Amit Shukla, Judicial Member.

1. The aforesaid appeals have been filed by the assessee 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 Years 2003-04 & 2004-05. Since, the issue involved in both the appeals is common arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of consolidated order.

2. We will first take up the appeal for the Assessment Year 203-04, wherein the assessee has raised the following grounds:

"1.1 That on facts and in law, the appellant denies 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 circumstances of the case and thus based his decision on factually incorrect findings.

2. That on the facts and circumstances of the case, Ld. CIT(A) erred in upholding the order of the Learned Assessing Officer ('Ld. AO') that the appellant has a business connection in the form of ESPN Software India (P) Ltd. ('ESPN India') and that the appellant 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 and 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 Double Taxation Avoidance Agreement ('DTAA').

4.1 That on the facts and circumstances of the case and 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 India under Article 5(4) of the DTAA.

4.2 That on the facts and circumstances of the case and 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, Ld. CIT(A) grossly erred in holding that ESPN India has and is habitually exercising authority to conclude advertisement contracts for the appellant within the meaning of Article 5(4) of the DTAA and such contracts are binding upon the appellant. That without prejudice to the above ground nos. 4 to 4.3, the Ld. CIT(A) grossly erred in rejecting the contention of the appellant that where the purported PE is remunerated on an arm's length basis, no additional profits could be attributed to appellants income.

5.2 That, without prejudice to the above grounds, on facts 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 issued by the Central Board of Direct Taxes, when the transactions with Indian company have been held at arm's length by Transfer Pricing Officer.

6 That, without prejudice to the above and in the alternative, Ld. CIT(A) has grossly erred on the facts and circumstances 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 considering the amount of net profits for the purpose of attribution to the alleged PE, as allowable under Article 7(3) of the DTAA."

3. The facts in brief are that, the assessee is a partnership firm between, ESPN (Mauritius) Ltd. having 99.9% share in profits; and ESS Asia Networks Pte Ltd. having 0.1% share in profits. The assessee firm has been established under the laws of Mauritius on March 29, 2002. The assessee is 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 advertisement 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 including India. The assessee entered into a representation agreement ("Agreement") with ESPN Software India (P) Ltd. ("ESPN India") appointing it as its representative for ad solicitation activities and for the collection of advertisement revenues from the Indian advertisers/ agencies. ESPN India collects the advertisement charges from various Indian companies (advertisers/advertising agencies) and remits the same to the assessee after deducting applicable taxes in India on the commission payable to it as per the agreement. In the income tax returns, the assessee declared 'Nil' income and in the notes of the computation, it was stated that revenue from the advertisements, being in the nature of business profits, are not subject to tax in India in accordance with Article 7 of the India-Mauritius DTAA, because assessee does not have any PE in India under Article 5.

