Director of Income-tax (IT) v. B4U International Holdings Ltd
[Citation -2015-LL-0429]

Citation 2015-LL-0429
Appellant Name Director of Income-tax (IT)
Respondent Name B4U International Holdings Ltd.
Court HIGH COURT OF BOMBAY
Relevant Act Income-tax
Date of Order 29/04/2015
Judgment View Judgment
Keyword Tags deduction of tax at source • permanent establishment • goods and merchandise • advertising agency • transfer pricing • avoidance of tax • commission agent • double taxation • foreign company • reserve bank • tv
Bot Summary: The Assessing Officer did not accept this contention of the assessee and held that the affiliated entities of the assessee are basically an extension in India and constitute a permanent establishment of the assessee within the meaning of article 5 of the Double Taxation Avoidance Agreement. Apart from the fact that separate appeals have to be filed even though the assessee is common, the order is common but the assessment years being different still what is pointed out by Mr. Mistri is that in all memos of appeal of the Revenue, similar questions are proposed and projected as substantial questions of law. Mr. Mistri then points out that if the Tribunal's order and which is fairly detailed for the assessment year 2001-02 is perused, it would indicate as to how the Tribunal has held in favour of the assessee and upheld some of the conclusions of the Commissioner. The details filed by the assessee revealed that there is a general permission granted by the Reserve Bank of India to act as advertisement collecting agents of the assessee. The argument further was that the agents of the assessee have marked the ad-time slots of the channels broadcasted by the assessee for which they have received remuneration on the arm's length basis. The Tribunal noted the findings of the Assessing Officer and found that the Commissioner of Income-tax held that the assessee carries out the entire activities from Mauritius and all the contracts were concluded in Mauritius. The Tribunal concluded that after referring to the clauses in the agreement between the assessee and B4U that B4U India is not a decision-maker nor has it the authority to conclude contracts.


JUDGMENT judgment of court was delivered by S. C. Dharmadhikari J.-These appeals by Revenue and for several assessment years, project following questions as substantial questions of law: "(1) Whether Income-tax Appellate Tribunal was correct in holding that decision of Commissioner of Income-tax (Appeals) that B4U cannot be treated as dependent agent of assessee despite various clauses of agreement between assessee and B4U demonstrating that case is covered by article 5(4) and article 5(5) of Indo-Mauritius Treaty? (2) Whether Income-tax Appellate Tribunal was correct in holding that agent being remunerated at arm's length no further profits is attributable despite agent being dependent? (3) Whether, on facts and in circumstances of case and in law, hon'ble Income-tax Appellate Tribunal is correct in holding that assessee need not deduct tax under section 195 and, subsequently, there can be no disallowance under section 40(a)(i) despite fact that transponder charges being consideration for'process' as clarified in terms of Explanation 6 to section 9(1)(i) of Income-tax Act? (4) Whether, on facts and in circumstances of case and in law, hon'ble Income-tax Appellate Tribunal is correct in holding that amount in question is not liable to tax in India and, consequently, question of deduction of tax at source under section 195 does not arise despite transfer of telecast right being consideration for royalty as clarified in Explanations 4 and 5 to section 9 of Income-tax Act?" factual background in which these appeals have been brought by Revenue are that respondent-assessee is Mauritius based company. Revenue proceeded against it on footing that it is engaged in business of telecasting of TV channels such as B4U music, MCM, etc. It is case of Revenue that income of assessee from India consisted of collections from time slots given to advertisers from India through its agents. assessee claimed that it did not have any permanent establishment in India and has no tax liability in India. Assessing Officer did not accept this contention of assessee and held that affiliated entities of assessee are basically extension in India and constitute permanent establishment of assessee within meaning of article 5 of Double Taxation Avoidance Agreement (DTAA). This view of Assessing Officer was not accepted by assessee and it preferred appeal. first appellate authority, namely, Commissioner of Income-tax (Appeals), Mumbai, partly allowed appeal in some cases and held that entity in India cannot be treated as independent agent of assessee. Alternatively, and assuming that it could be treated as such if dependent agent is paid remuneration at arm's length, further proceedings cannot be taxed in India. Revenue preferred appeal to Tribunal and essentially on this aspect. Tribunal having dismissed Revenue's appeals, matter