DDIT (INTERNATIONA I.T) Rg. - 2(1), MUMBAI V. M/s. SET SATELITE (SINGAPORE) PTE. LTD., MUMBAI

ITA 5442/MUM/2005

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8644 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 05-01-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 12-08-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Assessee Lawyers: P J PARDIWALA
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction
• Section: 234B

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER. I.T.A. NO. 5352/MUM/2005. ASSESSMENT YEAR : 2002-03. AND C.O.NO. 174/MUM/2009 (IN ITA NO. 5442/MUM/2005) ASSESSMENT YEAR : 2002-03. SET SATELLITE (SINGAPORE) PTELTD., DEPUTY DIRECTOR OF INCOME-TAX, C/O RSM & CO., AMBIT RSM HOUSE, VS. (INT ERNATIONAL TAXATION), 449, SENAPATI BAPAT MARG, RANGE-2(1), LOWER PAREL, MUMBAI 400013. MUMBAI. PAN APPELLANT/CROSS OBJECTOR RESPONDENT. I.T.A . NO. 5442/MUM/2005 ASSE SSMENT YEAR : 2002-03. DEPUTY DIRECTOR OF INCOME-TAX, SET SATELITE (SINGAPORE) PTE LTD. (INTERNATIONAL TAXATION), V S. MUMBAI. RANGE-2(1), MUMBAI. APPELLANT RESPONDENT. ASSESSEE BY : SHRI P.J.PARDIWALA. DEPARTMENT BY : SHRI NARENDRA SINGH. . O R D E R PER J. SUDHAKAR REDDY, A.M. : THESE ARE CROSS APPEALS FOR THE ASSESSMENT YEA R 2002-03 AND ARE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-XXXI, MUMBAI DATED 31 ST MAY, 2005. THE 2 ASSESSEE ALSO FILED A CROSS OBJECTION IN THE REVENU E APPEAL IN ITA NO. 5442/MUM/2005. BOTH THE APPEALS AND THE CROSS OBJEC TION ARE HEARD TOGETHER AND DISPOSED OF BY WAY OF THIS COMMON ORDER FOR THE SAK E OF CONVENIENCE. 2. BOTH THE PARTIES SUGGESTED THAT THE REVENUES AP PEAL BE DISPOSED OF INITIALLY. THUS WE FIRST TAKE UP THE REVENUES APPEAL IN ITA N O. 5442/MUM/2005. 3. FACTS IN BRIEF: THE ASSESSEE IS A FOREIGN COMPANY ENGAGED IN THE B USINESS OF ACQUIRING TELEVISION PROGRAMME AND MOTION PICTURES AND EXHIBI TING/TRANSMITTING THE SAME ON ITS TELEVISION CHANNELS FROM SINGAPORE. THE ASSESSE E IS A TAX RESIDENT OF SINGAPORE IN TERMS OF ARTICLE 4 OF THE DOUBLE TAXATION AVOIDA NCE AGREEMENT BETWEEN INDIA AND SINGAPORE (DTAA OR THE TREATY). DURING ASSESSME NT YEAR 2002-03, THE ASSESSEE DERIVED ADVERTISEMENT REVENUES FROM INDIAN AND INTERNATIONAL ADVERTISERS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE CAP TIONED YEAR ON OCTOBER 31, 2002 DECLARING TAXABLE INCOME AT NIL. 4. THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS BEFO RE THE AO: A) THE COMPANY IS INCORPORATED AND RESIDENT OF SINGAPO RE FOR TAX PURPOSES. B) THE ASSESSEE IS IN THE BUSINESS OF CREATING AND OPE RATING CABLE AND SATELLITE TELEVISION CHANNELS, MARKETING AND DISTRI BUTION OF TELEVISION CHANNELS AND RELATED ACTIVITIES. C) DURING THE YEAR, THE ASSESSEE HAS OPERATED TWO CHAN NELS SET AND SET MAX. IT WAS ALSO ENGAGED IN THE MARKETING OF AIRTIM E OF THE FOLLOWING TELEVISION CHANNELS: AXN AND CNBC INDIA. D) FOR THE PURPOSE OF MARKETING THE CHANNELS, THE ASSE SSEE HAS APPOINTED SET INDIA AS A NON EXCLUSIVE ADVERTISING AND SALES AGENT FOR CANVASSING AIRTIME FOR SET, SET MAX, AXN AND CNBC INDIA CHANNE LS. THE 3 ASSESSEE HAS ALSO GRANTED RIGHTS TO SET INDIA TO DI STRIBUTE, COLLECT AND RETAIN THE SUBSCRIPTION REVENUES OF SET, SET MAX AN D AXN CHANNELS WITH OBLIGATION TO INCREASE REACH OF CHANNELS. E) THE ASSESSEE BELIEVES THAT IT DOES NOT HAVE, A PE I N INDIA AS PER ARTICLE 5 OF THE DTAA BETWEEN INDIA AND SINGAPORE. ACCORDINGL Y, THE BUSINESS INCOME OF THE ASSESSEE IS NOT TAXABLE IN INDIA UNDE R ARTICLE 7 OF THE DTAA. F) WITHOUT