2006 (3) TMI 220 - AT - Income Tax

Income attributable - liability to pay tax u/s 9(1) - business connection - whether Permanent Establishment ( PE ) in India as understood by the DTAA between India and USA - Profits. Business connection - HELD THAT - The business of the assessee is to transfer monies across countries. There is thus a receiving aspect and a paying aspect to the transaction. They cannot be segregated; to do so would be artificial. There is a seamless integration between the two. The transaction, as has been rightly noticed by the income-tax authorities, is not complete unless the monies are paid in India to the claimant. Further, the agreements with the agents are initially for a term of 5 years, renewable for periods of one year at a time, but this could go on endlessly. The agents are bound to render services for the assessee as stipulated in the agreements. The agreement provides for security and confidentiality. The assessee has provided the software to the agents, though retaining the copyright in the same, to enable them to access the assessee's mainframes in the USA. All these are in our opinion sufficient to justify the conclusion that there is business connection within the meaning of section 9(1) of the Act. We uphold the conclusion of the income-tax authorities to this effect. PE of the assessee in India? - whether there is a PE as alleged by the income-tax authorities under any of the four categories (a) fixed place PE; (b) dependent agents PE; (c) software as PE or (d) LO as PE. (a) Fixed place PE - The assessee before us has appointed different agents in India. These agents are the Department of Posts of the Government of India, commercial banks, non-banking financial companies and tour operators. These agents have their own or hired premises from which they operate. All that they have to show that they are agents of the assessee is a display board which shows that they are the agents of the assessee. This cannot by any stretch of imagination amount to projection of the assessee in India. It cannot be postulated that the post offices of the Department of Posts which functions under the concerned Ministry of the Government of India would permit themselves to be looked upon as projecting the presence of Western Union Financial Services Inc., in India The same would be the case of commercial banks such as the Karnataka Bank Ltd., Bank of Punjab Ltd., etc. and others which have been appointed agents. They have their own presence and business with which they are perhaps more concerned and may be surprised to find themselves characterised as projecting the assessee in Indian soil. There is no evidence to show that the assessee can, as a matter of right, enter and make use of the premises of these agents for its business. We therefore hold that there is no fixed place PE of the assessee in India within the meaning of article 5.1 of the DTAA. (b) Is LO the fixed place of business (and hence a PE)? - We are of the view that the LO cannot be considered to be the fixed place PE of the assessee as it carries out activities which are of a preparatory or auxiliary character. It has not carried on any trading activity for the assessee in India. It has only a small number of executives and a support staff. The LO has also filed status reports to the RBI listing out the activities which it actually carried on during the years. None of the activities can be described as anything other than of preparatory or auxiliary character. (c) Is the software VOYAGER the PE of the assessee? - The software is the property of the assessee and it has not parted with its copyright therein in favour of the agents. The agents have only been allowed the use of the software in order to gain access to the mainframe computers in the USA. Mere use of the software for the purpose from the premises of the agents cannot in our opinion lead to the decision that the premises-cum-software will be the PE of the assessee in India. Under article 5.2(j) and installation may amount to a PE provided it is used for the exploration of natural resources. Therefore, even if the software is to be considered as an installation, since it is not used for exploration or exploitation of natural resources it cannot per se be treated as a PE. (d) Credit cards and PE - The existence of the assessee's own outlets in India has been stoutly denied. The observations of the Assessing Officer not being supported by any evidence and the CIT(A) not having specifically approved them, we hold that there can be no PE on account of the use of the credit cards. The agents (in the present case) have the authority to appoint sub-agents does not mean that they (agents) have the authority to conclude contracts. The terms of appointment of sub-agents given at page 22 of the paper book as attachment to the contract of agency with Karnataka Bank Ltd. lists the duties and responsibilities of the sub-agents regarding money transfer service requirements, advertising and promotion, exclusivity, locations and hours of operations, payment for the service, delivery standards, maintenance of records, security and confidentiality, accounting, use of software, indemnity, conditions of termination etc. Nowhere in the sub-agency agreement has any authority to conclude contracts has been given to them. In fact, when the agents themselves have no such authority under their agreement, they cannot delegate the same to their sub-agents (delegates non potest delegare). There is also no material to hold that the agents have habitually exercised the authority to conclude contracts. As already noted, the authority must be to conclude contracts in the conduct of the business proper of the foreign enterprise. The fact that the agents conclude in India the commitment of the assessee made abroad cannot be considered as an authority to conclude contracts. The contract is between the remitter abroad and the assessee. It is entered into outside India. The agents are not party thereto. The agents merely carry out the concluding step in the arrangement embodied in the contract. By executing the last leg of the contract which has already been concluded (outside India) he is not concluding the contract for the assessee, much less habitually. The appointment of sub-agents is merely to facilitate the work of the agent. That apart, what is considered to be a duty'; cannot be considered to be an authority . By making payment to the beneficiary, the agent in India is only performing his duty under the agreement of agency, for which he is remunerated; he is not exercising any authority , certainly not an authority to conclude contracts on behalf of the assessee. Thus, we are of the view that 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. Since we have held that there is no PE in India, the question of attributing any income to the same for the purpose of article 7 of the DTAA does not arise. We therefore consider it unnecessary to examine the question whether the attribution of income is fair and reasonable. In the result, we hold that (a) there is business connection and hence the assessee is liable to tax u/s 9(1) of the Income- tax Act; (b) but since there is no PE in India under article 5 of the DTAA between India and the USA, no profits can be attributed to the Indian operations of the assessee and taxed in India. The appeal is accordingly allowed but with no order as to costs.

