ITXA1984&1437_17.doc IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1984 OF 2017 WITH INCOME TAX APPEAL (IT) NO.1437 OF 2017 Commissioner of Income Tax (IT)-4 Appellant Vs. Taj TV Limited Respondent Mr. Tejveer Singh for Appellant. Mr. Madhur Agarwal a/w. Mr. Atul K. Jasani for Respondent. CORAM : UJJAL BHUYAN, MILIND N. JADHAV, JJ. DATE : FEBRUARY 06, 2020 P.C. : This order will dispose of both Income Tax Appeal Nos.1437 and 1984 of 2017. 2. Heard Mr. Singh, learned standing counsel Revenue for appellant and Mr. Agarwal along with Mr. Jasani, learned counsel for respondent. 3. Income Tax Appeal No.1437 of 2017 has been preferred by Revenue against common order dated 05.07.2016 passed by Income Tax Appellate Tribunal, Mumbai Bench "L", Mumbai (Tribunal) in I.T.A.Nos.4176/ Mumbai/2009 and 4706/Mumbai/2009 for assessment year 2005-06. 4. Income Tax Appeal No.1984 of 2017 has been preferred by Revenue against aforesaid common order dated 05.07.2016 passed by Tribunal in I.T.A.Nos.412/Mumbai/2008 and 5536/Mumbai/2008 for assessment year 2004-05. 1/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc 5. However, for sake of convenience, facts of Income Tax Appeal No.1984 of 2017 which pertains to earlier assessment year i.e., assessment year 2004-05 are being considered. 6. This appeal has been preferred by Revenue under Section 260-A of Income Tax Act, 1961 (briefly 'the Act' hereinafter). 7. Though three questions have been proposed in appeal, Mr. Singh fairly submits that appellant would press third question i.e. question No.(c), which reads as under: "(c) Whether on facts and in circumstances of case and in law, Tribunal erred in holding that there was no agency Permanent Establishment in form of Taj India without appreciating that transaction between assessee and Taj India could not be said to be on principle to principle basis?" 8. To appreciate controversy in question, brief recital of facts is considered necessary. 9. Respondent - assessee is registered company in Mauritius and is tax resident of that country. Assessee is engaged in telecasting sports channel called "Ten Sports". Assessee has appointed Taj Television (India) Private Limited, referred to hereinafter as 'Taj India', as its advertising sales agent in India to sell commercial advertisement spots to prospective advertisers and other parties in India in connection with business of programming and telecasting of Ten Sports Channel and to collect advertisement charges from Indian advertisers. In this connection, assessee had entered into agreement with Taj India on 08.05.2002. 10. Assessee had also appointed Taj India as its distributor to distribute Channel Ten Sports to cable systems for exhibition to subscribers in India. In this connection, agreement dated 01.03.2002 was entered into between assessee and Taj India. 2/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc 11. In assessment proceedings for assessment year 2004-05, assessing officer sought for views of assessee regarding non- taxability of its income in India since it did not carry any business in India through its Permanent Establishment (PE) and as to why it was filing alternative computation of income. Assessee submitted reply. Referring to India-Mauritius Double Tax Avoidance Agreement, more particularly Article 5 thereof, which defines Permanent Establishment, it was contended on behalf of assessee that it was not covered by any of clauses of Double Tax Avoidance Agreement (DTAA) and as such, it did not have Permanent Establishment in India. Transactions between assessee and Taj India are on principal to principal basis and at arm's length prices. Taj India did not have any authority to enter into any contract on behalf of assessee. Advertisement sales contracts were entered into between advertisers and assessee; therefore, it was contended that there was no Permanent Establishment in India. Consequently, no further tax implication arose. 12. Assessing officer vide assessment order dated 28.12.2006 however did not agree with contention of assessee, and after detailed order, recorded conclusion that Taj India had authority to conclude contracts in name of assessee which authority was exercised in India habitually and repeatedly. Therefore, it was held that assessee had Permanent Establishment in India within meaning of Article 5.4(i) of DTAA between India and Mauritius. 12.1. Regarding distribution revenue, assessing officer held that same was collected through Taj India on behalf of assessee. After considering agreement dated 01.03.2002, assessing officer held that Taj India had exclusive right to represent assessee before distribution systems / cable operators and to negotiate and procure cable distribution licence agreement for service as authorized by 3/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc assessee. Distribution revenue collected by Taj India was shared in ratio of 60:40 by assessee and Taj India. Therefore, assessing officer held that assessee had Permanent Establishment in India and subscription revenue was taxable as business income. 13. Aggrieved by above, assessee preferred appeal before Commissioner of Income Tax (Appeals)-XXXI, Mumbai, referred to hereinafter as 'first appellate authority'. In appellate proceedings, first appellate authority considered two aspects i.e., collection of advertisement revenue and revenue earned from distribution of pay channel. 