3.1 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 treated as dependent agent PE (DAPE) within the meaning of Article 5(4) of the DTAA. In response, the assessee submitted that the Indian entity cannot be a DAPE, because, firstly, it is an agent of independent status and is economically independent as the agent's business can stand on its own and is not dependent upon the Principal for its economic viability; secondly, the agent bears risk of loss from its own activities; and lastly, the agent is not dependent wholly and exclusively on one Principal but for various other AEs also. For instance, the ESPN India is also carrying on the activities of distribution of ESPN/Star Sports television programming services in India as a Principal in terms of its agreement with ESS distribution (Mauritius) SNC ET Compagnie and earns 'subscription fees'. It also carries on the sale/leasing of decoders etc. to various cable operators and earns income from the same. However, the learned Assessing Officer rejected the assessee's contention on the ground that, firstly, Indian entity is engaged in the business of soliciting advertisements for the assessee and also distributed the sports channels for the ESPN (Mauritius) Ltd. and as far as the advertising activities is concerned, Indian entity works only for one principal, i.e., assessee and the commission earned from soliciting advertisements comes entirely from the assessee, hence, advertising business of Indian entity would simply collapse if the assessee has to withdraw its patronage. Secondly, the risk is shared between the assessee and ESPN Software Ltd., because the principal task of inserting the advertisements into the program content and ensuring that same is telecast properly is the responsibility of M/s. ESPN Star Sports, 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 risk is being borne by the Indian entity. Lastly, to examine the principal agent relationship, the analysis has to be worked out with respect to a particular business activity and Indian entity might also be carrying out distribution activity for a related concern, but the fact remain that as far as advertising is concerned, Indian entity is working only for the assessee. Thus, Indian entity is economically dependent on assessee 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 assessee and rejected all the contention of the assessee that none 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 referred to the certain clauses of the agreement to reach to the conclusion 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 decision of Special Bench of Delhi ITAT in the case of Nokia Networks OY v. Jt. CIT [2018] 94 taxmann.com 111/171 ITD 1. After having held that assessee 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 and the Indian entity had already subjected to tax in the hands of the Indian entity and there should not be another assessment in the hands of the assessee to tax the very same profit. Further, Indian entity besides carrying out collection of ad revenues for the assessee was also engaged in the distribution of channel services in terms of its agreement with other entities and also sale and hire purchase of decoders for the third party customer. The final authority to accept such advertisement or to reject the same lies with the assessee. The ESPN India is an agent of independent status under Article 5(5) and 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 the 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 correct on the facts and circumstances of the case. Ld. CIT (A) has analyzed the assessee's submission firstly on account of business connection u/s. 9(1)(i) and then on DAPE under Article 5(4), and decided all the issues against the assessee. In so far as assessee is having a business connection in India in terms of Section 9(1)(i), he held that assessee does have a business connection, because the business carried on by the assessee and the activities carried on in India on its own sales through ESPN India from which its earning revenue has a direct connection and since ESPN is indirect 100% subsidiary of the assessee and profit has arisen to the assessee in the form of retention of its commission and hence, there is a commonness of interest between the assessee's business and the business of the Indian entity. On the issue of DAPE, he affirmed the observations and the finding of the Assessing Officer after detailed discussion appearing from pages 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 its business and all its activities are devoted exclusively 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 controlling stake in assessee to the extent of 99.99%, therefore, ESPN India does not enjoy any degree of autonomy in its decision 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 the issue whether the Indian entity had the authority to conclude the contract on behalf of the assessee, he observed that the assessee's contention that one employee was sufficient to discharge the function with the allotment of his right does not hold any merit, because one person cannot handle and no documentary evidence was filed before the Assessing Officer or during the course of appellate proceedings in the form of any correspondence between the advertisers and the assessee. He also referred to the various observations 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 management and a controlling stake, ESPN India acts as a fixed place PE of the assessee.

5. In so far as the issue of attribution of profit is concerned, assessee submitted that even if it is assumed that PE of assessee is constituted in India, then only the profits attributable to the PE in terms of Article 7 can alone be taxed and once the profits attributable to the activity of 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 Arm's Length principle nothing could have been attributed. The assessee's detailed submission in this regard have been incorporated by the ld. CIT(A) from pages 23 to 30 including the various judgments relied upon by the assessee specifically the judgment of Hon'ble Supreme Court in the case of DIT(IT) v. Morgan Stanley & Co. [2007] 162 Taxman 165/292 ITR 416 (SC); and the judgments of Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pte. Ltd. v. Dy. DIT (IT) [2008] 173 Taxman 475/307 ITR 205 (Bom) and Delhi High Court in DIT v. Galileo International Inc. [2009] 180 Taxman 357/[2011] 336 ITR 264 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 out the transfer pricing analysis with regard to the function performed by the Indian agent for soliciting the advertisement and collection of advertisement revenue. However, in addition to these functions the Indian agent is also carrying out many activities relating to transmission of the assessee's channel and once such important function is providing access to cable operator to downlink the channels through access code without which business of the assessee could not survive. Another function highlighted was that it is carrying out the negotiation and concluding contracts with advertising agency on behalf of the assessee. All these activities have 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 Indian agent when the normal commission payment as per him is around 15%. After detailed discussion, he held that attribution 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 Kaka 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 subsidiary of the assessee and both assessee and Indian entity were controlled over by the parent company. This cannot be the ground for holding 'fixed place PE' in view of the clear cut provision of Article 5(6). He further submitted that the observation 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 was an independent agent and was not devoted wholly or almost wholly for the assessee, because only 4% of the business of the Indian entity related to the assessee. Thus, he submitted that assessee has a very strong prima facie good case that Indian entity does not constitute any kind of PE for the assessee in India.

