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2012 (3) TMI 27 - AT - Income TaxDepended agent or independent agent - Money Transfer Business - Stand alone Machines - liaison office versus Permanent Establishment - held that - Non-banking financial companies deal with money belonging to others and the activity of paying out monies on behalf of the Western Union Financial Services Inc. must be viewed as part of their business activity. In the case of tour operators acting as agents of an established firm engaged in the international money transfer business may be conducive to their business. A broad view of the matter has to be taken in these matters. - held as independent agent. Whether the activities of the agent are wholly or almost wholly devoted to the assessee. - held that - just because they are not acting as agents for any other company carrying on money transfer business it cannot be said that their activities are wholly or almost wholly devoted to the assessee. Whether the transactions between the agents and the assessee are under arm s length. - Held that - There is no material to show that the rates of compensation are higher in other cases so as to indicate that the agents were discriminated against. The higher rate of compensation in the case of the Department of Posts is probably because its reach is much wider compared to the commercial banks NBFCs or tour operators. The terms of appointment of sub-agents are uniform in all cases. Thus there seems to be no basis for the charge that the compensation paid is not adequate for the services rendered by the agents. - there is no merit in the claim that the transactions between the assessee and the agents are not under arm s length. Existence of PE in India - held that - the fact that the agents in India payout the money to the beneficiaries or claimants which they are bound to under the agreement with the assessee for which they are remunerated does not appear to us to be a case of exercise of any authority. Thus the agents do not habitually exercise the authority to conclude the contracts on behalf of the assessee. - there is no agency PE of the assessee in India. In the absence of any PE in India it follows that the profits if any attributable to the Indian operations cannot be assessed as business profits under article 7 of the treaty.
Issues Involved:
1. Whether standalone machines with software applications constitute a fixed place PE of the assessee. 2. Whether the liaison office of the assessee in India constitutes its PE. 3. Whether representatives of the assessee in India constitute its Dependent Agent PE under Article 5(4) / 5(5) of the treaty. 4. Whether profits should be attributed to the activities carried out by the assessee through its PE in India. 5. Whether the assessee has a 'Business Connection' in India under Section 9 of the Income Tax Act, 1961. 6. Whether the assessee is liable to pay interest under section 234-B of the Act for default in payment of advance tax. Detailed Analysis: 1. Standalone Machines as Fixed Place PE: The Revenue argued that standalone machines where the software applications of the assessee are installed and dedicated to money transfer business should be treated as a fixed place PE. The Assessing Officer (AO) concluded that these machines, installed in the premises of various agents, constituted a fixed place of business, as they ensured connectivity between the assessee and the agents, thus forming a PE. However, the ITAT, following its decision in the assessee's own case for AY 2001-02, held that the software installed in agents' premises did not constitute a PE as the premises were owned or hired by the agents, and the assessee had no right to use these premises for its business. 2. Liaison Office as PE: The AO argued that the liaison offices in India were actively engaged in marketing, negotiating with agents, and other business activities, thus constituting a PE. However, the ITAT, referring to its earlier decision, found that the activities of the liaison office were preparatory and auxiliary in nature and did not constitute a PE. The liaison office acted as a communication link and provided training and support, but did not engage in any trading activity. 3. Representatives as Dependent Agent PE: The AO contended that the agents in India were dependent agents under Article 5.4(a) of the DTAA, as they were economically dependent on the assessee and had the authority to conclude contracts. However, the ITAT concluded that the agents were independent agents under Article 5.5 of the treaty, as their activities were not wholly or almost wholly devoted to the assessee, and the transactions were at arm's length. The agents did not have the authority to conclude contracts on behalf of the assessee; they merely executed the final step of the contract concluded outside India. 4. Attribution of Profits: Given the conclusion that there was no PE in India, the ITAT held that no profits could be attributed to the Indian operations of the assessee under Article 7 of the DTAA. Consequently, the AO's decision to tax 50% of the commission income was overturned. 5. Business Connection in India: The AO and CIT (Appeals) both concluded that there was a business connection in India under Section 9 of the Income Tax Act, 1961, as the agents in India facilitated the business of the assessee. The ITAT upheld this view, noting that the business of transferring money involved both receiving and paying aspects, and the transaction was not complete until the money was paid to the claimant in India. 6. Liability to Pay Interest under Section 234-B: The assessee argued that since the entire income was subject to tax deduction at source, it could not be held liable for default in payment of advance tax and thus not liable to pay interest under section 234-B. The ITAT upheld the CIT (Appeals) decision that the levy of interest under section 234-B was consequential in nature, directing the AO to allow consequential relief if applicable. Conclusion: The ITAT dismissed the appeals by the Revenue and the corresponding cross-objections by the assessee, upholding the findings of the CIT (Appeals) that the assessee did not have a PE in India, and therefore, no profits could be attributed to the Indian operations of the assessee. The ITAT also upheld the finding that the assessee had a business connection in India under Section 9 of the Act but was not liable for interest under section 234-B due to the consequential nature of the levy.
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