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Direct Tax

When a Dependent Agent of the assessee is remunerated at arm’s length basis, then whether any further attribution of profits can be made in the hands of the assessee in India?

ESPN Star Sports Mauritius Vs. ACIT ITA Nos. 3760 & 4542/Del/2016


The taxpayer is a partnership firm established under the laws of Mauritius on 29 March 2002, and is engaged in the business of acquiring and allotting advertisement time (Airtime) and programme sponsorship in connection with programming via non-standard television from Mauritius on ESPN, Star Sports and Star Cricket Programming services. The taxpayer had entered into an agreement with ESPN Software India (P) Ltd., India, which was engaged in the business of acquiring the airtime from the taxpayer and allotting it to various Indian advertisers and advertising agencies. The sale of airtime by Taxpayer to ESPN India is outside India. Further, it has no office in India and/or any operations in India.

The taxpayer claimed that the income arising from advertisement airtime is business income, and in the absence of a Permanent Establishment (PE) in India, the same is not taxable.

The Assessing Officer (AO), relying upon the orders of assessment years 2003-04 and 2004-05 held the transaction to be principal to the agent and not on a principal to principal basis. It was further held by the AO that ESPN India constitutes PE of the taxpayer under Article 5(4) of the India-Mauritius DTAA. The AO attributed part of the gross profits to the PE.

Aggrieved by the attribution of the AO, the taxpayer pleaded before the Delhi Tribunal irrespective of whether Dependent Agent PE is constituted or not when ESPN India is remunerated at an arm’s length basis, then no further attribution of profits can be made in the hands of the assessee in India.


While deciding the matter in the taxpayer case, the Delhi Tribunal noted that the factual aspects in the years 2003-04 and 2004-05 were at variance; the taxpayer had appointed the Indian company as an agent to sell air time for advertising. Subsequently, it changed the agreements and made the Indian company as the principal, which purchased air time and sold it to different customers.

The Delhi Tribunal held that where ESPN India was remunerated at an arm’s length by taxpayer, which has been accepted by the AO/TPO of ESPN India and also the taxpayer, then no further attribution of profits is to be made in the hands of the assessee. A similar proposition has also been laid down by the Delhi Tribunal in the assessee’s own case for assessment years 2003-04 and 2004-05.

The tribunal relied on the following judgment:

  • Honda Motors Co. Ltd. vs ADIT [2018] 92 353 (SC)
  • Asstt. DIT vs E-funds IT Solutions Inc. [2017] 86 240/251 Taxman 280/399 ITR 34 (SC);
  • BBC Worldwide Limited [2011] 203 taxman 54 (Del. HC)s.

Our Comments

The judgment has reiterated the principle that where remuneration of an agent is at arm’s length, no further attribution has to be done on account of PE laid down by various courts in the past.

However, this may lead to a tax arbitrage, as an Indian company would have taxed at 30% (plus applicable surcharge and cess), whereas the PE of a foreign company is taxable at 40%(plus surcharge and cess). The judicial precedents have not provided observation/comment on this aspect.

Whether fees for intermediary services paid to the HUB entity be considered as FTS?

Can a foreign company constitute a PE in India without a place of disposal?

Bombardier Transportation Sweden AB Vs. The DCIT ITA No. 859/Del/2016


The taxpayer is engaged in the business of manufacture of train control and signaling systems for the mass transit system. The taxpayer is a HUB entity for the Rail Control Solutions [RCS] businesses of Bombardier Group, and it houses functional heads for various functional areas like administration, procurement, engineering, quality, program management, and marketing, each catering to worldwide RCS business.

The taxpayer is engaged in the business of manufacture of train control and signaling systems for the mass transit system. The taxpayer is a HUB entity for the Rail Control Solutions [RCS] businesses of Bombardier Group, and it houses functional heads for various functional areas like administration, procurement, engineering, quality, program management, and marketing, each catering to worldwide RCS business.

During the year, the taxpayer entered into international transactions with Bombardier Transportation India Ltd [BTIN] and received fees for intermediary services. Such income from intermediary services was not offered to tax by the taxpayer. It was of the opinion that as per protocol 7 of India Sweden DTAA, the scope of FTS is restricted on account of agreement between India and a third state, which is a member of OECD. In the light of this, reliance was placed on the Portuguese Treaty, wherein the scope of FTS is restricted on account of the requirement of the ‘Make Available’ clause.

