ESPN Star Sports Mauritius S.N.C. et Compagnie, Mauritius V. DDIT, New Delhi

ITA 3410/DEL/2010

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2771 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-08-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 12-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G K DHALL
• Assessee Lawyers: DINESH CHAWLA
• Keywords: Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Wholly owned subsidiary; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI O.P. KANT, ACCOUNTANT MEMBER I.T.AS. NO.3410 & 3411/DEL/2010 ASSESSMENT YEARS: 2003-04 & 2004-05 ESS ADVERTISING (MAURITIUS) SNC ET COMPAGNIE (EARLIER KNOWN AS ESPN STAR SPORTS MAURITIUS SNC. ET COMPAGNIE) V. DY.DIT, CIRCLE-1(2), INTERNATIONAL TAXATION, DELHI TAN/PAN: (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI PORUS KAKA, SR. ADV. & DINESH CHAWLA, ADV. RESPONDENT BY: SHRI G.K. DHALL, CIT-D.R. DATE OF HEARING: 30 05 2018 DATE OF PRONOUNCEMENT: 20 08 2018 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESS EE AGAINST THE IMPUGNED COMMON ORDER DATED 31.03.2010, PASSED BY LD. CIT(APPEALS)-XXIX, NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S.143(3) FOR THE ASSESSMENT YEAR 2003-04 & 2004-05. SINCE, THE ISSUE INVOLVED IN BOT H THE APPEALS IS COMMON ARISING OUT OF IDENTICAL SET OF F ACTS, THEREFORE, SAME WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY WAY OF CONSOLIDATED ORDER. 2. WE WILL FIRST TAKE UP THE APPEAL FOR THE ASSESS MENT YEAR 203-04, WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWI NG GROUNDS: I.T.A. NO.3410 & 3411/DEL/2010 2 1.1 THAT ON FACTS AND IN LAW, THE APPELLANT DENI ES ITS LIABILITY TO BE ASSESSED UNDER THE INCOME-TAX ACT, 1961 (THE ACT ). 1.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XXIX ( LD. CIT(A)) GROSSLY ERRED IN NOT APPRECIATING THE FACTS AND CIR CUMSTANCES OF THE CASE AND THUS BASED HIS DECISION ON FACTUALLY INCOR RECT FINDINGS. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L D. CIT(A) ERRED IN UPHOLDING THE ORDER OF THE LEARNED ASSESSING OFFICE R (LD. AO) THAT THE APPELLANT HAS A BUSINESS CONNECTION IN THE FORM OF ESPN SOFTWARE INDIA (P) LTD. (ESPN INDIA) AND THAT THE APPELLAN T IS CARRYING ON ITS BUSINESS IN INDIA AND ALSO EARNING ITS INCOME FROM SOURCES IN INDIA IN TERMS OF SECTION 9(1 )(I) OF THE ACT. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, LD. CIT(A) GROSSLY ERRED IN UPHOLDING THE ORDER OF THE LD. AO THAT APPELLANT HAS A FIXED BASED PERMANENT ESTABLISHMENT (PE) IN INDIA UNDER ARTICLE 5(L)/5(2) OF THE INDIA MAURITIUS DOUB LE TAXATION AVOIDANCE AGREEMENT (DTAA). 4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, LD. CIT(A) GROSSLY ERRED IN UPHOLDING THE ORDER OF THE LD. AO THAT ESPN INDIA IS A DEPENDENT AGENT PE OF THE APPELLANT IN I NDIA UNDER ARTICLE 5(4) OF THE DTAA. 4.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) GROSSLY ERRED IN UPHOLDING THE ACTION OF THE LD. AO IN TREATING ESPN INDIA AS NOT AN AGENT OF INDEPENDENT STATUS IN TERMS OF THE PROVISIONS OF ARTICLE 5(5) OF THE DTAA. 5.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L D. CIT(A) GROSSLY ERRED IN HOLDING THAT ESPN INDIA HAS AND IS HABITUA LLY EXERCISING AUTHORITY TO CONCLUDE ADVERTISEMENT CONTRACTS FOR T HE APPELLANT WITHIN THE MEANING OF ARTICLE 5(4) OF THE DTAA AND SUCH CO NTRACTS ARE BINDING UPON THE APPELLANT. THAT WITHOUT PREJUDICE TO THE A BOVE GROUND NOS. 4 TO 4.3, THE LD. CIT(A) GROSSLY ERRED IN REJECTING T HE CONTENTION OF THE APPELLANT THAT WHERE THE PURPORTED PE IS REMUNERATE D ON AN ARMS I.T.A. NO.3410 & 3411/DEL/2010 3 LENGTH BASIS, NO ADDITIONAL PROFITS COULD BE ATTRIB UTED TO APPELLANTS INCOME. 