is carried before us. Our jurisdiction under section 260A of Income-tax Act, 1961 (hereinafter referred to as "the IT Act"), is invoked to urge that four questions which have been proposed and reproduced above, are all substantial questions of law. Mr. Tejveer Singh, appearing in support of these appeals which are for assessment years 2001-02, 2004-05 and 2005-06, would submit that Tribunal's orders raise above questions because Tribunal misapplied and misinterpreted decision of hon'ble Supreme Court in case of Director of I. T. (International Taxation) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 (SC). Mr. Tejveer Singh would submit that transfer pricing analysis was not submitted and mere reliance on circular of Revenue/Board would not suffice. If transfer pricing analysis did not adequately reflect functions performed and risks assumed by agent in India, then there would be need to attribute profits of permanent establishment for those functions/risks. That had not been considered. Mr. Tejveer Singh also submitted that B4U, MCM, etc., were erroneously assumed to be agents but not dependent on assessee. Alternatively, they have also been erroneously held to be paying remuneration at arm's length. All this has been assumed by Tribunal though there was no relevant material. Assessing Officer had rightly held that payment made towards purchase of films for which no details were submitted as to what are costs incurred were treated as royalties. exhibition and telecast price were intangible and could not be termed as goods and merchandise in respect of export of advertisement films. Such findings of Assessing Officer could not have been disturbed by Commissioner (Appeals) and by Tribunal. Therefore, Tribunal's orders raise above questions and which are substantial question of law. It is argued that even with regard to question (C), assessee cannot be said to be relieved of obligation of deducting tax under section 195 of Income-tax Act, 1961. This could not be finding and equally relief from applicability of section 40(a)(i) when transponder charges being consideration for "process" as clarified in terms of Explanation 6 to section 9(1)(i) of Income-tax Act, 1961. Thus, finding that this amount is not liable to tax in India and, consequently, question of deduction of tax at source does not arise will also raise substantial question of law. However, Mr. Mistri, learned senior counsel appearing on behalf of assessee, raised preliminary objection and pointed out that though appeals are for distinct assessment years, Revenue has filed appeals, raising same questions of law. Tribunal's order may be common but grounds for each assessment years and in memos of appeal before Tribunal are not necessarily common. Therefore, grounds in memos of appeal of Revenue and assessee being distinct and it being not indicated as to which part of Tribunal's order and covering which appeal is Revenue aggrieved by, this court should not entertain such common questions and projected as substantial questions of law. Apart from fact that separate appeals have to be filed even though assessee is common, order is common but assessment years being different still what is pointed out by Mr. Mistri is that in all memos of appeal of Revenue, similar questions are proposed and projected as substantial questions of law. They do not arise in all appeals. On merits it is submitted by him that none of findings and conclusions On merits it is submitted by him that none of findings and conclusions rendered to by Tribunal can be termed as perverse or vitiated by any error of law apparent on face of record. In that regard, he submits that Tribunal has held that B4U cannot be treated as dependent agent of assessee. Assuming that it can be so treated, it has been remunerated at arm's length. Therefore, no further profit is attributable. Mr. Mistri then points out that if Tribunal's order and which is fairly detailed for assessment year 2001-02 is perused, it would indicate as to how Tribunal has held in favour of assessee and upheld some of conclusions of Commissioner (Appeals). As far as other two questions are concerned, they have also been dealt with but essential and core finding is that B4U cannot be termed as dependent agent and that assuming it can be so, it has been held by Tribunal on issue of arm's length price there were two facets. One being whether it is arm's length price or not and, secondly, whether when arm's length price is paid, whether liability of principal gets extinguished. It was pointed out that 15 per cent. is norm for advertising agency and as determined by Circular No. 742, dated May 2, 1996 ([1996] 219 ITR (St.) 49), which has been referred to in paragraph 19 of Tribunal's order dated May 1, 2012, for assessment year 2001-02 in Income Tax Appeal No. 880/Mum/2005 together with cross-objection No. 118/Mum/2010. In such circumstances, other two questions do not arise. Even with regard to those questions, findings are that amounts are not taxable in India. Therefore, none of