Summary

Issues Involved:
1. Business connection under Section 9 of the Income-tax Act.
2. Permanent Establishment (PE) under the DTAA between India and USA.
3. Attribution of income to the PE.

Detailed Analysis:

1. Business Connection:
The Tribunal examined whether the non-resident company had a business connection in India under Section 9 of the Income-tax Act. The company was engaged in money transfer services, with activities in India facilitated through agents. The Tribunal upheld the income-tax authorities' conclusion that there was a business connection. The transaction of transferring money was seen as a seamless process that included activities in India, such as verifying the recipient's identity and paying out the money. The agreements with agents, the provision of software, and the continuity of transactions supported the existence of a business connection.

2. Permanent Establishment (PE):
The Tribunal analyzed whether the non-resident company had a PE in India under the DTAA between India and the USA. The assessment was based on four potential types of PE: fixed place PE, dependent agent PE, software as PE, and LO as PE.

a. Fixed Place PE:
The Tribunal concluded that the company did not have a fixed place PE in India. The agents' premises, such as those of the Department of Posts and commercial banks, could not be considered as projecting the presence of the non-resident company in India. There was no evidence that the company could use these premises as a matter of right for its business.

b. LO as PE:
The Tribunal determined that the Liaison Office (LO) could not be considered a fixed place PE. The LO's activities were preparatory or auxiliary, such as acting as a communication link, training agents, and providing software. These activities did not constitute a PE as they did not involve any trading or commercial activity.

c. Software as PE:
The Tribunal rejected the argument that the software provided to agents constituted a PE. The software was used to access the company's mainframe computers in the USA for verification purposes. The premises where the software was used could not be considered a PE, as the software was not used for the exploration of natural resources.

d. Credit Cards and PE:
The Tribunal dismissed the Assessing Officer's observation regarding the use of credit cards for drawing cash from the company's outlets in India, as there was no evidence to support this claim.

3. Agency PE:
The Tribunal examined whether the agents were dependent agents under Article 5.4(a) of the DTAA. It concluded that the agents were independent agents under Article 5.5, as they acted in the ordinary course of their business, their activities were not wholly or almost wholly devoted to the non-resident company, and the transactions were at arm's length. The agents did not have the authority to conclude contracts on behalf of the company, nor did they habitually exercise such authority.

Attribution of Income:
Since the Tribunal held that there was no PE in India, the question of attributing income to a PE did not arise. Consequently, no profits could be attributed to the Indian operations of the non-resident company and taxed in India.

Conclusion:
The Tribunal concluded that while there was a business connection under Section 9(1) of the Income-tax Act, there was no PE in India under the DTAA between India and the USA. Therefore, no profits could be attributed to the Indian operations of the non-resident company for taxation purposes. The appeal was allowed, with no order as to costs.