5.2 THAT, WITHOUT PREJUDICE TO THE ABOVE GROUNDS, ON FA CTS AND IN LAW, THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF THE LD. AO IN NOT APPLYING THE CIRCULAR NO. 23 DATED JULY 23, 1969 IS SUED BY THE CENTRAL BOARD OF DIRECT TAXES, WHEN THE TRANSACTION S WITH INDIAN COMPANY HAVE BEEN HELD AT ARMS LENGTH BY TRANSFER PRICING OFFICER. 6 THAT, WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALT ERNATIVE, LD. CIT(A) HAS GROSSLY ERRED ON THE FACTS AND CIRCUMSTA NCES OF THE CASE AND IN LAW IN ATTRIBUTING 50% OF THE PROFITS OF THE APPELLANT AS THE PROFITS OF THE APPELLANT FROM ITS INDIAN OPERATIONS . 7 WITHOUT PREJUDICE TO THE ABOVE, LD. CIT(A) GROSSLY ERRED IN NOT ALLOWING THE PROVISION FOR DOUBTFUL DEBTS WHILE CON SIDERING THE AMOUNT OF NET PROFITS FOR THE PURPOSE OF ATTRIBUTION TO TH E ALLEGED PE, AS ALLOWABLE UNDER ARTICLE 7(3) OF THE DTAA. 3. THE FACTS IN BRIEF ARE THAT, THE ASSESSEE IS A P ARTNERSHIP FIRM BETWEEN, ESPN (MAURITIUS) LTD. HAVING 99.9% SH ARE IN PROFITS; AND ESS ASIA NETWORKS PTE LTD. HAVING 0.1% SHARE IN PROFITS. THE ASSESSEE FIRM HAS BEEN ESTABLISHED UND ER THE LAWS OF MAURITIUS ON MARCH 29, 2002. THE ASSESSEE I S ENGAGED IN THE BUSINESS OF ACQUIRING AND ALLOTTING ADVERTISEMENT TIME AND PROGRAMME SPONSORSHIP IN CONNECTION WITH ESPN AND STAR SPORTS CHANNELS ON TELEVISION. THE ASSESSEE FIRM ACQUIRES ADVERTISEMEN T TIME FROM ESPN STAR SPORTS, SINGAPORE (ESS) WHICH IS A BRANCH OFFICE OF A GENERAL PARTNERSHIP BASED IN DELAWARE, USA. ESS IS ENGAGED IN THE BUSINESS OF TELECASTING OF ESPN AND STAR SPORTS CHANNELS IN VARIOUS SOUTH ASIAN COUNTRIES IN CLUDING INDIA. THE ASSESSEE ENTERED INTO A REPRESENTATION A GREEMENT I.T.A. NO.3410 & 3411/DEL/2010 4 (AGREEMENT) WITH ESPN SOFTWARE INDIA (P) LTD. (E SPN INDIA) APPOINTING IT AS ITS REPRESENTATIVE FOR AD SOLICITATION ACTIVITIES AND FOR THE COLLECTION OF ADVERTISEMENT REVENUES FROM THE INDIAN ADVERTISERS/ AGENCIES. ESPN INDIA C OLLECTS THE ADVERTISEMENT CHARGES FROM VARIOUS INDIAN COMPANIES (ADVERTISERS/ADVERTISING AGENCIES) AND REMITS THE S AME TO THE ASSESSEE AFTER DEDUCTING APPLICABLE TAXES IN INDIA ON THE COMMISSION PAYABLE TO IT AS PER THE AGREEMENT. IN T HE INCOME TAX RETURNS, THE ASSESSEE DECLARED NIL INCOME AND IN THE NOTES OF THE COMPUTATION, IT WAS STATED THAT REVENU E FROM THE ADVERTISEMENTS, BEING IN THE NATURE OF BUSINESS PRO FITS, ARE NOT SUBJECT TO TAX IN INDIA IN ACCORDANCE WITH ARTI CLE 7 OF THE INDIA-MAURITIUS DTAA, BECAUSE ASSESSEE DOES NOT HAV E ANY PE IN INDIA UNDER ARTICLE 5. 3. LEARNED ASSESSING OFFICER REQUIRED THE ASSESSEE TO JUSTIFY AS TO WHY THE INDIAN ENTITY WHICH IS WHOLLY OWNED SUBSIDIARY OF ESPN (MAURITIUS) LTD. SHOULD NOT BE T REATED AS DEPENDENT AGENT PE (DAPE) WITHIN THE MEANING OF ART ICLE 5(4) OF THE DTAA. IN RESPONSE, THE ASSESSEE SUBMITTED TH AT THE INDIAN ENTITY CANNOT BE A DAPE, BECAUSE, FIRSTLY , IT IS AN AGENT OF INDEPENDENT STATUS AND IS ECONOMICALLY INDEPENDE NT AS THE AGENTS BUSINESS CAN STAND ON ITS OWN AND IS NOT DE PENDENT UPON THE PRINCIPAL FOR ITS ECONOMIC VIABILITY; SECONDLY , THE AGENT BEARS RISK OF LOSS FROM ITS OWN ACTIVITIES; A ND LASTLY , THE AGENT IS NOT DEPENDENT WHOLLY AND EXCLUSIVELY ON ON E PRINCIPAL BUT FOR VARIOUS OTHER AES ALSO. FOR INSTA NCE, THE ESPN INDIA IS ALSO CARRYING ON THE ACTIVITIES OF DI STRIBUTION OF I.T.A. NO.3410 & 3411/DEL/2010 5 ESPN/STAR SPORTS TELEVISION PROGRAMMING SERVICES IN INDIA AS A PRINCIPAL IN TERMS OF ITS AGREEMENT WITH ESS DIST RIBUTION (MAURITIUS) SNC ET COMPAGNIE AND EARNS SUBSCRIPTIO N FEES. IT ALSO CARRIES ON THE SALE/LEASING OF DECODERS ETC . TO VARIOUS CABLE OPERATORS AND EARNS INCOME FROM THE SAME. HOW EVER, THE LEARNED ASSESSING OFFICER REJECTED THE ASSESSEE S CONTENTION ON THE GROUND THAT, FIRSTLY , INDIAN ENTITY IS