In a crucial tax ruling which will make the government richer by a few thousand crores, the Mumbai Income Tax Appellate Tribunal has held that revenue generated in India by a foreign company is taxable in India, even if the firm operates through a local agent. The order was given in a case pertaining to Sony Entertainment Televisions Singapore-based parent company, SET Satellite (Singapore ) Pte Ltd.

The order will effectively put an end to the practice by foreign firms of avoiding tax in India by setting up a company in another country with which India has a tax avoidance treaty; in such a structure, the earnings are shown in the name of the offshore company.

The order, upholding the income tax demand of Rs 10 crore, was given by ITAT last week on an appeal filed by the income tax department in the case of SET Satellite (Singapore). The company had said that tax cannot be levied on the income generated in India through selling airtime and advertisement revenue because the purchase and sale of airtime is effected in Singapore and also an arms length price was paid to the companys Indian agent, SET India. It said that the money paid to SET India is the only income that can be taxed in India.

The ITAT bench, comprising Pramod Kumar and Madhavi Devi, rejected the contention. It said that the payment made to the companys agent in India (ie, SET India), can at best be described as the expenditure incurred by the foreign company and this amount may be deducted for the purpose of arriving at the taxable income. But the tax should be levied on the foreign company on its whole operation in India.

The payment of arms length remuneration to the agent by a foreign company is its expenditure, and the taxability of such an expenditure in the hands of the recipient cannot extinguish the taxability of foreign company paying it.

In coming to this conclusion, the ITAT disagreed with the AAR ruling in the case of Morgan Stanley, which was in favour of the taxpayer. This had sparked the entire controversy.The ITAT has held that irrespective of whether one carries on the business directly or through the dependent agent, the profit attributable to such business continue to be taxable in the source country.