questions are substantial questions of law and appeals deserve to be dismissed. After hearing both sides and perusing with their assistance all appeal paper-books, we are inclined to agree with Mr. Mistri. Tribunal had before it order passed on November 8, 2004, by Commissioner of Income-tax (Appeals). As far as that order is concerned, it is subject matter of Revenue's Income Tax Appeal No. 1599 of 2013. There, Revenue raised ground that assessee was having dependent agent, viz., B4U, and that Commissioner of Income-tax (Appeals) erred in holding that it cannot be treated as such. Further, even if B4U is held to be dependent agent, it is being paid remuneration at arm's length. Therefore, further profits cannot be taxed in India. In so far as these grounds are concerned, admitted facts are that assessee is foreign company incorporated in Mauritius. As noted, it had filed its residency certificate and pointed out that its business is of telecasting of TV channels such as B4U music, MCM, etc. During assessment year under consideration, its revenue from India consisted of collections from time slots given to advertisers from India. details filed by assessee revealed that there is general permission granted by Reserve Bank of India to act as advertisement collecting agents of assessee. permissions were granted to M/s. B4U Multimedia International Ltd. and M/s. B4U Broadband Ltd. In computation of income filed along with return, assessee claimed that as it did not have permanent establishment in India, it is not liable to tax in India under article 7 of DTAA between India and Mauritius. argument further was that agents of assessee have marked ad-time slots of channels broadcasted by assessee for which they have received remuneration on arm's length basis. Thus, in light of Central Board of Direct Taxes Circular No. 23 of 1969, income of assessee is not taxable in India. conditions of Circular 23 are fulfilled. Therefore, Explanation 1(a) to section 9(1)(i) of Income-tax Act will have no application. Assessing Officer did not accept contentions of assessee. He did not agree on both counts but Tribunal noted that DTAA and particularly paragraph (5) of article 5 indicates that enterprise of Contracting State shall not be deemed to have permanent establishment in other Contracting State merely because it carries on business in that State through broker, general commission agent, or any other agent of independent status, where such persons are acting in ordinary course of their business. However, when activities of such agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered agent of independent status within meaning of this paragraph. Tribunal noted findings of Assessing Officer and found that Commissioner of Income-tax (Appeals) held that assessee carries out entire activities from Mauritius and all contracts were concluded in Mauritius. only activity which is carried out in India is incidental or auxiliary/preparatory in nature which is carried out in routine manner as per direction of principal without application of mind and, hence, B4U is not dependent agent. Nearly 4.69 per cent. of total income of B4U India is commission/service income received from assessee-company and, therefore, also it cannot be termed as dependent agent. As far as alternate contentions are concerned, first appellate authority held that assessee and B4U India were dealing with each other on arm's length basis. 15 per cent. fee is supported by Circular No. 742. Thus, it was held that no further profits should be taxed in hands of assessee. This conclusion of Commissioner of Income-tax (Appeals) has been upheld by Tribunal. It noted rival contentions and in great details. Tribunal concluded that after referring to clauses in agreement between assessee and B4U that B4U India is not decision-maker nor has it authority to conclude contracts (see paragraph 29). Further, Revenue has not brought anything on record to prove that agent has such powers and from agreement any such conclusion could not have been drawn. Barring this agreement, there is no material or evidence with Assessing Officer to disprove claim of assessee that agent has no power to conclude contract. This finding is rendered on complete reading of agreement. Thereafter, Indo-Mauritius DTAA has been referred to and particularly paragraphs 5.4 and 5.5 and Tribunal concludes that requirement that first enterprise in first mentioned State has and habitually exercised in that State authority to conclude contracts in name of enterprise unless his activities are limited to purchase of goods or merchandise for enterprise is condition which is not satisfied. Therefore, this is not case of B4U India being agent with independent status. This finding is rendered in paragraphs 29 and 30 of order under challenge. We do not find that Tribunal's order and which also refers to hon'ble Supreme Court decision in Morgan Stanley and Co. (supra) can raise any substantial questions of law. We are not agreement with Mr. Tejveer Singh when he submits