TII Instant Update - 2017-TII-INSTANT-ALL-497

CASE LAWS

2017-TII-37-SC-INTL

CIT Vs ZTE CORPORATION: SUPREME COURT OF INDIA (Dated: October 30, 2017)

Income tax - Sections 9(1)(vi), 133A, - India-China DTAA - Article 12(3)

Keywords - fixed place PE - installation PE - supply of telecom equipment - embedded software - business profits

The assessee, a tax resident of China, was engaged in supply of telecom equipment to Indian telecom operators as well as supply of mobile hand-sets to customers in India. It did not file its return of income arguing that it had no PE in India in terms of the provisions of Article 5 of the Indo-China DTAA. The AO however concluded that Assessee had fixed place PE, installation PE, dependent agency PE in India and, therefore, the revenues from supply of telecom equipment and mobile hand sets were to be taxed in India as business profits. He, therefore, proceeded to determine the profits attributable to the assessee's PE in India. Before computing the profits he pointed out that the profits to the PE in India have to be computed separately in respect of hardware and software components of the telecom equipment and the mobile handsets. When the matter reached High Court, it was held that income earned by a foreign company from supply of mobile hand-sets to Indian customers, could not be treated as 'royalty' either under Income tax Act or the DTAAs. The High Court in its impugned judgment further held that the mere fact that separate invoicing was done for purchase and other transactions related to supply of the said telecom equipments, would not render the same as 'royalty payment.

Having heard the parties, the Supreme Court condones the delay and grants leave to the Revenue Department to defend their case on the issue of treatment of "overseas receipts from supply of software in the hands of non resident entity".

Leave granted

2017-TII-62-HC-DEL-INTL

ESS DISTRIBUTION MAURITIUS Vs ACIT: DELHI HIGH COURT (Dated: October 31, 2017)

Income tax - Sections 9(1)(i), 143(3), 144C(15)(b) & 148 - India-Mauritius DTAA - Articles 5 & 7.

Keywords: Distribution of channels - Eligible Assessee - PE - partnership firm - Reasons to believe

The assessee, M/s ESS Distribution (Mauritius) SNCET Campagnie, is a partnership firm established under the laws of Mauritius by ESPN Mauritius Limited (EML) (now known as Worldwide Wickets, Mauritius). During the AY 2010-11, EML had 99.9% share in the profit of ESS Distribution. ESS Asia Limited (EAL) (incorporated in Labuan, Malaysia), had the remaining 0.01% share. ESS Distribution was engaged in the business of distribution of sports and sports related television programmes broadcast by ESPN Star Sports, Singapore (ESS) via Non-standard television. ESS Distribution had entered into agreements with ESPN Software India Private Limited (now known as Star Sports India Private Limited since merged with Star India Private Limited) (ESPN India) for distribution of the channels.

Since ESS Distribution was entitled to the protection under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). ESS Distribution filed its return of income for AY 2010-11 on 1st October 2010 as a partnership firm. The case of ESS Distribution was that its revenue from distribution being business profit was, in terms of Article 7 (1) of the DTAA, not taxable in India, in the absence of it having a Permanent Establishment (PE) in India as contemplated by Article 5 of the DTAA.

In the notes to the return of income, ESS Distribution mentioned that it had entered into an agreement with Scorpio Television India Private Limited (Scorpio) where Scorpio was granted a licence to use the live feed. However, it was stated that during AY 2010-11 no such feed was shared and therefore, ESS Distribution did not receive any sum from Scorpio. In the Form 3CEB appended to the income tax return, ESS Distribution declared the amount received on account of subscription remittance.

The income tax return of ESS Distribution for AY 2010-11 was picked up for scrutiny and the AO raised queries regarding taxability of the subscription/distribution revenue. ESS Distribution stated that it had not received revenue from any other customer (including Scorpio) during the AY in question. A query was raised by the AO as to why the status of the firm should not be treated as foreign company and taxed accordingly. By its letter dated 27th March 2014, ESS Distribution pointed out the difference between a partnership firm and a company.

Nevertheless the AO concluded the assessment and passed a draft assessment order. ESS Distribution filed its objections and contended that since ESS Distribution was a foreign partnership it was not an "eligible Assessee? within the meaning under Section 144C (15) (b) of the Act. This was accepted by the DRP holding that it did not have jurisdiction over the case of ESS Distribution. The DRP, therefore, declined to issue any direction.

