Rajendra, Accountant Member -

1. Challenging the orders of the CIT(A)-10,Mumbai,the Assessee has filed the appeals for the above-mentioned Assessment Years. As the issues, in these second round litigation matters, are similar, so, we are adjudicating all the appeals together for the sake of convenience. The details of filing of returns, returned incomes, dates of order of the First Appellate Authority(FAA) and dates of order of the Tribunal can be summarised as under :

ITA/5689/Mum/2014 A.Y.1998-99 :Brief Facts:

2. Assessee-company is incorporated in the Netherlands and is a wholly owned subsidiary of Satellite Television Asia Region Limited (STAR Limited)based in Hong Kong ,which in turn is subsidiary of STAR Television Limited. It had been granted the exclusive right for sale of advertising time, in India, on the channels of the STAR TV Network, which was owned by STAR Limited. It engaged STAR India Pvt Ltd.(earlier known as News Television (India) Limited),an Indian entity, to procure business from Indian advertisers, on a commission of 15% of receipts from such business. The revenue, so earned by it, was offered to tax @10% on the basis of CBDT Circular 742,dated 02/05/1996.However,the Assessing Officer(AO),held that income in question was to be assessed in the hands of STAR Limited, Hongkong, that the assessee was only a conduit-company ,that it was brought into picture only because of India having a favourable tax double tax avoidance treaty(DTAA) with the Netherlands, that the assessee company was located in Hong Kong ,that Hong Kong did not have any tax treaty with India, that it was a clear case of treaty shopping. He finally held that the income in question actually belonged to STAR Limited. As a protective measure, he also assessed the income in the hands of the assessee. He declined benefit of Circular 742 to the assessee, on the ground that it was not a telecasting or broadcasting company. Invoking the Rule 10 of the Income Tax Rules,1962(Rules),he estimated profit @ 20% of gross advertising revenues.

3. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA, who confirmed the action of the AO. He did not adjudicate the various grounds raised by the assessee, as he had endorsed the view of the AO that the assessee company was only a conduit. The assessee challenged the order of the FAA before the Tribunal and matter was restored back to his file for adjudicating the other grounds also.

4. In pursuance of the order of the Tribunal, the FAA initiated appellate proceeding. Before him, the assessee made elaborate submissions about PE, provisions of Indo-Netherland Tax-treaty, Circular 742 issued by the CBDT and levying of interests u/s.234 of the Act etc.

4.1 After considering the submissions of the assessee and the original order passed by the AO, the FAA held that STAR Ltd. JGN BV, STAR India were part of the same group, that STAR India had been incorporated primarily to promote business activities of other entities. He referred to the case of Asstt. CIT v. DHL Operations B.V. [2005] 142 Taxman 1 (Mag.) (Mum.) and held that due to close proximity between companies operating in India and outside India if it was found that foreign company was substantially conducted its business in India then it had to be held that Indian company was a PE. Finally, he observed that the AO had rightly held that the assessee had a PE in form of STAR India, in India. With regard to payment of arm's length remuneration to STAR India the assessee had argued that no further attribution of income should be made in the hands of the assessee. The FAA also held that Circular 742 was not applicable, that it was issued in connection with section 195 of the Act, that it was issued for telecasting companies, that the assessee itself had admitted that it was not a telecasting company, that it was not issued to facilitate the complexity of assessments of foreign telecasting companies, that the cases relied upon by the assessee pertained to the case of telecasting companies, that the AO was justified in determining the income of the assessee @ 20% of the profitability.

5. Before us ,the Authorised Representative(AR)argued that as per the tax treaty to constitute a PE the Indian agent should have power to enter into contract independently, that the agent had no power to conclude the contracts, that agency PE was not there, that the agent (SIPL)was wholly independent, that it was not dependent on the assessee, that as per the contractual arrangement STAR India Private Ltd(SPIL)was not a PE of the assessee in India, that SIPL was a commission agent and was paid commission® 15%for the services rendered by it to the assessee in connection with soliciting the advertisements and collection of revenue from the advertisers on behalf of the assessee, that the activities of SIPL were undertaken in the ordinary course of business, that SIPL was legally independent from the assessee, that the activities of SIPL were not devoted wholly on behalf of the assessee, that STAR India would also undertake agency activities for other channels, that it was also engaged in other businesses such as noticing/ procuring and supplying programs and acting as a licensee in India in respect of certain channels, that the remuneration paid to SIPL was at arm's length. It was also argued that when the agent would not satisfy the condition in para 6 of Article of the DTAA, laid down in clause 5 could be examined, that the agent covered by sub-section 6 would be an independent agent, that such agent would not constitute a PE in India even if it satisfied the conditions laid out in sub-section 5,that the assessee did not constitute a dependent agent PE of the assessee in India based on clause 6 of article 5 of the DTAA, that while completing the assessment for the assessment year 1997-98, the AO had dealt with the issue of income to be taxed on accrual basis or cash basis, that in that year the AO had not held that assessee had a PE in India, that the AO himself had granted the benefits of circular 742 to the assessee. He referred to pages 114 and 196 of the paper book and stated that in any of the years income not more than 15% had accrued to it from the assessee, that STAR India was emanated on ALP basis, that it was paid 15% commission on the advertisements solicited, that 15% commission was accepted as ALP, that the circular 742 accepted the said percentage as reasonable. Referring to page number 76 and 77 of the paper book, he said that SIPL was an independent agent, that as per the agreement soliciting did not give any right. He relied upon the cases of Set Satellite (Singapore) Pte. Ltd. v. Dy. CIT (International Taxation) [2008] 307 ITR 205 [LQ/BomHC/2008/1789] /173 Taxman 475 [LQ/BomHC/2008/1789] (Bom.), BBC Worldwide Ltd. v. Dy. DIT, Directorate of (International Taxation) [2010] 37 SOT 253 (Delhi), Galileo International Inc. v. Dy. CIT [2009] 116 ITD 1 (Delhi) and DIT (International Taxation) v. Morgan Stanley & Co. [2007] 292 ITR 416 [LQ/SC/2007/872] /162 Taxman 165 [LQ/SC/2007/872] (SC). The Departmental Representative(DR) relied upon the orders of the FAA. He stated that action u/s. 133A of the Act was carried out at the business premises of the assessee group, that some of the entities of the assessee group had approached the Settlement Commission for AY 2003-04 to 2006-07 , that additional commission income was offered by such entities, that the assessee had PE in India, that it was liable to pay tax in India for the income earned here. He also made reference to the case of DLF Operations, relied upon by the FAA.

In the rejoinder the AR stated that the assessee had not approached the Settlement commission, that other entities of the group had filed petition before the Settlement Commission to end the litigation.

6. We have heard the rival submissions and perused the material before us. We find that agency agreement was entered into between Star Advertising Sales BV and News Television India Private Ltd on 31/05/1994, that supplement agreement were executed in the months of May, 1995,1996 and 1998 between the same parties. We would like to refer to some of the clauses of the agreement of 31/05/1994.

"Appointment

The Company hereby appoints the Agent as its non-exclusive independent agent in India to market television advertising for the said channel and the Agent uneqivocally accepts such appointment.

Rate

The Agent shall solicit the advertisements in India for the said channel at such rates as the Company may fix from time to time.

Independent Agent

(a) The Agent shall not have the right to enter into any contract for and on behalf of the Company and/or bind the Company in any way whatsoever.

** ** **

(e) This Agreement shall not restrict the Agent from carrying on other business, including agency business, to the extent that carrying on of such other businesses by the Agent would not be prejudicial to the interest of the Company in India.

Client Requisition

After having solicited the advertisements as above, the Agent shall forward, by facsimile or Telex, each clients requisition for telecast of the advertisement (s) to the Company and the Company reserves the right to accept or reject the aforesaid requisition at its sole discretion.

Commission

The Agent shall be entitled to retain fifteen percent (15%) of the net invoiced amount paid by the clients at commission.

The agent was to follow the company's procedure and standard terms and conditions for soliciting advertisements from the clients in India.

A perusal of the above terms indicates that as per the agreement between SIPL and the assessee, SIPL was required to solicit advertisement in India for Channels, that the agent had to solicit the advertisement at the rates fixed by the assessee, that it could not enter in to any agreement with any client independently, that the even after agreement the assessee was the final and deciding authority to decide the fate of the advertisement, that the agent was to receive fix percentage of the invoiced amount as commission. The agent was free to carry out any other business. If all these facts are considered cumulatively, it becomes clear that the agent had no power to bind the assessee in any legal obligation.

6.1 Before proceeding further, we would like to refer to paragraph(v)and(vi)of Article 5 of the India-Holland DTAA and same read as under:

"5.Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 6 applies-is acting in one of the States on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first State if,

6. An enterprise of one of the States shall not be deemed to have a permanent establishment in the other State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm's-length conditions."

From the above, it is clear that before examining the question as to whether an agent satisfies conditions laid down in paragraph-5,it has to be examined that whether it satisfies conditions mentioned in paragraph-6.The provisions of paragraph 5 will come into picture only if the agent does not satisfy the conditions in paragraph 6. In short, if the agent satisfies the conditions laid down in paragraph 6 (independent agent),it would not constitute a PE in India even if the independent agent satisfies the condition laid down in paragraph 5.SIPL is an independent agent under Article 5(6)of the DTAA, acting in its ordinary course of business and its activities were not wholly or exclusively devoted to the assessee. SIPL was not economically dependent on the assessee, as it was engaged in a business activities like undertaking agency activities for NGC Network Asia LLC, producing/procuring and supplying program and acting as a licensee in India in respect of certain channels. The activity of media agent for channel was within the ordinary course of business activity of SIPL. We find force in the argument advanced by the assessee that activities of SIPL were no different from other agents of foreign telecasting companies operating in India. The India-Netherlands DTAA provides that when the activities of the agent are devoted wholly or almost wholly on behalf of the enterprise it would not be considered to be an agent of an independent status unless it was shown that the transactions between the agent and the principal were made on arms length conditions. We would like to discuss the arm's length payment issue in the succeeding paragraph. We had gone through the chart submitted by the assessee showing the percentage of revenue earned by SIPL from the assessee (Pg.196 of the PB).On perusal of the same is clear that SIPL had received the highest percentage of revenue from the assessee for the AY.1999-2000 which was 13.59%,whereas in the assessment year 2004-05 the percentage was as low as 0.003%. Clearly, SIPL has to be treated as an independent agent, acting in its ordinary course of business.

6.2 One more aspect in this regard has to be considered and that is the payment made by the assessee to SIPL are at arm's length. The assessee had paid commission to SIPL at the rate of 15% and the rate was as per the norms of the industry. Therefore, there cannot be further attribution of income in the hands of the assessee. From the AY.s 1998-99 to 2001-02 transfer pricing provisions were not applicable to the international transactions entered in to by the assessees with their AE.s. Besides, industry specific competitive data were not available in the public domain. Therefore, what is to be seen is the commission rate considered normal for the industry. It is a settled position that where the Indian agent is remunerated on an arm's length basis by foreign principal there would not be any further attribution of profits in the hands of the foreign principal. Circular 5 of 28/09/2004 stipulates that amount of profits attributable to a PE should be determined based on arm's length principle. It has to be remembered that circular dated 23/07/1969(Circular Number 23)had provided that the amount of profits attributable to PE should be determined as on the arm's length remuneration and that if transaction between a foreign enterprise and its PE were at arm's length it would extinguish the text liability of the foreign entity. CBDT circular No. 742 had recognised that rate of 15% commission payable to the Indian agents by the foreign telecasting companies was to be considered normal. It is also found that in the case of SIPL, while completing the transfer pricing assessments, for the AY.s 2002-03 to 2004-05,the TPO had held that payment of commission @of 15% by the assessee to its agent i.e. to SIPL was at arm's length.

