Global experts split over ITAT’s MNC taxation ruling
The Income-Tax Appellate Tribunal’s decision, on taxability of MNCs operating in India, held that revenue generated in India by the foreign company is taxable in India even if they operate through an agent.
By M Padmakshan, TNN |
MUMBAI: The Income-Tax Appellate Tribunal’s (ITAT) decision on taxability of multinational companies operating in India has triggered a serious debate among global cross-border taxation experts. These include professor Klaus Vogel, considered guru of cross-border taxation, United Nations Tax and Trade Co-operation chief Michael Lennard and Philip Baker, the English barrister who edits the International Tax Law Reporter.
The order, which has become a subject matter of acrimonious debates at tax seminars worldwide, involved Sony Entertainment Television (Singapore). The order 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: 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 contended that once an agent has been paid an arm’s length price, no further profits can be taxed in India.
The tribunal rejected this plea and held that whether the foreign company operates in India or not, the fees earned by the agent in India have to be taxed in India anyway. The ITAT bench, comprising Pramod Kumar and Madhavi Devi, held that the payment made to the company’s 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 (SET).
While Mr Baker criticised the order in his comments in the London-based International Tax Law Reporter, Mr Vogel supported ITAT stand in the column ‘Tax Treaty Monitor’ in the IBFD Bulletin on International Taxation, published from Amsterdam.
In his editorial remarks, Philip Baker wrote: “One of the strongest argument of this (tribunal’s) approach is that it is impossible to apply that approach in case of a dependent agent” and that this approach “requires an abandonment of reality and an entirely hypothetical attribution, while an arm’s length world must still have some basis in reality.” This approach he said, “is simply a licence for arbitrary allocation of profits” and that “ultimately, that is what the tribunal did here.” Late last year, the US released its new model convention in which amendments have been made to pre-empt such disputes.
Mr Vogel does not agree. “One can understand that many have problems imagining how profits should arise to a permanent establishment, which the tribunal itself repeatedly states, does not exist in reality and is ‘wholly hypothetical and fictional’, and adds that “such sceptics should, however, consider that the parent enterprise, as a rule, will aim at realising receipts from the contracts concluded by the dependent agent, which, apart from including agent’s commission, include a surplus profit, for otherwise the parent will lack any commercial reasons for employing the agent.”
Mr Vogel also said “fairness (international equity) requires that these surplus profits be taxed in the source state” and that “it is the rule that a profit, exceeding agents compensation, will be submitted to the agent’s state.”
The UN’s Mr Lennard, who was in India to attend an international tax conference last week, approved ITAT’s line. The decision was a correct one ‘built upon sound conceptual foundation’, Mr Lennard told ET. He also praised Indian tax judiciary’s decisions, particularly ITAT’s.
The order, which has become a subject matter of acrimonious debates at tax seminars worldwide, involved Sony Entertainment Television (Singapore). The order 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: 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 contended that once an agent has been paid an arm’s length price, no further profits can be taxed in India.
The tribunal rejected this plea and held that whether the foreign company operates in India or not, the fees earned by the agent in India have to be taxed in India anyway. The ITAT bench, comprising Pramod Kumar and Madhavi Devi, held that the payment made to the company’s 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 (SET).
While Mr Baker criticised the order in his comments in the London-based International Tax Law Reporter, Mr Vogel supported ITAT stand in the column ‘Tax Treaty Monitor’ in the IBFD Bulletin on International Taxation, published from Amsterdam.
In his editorial remarks, Philip Baker wrote: “One of the strongest argument of this (tribunal’s) approach is that it is impossible to apply that approach in case of a dependent agent” and that this approach “requires an abandonment of reality and an entirely hypothetical attribution, while an arm’s length world must still have some basis in reality.” This approach he said, “is simply a licence for arbitrary allocation of profits” and that “ultimately, that is what the tribunal did here.” Late last year, the US released its new model convention in which amendments have been made to pre-empt such disputes.
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Mr Vogel does not agree. “One can understand that many have problems imagining how profits should arise to a permanent establishment, which the tribunal itself repeatedly states, does not exist in reality and is ‘wholly hypothetical and fictional’, and adds that “such sceptics should, however, consider that the parent enterprise, as a rule, will aim at realising receipts from the contracts concluded by the dependent agent, which, apart from including agent’s commission, include a surplus profit, for otherwise the parent will lack any commercial reasons for employing the agent.”
Mr Vogel also said “fairness (international equity) requires that these surplus profits be taxed in the source state” and that “it is the rule that a profit, exceeding agents compensation, will be submitted to the agent’s state.”
The UN’s Mr Lennard, who was in India to attend an international tax conference last week, approved ITAT’s line. The decision was a correct one ‘built upon sound conceptual foundation’, Mr Lennard told ET. He also praised Indian tax judiciary’s decisions, particularly ITAT’s.
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