The AO decided to ignore the DRP decision and proceeded to pass the final assessment order on 28th January 2015 under Section 144C read with Section 143 (3) of the Act. The AO held that DRP had failed to deal with the other objections of the assessee. The AO described the decision of the DRP to be “grossly illegal against the intent of the legislature and not in accordance with the provisions of the Act”.

Aggrieved assessee opted to file writ. Even as the writ petition was pending the AO issues notice to reopen the assessment. After seven months the assessee received the reasons for reopening the assessment and filed detailed objections. Even as the assessee's reply was pending before the AO, the writ was heard and certain directions were issued. The assessee received another draft assessment order dated 19th December 2016 passed by the AO. The amendment sought by ESS Distribution to challenge the said draft assessment order was allowed by the Court and accordingly, the amended writ petition was taken on record.

The facts of the ESS Advertising, also a partnership firm, are similar and this case was also clubbed with this writ petition.

Having heard the parties, the Bench held that,

Whether when the DRP has held that the assessees are not 'eligible assessee' being partnership firms registered in Mauritius u/s 144C(15), such an order is binding on the AO - YES: HC

+ in respect of these very Assessees and for the same AY 2010-11, the earlier draft assessment order passed by the AO under Section 144C of the Act has already been set aside by its judgment dated 23rd March 2016. That judgment referred to the order of the DRP which had held that both the Assessees were not eligible Assessees under Section 144C (15) of the Act and that order of the DRP was binding on the AO. It was further held by this Court that the AO could not have disregarded the finding directions of the DRP and passed the final assessment order. This was an issue of jurisdiction of the AO to proceed under Section 144C of the Act against an entity which is a partnership firm incorporated outside India;

If the AO decides to ignore the DRP and even HC decision, such conduct is highly objectionable - YES: HC

+ the AO continues to be bound by the order of the DRP which was by this Court by its decision dated 23rd March 2016 in respect of the same Assessees for the same AY 2010-11. Since the Revenue has not challenged that judgment, the AO had no option but follow the DRP's order. Further, the AO was aware that the earlier attempt at disobeying the DRP's order led to invalidation of the draft and the final assessment order. What is surprising is that while disposing of the objections to the reopening of the assessment, the AO again chose to only record that the DRP held that both the Assessees were not eligible Assessees. The AO did not refer to this Court's order dated 24th March 2016. This is despite the fact that the AO was disposing of the objections more than nine months after the judgment of this Court. This conduct of the AO is simply unacceptable;

+ both the draft assessment orders in respect of ESS Distribution and ESS Advertising for AY 2010-11 dated 19th December 2016 are liable to be set aside.

+ the Court has also examined the reasons for reopening of the assessments in respect of both the Assessees for the AY in question. As far as ESS Distribution is concerned, two reasons have been adduced for reopening of the assessment. One was that the amount received by ESS Distribution from Scorpio, pursuant to the agreement entered into between them, was taxable under Section 9 (1) (i) of the Act read with the relevant provisions of the DTAA. The second was that the Assessee received from ESPN Software India Pvt. Ltd in the form of subscription revenue of Rs. 33,84,68,539 which had escaped assessment on account of failure by ESS Distribution to make appropriate disclosures in its return of income;

+ the Court has been shown a computation of income and notes to computation filed by ESS Distribution in the original assessment proceeding. It is clearly mentioned therein that during the year in question ESS Distribution has not conducted any business with Scorpio and accordingly, there were no receipts from Scorpio. Therefore, the said reason recorded for reopening the assessment was apparently invalid;

Whether when there is no nexus between the the 'reason to believe' regarding the escapement of income and the materials on record, it is a case of mere change of opinion - YES: HC

+ there was no new material for the AO to come into the conclusion that any other income arose during the AY in question that was left out from consideration. There was no nexus between the reasons to believe that income has escaped assessment and any new tangible material placed on record before the AO. The reopening was, therefore, based on a mere change of opinion;

+ as regards ESS Advertisement, there was only one reason for reopening of the assessment which is that 30% of the gross advertising revenue was assessed as an attributable income to Indian PE amounting to USD 418,939 had been left out for being considered. The determination of business income attributable to the India PE on an estimated percentage basis was deemed to have considered and taken into account all business income and expenses into its fold. There was no occasion for lifting any particular item reflected in the accounts for a specific treatment. Then it was already a part of the original assessment and there was no fresh tangible material available with the AO to form reasons to believe that any income of the Assessee escaped assessment. This order, therefore, is mere change of opinion.

Assessees' writs allowed