6.3 One more issue to be deliberated upon is the applicability of Circular No.742. In our opinion, Circular 742 was introduced to lay down mechanism for determination of tax ability of advertisement revenue earned by foreign companies. The assessee had filed original return and later on had revised the return. In both the returns it had offered the tax as per the guidelines of the Circular 742. It is a undisputed fact that the benefit of the said circular was granted by the AO to the assessee in the AY.s 1995-96 and 1997-98 and that the FAA had also endorsed the granting of benefit to the assessee as per the Circular. Paragraph 2 of the assessment order for the AY.1995-96 reads as under:

"The assessee has filed both the returns on the basis of presumptive rate of net profit at 10% is laid down in the guidelines contained in Circular No. 742 dated May 2, 1996 issued by the Central Board of Direct Taxes, New Delhi."

Pages 109-111 of the PB are the orders of the AO.s passed u/s.197 of the Act on 08/05/1998, 19/05/1999 and 18/04/2000.In all these orders, the they have referred to the Circular 742 and had applied the rates for deduction of tax for advertisement revenue. Thus, it is clear that the AO himself had accepted the applicability of the Circular. Nothing was brought on record to prove that because of substantial and material changes in the facts and circumstances for the year under appeal the Circular had no application. In our opinion, there was no difference in the facts for the earlier year and the year under appeal. Therefore, we hold that the provisions of circular 742 were applicable to the facts of the case under consideration.

6.4 We find that in the case of Set Satellite Singapore PTE Ltd.(supra)similar issues have been considered by the Hon'ble High Court. Facts of the case were that the assessee, a resident of Singapore, was having business activities in India, that through its dependent agent, namely SET India (P.)Limited, it carried on marketing activities in India for advertisement slots by canvassing advertisements in India, that it claimed that it did not have any tax liability in India as it did not have a PE in india, that it was also argued that its dependent agent was remunerated on an arm' s length basis, that income from various activities had been assessed to tax in the hands of SET India, that there could not be further assessment of income in the hands of the assessee on account of the said activities. Reliance was placed on Circular No. 23, dated 23/07/1969, issued by the CBDT. While filing revised return on 05/03/2001,it computed its taxable income as per the formula prescribed in the Circular No. 742 without prejudice to its contention that, it did not have any income which was taxable in India. The AO assessed the income of the assessee which included income from marketing fees as also advertisement collected from India and further the subscription fees received from cable operators of its dependent agent.

The assessee preferred an appeal before the FAA. Before him it was argued that only income attributable to the it's Indian operations viz., marketing of the ad time slots could be taxed in India and that ad revenues earned were not attributable to its Indian operations as the contract to sell were made outside India and the sales were made on principal to principal basis. The FAA held that paragraph 6(c) of Circular No. 23 was applicable to the assessee as the non-resident's business activities in India where wholly channelled through its agent, that the contracts to sell were made outside India, that the sales were made on a principal to principal basis. Considering the provisions of the India-Singapore DTAA it was held that as the assessee had remunerated SET India on an arm' s length basis and that as pre article 7(2) of the DTAA no further profits should be taxed in the hands of the assessee. The FAA, however, proceeded to hold that as the assessee itself had revised the return of income and offered the income to tax there was no reason to interfere with the order of the AO. In so far as distribution of revenue from AXN channel he held that distribution income belongs to SET India and not to the assessee. The said income had been offered to tax by SET India and had already been taxed in its hands. With regard to distribution rights it was held that same were commercial right and were distinct and different from a copyright and consequently there was no question of payment of royalty.

Cross appeals were filed by the AO and the assessee before the Tribunal. After considering the rival submissions, the Tribunal held SET India was a dependent agent and as such the assessee was deemed to have a permanent establishment, that in addition to the taxability of the dependent agent in respect of the remuneration earned by it, which was in accordance with the domestic law and which had nothing to do with the taxability of the foreign enterprise of which it was a dependent agent, the foreign enterprise was also taxable in India in terms of the provisions of Article 7 of the tax treaty, in respect of the profits attributable to the dependent agent permanent establishment.

Deciding the matter the Hon'ble High Court held as under:

"........in the matter of tax what has to be considered and more so in international transactions if there be a treaty, are the provisions of the treaty and if the provisions of the treaty are more advantageous to an assessee, then that construction will have to be given which is advantageous to the assessee. Circular No. 23, dated July 23, 1969, sets out that where 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 (i) the non-resident principal's business activities in India are wholly channelled through his agent ; (ii) the contracts to sell are made outside India ; and (iii) the sales are made on a principal-to-principal basis. The Commissioner of Income-tax (Appeals) had recorded a specific finding in favour of the appellant in the affirmative on all the three counts. Circular No. 23 would be binding on the Assessing Officer and had to be considered while assessing the tax liability of the assessee. Considering Circular No. 742 it would be fair and reasonable that the taxable income is computed at 10 per cent, of the gross profits. In the instant case in so far as marketing services were concerned by the arm's length principle what had been paid was more than 10 per cent, as could be seen from the order of the Commissioner of Income-tax (Appeals). This was not disputed by the Revenue in its appeal before the Income-tax Appellate Tribunal. Circular No. 23 of 1969 read with article 7(1) would result in holding that the advertisement revenue received by the appellant was not taxable in India as long as the treaty and the Circular stood. "

"15.From a reading of article 7(1) of the DTAA it is clear that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. The profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. In paragraph (2) while determining the profits attributable to the permanent establishment the expression used is "estimated on a reasonable basis". The DTAA does not refer to the arm' s length payment. The principles contained in the matter of income from international transaction on an arm' s length price are contained in section 92 of the Income-tax Act. The principles have been clarified by the Finance Act, 2001 as also the Finance Act, 2002. From the order of the Commissioner of Income-tax, which has been accepted it is clear that the appellant herein has paid to its permanent establishment on the arm's length principle. It recorded a finding of fact that the appellant had paid service fees at the rate of 15 per cent, of gross ad revenue to its agent, SET India, for procuring advertisements during the period April 1998 to October, 1998. The fact that 15 per cent, service fee is an arm' s length remuneration is supported by Circular No. 742 which recognizes that the Indian agents of foreign telecasting companies generally retain 15 per cent, of the ad revenues as service charges. Effective November 1998, a revised arrangement was entered into between the parties whereby the aforesaid amount was reduced to 12.5 per cent, of net ad revenue (i.e., gross ad revenue less agency commission). Simultaneously, the appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenue. Considering all these aspects and the fact that the agent has a good profitability record, it held that the appellant has remunerated the agent on an arm's length basis.

16. This finding of the Tribunal has not been disputed by the Revenue. The entire contention of the Revenue is that the advertisement revenue pertaining to its own channel and AXN channel are also taxable in India.

17. We may firstly point out that the Commissioner of Income-tax has dealt with the issue as to why the advertisements received by the appellant were not liable for being taxed in India based on the Central Board of Direct Taxes Circular No. 23, dated July 23, 1969, which clearly sets out that where 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 (i) the non resident principal' s business activities in India are wholly channelled through his agent; (ii) the contracts to sell are made outside India ; and (iii) the sales are made on a principal-to-principal basis. The Commissioner of Income-tax (Appeals) had recorded a specific finding in favour of the appellant in the affirmative on all the three counts. It is in these circumstances that it was held that the advertisement revenue received by the appellant may be from the customers in India is not liable for tax in India. That Central Board of Direct Taxes Circulars are binding needs no repetition. If authorities need be cited, we may now refer to the judgment of the Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889 . [LQ/SC/1999/561] In that judgment the issue was whether Circular of October 9, 1984, was inconsistent or whether there was contradiction in the circular and section 145 of the Income-tax Act. The Supreme Court observed that (page 901) :

"In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department."

18. See also CIT v. Hero Cycles P. Ltd. [1997] 228 ITR 463 (SC). It would thus be clear that Circular No. 23 would be binding on the Assessing Officer and had to be considered while assessing the tax liability of an assessee.

19. The Tribunal in its judgment has not considered the effect of the finding recorded by the Commissioner of Income-tax (Appeals) based on the Circular and which circular was relevant for the purpose of deciding the controversy in issue. This circular read with article 7(1) of the DTAA would result in holding that the income from advertisement if neither directly nor indirectly attributable to that of the permanent establishment, would not be taxable in India. The Tribunal in fact in paragraph 10 has recorded a finding that article 7(2) provides that the arm's length price is the criterion for computation of these hypothetical profits. In our opinion the entire rational or reasoning given by the Tribunal has to be set aside. In matters of tax what has to be considered and more so in international transactions if there be a treaty, the provisions of the treaty and if the provisions of the treaty are more advantageous to an assessee, then the construction will have to be given which is advantageous to the assessee. At this stage we may note that on behalf of the assessee learned counsel has produced an order passed by the Additional Commissioner of Income-tax (Transfer Pricing-II), Mumbai in the matter of determination of arm's length price with reference to all the transactions reported in Form No. 3CEB filed by the assessee. The assessee is SET India, the depending agent. The order records that the assessee is engaged in the business of providing audiovisual television content and also acts as an advertising agent of SET Satellite Singapore Pvt. Ltd. The assessee distributes these channels to the Indian cable operators and that the assessee has applied the TNM method to determine the arm's length price for its international transaction. It, however, clarified that the order is in respect of reference received for the assessment year 2002-03 and not for the subsequent assessment years.

20. We may now consider the judgment in DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 (SC) [LQ/SC/2007/872] . The appeals dealt with the Double Tax Avoidance Agreement (DTAA) between India and United States. That treaty advocated application of the arm' s length principle or provided a mechanism for avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, " the MSCo." ) and one of the group companies of Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short " the MSAS" ). An agreement was entered into for providing certain support services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo. On May 5, 2005, MSCo. filed its advance ruling application . The basic question related to the transaction between the MSCo. and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having permanent establishment in India under article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated April 14, 2005, and if so (ii) the amount of income attributable to such permanent establishment. It was ruled that MSAS should be regarded as constituting a service permanent establishment under article 5(2)(1). On the second question the Authority for Advance Rulings ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the arm's length price (ALP) in respect of the service agreement dated April 14, 2005, and it meets the test of arm' s length as prescribed under section 92C of the 1961 Act and no further income was attributable in the hands of MSAS in India. The said ruling of Authority for Advance Ruling on the question of income attributable to the permanent establishment was the subject-matter of challenge by the Department. In so far as the issue of permanent establishment is concerned the Supreme Court was pleased to hold that it agreed with the Ruling of the Authority for Advance Ruling that stewardship activities would fall under article 5(2)(l). Dealing with the question of deputation, the court held that on the facts that there is a service permanent establishment under article 5(2)(l) and as such held that the Department was right in its contention that there exists a permanent establishment in India. Considering article 7 of that treaty the court observed that what is to be taxed under article 7 is income of the MNE attributable to the permanent establishment in India and what is taxable under article 7 is profits earned by the MNE. Under the Income-tax Act the taxable unit is the foreign company, though the quantum of income taxable is income attributable to the permanent establishment of the said foreign company in India. The court observed that the important question which arises for determination is whether the Authority for Advance Ruling is right in its ruling when it says that once the transfer pricing analysis is undertaken there is no further need to attribute profits to a permanent establishment. The court further noted that the computation of income arising from international transactions has to be done keeping in mind the principle of arm' s length price. The court further reiterated that the main point for determination is whether the Authority for Advance Rulings was right in ruling that as long as MSAS was remunerated for its services at arm' s length, there should be no additional profits attributable to the applicant or to MSAS in India. After considering the various methods by which arm' s length price can be determined the court observed as under (page 440) :

"As regards determination of profits attributable to a permanent establishment in India (MSAS) is concerned on the basis of arm' s length principle we have quoted article 7(2) of the DTAA. According to the Authority for Advance Ruling where there is an international transaction under which a non-resident compensates a permanent establishment at arm' s length price, no further profits would be attributable in India. In this connection, the Authority for Advance Ruling has relied upon Circular No. 23 of 1969 issued by the Central Board of Direct Taxes . . This is the key question which arises for determination in these civil appeals."

21.After discussing the various issues the Court in its conclusion held as under (page 443) :

"As regards attribution of further profits to the permanent establishment of MSCo. where the transaction between the two are held to be at arm' s length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a permanent establishment) is remunerated on arm' s length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the permanent establishment. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the permanent establishment for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the permanent establishment has obtained services from the multinational enterprise at lower than the arm' s length cost."

22. In our opinion considering the judgment, if the correct arm's length price is applied and paid then nothing further would be left to be taxed in the hands of the foreign enterprise.

23. Considering the above principle as may be discerned from the judgment in DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 (SC) [LQ/SC/2007/872] it would be clear that :

(1) Considering the Central Board of Direct Taxes Circular No. 742 it would be fair and reasonable that the taxable income is computed at 10 per cent, of the gross profits. In the instant case in so far as marketing services are concerned by the arm' s length principle what has been paid is more than 10 per cent, as can be seen from the order of the Commissioner of Income-tax (Appeals). This was not disputed by the Revenue in its appeal before the Income-tax Appellate Tribunal.

(2) The only contention advanced and which found favour with the Tribunal was that the advertisement revenue received by the assessee was also income liable to tax in India. The Commissioner of Income-tax (Appeals) relied upon Circular No. 23 of 1969. That Circular read with article 7(1) would result in holding that advertisement revenue received by the appellant are not taxable in India as long as the treaty and the Circular stands.

24. In the light of the above appeal filed by the appellant herein is allowed and the order of the Income-tax Appellate Tribunal is set aside."

6.4.1 We would also like to refer to the case of Dy. DIT (International Taxation) v. B4U International Holdings Ltd. [2012] 23 taxmann.com 372/137 ITD 346 (Mum.). In that matter the tribunal has held as under:

"Coming to the alternate argument even if it is held that there is a PE of the assessee in India, then we would hold that the rate of commission of 15% was accepted as ALP by the TPO for the AY 2003-04 to 2004-05, no further profit is attributable to the PE. This is the rate mentioned in the CBDT Circular No.742 of the order 1996. Similar rate is accepted by the Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pte. Ltd. (supra). Thus we have no agitation in upholding the contention of the assessee that the payment was at arms' length. When the payment is at ALP there is no further need to attribute profit to the PE as held by the Hon'ble Supreme Court in the case of Morgan Stanley &Co.( supra)."

6.4.2 We would also like to rely upon the matter of BBC Worldwide Ltd. (supra).In that matter also the Hon'ble Delhi High Court had referred to the case of Sat Satellite (Singapore) Pte. Ltd. (supra) and held that if correct ALP was applied and paid nothing further would be left to be taxed in the hands of the foreign enterprise. It also placed reliance on Circular No.742 and held that CBDT itself had considered 15% commission as normally accepted commission rate payable to the agents of telecasting companies.

7. Considering the above discussion, we hold that the assessee did not have a PE in India, that it was not carrying out any business activities in India and therefore no part of its revenue was attributable to India, that SIPL was an independent agent under Article 5(6)of the tax treaty between India and Holland, that the activities of the agent were carried out in its ordinary course of business, that the agent was not wholly and exclusively devoted to the assessee, that payments made to SIPL were at arm's length, that provisions of Circular 742 were applicable for determining the tax liability of the assessee. In short, the assessee was not liable to pay tax in India in any of the AY.s. mentioned above. Effective ground of appeal is decided in favour of the assessee.

ITA.s/5690/Mum/2014 to 5695/Mum/14 A Y.s. 1999-2000 to 2004-05:

8. Facts of the cases for the remaining AY.s. are almost identical to the facts of AY. 1998-99 except for the facts in some of the AY.s. TP provisions were applicable. In the earlier paragraphs we have held that the TPO.s/AO.s have found that the payments made by the assessee to its agent were at arm's length. Therefore, in our opinion, there is no justification to make any further addition on that accounts. Following our order for the AY. 1998-99,we allow remaining appeals, filed by the assessee for the subsequent AY.s.

As a result, all the appeals filed by the assessee stand allowed.