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Background
The Delhi Income-tax Appellate Tribunal (“the Tribunal”) in a recent decision1 examined the issue of whether an appeal can be filed before the Commissioner of Income- tax (Appeals) (“CIT(A)”) in respect of an order passed under section 154 read with section 143(3) of the Income-tax Act, 1961 (“the Act”), to give effect to the Mutual Agreement Procedure (“MAP”) resolution under section 90 of the Act.
Facts
• Cable News Network, LP, LLLP (now Cable News Network, Inc.) (“the assessee”), a non–resident company, derived advertising and subscription revenues through its India representative in India.
For the assessment year 2003-04, the Assessing Officer (“AO”) passed an assessment order under section 143(3) of the Act in which total income was
1 Cable News Network LP, LLLP v. ADIT [2010-TIOL-20-ITAT-DEL]
computed by attributing 30% of the revenue (net of India representative commission) as profits taxable in India.
• The assessee applied for the resolution of dispute by way of MAP under the Indo-US treaty. A resolution was passed by the Indian and the US competent authority (“CA”) to the effect that 10% of advertisement and subscription revenue received during the relevant previous year will be deemed to be the net profit chargeable to tax.
• Consequently, the AO passed fresh orders under section 154 read with section 143(3) of the Act to give effect to the MAP resolution under section 90 of the Act, bringing to tax 10% of the gross receipts, without allowing India representative’s commission.
The assesee, aggrieved by the order of the AO, filed an appeal before the CIT(A).
An order passed giving effect to resolution under Mutual Agreement Procedure is an appealable order under section 246A Tax & Regulatory Services
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19 January, 2010
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• After considering the submissions of the assessee, the CIT(A) held that the CA determined the profit at 10% of advertisement and subscription revenue received during the relevant year. The authority had not mentioned that the aforesaid percentage was net advertisement revenue received by the assessee. In absence of any direction to determine profit on the basis of the net amount, the claim regarding deduction of India representative’s commission cannot be allowed.
Aggrieved, the assessee went in appeal before the Tribunal.
Issues
(a) Whether an appeal can be filed before the CIT(A) in respect of an order passed under sections 154 / 143(3) of the Act to give effect to the MAP resolution under section 90 of the Act?
(b) Whether the total income has to be computed at 10% of the gross revenue or net revenue (net of India representative’s commission)?
Assessee’s contentions
• Non-exclusion of the commission amount retained by the India representative led to double taxation of the same amount, once in the hands of the India representative and again in the hands of the assessee, thereby defeating the very purpose of MAP resolution.
• The issue regarding deduction of commission paid to the India representative was never an issue before the AO and such commission was deducted by him from the gross revenue in the original assessment. The dispute in MAP proceedings was merely about the percentage to be applied to the net revenue. The resolution of the US CA was quite clear in the matter that the percentage had to be applied to the net revenue. Even exact computation to that effect had been made in the annexure to the resolution and this computation had not been objected to by the Indian CA.
• Sub-rule (4) of rule 44H of the Income-tax Rules, 1962 (“the Rules”) contains a provision that the effect to the MAP resolution shall be given by the AO within 90 days of receipt of the same by the Director General of Income tax, if the assessee – (i) gives his acceptance to the MAP resolution; and (ii) withdraws his appeal, if any,
pending on the issue which was the subject matter of adjudication under the MAP. It was contended that the assessee fulfilled the aforesaid conditions and, thus, the AO was obliged to give effect to the MAP resolution.
Revenue’s contentions
• The AO had passed the order to give effect to the MAP resolution in accordance with section 90 of the Act and Rule 44H(3) of Rules after the assessee gave its acceptance to the resolution.
• The order passed by the AO was an order under section 90 of the Act, which could not have been appealed against before the CIT(A), as the whole purpose of MAP is to bring the litigation to an end. Reliance was placed on the decision of the Kerala High Court in the case of Kerala State Civil Supplies Corporation Ltd.2.
• If deduction is allowed in respect of the India representative’s commission from the gross commission receivable by the assessee, then, the profit will not amount to 10%
of the commission received from Indian sources.
• There is no question of double taxation of the same amount, in view of the correlative relief granted in respect of the US taxable income.
Assessee’s rejoinder
• The relief in US taxable income was not the issue in hand.
• The AO himself had calculated profit at 30% of net receipt, which was reduced to 10%
under MAP resolution. Thus, deduction of the commission paid to the India representative was never an issue before the CA.
• The assessee was within its right to challenge the order of the AO, passed under section 154 read with section 143(3) of the Act, as per provisions contained in section 246A(1)(a) of the Act. The appeal before the Tribunal against the order of the CIT(A)
2Kerala State Civil Supplies Corporation Ltd. v. JCIT [2006] 282 ITR 647 (Ker.)
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was competent as it was based upon a valid order passed by the first appellate authority.
• The dispute in the case of Kerala State Civil Supplies Corporation Ltd. (above) was in respect of recovery of interest paid under section 244A of the Act, which could be done only by the Chief Commissioner (“CCIT”) or the CIT, as specifically provided in section 244(2) of the Act. An order under section 244A of the Act cannot be challenged under section 246A of the Act as no mention is made of that section in this section.
Tribunal’s ruling
• The appeal in the case of Kerala State Civil Supplies Corporation Ltd. (above) was allowed by the Tribunal only for statistical purposes with a direction to the AO to refer the matter to the CCIT or the CIT. The facts in the present case were different and therefore no incompetence was found in the appeal of the assessee.
• The resolution of the India and the US CAs was that the deemed net profit will be calculated at 10% of advertising and subscription revenue received from Indian sources. The US CA had also furnished the workings (after deducting the India representative’s commission),this computation had not been objected to in any manner by the Indian CA. Thus, the terms of mutual agreement were very clear that the profit had to be worked out at 10% of the advertising and subscription revenue received from Indian sources.
• The only pre-condition for giving effect to the mutually agreed resolution is mentioned in Rule 44H(3) of the Rules. The assessee had given the consent for implementation of the agreement and the appeal against the order was stated to have been withdrawn. Therefore, there was no impediment in giving effect to the resolution as it is.
• The order passed in consequence to the MAP resolution was an order under section 143(3) read with section 90 and it was in substitution of earlier order under section 143(3) of the Act.
• The Tribunal held that in view of the resolution, the CIT(A) erred in upholding the order of the AO in which the profit was determined at 10% of the gross revenue.
• There was no justification in the argument that the assessee could not litigate on the matter after resolution of the dispute through MAP proceedings, for the reason that the AO did not fully give effect to the resolution of the CA.
• Even if the AO harboured any doubt about the interpretation of the agreement, the best course for him would have been to approach the CA for clarification in the matter, more so when the computation of profit was annexed with the resolution of the US CA. Since he had not done so, the assessee was left with no other alternative but to approach the appellate authority for appropriate relief.
• The argument regarding correlative relief in USA was not relevant as the question was regarding computation of income as per the agreement.
Conclusion
This is a landmark order by the Tribunal setting a precedent for cases involving orders consequent to MAP resolutions and whether they can be appealed against. Further, the Tribunal has also clarified the fact that such order is an order under section 143(3) read with section 90 of the Act and it is in substitution of earlier order under section 143(3) of the Act.
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