By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
[2017] 87 taxmann.com 345 (Mumbai – Trib.)
SPE Networks India Inc. vs. DCIT
A.Ys: 2005-06 to 2010-11,
Date of Order: 08th November,
2017
Facts
The Taxpayer was a company incorporated in,
and a resident of, USA. It was engaged in the business of operating, marketing
and distribution of the television channels and related activities. For
marketing two of its channels the Taxpayer had appointed its group company in
India (“ICo”) as a non-exclusive advertising and sales agent for canvassing
airtime for its channel. The Taxpayer was to receive substantial portion of the
share of revenue collected by ICo from distribution of channels. The Taxpayer
claimed that since it did not have PE in India, in terms of Article 7 of
India-USA DTAA, its income was not taxable in India.
For the following reasons, AO contended that
ICo was a dependent agent of the Taxpayer and hence, the Taxpayer had a
business connection and Dependent Agency PE in India.
(i) The Taxpayer carried on
the telecasting business in India by extensively utilising the services of ICo
for sale of advertisements and distribution of channels.
(ii) Activities of both the
Taxpayer and ICo were interlaced, interconnected, inter dependent and interlinked.
(iii) The agreement was a
revenue sharing arrangement which depended upon the gross advertisement airtime
revenue and not purchase and sale of advertisement airtime.
(iv) ICo had an authority to
conclude contracts on behalf of the Taxpayer in India .
Accordingly, AO held that
15% of the net revenue received by the Taxpayer from ICo was taxable in India.
Held
? Taxpayer had entered into two agreements
with ICo, which gave rise to two revenue streams for the Taxpayer i.e
advertisement revenue and distribution revenue. Advertisement revenue was
generated from advertisement broadcasted on the channel and distribution
revenue was generated by distributing the viewership rights to the customers
through cable operators.
? Perusal of the agreements clearly showed
that: (a) the Taxpayer was carrying on its operations from USA and not from
India; (b) both sale of advertisement and distribution of channels were not
carried out in India; (c) the Taxpayer did not have any office premises or a
fixed place of business in India at its disposal; and (d) none of its employees
were based in India through whom it could render the services in India. Thus,
there was neither fixed base PE nor service PE in India.
? Though CIT(A) endorsed the view of the AO
that the Taxpayer had Agency PE, nothing was brought on record to prove that
the agreements between the Taxpayer and ICo were not on Principal-to-Principal
basis. Tribunal noted that: (i) ICo had no authority to conclude contract on
behalf of the Taxpayer; (ii) while selling the airtime and distributing
channels, ICo was acting in its own right and not on behalf of the Taxpayer:
(iii) ICo was not dependent on the Taxpayer economically or legally; and (iv)
ICo also carried out significant marketing activities for other channels.
Hence, it was an independent entity carrying on its own business.
? ICo
purchased airtime from the Taxpayer and sold in its own right and the Taxpayer
had no control over it. The revenue earned by ICo was not on behalf of the
Taxpayer. ICo made payment to the Taxpayer for the purchases. ICo was not
subject to any control of the Taxpayer for conducting business in India. Its
activities were not devoted wholly or almost wholly for the Taxpayer.
Similarly, revenue of the Taxpayer was not entirely dependent on the earning of
ICo. Thus, it cannot be treated as a dependent agent, of the Taxpayer.
? The AO had not alleged that the transactions
between the Taxpayer and ICo were not at arm’s length. The TPOs had held that
no TP adjustments were required to be made to the income of the Taxpayer on
account of advertisement revenue or distribution revenue.
? Accordingly, the Taxpayer did not have any
business connection or agency PE or fixed base PE in India and ICo was not an
agent of the Taxpayer. Hence, the AO had wrongly invoked Rule 10.