However, the AO disregarded the position adopted by the taxpayer and made additions considering the income from intermediary services as FTS.

Objections were raised before the DRP but were of no avail. Instead, DRP enhanced the income of the taxpayer on account of PE in India.

DRP examined the agreement between the taxpayer, BTIN and DMRC and concluded that taxpayer has PE in India in the form of BTIN and accordingly attributed the income earned by the taxpayer from an offshore supply of goods and equipment to the PE.


The House of Lords was of the opinion that as far as the taxability of Intermediary services is concerned since the appellant is a tax resident of Sweden, it is entitled to benefits of Indo- Sweden DTAA and protocols thereof, and Protocol 7 of the Treaty provides the scope of taxability of FTS which is restricted on account of agreement between India and a third state, i.e., Portuguese Treaty in this case. The fact that the provision of the service may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service. Thus, it was held that intermediary services cannot be considered as FTS failing the ‘Make Available’ test as envisaged in India- Portuguese DTAA.

Further, with respect to the enhancements made on account of PE, the Delhi Tribunal held that the undisputed fact is that the supplies made under the BS-02 agreement were offshore supplies. Relying on the Hon’ble Supreme Court’s ruling in the case of Ishikawajima HarimaHeavy Industries Ltd, only such part of the income as is attributable to the operations carried out in India can be taxed in India. Further, for the operation carried out in India, the tribunal considered the agreement between the taxpayer and BTIN and found that as per the MOU, the scope of work between the appellant and BTIN are clearly bifurcated.

It was found that the entire findings of the DRP are based on an erroneous appreciation of the wrong facts. It has considered the contract RS 02. This contract is between BTIN, Bombardier Transportation, Germany, and DMRC, for which Bombardier Transportation Germany has raised invoices to BTIN for offshore manufacture and supply of equipment, whereas the contract under consideration is between DMRC and Consortium taxpayer and BTIN towards offshore supply train control and signalling equipment.

The tribunal also highlighted that taxpayer does not have any place of business in India and the DRP held that BTIN is the PE of the appellant in India without appreciating the true facts that the appellant has no place of disposal in India in the office of BTIN from where the appellant could have conducted its business in India.

Our Comments

Determination of PE is a factual exercise. However, the judgment has highlighted the relevance of place of disposal for constituting PE of the taxpayer.

Transfer Pricing

Whether capacity utilization adjustment is allowed during the first year of operations?

Colwell & Salmon Communications [I] Ltd - ITA No. 3054/DEL/2011 [A.Y 2004-05] and ITA No. 1117/ DEL/2012 [A.Y 2005-06]


The taxpayer, a 100% subsidiary company of Gujrat Heavy Chemicals Limited (GHCL), commenced operations from July 2003 being its first year of operation. The taxpayer provided backoffice services to GHCL’s subsidiary in the US (AE). The taxpayer has applied the Transactional Net Margin Method (TNMM) as most appropriate method to benchmark the said transaction for transfer pricing (TP) purposes.

The tax authorities proposed a TP adjustment rejecting the taxpayer’s claim of taking AE as the tested party. The tax authorities did a benchmarking search taking the taxpayer as the tested party.

When the matter reached the first appellate authority, the taxpayer submitted an analysis justifying ALP even if the taxpayer is taken as the tested party. However, the taxpayer claimed capacity utilization adjustment under this approach (being the first year of operation), which was accepted by the first-level appellate authority.

Ruling by ITAT

ITAT observed that the taxpayer was in its first year of business operations and had operated only for nine months in the year under consideration and that it has not achieved an optimum level of capacity utilization. ITAT stated that the taxpayer has to absorb certain start-up costs and fixed operating costs and observed that it had an unutilized capacity of 47.35%.

Also, In the subsequent years, capacity utilization has been increased from 50% to 100%, thereby having no reason to not consider the unutilized capacity adjustment as upheld by the first appellate authority.

ITAT further held that the alternative TP study prepared by the taxpayer, taking itself as the tested party, fulfills the requirements of TP regulations. The operating margins of the taxpayer being higher than the comparables adopted by the taxpayer as well as by the TPO justify that the taxpayer’s transactions are at arm’s length.

