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No tax on foreign cos if arm's length basis followed: ITAT
February, 09th 2010

The Income Tax Appellate Tribunal (ITAT) has held that a foreign company is not liable to pay tax to Indian authorities if its domestic agent is paid on an arms length basis. ITAT given the order in an appeal filed by UK-based BBC Worldwide.

An arms length price is at which two related parties trade as if they are not associated, so that there is no conflict of interest.

BBC Worldwide had appointed its Indian subsidiary BBC India to solicit orders for the sale of advertising airtime on its channel. BBC Worldwide had received the payment from advertisers while BBC India got a 15% commission.

BBC Worldwide claimed that as the revenue was its business profit and it had no permanent establishment in India, the income was not taxable in the country under the India-UK Double Taxation Avoidance Agreement (DTAA).

However, the I-T assessing officer (AO) in New Delhi submitted that BBC Worldwides income from the advertisement accrued in India should attract 20% tax as per the DTAA as its Indian subsidiary was a permanent establishment in India.

But the ITAT held that BBC Indias commission was fixed at an arms length and the quantum of the commission was a fair transfer price. ITAT also found that commission paid to advertising agents of foreign telecasting companies in India is usually 15% of revenues.

The ITAT also considered a circular issued by the Central Board of Direct Taxes, which said if the sales of the non-resident company were secured through its agent in India, the taxable income was limited to the profits of the agent.

The CBDT circular also stated that the business activities should be channelled wholly through the agent and the contract to sell should be signed outside India.

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