13.1. Regarding collection of advertisement revenue, first appellate authority considered agreement dated 08.05.2002 as well as findings returned by assessing officer. Thereafter, it was held that Taj India was fully dependent on assessee for its business. Taj India was therefore, dependent agent. Consequently, after considering Article 5(4) of DTAA, first appellate authority vide appellate order dated 17.10.2007 agreed with assessing officer that assessee had agency Permanent Establishment in India as per Article 5(4) for collection of advertisement revenue. Consequently, finding of assessing officer in this regard was sustained. 13.2. Regarding distribution revenue, first appellate authority examined distribution agreement entered into between assessee and Taj India on 01.03.2002 wherefrom he deduced that Taj India was appointed as exclusive distributor in India. Taj India was not acting as agent of assessee but had obtained right of distribution for TV channel for itself. It was found by first appellate authority that Taj India had subsequently entered into contracts with other parties in its own name. One such contract was examined; whereafter first appellate authority noted that in such contract, assessee did not figure at all. He, therefore, came to conclusion that assessee had given distribution rights to Taj 4/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc India for promoting and distributing TV channels in India on principal to principal basis. He opined that Taj India was not acting as agent of assessee in India and distribution agreement had given exclusive rights to Taj India to distribute channel in India on its own behalf and not on behalf of assessee. In such circumstances, it was held that Taj India did not constitute agency Permanent Establishment within meaning of Article 5(4) of DTAA in respect of distribution income. To this effect, finding of assessing officer was set aside. 14. Assailing order of first appellate authority, both Revenue and assessee preferred separate appeals before Tribunal. While Revenue s appeal being I.T.A.No.412/Mumbai/2008 was against finding of first appellate authority as regards distribution revenue, appeal by assessee being I.T.A.No.5536/ Mumbai/2008 was regarding collection of advertisement revenue. 15. In so far assessee s appeal i.e., I.T.A.No.5536/Mumbai/2008 is concerned, same was dismissed as being time barred. Regarding appeal by revenue on issue of distribution revenue, i.e., I.T.A. No.412/Mumbai/2008, Tribunal held that none of conditions as stipulated in Article 59(4) of DTAA was applicable because Taj India was acting independently qua its distribution rights and entire agreement was on principal to principal basis. Therefore, distribution income by assessee could not be taxed in India because Taj India did not constitute agency Permanent Establishment under terms of said Article. This finding of first appellate authority was upheld and challenge made thereto by Revenue was dismissed. 15.1. Hence, Revenue is before us in appeal. Assessee has not preferred further appeal against dismissal of its appeal. 16. Learned counsel for parties have made detailed submissions and have taken us to orders passed by authorities below. They 5/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc have also referred to various provisions of DTAA, more particularly clause 5 thereof. 17. Submissions made by learned counsel for parties have been considered; also perused materials on record. 18. At outset, we may advert to DTAA entered into between India and Mauritius. said agreement was entered into between two countries for avoidance of double taxation and for prevention of fiscal evasion with respect to taxes on income and capital gains and also to encourage mutual trade and investment. Central Government in exercise of powers conferred by Section 90 of Act and Section 24-A of Companies (Profits) Surtax Act, 1964 issued notification dated 06.12.1983 (as amended) directing that all provisions of said DTAA shall be given effect to in Union of India. 19. As per Article 3(1)(c), expressions Contracting State and other Contracting State mean India or Mauritius as context requires. Article 5 thereof defines Permanent Establishment . Clause 1 says that term permanent establishment means fixed place of business through which business of enterprise is wholly or partly carried on. As per clause 2, which is inclusive provision, term permanent establishment shall include place of management; branch; office; factory; workshop; warehouse in relation to person providing storage facilities to others; mine, oil or gas well, quarry or any other place of extraction of natural resources; firm, plantation or other place where agricultural, forestry, plantation or related activities are carried out; and building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for period of more than nine months. Clause 3 provides exclusions to term permanent establishment . 