No tax if arms length pricing followed, rules ITAT

The Income Tax Appellate Tribunal (ITAT) has ruled that a foreign company need not pay tax to the Indian exchequer if its domestic agent is paid on an arm's length basis. The order relates to a tax dispute between the Indian revenue authorities and UK-based BBC Worldwide. Arm's length price is a frequently used concept used by revenue authorities to decide if the price at which related entities - usually a multi-national company and its affiliate - are trading with each other is 'fair' . The price is deemed to be fair or at arms length if in other transactions the MNC offers the same price to an entity not linked to it. BBC Worldwide had appointed its Indian subsidiary BBC India to sell advertising airtime on its channel . The UK based broadcaster had received payments from advertisers while BBC India got a 15% commission . BBC Worldwide claimed that as the revenue was its "business profit" and it had no permanent establishment in India, the income was not taxable in the country under the India-UK Double Taxation Avoidance Agreement or DTAA. However, the I-T assessing officer in New Delhi ruled that BBC Worldwide's income from the advertisement by Indian companies should attract 20% tax under the terms of the DTAA as its Indian subsidiary was a permanent establishment in India. The ITAT ruled that BBC India's commission was fixed at arm's length and was a fair transfer price. It also found that the commission paid to advertising agents of foreign broadcasters in India is usually 15% of revenues. The tribunal also considered a circular issued by CBDT, which said if the sales of a non-resident company were obtained through the efforts of its agent in India, the taxable income was limited to the profits of the agent. The CBDT circular also said that business activities should be carried out completely through the agent and the contract to sell should be signed outside India.