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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & MS. ASTHA CHANDRA
O R D E R PER ASTHA CHANDRA, JM
The appeal filed by the assessee is directed against the order dated 26.04.2022 of the Ld. Deputy Commissioner of Income Tax, Circle International Taxation-3(1)(1), New Delhi (“AO”) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2019-20.
2. The assessee has raised the following grounds of appeal:
“1. That on the facts and circumstances of the case and in law, the Assessing Officer (“AO”) erred in completing the assessment of the Appellant at an income of INR 4,15,02,000 as against Nil returned income.
2. That on the facts and circumstances of the case and in law, the Id. AO has erred in not providing any opportunity to show cause in respect of the addition made to the returned income of the Appellant, thereby violating the principles of natural justice and rendering the order passed as bad in law.
3. That on the facts and circumstances of the case and in law, the Id. AO has erred in completely misconstruing the concept of ‘business income’ and holding that the Appellant’s receipts from customer constitutes ‘other income’. 4 That on the facts and circumstances of the case and in law, the Id. AO, having accepted that Appellant’s service revenue does not constitute Fee for Technical/Included Services under the Income-tax Act, 1961 as well as under the India-US tax treaty, erred in not holding that these service revenues cannot be taxed in absence of Permanent Establishment in India. 5 Without prejudice, that on the facts and circumstances of the case and in law, the Id. AO has erred in holding that receipts amounting to INR 4,15,02,000 from customer constitutes income arising in India and hence are chargeable to tax in India as other income in terms of Article 23 of India-US tax treaty.
6. Without prejudice to the above grounds, the Id. AO has erred in charging surcharge and education cess on the applicable tax rate while computing the tax demand.
7. That on the facts and circumstances of the case and in law, the Id. AO has erred in charging interest under section 234A, 234B and 234D of the Act.
8. That on the facts and circumstances of the case and in law, the Id. AO has erred in initiating penalty proceedings under section 270A of the Act mechanically and without recording any adequate satisfaction for such initiation.”
3. Briefly stated, the assessee is a non-resident company incorporated under the laws of USA and is a tax resident of USA. The assessee is engaged in the business of branding and talent book agency services and inter alia acts as a mediator to and in coordination with several worldwide event management company for arranging live performances by renowned artistes from around the world. During the relevant AY the assessee entered into an agreement with Big Tree Entertainment Pvt. Ltd. (“Customer”) in India to make the services of “Maroon 5” artiste available for a live musical performance at a private event held in India. In consideration thereof, the assessee received Rs. 4,15,02,000/- from the Customer after deduction of TDS of Rs. 45,32,019/- under section 195 of the Act.
3.1 For the AY 2019-20, the assessee filed its return on 27.11.2019 declaring NIL income and claimed refund of tax withheld by the Customer. The assessee’s case was selected for scrutiny under CASS and statutory notices along with detailed questionnaire were issued to which the assessee responded by filing necessary information and details electronically.
3.2 The Ld. AO passed draft assessment order on 30.09.2021 under section 143(3) r.w.s. 144C of the Act proposing to tax the income received by the assessee from the Customer as “other income” under the provisions of the Act as well as Article 23 of the India-USA Double Taxation Avoidance Agreement (“India-USA DTAA”) as against the claim of the assessee that it is ‘business profit’ not chargeable to tax in India in the absence of a Permanent Establishment (“PE”) of the assessee in India. On filing objection before the Ld. Dispute Resolution Panel (“DRP”) the Ld. DRP vide its order dated 08.03.2022 upheld the finding of the Ld. AO. Pursuant to the DRP’s order, the Ld. AO passed the final assessment order under section 143(3) r.w.s. 144C(13) of the Act on 26.04.2022 by recording his findings as under:-
“4.3 Characterisation of income: In this case, the assessee company has performed certain services for providing talent to Indian payers. In particular, the assessee has provided the services of Artiste - Maroon 5 for a live musical performance at a private event held in India. Apparently, such services are neither expressly covered under the definition of “fees for technical services” under Explanation-2 to section 9(1)(vii) nor under Article 12(3) of India-USA DTAA relating to “Fees for Inclusive services". The question is then whether such services are of the nature of business receipts. Under Tax Treaty framework, taxing right is allocated to the contracting states on the basis of categorization/characterization of income: Active or passive income. Generally, with regard to passive income such as dividend, interest, Royalty and FTS or capital gains, both the contracting states have right to tax such income. However, in respect of active income (business income), the source country has a right to tax only when the non- resident has a PE in that state. The threshold of PE under DTAAs and 3 “business connection” under Income-tax Act cover situations where the business activities of non-resident satisfy “business in” criteria for establishing a taxable presence in the source country. A reference may be made to the decision of Andhra Pradesh High Court in the case of CIT Vs Visakhapatnam Port Trust (144 ITR 146). Therefore, whether the income to be characterized as active business income or passive income is decided on the basis of degree of involvement in the activities by the non-resident taxpayer in a source country. In order to categorize certain income stream as business income in the hands of non-resident in a source