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2015 (9) TMI 844 - AT - Income TaxDependent agency Permanent Establishment (PE) in India under Article 5(4) and 5(5) and Service PE under Article 5(2)(k) of Indo-UK DTAA - DRP taxing the Distribution revenues on gross basis u/s 44D - whether if the assessee does constitute a PE in India then no further profits can be said/sought to be attributable to the PE as the transaction with the assessee have been found to be at arm s length by the Transfer Pricing Officer (TPO), in subsequent years? - Held that - The assessee is a tax resident of United Kingdom and has worldwide business of providing news and financial information distributed through Reuters Global Network. In India, it has entered into distribution agreement with RIPL for distribution of news and information service compiled by the Reuters from the materials collected either by the Reuters itself or from its subscribers in the territory of India and also supply of news and information by the distributor. From the plain reading of the relevant terms of the agreement, it is quite apparent that nowhere it has been specified or there is any mandate that RIPL is habitually exercising its authority to negotiate and to conclude the contracts on behalf of the assessee in the territory of India which binding or can bind the assessee. It envisages simply delivering of Reuter services for a price which can be further distributed by the RIPL for earning of its own revenue. There is no clause that RIPL will act as an agent on behalf of assessee qua the distribution to subscribers. In fact, the RIPL is having independent contract with the subscribers, which is evident from the contract agreement between RIPL and Third party subscribers in India The character of an agent under Article 5(4) which can be said to be dependent is that the commercial activities of the agent for the enterprise are subject to instructions or comprehensive control and it does not bear the entrepreneur risk. The main thrust of an agent being a PE under Indo-UK treaty is that whether the agent has an authority to conclude contracts in the name of the enterprise i.e. the agent has sufficient authority to bind enterprise s participation in the business activities and the agent s activities involved the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is authorization to act on behalf of somebody else so much as to conclude the contracts. Here in this case, there is no such terms which is borne out from the distribution agreement that RIPL is only acting on behalf of Reuters or is in kind of dependent agent. It is completely an independent entity and the relationship between the assessee and RIPL is on principal-to-principal basis. As stated above, activities of RIPL cannot be said to be devoted wholly or almost wholly on behalf of the assessee as it has entering into contracts with the subscribers in India on independent basis and on principal-to-principal for earning and generating its revenues. In fact revenue from third party subscribes are far excess than transaction with the assessee. It is not the case here that it has completely or wholly doing activity for Reuters and earning income wholly from Reuters only. Thus, the conditions laid down in Article 5(5) also does not fulfill. As per terms of clause 3 of the agreement, the assessee is merely delivering Reuters services to the distributors. The Bureau Chief has nothing to do for providing of Reuters services to the distributor i.e. RIPL. The Bureau Chief is only acting as a Chief reporter and Text Correspondent in India in the field of collection and dissemination of news. Thus, it cannot be held that the News Bureau Chief constitute a service PE in India for the assessee to the Article 5(2)(k) as he has not furnished any services in India on which the assessee has earned the distribution fee. In view of our findings given above, we hold that neither under Article 5(2)(k) nor under Article 5(4) read with 5(5), the assessee has a PE in India and, therefore, the distribution fee received by the assessee can not be held to be taxable in India. - Decided in favour of assessee. Levy of interest u/s 234B - Held that - It has been admitted by both the parties that same is covered by the decision of Hon ble Bombay High Court in the case of NGC Network 2009 (1) TMI 174 - BOMBAY HIGH COURT
Issues Involved:
1. Whether the assessee has a Permanent Establishment (PE) in India under Article 5(4) and 5(5) of the Indo-UK DTAA. 2. Whether the assessee has a Service PE in India under Article 5(2)(k) of the Indo-UK DTAA. 3. Taxability of the distribution revenues on a gross basis under Section 44D. 4. Levy of interest under Sections 234B and 234D. Detailed Analysis: 1. Permanent Establishment (PE) under Article 5(4) and 5(5): The assessee, a UK-based company, entered into a Distributor Agreement (DA) with its Indian subsidiary, RIPL, to distribute "Reuters Products" in India. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) concluded that RIPL constituted a dependent agency PE under Article 5(4) and 5(5) of the Indo-UK DTAA, as RIPL was dedicated to the business of the assessee. However, upon examination, it was found that RIPL did not habitually exercise authority to negotiate and conclude contracts on behalf of the assessee, nor did it maintain a stock of goods or merchandise for the assessee. RIPL's substantial income from third-party transactions indicated that it was not wholly or almost wholly devoted to the assessee's business. Thus, the Tribunal held that RIPL did not constitute a dependent agency PE in India under Article 5(4) and 5(5). 2. Service PE under Article 5(2)(k): The AO and DRP also concluded that the assessee had a Service PE in India under Article 5(2)(k) due to the presence of Mr. Simon Moore, who was deputed as Bureau Chief in Bombay. However, the Tribunal found that Mr. Moore's role was primarily to gather, write, and distribute news, which did not relate to the distribution agreement between the assessee and RIPL. His activities were not connected to the earning of distribution fees by the assessee. Therefore, the Tribunal held that the presence of Mr. Moore did not constitute a Service PE under Article 5(2)(k). 3. Taxability of Distribution Revenues: The AO taxed the distribution revenues on a gross basis under Section 44D read with Section 115A, treating them as fees for technical services. However, since the Tribunal concluded that the assessee did not have a PE in India under Articles 5(4), 5(5), and 5(2)(k), the distribution revenues could not be taxed in India. This rendered the issue of gross basis taxation under Section 44D purely academic. 4. Levy of Interest under Sections 234B and 234D: Regarding the levy of interest under Section 234B, both parties agreed that the issue was covered by the Bombay High Court decision in NGC Network, which ruled that interest under Section 234B is not applicable to non-residents where tax is deductible at source. For interest under Section 234D, the Tribunal directed the AO to verify the assessee's claim that no refund was granted and no interest was originally charged, and accordingly, no interest under Section 234D should be levied. Conclusion: The Tribunal concluded that the assessee did not have a PE in India under Articles 5(4), 5(5), and 5(2)(k) of the Indo-UK DTAA, and hence, the distribution revenues could not be taxed in India. The appeal filed by the assessee was allowed, and the AO was directed to verify the applicability of interest under Section 234D.
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