The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed a set of appeals concerning the taxation of a UK-resident media company having a Dependent Agency Permanent Establishment (DAPE) in India, holding that while the profit attributable to the Indian PE could not continue at the historical rate of 8.75% in view of expanded activities revealed during a survey, the Assessing Officer (AO) was also not justified in enhancing the attribution to 15% merely on estimation.

The Bench of Vikas Awasthy (Judicial Member) and Renu Jauhari (Accountant Member) directed the AO to verify and quantify credit for taxes paid by the Indian PE in relation to advertisement income. The Tribunal applied the same findings to the assessment years 2017-18 to 2021-22, resulting in partial allowance of all the appeals.

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The case involved a UK tax resident engaged in operating an international news television channel and the BBC website. The Indian entity, BBC Global News India Pvt. Ltd. (BGNIPL), was undisputedly treated as the assessee’s Dependent Agency Permanent Establishment in India.

The central dispute was the percentage of advertisement revenue that should be attributed as profit to the Indian PE for tax purposes.

For assessment years 2004-05 to 2014-15, the parties had reached a resolution under the Mutual Agreement Procedure (MAP) under which profit attributable to the Indian PE was determined at 8.75% of advertisement revenue. The same rate was subsequently adopted for assessment years 2015-16 and 2016-17.

For the assessment year under consideration, however, the AO increased the attribution rate from 8.75% to 15%. The taxpayer challenged the increase, contending that there had been no material change in its functions or the manner in which the Indian operations were conducted and that the historical 8.75% rate should therefore continue.

The department defended the higher attribution by relying principally on a survey action conducted in February 2023.

During the survey, statements of key officials were recorded, including the Sales Director for South Asia Advertising. According to the Revenue, the statements revealed that the Indian PE was performing functions that went beyond those described in the taxpayer’s Transfer Pricing Study Report (TPSR).

The department also pointed out that, following the survey, the taxpayer had offered additional income of ₹80 lakh to tax. According to the Department, these developments demonstrated that the activities of the Indian DAPE were wider than what had been represented in the TPSR, justifying the increase of profit attribution from 8.75% to 15%.

The Tribunal noted that the survey material indicated that the Indian PE was involved in a wide range of activities.

These included promoting sales of advertising airtime and sponsorships, soliciting proposals from advertisers, providing clarifications regarding advertising products, obtaining customer orders, assisting with documentation, collecting outstanding amounts, undertaking business development, identifying market opportunities, proposing campaigns, implementing marketing and promotional activities, supplying marketing material and conducting research concerning the reach of the news channel, websites and social media.

The Tribunal observed that the taxpayer had not been able to controvert the activities identified by the AO and that these functions were over and above those specified in the TPSR.

A significant aspect of the ruling concerns the Tribunal’s treatment of the earlier MAP resolution.

The Tribunal accepted that a MAP resolution is not binding for assessment years that are not expressly covered by it. At the same time, it recognized that the methodology or benefit arising from a MAP resolution could potentially be followed in subsequent years where there was no change in the facts, functions or scope of activities.

In the present case, however, the survey material indicated a wider functional profile of the Indian PE than what had been disclosed in the TPSR. The Tribunal therefore held that the earlier 8.75% attribution rate could not simply be carried forward to the year under consideration.

According to the Tribunal, the changed factual circumstances warranted an enhancement in profit attribution so as to compensate for the additional activities being performed by the Indian PE.

While the Tribunal agreed with the Revenue that the 8.75% rate could not be retained in light of the changed circumstances, it simultaneously found fault with the AO’s decision to fix the attribution at 15%.

The Bench specifically observed that the AO had enhanced the attribution from 8.75% to 15% on mere estimation and concluded that the 15% rate was on the higher side.

Balancing the expanded activities of the Indian PE against the lack of adequate basis for the 15% figure, the Tribunal restricted the profit attributable to the Indian PE to 12% of advertisement revenue.

The grounds challenging the enhancement were consequently partly allowed.

The taxpayer also argued that its Indian DAPE had already been remunerated at arm’s length for providing advertisement sales and market support services. On that basis, it contended that no further attribution of profit to the PE was warranted.

The Tribunal considered the Supreme Court’s principle in DIT v. Morgan Stanley & Co., under which no further attribution may be necessary where a PE has been remunerated at arm’s length after taking into account all relevant risk-taking functions.

However, the Supreme Court principle also recognizes an exception where the transfer pricing analysis does not adequately reflect the functions performed and risks assumed by the PE.

The Tribunal held that the present case fell within that exception. It therefore rejected the taxpayer’s contention that the arm’s length remuneration to the Indian entity completely extinguished the need for further profit attribution.

Another important issue concerned credit for taxes paid by the Indian PE.

The taxpayer claimed that the AO had failed to give effect to the directions of the Dispute Resolution Panel (DRP), particularly in relation to a tax credit of ₹25,08,200. The DRP had directed the AO to examine the taxpayer’s submissions concerning the credit and pass a speaking order.

According to the taxpayer, the final assessment order did not properly implement those directions.

The Revenue argued that the earlier MAP resolutions were applicable only to the assessment years covered by them and that the absence of a MAP agreement for the year under consideration prevented the taxpayer from automatically claiming the same benefit.

The Tribunal agreed with the Revenue that a MAP resolution is not binding on assessment years outside its scope. However, it held that there was no justification for denying the tax credit where there was no material change in facts and where the earlier MAP resolution had accepted, in principle, that taxes paid by the Indian PE in respect of advertisement income should be credited to the taxpayer.

The Tribunal therefore restored the issue to the AO for verification and quantification of the credit of taxes paid by the Indian PE in relation to advertisement income.

The Tribunal also dealt with the challenge to interest under Section 234B of the Income-tax Act. It held that such interest was consequential and mandatory and therefore dismissed the corresponding ground.

The challenge to initiation of penalty proceedings under Section 270A was also rejected. The Tribunal observed that contesting the initiation of penalty proceedings at that stage was premature.

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