ENGAGED IN THE BUSINESS OF SOLICITING ADVERTISEMENT S FOR THE ASSESSEE AND ALSO DISTRIBUTED THE SPORTS CHANNELS F OR THE ESPN (MAURITIUS) LTD. AND AS FAR AS THE ADVERTISING ACTIVITIES IS CONCERNED, INDIAN ENTITY WORKS ONLY FOR ONE PRIN CIPAL, I.E., ASSESSEE AND THE COMMISSION EARNED FROM SOLICITING ADVERTISEMENTS COMES ENTIRELY FROM THE ASSESSEE, HE NCE, ADVERTISING BUSINESS OF INDIAN ENTITY WOULD SIMPLY COLLAPSE IF THE ASSESSEE HAS TO WITHDRAW ITS PATRONAGE. S ECONDLY , THE RISK IS SHARED BETWEEN THE ASSESSEE AND ESPN SOFTWARE LT D., BECAUSE THE PRINCIPAL TASK OF INSERTING THE ADVERTI SEMENTS INTO THE PROGRAM CONTENT AND ENSURING THAT SAME IS TELECAST PROPERLY IS THE RESPONSIBILITY OF M/S. ESPN STAR SP ORTS, SINGAPORE AND THE ASSESSEE. THE RISK ASSUMED BY THE INDIAN ENTITY CAN AT MOST BE RESTRICTED TO SECURE PAYMENTS FROM THE ADVERTISERS. HENCE, IT CANNOT BE SAID THAT ENTIRE R ISK IS BEING BORNE BY THE INDIAN ENTITY. LASTLY , TO EXAMINE THE PRINCIPAL AGENT RELATIONSHIP, THE ANALYSIS HAS TO BE WORKED O UT WITH RESPECT TO A PARTICULAR BUSINESS ACTIVITY AND INDIA N ENTITY MIGHT ALSO BE CARRYING OUT DISTRIBUTION ACTIVITY FO R A RELATED CONCERN, BUT THE FACT REMAIN THAT AS FAR AS ADVERTI SING IS I.T.A. NO.3410 & 3411/DEL/2010 6 CONCERNED, INDIAN ENTITY IS WORKING ONLY FOR THE AS SESSEE. THUS, INDIAN ENTITY IS ECONOMICALLY DEPENDENT ON AS SESSEE SO FAR AS THE ACTIVITY OF SOLICITING ADVERTISEMENTS IS CONCERNED. HE HAS FURTHER ANALYZED AS TO HOW THE INDIAN ENTITY HAS THE AUTHORITY TO CONCLUDE CONTRACT ON BEHALF THE ASSE SSEE AND REJECTED ALL THE CONTENTION OF THE ASSESSEE THAT NO NE OF THE ACTIVITIES CARRIED OUT BY THE INDIAN ENTITY WAS IN ANY MANNER OF DEPENDENT AGENCY AND NOWHERE IT HAD AUTHORITY TO CONCLUDE CONTRACT FOR THE ASSESSEE. HE ALSO REFERRE D TO THE CERTAIN CLAUSES OF THE AGREEMENT TO REACH TO THE CO NCLUSION THAT THE INDIAN ENTITY IS DAPE OF THE ASSESSEE. NOT ONLY THAT, HE ALSO FURTHER HELD THAT INDIAN ENTITY IS A FIXED PLACE PE OF THE ASSESSEE AND IN SUPPORT HE RELIED UPON THE DECI SION OF SPECIAL BENCH OF DELHI ITAT IN THE CASE OF M/S. NOK IA NETWORKS OY VS. DCIT. AFTER HAVING HELD THAT ASSESS EE HAS A PE, HE ATTRIBUTED 70% OF THE PROFIT FROM THE INDIAN PE AND THEREBY ATTRIBUTED THE INCOME OF RS.8,60,66,552/-. 4. BEFORE THE CIT (A), THE ASSESSEE SUBMITTED THAT THE PROFIT EMBEDDED IN THE TRANSACTION BETWEEN THE ASSESSEE AN D THE INDIAN ENTITY HAD ALREADY SUBJECTED TO TAX IN THE H ANDS OF THE INDIAN ENTITY AND THERE SHOULD NOT BE ANOTHER ASSES SMENT IN THE HANDS OF THE ASSESSEE TO TAX THE VERY SAME PROF IT. FURTHER, INDIAN ENTITY BESIDES CARRYING OUT COLLECTION OF AD REVENUES FOR THE ASSESSEE WAS ALSO ENGAGED IN THE DISTRIBUTION O F CHANNEL SERVICES IN TERMS OF ITS AGREEMENT WITH OTHER ENTIT IES AND ALSO SALE AND HIRE PURCHASE OF DECODERS FOR THE THIRD PA RTY CUSTOMER. THE FINAL AUTHORITY TO ACCEPT SUCH ADVERT ISEMENT OR I.T.A. NO.3410 & 3411/DEL/2010 7 TO REJECT THE SAME LIES WITH THE ASSESSEE. THE ESPN INDIA IS AN AGENT OF INDEPENDENT STATUS UNDER ARTICLE 5(5) A ND IS ACTING IN THE ORDINARY COURSE OF ITS BUSINESS WHILE DEALING WITH THE ASSESSEE. THE ASSESSEE FURTHER CHALLENGED THE OBSERVATION OF THE LEARNED ASSESSING OFFICER THAT T HE ASSESSEE HAS A FIXED PLACE PE WITHOUT ASSIGNING ANY REASON, BECAUSE THE ASSESSEE DOES NOT HAVE ANY OFFICE OR BRANCH IN INDIA; AND EVEN THE ATTRIBUTION OF 70% OF THE PROFIT WAS NOT C ORRECT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. LD. CIT (A ) HAS ANALYZED THE ASSESSEES SUBMISSION FIRSTLY ON ACCOU NT OF BUSINESS CONNECTION U/S. 9(1)(I) AND THEN ON DAPE U NDER ARTICLE 5(4), AND DECIDED ALL THE ISSUES AGAINST TH E ASSESSEE. IN SO FAR AS ASSESSEE IS HAVING A BUSINESS CONNECTI ON IN INDIA IN TERMS OF SECTION 9(1)(I), HE HELD THAT ASSESSEE DOES HAVE A BUSINESS CONNECTION, BECAUSE THE BUSINESS CARRIED O N BY THE ASSESSEE AND THE ACTIVITIES CARRIED ON IN INDIA ON ITS OWN SALES THROUGH ESPN INDIA FROM WHICH ITS EARNING REVENUE H AS A DIRECT CONNECTION AND SINCE ESPN IS INDIRECT 100% S UBSIDIARY OF THE ASSESSEE AND PROFIT HAS ARISEN TO THE ASSESS EE IN THE FORM OF RETENTION OF ITS COMMISSION AND HENCE, THER E IS A COMMONNESS OF INTEREST BETWEEN THE ASSESSEES BUSIN ESS AND THE BUSINESS OF THE INDIAN ENTITY. ON THE ISSUE OF DAPE, HE AFFIRMED THE OBSERVATIONS AND THE FINDING OF THE AS SESSING OFFICER AFTER DETAILED DISCUSSION APPEARING FROM PA GES 15 TO 21 OF THE APPELLATE ORDER. THE SUM AND SUBSTANCE OF HIS FINDINGS ARE THAT; FIRSTLY , ESPN INDIA HAS NOT ACTING ON THE ORDINARY COURSE OF I.T.A. NO.3410 & 3411/DEL/2010 8 ITS BUSINESS AND ALL ITS ACTIVITIES ARE DEVOTED EXC LUSIVELY FOR ESPN GROUP, AND THEREFORE, IT IS NOT AN AGENT OF INDEPENDENT STATUS. SECONDLY , ESPN INDIA IS A 100% SUBSIDIARY OF ESPN (MAURITIUS) AND THE SAME ENTITY ALSO HAD A CONTROLL ING STAKE IN ASSESSEE TO THE EXTENT OF 99.99%, THEREFORE, ESP N INDIA DOES NOT ENJOY ANY DEGREE OF AUTONOMY IN ITS DECISIO N MAKING PROCESS AND THE ACTIVITIES OF ESPN INDIA ARE DEVOTED WHOLLY, WHICH OPERATE UNDER A COMMON CONTROL AND MANAGEMENT. THIRDLY , ESPN INDIA FULFILLS THE CONDITIONS MENTIONED IN ARTICLE 5(4) AND HENCE IT CONSTITUTES A DAPE. ON TH E ISSUE WHETHER THE INDIAN ENTITY HAD THE AUTHORITY TO CONC LUDE THE CONTRACT ON BEHALF OF THE ASSESSEE, HE OBSERVED THA T THE ASSESSEES CONTENTION THAT ONE EMPLOYEE WAS SUFFICI ENT TO DISCHARGE THE FUNCTION WITH THE ALLOTMENT OF HIS RI GHT DOES NOT HOLD ANY MERIT, BECAUSE ONE PERSON CANNOT HANDL E AND NO DOCUMENTARY EVIDENCE WAS FILED BEFORE THE ASSESS ING OFFICER OR DURING THE COURSE OF APPELLATE PROCEEDIN GS IN THE FORM OF ANY CORRESPONDENCE BETWEEN THE ADVERTISERS AND THE ASSESSEE. HE ALSO REFERRED TO THE VARIOUS OBSER VATIONS AS WELL AS THE DECISIONS IN THIS REGARD. LASTLY , HE ALSO HELD THAT ASSESSEE HAS A FIXED PLACE PE, BECAUSE THE INDIAN ENTITY IS A VIRTUAL PROJECTION OF THE ASSESSEE IN INDIA AND LOOKING TO THE COMMON MANAGEM ENT AND A CONTROLLING STAKE, ESPN INDIA ACTS AS A FIXED PLACE PE OF THE ASSESSEE. I.T.A. NO.3410 & 3411/DEL/2010 9 5. IN SO FAR AS THE ISSUE OF ATTRIBUTION OF PROF IT IS CONCERNED, ASSESSEE SUBMITTED THAT EVEN IF IT IS AS SUMED THAT PE OF ASSESSEE IS CONSTITUTED IN INDIA, THEN ONLY T HE PROFITS ATTRIBUTABLE TO THE PE IN TERMS OF ARTICLE 7 CAN AL ONE BE TAXED AND ONCE THE PROFITS ATTRIBUTABLE TO THE ACTIVITY O F THE PE ARE DETERMINED ACCORDING TO THE ARMS LENGTH PRINCIPLE IN ITS DEALING WITH ENTERPRISES OF WHICH IT CONSTITUTES A PE, THEN NO FURTHER HYPOTHETICAL PROFITS CAN BE ATTRIBUTABLE TO SUCH PE. THUS, IN VIEW OF ARMS LENGTH PRINCIPLE NOTHING COU LD HAVE BEEN ATTRIBUTED. THE ASSESSEES DETAILED SUBMISSION IN THIS REGARD HAVE BEEN INCORPORATED BY THE LD. CIT(A) FRO M PAGES 23 TO 30 INCLUDING THE VARIOUS JUDGMENTS RELIED UPON BY THE ASSESSEE SPECIFICALLY THE JUDGMENT OF HON'BLE SUPREM E COURT IN THE CASE OF DIT VS. MORGAN STANLEY & CO., REPORTED IN (2009) 292 ITR 416 (SC); AND THE JUDGMENTS OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SINGAPORE) PTE. LTD., (307 ITR 205 (BOM) AND DELHI HIGH COURT IN GALLILIO INTERNATIONAL, 371 CTR 251 (DEL.) AND CATENA OF OTHER DECISIONS. 