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TMI Blog2009 (7) TMI 906X X X X Extracts X X X X X X X X Extracts X X X X ..... ied and distributed by the assessee through the Reuters Global Network. The Reuters global network is a vast global communication network consisting of data storage facilities in three locations ( i.e., London, New York and Singapore) linked by satellite links and terrestrial lines. It is one of the world s largest privately owned electronic networks of its kind. The assessee uses this network to receive information, to transmit information and provide access to subscribers of the Reuters products. The assessee provides Reuters Products to its Indian subsidiary, Reuters India Limited (RIL) under certain specified agreements, as explained below. RIL then distributes the Reuters products to Indian subscribers independently in its own name. Contractual Agreements with RIL 1.Distributor Agreement (DA) : - The assessee entered into a DA, dated 6-9-1995, with RIL under which, RIL has been appointed to sell designated Reuters products to subscribers in India, using the Reuters global network. Under the DA, inter alia , the assessee provides RIL a connection to the Reuters global network whereby Reuters products are made available to RIL, which are then distributed by RIL to variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (PE) in India and even in such case, only to the extent of the profits as are attributable to the PE in India. According to the assessee, since the assessee did not have any PE in India as contemplated by Article 5 of the India-UK Treaty, the distribution fee and the product distribution fee were not liable to tax in India, as per the India UK Treaty. According to the assessee, this position was accepted by the Income-tax Department vide their orders under section 195(2) of the Act dated 2-12-1997 and January 6,1998 in pursuance of the distribution fee and the product distribution fee under the DA and PDA respectively to the assessee. The Assessing Officer in his order dated 30-3-1998 under section 143(3) of the Act treated the distribution fee payable under the DA as Fees for Technical Services (FTS) as per Article 13 of the India-UK-Treaty. According to the JCIT, the distribution fee is essentially a technical services provided by the assessee to Indian clients and rendered as on line computer services . According to the Assessing Officer, the assessee s case is also covered by the Authority for Advance Ruling in the case of an American Company P. No. 30 of 1999 In re [199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e banking and finance industry. In addition, more than 2000 journalists operating from 182 bureaus were responsible for the gathering and editing of news including news from financial markets. The assessee was responsible for retrieving and compiling information from its contributors and making the finished products available on its high speed global communications networks for access by subscribers, including subscribers in India. The communications network linked 154 countries in real-time by sophisticated technology including satellite and fiber optics technology. For such subscribers in the financial community, the importance of real time access was extremely crucial and the speed, accuracy and timeliness of the delivery of the products were substantial part of commercial value of Reuters products. The assessee referred to the definition of FTS in Article 13(4) of the DTAA and pointed out that the payments under DA are clearly outside the purview of clauses ( a ) and ( b ) of the above definition, since the payments are not ancillary or subsidiary to any royalty payment for transfer of copyrights or use or right to use industrial commercial or scientific equipment. As regards c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee under the DA viz., whether they were are royalty, FTS or business profits within the meaning of these terms in the DTAA. 7. As far as the second issue is concerned, the learned CIT(A) held that distribution fee paid under the DA is not royalty or FTS but business profits. The findings of the learned CIT(A) in this regard are contained in para 10 of his order. In this appeal, the revenue has not challenged the aforesaid findings of learned CIT(A). Therefore we need not deal with this aspect at length. 8. As far as the first issue as to whether the assessee can be said to have a PE in India and therefore its business profits can be brought to tax in India, which is the dispute in the appeal by the revenue before the Tribunal, the learned CIT(A) held that there was no PE of the assessee in India. Before we deal with this issue, it is necessary to set out Article 5(1)(4) to (7) and Article 7(1) of India-UK DTAA. They are as follows : ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. **** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. 9. The case of the Assessing Officer was that (a) the assessee had an agent viz., RIPL and RIPL was an independent agent of the assessee in India falling within the ambit of Article 5(5) of the Treaty dealing on behalf of the assessee in India; ( b ) the assessee had an agent viz., RIPL who was a dependent agent under Article 5(4) of the Treaty, RIPL as an agent having activity to market assessee s products in India and execute contracts and render services on behalf of the assessee in India. The Assessing Officer, however, did not spell out as to how he came to such conclusion. 10. Learned CIT(A) however took up for consideration the issue as to whether RIPL was a dependent agent or independent agent within the meaning of Article 5(4) and 5(5) of the treaty. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax. It is also seen that not only RIPL has been appointed to sell designated Reuters products to the subscribers in India using Reuter Global Network, on payment of distribution fees fixed at 65 per cent of the subscription revenues derived by RIPL from the Indian subscribers, under the same agreement, the RIPL has also certain other obligations. RIPL gathers, edits, complies and supplies to the assessee news material in the form of news reports, pictures etc., on the news and features of the day within India using the same Global Network. In consideration for the same, the appellant pays to RIPL an Edit and Data fee equivalent to 110 per cent of the cost to RIPL, in gathering, editing, compiling and supplying such news material to the appellant. The supply of designated products to RIPL by the appellant and the supply of news material by RIPL to the appellant are independent activities although the obligations are stipulated under the same agreement i.e., DA. On query, it has also clarified that the distribution fee payable by RIPL to