Volume 5, Issue 10

7th June, 2012

Tax Alert
Agent of foreign telecasting company does not create a PE; arm's length remuneration to agents extinguishes further attribution to PE

This tax alert summarizes a recent ruling pronounced by the Mumbai Bench of the Income-tax Appellate Tribunal in the case of B4U International Holdings Ltd.1 (‘B4U International’), wherein the Tribunal has held that the Indian agent of the foreign company does not constitute a Permanent Establishment (‘PE’) under the India – Mauritius Double Tax Avoidance Agreement (‘DTAA’).


B4U International (‘also referred to as taxpayer’), a company incorporated in Mauritius, is engaged in business of telecasting TV channels. For the relevant year its revenue from India consisted of collection from time slots given to Indian advertisers. For this purpose, B4U Multimedia International Ltd. and B4U Broad Band Ltd., both Indian companies, (collectively known as ‘B4U India’) were granted permission by Reserve Bank of India to act as advertisement collecting agents of B4U International. The taxpayer entered into a well defined agreement with B4U India. The significant features of the said agreement are as follows:

  • The agent i.e. B4U India’s responsibility inter alia included  generating maximum amount of advertising sales, undertaking market analysis, ensuring all advertisers have the valid Indian documentation etc.
  • While discharging the above functions, B4U India had to adhere to the rate card approved by the Principal i.e. B4U International and it was restricted from representing any other competing television network.
  • B4U International had the absolute right to reject any advertisement and to sell the advertisement time.
  • All activities of the agent are subject to the control of the Principal. The agent cannot bind the Principal without prior written consent. It can only forward requests of advertisers, collect payment and obtain approvals.

Issues before the Tribunal:

  • Whether B4U India constitutes an agency PE of B4U International?
  • Whether the commission payment by the B4U International to B4U India is at arm’s length and whether the payment of arm’s length commission extinguishes the liability of B4U International?

Department’s contention: 

It was contended that B4U International has an Agency PE in India in terms of the DTAA on account of the following grounds:
    • The sole purpose of the business of the taxpayer is generating revenues by offering advertisement slots and this activity was carried on by B4U India on its behalf. In addition, the taxpayer did not have any infrastructure in Mauritius which could be used for generation of the revenue. Thus, the taxpayer extended its physical presence in India through B4U India for the most important function of its business.
    • In terms of the agreement, the agent i.e. B4U India was restrained from representing any other television network which indicates that B4U India was working wholly and exclusively for B4U International and consequently was a dependent agent of the latter in India.
    • The agreement further provided that in the event of termination of the agreement, the agent shall supply to B4U International such information as may be requested for invoicing and collecting outstanding amounts. Accordingly it was submitted that the agent had the power to conclude contracts. It was also submitted that authority to conclude contracts includes a case where the agent concludes a contract that are binding on the Principal even if such contracts are not in the name of the Principal.

    It was further contended that the payment of arm’s length remuneration by the taxpayer to B4U India does extinguish the tax liability of B4U International in India on account of the following reasons:

    • Payments to agent and business profits of the taxpayer are distinct things which cannot be compared.
    • In view of the decision of the Mumbai Bench of the Tribunal in the case of Hapag-Lloyd Container Line GMBH2, since the agent has the power to conclude contracts in India the payment of arm’s length remuneration to the agent would not extinguish the tax liability of the taxpayer in India.

    Taxpayer’s contention

    In support of its contention, the taxpayer argued as under:

    • An agent can constitute a dependent agency PE only if there is a legal existence of the right to conclude contracts in India and in the present case, the agreement between the taxpayer and B4U India did not bestow any such right on the latter.
    • In case of a dependent agent, PE would be constituted only if the agent’s activities are devoted exclusively to the Principal and this should be ascertained having regard to the activities of the agent and not of the non-resident Principal. In the instant case, the income earned by B4U India from B4U International constituted only 4.69% of their total income.
    • The 15% compensation paid by the taxpayer to the agent was a norm for advertising agency and the same was duly accepted in the Transfer Pricing assessment for the subsequent years. Further, the same is duly supported by the Department circular3; therefore the taxpayer has paid arm’s length remuneration to the agents.
    • In view of the various judicial precedents4, it is a well-settled principle that in case of payment of arm’s length remuneration no further profits can be attributed to the PE.
    • Since in the present case the agent did not have the authority to conclude contracts, the decision of Hapag-Lloyd is not applicable.

    Tribunal’s Ruling:

    The agent i.e. B4U India had no authority to fix the rate, raise an invoice or accept an advertisement. B4U India could only forward the advertisement to B4U International who had the right to accept or reject the same. Thus, it is demonstrated that B4U India is not the decision maker, nor did it have the authority to conclude contracts. Consequently, it could not be deemed to constitute a dependent agency PE of the taxpayer.

    B4U India was deriving only 4.69% of its total income from B4U International and hence it could not be said that the activity of B4U India is exclusively or almost exclusively devoted to B4U International. Accordingly, B4U India does not constitute an independent agency PE for B4U International.

    Since the compensation of 15% paid by the taxpayer to the Indian agent was covered by the Departmental circular and was also accepted in the Transfer Pricing assessments for the subsequent years, the same was upheld to be arm’s length remuneration.

    The Tribunal accepted the judicial precedents relied upon by the taxpayer on facts and accepted the alternative argument that since the agent was remunerated at arm’s length no further profit is attributable to the taxpayer.

    SKP comments

    This is a welcome ruling from the Tribunal and on the same lines as the earlier rulings in the case of various companies engaged in marketing of airtime on international media channels in the television domain. Thus, this issue apparently seems to be settled at least for taxpayers operating in this industry. However, whether the same principle (i.e. no further attribution of profits on payment of arm’s length remuneration) can be applied to entities engaged in other sectors is a moot question which still remains unanswered as there have been few unfavourable rulings on this issue.

    Taxpayers should therefore ensure that the legal agreement between parties and the actual conduct do not violate the principles for formation of an agency PE. Further, in such cases where there is a potential PE exposure, the Transfer Pricing policy and arm’s length remuneration assume utmost significance. A well documented arm’s length pricing policy would go a long way in enabling taxpayers to defend their case.

1 DDIT vs. B4U International Holdings Ltd. (ITA No. 880/ Mum/ 2005)
2 ITA No: 8854/MUM/2010, dated 7th March, 2012
3 Central Board of Direct Taxes Circular number 742 dated 2 May 1996.
4 Morgan Stanley (SC) (292 ITR 416), Set Satellite (Mumbai HC) (307 ITR 205), BBC Worldwide (Delhi HC) (203 Taxmann 554)