6/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc 20. Clause 4 is relevant and is extracted hereunder: 4. Notwithstanding provisions of paragraphs (1) and (2) of this article, person acting in Contracting State for or on behalf of enterprise of other Contracting State [other than agent of independent status to whom provisions of paragraph (5) apply] shall be deemed to be permanent establishment of that enterprise in first-mentioned State if: (i) he has and habitually exercises in that first-mentioned State, authority to conclude contracts in name of enterprise, unless his activities are limited to purchase of goods or merchandise for enterprise; or (ii) he habitually maintains in that first-mentioned State stock of goods or merchandise belonging to enterprise from which he regularly fulfills orders on behalf of enterprise. 20.1. Clause 4 starts with non obstante clause. It starts with word notwithstanding provisions of paragraphs (1) and (2) of Article 5, person acting in contracting State for or on behalf of enterprise of other contracting State shall be deemed to be permanent establishment of that enterprise in first-mentioned State if two conditions are fulfilled. Firstly, he has and habitually exercises in first-mentioned State, authority to conclude contracts in name of enterprise, unless his activities are limited to purchase of goods or merchandise for enterprise. Secondly, he habitually maintains in that first mentioned State, stock of goods or merchandise belonging to enterprise from which he regularly fulfills orders on behalf of enterprise. Thus, sum and substance of clause 4 of Article 5 is that person acting in contracting State on behalf of enterprise of other contracting State shall be deemed to be permanent establishment of that enterprise in first-mentioned contracting State if he habitually exercises in first contracting State authority to conclude contracts in name of enterprise and he habitually maintains in first contracting State stock of goods or merchandise belonging to enterprise from which he regularly fulfills orders on behalf of enterprise. 21. Having noted requirement of Article 5 of DTAA, we may 7/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc now advert as to how matter was dealt with by first appellate authority. As already noticed above, in so far advertisement revenue is concerned, first appellate authority concurred with findings of assessing officer that assessee had agency Permanent Establishment in India which is Taj India within meaning of Article 5(4) of DTAA. Therefore, this part of income was liable to be taxed in India. 21.1. In so far revenue earned by Taj India on account of distribution of pay channel, first appellate authority held as under: 3.3 I have examined arguments of AR and I have also examined facts. AR filed Distribution Agreement, and copies of agreement entered into by distributor with cable operators. AR had explained that sub-distributor agreement was entered into between Taj India and HMA Udyog Ltd. on 11.03.2002. Copy of this agreement has been filed. Agreements with cable operators are entered into by sub-distributor. sample copy of same has also been filed. I have examined Distribution Agreement between appellant and Taj India. Perusal of agreement reveals that appellant has appointed Taj India as exclusive distributor in India. Further agreement provides that appellant shall not transmit for cable distribution, any other Ten Sports channel service that is not distributed in cable in India by Taj India. In other words, Taj India is exclusive distributor and prohibits appellant from entering into distribution agreement with anybody else. Para-1.2 of agreement provides that Taj India shall have exclusive right to represent Taj and negotiate and procure cable distribution and license agreement. Para-3.8 provides that Taj India shall be solely responsible for marketing and promoting service to help drive cable operators sales. amount and type of said marketing support shall be at discretion of Taj India. responsibility of appellant would be of providing services signal to Taj India. Para-7 of agreement provides that Taj India shall have first right to negotiate and additional 3 year term for contract. 3.4. Perusal of Distribution Agreement clearly provides that Taj India is not acting as agent of appellant but has obtained right of distribution of TV channel for itself and subsequently it is entering into contract with other parties in its own name. This fact is proved by cable sub-distribution agreement dated 11.03.2002 entered into between Taj India and HMA Udyog Ltd., which has appointed HMA Udyog Ltd. as sub-distributor in India. As per agreement, 75% of 8/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc revenue would be income of Taj India and balance 25% would be income of HMA Udyog Ltd. In this agreement appellant does not figure anywhere. Agreement is entered into between Taj India and HMA Udyog for distribution of TV channel Ten Sports in India. Subsequently, agreement is entered into between cable operators and sub-distributor. sample copy has been filed of agreement dated 12.10.2002 between Agny Associates and Mr. Prakash S. for distribution of TV channel on cable network. Neither appellant nor Taj India appear anywhere in agreement. Therefore, from perusal of distribution agreement, sub- distribution