February 09, 2010
BBC Worldwide (India) paid on arm's length basis - No further attribution
The Delhi Tribunal recently ruled on the principle of profit attribution to a permanent establishment (“PE”) in the case of BBC Worldwide Limited v. DDIT1. In line with the Supreme Court ruling in Morgan Stanley v. DIT2 and Bombay High Court ruling in SET Satellite (Singapore) Pvt. Ltd. v. DDIT3, the Tribunal reiterated the single entity approach, that an arm’s length payment by a non-resident enterprise to its Indian PE absolves the non-resident from any additional tax liability in India.
BBC Worldwide Limited (the “Assessee”), incorporated under the laws of England and Wales, operates as an international consumer media company in the areas of TV, publishing and program licensing, etc. The Assessee has an indirect subsidiary in India, BBC Worldwide (India) Pvt. Ltd (“BWIPL”). In pursuance of agreements entered into between the Assessee and BWIPL, BWIPL was appointed as the authorized agent of the Assessee in India to solicit orders for sale of advertising airtime (for dollar and Indian rupee denominated deals) in lieu of 15% marketing commission of the advertisement revenues received by the Assessee from Indian advertisers. The Assessee claimed that, in the absence of a permanent establishment in India it was not taxable on its airtime sales income in India (except to the extent of disclosed royalty income).
The tax authorities, however, held that the Assessee had a permanent establishment in India in accordance with Article 5(4) of the India-UK tax treaty and assessed the profits of the Assessee attributable to BWIPL @ 10% of the gross revenue receipts from India, placing reliance on Circular No. 742 dated May 2, 19964 (“Circular”).
The Assessee had contended before the income tax authorities that BWIPL was merely soliciting orders to the Assessee and the right to accept or reject the order lay solely with the Assessee. Further, BWIPL had no authority to bind the Assessee and / or conclude contracts on behalf of the Assessee. Based on the same, the Assessee claimed that neither did it have a fixed place of business in India in terms of Article 5(1) of the India-UK Tax Treaty nor could it be considered to have a PE in terms of Article 5(4).
Before the Tribunal, the Assessee’ contentions focused, without prejudice to the above argument, on the single entity approach for attribution of profits upheld by the Supreme Court of India in Morgan Stanley and the Bombay High Court in SET Satellite. According to these decisions, where an associated enterprise is paid at arm’s length taking into account all risk-taking functions, nothing further would be attributed to its PE in India. In this regard, the Assessee further placed reliance on Circular 23 of 19695. The Assessee placed specific reliance on SET Satellite, since the SET Satellite ruling was sought on similar facts, including the concerned period being prior to the introduction of transfer pricing laws in India, as in the present case. The Assessee also contended the inapplicability of Circular 742 on grounds of non-satisfaction of the conditions laid down therein.
It was the case of the tax authorities that (i) the Assessee had a permanent establishment in India on the basis of the activities undertaken by BWIPL; (ii) the Circular was applicable to the present case since the conditions laid down therein were mutually exclusive and even if one condition was fulfilled, the Circular would be applicable; and (iii) the Morgan Stanley ruling laid down that the assessment of a dependent agent PE was extinguished only when two conditions were met – first, remuneration of the agent on arm’s length and second, when by a functions, assets and risk (‘FAR’) analysis, nothing more could be attributed to the PE over and above the remuneration paid to the dependent gent. The tax authorities, in this regard, contended that no FAR analysis was conducted by the Assessee and that such analysis would result in an additional income of Rs. 36 million for BWIPL.
The Tribunal placed reliance on the ruling in SET Satellite being factually similar to the present case, the Supreme Court ruling in Morgan Stanley and Circular 23 of 1969 and upholding the contention of the Assessee, held that nothing further could be attributed to the Assessee as it remunerated BWIPL at arm’s length.
While internationally there are divergent theories on attribution of profits to a PE in a foreign jurisdiction, India’s stance on the subject seems to be that once an arm’ length payment has been made, nothing further is attributable to the PE, as can be seen from the position taken by the Supreme Court of India and Bombay High Court previously. The present decision of the Delhi Tribunal reiterates this position and upholds the single entity approach, despite the recent withdrawal of Circular 23 of 1969, reflecting a consistent approach towards profits attribution.
2 (2007) 7 SCC 1
4 Circular 742 lays down the computation guidelines for foreign telecasting companies in India
5 Circular 23 of 1969 dealt with tax liability with respect to income accruing or arising through or from a business connection in India. This circular has been withdrawn vide circular 7 of 2009.
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