PREJUDICE, ASSUMING BUT NOT ADMITTING THAT THE ASSESSEE HAS A PE IN INDIA IN THE NATURE OF AGENCY PE (I.E. SET INDIA PVT. LTD.), AN ARMS LENGTH REMUNERATION IS BEING PAID BY THE ASSESSEE T O SET INDIA. THIS PAYMENT EXTINGUISHES THE TAX LIABILITY OF THE ASSES SEE IN INDIA. RELIANCE HAS BEEN PLACED ON CIRCULAR NO. 23 DATED 23/07/196 9. G) WITHOUT PREJUDICE TO THE ABOVE, IT IS FURTHER SUBMI TTED THAT THE ASSESSEE HAS SUFFER A LOSS AS PER THE BOOKS OF ACCOUNTS AND THE LOSS ATTRIBUTABLE TO THE INDIAN PE SHOULD BE ALLOWED TO BE CARRIED FORWA RD. 5. THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THAT : 1) THE ASSESSEE HAS A PE IN INDIA IN THE FORM OF SET INDIA LTD. WHICH IS AN AGENCY PE. 2) CBDT CIRCULAR NO. 23 DATED 23-7-1969 IS NOT APPLICA BLE, AS THE FACTS AND THE ISSUES INVOLVED ARE SIMILAR TO THOSE IN THE ASS ESSMENT YEARS 1999- 2000, 2000-01 AND 2001-02 AND THE CIT(APPEALS) IN T HOSE YEARS HAD HELD THAT THE CIRCULAR NO. 23 IS NOT APPLICABLE. 3) THAT SET INDIA IS A DEPENDENT AGENT OF THE ASSESSEE AND CONSTITUTES PE UNDER ARTICLE 5(8) OF THE PE. 4) ON THE ARGUMENT THAT THE PAYMENT MADE TO SET INDIA, IS AT AN ARMS LENGTH AND HENCE NO FURTHER PROFITS CAN BE TAXED IN INDIA AS PER ARTICLE 7(2). 6. THE AO REFERRED TO THE TRANSFER PRICING OFFICER S ORDER, AND AS THE T.P.O. HELD THAT THE AMOUNT ACTUALLY PAID IS FAR IN EXCESS OF THE ARMS LENGTH COMPENSATION PAYABLE FOR MARKETING AND IN VIEW OF THIS FINDING, CONCLUDED THAT THE EARLIER DECISIONS OF THE CIT(APPEALS) ON THIS ISSUE DOES NO T APPLY TO THIS YEAR. AFTER REJECTING THE OTHER CONTENTIONS, THE AO ASSESSED TO TAX 15% OF THE NET AD REVENUE IN THE HANDS OF THE ASSESSEE. FURTHER, THE ENTIRE D ISTRIBUTION REVENUES RETAINED BY SET INDIA IN INDIA AMOUNTING TO RS.47,66,19,746/- H AS BEEN ASSESSED TO TAX IN THE 4 HANDS OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE CARR IED THE MATTER IN APPEAL. THE FIRST APPELLATE AUTHORITY GRANTED PART RELIEF. FURT HER AGGRIEVED, BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL. 7. THE REVENUES APPEAL IS ON THE FOLLOWING GROUNDS : (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE AND I N LAW, THE CIT(A) ERRED IN HOLDING THAT SINCE THE AGENT I.E. SET INDI A P. LTD. HAS A GOOD PROFITABILITY RECORD, IT CAN BE SAID THAT THE ASSES SEE HAS REMUNERATED THE AGENT ON AN ARMS LENGTH BASIS AND BASED ON THE PRO VISION OF ARTICLE 7(2), THE OCED COMMENTARY ON THE SUBJECT AND THE OTHER CO NTENTIONS MADE, NO FURTHER PROFITS SHOULD BE TAXED IN INDIA IN RESPECT OF AD REVENUES FROM ITS OWN CHANNEL; IGNORING THE FACTS: (I) THAT THE ASSESSEE HAS DEPENDENT AGENCY PE IN INDIA IN THE FORM OF SET INDIA P. LTD.; (II) THAT THE ASSESSEES INCOME IS ASSESSABLE AS BUSINES S INCOME WITHIN THE MEANING OF ARTICLE 7 OF THE INDO-SINGAPO RE DTAA. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE AND I N LAW, THE CIT(A) ERRED IN HOLDING THAT AD REVENUES PERTAINING TO AXN CHANNEL ARE NOT TAXABLE IN INDIA ON THE GROUND THAT ASSESSEE HAS PA ID AN ARMS LENGTH SERVICE FEE FOR THE SERVICES RENDERED BY ITS AGENT I.E. SET INDIA P. LTD. AND BASED ON THE PROVISIONS OF SECTION 9(1)(I) OF T HE ACT, ARTICLE 7(1) OF DTAA AND THE RATIO OF CIRCULAR NO. 23 DATED 23/7/69 , NO INCOME IN RESPECT THEREOF, IS TAXABLE IN INDIA, IGNORING THE FACT THAT : (I) THOUGH THE PURCHASE AND SALE OF AIR TIME IS EFFECTE D IN SINGAPORE, THE RECEIPT IN RESPECT OF BROADCASTING ADVERTISEMEN T IS IN THE TERRITORY OF INDIA. (II) THE INCOME IN RESPECT OF OR IN CONNECTION WITH THE RELAY OF ADVERTISEMENTS