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No functions, assets and risks analysis is required before AY 2002-03 for determination of profits attributable to dependent agent permanent establishment; no further attribution if dependent agent paid arm’s length commission
In brief
In a recent ruling in the case of BBC Worldwide Ltd.1 (the “assessee”), the Delhi High Court (the “High Court”) has held that no FAR analysis is required in a pre- assessment year (“AY”) 2002-03 scenario for computing the amount of profits attributable to a dependent agent permanent establishment (“DAPE”). It has been further held that where an Indian agent has been remunerated at an arm’s length price (“ALP”), nothing further is left to be taxed in the hands of the foreign enterprise. In adjudicating this matter, the High Court relied upon the decision of
1 DIT v. BBC Worldwide Ltd. [TS-674-HC-2011(DEL)]
Supreme Court in the case of Morgan Stanley and Co.2 and the Bombay High Court judgement in the case of SET Satellite (Singapore) Pvt. Ltd.3.
Facts
• The assessee is a company incorporated under the laws of England and Wales and is a part of BBC group. This BBC group has a company incorporated in India as well, known as BBC Worldwide India Pvt. Ltd. (“BWIPL”).
2 DIT v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 (SC)
3 SET Satellite (Singapore) Pvt. Ltd. v. DDIT [2008] 307 ITR 205 (Bom.) www.pwc.com/in
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• The assessee had appointed BWIPL as its authorised agent in India to solicit orders for advertising airtime on channels at the rates and on the terms and conditions provided by the assessee.
• Two separate agreements were entered into in this regard, for dollar denominated deals and for rupee denominated deals. In consideration for the services provided, BWIPL was to receive 15% commission of the advertisement revenues received by the assessee from Indian advertisers. The latter agreement enabled BWIPL to collect payments from Indian advertisers on sale of airtime on its behalf and remit them after deducting its commission of 15%.
• The assessing officer (“AO”) held that the income of the assessee from the advertisement revenues accrued or arose in India under section 9(1) of the Income-tax Act, 1961 (the “Act”). The AO also held that BWIPL constituted a permanent establishment (“PE”) under Article 5(4)(a) and Article 5(4)(c) of the Double Taxation Avoidance Agreement between India and UK (the “tax treaty”). The profits were estimated at an ad hoc rate of 20% of total advertisement revenues attributed to India.
• The Commissioner of Income-tax (Appeals) (the “CIT(A)”) agreed with the findings of the AO and affirmed this while dismissing the appeal of the assessee.
• In appeal before the Income-tax Appellate Tribunal (the “Tribunal”), the assessee took an alternate plea that BWIPL was remunerated at an arm’s length basis, and therefore, nothing remained to be taxed in India. For this argument, the assessee placed reliance on the order of the transfer pricing officer (“TPO”) for AY 2002-03 where the commission paid to BWIPL was accepted as being at ALP.
• The assessee referred to the judgement of Bombay High Court in the case of SET Satellite (Singapore) Pvt. Ltd. (above), where it was held that the payment of service fee at 15% of the gross advertisement revenue to its agent represented the price computed on the ALP principle. It was noted by the
Tribunal that the above judgement was also delivered for the AY 1999-2000, i.e. before the onset of the transfer pricing regime and therefore, it was directly applicable to the assessee’s case.
• The assessee also referred to the judgement of the Delhi Tribunal in the case of Galileo International Corporation4, which referred to the Central Board of Direct Taxes (“CBDT”) Circular no. 7425, which recognised that advertising agents of foreign telecasting companies usually retain 15%.
• The Tribunal held that the TPO had accepted that the commission of 15% paid to BWIPL is a fair transfer price and on this basis, income declared by BWIPL for AY 2002-03 was accepted by the tax department.
• The Tribunal has also referred to CBDT Circular no. 23 and the Supreme Court decision in the case of Morgan Stanley and Co. (above). In this case, it was held that when an associated enterprise, which also constituted a PE, was remunerated at an arm’s length basis, taking into account all the risk taking functions of multinational enterprises, nothing further would be left to attribute to the PE.
Revenue’s contentions
• The Tribunal was not justified in relying upon the order of the TPO in the case of BWIPL when no such exercise was carried out in the case of the assessee. As per the provisions of section 92C of the Act, it was mandatory to undertake FAR analysis in the case of the assessee.
• The Tribunal cannot do the FAR analysis or substitute the FAR analysis of the PE for it, when it has not been done by the AO or TPO.
• Article 7 of the tax treaty also provides that the FAR analysis is to be conducted for determining the assessable income of the non-resident.
4 DIT v. Galileo International Incorporation [2007] 114 TTJ 289 (Del)
5 CBDT Circular no. 742 dated 2 May, 1996
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• CBDT Circular No. 742 is applicable to the facts of the present case, as the assessee does not maintain any country-wise accounts.
• When no FAR analysis has been done in the case of the assessee, then to reach the conclusion that nothing more is attributable to the assessee is absolutely baseless and illegal.
• If the FAR analysis were done in the case of the assessee, then it would reveal the real nature of the assessee’s ALP.
Assessee’s contentions
• Reliance upon the FAR analysis done by the TPO in the case of BWIPL was most relevant as it is this very commission which was paid by the assessee to BWIPL and once treated as ALP in the case of BWIPL, it would be the most material and direct evidence in the case of the assessee as well.
• Transfer pricing provisions were introduced in the Act vide the Finance Act, 2002 from the AY 2002-03, requiring FAR analysis to be maintained in certain cases as prescribed. Therefore, for the first two years under appeal, i.e., AYs 2000-01 and 2001-02, neither the assessee nor BWIPL were required to undertake FAR analysis.
• For AY 2002-03, FAR analysis was prepared and submitted by BWIPL in respect of its functions performed in India for the assessee and on assessment by the TPO, the remuneration was held to be at ALP.
High Court Ruling
• The provisions of transfer pricing were introduced in the Finance Act, 2002 from AY 2002-03 and therefore, in respect of two appeals for the AYs 2000-01 and 2001-02, no such FAR analysis was even required.
• Once the commission to BWIPL was accepted to be at ALP by the TPO, a different view could not be taken in the case of the assessee who paid the same commission.
• There is no merit in the contention that since the assessee had not prepared country-wise accounts, the deemed rate of taxation at 10% of advertisement revenue as per CBDT Circular no. 742 should be applied to tax the PE. The assessee had prepared country-wise accounts and this fact had been recorded by the Tribunal in the order for AY 2000-01.
• The judgement of the Bombay High Court in the case of SET Satellite (Singapore) Pvt. Ltd. (above) that if correct ALP is applied and paid, nothing further would be left to be taxed in the hands of the foreign enterprise is squarely applicable to the case.
• Reliance was placed on Para 3 of CBDT Circular no. 742 for justification of the commission of 15% to agents of telecasting companies.
• The High Court, while dismissing the appeals, concluded that no question of law arises in the case.
PwC’s observations
• The precedent set in the SET Satellite and Morgan Stanley cases has been followed in this judgement by the High Court, where it has been held that where an Indian agent is remunerated at an ALP, there is nothing further left to be attributed and taxed in the hands of the foreign enterprise.
• The High Court has relied on the transfer pricing order of the Indian agent, i.e.
BWIPL to determine the ALP in the hands of the foreign enterprise for the same payment under consideration. This may go a long way in resolving similar disputes.
PwC News Alert November 2011
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