INCOME TAX ACT, 1961

Section 90(1) Article 5(2) & 5(4)

Double Tax Avoidance Agreement - Agreement with Mauritius - Existence of DAPE/PE or not -

Assessee was a foreign telecasting company incorporated in Mauritius and having a tax residency certificate of Mauritius. It sells advertising time and collects subscription revenues through its Indian affiliates Zee Telefilms Limited and El Zee, but its claim was that since it does not have any permanent establishment in India, no part of its income was taxable in India. AO did not accept the claim as he was of the view that its Indian agent constitutes virtual projection of the foreign company, and, therefore, it has a permanent establishment in India, in the light of Andhra Pradesh High Court's judgment in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP) : 1983 TaxPub(DT) 1556 (AP-HC). CIT(A) held that the assessee does not have any permanent establishment in India. Therefore, the assessee cannot be taxed in respect of its income from Indian operations. Held: It is an admitted position that the assessee does not have any office or place of management of its own, and its presence in India is only through its agents. What was relevant was the role played by the agent in India and whether the remuneration paid by the assessee company, for the services of the agent, was a fair and arm's length emuneration vis-a-vis the functions performed, assets employed and risks assumed by the Indian agent. No issues are raised on the inadequacy of agent's remuneration by the AO, and now a fresh inning is sought to find these inadequacies and improve the case of the revenue. That is impermissible. In his analysis, while the AO has proceeded on sweeping generalization about the risks assumed by the PE but there is no specific FAR analysis which could support that the agent's remuneration not being an arm's length remuneration, and the AO has proceeded on the basis that all the business risks of the assessee (i.e., the foreign company) were borne by the PE as PE was the content provider and responsible for up linking activity. That is too sweeping a generalization to meet any judicial approval, and, on the same set of findings, the coordinate Benches have disapproved the stand of the AO. Under these circumstances, there was no reason to remit the matter to the file of the AO for a fresh round of ALP ascertainment proceedings, as prayed by the DR. The plea of the assessee, as raised in the cross-objections, therefore, merits acceptance. Whether there is a DAPE or not, there are no additional profits to be brought to tax as a result of the existence of the DAPE, and, therefore, the question about the existence of a DAPE on the facts of this case is wholly academic. In the light of the present legal position, existence of dependent agency permanent establishment in wholly tax-neutral, unless it was shown that the agent has not been paid an arm's length remuneration, and when it is not the case of the AO, as noted earlier, that the agents have not been paid an arm's length remuneration, the question regarding the existence of dependent agency permanent establishment, i.e., under article 5(4), was a wholly academic question.

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