ACCRUES IN INDIA; (III) THE ASSESSEE HAS A PE IN INDIA IN THE FORM OF SET I NDIA PVT. LTD. AND, THEREFORE, ADVERTISEMENT REVENUE FROM AXN CHAN NEL IS TAXABLE IN INDIA AS BUSINESS INCOME. (3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) HAS ERRED, INTERALIA, IN NOT APPRECIATING TH AT : 5 (I) THE ASSESSEE HAD A BUSINESS CONNECTION IN INDIA AND THE INCOME IN THE FORM OF SUBSCRIPTION REVENUE WAS TAXABLE U NDER SECTION 9 OF THE INCOME TAX ACT, 1961 AND; (II) THE ASSESSEE HAS GOT THE RIGHT TO RECEIVE THE CONSI DERATION FOR SUBSCRIPTION WHICH HAS BEEN FORGONE IN FAVOUR OF SE T INDIA PVT. LTD. DOES NOT CHANGE THE CHARACTER OF TAXABILI TY OF THE INCOME IN THE HANDS OF THE ASSESSEE. (4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) HAS ERRED IN HOLDING THAT THE ASSESSEE HAD NO LIABI LITY U/S 234B OF THE I.T. ACT ARISE, IGNORING THE FACT : (I) THAT SINCE THE TAX DEDUCTED AT SOURCE WAS NOT ADEQU ATE TO MEET THE ENTIRE TAX LIABILITY, IT WAS OBLIGATION ON THE PART OF THE ASSESSEE TO MAKE THE DEFICIT GOOD BY MAKING THE PAY MENTS TOWARDS THE ADVANCE TAX; (II) THAT SINCE THE ASSESSEE FAILED TO PAY THE ADVANCE T A, THE ASSESSING OFFICER WAS RIGHT IN CHARGING INTEREST U/ S 234B OF THE I.T. ACT, 1961. 8. THE LEARNED DR, MR. NARENDRA SINGH, SUBMITTED TH AT THE AO RIGHTLY HELD THAT THE ASSESSEE HAS A DEPENDANT AGENCY PE IN INDI A, IN THE FORM OF SET INDIA PVT. LTD. HE SUBMITTED THAT THE ASSESSEES INCOME I S ASSESSABLE AS BUSINESS INCOME WITHIN THE MEANING OF ARTICLE 7 OF THE INDO-SINGAPO RE DTAA. HIS CONTENTION IS THAT THE CIRCULAR RELIED UPON BY THE CIT(APPEALS) H AS BEEN WITHDRAWN BY THE BOARD VIDE CIRCULAR NO. 7/2009 DATED 22-10-2009, AS THE BOARD NOTICED THAT THE INTERPRETATION OF THE CIRCULAR BY SOME OF THE TAX P AYERS TO CLAIM RELIEF, IS NOT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 9 OF THE INCOME-TAX ACT OR THE INTENTION BEHIND THE ISSUANCE OF THE CIRCULAR. THUS HE SUBMIT S THAT THOUGH THE ISSUE HAS BEEN DEALT BY THE TRIBUNAL IN THE EARLIER ASSESSMENT YEA RS IN THE ASSESSEES OWN CASE, IN VIEW OF THE WITHDRAWAL OF THE CIRCULAR AND IN VIEW OF THE BASIS FOR WITHDRAWAL OF THE CIRCULAR, THE ORDER OF THE CIT(APPEALS) HAS TO BE SET SIDE AND THAT OF THE AO BE UPHELD. 6 9. ON GROUND NO.2, THE LEARNED DR SUBMITTED SIMILA R ARGUMENTS, AS THAT SUBMITTED FOR GROUND NO.1 APPLY, THE ONLY DIFFERENC E BEING THAT AD REVENUES PERTAINED TO AXN CHANNEL. 10. ON GROUND NO.3, THE LEARNED DR SUBMITTED THAT S UBSCRIPTION REVENUES WAS TAXABLE U/S 9 OF THE INCOME-TAX ACT AS THE ASSESSEE , HAD A BUSINESS CONNECTION IN INDIA. HE REFERRED TO THE ORDER OF THE AO ON THIS I SSUE AND SUPPORTED THE SAME. 11. THE LEARNED SENIOR COUNSEL, MR. PERCY PARDIWALA , ON THE OTHER HAND, SUBMITTED THAT THE ISSUE WHETHER THE ASSESSEE HAS A DEPENDANT AGENT IN INDIA OR NOT, NEED NOT BE NECESSARILY BE ADJUDICATED UPON BY THE TRIBUNAL IN THIS CASE, FOR THE REASON THAT SET INDIA HAS BEEN REMUNERATED BY THE A SSESSEE AT A PRICE WHICH IS MORE THAN THE ARMS LENGTH PRICE DETERMINED BY THE TPO AND UNDER THOSE CIRCUMSTANCES, THERE WOULD BE NO PROFIT WHATSOEVER ATTRIBUTABLE TO THE PE IN THE CASE OF THE ASSESSEE. HE BROUGHT TO THE NOTICE OF T HE BENCH THE ORDER OF THE TPO WHEREIN THE TPO HAS HELD THAT THE ARMS LENGTH COMP ENSATION PAYABLE FOR MARKETING IS ONLY R.22.93 CRORES (APPROX.) AND WHER EAS THE AMOUNT ACTUALLY PAID IS RS.31.56 CRORES (APPROX.). HE CONTENDED THAT THE IS SUE IS COVERED IN HIS FAVOUR BY THE ASSESSEES OWN CASE IN A JUDGMENT OF THE JURISD ICTIONAL HIGH COURT IN