BBC Worldwide vs. DDIT (ITAT Delhi)

DATE: (Date of pronouncement)
DATE: February 7, 2010 (Date of publication)

Click here to download the judgement (bbc_worldwide_attribution_profits_circular_23_1969.pdf)

Foreign Co not liable to tax in India if Indian agent is paid on arms’ length basis

The assessee, a UK company, operated the “BBC World News Channel”. It appointed its subsidiary in India (BBC India) to solicit orders for the sale of advertising airtime on the Channel and to pass on such orders to the assessee for acceptance and confirmation. The payment from the Indian advertisers in foreign currency was to be received directly by the assessee while the consideration in Indian rupees would be received by BBC India and remitted to the assessee. BBC India was entitled to receive 15% marketing commission of the advertisement revenues. The assessee claimed that as the revenue was ‘business profits’ and there was no permanent establishment in India, the income was not taxable in India under the India-UK DTAA. The AO took the view that BBC India was a ‘business connection’ under s. 9 (1)(i) as well as a ‘permanent establishment’ under Article 5 of the DTAA and that 20% of the total advertisement revenue was attributable to India. This was upheld by the CIT(A) who estimated the profits of the assessee at 10% of the total advertisement revenue allocable to India on the basis of CBDT Circular No. 742 dated 2.5.96. On appeal by the assessee, HELD deciding in favour of the assessee (without going into the issue of whether there was a business connection or PE) that:

(i) In the transfer pricing proceedings for subsequent years, the department had accepted that the commission of 15% paid to BBC India was fair and at arms’ length. It was found that the rate of commission in the assessee’s trade was fairly uniform and almost everyone was charging the same rate of commission;

(ii) In Circular No. 23 of 1969 dated 23rd July 1969 the CBDT has held that if a non resident’s sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent’s services provided that non-resident’s business activities in India are wholly channeled through its agent, the contracts to sell are made outside India and sales are made on a principle-to-principle basis. It has been held that in the assessment of the amount of profits, a deduction will be given for the expenses incurred, including the agent’s commission. Accordingly, if the agent’s commission fully represents the value of the profit attributable to his service, nothing further can be assessed in the hands of the non-resident;

(iii) This principle that if a transaction is at arms length and the associated enterprise, which also constitutes a permanent establishment, is remunerated on arm’s length basis, taking into account all the risks–taking functions, then nothing further would be left to attribute to the permanent establishment has been accepted in Morgan Stanley 292 ITR 416 (SC), SET Satellite (Singapore) 307 ITR 205 (Bom) and Galileo International 114 TTJ 289 (Del) {approved 224 CTR 251(Del)};

(iv) The consequence is that even if the assessee had a business connection or permanent establishment in India, it could not be assessed to tax in India.

Note: Circular No. 23 of 1969 dated 23rd July 1969 has been withdrawn vide Circular No. 7/2009 dated 22-10-2009. In Siemens AG it has been held by ITAT Mumbai that the withdrawal is prospective and does not impact earlier years.