the appellant and the edit and data fee payable by the appellant to RIPL are both actually paid and there is no set off of either of the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in that State." In this regard the first aspect pointed out by learned Departmental Representative was the fact that the payments in dispute was in consideration for services rendered by the assessee in India (though not services of the nature of royalty or technical services within the meaning of Article 13 of the Treaty). According to him the assessee furnished services in India through its employees or other personnel. In this regard, the learned Departmental Representative drew our attention to the decision of learned CIT(A) for assessment year 1998-99. In assessment year 1998-99, the question whether the assessee can be said to have a service PE in India in terms of Article 5(2)( k ) in respect of receipts of distribution fees under very same DA was considered by learned CIT(A) though such a case was not made out by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere sent to render managerial services in RIL. For example during the year under consideration, Mr. John Chalmers Worked as Deputy Chief of the Bureau, New Delhi for the period November, 1997 to March, 1998, Mr. Chaitanya Kalbag worked as Chief of Bureau, New Delhi for the period August, 1997 to March 1998, Mr. John Atkinson worked as Managing director of RIL during the period August, 1997 to March, 1998 and Mr. Simon Moore worked as Chief of the Bureau, Mumbai for the period April 1997 to March, 1998. All these employees while rendering managerial services in RIL also got paid from the appellant in foreign currency (GBP) apart from certain payment from RIL in Indian rupees. Considering the nature of services and period of stay of these employees, there remains no doubt that there is a case for the appellant having a PE in India in terms of Article 5.2( k ) of the DTAA. The appellant has contended that these employees were merely deputed to RIL and the primary condition that the appellant should be rendering services in India itself is not satisfied. However, I fail to understand how the appellant is reading clause 5.2( k ) to convey a meaning that the appellant itself should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 1998-99. Learned Departmental Representative further submitted that in the light of the decision of learned CIT(A) for assessment year 1998-99 and the availability of prima facie evidence to show applicability of Article 5(2)( k ) the issue regarding existence of a service PE of the assessee in India should be remanded to the Assessing Officer for fresh examination. Learned Departmental Representative also pointed out that learned CIT(A) after holding that RIPL was neither a dependant agent nor a independent agent of the assessee within the meaning of Article 5(4) and 5(5) of the India-UK DTAA has further made reference to OECD Commentaries and opined that RIPL can be considered as an agent of an independent status under Article 5(5) of the DTAA. There is therefore a contradiction in the conclusion of the learned CIT(A) and the basis on which the learned CIT(A) held that there was no PE of the assessee in India. This issue also therefore requires a fresh examination by the Assessing Officer as there are no clear findings on the issue. 14. Learned counsel for the assessee vehemently opposed the prayer made on behalf of the revenue by Departmental Representative. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the rival submissions. First issue to be adjudicated is as to whether the new plea put forth on behalf of the revenue could be considered. The powers of the Tribunal in dealing with appeals are expressed in section 254(1) of the Act in the widest possible terms. "The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit." The word "thereon", of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the Commissioner of Income-tax (Appeals) by section 251 of the Act. Rule 11 of the Appellate Tribunal Rules, 1963, provides as follows : "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule : Provided that the Tribunal shall not rest its decision on any other gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (and for that matter, any other unrelated company) will be deemed to be a PE if both the following conditions are simultaneously met. ( a )It is not an agent of independent status in terms of paragraph (5) of Article 5 and ( b )It has an habitually exercises authority to conclude contracts in the name of or on behalf of the parent company. In the present case, there may possibly be an arguable point that the condition ( a ) is met. However, the condition ( b ) is definitely absent. Nor the Assessing Officer has established its presence. In view of this position, I hold that the assessee non-resident did not have a PE India. Ground No. 2 will accordingly stand allowed." The above finding of learned CIT(A), though in the context of OECD commentary on Model Tax Convention on income and capital, clearly contradicts with his finding that there was no PE under Article 5(5) of the DTAA. Thus, there is no definite finding on this issue either by the Assessing Officer or learned CIT(A). This issue therefore requires fresh examination by the Assessing Officer. 19. In assessment year 1998-99 on identical facts, learned CIT(A) has held that there was a PE of the assessee in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er years in the export turnover for arriving at the allowable deduction under section 80HHC of the Act. The Assessing Officer excluded the exchange rate gain difference pertaining to earlier years export from export turnover because the same cannot be said to be export turnover of the current year. Learned Departmental Representative contended before the Tribunal that the exchange rate gain was to be considered as Income from other sources . In such a situation the Tribunal held that even the Assessing Officer has held that the gain was income from business and the Departmental Representative cannot bring an altogether different case undoing what has been done by the Assessing Officer. The Tribunal held that modification as contended by the Departmental Representative can be done only by proceedings under section 147 or 154 or 263. In the present case, the Assessing Officer held that there was a PE of the assessee in India. He held that there was a PE of the assessee in India. It is the very same case pleaded by the Departmental Representative also before us; but under a different clause of the DTAA. Moreover the decision in the case of Prakash L. Shah ( supra ) was rendered in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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