THE CASE OF SET SATELITE (SINGAPORE) PTE. LTD. VS. DDIT AND OTHERS (2008) 107 ITR 205 (BOM.). HE SPECIFICALLY REFERRED TO PAGE 220 WHERE AT PAGINATION 22, THE HONBLE COURT HELD THAT IF THE CORRECT ARMS LENGTH PRICE I S APPLIED AND PAID, THEN NOTHING FURTHER WOULD BE LEFT TO TAX IN THE HANDS OF THE FO REIGN ENTERPRISE. HE FURTHER REFERRED TO THE ORDER OF THE TRIBUNAL IN THE ASSESS EES OWN CASE FOR THE ASSESSMENT YEARS 2000-01 AND 2001-02 IN ITA NO.3534/MUM/2004 E TC., L-BENCH ORDER, DATED 9 TH JULY, 2005 AND SUBMITTED THAT THE ISSUE IS COVERED IN HIS FAVOUR. ON THE WITHDRAWAL OF THE CIRCULAR OF THE BOARD, HE SUBMITT ED THAT THE CIRCULAR WAS WITHDRAWN WITH EFFECT FROM 22-10-2009 AND HENCE IS NOT APPLICABLE TO THESE 7 ASSESSMENT YEARS. HE FURTHER SUBMITTED THAT THE DEC ISIONS OF THE COURTS ARE INDEPENDENT OF THE CIRCULAR. HE RELIED ON THE DECIS ION OF THE HONBLE SUPREME COURT COURT IN THE CASE OF DIT (INTERNATIONAL TAXAT ION) VS. MORGAN STANLEY AND CO. INC. 292 ITR 416 AND DREW OUR ATTENTION TO PAGE 440 FOR THIS PROPOSITION. 12. ON GROUND NO.3, THE LEARNED COUNSEL SUBMITTED T HAT THE ENTIRE SUBSCRIPTION REVENUES ARE ASSESSED IN THE HANDS OF THE ASSESSEE, THOUGH THE SAME HAVE BEEN OFFERED AS INCOME OF SET INDIA LTD. AND HAVE ALSO B EEN ASSESSED AS SUCH. HE VEHEMENTLY CONTENDED THAT THIS IS A CASE OF DOUBLE ADDITION AND THE INCOME NEVER BELONGED TO THE ASSESSEE AND HENCE CANNOT BE ASSESS ED AS SUCH. HE TOOK THIS BENCH TO PAGE 39 PARA 6 OF THE CIT(APPEALS) ORDER AND SP ECIFICALLY RELIED AT PARA 6.6 AND 6.7. 13. ALTERNATIVELY HE SUBMITTED THAT IF SUBSCRIPTION INCOME IS CONSIDERED AS BUSINESS INCOME OF THE ASSESSEE, THEN THE PAYMENT M ADE TO SET INDIA, WOULD BE THE EXPENDITURE OF THE ASSESSEE AND THE NET RESULT WOULD BE THAT NO INCOME IS TAXABLE IN THE HANDS OF THE ASSESSEE. HE SUBMITTED THAT THE ASSESSEE HAD NO RIGHT TO RECEIVE THESE SUBSCRIPTION AND HENCE THE QUESTION O F TREATING IT AS THE ASSESSEES INCOME DOES NOT ARISE. 14. MR. PARDIWALA POINTED OUT THAT FOR THE ASSESSME NT YEAR 1999-2000, THE REVENUE HAS RAISED AN ADDITIONAL GROUND AND THE TRI BUNAL HAS NOT ADJUDICATED THIS GROUND. WHEN THE MISCELLANEOUS APPLICATION WAS FILE D, THE BENCH DISMISSED THE SAME BY OBSERVING THAT THE ORDER OF THE TRIBUNAL ME RGED WITH THE ORDER OF THE BOMBAY HIGH DATED 22 ND AUGUST, 2008 AND UNDER THOSE CIRCUMSTANCES, THE QUESTION OF RECTIFICATION DOES NOT ARISE. HE FURTHE R SUBMITTED THAT THE CIT(APPEALS) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE DURING THE ASSESSMENT YEAR 2000-01 AND THE DEPARTMENT DID NOT FILE AN APPEAL. FOR THE ASSE SSMENT YEAR 2001-02, THE AO 8 HIMSELF HAS NOT MADE THIS ADDITION, THOUGH NOW THE SAME IS REOPENED FOR MAKING THIS ADDITION. HE SUBMITTED THAT THE FIRST APPELLAT E AUTHORITY HAS GIVEN A CATEGORICAL FINDING THAT THIS IS NOT A ROYALTY BUT IS ONLY THE BUSINESS INCOME AND POINTED OUT THAT THE REVENUE HAS NOT CHALLENGED THIS FINDING OF THE CIT(APPEALS). UNDER THESE CIRCUMSTANCES, HE SUBMITS THAT NO INCOME CAN BE TAX ED IN THE HANDS OF THE ASSESSEE ON THE ISSUE OF SUBSCRIPTION REVENUE. 15. COMING TO GROUND NO.4, THE LEARNED COUNSEL SUBM ITTED THAT THE ISSUE IS COVERED IN HIS FAVOUR BY THE DECISION OF THE JURISD ICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE IN INCOME TAX APPEAL NO. 814 OF 2009 FOR THE ASSESSMENT YEAR 1999-2000 JUDGMENT DATED 17 TH JUNE, 2009. 16. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPE RS ON RECORD AND THE ORDERS OF THE AUTHORITIES AS WELL AS THE CASE LAWS CITED, WE HOLD AS FOLLOWS. 