Income Tax Liability of Multinational Companies: ITAT grants Partial Relief to Fox International [Read Order]

In a significant ruling clarifying the tax liability of multinational corporations with operations in India, the Income Tax Appellate Tribunal (ITAT) has held that the assessee, a Hong Kong-based cable and satellite channels Company, can only be taxed for the commissions it earns and license fees it charges in India as opposed to its entire income.

The assessee received income through its Indian subsidiary – Star TV. However, it is primarily a service provider and distributes content and sells ad space for its subsidiary channels – Star Movies, Star World, Star Plus, Channel V, Star Gold – at the global level.

The department noticed that as per the contractual arrangement between the assessee and the channel companies, the assessee is compensated so as to earn an amount equal to the profits / loss earned / incurred to by the channel companies, meaning thereby, an amount which is equivalent to the total profits of all the channel companies was also considered as profits in the hands of the assessee. It was also noticed that out of the global commission received by the assessee from the overseas merged entities, commission fee received towards the services rendered outside India was not offered to tax by the assessee in India and only the balance commission fee was offered to tax in India.

Since Fox doesn’t have a permanent establishment (PE) – legal speak for physical presence – in India, it will be levied taxes on the income it earns from business dealings with Indian entities.

Foreign companies with ‘substantial economic presence’ were earlier liable to pay tax in India. This had left room for interpretation, causing some confusion.
Hence, it will be levied taxes on the agency fees it charges to its subsidiaries as a distributor and seller of ad space.

As a result of the ruling, only the “attributable profits” of a foreign company can be taxed by domestic authorities. In the future, MNCs will be subject to taxes based on deal volumes and the number of consumers.

“It is the contention of the learned Sr. Counsel for the assessee that since the assessee is a non–resident and liability was cast upon the payer to deduct tax at source while making the payment, interest cannot be charged under Section 234C of the Income Tax Act for failure to pay installments of advance tax. In this context, he has relied upon the decision of the Hon’ble Jurisdictional High Court in DIT v/s NGC Network Asia LLC, [2009] 313 ITR 187 (Bom.). We find substantial merit in the aforesaid submissions of learned Sr. Counsel,” the Tribunal said.