6. HOWEVER, LD. CIT (A) DID NOT ACCEPT THE ASSESSEE S CONTENTION AND THE VARIOUS JUDGMENTS RELIED UPON BY THE ASSESSEE ON THE GROUND THAT; THE TPO HAS CARRIED OU T THE TRANSFER PRICING ANALYSIS WITH REGARD TO THE FUNCTI ON PERFORMED BY THE INDIAN AGENT FOR SOLICITING THE AD VERTISEMENT AND COLLECTION OF ADVERTISEMENT REVENUE. HOWEVER, I N ADDITION TO THESE FUNCTIONS THE INDIAN AGENT IS ALSO CARRYIN G OUT MANY ACTIVITIES RELATING TO TRANSMISSION OF THE ASSESSEE S CHANNEL I.T.A. NO.3410 & 3411/DEL/2010 10 AND ONCE SUCH IMPORTANT FUNCTION IS PROVIDING ACCES S TO CABLE OPERATOR TO DOWNLINK THE CHANNELS THROUGH ACCESS CO DE WITHOUT WHICH BUSINESS OF THE ASSESSEE COULD NOT SU RVIVE. ANOTHER FUNCTION HIGHLIGHTED WAS THAT IT IS CARRYIN G OUT THE NEGOTIATION AND CONCLUDING CONTRACTS WITH ADVERTISI NG AGENCY ON BEHALF OF THE ASSESSEE. ALL THESE ACTIVITIES HAV E NOT BEEN TAKEN INTO ACCOUNT WHILE CARRYING OUT THE TRANSFER PRICING ANALYSIS. HE ALSO ADVERSELY COMMENTED UPON THE TPO S APPROACH IN ACCEPTING 10% REMUNERATION TO THE INDIA N AGENT WHEN THE NORMAL COMMISSION PAYMENT AS PER HIM IS AR OUND 15%. AFTER DETAILED DISCUSSION, HE HELD THAT ATTRIB UTION OF 50% OF THE NET PROFIT OF THE ASSESSEE TO THE INDIAN ENTITY WHICH IS A DAPE WOULD BE FAIR ATTRIBUTION. 7. BEFORE US, LEARNED SENIOR COUNSEL, SHRI PORUS KA KA SUBMITTED THAT IN SO FAR AS THE OBSERVATION AND THE FINDING OF THE LD. CIT (A) THAT ASSESSEE HAS A FIXED PLACE PE, THE SAME IS BASED ON THE FACT THAT THE INDIAN ENTITY WAS SUBSID IARY OF THE ASSESSEE AND BOTH ASSESSEE AND INDIAN ENTITY WERE C ONTROLLED OVER BY THE PARENT COMPANY. THIS CANNOT BE THE GROU ND FOR HOLDING FIXED PLACE PE IN VIEW OF THE CLEAR CUT P ROVISION OF ARTICLE 5(6). HE FURTHER SUBMITTED THAT THE OBSERVA TION AND THE FINDING OF BOTH THE AUTHORITIES ARE COMPLETELY DIVORCED FROM THE FACTS AND MISINTERPRETATION OF THE ENTIRE TRANSACTION AND THE TERMS OF THE AGREEMENT. THE INDIAN ENTITY W AS AN INDEPENDENT AGENT AND WAS NOT DEVOTED WHOLLY OR ALM OST WHOLLY FOR THE ASSESSEE, BECAUSE ONLY 4% OF THE BUS INESS OF THE INDIAN ENTITY RELATED TO THE ASSESSEE. THUS, HE SUBMITTED I.T.A. NO.3410 & 3411/DEL/2010 11 THAT ASSESSEE HAS A VERY STRONG PRIMA FACIE GOOD CASE THAT INDIAN ENTITY DOES NOT CONSTITUTE ANY KIND OF PE FO R THE ASSESSEE IN INDIA. 8. HOWEVER, MR. PORUS KAKA POINTED OUT THAT IT IS NOT IN DISPUTE THAT THE TRANSACTION BETWEEN THE ASSESSEE A ND THE INDIAN ENTITY HAS BEEN FOUND TO BE AT ARMS LENGTH WHICH HAS BEEN NOTED EVEN BY THE LD. CIT (A). ONCE THE TRANSA CTION AND THE REMUNERATION ARISING THEREOF HAVE BEEN ACCEPTED TO BE AT ARMS LENGTH, THEN THERE COULD NOT BE ANY FURTHER A TTRIBUTION OF ANY PROFIT. THE INDIAN ENTITY HAD FILED ITS ENTI RE TRANSACTION IN FORM 3CEB AND NO TPO ADJUSTMENT ORDER HAS BEEN PA SSED AND THE MARGIN OF 10% OF THE COMMISSION PAID TO THE INDIAN ENTITY HAS BEEN ACCEPTED TO BE AT ARMS LENGTH PRIC E. SIMILARLY, IN THE ASSESSMENT YEAR 2004-05, HE SUBMI TTED THAT THE REFERENCE WAS MADE TO THE TPO BUT NO TP ADJUSTME NT HAS BEEN PROPOSED AND THE REMUNERATION OF 10% HAS BEEN ACCEPTED AT ARMS LENGTH PRICE. IN THE CASE OF THE INDIAN COMPANY FOR THE ASSESSMENT YEAR 2003-04, TRANSFER P RICING ORDER HAS BEEN PASSED VIDE ORDER DATED 09.03.2006, WHEREIN IN SO FAR AS RECEIPT OF ADVERTISEMENT COMMISSION IS CONCERNED, SAME HAS TO BE ACCEPTED AT ARMS LENGTH. WHENCE, IN THE CASE OF THE INDIAN ENTITY THE ENTIRE TRANSACTION WITH TH E ASSESSEE HAS TO BE FOUND AT THE ARMS LENGTH, THEN NO FURTHE R ATTRIBUTION CAN BE MADE. IN SUPPORT OF HIS CONTENTI ON THAT WHEN THE TRANSACTION HAS BEEN FOUND TO BE AT ALP TH EN NO FURTHER ATTRIBUTION IS REQUIRED TO BE MADE, HE RELI ED UPON THE FOLLOWING JUDGMENT:- I.T.A. NO.3410 & 3411/DEL/2010 12 SET SATELLITE (SINGAPORE) PTE LTD. V. DEPUTY DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION AND ANOTHER [2008] 307 ITR 205 (BOMBAY HIGH COURT) DIRECTOR OF INCOME-TAX V. BBC WORLDWIDE LTD. [2011] 20 3 TAXMAN 554 (DELHI HIGH COURT) DIRECTOR OF INCOME-TAX (IT) V. B4U INTERNATIONAL HOLDIN GS LTD. [2015] 374 ITR 