8. However, Mr. Porus Kaka pointed out that it is not in dispute that the transaction between the assessee and the Indian entity has been found to be at arm's length which has been noted even by the ld. CIT (A). Once the transaction and the remuneration arising thereof have been accepted to be at arm's length, then there could not be any further attribution of any profit. The Indian entity had filed its entire transaction in Form 3CEB and no TPO adjustment order has been passed and the margin of 10% of the commission paid to the Indian entity has been accepted to be at arm's length price. Similarly, in the Assessment Year 2004-05, he submitted that the reference was made to the TPO but no TP adjustment has been proposed and the remuneration of 10% has been accepted at arm's length price. In the case of the Indian company for the Assessment Year 2003-04, transfer pricing 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 arm's length. Whence, in the case of the Indian entity the entire transaction with the assessee has to be found at the arm's length, then no further attribution can be made. In support of his contention that when the transaction has been found to be at ALP then no further attribution is required to be made, he relied upon the following judgment:—

Set Satellite (Singapore) PTE Ltd. (supra)

Director of Income-tax v. BBC Worldwide Ltd. [2011] 16 taxmann.com 162/203 Taxman 554 (Delhi)

Director of Income-tax (IT) v. B4U International Holdings Ltd. [2015] 57 taxmann.com 146/231 Taxman 858/374 ITR 453 (Bombay High Court)

Morgan Stanley & Co. (supra)

Galileo Nederland BV v. Asstt. DIT (Intl. Tax) [2015] 228 Taxman 11/[2014] 51 taxmann.com 419/367 ITR 319 (Delhi)

Asstt. DIT v. E-Funds IT Solution Inc. [2017] 86 taxmann.com 240/251 Taxman 280/399 ITR 34 (SC)

Honda Motor Co. Ltd, Japan v. Asstt. DIT [2018] 92 taxmann.com 353/255 Taxman 72 (SC)

9. On the other hand, ld. CIT-DR submitted that there has been no transfer pricing analysis in the case of the assessee in the Assessment Year 2003-04 and only form 3CEB was submitted without any TP study report. Thus, there cannot be any question of ALP or attribution of profit. Further, the ld. CIT (A) has noted that the TPO in the Assessment Year 2004-05 has not taken into account FAR analysis of the entire functions carried out by the assessee, because entire work right from soliciting to negotiation of rate with the advertisers has been done by the Indian entity. Thus, on this basis, it cannot be held that entire FAR analysis has been done by the TPO for all the functions of the assessee carried through Indian entity. Regarding PE issue, he referred to the various observations and the findings of the ld. CIT (A) and 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 also 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 and allotting advertisement time and programme sponsorships in connection with ESPN and Star Sports channel in Television, which it acquires the advertisement time from ESPN Star Sports Singapore. It has entered into with 'representation agreement' with ESPN India appointing it as its representative for ad soliciting activities and for collection of advertisement revenue from the Indian advertisers/ agencies. The ESPN India collects advertisement charges from various Indian companies and remits the same to the assessee after deducting the tax on the commission payable to it as per the agreement. However, before coming to the issue whether 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 remuneration paid by the assessee to the Indian entity is at arm's length price or not, because, if the transaction between the assessee and the Indian entity are at arm's length then there would not be any further attribution of profit and consequently the issue of PE will become purely academic. The ld. CIT(A) has rejected the assessee's contention that the remuneration paid by the assessee to the Indian entity has been found to be at arm's length price on the ground that the TPO has not analyzed 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 carrying out many other activities relating to transmission of all the assessee's channel and also providing access to the cable operators to the downlink the channel through access code. From where he has attributed these functions of the Indian Entity for the assessee firm it is not clear; and to how these functions has been captured by the ld. CIT (A), vis-à-vis, the assessee and the Indian entity. So far as the assessee is concern, it is only acquiring and allotting advertisement time and programme sponsorships for which it has appointed the ESPN India for advertisement soliciting activity and for the collection of advertisement revenue from the Indian advertisers/ agencies for which Indian company was compensated with the commission @10% of the net billed advertisement revenue generated by it. This is evident from the 'representation agreement' which is effective from 1st April, 2002 which mentions as under:

"Appointment

The Representative is hereby appointed as the exclusive independent representative in the territory to solicit television advertising on the channel and to collect and remit advertisement charges to ESS Mauritius and the Representative unequivocally accepts such appointment. The Representative agrees that it is authorized only to solicit television advertisement in the Territory and that any other solicitations (including those that encompass the Territory but which are deemed to be regional or global) 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 amount of advertising time in each Channel available to the Representative for soliciting advertisers.

