Mum,Bai-400 064 v. Deputy Director Of Income-Tax

-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.944 OF 2007 SET Satellite (Singapore) Pte Ltd., ) a Company incorporated and registered ) under the laws of Singapore, having ) its registered office at 5, Tampines ) Central 6, # 02-19, Telepark Building ) Siongapore-529482 and address for ) correspodnence in India at SET India ) Private Limited, Interface Building 7, ) Malad Link Road, Malad (West), ) Mum,bai-400 064. )..APPELLANT Versus 1.Deputy Director of Income-tax ) International Taxation, Rg.2(1), ) Mumbai having his address at Scindia ) House,1st Floor, Ballard Estate, ) Mumbai-400 038. ) 2.Director of Income-tax, International) Taxation, Mumbai having his address ) at Scindia House, Ballard Estate, ) Mumbai-400 038. )..RESPONDENTS Mr.Harish Salve, Senior Counsel with Mr. S.K. Srivastav, Meenaxi Grover, Mr. N. Sahu i/b. S.K. Srivastav & Co., for the Appellant. Mr.B.M.Chatterjee with Mrs. Poonam Bhosale for -2- respondents. CORAM: F.I. REBELLO & CORAM: F.I. REBELLO & CORAM: F.I. REBELLO & R.S. MOHITE, JJ. DATE : 22ND AUGUST, 2008. JUDGMENT: (PER F.I. REBELLO, J.). JUDGMENT: (PER F.I. REBELLO, J.). JUDGMENT: (PER F.I. REBELLO, J.). . This is an Appeal by the assessee against the order of ITAT dated 20th April, 2007 in respect of assessment year 1999-2000. According to the Appellant it is a resident of Singapore and has business activities in India. Undisputed fact is that, the Appellant through its dependent agent in the form of SET India (P) Limited, is carrying on marketing activities in India for advertisement slots by canvassing advertisements in India. It filed its return of income on 30th December, 1999 declaring its income at Nil. On 5th March, 2001 they filed revised return of income declaring business income of Rs.13,58,43,976/-. Along with the return it was submitted that it did not have any tax liability in India as it did not have a permanent establishment and that its dependent agent was remunerated on an arm’s length basis. As this income from various activities had been assessed to tax in the hands of SET India, there could not be further assessment of income in the hands of the Appellant on account of the said activities. Reliance was placed on Circular No.23 dated July, 23, 1969 issued by the CBDT. Whilst filing revised return on March 5, 2001 it computed its taxable income at Rs.13,58,43,976/- as per the formula prescribed in the -3- CBTD Circular No.742 without prejudice to its contention that they do not have any income which is taxable in India. Whilst filing its revised returns it was its contention that there was no income which was assessable to tax in India. The Assessment Officer by his order dated 20th March, 2002 was pleased to assess the Assessee’s income 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. Consequent to this order, as there was no deduction at source it imposed interest under Section 234A, 234B and 234C of the Income Tax Act. The Appellant being aggrieved preferred an Appeal before the Commissioner of Income Tax. 2. At the hearing of the Appeal before the C.I.T. it was contended on behalf of the Appellant that only income attributable to the Appellant’s Indian operations viz. marketing of the ad time slots can be taxed in India and that ad revenues earned were not attributable to its Indian operations as the contract to sell are made outside India and the sales are made on principal to principal basis. Ground No.1 was taxability of ad further the subscription fees received from cable operators of its dependent agent. Consequent to this order, as there was no deduction at source it imposed interest under Section 234A, 234B and 234C of the Income Tax Act. The Appellant being aggrieved preferred an Appeal before the Commissioner of Income Tax. 2. At the hearing of the Appeal before the C.I.T. it was contended on behalf of the Appellant that only income attributable to the Appellant’s Indian operations viz. marketing of the ad time slots can be taxed in India and that ad revenues earned were not attributable to its Indian operations as the contract to sell are made outside India and the sales are made on principal to principal basis. Ground No.1 was taxability of ad revenues from its own channels and Ground No.2 was taxability of ad revenues from third party channel. In so far as the ad revenues are concerned, the learned C.I.T. was pleased to hold that para.6(c) of the Circular No.23 is applicable to the Appellant as (1) the -4- non-resident’s business activities in India where wholly channelled through its agent; (2) the contracts to sell are made outside India and (3) the Sales are made on a principal to principal basis. In view of this finding it proceeded to examine whether profits arising to the appellant out of SET India’s marketing activities in India are sufficiently taxed in India. Considering the provisions of the India Singapore TDAA it held that as the Appellant had remunerated SET India on an arm’s length basis and considering Article 7(2) of the DTAA it held that no further profits should be taxed in the hands of the Appellant. The Appellate Authority, however, proceeded to hold that as the Appellant itself had revised the return of income and offered the income to the tax there was no reason to interfere with the order of A.O. In so far as distribution of revenue from AXN channel it was pleased to record a finding of fact that distribution income belongs to SET India and not to the Appellant. The said income had been offered to tax by SET India and had already been taxed in its hands. That distribution rights it was held is a commercial right which is distinct and different from a copyright and consequently there was no question of payment of royalty as had been held by the A.O. and the income belongs to SET India which cannot be subject to tax in the hands of the Appellants. Accordingly, the A.O. was directed to delete the portion of Rs.1,27,89,154/- earned by SET India while computing the taxable income of the -5- Appellant. In so far as interest under Sections 234-A and 234-B is concerned considering various authorities and contention advanced directed the A.O. to delete the interest of Rs.3,52,39,785/- and Rs.49,39,278/- levied under Section 234B and 234C of the Act respectively. India while computing the taxable income of the -5- Appellant. In so far as interest under Sections 234-A and 234-B is concerned considering various authorities and contention advanced directed the A.O. to delete the interest of Rs.3,52,39,785/- and Rs.49,39,278/- levied under Section 234B and 234C of the Act respectively. 