453 (BOMBAY HIGH COURT) DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) V. MORGA N STANLEY & CO. [2007] 292 ITR 416(SC) GALILEO NEDERLAND BV V. ASSISTANT DIRECTOR OF INCOME-TA X, CIRCLE-I(2), (INTL. TAX), NEW DELHI [2014] 367 ITR 3 19 (DELHI HIGH COURT) ASSISTANT DIRECTOR OF INCOME-TAX-I, NEW DELHI V. E-FUND S IT SOLUTION INC. [2017) 399 ITR 34 (SC) HONDA MOTOR CO. LTD, JAPAN V. ASSTT. DIRECTOR OF INCOME -TAX [CIVIL APPEAL NO (S) 2833 OF 2018 (ARISING OUT OF SL P(C) NO. 25363 OF 2014] (SC) 9. ON THE OTHER HAND, LD. CIT-DR SUBMITTED THAT THE RE HAS BEEN NO TRANSFER PRICING ANALYSIS IN THE CASE OF TH E ASSESSEE IN THE ASSESSMENT YEAR 2003-04 AND ONLY FORM 3CEB W AS SUBMITTED WITHOUT ANY TP STUDY REPORT. THUS, THERE CANNOT BE ANY QUESTION OF ALP OR ATTRIBUTION OF PROFIT. FURTH ER, THE LD. CIT (A) HAS NOTED THAT THE TPO IN THE ASSESSMENT YE AR 2004- 05 HAS NOT TAKEN INTO ACCOUNT FAR ANALYSIS OF THE E NTIRE FUNCTIONS CARRIED OUT BY THE ASSESSEE, BECAUSE ENTI RE WORK RIGHT FROM SOLICITING TO NEGOTIATION OF RATE WITH T HE ADVERTISERS HAS BEEN DONE BY THE INDIAN ENTITY. THUS, ON THIS B ASIS, IT CANNOT BE HELD THAT ENTIRE FAR ANALYSIS HAS BEEN DO NE BY THE TPO FOR ALL THE FUNCTIONS OF THE ASSESSEE CARRIED T HROUGH INDIAN ENTITY. REGARDING PE ISSUE, HE REFERRED TO T HE VARIOUS I.T.A. NO.3410 & 3411/DEL/2010 13 OBSERVATIONS AND THE FINDINGS OF THE LD. CIT (A) AN D POINTED OUT THAT THERE IS CATEGORICAL FINDING AS TO WHY THE INDIAN ENTITY IS A DAPE OF ASSESSEE IN INDIA. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATTER REFERRED TO BEFORE US. IT IS NOT IN DISPUTE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF ACQUIRING AN D ALLOTTING ADVERTISEMENT TIME AND PROGRAMME SPONSORSHIPS IN CONNECTION WITH ESPN AND STAR SPORTS CHANNEL IN TEL EVISION, WHICH IT ACQUIRES THE ADVERTISEMENT TIME FROM ESPN STAR SPORTS SINGAPORE. IT HAS ENTERED INTO WITH REPRESE NTATION AGREEMENT WITH ESPN INDIA APPOINTING IT AS ITS REP RESENTATIVE FOR AD SOLICITING ACTIVITIES AND FOR COLLECTION OF ADVERTISEMENT REVENUE FROM THE INDIAN ADVERTISERS/ AGENCIES. THE ESPN INDIA COLLECTS ADVERTISEMENT CHARGES FROM VARIOUS I NDIAN COMPANIES AND REMITS THE SAME TO THE ASSESSEE AFTER DEDUCTING THE TAX ON THE COMMISSION PAYABLE TO IT A S PER THE AGREEMENT. HOWEVER, BEFORE COMING TO THE ISSUE WHET HER THERE IS A PE OF ASSESSEE IN INDIA EITHER IN THE FORM OF DAPE OR FIXED PLACE, WE WOULD LIKE TO DEAL FIRST, WHETHER THE REM UNERATION PAID BY THE ASSESSEE TO THE INDIAN ENTITY IS AT ARM S LENGTH PRICE OR NOT, BECAUSE, IF THE TRANSACTION BETWEEN T HE ASSESSEE AND THE INDIAN ENTITY ARE AT ARMS LENGTH THEN THER E WOULD NOT BE ANY FURTHER ATTRIBUTION OF PROFIT AND CONSEQUENT LY THE ISSUE OF PE WILL BECOME PURELY ACADEMIC. THE LD. CIT(A) H AS REJECTED THE ASSESSEES CONTENTION THAT THE REMUNERATION PAI D BY THE ASSESSEE TO THE INDIAN ENTITY HAS BEEN FOUND TO BE AT ARMS I.T.A. NO.3410 & 3411/DEL/2010 14 LENGTH PRICE ON THE GROUND THAT THE TPO HAS NOT ANA LYZED THE ENTIRE FUNCTIONS AND RISK CARRIED OUT BY THE INDIAN ENTITY FOR THE ASSESSEE COMPANY. FOR EXAMPLE, HE HAS HELD THAT APART FROM SOLICITING THE ADVERTISEMENT AND COLLECTION OF ADVERTISEMENT REVENUE, THE INDIAN ENTITY IS ALSO CA RRYING OUT MANY OTHER ACTIVITIES RELATING TO TRANSMISSION OF A LL THE ASSESSEES CHANNEL AND ALSO PROVIDING ACCESS TO THE CABLE OPERATORS TO THE DOWNLINK THE CHANNEL THROUGH ACCES S CODE. FROM WHERE HE HAS ATTRIBUTED THESE FUNCTIONS OF THE INDIAN ENTITY FOR THE ASSESSEE FIRM IT IS NOT CLEAR; AND T O HOW THESE FUNCTIONS HAS BEEN CAPTURED BY THE LD. CIT (A), VIS --VIS, THE ASSESSEE AND THE INDIAN ENTITY. SO FAR AS THE ASSES SEE IS CONCERN, IT IS ONLY ACQUIRING AND ALLOTTING ADVERTI SEMENT TIME AND