The Representative shall not solicit any exclusivity, entitlements or other sponsor identified packages without prior written approval from ESS Mauritius.

After having solicited the advertisements, the Representative shall forward by facsimile or electronic mail each advertiser's requisition ('order1 or 'advertising order6) for telecast of its advertisement(s) to ESS Mauritius or a person designated by it and ESS Mauritius reserves the right to accept or reject the aforesaid requisition at its sole discretion, For purposes of avoidance of doubt, any failure by ESS Mauritius to indicate its approval within thirty (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 discretion, in light of the terms ESS Mauritius may set from time to time, which may include the quality or nature of the advertising content or the credit standing of an advertiser or proposed advertiser and it shall not be under any obligation or liability whatever to the Representative, the advertiser or proposed advertiser, or anyone else with respect to any such order which it might reject.

No later than three weeks before telecast of any advertisement solicited by the Representative, the Representative shall provide ESS Mauritius or a person designated by it with "ready to broadcast" advertising material to be included in the program in a manner which meets the technical specifications provided by ESS Mauritius to the Representative, which may be modified from time to time during the term of this Agreement."

11. Thus, from the aforesaid terms of the agreement, 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 charges to ESS Mauritius. It is only authorized to solicit television advertisement for the Indian Territory. The compensation part clearly shows that the commission would be paid @10% of net billed advertisement actually collected by it or received by ESS Mauritius for the advertisement solicited by the Indian entity. From the perusal of the transfer pricing order, in the case of ESPN India, it is seen that it carried various functions of other entities for the ESPN group like, distribution of ESPN Star Sports Channel in India for which it collects 'subscription fees' from the cable distributors. This activity of function is not carried out for the assessee but for different group entity. The TPO has held that only the marketing support services relates to the present assessee for soliciting the advertisement for the channel for which the Indian entity paid 10% which has been accepted by him after detailed analysis at arm's length price. The TP adjustment was made with regard to its other activities for the other entities which are not related to the assessee at all. Thus, only function carried out by the Indian entity is that it is doing solicitation and collection of advertisement revenue and remitting 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 arm's length. No other functions are carried out or there are any other transaction by the Indian entity vis-à-vis the assessee and all other functions of the ESPN India relate to distribution of the channel of other entities for which it is paid 'subscription fee'. If one goes by the overall revenue earned by the Indian Entity, then transaction with the assessee 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.

International 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 been received from the assessee. Thus, if the Indian entity has been remunerated at arm's length price, then no further attribution of profit can be made. This proposition is well settled and upheld by the Hon'ble Supreme Court in the case of Morgan Stanley (supra) which has been reiterated and reaffirmed by the Hon'ble Supreme Court in the case of E-funds IT Solution. Apart from that Hon'ble Delhi High Court in the case of Galileo Nederland. Moreover in the judgment cited and relied upon by the learned Senior Counsel, we found that in all these cases it has been held that if the assessee has remunerated the agent at arm's length, then no further profit of the assessee could be taxed in India other than the profit earned by the agent. All these judgments are based on the principle laid down by the Hon'ble Supreme Court in the case of Morgan Stanley (supra). Thus, we hold that, once the payment made by the assessee to the Indian entity have been accepted to be at arm's length price then no further attribution is required to be done. Accordingly, the addition made on account of attribution of profit is directed to be deleted.

12. In view of the aforesaid findings, the issue of PE has become purely academic.

13. Admittedly, similar facts are permeating in Assessment Year 2004-05 also, therefore, our finding given above will apply mutatis mutandis for Assessment Year 2004-05 also. Accordingly, the appeal of the assessee is treated as allowed.

14. In the result, both the appeals of the assessee are allowed.