agreement and cable operator agreement, it becomes very clear that appellant has given distribution rights to Taj India for promoting and distributing TV channel in India on principal to principal basis. Taj India subsequently has given sub-distribution rights to other parties, which have in turn entered into contract with cable operators for distribution of TV channel. No evidence is available to show that Taj India is acting as agent of appellant for distribution business. Perusal of assessment order reveals that AO has provided no reason why Taj India should be treated as agency PE for distribution income as per Article 5(4) of DTAA. I am accordingly of opinion that Taj India is not acting as agent of appellant in India and distribution agreement has given exclusive right to Taj India to distribute channel in India on its own behalf and not on behalf of appellant. Contracts entered into by Taj India are by virtue of Taj India being distributor and not agent of appellant. In view of this it is held that Taj India does not constitute agency PE within meaning of Article-5(4) of DTAA in respect of distribution income. In preceding assessment year 2003-04, my predecessor CIT(A) had similarly set aside findings of AO on this issue in Para No.2.8 of his order dt. 26.02.2007 in Appeal No.CIT (A)XXXI/ DDIT(IT)2(1)/IT-116/2006-07. I am in agreement with his findings on this issue. Findings of AO in this regard are set aside. 22. first appellate authority examined distribution agreement between assessee and Taj India, which disclosed that Taj India was appointed as exclusive distributor in India, Taj India being solely responsible for marketing and promoting service to help drive cable operators sales. Thus, first appellate authority held that Taj India was not acting as agent of assessee but had obtained right of distribution of TV channel for itself. It was also noticed that Taj India had independently entered into contract with other parties for 9/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc purpose of distribution of pay channel and in such contracts, assessee did not figure at all. Therefore, first appellate authority held that assessee had given distribution rights to Taj India for promoting and distributing TV channel in India on principal to principal basis and there was no reason why Taj India should be treated as agency Permanent Establishment for purpose of distribution income as per Article 5(4) of DTAA. Therefore, order of assessing officer was set aside. 23. In further appeal before Tribunal, it was held as under: 17. We have carefully considered entire gamut of facts as discussed in impugned orders, rival submissions made before us, materials relied upon and decisions relied upon. assessee company is incorporated and registered under Mauritius Law and is also Tax Resident of Mauritius, therefore, qua its various streams of income, India-Mauritius DTAA has to be seen. assesee is engaged in business of telecasting sports channel called Ten Sports and for generating revenue, it has been collecting advertisement revenue and distribution of channel in India. It has appointed Taj India as its advertising sales agent to sell commercial slot / spot to prospective advertisers and other parties in India in connection with business of programming and telecasting of Ten Sports Channel. As per agreement, commission @ 10% of advertisement revenue was paid to Taj India. assessee has claimed that, such income is not taxable in India, because there is no PE in India as Taj India is not dependent agent of assessee within terms of Article 5(4). This contention of assessee has been negated by Ld. CIT(A) after discussing issue in detail and holding that, there is no agency relationship between assessee and Taj India qua advertisement income within scope of Article 5(4). However, in revenue s appeal, main issue involved in ground no.1 is with regard to taxability of distribution revenue in terms of distribution Agreement dated 1st March, 2002. Under terms of distribution agreement, assessee has appointed Taj India as exclusive distributor in India and prohibits assessee for entering into distribution agreement with anybody else. Ld. CIT(A) after taking note of Distribution Agreement and examining various terms and clauses used therein and also taking into consideration conduct of parties, came to conclusion that, Taj India is not acting as agent of assessee but it had obtained right of distribution of channel for itself and subsequently it is entering into contract with other parties in its own name in which assessee is not party. distribution of revenue between assessee and Taj India has been allocated in 10/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc ratio of 60:40 and entire relationship is principal to principal basis. Ld. CIT(A) has also noted that, there is no evidence on record to show that Taj India was acting as agent of assessee for distribution business in any manner. This finding of fact of Ld. CIT(A) is corroborated by terms and conditions of distribution agreement as well as sub- distributor agreement as placed in paper book. Thus, such finding of fact by Ld. CIT(A) without there being any rebuttal by way of any contrary material, is affirmed. Even if we independently examine facts of case vis-a-vis provisions contained in Article 5(4) to 5(6) which deals with agency PE, it can be seen that there is no agency PE of Assessee in India. Relevant Article 5 dealing with agency PE is reproduced here under:- 4. Notwithstanding provisions of paragraphs (1) and (2) of this article, person acting in Contracting State for or on behalf of enterprise of other Contracting State [other than agent of independent status to whom provisions of paragraph (5) apply] shall be deemed to be permanent establishment of that enterprise in first-mentioned State if: (i) he has and habitually exercises in that first-mentioned State, authority to conclude contracts in name of enterprise, unless his activities are limited to purchase of goods or merchandise for enterprise; or (ii)he habitually maintains in that first-mentioned State stock of goods or merchandise belonging to enterprise from which he regularly fulfills orders on behalf of enterprise. 5. enterprise of Contracting State shall not be deemed to have permanent establishment in other Contracting State merely because it carries on business in that other 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. 6. fact that company, which is resident of Contracting State controls or is controlled by company which is resident of other Contracting State, or which carries on business in that other Contracting State (whether through permanent establishment or otherwise) shall not, of itself, constitute either company permanent establishment of other. 11/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc Thus, agent is deemed to be PE of foreign enterprise, if he is not independent and habitually exercises authority to conclude contracts in name of enterprise unless activities of such person are limited to those mentioned in paragraph 4 that is, to purchase of goods or merchandise for enterprise; or if he has no such authority, but habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of enterprise. Thus, character of agent, who can be said to be dependent only if, firstly, commercial activity for enterprise is subject to instructions or comprehensive control and secondly, he does not bear entrepreneur risk. It is sufficient for establishment of agency PE that agent has sufficient authority to bind enterprise s participation in business activity. Here in this case, none of conditions as stipulated in Article 5(4) is applicable because Taj India is acting independently qua its distribution rights and entire agreement ostensibly is on principal to principal basis as analyzed and found by ld. CIT(A). When entire relationship qua distribution revenue is that of principal to principal basis and Taj India is acting independently, then it moves out from conditions laid down in Article 5(4). Thus distribution income by assessee cannot be taxed in India, because Taj India does not constitute agency PE under terms of Article 5(4). Thus, order of CIT(A) is upheld and ground No.1 as raised by revenue is dismissed. 24. Tribunal noted that first appellate authority, after due deliberation, had returned finding of fact that Taj India was not acting as agent of assessee but it had obtained right of distribution of channel for itself and subsequently, it had entered into contracts with other parties in its own name in which assessee was not party. distribution of revenue between assessee and Taj India was in ratio of 60:40 and entire relationship was on principal to principal basis. Tribunal noted that this finding by first appellate authority is corroborated by terms and conditions of distribution agreement as well as sub-distributor agreement. After examining requirement of Article 5 of DTAA to constitute agency Permanent Establishment, Tribunal as matter of fact held that none of conditions as stipulated in Article 5(4) was applicable because Taj India was acting independently qua its distribution rights and entire agreement was on principal to principal basis. Therefore, it was held that 12/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 ITXA1984&1437_17.doc distribution income earned by assessee cannot be taxed in India because Taj India does not constitute agency Permanent Establishment under terms of Article 5(4) of DTAA. order of first appellate authority was accordingly upheld. 25. On thorough consideration of matter, we are in agreement with views expressed by Tribunal. In fact, there is concurrent finding of fact between both appellate authorities on this point. Learned standing counsel Revenue has not been able to show any perversity in such finding returned by appellate authorities. In absence thereof, we see no good reason to interfere with finding of Tribunal affirming order of first appellate authority. 26. Consequently, we do not find any merit in appeal. No substantial question of law arises from order of Tribunal. Appeal is accordingly dismissed. However, there shall be no order as to costs. 27. In view of above, other appeal being Income Tax Appeal No.1437 of 2017 is also dismissed. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) Minal Parab 13/13 Uploaded on - 04/03/2020 Downloaded on - 11/03/2020 09:43:12 Commissioner of Income-tax (IT)-4 v. Taj TV Limited