In the result, the appeal of the revenue is dismissed, and the appeal is ruled in favor of the taxpayer.

Our Comments

Capacity underutilization in initial years is certainly an important factor affecting net profit margin in the open market.

Thus such adjustment is necessary in in initial years of operations to help taxpayer absorb various start-up costs.

However, the business reason for underutilization should be well documented in the transfer pricing study report.

Can a protective adjustment be sustained even if transactions are upheld at arm’s length?

Sumitomo Corporation India - ITA No.8932/Del/2019

The taxpayer is engaged in the business of facilitating import and export activities both directly and indirectly on behalf of various customers in India and overseas and earns commission income. While international transactions of the taxpayer with one of the AE is covered by Bilateral APA, a transaction with this AE was held at arm’s length as per APA, and no adjustment was proposed.

The taxpayer had entered into similar transactions with AEs other than the one covered under APA. The TPO held that since profitability in respect of transaction with such other AEs is the same as that of margins earned by an AE covered under Bilateral APA, also since the functional profile is the same, such transactions are also considered at arm’s length.

However, based on segmental data available, the TPO observed that commission income earned by the taxpayer as a percentage on FOB value of goods from its AE segment is 2.49% as compared to 3.03% earned from a non-AE segment. Considering that higher functions were performed for the AE segment, TPO adjusted commission from non-AEs at 5% on an ad-hoc basis and proposed TP adjustment on a protective basis.

ITAT rejected the CUP analysis adopted by tax authorities, based on the fact that various dissimilarities existed in the transaction with AE vis-à-vis non- AE. The differences were majorly on account of-

  1. Huge differences in volume on a FOB basis;
  2. Different geographies dealt with AE and non-AE segment;
  3. Dissimilarity in products involved in controlled and uncontrolled transactions.

ITAT thus remanded the issue back to the TPO to examine and benchmark international transactions by adopting TNMM as the most appropriate method and taking the Berry ratio as PLI, as adopted in previous assessment years and accepted by Hon’ble High Court.

ITAT also stated that once TPO has held the transactions entered into by taxpayer with its AEs are at arm’s length, there arises no justification to make any protective adjustment under the regime of TP adjustment.

Our Comments

Protective adjustment cannot be applied as long as transactions are concluded at arm’s length.

The principle of consistency applies when there is no change in the functional profile.

CUP can be applied as the most appropriate method only when there is a very high degree of similarity between the control and uncontrolled transactions.

Can domestic sales be considered as CUP for export sales?

Dow Chemical International Pvt Ltd. - ITA No. 3054/DEL/2011 [A.Y 2004-05] and ITA No. 1117/ DEL/2012 [A.Y 2005-06]


The taxpayer is engaged in the business of manufacturing and distributing silicon-based specialty chemicals and lubricants. The taxpayer has entered into the following intra-group transactions:

  1. Huge differences in volume on a FOB basis;
  2. Export of finished goods
  3. Payment towards services availed amongst others.

The taxpayer benchmarked export sales using TNMM as the most appropriate method aggregating with imports and royalty.

The TPO applied CUP as the most appropriate method for export sales and proposed an adjustment comparing prices with domestic third party sales. Further, in respect of payment made towards services availed, TPO rejected benchmarking done by the taxpayer and determined the arm’s length price on an ad-hoc basis.

Ruling by ITAT

ITAT confirmed the taxpayer’s contention that the CUP method requires strict product comparability and that price of the product varies basis the geographical location. As a result, the price of the products sold in domestic markets cannot be compared to export sales, and thus CUP method cannot be applied if sufficient comparable export sales transactions are not available. The matter was restored back for the tax officer to conduct a fresh analysis.

Further, the ITAT also deleted the adjustment made towards payment of services availed, noting that instead of applying any prescribed methods or CUP and bringing on record comparable uncontrolled transactions, TPO benchmarked the transaction on estimate basis. Further, it held that if TPO was not satisfied by the taxpayer’s benchmarking under TNMM, it should have independently benchmarked the transaction by applying one of the prescribed methods.

Our Comments

While considering whether controlled and uncontrolled transactions are comparable, regard should be given to broader business functions rather than just product comparability.

Application of CUP needs elimination of differences.

