ZTL / El-Zee have been remunerated at arm's length. Hence, as per Circular 23 no further income can be made attributable to the foreign company. The CIT(A) ought to have considered the application of the said circular which is binding on the department.

3. Without prejudice to above, the CIT(A) erred in law and facts in upholding the assessment of income on the assessee (Foreign Company) inspite of the fact of the assessee suffered losses in its worldwide business as per audited accounts of earlier years and there are huge accumulated losses during the year also.

4. The CIT(A) erred in law and facts in estimating income U/R 10(2)(ii) on the basis of percentage of profit in worldwide accounts of aft its activities instead of percentage of profit in broadcasting business, wherein the appellant suffered losses and he ought to have estimated no income based on losses in the relevant business”

According to the assessee no part of the advertisement and subscription revenue is taxable in India.

5.1. The assessee eneterd into Distribution Agreement dated 01/7/2000 with El-Zee. El-Zee was granted exclusive rights of distriburion/marketing of satellite channels broadcasted by the assessee within the territory of India. In consideration thereof, EL-Zee was allowed to retain 20% of the subscription fees charged by the assessee from the affiliates /subscribers of the channels in India. The Assessing Officer held subscription fee in the nature of ‘royalty’ u/s.9(1)(vi) of the Act, taxable @20%.

5.2 In proceedings before the First Appellate Authority the assessee contended that though the assessee has earned net profit of 9.36% on global basis but in India the assessee has incurred losses, therefore, no taxable income had accrued in India. The CIT(A) disregarding the contentions of the assessee attributed 9.36% of the advertisement revenue as chargeable to tax. However, the CIT(A) upheld the contentions of the assessee that the advertisement revenue should be tax on cash basis and not on accrual basis as has been done by the Assessing Officer. The CIT(A) further deleted the addition made by the Assessing Officer treating subscription fee as royalty.

The assessee has placed reliance on the decision in the case of one of its group concern Asia Today Ltd. ADIT(supra), wherein addition made for similar reasons were deleted by the Tribunal. Before we proceed further, it would be relevant to point out that in the case of Asia Today Ltd.(supra) the provisions of India-Mauritius DTAA were in operation, whereas in the instant case there is no DTAA between India and BVI. The contention of the assessee is that provisions of Article-7(1), which deals with business profits of DTAA are pari- materia to provisions of Explanation 1 (a) to Section 9(1)(i) of the Act. For the sake of ready reference, the relevant extract of Article 7(1) of the DTAA and relevant provisions of section 9(1)(i), as they were applicable to Assessment Year under appeal are reproduced herein below:

“ARTICLE -7 BUSINESS PROFITS 1. 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. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”

“Section 9 - Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :— (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [***] or through the transfer of a capital asset situate in India. [Explanation 1].—For the purposes of this clause— (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ;”

Explanation 1(a) to section 9(1)(i) of the Act contemplates that a where a non resident has business connection in India and his business operations are carried out partly abroad and partly in India, in such a situation revenue only from operations in India shall be taken into account and a reasonable portion thereof shall be treated as income accruing or arising in India.

An comparative analysis of provisions of Article 7(1) of DTAA and provisions of Explanation 1(a) to Section 9(1)(i) reflects that they are homogeneous. Both the provisions tax income that from business operations in India and only to the extent the revenue is reasonably attributable to India operations. The co-ordinate Bench in the case of Galileo International Inc. vs. DCIT (Supra) held, “Reading the above Article 7 of the treaty it is clear that the profit of an enterprise will be taxable only to the extent as is attributable to the permanent establishment. This is in pari material with clause (a) of Explanation 1 to section 9(1)(i) of the Act.”

The assessee claimed that even if they are held to be PEs, the assessee has remunerated the PEs at arm’s length, hence, the assessee is not liable for further tax on remaining revenue. The Co-ordinate Bench after placing reliance on the decision in the case of SET Satellite (Singapore)PTE Ltd. vs. CIT(supra) held that where assessee had Dependent Agency PE (DAPE), if Indian agent was paid arm’s length remuneration, nothing further could be taxed in the hands of assessee.

“ On the facts and circumstances of the case the learned CIT(A) erred in holding that since the assessee has remunerated the agent on arm’s length(ALP) no further profits of the assessee could be taxed in India other than the profits so earned by the dependent agent(DA)?” Answering the aforesaid question and the additional questions framed during hearing of appeal by the assessee/appellant, the Hon’ble High Court threadbare examined the provisions of Article-7(1) of the DTAA and Circular No.23 of 1969 and held:

“11. We may firstly point out that CIT has dealt with the issue as to why the advertisements received by the Appellant were not liable for being taxed in India based on the CBDT Circular No. 23, dated 23-7-1969 which clearly sets 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 CIT(A) had recorded a specific finding in favour of the Appellant in the affirmative on all three counts. It is in these circumstances that it was held that the advertisement revenue received by the Appellant may be from the customers in India is not liable for tax in India. That CBDT Circulars are binding needs no repetition. If authorities need be cited. We may now refer to the judgment of the Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889. In that judgment the issue was whether Circular of 9-10-1984 was inconsistent or whether there was contradiction in the circular and Section 145 of the Income-tax Act. The Supreme Court observed that :— "... In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the department." (p. 901) See also CIT v. Hero Cycles (P.) Ltd. [1997] 228 ITR 463 (SC). It would thus be clear that the Circular No. 23 would be binding on the Assessing Officer and had to be considered while assessing the tax liability of an assessee. The Tribunal in its judgment has not considered the effect of the finding recorded by the CIT (Appeals) based on the Circular and which circular 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 neither directly nor indirectly attributable to that of the permanent establishment, would not be taxable in India. The Tribunal in fact in para 10 has recorded a finding that Article 7(2) provides that the arm's length price is the criterion for computation of these hypothetical profits. In our opinion the entire rational or reasoning given by the Tribunal has to be set aside. In matters of tax what has to be considered and more so in international transactions if there be a treaty, the provisions of the treaty and if the provisions of the treaty are more advantageous to an assessee, then the construction will have to be given which is advantageous to the assessee. At this stage we may note that on behalf of the assessee learned Counsel has produced an order passed by the Additional CIT (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 assessee. The assessee is SET India, the depending agent. The order records that the assessee is engaged in the business of providing audio- visual television content and also acts as an advertising agent of Set Satellite Singapore Pvt. Ltd. The assessee distributes these channels to the Indian cable operators and that the assessee has applied the TNM method to determine the arm's length price for its international transaction. It, however, clarified that the order is in respect of reference received for assessment year 2002-03 and not for subsequent assessment years.

12. We may now consider the judgment in Morgan Stanley & Co. Inc's case (supra). The Appeals dealt with the Double Tax Avoidance Agreement (DTAA) between India and United States. That treaty advocated application of the arm's length principle or provided a mechanism for avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, "MSCo.") and one of the group companies

of Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short "MSAS"). An agreement was entered into for providing certain support services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo. On 5-5-2005 MSCo. filed its advance ruling application . The basic question related to the transaction between the MSCo. and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having PE in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated 14-4-2005 and if so (ii) the amount of income attributable to such PE. It was ruled that MSAS should be regarded as constituting a service PE under Article 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the Arm's Length Price (ALP) in respect of the service agreement dated 14-4-2005 and it meets the test of arm's length as prescribed under section 92C of the 1961 Act and no further income was attributable in the hands of MSAS in India. The said ruling of AAR on the question of income attributable to the PE was the subject-matter of challenge by the Department. Insofar as the issue of PE is concerned the Supreme Court was pleased to hold that it agreed with the Ruling of the AAR that stewardship activities would fall under Article 5(2)(1). Dealing with the question of deputation, the Court held that on the facts that there is a service PE under Article 5(2)(1) and as such held that the Department was right in its contention that there exists a PE in India. Considering Article 7 of that treaty the Court observed that what is to be taxed under Article 7 is income of the MNE attributable to the PE in India and what is taxable under Article 7 is profits earned by the MNE. Under the Income-tax Act the taxable unit is the foreign company, though the quantum of income taxable is income attributable to the PE of the said foreign company in India. The Court observed that the important question which arises for determination is whether the AAR is right in its ruling when it says that once the transfer pricing analysis is undertaken there is no further need to attribute profits to a PE. The Court further noted that the computation of income arising from international transactions has to be done keeping in mind the principle of arm's length price. The Court further reiterated that the main point for determination is whether the AAR was right in ruling that as long as MSAS was remunerated for its services at arm's length, there should be no additional profits attributable to the applicant or to MSAS in India. After considering the various methods by which arm's length price can be determined the Court observed as under :— "As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm's length principle we have quoted Article 7(2) of the DTAA. According to the AAR where there is an international transaction under which a non-resident compensates a PE at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by the Central Board of Direct

Taxes. This is the key question which arises for determination in these civil appeals." After discussing the various issues the Court in its conclusion held as under :— "As regards attribution of further profits to the PE of MSCo. where the 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 risk-taking 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 of 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 represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost." In our opinion considering the judgment, 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.” From the aforesaid decision it is unambiguous that where the overseas entity has remunerated PE in India at arm’s length nothing further is liable to be taxed in the hands of non-resident entity.

