Mumbai: When a company based in India collects commission on a global deal, what is taxable domestically — the commission amount or the value of the total deal?
In a precedent for multinationals with significant economic presence in India, a tax tribunal has ruled that only “attributable profits” of a multinational can be taxed domestically.
The tax tribunal ruling in the case of Fox International, part of Star TV, said only the company's commissions charged and not the entire income must be taxed domestically.
The ruling focussed on 'real' territorial nexus for the purpose attribution of profits and their taxation to Indian 'business connection' of foreign companies.
Fox International, as per the Income Tax Appellate Tribunal (ITAT) documents, doesn’t have a permanent establishment or PE in India. PE is a concept that determines the jurisdiction where a company pays its taxes.
Experts say that the emphasis on local presence of physical operations is likely to undergo a significant shift due to the worldwide movement for taxation of digital businesses.
“India has incorporated the concept of Significant Economic Presence (SEP) in its definition of 'business connection.' As a result, we might witness taxation of foreign companies in India based upon the principles of economic value creation, even in the absence of any tangible / physical operations in India,” Rahul Garg, partner, Heads Up Consulting, a tax consultancy.
Tax experts said the ruling would be crucial in future litigation when the tax department wants to “attribute” profits of multinationals to India. The government is looking to articulate rules to tax multinationals based on volume of transactions and number of consumers and not their PE.
As per the ITAT documents, Fox International is engaged in distribution of satellite television channels and sale of advertisement air time for the channel companies at global level. It is not a channel owner but is a service provider to group companies that own television channels like Star Movies, Star World, Channel–V, Star Plus, Star Utsav, Star Gold and Star One.
“The channel companies had appointed the assessee (Fox International) as an agent to sell the advertisement air time on the channels, to distribute the channels in the territories where the channels are being broadcast and to procure syndication revenues in respect of the contents of the channels.
The tax tribunal ruled that “the income which is deemed to accrue or arise in India must have a “territorial nexus (or PE)” “It will be clear that it is not applicable to the agency commission earned by the company, the ITAT ruled. The dispute involved taxation on the company’s profits of around ?250 crore.
The company changed the way it pays taxes in India, as per the ITAT documents, due to change in the domestic regulations around 2008.
This also overlapped with the company’s restructuring a year later. In August 2009, the then News Corp had split its Asian broadcasting business housed under Star into three units – Star India, Star Greater China and Fox International Channels (FIC).
Star India, led by CEO Uday Shankar, started managing sales and distribution of all News Corp channels in India – a total of 19 channels in eight languages at that time – as well as News Corp’s interests in seven ventures including DTH operator Tata Sky.
It was during the same restructuring that Shankar was given responsibility for managing the sales and distribution of all Fox-branded channels in India. Earlier, Fox branded channels were managed by the Hong Kong subsidiary of News Corp.
FIC combined Star World, Star Movies and Channel [V] International with channels under the Fox and National Geographic Channel brands, operating 37 channels under 17 channel brands.
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