3. Both the assessee and the Revenue aggrieved by the order of the Commissioner (Appeals) dated 1st October, 2003 preferred appeal before the ITAT. Appeal filed by Revenue was numbered as ITA No.535/Mum/04 and Appeal filed by Assessee was numbered as ITA No.205/Mum./04. It was contended as can be seen from para.3 of the order of the Tribunal on behalf of Revenue that C.I.T. (Appeal) erred in holding that as SET India had been remunerated on arm’s length basis no further profit could be taxed in India in respect of advertisement revenue from its own channel. Similarly it was contended that CIT (A) erred in holding that advertisement revenue pertaining to AXN channel are not taxable in India. The third ground was in respect of liability to pay interest under Section 234B and 234-C. 4. At the hearing of the Appeal the ITAT referred the question of law as under, in the Appeal filed by Revenue:- "On the facts and circumstances of the case the learned C.I.T. (A) erred in holding that since -6- the assessee has remunerated the agent on arm’s length price (ACP) no further profits of the assessee could be taxed in India other than the profits so earned by the dependent agent (DA)?" . On the issue as to whether SET India was P.E. of the Appellant after discussing the issue it recorded a finding that the SET India was a dependent agent and as such the Appellant is deemed to have a P.E. It then proceeded to pose to itself a question, as to how to such the Appellant is deemed to have a P.E. It then proceeded to pose to itself a question, as to how to compute the profit of the fictional hypothetical PE. It went on to hold that in addition to the taxability of the D.A. in respect of the remuneration earned by them, which is in accordance with the domestic law and which has nothing to do with the taxability of the foreign enterprise of which it is dependent agent, the foreign enterprise is 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. The Appellant assessee had contended that the ruling given by the authority for Advance Ruling in the case of Morgan Stanley & Co. Inc. 284 ITR 260 the case of Morgan Stanley & Co. Inc. 284 ITR 260 would apply. It held that it would not be binding on it. It then went on to hold that there are no specific guide-lines on the issue of computation of profits of dependent agent permanent establishment from the tax authorities or in the applicable tax treaty. It, however, observed that in respect of these treaty -7- provisions, there is some guidance available from the tax establishment. The Appellant assessee had contended that the ruling given by the authority for Advance Ruling in the case of Morgan Stanley & Co. Inc. 284 ITR 260 the case of Morgan Stanley & Co. Inc. 284 ITR 260 would apply. It held that it would not be binding on it. It then went on to hold that there are no specific guide-lines on the issue of computation of profits of dependent agent permanent establishment from the tax authorities or in the applicable tax treaty. It, however, observed that in respect of these treaty -7- provisions, there is some guidance available from the tax rulings abroad and other literature from multilateral bodies like OECD (Organization of Economic Co-operation and Development, Paris) as also prominent organizations like IFA (International Fiscal Association, Amsterdam). It then proceeded to consider the Australian Tax Office guide-lines and the view expressed by O.E.C.D. It was submitted on behalf of the Assessee that what has to be considered is what is the liability according to the applicable law and not what the law ought to be. It also relied on the report in the proceedings of the International Fiscal Associations 2006 Congress at Amsterdam as also IFA Congress Report 2008 and went on to hold in paragraph 31 that the tax liability of a foreign enterprise, in respect of its dependent agency permanent establishment, is not extinguished by making an arms length payment to the dependent agent and consequently the relief given by the Commissioner by holding that the taxability of arms’ length remuneration to the dependent agent extinguishes the tax liability of dependent agent permanent establishment as well, is unjustified and accordingly allowed the Appeal of Revenue on the question framed and consequently allowed Ground No.1. For the reasons while allowing Ground 1 it also allowed ground No.2. In so far as Ground No.3 is concerned, in the matter of liability under Sections 234B and 234C for payment of interest it upheld the view taken by CIT (A). -8- 5. It then dealt with the contention raised by the assessee appellant in its Appeal, that C.I.T.(A) had erred in holding that as the Appellant had offered the advertisement revenue (including those relating to the AXN channel) to tax in the revised return of income, no relief from taxation could be given to the Appellant, despite holding that no further profits should be taxed in the hands of the Appellant, under Article 7 of the India Singapore Tax Treaty. Considering the findings given by it, on the Appeal preferred by the revenue it held that the said ground had become infructuous. In so far as the second ground that the learned Commissioner (Appeals) had not considered the contention of the appellant that the advertisement revenues earned were not liable to tax in India under the Income Tax Act, 1961, it held that it would be proper to remit the matter to the file of C.I.T. (A) for the limited purpose of adjudication on the issue. Ground No.2 was allowed for statistical purposes. Ground No.3 was that the advertisement revenue was not taxable under the Income Tax Act and that considering Circular No.23 dated July 23, 1969 the advertisement revenue was not taxable in India, remanded the matter to the file of the C.I.T. (A). 5. In this Appeal, Assessee-Appellants have raised the following questions of law:- -9- "(a). Whether the activities of the non-independent agent under para.8 of Article 5 would be treated as the activities of the "deemed" permanent establishment and thereby the amount taxable under para..2 of Article 7 in respect of file of C.I.T. (A) for the limited purpose of adjudication on the issue. Ground No.2 was allowed for statistical purposes. Ground No.3 was that the advertisement revenue was not taxable under the Income Tax Act and that considering Circular No.23 dated July 23, 1969 the advertisement revenue was not taxable in India, remanded the matter to the file of the C.I.T. (A). 5. In this Appeal, Assessee-Appellants have raised the following questions of law:- -9- "(a). Whether the activities of the non-independent agent under para.8 of Article 5 would be treated as the activities of the "deemed" permanent establishment and thereby the amount taxable under para..2 of Article 7 in respect of the deemed permanent establishment would be the income attributable in these activities? (b) Whether having taxed the agent on the fair value of the activities in India, the same could be taxed all over again in the hands of the assessee as being income attributable to the deemed permanent establishment? (c) Whether the assessee is debarred from contending in appeal that there was no income liable to tax as a matter of law, solely on account of the fact that, it had at some stage surrendered, on ad hoc basis, a sum for taxation as being liable to tax in India, without prejudice to its claim that its income is not liable to tax in India. 6. On behalf of the Appellant it is submitted that as a general rule the DTAA between India and Singapore provides that profits from business of a person, resident in Singapore can be taxed in India only if it carries on business in India through a permanent establishment -10- (P.E.). in India. If there be no P.E. then notwithstanding Section 9 of the Income Tax Act the income would not be liable to tax in India. An additional fiction is created of a deemed PE - i.e. where a person does not have a P.E., but has a dependent agent. The object being to ensure that where the fair share of income attributable to the operations in India (carried out through an agent, instead through a PE) is not taxed in India in the hands of the agents, the differential would be liable to tax in India. Thus when the remuneration of the Indian Agent is on the basis of a fair transfer price i.e. on an arms length price, nothing further remains to be taxed in India. It is submitted that the A.O. has applied Article 5(8) of the DTAA to treat SET India as dependent agent P.E. of the Appellant in India. This has been accepted by the Tax Department in para.1 of Ground No.1 and para.3 of Ground No.3 in the grounds of Appeal filed in the Tribunal. As per Article 7(1) of the DTAA if foreign resident carries on business in India through a P.E. then only so much of its profits as is directly or indirectly attributable to the P.E. may be taxed in India. The formula to arrive at the profits attributable to P.E. is provided in Article 7(2) of the DTAA. In this context the requirement is to ascertain the arms length price i.e. if instead of the PE (i.e. SET India) similar activities were carried out through an independent enterprise, then what would be the amount that would have been charged by -11- such enterprise and the difference would be regarded as the profit attributable to the PE. In other words, one its profits as is directly or indirectly attributable to the P.E. may be taxed in India. The formula to arrive at the profits attributable to P.E. is provided in Article 7(2) of the DTAA. In this context the requirement is to ascertain the arms length price i.e. if instead of the PE (i.e. SET India) similar activities were carried out through an independent enterprise, then what would be the amount that would have been charged by -11- such enterprise and the difference would be regarded as the profit attributable to the PE. In other words, one has to see the profits that SET India would have made if it was an independent entity which was engaged in the same activities. It has also been submitted that the Department has not challenged the conclusion arrived at by C.I.T. (A) that the payment to SET India is at arms length price. What the Tribunal proceeded to enquire was whether such arms length payment would extinguish the tax liability of the Appellant in India. It is also submitted that merely because the income of the appellant was determined for Assessment Year 1997-98 and 1998-99, the assessment done should be accepted. It is submitted that after completion of assessment a protest letter was filed with the Tax Officer stating that although the Appellant does not have any tax liability in India, since the taxes computed were already withheld at source and with a view not to litigate further with the Revenue Authorities, the income computed in the assessment proceedings was accepted. It is submitted that considering the judgment of the Supreme Court in D.I.T.(International Tax) vs. Morgan Stanley & Co., Inc. 292 ITR 416 ITR 416, the principle is now accepted that if a ITR 416, the principle is now accepted that if a dependent agent is paid on the arms length basis and that has been worked out correctly the non-resident company would not be liable to any further tax. 8. On behalf of the Revenue it is submitted that the -12- interpretation given by the ITAT that the compensation payable to the dependent agent represents only remuneration for the services rendered and does not take into account the profit or any part of it arising with its non-resident principal based on the functions performed, risks assumed and assets used will necessarily have to be determined. This means that:- 1) There are two tax payers in the source country: Dependent agent enterprise Dependant agent permanent establishment (DAPE) 2) Does dependant agent performs functions on behalf of the foreign principal that cause attribution of risks or assets of foreign principal to host country, i.e. country of source. 3) If so, profits (or losses) may be attributed to DAPE by host country based on those assets used, risks assumed and functions performed. 4. DAPE is entitled to deduction in host country for arm’s length compensation/remuneration to dependant agent enterprise. It is further submitted that the judgment in Morgan Stanley -13- (supra) would not have the effect of setting aside the order of ITAT. 9. For answering the issue we may firstly refer to some of the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. Articles 5(8) and (9) read as under:- "5(8). Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies-- is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if, dependant agent enterprise. It is further submitted that the judgment in Morgan Stanley -13- (supra) would not have the effect of setting aside the order of ITAT. 9. For answering the issue we may firstly refer to some of the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. Articles 5(8) and (9) read as under:- "5(8). Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies-- is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if, (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or -14- (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 9. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting 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 wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph." We may also reproduce Article 7(1), 7(2) and 7(3), which read as under:- "7(1). The profits of an enterprise of a -15- 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, if the enterprise carries on business as aforesaid, 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. (2). Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall, in each Contracting State, be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. -16- (3). In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. -16- (3). In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State." . We may now gainfully refer to paragraph 6(c) of Circular dated July 23, 1969, which reads as under;- "6(c). 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. In the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agent’s commission, in making the sales. If the agent’s -17- commission fully represents the value of the profit attributable to his service; it should prima facie extinguish the assessment." Reliance was also placed on Circular No.742, paragraphs 3 and 4, which read as under:- "3. It is seen that out of the gross amount of bills raised by a foreign telecasting company, the advertising agent retains commission @ 15% or so. Similarly, the Indian agent of the foreign telecasting company retains his service charges @ 15% or so of the gross amount. The balance amount of approximately 70% is remitted abroad to the foreign company. So far as the income of Indian advertising agent and the agent of the non-resident telecasting company are concerned, the same is liable to tax as per the accounts maintained by them. As regards the foreign telecasting companies which are not having any branch office or permanent establishment in India, tax has to be deducted and paid at source in accordance with the provisions of Section 195 of the Income Tax Act, 1961 by persons responsible for paying or remitting the amount to them. 4. In the absence of country-wise accounts and keeping in view the substantial capital cost, -18- installation charges and running expenses etc. in the initial years of operations, it would be fair and reasonable if the taxable income is computed at 10% of the gross receipts (excluding the amount retained by the advertising agent and the Indian agent of the non-resident foreign telecasting company as their commission/charges) meant for remittance abroad. The assessing Officers shall accordingly compute the income in the cases of the foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining countrywise accounts by adopting presumptive profit rate of 10% of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, i.e. 55% at present." . The A.O. has refused to rely on the Circular No.742 on the basis that it applies only to those retained by the advertising agent and the Indian agent of the non-resident foreign telecasting company as their commission/charges) meant for remittance abroad. The assessing Officers shall accordingly compute the income in the cases of the foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining countrywise accounts by adopting presumptive profit rate of 10% of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, i.e. 55% at present." . The A.O. has refused to rely on the Circular No.742 on the basis that it applies only to those companies which do not have any branch office in India or are not maintaining countrywide operations in India. 10. 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. -19- 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 para.2 while determining the profits attributable to the permanent establishment the expression used is In para.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 arms length payment. The principles contained in the matter of income from international transaction on an arms length price are contained in Section 92 of the Income Tax Act. The principles have been clarified by the Finance Act, 2001 as also Finance Act, 2002. From the order of the C.I.T. which has been accepted it is clear that the Appellant herein has paid to its P.E. on arms length principle. It recorded a finding of fact that the Appellant had paid service fees at the rate of 15% of gross ad revenue to its agent, SET India, for procuring advertisements during the period April 1998 to October, 1998.The fact that 15% 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% 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% of net ad revenue (i.e. gross ad revenues less agency commission). Simultaneously, the Appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenues. -20- 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. . 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. 11. We may firstly point out that CIT 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 CBTD 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 basis. . 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. 11. We may firstly point out that CIT 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 CBTD 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 CIT (A) had recorded a specific finding in favour of the Appellant in the affirmative on all three counts. It is in these circumstances that it was held that the advertisement revenue received by the Appellant may be from the -21- customers in India is not liable for tax in India. That C.B.T.D. 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 vs.Commissioner of Income Tax, 237 ITR 889. 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. 1984 was inconsistent or whether there was contradiction in the circular and Section 145 of the Income Tax Act. The Supreme Court observed that :- "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 is, therefore, validly issued under Section 119 of the Income-tax Act. As such, the circular would be binding on the Department." See also Commissioner of Income Tax vs. Hero Cycles Pvt. Income Tax vs. Hero Cycles Pvt.Ltd. & Ors, 228 ITR 463. It would thus be clear that Ltd. & Ors, 228 ITR 463. the Circular No.23 would be binding on the A.O. and had to be considered while assessing the tax liability of an assessee. -22- . The Tribunal in its judgment has not considered the effect of the finding recorded by the C.I.T. (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 para.10 has recorded a finding that Article 7(2) provides that the arms 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 attributable to that of the permanent establishment, would not be taxable in India. The Tribunal in fact in para.10 has recorded a finding that Article 7(2) provides that the arms 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 C.I.T.(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 audio-visual television content and also acts as an -23- 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 arms length price for its international transaction. It, however, clarified that the order is in respect of reference received for assessment year 2002-03 and not for subsequent assessment years. 12. We may now consider the judgment in DIT (International Taxation) vs. Morgan Stanley and Co.Inc.,(2007) 292 ITR 416 (S.C.). 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, "MSCo.) and one of the group companies of Morgan Stanley,Morgan Stanley Advantages Services Pvt. Ltd. (for short "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. -24- The advance ruling was sought on two counts (i) whether the applicant was having P.E. 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 P.E. It was ruled that MSAS should be regarded as constituting a service P.E. under Article 5(2)(l). On the second question the AAR 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 AAR on the question of income attributable to the P.E. was the subject matter of challenge by the Department. In so far as the issue of P.E. is concerned the Supreme Court was pleased to hold that it agreed with 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 AAR on the question of income attributable to the P.E. was the subject matter of challenge by the Department. In so far as the issue of P.E. is concerned the Supreme Court was pleased to hold that it agreed with Department. In so far as the issue of P.E. is concerned the Supreme Court was pleased to hold that it agreed with the Ruling of the AAR 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 P.E. under Article 5(2)(l) and as such held that the Department was right in its contention that there exists a P.E. in India. Considering Article 7 of that treaty the Court observed that what is to be taxed under Article 7 is income of the M.NE attributable to the P.E. in India and what is taxable under Article 7 is is profits earned by the MNE. Under the Income-tax Act the -25- taxable unit is the foreign company, though the quantum of income taxable is income attributable to the P.E. of the said foreign company in India. The Court observed that the important question which arises for determination is whether the AAR 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 P.E. 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 AAR 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:- "As regards determination of profits attributable to a P.E. 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 AAR where there is an international transaction under which a non-resident compensates a P.F. at arm’s length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No.23 of 1969 issued by the Central Board of Direct Taxes. This is the -26- key question which arises for determination in these civil appeals." After discussing the various issues the Court in its conclusion held as under:- "As regards attribution of further profits to the P.E. 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 P.E.) is remunerated on arm’s length basis taking into acc