Thus, in facts of the case and decisions discussed above, we find merit in ground No.2 of appeal by the assessee. The Assessing Officer is directed to delete addition of Rs.3,38,14,897/- confirmed by the CIT(A) on account of assessee’s income from operations in India.

Department’s Appeal:

"1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that the assessee was justified in following the cash system of accounting. 2. On the facts and in the circumstances of the case, and in law, the Id. CIT(A) erred in holding that the subscription revenue collected is only business income of the telecasting company and not royalty within the meaning of section 9(1)(vi)of the I.T. Act, 1961.

3. On the facts and in the circumstances of the case and in law the Id. CIT(A) erred in holding that global profitability ratio of 9.36% be applied to estimate the Indian income of the assessee.

4. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that no interest u/s. 234B is payable by a non-resident whose total income is subject to deduction of tax at source and directing the Assessing Officer to delete interest charged u/s. 234B of the IT. Act, 1961."

The ld. Departmental Representative supporting the assessment order further submitted that the CIT(A) has erred in coming to the conclusion that subscription revenue collected is only business income of telecasting company and not royalty within the meaning of section 9(1)(vi) of the Act. The CIT(A) has further erred in applying global profitability rate of 9.36% as against 15% adopted by the Assessing Officer in respect of advertisement revenue. The Assessing Officer has given detailed reasons for holding subscription income as royalty taxable at 20%. He prayed for upholding the assessment order and reversing findings of the CIT(A).

“c. Whether on the facts and circumstances of the case and in law, the ITAT erred is not appreciating that the assessing officer has correctly assessed distribution receipt as ‘Royalty Income’?”

Answering the aforesaid question in negative the Hon’ble Court held:

“12. Section 9 of the Act pertains to income deemed to accrue or arise in India. Clause (vi) of Section 9(1) pertains to income by way of royalty. Relevant portion reads as under:— '(vi) income by way of royalty payable by — (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is non-residnet, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Explanation 2 below sub-section (1) of Section 9 describes the term "royalty" for the purpose of said clause, relevant portion of which reads as under:— Explanation 2.- For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains")for' 13. In our opinion, these provisions would in no manner change the position. Only if the payment in the present case by way of a royalty as explained in explanation (2) below sub-section (1) of Section 9 of the Act, the question of applicability of clause (vi) of sub-section (1) of Section 9 would arise. Learned counsel for the revenue placed considerable tress on clause (v) of explanation (2) by virtue of which the transfer of the rights in respect of copyright of a literary, artistic or scientific wok including cinematograph film or films or tape used for radio or television broadcasting etc. would come within the fold of royalty for the purpose of Section 9(1) of the Act. We do not see how the payment in the present case could be covered within the said expressions. As noted, this is not a case where payment of any copyright in literary, artistic or scientific work was being made.” [Emphasised by us] Thus, in facts of the case and the decision referred above, ground No.2 of appeal is dismissed sans-merit.

30. In ground No.4 of appeal, the assessee has assailed the findings of CIT(A) in deleting interest u/s. 234B of the Act. The Revenue has not been able to controvert the well reasoned findings of CIT(A) on this issue. We see no reason to interfere with the order of CIT(A) on this count. Ground No.4 of appeal is thus, dismissed.

ITA NO.3149/MUM/2007 (A.Y. 2003-04)- Assessee’s Appeal: (A.Y. 2003-04)- Revenues’s Appeal:

in appeal for Assessment Year 2003-04 in cross appeals by the assessee and Revenue are similar to the one raised in Assessment Year 2002-

03. The findings given by us while adjudicating cross appeals for Assessment Year 2002-03 would mutatis mutandis apply to the instant set of appeals. For parity of reasons appeals of the assessee are partly allowed and that of the Revenue is dismissed.

Order pronounced in the open court on Tuesday the 2nd day of January, 2024.

Sd./- Sd./- (GAGAN GOYAL) (VIKAS AWASTHY) लेखाकार सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER मुंबई/ Mumbai, �दनांक/Dated 02/01/2024 Vm, Sr. PS(O/S)