2004 (10) TMI 88 - AAR - Income Tax

Applicant, a non resident, is an associate of the Dun and Brad-street group (referred to as D&B ) which has the largest and the most comprehensive database available, with information on 79 million business entities worldwide - payments made for the electronic purchases of Business Information Reports to the applicant will be treated as part of the applicant s business profits and hence covered within the provision of article 7 of the treaty - applicant will be held as not having a PE in India

Issues Involved:
1. Entitlement to benefits under the Double Taxation Avoidance Agreement (DTAA) between India and Spain.
2. Tax treatment of payments made by DBIS for electronic purchase of Business Information Reports (BIRs).
3. Determination of Permanent Establishment (PE) status in India.
4. Taxability of business profits in India.
5. Requirement for DBIS to withhold tax under section 195 of the Income Tax Act.
6. Obligation to file a tax return in India.
7. Applicability of penal provisions for non-filing of tax returns.

Detailed Analysis:

1. Entitlement to Benefits under DTAA:
This issue was not pressed by the applicant, hence no ruling was pronounced.

2. Tax Treatment of Payments for BIRs:
The Authority ruled that the payments made by DBIS for the electronic purchase of BIRs are part of the applicant's business profits. These payments fall under Article 7 of the DTAA, which deals with the taxability of business profits. The applicant contended that such income is taxed in Spain as business income and should be treated similarly under the treaty.

3. Determination of Permanent Establishment (PE) Status:
The key issue was whether the applicant has a PE in India under Article 5 of the DTAA. The Authority examined several grounds:
- Branch or Sales Outlet: The Commissioner argued that DBIS acts as a branch or sales outlet of the applicant. However, the Authority found no evidence that DBIS is under the management or control of the applicant, thus rejecting this ground.
- Deemed Inclusion Clause (Para 4 of Article 5): The Commissioner suggested that DBIS maintains a stock of goods (BIRs) and delivers them on behalf of the applicant. The Authority disagreed, stating that DBIS does not maintain a stock but rather purchases BIRs from the applicant as needed.
- Agent of Independent Status (Para 5 of Article 5): The Authority concluded that DBIS is not an agent of the applicant. DBIS operates independently, sets its own prices, and is not controlled by the applicant. Therefore, DBIS cannot be considered a PE of the applicant.

4. Taxability of Business Profits in India:
Since the applicant does not have a PE in India, its business profits are not taxable in India under Article 7 (read with Article 5) of the DTAA.

5. Requirement for DBIS to Withhold Tax:
Given that the applicant is not taxable in India, DBIS is not required to withhold any tax under section 195 of the Income Tax Act when making remittances for BIRs.

6. Obligation to File a Tax Return:
This issue was not pressed by the applicant, hence no ruling was pronounced.

7. Applicability of Penal Provisions:
This issue was also not pressed by the applicant, hence no ruling was pronounced.

Conclusion:
The Authority ruled that the payments made by DBIS to the applicant for BIRs are part of the applicant's business profits and are covered under Article 7 of the DTAA. The applicant does not have a PE in India, and therefore, its business profits are not taxable in India. Consequently, DBIS is not required to withhold tax under section 195 of the Income Tax Act. The issues related to filing tax returns and penal provisions were not pressed by the applicant and thus were not ruled upon.

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