Indirect Tax

Whether a company located outside India that has entered into a Maintenance and Repair Contract (MARC) with an Indian customer required to obtain GST registration and discharge GST liability?

[Background: As per Notification No.10/2017-Integrated Tax (Rate) dated 28.06.2017, the recipient of service is liable to pay IGST under reverse charge mechanism (RCM) on ‘import of services.’]

IZ Kartex – Appellate Authority for Advance Ruling (AAAR), West Bengal [2020 (11) TMI 528]


  • The appellant is a company incorporated in Russia and has entered into a MARC with an Indian customer;
  • The appellant has deployed an Indian company as the sub-contractor who issues invoices to it. In turn, the appellant is issuing invoices on the customer against the supply of service;
  • Certain issues in payment channel necessitated the appellant to open a branch and bank account in India, and they also obtained a GST registration;
  • However, the customer contended that it is liable to pay GST under RCM and asked the appellant to revise its invoices by reducing the GST element;
  • On an application, the AAR ruled that the appellant is liable to pay GST under the forward charge, which is the subject matter of the appeal;

Given the above facts, the AAAR ruled as follows:

  • While going through the impugned ruling, it is seen that the AAR has not considered the fact that the entire control of the activities would rest with the foreign entity, which had entered into an agreement with the customer;
  • The AAR has not adduced any finding to draw the conclusion that the appellant registered in India maintains suitable structures in terms of human and technical resources to provide the service for which the MARC has been entered into between the parties;
  • Therefore, the criteria for ‘fixed establishment’ are not met;
  • It is amply clear that the appellant’s foreign entity is providing the service;
  • Therefore, the supply of service by the appellant to the customer qualifies as ‘import of service,’ and the customer is liable to pay GST under RCM.

Our Comments

The GST implications on the foreign service provider in such tripartite arrangements is a grey area given the possibility of varied interpretation of concepts such as ‘Fixed Establishment.’ The interplay of ‘Fixed Establishment’ under GST vis-à-vis ‘Permanent Establishment’ under the direct tax laws also adds to the complexities and requires a comprehensive analysis of the contractual terms to determine the GST implications.

This ruling should serve as an important reference point for foreign companies operating under a similar model in India and should help them to understand the GST implications on their business.

Whether the ‘Type 3’ tests/exams conducted by the Respondent company qualify as Online Information and Database Access or Retrieval (OIDAR) Services on which it is required to pay GST?

[Background: As per Section 2(17) of IGST Act, OIDAR services means services whose delivery is mediated by information technology over the internet and the nature of which renders their supply essentially automated and involving minimal human intervention.]

NCS Pearson Inc. – AAAR, Karnataka [2020 (11) TMI 956]


  • The Type 3 test contains MCQs as well as essay-based questions;
  • The candidate has to physically visit a test center;
  • The computer-based algorithm provides a final result for MCQs and indicative score for essay-based questions;
  • The essay-based questions are then sent to a human evaluator, after which a final score is provided over the email;
  • The AAR held that since Type 3 tests are scored after the human intervention, it should be outside the purview of OIDAR, and therefore exempt from GST;
  • The ruling of the AAR was challenged by the department before the AAAR.

Given the above facts, the AAAR observed as follows:

  • An essay is given to a human scorer as well as to the Automated Essay Scoring (AES) program;
  • A machine-human score correlation serves as a good indicator of whether the AES is returning a stable consensus score of the essay. Therefore, the role of the human scorer is in effect a means to ensure the reliability of the AES program;
  • For this reason, we hold that the involvement of the human element in the assessment of essay responses is well within the realm of ‘minimum human intervention;’
  • Further, even from the perspective of the candidate, the human involvement is minimum in the entire process of the Type-3 test starting from the manner of registering for the test, the actual test-process and the outcome of the test, as all stages are automated;
  • We hold that the service provided for the Type-3 test is classifiable as an OIDAR service.

Our Comments

The tests for determining whether an activity qualifies as an OIDAR service are being widely debated upon under the Indian GST law as well as the EU VAT law, which contain similar provisions for OIDAR services. The CBIC has also issued a flyer on OIDAR services wherein it has laid down various illustrations of what does or does not qualify as an OIDAR service.

The post COVID-19 era may witness an increase in litigations on OIDAR provisions, with many foreign universities and institutes providing distance coaching and educational content to Indian students.