17. ON GROUND NO.1, THE FIRST APPELLATE AUTHORITY A T PARA 4.9 AND 4.10 HELD AS FOLLOWS : 4.9 I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS M ADE BY THE A.O. IN THE ASSESSMENT ORDER AND THE CONTENTIONS OF THE APPELLA NT. I NOTE THAT THIS GROUND IS SIMILAR TO THAT RAISED IN THE APPEAL FOR ASSESSMENT YEARS 1999- 2000, 2000-01 AND 2001-02, WHICH HAVE BEEN DECIDED BY ME VIDE ORDER NO. CIT(A)XXXI/ DDIT(IT)-158/02-03/03-04 DATED 15 TH OCTOBER, 2003, ORDER NO. CIT(A)XXXI/DDIT(IT)2(1)-98/03-04 DATED 8 TH MARCH 2004 AND ORDER NO. CIT(A)XXXI/DDIT(IT)2(1)/IT-346/03-04/04-05 DATE D 29 TH OCTOBER, 2004, WHEREIN I HAVE HELD THAT IF THE SERVICE FEE P AID BY THE APPELLATE TO SET INDIA FOR MARKETING OF AIRTIME IS ON AN ARMS L ENGTH BASIS, THEN SUCH AN ARMS LENGTH REMUNERATION EXTINGUISHES THE TAX LIA BILITY OF THE APPELLANT IN INDIA VIS--VIS AD REVENUES, HAVING REGARD TO ARTIC LE 7(2) OF THE TREATY. I NOTE THAT THE MARKETING SERVICES PROVIDED BY SET IN DIA DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEARS 1999-2000, 2000-0 1 AND 2001-02 ARE THE SAME AS THOSE PROVIDED IN THE PREVIOUS YEAR RELEVAN T TO ASSESSMENT YEAR 2002-03 AND THERE IS NO CHANGE IN THE FACTS THEREIN . CONSIDERING THE 9 PROFITABILITY RECORD OF SET INDIA, THE POSITION OF THE APPELLANT THAT IT HAS PAID AN ARMS LENGTH REMUNERATION AND THE CONTENTIO NS OF THE A.O. BASED ON THE TRANSFER PRICING OFFICERS ORDER DATED 24 TH MARCH, 2005, THAT MORE THAN AN ARMS LENGTH FEE IS PAID, I HOLD THAT THE APPELL ANT CANNOT BE SAID TO HAVE NOT PAID SET INDIA ON AN ARMS LENGTH BASIS. FURTHE R, IN LIGHT OF THE SUBMISSIONS MADE BY THE APPELLANT AND THE DETAILED REASONING GIVEN IN MY ORDER FOR ASSESSMENT YEAR 1999-2000, I HOLD THAT PA YMENT OF ARMS LENGTH REMUNERATION BY THE APPELLANT TO SET INDIA EXTINGUI SHES ITS TAX LIABILITY IN INDIA. THIS VIEW IS ALSO SUPPORTED BY THE RECENT CI RCULAR NO. 5 DATED SEPTEMBER 28, 2005 ISSUED BY THE CBDT IN THE CONTEX T OF BPO TAXATION, WHEREIN IT HAS BEEN CATEGORICALLY STATED THAT PROFI TS TO BE ATTRIBUTED TO A PE IN INDIA HAVE TO BE COMPUTED ON THE BASIS OF ARMS LEN GTH PRINCIPLE. SINCE, I HAVE ALREADY HELD THAT PAYMENT OF AN ARMS LENGTH RE MUNERATION BY THE APPELLANT TO SET INDIA, EXTINGUISHES ITS TAX LIABIL ITY IN INDIA, I DO NOT CONSIDER IT NECESSARY TO ADJUDICATE UPON WHETHER TH E APPELLANT HAS A PE IN INDIA. I MAY ALSO ADD THAT SINCE THE A.O. HAS HELD (BASED ON TRANSFER PRICING OFFICERS ORDER) THAT MORE THAN ARMS LENGTH REMUNE RATION IS PAID TO SET INDIA, THERE IS NO CASE FOR ANY TAXATION IN THE HAN DS OF THE APPELLANT, SINCE EVEN WHERE AN ARMS LENGTH REMUNERATION IS PAID, TH E TAX LIABILITY OF THE PRINCIPAL NON-RESIDENT GETS EXTINGUISHED IN INDIA, IN TERMS OF ARTICLE 7(2) OF THE TREATY REFERRED ABOVE. 4.10. ACCORDINGLY, I HOLD THAT THE INCOME EARNED BY THE APPELLANT BY WAY OF AD REVENUES FROM ITS OWN CHANNELS (INCLUDING THE INCOME BY WAY OF AD REVENUES ENHANCED BY THE A.O. PURSUANT TO TRANSFER PRICING OFFICERS ORDER UNDER SECTION 92CA(3) OF THE I.T. ACT IS NOT TAXABL E IN INDIA. THIS GROUND IS ACCORDINGLY HELD IN FAVOUR OF THE APPELLANT. 