country, the taxpayer need to exhibit that his/her involvement is substantial. In other words, the non-resident creates a taxable presence in a source country only when it establishes a significant/substantial economic connection. The PE threshold rules for taxation of business profits of non-resident in a source country is based on this criterion. Physical presence with certain degree of permanence of a non-resident or doing activities through a dependent person or employees are considered to .satisfy the substantial economic connection in a source country. As per the decision of the Apex court in the case of R D Agrawal (56 ITR 20,24), non-resident is said to have a business activity if there exists a real intimate relation between trading activity carried on outside the taxable territories" and trading activity within the territories. The landmark judgment of the Andhra Pradesh High Court in the case of GVK Industries Ltd (228 ITR 564) held that to constitute a business activity there must be continuity of activity or operation of the non- resident with the Indian party and a stray or isolated transaction is not enough to constitute business activity. The Authority of Advance Ruling in the case of Honeywell Technologies SARL. after referring to the decisions of the Hon'ble Supreme Court in R.D. Aggarwal & Co. (supra) and in Anglo French Textile Co. Ltd. v. CIT (1953) 23 LTR 101 (SC) summed up the essential features of the business connection thus: (a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India; (b) such relation, shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India. The courts in India including Apex court had several occasions to deal with what constitute business income or investment income. There is unanimous view that regularity, continuity, frequency, volume are the basic attributes of a business activities. These attributes signify substantial involvement of a taxpayer. In the instant case, the transaction between the Assessee Company and Indian user does not satisfy these criteria. Therefore, it is absolutely clear that the assessee’s case is that of “business with” in India as against “business in”. In view of this, consideration received by the assessee company from Indian payers is not business income. Therefore, the consideration paid to the assessee company shall be taxable under the residual category of income i,e income from other sources under section 56 of the Income-tax Act. The courts have held that payments which are revenue receipts and arise in the course of business but do not fall under any of the heads of income specified u/s 14 of the Income-tax Act are to be taxed under section 56(1) of the Income-tax Act under head “Income from other sources”. Reliance is placed in this respect on the decision of Madhya Pradesh High Court in the case of CIT v. Alpine Solvex Ltd (2005) 276 ITR 92 (MP). Accordingly, taxation of consideration received by the assessee company is analyzed as under: Taxation of consideration under Income-tax Act: Under the scope of source rule under section 5(2) of the Income-tax Act, the taxable income of the non-resident constitutes income that accrues or arises or is received in India and that income which is deemed to accrue or arise or received in India. The concept of accrual of income is based on crystallization of the right to receive the income. Apparently, in the instant case the right to receive income by the assessee company from Indian payer for their services for searching of talent has been established. Therefore, the said income is sourced in India in the hands of the assessee. Second, the Source Rule was further explained by the Apex court in GVK Industries case (332 ITR 130) where in the Apex Court has held that the income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. Even though the issue was in respect of fees paid for services rendered out-side India, the ratio on source rule is very much applicable to the instant case. Accordingly, the income of the assessee company has arisen in India as the payer Bigtree is also situated in India. Under the Income-tax Act, each head of income specified in section 14 of the Income-tax Act has its own unique principles regarding accrual or arising of income. For salary income it is the place where employment is exercised. For house property income, the location or situs of property is decisive. Similarly, for capital gains, the situs of the capital asset is the basis of determining the place of taxation. For business income, it is the place where business activities are undertaken. However, for income from other sources, the location of payor is a recognized basis of determining the place where the income arises. Therefore, the income of the assessee company is taxable under first clause of section 5(2) of the income-tax Act being income arises in India. Accordingly, the test of taxability under deeming provisions under section 9 is unwarranted. Taxation of consideration under India-USA DTAA: Article 23 of the India- USA DTAA deals with the allocation of taxing rights and scope of taxation in respect “other income. As per paragraph 3 of Article 23 any items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that other State. The Article is reproduced as under: “ARTICLE 23 OTHER INCOME 1. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State.
The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6 [Income from Immovable Property (Real Property)], if the beneficial owner of the income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the income is attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply.
Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that other State. ’’ Accordingly, as the income has arisen in India and the same is not dealt with any other articles of India-USA DTAA being not in the nature of dividend, interest, royalty or fees for inclusive services, capital gains or business profits, the income shall be taxable in India,”
Aggrieved, the assessee is in appeal before the Tribunal challenging the order of the Ld. AO and all the grounds of appeal relate thereto.
