The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that profit attribution to a Dependent Agency Permanent Establishment (DAPE) must reflect the actual functions performed and risks assumed by the PE in the source jurisdiction. A historical MAP-agreed rate cannot be treated as immutable for years outside the MAP’s scope, particularly when post-assessment evidence, such as statements recorded during a survey, discloses that the PE is carrying on a wider range of activities than those documented in the transfer pricing study. The revenue authorities are therefore within their rights to enhance the attribution rate.
However, such enhancement cannot be arbitrary. The rate must be anchored in reasoned analysis and must bear a proportionate relationship to the additional functions identified. An enhancement based purely on estimation, without empirical support, is liable to be moderated, added the Tribunal.
On the question of tax credit, the ITAT drew a distinction between the binding effect of a MAP resolution and the substantive benefit agreed under it. While the resolution itself does not bind non-covered years, the underlying principle, that taxes paid by the Indian PE on advertisement income should be credited to the assessee, should continue to apply unless the Revenue can point to material evidence warranting a departure. The burden of demonstrating that the credit is no longer available lies with the Revenue, not the assessee.
The Division Bench comprising Vikas Awasthy (Judicial Member) and Renu Jauhri (Accountant Member) observed that a Mutual Agreement Procedure (MAP) resolution binds only the assessment years it explicitly covers. The 8.75% profit attribution rate agreed for AY 2004-05 to 2014-15 could not be mechanically carried forward to subsequent years once the scope of the PE’s activities was shown to have expanded. The Tribunal found that statements recorded during the February 2023 survey revealed that BBC’s Indian entity was performing activities well beyond those disclosed in the Transfer Pricing Study Report, including soliciting orders, implementing marketing campaigns, collecting dues, and conducting market research.
While the Tribunal accepted that an upward revision was warranted, it held that the Assessing Officer’s jump from 8.75% to 15% was made on mere estimation without empirical analysis. The Tribunal restricted the rate to 12% of advertisement revenue as a reasonable middle ground. As far as arm’s-length remuneration to PE does not foreclose further attribution, the Tribunal applied the Supreme Court’s ruling in DIT v. Morgan Stanley [162 Taxman 165] but found that BBC’s case fell within the recognised exception, where the transfer pricing analysis does not adequately reflect the functions performed and risks assumed by the PE, additional profit attribution is warranted.
Even though the MAP resolution does not strictly bind non-covered assessment years, the Tribunal held that once a principled agreement exists for allowing credit of taxes paid by the Indian PE on advertisement income, the Revenue cannot withdraw that benefit in later years without producing material evidence to justify the deviation. The issue was remanded to the Assessing Officer for verification and quantification.
Briefly, BBC Global News Limited, a tax resident of the United Kingdom engaged in broadcasting the BBC World News Channel and operating its website, has a Dependent Agency Permanent Establishment in India named BBC Global News India P. Ltd. Historically, under a Mutual Agreement Procedure for the assessment years 2004-05 to 2014-15, the profit attribution to the Permanent Establishment was mutually agreed at 8.75 percent of the advertisement revenue, which was also adopted for subsequent years up to 2016-17.
However, following a survey action in February 2023, the Assessing Officer enhanced the profit attribution rate to 15 percent for the assessment year 2022-23 and reopened assessments for the years 2017-18 to 2021-22 to apply the same enhanced rate. The enhancement was based on statements from key officials indicating that the Indian entity was carrying out activities significantly beyond the scope mentioned in the Transfer Pricing Study Report, such as soliciting proposals, obtaining orders, and implementing marketing campaigns. Additionally, the Assessing Officer denied the credit of taxes paid by the Indian entity, arguing that the Mutual Agreement Procedure resolution was not applicable to the current assessment years.
