M/S. SATELLITE TELEVISION ASIA REGION ADVERTISING SALES B.V., Mumbai v. THE ADIT (I.T) 3(1), Mumbai

ITA 1840/MUM/2004 | 1998-1999
Pronouncement Date: 21-05-2010 | Result: Partly Allowed

Appeal Details

RSA Number 184019914 RSA 2004
Assessee PAN EMBER2003P
Bench Mumbai
Appeal Number ITA 1840/MUM/2004
Duration Of Justice 6 year(s) 2 month(s) 2 day(s)
Appellant M/S. SATELLITE TELEVISION ASIA REGION ADVERTISING SALES B.V., Mumbai
Respondent THE ADIT (I.T) 3(1), Mumbai
Appeal Type Income Tax Appeal
Pronouncement Date 21-05-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted H
Tribunal Order Date 21-05-2010
Assessment Year 1998-1999
Appeal Filed On 19-03-2004
Judgment Text
ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBU NAL MUMBAI L BENCH MUMBAI BEFORE SHRI PRAMOD KUMAR ( ACCOUNTANT MEMBER) AND SHRI R S PADVEKAR ( JUDICIAL MEMBER) ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 SATELLITE TELEVISION ASIA REGION ADVERTISING SALES BV .APPELLANT C/O S R BATLIBOI & CO. 18 TH FLOOR EXPRESS TOWERS NARIMAN POINT MUMBAI 400 021 VS. ASSISTANT DIRECTOR OF INCOME TAX - INTERNATIONAL TAXATION 3 (1) MUMBAI . RESP ONDENT SCINDIA HOUSE BALLARD PIER MUMBAI 400 001 APPELLANT BY : SHRI PORUS KAKA RESPONDENT BY : SHRI AJIT KUMAR SINHA O R D E R PER PRAMOD KUMAR: 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS D IRECTED AGAINST THE ORDER DATED 19 TH DECEMBER 2003 PASSED BY THE CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX A CT 1961 FOR THE ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 2 OF 11 ASSESSMENT YEAR 1998-99. 2. GRIEVANCES RAISED BY THE ASSESSEE ARE AS FOLLOWS : GROUND NO. 1 THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE AP PELLANT IS A CONDUIT FOR SATELLITE TELEVISION ASIAN REGION LIMIT ED ( STAR LTD.). GROUND NO. 2 THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE ST AR INDIA PVT LTD IS A DEPENDENT AGENT OF STAR LIMITED. GROUND NO. 3 HAVING HELD IN GROUND NO. 1 OF APPEAL THAT THE APPE LLANT IS A CONDUIT OF STAR LTD THE LEARNED CIT(A) HAS NOT CONSIDERED IT RELEVANT TO ADJUDICATE ON THE BALANCE GROUNDS OF APPEAL AS DETA ILED BELOW: (I) CONCLUDING THAT THE APPELLANT HAS A PERMANENT ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 3 OF 11 ESTABLISHMENT IN INDIA UNDER THE DOUBLE TAXATION A VOIDANCE AGREEMENT EXECUTED BETWEEN INDIA AND THE NETHERLAND S (NETHERLANDS TREATY); (II) WITHOUT PREJUDICE TO THE ABOVE CONCLUDING THA T THE APPELLANT IS NOT ELIGIBLE TO BE TAXED AS PER THE PR OVISIONS OF CIRCULAR 742 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES; (III) WITHOUT PREJUDICE TO THE ABOVE CONCLUDING TH AT STAR LIMITED HAS A PERMANENT ESTABLISHMENT IN INDIA; AND (IV) LEVYING INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT. 3. THE MATERIAL FACTS SO FAR AS RELEVANT TO THE IS SUE IN APPEAL BEFORE US ARE AS FOLLOWS. THE APPELLANT BEFORE US IS A COMPA NY INCORPORATED IN THE NETHERLANDS. IT IS A WHOLLY OWNED SUBSIDIARY OF SAT ELLITE TELEVISION ASIA REGION LIMITED (STAR LIMITED IN SHORT) BASED IN HO NG KONG WHICH IN TURN IS SUBSIDIARY OF A BRITISH VIRGIN ISLAND BASED COMPANY BY THE NAME OF STAR TELEVISION LIMITED. THE ASSESSEE HAS BEEN GRAN TED THE EXCLUSIVE RIGHT FOR SALE OF ADVERTISING TIME IN INDIA ON THE CHAN NELS OF THE STAR TV NETWORK WHICH IS OWNED BY STAR LIMITED. THE APPELL ANT HAS ENGAGED AN ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 4 OF 11 INDIAN COMPANY BY THE NAME OF STAR INDIA PVT LTD WHICH WAS EARLIER KNOWN AS NEWS TELEVISION (INDIA) LIMITED TO PROCUR E BUSINESS FROM INDIAN ADVERTISERS ON A COMMISSION OF 15% OF RECEI PTS FROM SUCH BUSINESS. THE REVENUES SO EARNED BY THE ASSESSEE WE RE OFFERED TO TAX @10% ON THE BASIS OF CBDT CIRCULAR NO. 742 DATED 2 ND MAY 1996. HOWEVER WHEN THE INCOME TAX RETURN SO DECLARING THE ASSESSE ES INCOME UNDER CIRCULAR # 742 CAME UP FOR SCRUTINY BEFORE THE ASSE SSING OFFICER THE ASSESSING OFFICER EXPRESSED THE VIEW THAT THIS INCO ME CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE AS INCOME ACTUALLY BELON GED TO STAR LIMITED HONGKONG OWNER OF THE STAR TV NETWORK AND THE AS SESSEE WAS ONLY A CONDUIT COMPANY. IT WAS OBSERVED THAT THE ASSESSEE COMPANY WAS BROUGHT INTO PICTURE ONLY BECAUSE OF INDIA HAVING A FAVOURABLE TAX TREATY WITH THE NETHERLANDS WHERE THE ASSESSEE CMAPNY IS LOCATED AND ONLY BECAUSE THE HONG KONG WHERE STAR LIMITED WAS LOCA TED DID NOT HAVE ANY TAX TREATY WITH INDIA. IT WAS ACCORDING TO THE ASSESSING OFFICER A CLEAR CASE OF TREATY SHOPPING. THE CONCEPT OF TREATY SHOP PING AND CONDUIT COMPANIES WAS DISCUSSED IN DETAIL. IT WAS THEN OBSE RVED THAT THE ASSESSEE COMPANY IS A FLOATED ONLY FOR THE PURPOSES OF TAX P LANNING AND AVOIDANCE AND THAT STAR LIMITED HONGKONG HAS A PERMANENT ESTA BLISHMENT BY WAY OF STAR INDIA PVT LTD WHICH WAS OSTENSIBLY AGENT OF THE ASSESSEE COMPANY. WHEN THE ASSESSEE WAS CONFRONTED WITH A SHOW CAUSE NOTICE REQUIRING THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ADVERTISING RE VENUES EARNED BY THE ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 5 OF 11 ASSESSEE SHOULD NOT BE TREATED AS ADVERTISEMENT REV ENUES OF STAR LIMITED AND THE ASSESSEE BEING BROUGHT TO THE PICTURE BE TR EATED AS A CASE OF TREATY SHOPPING NOT PERMISSIBLE UNDER THE LAW TH E ASSESSEE SUBMITTED THAT HE IS NOT AWARE OF ANY SPECIFIC PROVISIONS IN THE LAW WHICH DEAL WITH TREATY SHOPPING BEING DISREGARDED. IT WAS FURTHER S UBMITTED THAT THE ASSESSEE COMPANY IS REGISTERED IN ASSESSED TO TAX IN AND DOMICILED IN THE NETHERLANDS AND ALL ITS BUSINESS IS CONDUCTED FROM THE NETHERLANDS. THE TAX RESIDENCY CERTIFICATES ISSUED BY THE NETHERLAN DS TAX AUTHORITIES IN RESPECT OF THE NETHERLANDS- ISRAEL THE NETHERLANDS - INDONESIA AND THE NETHERLANDS- UK WERE FILED BEFORE THE ASSESSING OFF ICER. IT WAS ALSO POINTED OUT THAT THE ASSESSEE DOES NOT ONLY EARN RE VENUES FROM INDIA BUT ALSO FROM OTHER COUNTRIES. THESE SUBMISSIONS DID NO T IMPRESS THE ASSESSING OFFICER. HE WAS OF THE VIEW THAT MERELY B ECAUSE TAX RESIDENCY CERTIFICATES HAVE BEEN ISSUED IT DOES NOT MEAN THA T THE ASSESSEE COMPANY IS NOT CREATED WITH A MOTIVE TO AVOID TAXES AND TH AT THE REVENUE AUTHORITIES HAVE THE POWERS TO LIFT THE VEIL AND L OCATE ITS REAL RESIDENCY. IT WAS ALSO OBSERVED THAT THE DTAA BETWEEN INDIA AND THE NETHERLANDS WAS ENTERED INTO IN ORDER TO GIVEN BENEFITS AND RELIEFS TO BONAFIDES AND GENUINE COMPANIES AND NOT TO ENCOURAGE THE CREATION OF NON GENUINE COMPANIES OR CONDUIT COMPANIES FOR THE PURPOSES OF AVOIDANCE OF TAX. THE ASSESSING OFFICER THUS CONCLUDED THAT THE ASSES SEE COMPANY IS A CONDUIT COMPANY AND ITS REAL RESIDENCY IN NOT IN TH E NETHERLANDS. THE ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 6 OF 11 TREATY BENEFITS WERE THUS DECLINED. IT WAS OBSERVED THAT THE INCOME IN QUESTION ACTUALLY BELONGED TO STAR LIMITED. AS A PR OTECTIVE MEASURE HOWEVER THE ASSESSING OFFICER ALSO ASSESSED THIS I NCOME IN THE HANDS OF THE ASSESSEE. HE HOWEVER DECLINED BENEFIT OF CIRCUL AR 742 ON THE GROUND THAT IT IS NOT A TELECASTING OR BROADCASTING COMPAN Y BUT ONLY A CONDUIT COMPANY. BY INVOKING RULE 10 OF THE INCOME TAX RULE S THE ASSESSING OFFICER ESTIMATED PROFIT @ 20% OF GROSS ADVERTISING REVENUES. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER ASS ESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS . THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER IN PR INCIPLE AND OBSERVED AS FOLLOWS: GIVEN THE ABOVE (FACTS) ON BALANCE IT WOULD BE MORE APPROPRIATE THAT IN THE ASSESSMENT YEAR UNDER CONSIDERATION TH E INCOME FROM AD REVENUES BE TAXED IN THE HANDS OF STAR LIMITED UNDE R THE PROVISION OF CIRCULAR 742 AS ISSUED BY THE CBDT AND I AGREE WI TH THE ASSESSING OFFICER THAT THE APPELLANT COMPANY IS MERELY A COND UIT COMPANY OF STAR LIMITED. ACCORDINGLY THE ISSUE IS DECIDED AGA INST THE APPELLANT. 4. AGGRIEVED BY THE STAND SO TAKEN BY THE CIT(A) AS WELL THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 7 OF 11 5. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 6. THE BASIC CASE OF THE REVENUE IN OUR HUMBLE UN DERSTANDING IS THAT THE ASSESSEE BEFORE US IS USED AS A COMMERCIALLY IR RELEVANT IN INTERMEDIATE ENTITY WHICH ARE USUALLY REFERRED TO PE BLOCKER SO AS TO RESTRICT TAX EXPOSURE OF THE STAR LIMITED IN INDIA. IT IS ON THIS BASIS THAT THE ASSESSING OFFICER HAS COME TO THE CONCLUSION TH AT THE REAL TAXABILITY OF ADVERTISING REVENUES MUST LIE IN THE HANDS OF THE S TAR LIMITED. AS A COROLLARY TO THIS ACCORDING TO THE ASSESSING OFFIC ER THE SAID INCOME CANNOT BE TAXED IN THE HANDS OF THIS ASSESSEE. THE CASE OF THE REVENUE THUS HINGES ON ITS PERCEPTION THAT THE STAR LTD IS DERIVING TAX ADVANTAGE BY INSERTING THE ASSESSEE COMPANY AS A LINK IN CHAI N OF ENTITIES TO GET THE ADVERTISING REVENUES. THIS PERCEPTION IS HOWEVER CLEARLY ERRONEOUS. AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD VS DDIT (307 ITR 205) IN TERMS OF CBDT CIRCULAR NO. 23 WHERE A NON RESIDENTS SALE TO INDIAN CUSTOMER S ARE SECURED THROUGH AN AGENT THE ASSESSMENT IN INDIA OF THE INCOME ARI SING FROM THE SAID TRANSACTION WILL BE RESTRICTED TO AMOUNT OF PROFIT WHICH IS ATTRIBUTABLE TO THE AGENTS SERVICES. NO DOUBT THIS CIRCULAR IS NOW WITHDRAWN WITH EFFECT ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 8 OF 11 FROM 22 ND OCTOBER 2009 BUT A WITHDRAWAL OF THE CIRCULAR AS IS THE SETTLED LEGAL POSITION IS ONLY PROSPECTIVE IN NATURE. IN T HE RELEVANT PERIOD THE CIRCULAR WAS VERY MUCH IN FORCE AND CANNOT BE IGNOR ED. NOW WHETHER THE ADVERTISING REVENUES ARE TAXED IN THE HANDS OF THE ASSESSEE COMPANY OR IN THE HANDS OF THE STAR LIMITED THERE IS NO DISPUTE THAT THE ADVERTISING REVENUES ARE GENERATED THROUGH THE COMMISSION AGENT I.E. STAR INDIA PVT LTD AND THAT THE COMMISSION AGENT HAS BEEN PAID A F AIR REMUNERATION FOR ITS SERVICES. THAT INCOME IS ALREADY TAXED IN THE H ANDS OF THE STAR INDIA PVT LTD AND IN TERMS OF THE CIRCULAR 23 TAXABILITY I N RESPECT OF SUCH SALES CANNOT EXTEND BEYOND THAT INCOME. IN VIEW OF THE L EGAL POSITION AS IT NOW STANDS NOW THERE IS NO TAX ADVANTAGE IN ROUTING TH E REVENUES THROUGH THE ASSESSEE COMPANY. 7. IN ANY CASE WE HAVE ALSO NOTICED THAT THE ASSES SEE COMPANY WAS FORMED NOT ONLY FOR PROCURING ADVERTISING BUSINESS FROM INDIA BUT ALSO FROM OTHER COUNTRIES. IT IS THUS CLEAR THAT THE AS SESSEE GROUP CHOSE TO CENTRALIZE THE SALE OPERATIONS TO THE ASSESSEE COMP ANY ON A GLOBAL BASIS AND IT WAS NOT DRIVEN BY INDIAN TAX CONSIDERATIONS ALONE. LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO ADDRESSED US AT LENGTH ON COMMERCIAL JUSTIFICATION OF ROUTING THE ADVERTISING SALES BUSI NESS THROUGH THIS COMPANY WHICH INCLUDED TRADE DISPUTES SETTLEMENTS OF STAR LIMITED WITH ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 9 OF 11 ITS FORMER ASSOCIATE MEDISCOPE WHICH WAS APPOINTED EXCLUSIVE AGENT FOR SOME PART AND NON EXCLUSIVE AGENT FOR OTHER PART OF THE BUSINESS IN INDIA AND WHICH IS WAY THE ASSESSEE COMPANY HAD TO BE BR OUGHT TO THE PICTURE. COPIES OF DOCUMENTS EVIDENCING THESE DISPUTES AND T HEIR SETTLEMENTS WERE ALSO FILED BEFORE US. LEARNED DEPARTMENTAL REPRESE NTATIVE COULD NOT POINT OUT ANY REASONS AS TO WHY ALL THESE COMMERCIAL JUST IFICATIONS CAN BE IGNORED. 8. BASED ON THE MATERIAL BEFORE US IN THE CASE OF T HIS CASE THERE IS NO GOOD REASON THUS TO DISREGARD THE EXISTENCE OF THE ASSESSEE COMPANY AND PROCEED TO TAX THE ENTIRE ADVERTISING REVENUE IN TH E HANDS OF ITS PARENT COMPANY. IT IS DIFFICULT TO UNDERSTAND THE REASONI NG ADOPTED BY THE CIT(A) WHO HAS OBSERVED THAT GIVEN THE FACTS OF CASE IT W OULD BE MORE APPROPRIATE TO TAX THE INCOME IN THE HANDS OF THE STAR LIMITED. HE EXERCISED A CHOICE WHICH WAS NOT AVAILABLE TO HIM. WHAT IS TO BE TAXED IN THE HANDS OF STAR LIMITED IS TO BE DECIDED WHEN THE ASSESSMENT OF STAR LIMITED IS FINALIZED AND HOW CAN ANY FINDING BE GI VEN AGAINST STAR LIMITED WITHOUT EVEN HEARING THE SAID ASSESSEE. THE COURSE OF ACTION ADOPTED BY THE CIT (A) IN TAXING THE INCOME IN THE HANDS OF THE STAR HONG KONG RATHER THAN DOING SO IN THE HANDS OF THE ASSESSEE DOES NOT MEET OUR APPROVAL. HAVING SAID SO HOWEVER WE MAY HASTEN TO ADD THAT ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 10 OF 11 THIS DECISION WILL HAVE NO BEARING ON THE QUESTION AS TO WHETHER THE STAR LIMITED WILL BE TAXABLE IN RESPECT OF THESE INCOMES DIRECTLY AS WE DO NOT WANT TO BE SEEN AS PRE-EMPTING THE DECISION IN THE CASE OF STAR LIMITED. THAT IS A QUESTION WHICH CAN BE DECIDED AFTER TAKIN G INTO ACCOUNT MATERIAL ON RECORDS IN THAT CASE AND AFTER HEARING THE STAR LIMITED NO IS IT ANY OF OUR CONCERN TO GIVE THAT FINDING. THE SUBJECT MATT ER OF APPEAL BEFORE US MUST BE RESTRICTED TO THE APPEAL BEFORE US AND WE SHOULD BE CAREFUL IN BEING WITHIN THESE LIMITS. ALL WE CAN SAY IS THAT ON THE BASIS OF MATERIAL PRODUCED BEFORE US IN THE CASE OF THIS ASSESSEE TH ERE IS NO GOOD REASON TO COME TO THE CONCLUSION THAT THE INCOME FROM SALE RE VENUES OF ADVERTISING TIME DOES NOT BELONG TO THE ASSESSEE. WE LEAVE IT A T THAT. 9. FOR THE REASONS SET OUT ABOVE WE ARE OF THE CO NSIDERED VIEW THAT THE ASSESSING OFFICER WAS NOT QUITE JUSTIFIED IN TAXING THE INCOME FROM ADVERTISING TIME SALES IN INDIA COULD NOT BE T AXED IN THE HANDS OF THE ASSESSEE. HE OUGHT TO HAVE TAXED THE SAME IN THE HA NDS OF THE ASSESSEE COMPANY. 10. AS REGARDS THE OTHER ISSUES RAISED IN THIS APPE AL WE HAVE NOTICED THAT THE CIT(A) HAS NOT REALLY ADJUDICATED UPON THE SAME. WE THEREFORE REMIT THE MATTER TO THE FILE OF THE CIT(A) FOR FRES H ADJUDICATION ON THE SPECIFIC GRIEVANCES RAISED BY THE ASSESSEE ON THE Q UANTIFICATION OF ITA NO. 1840/MUM/04 ASSESSMENT YEAR 1998-99 PAGE 11 OF 11 TAXABILITY OF INCOME AND OTHER CONSEQUENCES. 11. IN THE RESULT THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 21 ST DAY OF MAY 2010. SD/XX SD/XX (R S PADVEKAR) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 21 ST DAY OF MAY 2010. COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) MUMBAI 4. COMMISSIONER (APPEALS) MUMBAI 5. DEPARTMENTAL REPRESENTATIVE L BENCH ITAT MUMB AI 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI