Under the provisions of the Income-tax Act of 1961, income
that has arisen directly or indirectly from a business
connection is considered taxable in India. In business cases
where not all operations are carried out in India, the income
deemed taxable is considered 'reasonably attributable' to
operations carried out in India. The applicability of this
provision has been upheld in several judicial precedents.
In the case dealt with by the tribunal, the taxpayer is a
foreign company (tax resident of Hong Kong) and is appointed by
a television channel as an agent to:
- Sell advertising air-time on the
- Distribute the channels in the territories
where the channels are broadcast; and
- Procure syndication revenues from the
content on the channels.
In a particular year, the taxpayer earned agency commission
on advertising services in India, as well as outside India.
However, at that particular time, India did not have a tax
treaty with Hong Kong.
It appears that the foreign company had a business
connection in India and income attributable to the business
operations. As a result, the taxpayer was compensated with an
amount equal to the profit earned by the channel companies and
overseas entities that had merged into an Indian group
Profit attribution was determined on sound transfer pricing
(TP) principles and by applying a global profitability
The tax authorities accepted the TP methodology and profit
margin. However, the tax authorities made an adjustment on the
amount taxable by the taxpayer (i.e. commission received
towards services rendered outside India). It was also argued
that under the Act, certain offshore income earned by a
non-resident (i.e. by way of
interest/royalty/fees for technical services) is taxable in
India, irrespective of the place of rendition of the services
or the presence of a business connection in India.
Subsequently, the tribunal rejected the position of the tax
authorities. In this case, reliance on the provisions relating
to the taxation of certain offshore income was not applicable
to the agency commission earned by the taxpayer.
The tribunal held that the income taxable in India will only
be part of the income as 'reasonably attributable' to the
operations carried out in India. The income which could be said
to be taxable in India should have a 'territorial nexus'.
Since the commission fee was paid to the taxpayer outside
India for services rendered outside India, the tribunal held
that it was not attributable to operations in India and hence
not taxable in India.
Rakesh Dharawat (email@example.com) and Rishi
Dhruva Advisors India
Tel: +91 22 6108 1000