The Ld. AR submitted that the Ld. AO failed to appreciate the fact that the assessee is engaged in the business of providing talent booking agency services to its clients globally. He submitted that during the course of assessment proceedings the assessee submitted an extract of copy of the tax residency certificate, global consolidated financial statement along with the 6 income tax return of the group filed in US which establishes the fact that the group of companies of which the assessee is a part has earned revenue from business amounting to more than 11 billion USD (pages 22 to 41 of the Paper Book). The Ld. AR also referred to the website extracts of the assessee which demonstrates the fact of assessee being in this business (pages 132 to 134 of the Paper Book). The talent booking agency services were provided by the assessee outside India and none of its employees or personnel visited India either in connection with the event or otherwise in relation to the services. Further, the performance fee of the artiste was paid separately by the Customer to the artist directly under an independent contract to which the assessee is not a party. The impugned receipts are thus in the nature of business income of the assessee and not chargeable to tax in India in the absence of PE of the assessee in India under the provision of Article 7 of the India-USA DTAA. He submitted that as per Article 7 of the India-USA DTAA business profits of a non-resident cannot be taxed in India if the non- resident does not have a PE therein. The Ld. AO has erroneously arrived at a conclusion that an enterprise can be said to be engaged in business only if it carries on such business through a PE in India. It is however not the case of the Ld. AO that there is a PE of the assessee in India. Since the assessee is engaged in business catering to global customers, the impugned receipts have been erroneously covered within the ambit of Article 23 ‘Other Income’ of the India-USA DTAA.
The Ld. DR on the other hand supported and relied upon the order of the Ld. AO/DRP.
We have heard the Ld. Representative of the parties and perused the material on record. It is an undisputed fact that the assessee is engaged in the business of brand and talent booking agency services and inter alia acts as a mediator, to and in connection with several worldwide event management companies for arranging live performance by renowned artistes from around the world. During the relevant assessment year it entered into an agreement to make the services of “Maroon 5” available to the Customer for a live musical performance in India. It is also an undisputed fact that the 7 assessee has no PE in India. It is a tax resident of USA and hence opted to be governed by the provisions of the India-USA DTAA being more beneficial to it.
7.1. The Ld. AO has not denied the fact that the assessee is engaged in a business. However, he proceeded to conclude that the impugned receipts from the Customer did not constitute business income of the assessee as the transaction between the assessee and the Customer purportedly does not satisfy the basic attributes of business i.e. regularity, continuity, frequency and volume. These attributes are to be considered to determine the presence of a business connection of a non-resident in India. The Ld. AO applied these attributes to interpret the meaning of business for the purposes of Article 7 of the India-USA DTAA which is clearly misplaced. He arrived at an erroneous conclusion that the impugned receipts from the services rendered by the assessee to the Customer is not business income but ‘Other Income’ which is taxable in India under Article 23 of the India- USA DTAA. Considering the factual matrix of the present case, in our humble opinion, the reliance placed by the Ld. AO in the case of CIT vs. R.D. Aggarwala & Co. (1965) 56 ITR 20 (SC) and GVK Industries Ltd. vs. ITO is misplaced. Another case relied upon by the Ld. AO i.e. CIT vs. Alpine Solvex Ltd. (2005) 276 ITR 92 (MP) is also distinguishable on facts.
7.2 The relevant extract of Article 7 of the India-USA DTAA is reproduced below:-
“Article 7 Business Profit 1. The profits of an enterprise of a Contacting 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.
7. For the purposes of the Convention, the term “business profits” means income derived from any trade or business including income from the furnishing of services other than included services as defined in Article 12 (Royalties and Fees for Included Services) and including income from the rental of tangible personal property other than property described in paragraph 3(b) of Article 12 (Royalties and Fees for Included Services).”
7.3 The Ld. AO has not disputed that the assessee is doing business but arrived at an erroneous conclusion that the assessee is doing business with India and not in India and hence the payments received by the assessee from the Indian Customer is not taxable as ‘business income’ but as ‘other income’. It cannot be disputed that the assessee is not engaged in the business. There are numerous decisions wherein while interpreting the meaning of the term ‘business’, the courts have held that it is an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income.
7.4 Article 7(7) of the India-USA DTAA clearly defines ‘business profit’ to mean income derived from any trade or business including income from furnishing of services which are other than specified services (Royalties and FIS). It is not the case of the Ld. AO that the services rendered by the assessee are in the nature of FIS/royalty etc. In view of this, it cannot be said that the assessee was not engaged in business while rendering talent booking agency services to the Customer and hence the classification of the impugned receipts as ‘Other Income’ which is a residuary head is erroneous. Needless to say that Article 23 would apply only to items of income ‘not expressly covered’ or ‘not dealt with’ by provisions of other Articles in the relevant DTAA as held by judicial authorities in numerous decisions.
7.5 Based on the above, in our considered view the impugned receipts of the assessee from the Customer constitutes business profits and hence are not chargeable to tax in India in the absence of the PE of the assessee in India. Accordingly, ground Nos. 1, 3, 4 and 5 are decided in favour of the assessee.
Ground No. 2 and 6 are not pressed.
Ground No. 7 and 8 are consequential in nature
In the result, the appeal of the assessee is allowed.