ITAT: DAPE wholly Tax-Neutral if Remuneration is paid by Agent on Arm's Length Price

ITAT: DAPE wholly Tax-Neutral if Remuneration is paid by Agent on Arm's Length Price

On 29 January 2021, the coram headed by the Vice President, Pramod Kumar of the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, clarified that as far as profit attribution of a Dependent Agent Permanent Establishment (DAPE) is concerned, the legal position is that as long as an agent is paid an Arm's Length Price (ALP) for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment

The factual matrix of the case is, Asia Today Limited (assessee) is a foreign telecasting company incorporated in Mauritius and having a tax residency certificate of Mauritius.

It sells advertising time and collects subscription revenues through its Indian affiliates Zee Telefilms Limited and El Zee, but it claimed that since it does not have any permanent establishment in India, no part of its income was taxable in India.

It was alleged by the assessee that the Assessing Officer (AO) did not accept the claim. He was of the view that its Indian agent constitutes a virtual projection of the foreign company, and, therefore, it has a permanent establishment in India.

It was further observed by the AO that the assessee has an agency permanent establishment in India, under Article 5(4) of India Mauritius DTAA, as its Indian agents are the dependent agents. Hence, the assessee is held to have a dependent agent permanent establishment.

The AO held that no further profits can be attributed in the hands of the assessee as the agent has been paid ALP services. Hence, the existence of a dependent agency permanent establishment is wholly tax neutral.

An appeal was filed before the ITAT against the order of the AO. The ITAT held that the existence of dependent agency permanent establishment is wholly tax-neutral unless it is shown that the agent has not been paid an arm's length remuneration.

It further stated that it was not the case of the AO, that the agents have not been paid an ALP. It further pointed out that the question regarding the existence of dependent agency permanent establishment, i.e., under Article 5(4), is wholly academic question.