Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (ITAT) in the case of: Fox International Channel Asia Pacific Ltd v. DCIT (ITA No.1947/Mum/2015) regarding the taxability of agency commission relating to the services rendered outside India. Because the claim of the taxpayer that actual profit attributable to India was found to be correct, no further adjustment could be made to the arm’s length price since the Transfer Pricing Officer concluded that the profit margin of the international transaction shown by the taxpayer was higher than the average margin of the comparable.

Summary of the case:

The taxpayer is a foreign company engaged in the distribution of satellite television channels and sale of advertisement air time for the channel companies at a global level. The taxpayer is not a channel owner but a service provider who was appointed as an agent by the channel companies to sell the advertisement air time on the channels, to distribute the channels in the territories where the channels are being broadcast and to procure syndication revenues in respect of the contents of the channels. Towards the aforesaid services, the taxpayer earned income by way of agency commission, management fees and other income in the nature of royalty.

However, the taxpayer has not maintained India specific financial statement or any India specific account. The taxpayer originally filed its tax return on the basis of unaudited global financial statements which was subsequently revised on the basis of audited global financial statements of itself and channel companies. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO).

The TPO held that the taxpayer and the channel companies had benchmarked the international transaction by adopting the profit split method (PSM) as the most appropriate method. Insofar as agency commission is concerned, the global profitability percentage as per the audited financial statements of channel companies has been applied to the Indian revenues and global revenues earned by the channel companies and the overseas merged entities respectively to arrive at the profit/loss earned by each of the channel companies.

The Dispute Resolution Panel held that since the taxpayer itself had admitted that Arm’s Length Price is attributable to India, no fault can be found with the TPO in making the adjustment. While holding so, the DRP rejected the taxpayer’s contention that the part of commission income does not fall within the purview of Section 9 of the Act as the services related to such commission income were provided outside India and the payment was also received outside India

Decision of the Tribunal:

Finally, the Tribunal held that since the actual profit attributable to India is a purely factual issue which has to be demonstrated by the taxpayer through proper documentary evidence/books of account. It was held that, as per Explanation 1 to section 9(1)(i) of the Act, where a taxpayer does not carry out business operations exclusively in India, only such part of the income as is reasonably attributable to the operations carried out in India shall be deemed to accrue or arise in India. Therefore, the income which is deemed to accrue or arise in India must have a territorial nexus.

The ITAT also explained that on careful reading of the provision contained in Explanation of section 9(2) of the Act, it would be clear that it will not be applicable to the agency commission earned by the taxpayer. Therefore, the ITAT directed the AO to not make any adjustment in the ALP if the attribution of INR 227.80 crores is found to be factually correct, thereby ruling in favour of the taxpayer.