The Supreme Court on Friday admitted an appeal by the Income Tax department against the relief given to Sony Entertainment Television by the Bombay High Court. The apex courts move keeps alive the debate on taxing profits from Indian operations of a foreign entity which does business in India through a dependent agent. The Supreme Courts final decision on this issue will have a bearing on similar cases pending at various stages of litigation the total disputed tax liability in such cases could be over Rs 5,000 crore.

The division bench of the Supreme Court headed by Justice SH Kapadia and Justice Aftab Alam observed that the Income Tax departments appeal raises significant legal questions which need to be answered by the Supreme Court. The department was represented by lawyers Parag Tripathi and Persi Pardiwala, while lawyers Harish Salve and Beni Chatterjee appeared for Sony Entertainment Television.

The origin of the debate was with a ruling by the Income Tax Appellate Tribunal (ITAT), Mumbai. The ITAT bench comprising Pramod Kumar and Madhavi Devi held that revenue generated in India by the foreign company is taxable in India even if they operate through an agent. The question before the tribunal was this: When a foreign company operates in India through a dependent agent and when the agent is paid for the services at fair market value, can further profits of the foreign company be taxed in India.

Sony Entertainment Television did not dispute that they had a dependent agent in India and that the business was carried out through this agent. But, it contended that once an agent has been paid an arms length price, no further profits can be taxed in India.

The ITAT rejected this plea and held that whether the foreign company operates in India or not, the fee earned by the agent in India has to be subjected to taxation in India. The ITAT further held that the payment made to the companys agent in India, 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 taxing Sony Entertainment Television.

However, the Bombay High Court reversed the ITAT order. The order by division bench comprising Justice FI Rebello and Justice RS Mohite virtually set aside the rationale of the ITAT on the ground that the apellate tribunal did not consider the impact of a circular issued by CBDT.