that Supreme Court judgment in case of Morgan Stanley and Co. will not apply. In that regard, he relies upon conclusion rendered by hon'ble Supreme Court. That conclusion is that there being no need for attribution of further profits to permanent establishment of foreign company where transaction between two was held to be at arm's length but this was only provided that associate enterprise was remunerated at arm's length basis taking that associate enterprise was remunerated at arm's length basis taking into account all risk-taking functions of multinational enterprise. Thus, Mr. Tejveer Singh's reliance on these observations in Supreme Court judgment are strictly on alternate argument canvassed by assessee. That alternate argument was that assuming that B4U India is dependent agent of assessee in India it has been remunerated at arm's length price and, therefore, no profits can be attributed to assessee. Mr. Tejveer Singh would submit that Tribunal failed to note that situation would be different if transfer price analysis did not adequately reflect functions performed and risks assumed by enterprise. In such case, there would be need to attribute profits to permanent establishment for those functions/risks that had not been considered. Mr. Tejveer Singh's argument is that assessee had not subjected itself to transfer price regime. Therefore, no assistance can be derived by it from this judgment. In this regard, Mr. Mistri has rightly pointed out that requirement and in relation to computation of income from international transactions having regard to arm's length price has been put in place in Chapter X listing special provisions relating to avoidance of tax by substituting section 92 to section 92F by Finance Act of 2001 with effect from April 1, 2002. Therefore, such compliance has to be made with effect from assessment year 2002-03 relevant to which is previous year commencing from April 1, 2002. In any event, we find that Tribunal has rightly dealt with alternate argument by referring to Revenue Circular No. 742. There, 15 per cent. is taken to be basis for arm's length price. Nothing contrary to same having been brought on record by Revenue before Commissioner of Income-tax (Appeals) as also Tribunal, it rightly concluded that judgment of hon'ble Supreme Court in Morgan Stanley and Co. and principle therein would apply. Similarly, Division Bench judgment of this court in case of Set Satellite (Singapore) Pte. Ltd. v. Deputy Director of I. T., International Taxation [2008] 307 ITR 205 (Bom) would conclude this aspect. Therefore, we are of opinion that Tribunal's conclusions and which are consistent with factual materials and principles of law laid down above are neither perverse nor vitiated by any error of law apparent on face of record. Strictly speaking answers on questions (1) and (2) and which are common for all appeals disposes of all appeals against Revenue and in favour of assessee. However, argument of Mr. Tejveer Singh is that Tribunal and equally Commissioner of Income-tax (Appeals) has dealt with other two questions. They are being projected before us and in relation to assessment years 2004-05. It is submitted that assessee was obliged to deduct tax at source under section 195 and having not deducted same, there has to be disallowance under section 40(a)(i) of Income-tax Act. That is because transponder charges being consideration and process as clarified in terms of Explanation 6 to section 9(1)(i) of Income-tax Act. We have found from detailed reasoning in Tribunal's order and assuming that such questions were indeed raised that in light of findings on main issue, namely, on permanent establishment/dependent agent these grounds or questions were not required to be answered. They are not required to be answered separately but consistent with findings on questions Nos. (1) and (2). It is precisely applying that Tribunal has concluded that even this ground would have to be answered against Revenue. It was also doubtful and in given facts and circumstances as to whether any payment which is stated to be made to US based company by assessee which is Mauritius based company, can be brought to tax in terms of Indian tax laws. We are of opinion that any wider question or controversy need not be addressed. Once consistent with findings on main issue even these questions have to be answered in peculiar factual backdrop against Revenue then we can dispose of these appeals on these questions. We also clarify that arguments of Mr. Tejveer Singh and based on whether payments made could be brought within meaning of word "process" and within explanation can be raised and are kept open for being considered in appropriate case. Keeping them open and in such manner, we hold that none of questions projected and proposed are substantial questions of law. Each of above appeals, therefore, fail and are dismissed but without any order as to costs. *** Director of Income-tax (IT) v. B4U International Holdings Ltd
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