PROGRAMME SPONSORSHIPS FOR WHICH IT HAS APPOINT ED THE ESPN INDIA FOR ADVERTISEMENT SOLICITING ACTIVITY AN D FOR THE COLLECTION OF ADVERTISEMENT REVENUE FROM THE INDIAN ADVERTISERS/ AGENCIES FOR WHICH INDIAN COMPANY WAS COMPENSATED WITH THE COMMISSION @10% OF THE NET BIL LED ADVERTISEMENT REVENUE GENERATED BY IT. THIS IS EVID ENT FROM THE REPRESENTATION AGREEMENT WHICH IS EFFECTIVE F ROM 1 ST APRIL, 2002 WHICH MENTIONS AS UNDER: APPOINTMENT THE REPRESENTATIVE IS HEREBY APPOINTED AS THE EXCLU SIVE INDEPENDENT REPRESENTATIVE IN THE TERRITORY TO SOLI CIT TELEVISION ADVERTISING ON THE CHANNEL AND TO COLLECT AND REMIT ADVERTISEMENT CHARGES TO ESS MAURITIUS AND THE REPRESENTATIVE UNE QUIVOCALLY ACCEPTS SUCH APPOINTMENT. THE REPRESENTATIVE AGREES THAT IT IS AUTHORIZED ONLY TO SOLICIT TELEVISION ADVERTISEMENT IN THE TERRITORY I.T.A. NO.3410 & 3411/DEL/2010 15 AND THAT ANY OTHER SOLICITATIONS (INCLUDING THOSE T HAT ENCOMPASS THE TERRITORY BUT WHICH ARE DEEMED TO BE REGIONAL OR GL OBAL) ARE RESERVED FOR ESS MAURITIUS AND ITS DESIGNEES. THE APPOINTMENT OF THE PROCEDURE CLAUSE READS AS UNDER: PROCEDURES ESS MAURITIUS WILL MAKE AVAILABLE FOR SOLICITING BY THE REPRESENTATIVE, ADVERTISING TIME IN RELATION TO THE CHANNEL. ESS MAURITIUS MAY FROM TIME TO TIME NOTIFY ANY CHANGE, AT ITS DISCRETION, IN THE COMMERCIAL FORMAT OF THE CHANNEL AND THE AMO UNT OF ADVERTISING TIME IN EACH CHANNEL AVAILABLE TO THE R EPRESENTATIVE FOR SOLICITING ADVERTISERS. THE REPRESENTATIVE SHALL NOT SOLICIT ANY EXCLUSIVIT Y, ENTITLEMENTS OR OTHER SPONSOR IDENTIFIED PACKAGES WITHOUT PRIOR WRI TTEN APPROVAL FROM ESS MAURITIUS. AFTER HAVING SOLICITED THE ADVERTISEMENTS, THE REPR ESENTATIVE SHALL FORWARD BY FACSIMILE OR ELECTRONIC MAIL EACH ADVERT ISER'S REQUISITION ('ORDER1 OR 'ADVERTISING ORDER6) FOR TELECAST OF IT S ADVERTISEMENT(S) TO ESS MAURITIUS OR A PERSON DESIGNATED BY IT AND ESS MAURITIUS RESERVES THE RIGHT TO ACCEPT OR REJECT THE AFORESAI D REQUISITION AT ITS SOLE DISCRETION, FOR PURPOSES OF AVOIDANCE OF DOUBT , ANY FAILURE BY ESS MAURITIUS TO INDICATE ITS APPROVAL WITHIN THIRT Y (30) DAYS OF RECEIPT OF A REQUISITION FROM REPRESENTATIVE SHALL BE DEEMED TO BE A REJECTION OF SUCH REQUISITION. ESS MAURITIUS SHALL NOT BE OBLIGATED TO ACCEPT ANY PARTICULAR ADVERTISING ORDER OR ORDERS. ESS MAURITIUS SHALL BE FREE TO ACCEPT OR REJECT ANY SUCH ORDER AS IT MAY DETERMINE IN ITS DI SCRETION, IN LIGHT OF THE TERMS ESS MAURITIUS MAY SET FROM TIME TO TIM E, WHICH MAY INCLUDE THE QUALITY OR NATURE OF THE ADVERTISING CO NTENT OR THE CREDIT STANDING OF AN ADVERTISER OR PROPOSED ADVERTISER AN D IT SHALL NOT BE I.T.A. NO.3410 & 3411/DEL/2010 16 UNDER ANY OBLIGATION OR LIABILITY WHATEVER TO THE R EPRESENTATIVE, THE ADVERTISER OR PROPOSED ADVERTISER, OR ANYONE ELSE W ITH RESPECT TO ANY SUCH ORDER WHICH IT MIGHT REJECT. NO LATER THAN THREE WEEKS BEFORE TELECAST OF ANY AD VERTISEMENT SOLICITED BY THE REPRESENTATIVE, THE REPRESENTATIVE SHALL PROVIDE ESS MAURITIUS OR A PERSON DESIGNATED BY IT WITH 'RE ADY TO BROADCAST' ADVERTISING MATERIAL TO BE INCLUDED IN T HE PROGRAM IN A MANNER WHICH MEETS THE TECHNICAL SPECIFICATIONS PRO VIDED BY ESS MAURITIUS TO THE REPRESENTATIVE, WHICH MAY BE MODIF IED FROM TIME TO TIME DURING THE TERM OF THIS AGREEMENT. 