18. THIS BENCH OF THE TRIBUNAL IN THE ASSESSEES OW N CASE REPORTED AT 106 ITD 175 FOR THE ASSESSMENT YEAR 1999-2000 HELD THAT AS PER ARTICLE 7 OF DTAA, WHAT IS TO BE TAXED, IS INCOME OF THE FOREIGN ENTERPRISE AT TRIBUTABLE TO THE PE IN THE HOST COUNTRY. AGENCY REMUNERATION PAID BY FOREIGN ENTERP RISE TO ITS DEPENDANT AGENT IS NOT ITS INCOME BUT AN EXPENDITURE. IT CANNOT BE SAI D THAT, BY PAYMENT OF TAX LIABILITY BY DEPENDANT AGENT, TAX LIABILITY OF FOREIGN ENTERP RISE IS ALSO DISCHARGED. IN THE CASE ON HAND, THE TRANSFER PRICING OFFICER HAS HELD THAT THE ASSESSEE HAS PAID AN AMOUNT WHICH IS MORE THAN THE ARMS LENGTH PRICE DETERMINE D BY HIM. IN SUCH 10 CIRCUMSTANCES, IT CANNOT BE SAID THAT THERE IS ANY INCOME ATTRIBUTABLE TO THE DEPENDANT PE, IF ANY. 19. COMING TO THE ARGUMENT ON THE WITHDRAWAL OF THE CIRCULAR IN QUESTION, WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF DIT (INTERNATIONAL NATIONAL) VS. MORGAN STANELY AND CO. INC. 292 ITR 416 AT PAGE 440 TO 442, PARA 29, 30 AND 31, HELD AS FOLLOWS : 29. AS REGARDS DETERMINATION OF PROFITS ATTRIBUTAB LE TO A PE IN INDIA (MSAS) IS CONCERNED ON THE BASIS OF ARMS LENGTH PR INCIPLE WE HAVE QUOTED ART. 7(2) OF THE DTAA. ACCORDING TO THE AAR WHERE T HERE IS AN INTERNATIONAL TRANSACTION UNDER WHICH A NON-RESIDENT COMPENSATES A PE AT ARMS LENGTH PRICE, NO FURTHER PROFITS WOULD BE ATTRIBUTABLE IN INDIA. IN THIS CONNECTION, THE AAR HAS RELIED UPON CIRCULAR NO. 23 OF 1969 ISSUED BY CBDT AS WELL AS CIRCULAR NO. 5 OF 2004 ALSO ISSUED BY CBDT. THIS IS THE KEY QUESTION WHICH ARISES FOR DETERMINATION IN THESE CIVIL APPEALS. 30. TO ANSWER THE ABOVE QUESTION WE QUOTE ART. 7 OF THE UN MODEL CONVENTION WHICH READS AS UNDER : 'ARTICLE 7 ATTRIBUTION OF BUSINESS PROFITS ARTICLE 7 OF THE UN MODEL CONVENTION STATES AS UNDE R : BUSINESS PROFITS 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING ST ATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CARRIES ON BUSINES S IN THE OTHER CONTRACTING STATE THROUGH A PE SITUATED THEREIN. IF THE ENTERPR ISE CARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF THE ENTERPRISE MAY BE TAX ED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO (A) THAT PE; (B) SALES IN THAT OTHER 11 STATE OF GOODS OR MERCHANDISE OF THE SAME OR SIMILA R KIND AS THOSE SOLD THROUGH THAT PE; OR (C) OTHER BUSINESS ACTIVITIES C ARRIED ON IN THAT OTHER STATE OF THE SAME OR SIMILAR KIND AS THOSE EFFECTED THROU GH THAT PE, 2. SUBJECT TO THE PROVISIONS OF PARA 3, WHERE AN EN TERPRISE OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PE SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING STATE BE A TTRIBUTED TO THAT PE THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WE RE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIE S UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY OR INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PE 3. IN THE DETERMINATION OF THE PROFITS OF A PE, THE Y SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURP OSES OF THE BUSINESS OF THE PE INCLUDING EXECUTIVE AND GENERAL ADMINISTRATI VE EXPENSES SO INCURRED, WHETHER IN THE STATE IN WHICH THE PE IS SITUATED OR ELSEWHERE. HOWEVER, NO SUCH DEDUCTION SHALL BE ALLOWED IN RESPECT OF AMOUN TS, IF ANY, PAID (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXP ENSES) BY THE PE TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER O FFICES, BY WAY OF ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE US E OF PATENTS OR OTHER RIGHTS, OR BY WAY OF COMMISSION, FOR SPECIFIC SERVICES PERF ORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENT ERPRISE, BY WAY OF INTEREST ON MONEYS LENT TO THE PE. LIKEWISE, NO ACC OUNT SHALL BE TAKEN, IN THE DETERMINATION OF THE PROFITS OF A PE, FOR AMOUNTS C HARGED (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES), BY THE P E TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS O R OTHER RIGHTS, OR BY WAY OF COMMISSION FOR SPECIFIC SERVICES PERFORMED OR FOR M ANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE BY WAY OF INTEREST ON MONEYS LENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER O FFICES. 