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TMI Blog2012 (1) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant's case falls under Article 5(1) of the DTAA as the business was carried out through agents's fixed place in India wherein the agent was to maintain office for the principal, duly equipped. 3.2 The learned ADIT erred in holding that the appellant's case is also covered under Article 5(5) of the DTAA 4. Computation of income 4.1 The learned ADIT erred in denying the applicability of provisions of Section 44B of the Act, with respect to freight earnings of Rs 23,66,57,986 4.2 Having denied the applicability of section 44B of the Act, the learned ADIT erred in estimating the income at 10% of freight earnings of Rs 23,66,57,986 in accordance with the provisions of Rule 10 of the Income Tax Rules 1962. 3. The assessee before us is a foreign company incorporated in, and tax resident of, the Republic of France. The assessee claims to be engaged in the business of operations of ships in international traffic. Independent of its claim that, in terms of the distributive rule embedded in Article 9 of Indo French DTAA, entire profits of such business cannot be taxed in the source country i.e. India, the assessee has also contended that since the assessee does not have any PE in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is carried out by its agent , namely Barwil". In this view of the matter, and relying upon a coordinate bench's unreported decision in the case of ACIT v. DHL Operations BV, ITA No. 7987 and 7988/Bom/92 the Assessing Officer held that the assessee had a permanent establishment in India. Having held that the assessee had a PE in India, and in the absence of details so as to enable him to compute profits of the PE, the Assessing Officer proceeded to adopt total income of the assessee at 10% of gross receipts. Aggrieved by the stand so taken by the Assessing Officer, assessee raised objection to the same before the Dispute Resolution Panel, but without any success. The DRP rejected the objection by observing as follows: The objection of the assessee is not tenable. Article 9 of the DTAA presupposes the existence of a PE and thus allows exemption of profits from operations of ships in international traffic. The assessee's agent in India, who is issuing the bill of lading, has the authority to conclude contracts which are legally binding on the assessee. The business of operations of ships of the assessee is being carried out through the office of the agent in India. In view of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence of assessee's PE in India, and, second- quantification of the profits which can be said to be attributed to assessee's PE in India. Let us deal with the first issue first, but before we address ourselves to the question as to whether or not the assessee can be said to have a permanent establishment in India, on the facts of this case, it will be useful to take a look at the relevant provision in the Indo French DTAA, which is reproduced below for ready reference: 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. The term permanent establishment includes especially : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; (g) a warehouse in relation to a person providing storage facilities for others ; (h) a premises used as a sales outlet; (i) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and 5(2). As observed by a coordinate bench in the case of Airline Rotables Ltd v. Dy. DIT 44 SOT 368, in order that there exists a fixed base PE, under article 5(1) and 5(2), "there are three criteria embedded in this definition - physical criterion i.e., existence of physical location, subjective criterion i.e., right to use that place, and functionality criterion i.e., carrying out of business through that place" and that "It is only when these three conditions are satisfied, a PE under the basic rule can be said to have come into existence". The very business model of the agency PE is such that the subjective criterion, i.e. "right to use that place", can never be satisfied inasmuch as while it is a sine qua non for existence of a fixed base PE that "the place of business should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well", that "a place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities, and that such "place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice" , as ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in which business being carried on through a dependent agent results in creation of PE in the source state. The provisions of Article 5(6) are, however, slightly at variance with standard tax treaty provisions, and need to be analysed in some detail . The significant feature of Article 5(6) of Indo French DTAA, which is somewhat unique in the sense that this provision is in clear deviation from the standard UN and OECD Model conventions, is that even when an agent is wholly or almost wholly dependent on the foreign enterprise, he will still be treated as an independent agent unless additional condition of the transactions being not an arm's length conditions is fulfilled. It is so for the reason that Article 5(6) provides that even when an agent is wholly or almost wholly dependent on the principal, i.e. foreign enterprise, "he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arms length conditions" ( emphasis by underlining supplied by us). In other words, as long as it is not shown that the transactions between the agent and the principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA, the onus is even greater inasmuch the very foundation of DAPE rests on a negative finding with respect to the wholly dependent or almost wholly dependent agent i.e. "if it is shown that the transactions between the agent and the enterprise were not made under at arms length conditions". Unless this negative finding is on record, it cannot be inferred that the agent is not of an independent status. No such finding was given by the Assessing Officer, or even by the Dispute Resolution Panel. Even in the proceedings before us, no material has been brought on record which at least prima facie demonstrates, or even indicates, that the transactions between the principal and agent are not under arm's length conditions. Once this onus is not discharged by the revenue authorities at any of these stages, and in accordance with the law laid down by Special Bench decision in the case of Motorola Inc supra, we have to hold that the assessee did not have any PE in India. We are not inclined to grant a fresh inning to the Assessing Officer for making roving and fishing enquiries on the aspect of transactions not having been done in arm's length conditions - particularly as there is nothing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD Commentary, therefore, is of no avail either. In view of these discussions, as also bearing in mind entirety of the case, we set aside and vacate the Assessing Officer's findings with regard to existence of assessee's PE in India. We may, at the cost of repetition, clarify that these conclusions are arrived at in the light of the factual position that there are no findings by the Assessing Officer, or the Dispute Resolution Panel, to the effect that the transactions between the agent and the assessee are not at an arm's length price, and that, in view of the provisions of Article 5(6) of Indo French DTAA, such a finding by the revenue is a sine qua non for existence of DAPE. To this extent, our decision is confined to the facts of this case for the particular assessment year before us. 10. There are some interesting issues with respect to PE profit attribution, raised by the learned Departmental Representative, that we may briefly touch upon, even though, having held that the DAPE did not exist on the facts of this case, it is not really necessary to deal with, on merits, the fine points regarding profit attribution in the case of DAPEs. On a conceptual note, PE, whether a fixe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA in respect of freight earnings of Rs 23,66,57,986. 2.3 The learned ADIT erred in denying the relief on the basis that the appellant has failed to provide complete and sufficient documentary evidence, to link and establish voyage wise, that the feeder vessels were actually loading the cargo into mother vessels. 16. Learned counsel fairly states that the issue is covered against the assessee by a coordinate bench's decision in assessee's own case for the assessment year 2001-02 reported as DDIT v. Delmas, France 27 SOT 441 inasmuch as the provisions of Article 9 of India France Double Taxation Avoidance Agreement are held to not applicable to the income in question, but he hastens to add that Hon'ble Bombay High Court has admitted appeal against the said order, that this statement should not be construed as assessee's conceding the issue and that the assessee would like to keep the issue alive before higher judicial forums. Learned Departmental Representative does not oppose these submissions either. While the issue is thus covered against the assessee so far as this forum is concerned, the assessee is at liberty to, if so advised, take up the issue before Hon'ble Courts abov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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