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[2012] 23 taxmann.com 372 (Mumbai)/[2012] 137 ITD 346 (Mumbai)/[2012] 148


TTJ 274 (Mumbai)

IT/ILT : Where assessee, a foreign company, was engaged in business of


telecasting of TV channels and its agent in India had no power to conclude
contracts and was not dependent at all on assessee, latter had no permanent
establishment in India

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[2012] 23 taxmann.com 372 (Mum.)


IN THE ITAT MUMBAI BENCH 'L'
Deputy Director of Income-tax (IT) - 3(2)
v.
B4U International Holdings Ltd.*
B.R. MITTAL, JUDICIAL MEMBER AND J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
IT APPEAL NO. 880 (MUM.) OF 2005 C.O. NO. 118 (MUM.) OF 2010
[ASSESSMENT YEAR 2001-02]
MAY 28, 2012

† Section 9 of the Income-tax Act, 1961, read with articles 5 and 7 of the DTAA between
India and Mauritius (Permanent Establishment) - Income - Deemed to accrue or arise in
India - Assessment year 2001-02 - Assessee, a foreign company incorporated in Mauritius,
was engaged in business of telecasting of TV channels - Its revenue from India consisted
of collections from time slots given to advertisers from India - One 'B' was granted general
permission by RBI to act as advertisement collecting agent of assessee - Assessee's case
was that as it did not have any permanent establishment [PE] in India, it was not liable to
tax in India under article 7 of DTAA between India and Mauritius - It also submitted that 'B'
had marketed ad-time slots of channels broadcasted by assessee, for which 'B' had
received remuneration on arm's length basis, and, therefore, its income was not taxable in
India - As per agreement entered into between parties, 'B' had no power to conclude
contracts and 'B' was not dependent at all on assessee - Whether assessee had no PE in
India - Held, yes - Whether even if it was presumed that there was a PE of assessee in
India, in view of fact that payment of service fee by assessee to 'B' was at arm's length
price, there was no further need to attribute profits to PE - Held, yes [In favour of assessee]
Circulars & Notifications : Circular No. 23 of 1969, dated 23-7-1969, Circular No. 742, dated
2-5-1996, Circular No. 01 of 2004, dated 1-1-2004
FACTS
The assessee, a foreign company incorporated in Mauritus, was engaged in the business of telecasting of TV
channels. During the previous year, the assessee's revenue from India consisted of collections from time
slots given to advertisers from India. One 'B' was granted general permission by the RBI to act as
advertisement collecting agent of the assessee. In the return of income filed for the assessment year 2001-
02, the assessee claimed that as it did not have a permanent establishment (PE) in India, it was not liable to
tax in India under article 7 of the DTAA between India and Mauritius. It also submitted that 'B' had
marketed the ad-time slots of the channels broadcasted by it, for which he had received remuneration on
arm's length basis. Thus, in the light of Circular No. 23 of 1969, dated 23-7-1969 its income was not taxable
in India under the provisions of the Income-tax Act, 1961. The Assessing Officer held that for the
assessment year 2001-02 'B' was a dependent agent of the assessee and constituted a PE of the assessee
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within the meaning of article 5 of the DTAA. Further, the business of the PE of the assessee was to generate
advertisement revenue in India. Thus, the business income of the PE was assessable under article 7 of the
DTAA. He further held that since the assessee had business operations not only in India but also outside
India, it would be only fair to make a reasonable estimate of the assessee's profits, as mandated by article
7(2) of the DTAA, and also by rule 10 of the IT Rules, 1962. In fact, in this regard, the best available
yardstick is provided by Circular No. 742, dated 2-5-1996, which envisages profit at the rate of 10 per cent
after allowing commission payable to advertising agents and other parties. The Assessing Officer further
having found that the total revenue of the assessee from its Indian operations was to the tune of Rs.
9,41,03,019 after allowing the commission paid to 'B' worked out the profit of the assessee at Rs. 94,10,302.
He also did not agree with the assessee that since the payment to 'B' was made at arm's length price, it was
not liable to tax in India.
On appeal, the Commissioner (Appeals) having noticed that (i ) the assessee carried out its entire activities
from Mauritius, and (ii) all the contracts were concluded in Mauritius, held that only activity which was
carried out in India was incidental or auxiliary/preparatory in nature which was carried out by 'B' in a
routine manner as per the direction of the assessee without application of mind. He also held that merely
4.69 per cent of the total income of 'B' was commission/service income received from the assessee-
company. The Commissioner (Appeals), therefore, held that 'B' could not be termed as a dependent agent of
the assessee. He further held that the assessee and 'B' were dealing with each other on an arm's length basis.
15 per cent service fee paid by the assessee to 'B' was at arm's length price and was supported by Circular
No. 742, dated 2-5-1996. Thus, he held that no further profits should be taxed in the hands of the assessee.
On second appeal by the revenue:
HELD
A plain reading of the agreement between the assessee and 'B' demonstrates that 'B' is not the decision
maker, nor he has the authority to conclude contracts. He has no authority to fix the rate or to accept an
advertisement. He can merely forward the advertisement and the assessee has the right to reject. No
deviation can be done from the rate card unless the assessee approves the same. The agent is independent
contractor and is not servant or employee of the assessee. [Para 26]
From the above, it is clear that 'B' does not have any power to conclude contracts. The revenue has not
brought out anything on record to prove that the agent 'B' has power to conclude contracts. The inferences
drawn by the revenue based on the agreement are factually incorrect. Other than the agreement, there is no
material or evidence with the Assessing Officer to disprove the claim of the assessee that the agent 'B' has
no power to conclude contract. [Para 27]
The revenue submits that article 5.4 of the DTAA is attracted in the instant case. In article 5.4 of the DTAA
the wordings read as follows: '…has habitually exercises authority to conclude contracts….'. On facts it
cannot be said that 'B' has habitually exercises authority to conclude contracts. The term 'has' have
reference to legal existence of such authority in terms of the contract between principal and agent. A
reading of the agreement shows that such power is not conferred on 'B'. The words 'habitually exercises'
have reference to a systematic course of conduct on part of the agent. In the instant case, there is neither
legal existence of such authority, nor is there any evidence to prove that 'B' has habitually exercised such
authority. In fact, the assessee has raised all the invoices. When it is the case of the assessee that 'B' has no
authority to conclude contracts, the revenue cannot ask for contrary evidence as nobody can prove the
negative. Thus, article 5.4 of the DTAA is not attracted in the instant case. [Para 29]
In article 5.5 of the DTAA the wordings read as follows '… when the activities of such an agent are devoted
exclusively or almost exclusively on behalf of the assessee enterprises….'. These wordings refer to the
activities of an agent and its devotion to the non-resident and not the other way round. The perspective
should be from the angle of the agent and not of the non-resident. [Para 30]
The Commissioner (Appeals) has brought out in his order that the total income of 'B' for the year ended on
31-3-2001 was Rs. 30.57 crores and out of which he received only Rs. 1.44 crores from the assessee and that
it constitute merely 4.69 per cent of the total income and, hence, not a dependent agent. From the
perspective of 'B' he is not dependent at all on the assessee. [Para 38]
In view of the above discussion neither article 5.4 nor article 5.5 of the DTAA are attracted in the instant
case. Hence, the assessee has no P.E. in India. [Para 39]
Even if it is held that there is a PE of the assessee in India, then as the rate of commission of 15 per cent
was accepted as ALP by the TPO for the assessment years 2002-03 to 2004-05, no further profit is

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