4. INSOFAR AS IT HAS BEEN CUSTOMARY IN A CONTRACTIN G STATE TO DETERMINE THE PROFITS TO BE ATTRIBUTED TO A PE ON THE BASIS OF AN APPORTIONMENT OF THE TOTAL PROFITS OF THE ENTERPRISE TO ITS VARIOUS PARTS, NOT HING IN PARA 2 SHALL PRECLUDE THAT CONTRACTING STATE FROM DETERMINING THE PROFITS TO BE TAXED BY SUCH AN APPORTIONMENT AS MAY BE CUSTOMARY; THE METHOD OF AP PORTIONMENT ADOPTED SHALL, HOWEVER, BE SUCH THAT THE RESULT SHALL BE IN ACCORDANCE WITH THE PRINCIPLES CONTAINED IN THIS ARTICLE. 5. FOR THE PURPOSES OF THE PRECEDING PARAGRAPHS, TH E PROFITS TO BE ATTRIBUTED 12 TO THE PE SHALL BE DETERMINED BY THE SAME METHOD YE AR-BY-YEAR UNLESS THERE IS GOOD AND SUFFICIENT REASON TO THE CONTRARY. 6. WHERE PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES OF THIS CONVENTION, THEN THE PROVISI ONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISIONS OF THIS ARTICLE. NOTE : THE QUESTION OF WHETHER PROFITS SHOULD BE AT TRIBUTED TO A PE BY REASON OF THE MERE PURCHASE BY THAT PE OF GOODS AND MERCHA NDISE FOR THE ENTERPRISE WAS NOT RESOLVED. IT SHOULD THEREFORE BE SETTLED IN BILATERAL NEGOTIATIONS.' 31. ARTICLE 7 OF THE UN MODEL CONVENTION INTER ALIA PROVIDES THAT ONLY THAT PORTION OF BUSINESS PROFITS IS TAXABLE IN THE SOURC E COUNTRY WHICH IS ATTRIBUTABLE TO THE PE. IT SPECIFIES HOW SUCH BUSIN ESS PROFITS SHOULD BE ASCERTAINED. UNDER THE SAID ARTICLE, A PE IS TREATE D AS IF IT IS AN INDEPENDENT ENTERPRISE (PROFIT CENTRE) DEHORS THE HEAD OFFICE A ND WHICH DEALS WITH THE HEAD OFFICE AT ARMS LENGTH. THEREFORE, ITS PROFITS ARE DETERMINED ON THE BASIS AS IF IT IS AN INDEPENDENT ENTERPRISE. THE PROFITS OF THE PE ARE DETERMINED ON THE BASIS OF WHAT AN INDEPENDENT ENTERPRISE UNDER S IMILAR CIRCUMSTANCES MIGHT BE EXPECTED TO DERIVE ON ITS OWN. ARTICLE 7(2 ) OF THE UN MODEL CONVENTION ADVOCATES THE ARMS LENGTH APPROACH FOR ATTRIBUTION OF PROFITS TO A PE. FURTHER, AT PARA 32 THE HONBLE SUPREME COURT HELD AS FOLLOWS : 32. THE OBJECT BEHIND ENACTMENT OF TRANSFER PRICIN G REGULATIONS IS TO PREVENT SHIFTING OF PROFITS OUTSIDE INDIA. UNDER AR T. 7(2) NOT ALL PROFITS OF MSCO WOULD BE TAXABLE IN INDIA BUT ONLY THOSE WHICH HAVE ECONOMIC NEXUS WITH PE IN INDIA. A FOREIGN ENTERPRISE IS LIABLE TO BE TAXED IN INDIA ON SO MUCH OF ITS BUSINESS PROFIT AS IS ATTRIBUTABLE TO T HE PE IN INDIA. THE QUANTUM OF TAXABLE INCOME IS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF IT ACT. ALL PROVISIONS OF IT ACT ARE APPLICABLE, IN CLUDING PROVISIONS RELATING TO DEPRECIATION, INVESTMENT LOSSES, DEDUCTIBLE EXPE NSES, CARRY FORWARD AND SET OFF LOSSES ETC. HOWEVER, DEVIATIONS ARE MADE BY DTAA IN CASES OF ROYALTY, INTEREST ETC. SUCH DEVIATIONS ARE ALSO MAD E UNDER THE IT ACT (FOR EXAMPLE : SS. 44BB, 44BBA ETC.). UNDER THE IMPUGNED RULING DELIVERED BY 13 THE AAR, REMUNERATION TO MSAS WAS JUSTIFIED BY A TR ANSFER PRICING ANALYSIS AND, THEREFORE, NO FURTHER INCOME COULD BE ATTRIBUT ED TO THE PE (MSAS). IN OTHER WORDS, THE SAID RULING EQUATES AN ARMS LENGT H ANALYSIS (ALA) WITH ATTRIBUTION OF PROFITS. IT HOLDS THAT ONCE A TRANSF ER PRICING ANALYSIS IS UNDERTAKEN; THERE IS NO FURTHER NEED TO ATTRIBUTE P ROFITS TO A PE. THE IMPUGNED RULING IS CORRECT IN PRINCIPLE INSOFAR AS AN ASSOCIATED ENTERPRISE, THAT ALSO CONSTITUTES A PE, HAS BEEN REMUNERATED ON AN ARMS LENGTH BASIS TAKING