2016 (5) TMI 73 - AT - Income Tax

Failure to deduct the TDS on the payment made to overseas entities for logistic services - concept of permanent establishment (PE) - Held that - liability to deduct TDS arises only if the tax is assessable in India . Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. With regard to countries in respect of which India has no DTAA, we find that It is an undisputed fact and law that the taxability of business profits earned by overseas countries in India would wholly depend upon the fact whether such non-resident overseas entities rendered any services in India or not. Only if the services are rendered in India, the deeming provisions contained in Section 9(1) of the Act would apply so as to tax the income deemed to accrue or arise in India. Since the nonresident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no portion of their business profits earned by them exclusively for services rendered outside India can be brought to tax in India, either under Section 9(1) or otherwise or at all. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of Section 9(1)(i) of the Income Tax Act, 1961. Since there is no business connection within the meaning of section 9(1)(i) of the said Act between the Appellant Company and the overseas entities, the overseas entities are not chargeable to tax in India on their profits, which wholly accrued and arose outside India and through rendering of services by them wholly outside India. None of the non-resident Entities had any permanent establishments in India. The Appellant Company as well as each of the nonresident entities were acting on Principal to Principal basis; and that none of them were agents of each other. The mere fact that the Agreements executed in between the Appellant Company and each of the different non-resident entities used the nomenclature Reciprocal Appointment as Agents , both ways, for Air / Ocean import and export transportation between India and the respective establishments in the overseas countries, it cannot and does not make the Appellant Company as the agent of the non-resident entities in any manner whatsoever, as is by now well settled in Super Poly Fabriks Ltd. v. Commissioner of Central Excise (2008 (4) TMI 31 - Supreme court ) the nature of operations and activities carried out by the Appellant Company as well as each of the non-resident entities clearly show that none of them are agents of each other; and that each of them are operating in their respective countries on Principal to Principal basis. As such, the Appellant Company can by no stretch of imagination be treated as the Permanent Establishment of any of the non-resident entities. in the circumstances mentioned hereinabove, the Appellant Company was not required to deduct any tax at source either under section 195 and/or section 195A of the said Act. The payment made by the assessee to the overseas entities is not chargeable to tax in India therefore the question of TDS deduction does not arise. The assessee is neither acting as an agent of the overseas entities nor its place of business can be regarded as PE of the overseas entities. Accordingly we reverse the order of the authorities below. Hence this ground of appeal of the assessee is allowed.

Issues Involved:
1. Liability to deduct tax at source under section 195 of the Income Tax Act, 1961.
2. Accrual or arising of income in India as per section 5(2)(b) of the Income Tax Act, 1961.
3. Appointment of the assessee as an ‘Exclusive Agent’ by overseas entities.
4. Assessee acting as a “Dependent Agent” or “Permanent Establishment” in India under various DTAAs.

Issue-Wise Detailed Analysis:

1. Liability to Deduct Tax at Source Under Section 195:
The core issue is whether the assessee is liable to deduct TDS on payments made to overseas entities for logistic services. The Tribunal emphasized that under section 195, tax is to be deducted only if the payment is chargeable to tax in India. The Tribunal relied on the Supreme Court decisions in *Vijay Ship Breaking Corporation v. CIT* and *GE India Technology Centre Pvt. Ltd. v. CIT*, which stated that TDS liability arises only if the income is assessable in India. Since the payments were not chargeable to tax in India, the Tribunal concluded that the assessee was not liable to deduct TDS.

2. Accrual or Arising of Income in India:
The Tribunal examined whether the income received by the overseas entities accrued or arose in India under section 5(2)(b) of the Income Tax Act. The Tribunal referred to the Supreme Court rulings in *Carborandum Co. v. CIT*, *CIT v. Toshoku Ltd.*, and *Ishikawajima-harima Heavy Industries Ltd. v. Director of Income Tax*. It concluded that since the overseas entities did not carry out any operations or render services in India, their income did not accrue or arise in India. Consequently, the income was not taxable in India.

3. Appointment as ‘Exclusive Agent’:
The Tribunal analyzed whether the overseas entities had appointed the assessee as their ‘Exclusive Agent’. The agreements between the assessee and the overseas entities used the term “Reciprocal Appointment as Agents.” However, the Tribunal found that the relationship was on a principal-to-principal basis. The Tribunal emphasized that the mere use of the term “agent” in the agreements did not establish an agency relationship. The Tribunal relied on the Supreme Court decision in *Super Poly Fabriks Ltd. v. Commissioner of Central Excise*, which held that the nature of the transaction must be determined based on the substance rather than the terminology used.

4. Dependent Agent or Permanent Establishment:
The Tribunal examined whether the assessee acted as a “Dependent Agent” or constituted a “Permanent Establishment” (PE) of the overseas entities in India under various DTAAs. The Tribunal referred to Article 5 of the DTAA with UAE, which excludes agents of independent status from being considered as a PE. The Tribunal found that the assessee and the overseas entities operated independently and did not have an agency relationship. The Tribunal also noted that the overseas entities did not have any fixed place of business in India. Therefore, the assessee could not be considered a PE of the overseas entities.

Conclusion:
The Tribunal concluded that the payments made by the assessee to the overseas entities were not chargeable to tax in India, and hence, the assessee was not liable to deduct TDS. The Tribunal reversed the orders of the lower authorities and allowed the appeal of the assessee.

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