In a significant tax ruling pertaining to MNC arms in the country, the Bombay High Court has said Sony Entertainment Television (SET), Singapore, was not liable to pay tax in India, as the foreign entity has paid an arms length remuneration to its local agent, SET India now called Multi Screen Media (MSM).

The dispute goes back to the days when SET India was set up to source advertising for AXN a channel owned by Singapore-based SET Satellite. While SET India paid the tax on the commission earned by SET India, SET Satellite did not pay any tax on the advertising revenue that it sourced from India on grounds that it was carrying on the activity through a commission agent. All payments made to the commission agent (i.e., SET India) were at arms length or market price. Therefore, SETs contention was that only the commission should be taxed, and that the Singapore company was not liable to pay a tax.

However, the tax tribunal differed. The ITAT bench ruled against Sony, stating that whether one carries on the business directly or through a dependent agent, the profit attributable to such business continues to be taxable in the source country. Sony then challenged the judgement and moved the Bombay HC. The court on Friday upheld the MNCs contention, which was, even if an MNC had a permanent establishment in India, it was not liable to pay tax if the foreign entity paid an arms length remuneration to the permanent establishment.

This is a historical decision and will be quoted internationally for decisions on international taxation. When MNCs deal with India, they often have a permanent establishment in India, and there are obvious questions on the tax liability.

Sony India is an agent of SET Singapore and was indeed a permanent establishment of the company. A fundamental principle came up before HC: if you pay an arms length remuneration to the permanent establishment, would there be any further tax liability at all? Set Singapore contented that it paid an arms length remuneration, and that SET India had paid taxes on the services it offered in India and therefore, SET Singapore was not liable to pay any further tax, said PWC head of tax practice Dinesh Kanabar.