INTO ACCOUNT ALL THE RISK-TAKING FUNCTIONS O F THE ENTERPRISE. IN SUCH CASES NOTHING FURTHER WOULD BE LEFT TO BE ATTRIBUTE D TO THE PE. 20. A PERUSAL OF THE ABOVE, DEMONSTRATES THAT THE H ONBLE SUPREME COURT HAS, DEHORSE THE CIRCULAR NO. 23 DATED 23 RD JULY, 1969, HELD THAT IF THE CORRECT ARMS LENGTH PRICE IS PAID, THEN NOTHING FURTHER WOULD BE LEFT TO BE TAXED IN THE HANDS OF THE FOREIGN ENTERPRISE. IN ANY EVENT, THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR BY THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT. IN VIEW OF THE AB OVE, WE DISMISS GROUND NO.1 OF THE REVENUE. 21. COMING TO GROUND NO.2, FOR THE SAME REASONS AS DISMISSING GROUND NO.1, WE UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORIT Y AND DISMISS THIS GROUND OF THE REVENUE. 22. COMING TO GROUND NO.3, THE ISSUE WHETHER THE SU BSCRIPTION INCOME IN QUESTION IS BUSINESS INCOME OR ROYALTY , IS NOT IN DISPUTE AS THE REVENUE HAS NOT DISPUTED THE SAME. THE FIRST APPELLATE AUTHORITY HA S TREATED THE INCOME AS BUSINESS INCOME. WHILE SO, THE ALTERNATIVE CONTENTION OF TH E ASSESSEE THAT IF THIS AMOUNT IS TAKEN AS INCOME OF THE ASSESSEE, THEN THE AMOUNT PA ID TO SET INDIA IS TO BE TREATED AS EXPENDITURE, RESULTING IN NIL INCOME IS RIGHT A ND HAS TO BE ACCEPTED. IN ANY EVENT, THE SAME AMOUNT COULD NOT BE TAXED BOTH IN T HE HANDS OF THE SET INDIA AS 14 WELL AS IN THE HANDS OF THE ASSESSEE. FOR THIS REAS ON, WE UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORITY AND DISMISS GROUND NO. 3 OF THE REVENUE. 23. WHILE DEALING WITH GROUND NOS. 1, 2 AND 3, WE A GREE WITH THE ARGUMENT OF THE ASSESSEE THAT WE NEED NOT ADJUDICATE THE ISSUE , AS TO WHETHER THE ASSESSEE HAS DEPENDANT AGENT OR NOT IN SET INDIA PVT. LTD., FOR THE REASON THAT NO PROFIT IS ATTRIBUTABLE TO THE DEPENDANT AGENT, ON THE FACTS A ND CIRCUMSTANCES OF THIS CASE. THUS THIS QUESTION IS LEFT OPEN. 24. COMING TO GROUND NO.4, WHICH IS ON THE ISSUE OF LEVY OF INTEREST U/S 234B, THE FIRST APPELLATE AUTHORITY HELD THAT THE ASSESSE E IS NOT LIABLE TO TAX IN INDIA AND HENCE THE QUESTION OF LEVY OF INTEREST U/S 234B DOE S NOT ARISE. WE AGREE WITH THIS FINDING. EVEN OTHERWISE THE ISSUE OF LEVY OF INTERE ST U/S 234B IS COVERED IN FAVOUR OF THE ASSESSEE, IN THE ASSESSEES OWN CASE BY THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL (L) NO. 298 OF 2008 , JUDGMENT DATED 15 TH JUNE, 2009 WHERE THE HONBLE COURT FOLLOWED ITS OWN DECIS ION IN THE CASE OF DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) VS. M/S NGC NET WORK ASIA LLC, 222 CTR (BOM) 86. IN VIEW OF THE ABOVE, THIS GROUND OF THE REVENUE IS DISMISSED. 25. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 26. ITA NO. 5352/MUM/2005 AND CO NO.174/MUM/2009. THE LEARNED SENIOR COUNSEL, MR. PARCY PARDIWALA, S UBMITTED THAT IF THE TRIBUNAL DISMISS THE REVENUES APPEAL IN ITA NO.544 2/MUM/2005, THEN BOTH THE ASSESSEES APPEAL AS WELL AS THE CROSS OBJECTION, W OULD BECOME INFRUCTUOUS AND HAVE TO BE DISMISSED AS SUCH. IN VIEW OF THE ABOVE SUBMISSIONS, WE DISMISS THE ASSESSEES APPEAL IN ITA NO.5352/MUM/2005 AND THE A SSESSEES CROSS OBJECTION NO. 174/MUM/2009. 15 27. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THE APPEAL AS WELL AS THE CROSS OBJECTION OF THE ASSESSEE ARE ALSO DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY , 2011. SD/- SD/- (VIJAY PAL RAO) (J. SUDHAKAR RED DY) JUDICIAL MEMBER. ACCOUNTANT MEMBER MUMBAI, DATED: 28 TH JANUARY, 2011. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R, ITAT, MUMBAI BENCHES, MUMBAI.