11. THUS, FROM THE AFORESAID TERMS OF THE AGREEMEN T, IT IS SEEN THAT THE INDIAN ENTITY HAS BEEN APPOINTED AS INDEPENDENT REPRESENTATIVE FOR SOLICITING TV AD ON THE CHANNELS AND TO COLLECT AND REMIT ADVERTISEMENT CHA RGES TO ESS MAURITIUS. IT IS ONLY AUTHORIZED TO SOLICIT TEL EVISION ADVERTISEMENT FOR THE INDIAN TERRITORY. THE COMPENS ATION PART CLEARLY SHOWS THAT THE COMMISSION WOULD BE PAID @10 % OF NET BILLED ADVERTISEMENT ACTUALLY COLLECTED BY IT OR RE CEIVED BY ESS MAURITIUS FOR THE ADVERTISEMENT SOLICITED BY TH E INDIAN ENTITY. FROM THE PERUSAL OF THE TRANSFER PRICING OR DER, IN THE CASE OF ESPN INDIA, IT IS SEEN THAT IT CARRIED VARI OUS FUNCTIONS OF OTHER ENTITIES FOR THE ESPN GROUP LIKE, DISTRIBU TION OF ESPN STAR SPORTS CHANNEL IN INDIA FOR WHICH IT COLLECTS SUBSCRIPTION FEES FROM THE CABLE DISTRIBUTORS. TH IS ACTIVITY OF FUNCTION IS NOT CARRIED OUT FOR THE ASSESSEE BUT FO R DIFFERENT GROUP ENTITY. THE TPO HAS HELD THAT ONLY THE MARKET ING SUPPORT SERVICES RELATES TO THE PRESENT ASSESSEE FO R SOLICITING THE ADVERTISEMENT FOR THE CHANNEL FOR WHICH THE IND IAN ENTITY I.T.A. NO.3410 & 3411/DEL/2010 17 PAID 10% WHICH HAS BEEN ACCEPTED BY HIM AFTER DETAI LED ANALYSIS AT ARMS LENGTH PRICE. THE TP ADJUSTMENT W AS MADE WITH REGARD TO ITS OTHER ACTIVITIES FOR THE OTHER E NTITIES WHICH ARE NOT RELATED TO THE ASSESSEE AT ALL. THUS, ONLY FUNCTION CARRIED OUT BY THE INDIAN ENTITY IS THAT IT IS DOIN G SOLICITATION AND COLLECTION OF ADVERTISEMENT REVENUE AND REMITTI NG THE SAME TO THE ASSESSEE. QUA THIS FUNCTION, THE REMUNERATION PAID BY THE ASSESSEE TO THE INDIAN ENTITY WHICH IS SUBJECTED TO TAX IN INDIA IS @10% WHICH HAS BEEN ACCEPTED TO BE AT ARMS LENGTH. NO OTHER FUNCTIONS ARE CARRIED OUT OR THER E ARE ANY OTHER TRANSACTION BY THE INDIAN ENTITY VIS--VIS TH E ASSESSEE AND ALL OTHER FUNCTIONS OF THE ESPN INDIA RELATE TO DISTRIBUTION OF THE CHANNEL OF OTHER ENTITIES FOR W HICH IT IS PAID SUBSCRIPTION FEE. IF ONE GOES BY THE OVERALL REVE NUE EARNED BY THE INDIAN ENTITY, THEN TRANSACTION WITH THE ASSESS EE IS MUCH LESS THAN 5%, AS NOTED BY THE TPO IN HIS ORDER THE FOLLOWING INTERNATIONAL TRANSACTION OF INDIAN ENTITY WITH ITS AES:- S. NO. INTERNA TIONAL TRANSACTION METHOD VALUE (IN RS.) 1. REMITTANCE OF SUBSCRIPTION FEE TNMM 1,088,854,893 2. RECEIPT OF ADVERTISEMENT COMMISSION TNMM 42,816,391 THE RECEIPT OF ADVERTISEMENT COMMISSION ONLY HAS BE EN RECEIVED FROM THE ASSESSEE. THUS, IF THE INDIAN ENT ITY HAS BEEN REMUNERATED AT ARMS LENGTH PRICE, THEN NO FUR THER I.T.A. NO.3410 & 3411/DEL/2010 18 ATTRIBUTION OF PROFIT CAN BE MADE. THIS PROPOSITION IS WELL SETTLED AND UPHELD BY THE HON'BLE SUPREME COURT IN THE CASE OF DIT VS. MORGAN STANLEY (SUPRA) WHICH HAS BEEN REITERATED AND REAFFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF ADIT VS. E-FUNDS IT SOLUTION, (2017) 399 ITR 34 (SC ) . APART FROM THAT HON'BLE DELHI HIGH COURT IN THE CAS E OF GALELIO NEDERLAND BV VS. ADIT, (2014) 367 ITR 319 ( DEL.) . MOREOVER IN THE JUDGMENT CITED AND RELIED UPON BY TH E LEARNED SENIOR COUNSEL, WE FOUND THAT IN ALL THESE CASES IT HAS BEEN HELD THAT IF THE ASSESSEE HAS REMUNERATED THE AGENT AT ARMS LENGTH, THEN NO FURTHER PROFIT OF THE ASSE SSEE COULD BE TAXED IN INDIA OTHER THAN THE PROFIT EARNED BY T HE AGENT. ALL THESE JUDGMENTS ARE BASED ON THE PRINCIPLE LAID DOW N BY THE HON'BLE SUPREME COURT IN THE CASE OF MORGAN STANLEY (SUPRA). THUS, WE HOLD THAT, ONCE THE PAYMENT MADE BY THE AS SESSEE TO THE INDIAN ENTITY HAVE BEEN ACCEPTED TO BE AT AR MS LENGTH PRICE THEN NO FURTHER ATTRIBUTION IS REQUIRED TO BE DONE. ACCORDINGLY, THE ADDITION MADE ON ACCOUNT OF ATTRIB UTION OF PROFIT IS DIRECTED TO BE DELETED. 12. IN VIEW OF THE AFORESAID FINDINGS, THE ISSUE O F PE HAS BECOME PURELY ACADEMIC. 13. ADMITTEDLY, SIMILAR FACTS ARE PERMEATING I N ASSESSMENT YEAR 2004-05 ALSO, THEREFORE, OUR FINDING GIVEN ABO VE WILL APPLY MUTATIS MUTANDIS FOR ASSESSMENT YEAR 2004-05 ALSO. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. I.T.A. NO.3410 & 3411/DEL/2010 19 14. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH AUGUST, 2018. SD/- SD/- [O.P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 20 TH AUGUST, 2018 PKK: