Indian Company having independent existence cannot be termed as Agency PE

1.        Whether the royalty for distribution of cinematographic films in India received by the assessee is assessable to tax in India as royalty income ?
2.        Whether ,alternatively, the amount received as royalty being ,business profit attributable to the PE of assessee in India,is assessable to tax as business income in India  ?
INDIA US DTAA                                           
The assessee company,a tax resident of USA, is engaged in the distribution of cinematographic films. The company entered into an agreement with Warner Bros Pictures India Pvt Ltd, an Indian company, for the distribution of the cinematographic films in India and receipt of royalty at specified rates. The assessee company submitted before the Assessing Officer that the royalty received from India on account of distribution of films is not taxable under the Indian Income Tax Act as per clause (v) of Explanation 2 to section 9(1)(vi) of the IT Act which excludes consideration for the sale, distribution or exhibition of cinematographic films from the purview of 'royalty'. It was further contended that even if the said receipt is held as business income, then in the absence of PE in India, the same would not be taxable in India. The Assessing Officer did not accept the contention of the assessee company and proposed to assess the royalty received as 'business income' of the assessee company by treating the same as profit attributable to PE in India                   
(a)   That income has been generated by the US based company by the distribution and exhibition of the films in India through its Agent WIPL. Thus, the income accrues and arises in India as per the meaning of section 5(2) of the Act.
(b)   That the Explanation to section 9(1)(i) of Income Tax Act is not applicable in the case of the assessee since the assessee has a business connection in India and the assessee has a distribution agent and PE in the form of Indian company.
(c)    That the income is assessable as business income of assessee company in India attributable to the PE being Agency PE.
(d)   That the CIT (A) erred in not considering the provisions of section 5 of the Income Tax Act and Article 7 of the DTAA while deleting the addition as there is a business connection and accordingly the income is taxable under the Indian Income Tax Act Sec. 9(1)(i) r.w.s Section 5 (2).
(a)   That royalty received was not taxable because clause (v) of Explanation 2 to section 9 (1)(vi) of the Income Tax Act excludes consideration for the sale, distribution or exhibition of cinematographic films from the purview of royalty;
(b)   That if the said receipt was held as business income, then in absence of PE in India, the same would not be taxable in India.
(c)    That the transaction between the assessee and Indian Company to whom license was granted cannot be considered as Agency PE as the Indian assessee is not exclusively dealing with the assessee company.
Mumbai Bench discussed the relevant provisions of Income Tax Act and DTAA between Indian and US and observed & held as under :-
(a)   That the definition of 'royalty' under section 9(1)(vi) read with Explanation 2(v ) and as per article 12 of the DTAA excludes the payments received with reference to sale, distribution and exhibition of cinematographic films. Therefore, the amount received by the assessee company cannot be considered as royalty under the Act and DTAA.
(b)   That even if income arises to the Non-Resident due to the business connection in India, the income accruing or arising out of such business connection can only be taxed to the extent of the activities attributed to permanent establishment
(c)    That in this case assessee does not have Permanent Establishment in India since the Indian Company is acting independently. Hence agency PE provisions are not applicable to the US based assessee.
(d)   That relying on the decision of Ishikawajma-Harima Heavy Industries Ltd v. Director of Income Tax of the Hon'ble Supreme Court ,incomes arising to a Non-Resident cannot be taxed as business income in India, without a PE. As the assessee does not have any permanent establishment in India, the incomes arising outside Indian Territories cannot be brought to tax.
Comments  :-
In this case the question that arose basically was that whether the US based company was doing business in India through Indian company and avoiding taxes on income earned from India on the ground that Indian Company is a separate entity having independent existence and thus Indian company is not a PE of US based company.
In case the revenue had proven that Indian company is acting as PE of the US based company then the US based company had to pay taxes on the profits earned from India .
But the US Company was able to prove that the Indian Company has independent existence and that the Indian company is doing business for other foreign companies also. Hence income earned by US based company even if termed as business income was held to be not taxable in India in absence of PE in India.
I am sure that your goodself would find the above ruling useful.
 CA.Vipin Verma
(M): 9811156389, 9811188940
(O) : 011-27429630 / 47082580



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