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TMI Blog2012 (3) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... te its PE; 3. On the facts and circumstances of the case, ld. CIT (A) has erred in inferring that representatives of the assessee in India do not constitute its Dependent Agent PE under Article 5(4) / 5(5) of the treaty; 4. On the facts and circumstances of the case, ld. CIT (A) has erred in not attributing any profits against the activities being carried out by the assessee through its PE in India. 5. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal." CO nos.163 to 165 /Del . /2010[Assessee] " 1. That on facts and in law, the ld. CIT (Appeals)-XXIX, New Delhi erred in upholding that the assessee has a 'Business Connection' in India under Section 9 of the Income Tax Act, 1961 (the 'Act'); 2. That on facts and in law, the ld. CIT (Appeals)-XXIX, New Delhi erred in not appreciating that the entire income received by the assessee was such from which tax was deductible at source, the assessee could not be held to have committed default in payment of advance tax and, consequently, was not liable to pay interest under section 234-B of the Act; 3. That on facts and in law to the extent the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO was that the money would be first paid out by the agent in India and thereafter, he would be reimbursed the same together with the commission due to him. This commission was termed as the "base compensation" in the agreement. The agent had also been given the power to appoint sub-agents/representatives. However, it was the responsibility of the agents to pay the sub-agents. The assessee could ask the agent to terminate the services of a sub-agent if it was found that the subagent was acting in a manner prejudicial to the interests of the assessee. Besides, there were the usual clauses providing for security and confidentiality and reserving the intellectual property rights of both the parties in the trade names, trademarks, copyrights etc. belonging to them apart from enjoining the agent to maintain records of all the transactions of money transfer routed through him. 2.2 For its business in India, initially, the assessee ,with the approval of RBI opened a liaison office in India. The activities of the liaison office and the terms and conditions stipulated in the approval of the RBI are detailed in the order of the ITAT for the AY 2001-02. Subsequently, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economically dependent on the assessee company, agents being dependent upon technology and software. According to the AO, the agents were not independent agent within the meaning of Art 5(5) of the DTAA. The AO further observed that the agents were ,in fact, dependent agents as revealed from an agreement between the assessee and Weizmann Ltd., which prohibited the latter from carrying on a similar business during the term of the agreement and for a period of 6 months after the expiry of the agreement, which showed that Weizmann was working wholly and exclusively for the assessee. The case of other agents was the same. Further, they had the authority to conclude contracts on behalf of the assessee in the sense that they carried out in India the commitment given by the assessee that the money would be paid. The agents were also given the authority to appoint sub-agents. The compensation paid to the agents was not adequate in comparison to the revenue received by the assessee for the work. The main part of the transaction- the payment of the money to the claimant was carried out by the agents in India and thus, merited adequate compensation. Since the compensation paid was not adequat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in India alone, the activities of the agent on behalf of the assessee being undertaken in India. Accordingly, the AO brought to tax income of the assessee in these three assessment years as under :- AY Total Commission Rate Net Profit 50%of the commission [In Rs.] [In Rs.] [In Rs.] 2002-03 729572745 22.89 % 166999201 83499600* 2003-04 1181936497 13.65 % 161334332 80667166* 2005-06 841138974 23.98 % 201705126 100852563* * The entire operations for money transfer business of the assessee having not been in India ,accordingly 50% alone brought to tax. 3. On appeal, the ld. CIT (Appeals) following the decision dated 10.3.2006 of ITAT in the assessee's own case for assessment year 2001-02 in ITA no. 4889/Del/2004,reported in 104 ITD 34(Del.), concluded that since facts of all assessment years under consideration were the same as these were in the AY 01-02, the findings of ITAT in respect of existence of business connection & PE shall apply to these assessment years as well. Accordingly, it was held that the assessee had a business connection for all the relevant assessment years but did not have a PE in India. 4. The Revenue is now in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter. AIPL identities/authorizes the travel agent as a valid CRS user and processes the request for information into relevant segments. It is to be noted that business process involved in business of the assessee starts in Spain and is completed in India and entire process is done on an software. Hon'ble IT AT has held on basis of these facts that.- "23.1 In the present case it is seen that the CRS, which is the source of revenue is partially existent in the machines namely various computers installed at the premises of the subscribers. In some cases, the appellant itself has placed those computers and in all the cases the connectivity in the form of nodes leased from SITA are installed by the appellant through its agent. The computers so connected and configured which can perform the function of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from AIPL who allows the use of such computers for reservation and ticketing. Without the authority of AIPL such computers are not capable of performing the reservation and ticketing part of the CRS system. The computers so installed cannot be shifted from one place to ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of revenue, the activities as narrated above carried out in India is in no way of 'preparatory orauxiliary' character. Thus the exception provided in Paragraph 3 of 5 will not apply and hence as stated above, the assessee shall be deemed to have permanent establishment in India." Further in para 23.3, Hon 'ble ITA T has held that there exist dependent agency PE Thus, it is seen that Hon 'ble ITAT has taken a different view regarding existence of PE in a case subsequent to that of assessee itself where vital facts were similar. In view of this, it is submitted that matters under appeal may be decided by following later decision of co-ordinate bench of Hon'bIe IT AT in case of Amadeus Global Travel Distribution SA or if the Hon'ble bench deems fit, the matter may be referred to special bench. Regarding CO by the assessee, the issues raised are consistently decided by Hon'ble ITAT in both the cases referred above. " 5.. On the other hand, the ld. AR on behalf of the assessee in their written submissions, distinguished the decision relied upon by the ld. DR ,explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL and they exercised a great degree of control over these computers in as much as the computers cannot be used without the permission of Amadeus/AIPL and they can't even be shifted from one place to another without permission. It was because of this control that the Hon'ble ITAT concluded In this case, the assessee does not exercise/possess any control over the computer systems which are independently owned by agents and are not provided by the assessee. It has been held by Hon'ble IT AT in this case that "The premises of the agents are either owned or hired by them. There is no evidence to show that the assessee can as a matter of right enter and make use of the premises for the purpose that fixed place PE exists within the meaning of para 1 of Art. 5 of India-Spain treaty {kindly refer page 851, para 23.1 of TT J citation). of its business". It has been further been held By Hon'ble ITAT that under Art. 5.2(j) an Installation may amount to a PE Provided it is used for the exploration of natural resources which is not relevant to the instant case (Page 63, top para and page 65, top para of ITD citation. Agency PE In Amadeus's case it has been held by Hon'ble ITAT that : (a) "In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the point which has been decided and no judgment can be read as if it were a statute nor a word or a clause or a sentence in the judgment be regarded as a full exposition of law." It is submitted that the request made by Ld CIT(DR) for constitution of a Special Bench should also not be accepted considering that, for reasons stated above, there cannot be any conflict in the views adopted by Hon'ble ITAT while passing orders in both these cases since both these decisions rest on the pillars of their own facts. As such, it is requested that captioned appeals may kindly be decided by following orders passed by Hon'ble ITAT in assessee's own case for AY 01-02. " 6.. We have heard both the parties and gone through the facts of the case as also the written submissions filed on behalf of both the parties. Adverting first to the issue as to whether in the facts and circumstances before us , the decision of the ITAT in the assessee's own case for the AY 2001-02 ,followed by the ld. CIT(A) is applicable or the subsequent decision of the ITAT in Amadeus Global Travel Distribution SA(supra),relied upon by the ld. DR, rendered on the facts of its own. The ld. DR appearing before us did not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business. We are of the view that applying these tests to the present case, particularly the test underlined by us, it must be held that there is a business connection. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncept of permanent establishment does not arise. Having a mere liaison office for example, which could be treated as an office in India, may not constitute business connection in the absence of any role which liaison office plays in finalization of contracts of such other business needs, but merely acting as a post office. But the existence of the office itself may constitute permanent establishment but still there may be no liability, because either in the concept of business connection under section 9 or in the concept of permanent establishment under DTAA, there should be income arising out of such business connection in Indian law and from the permanent establishment under the DTAA ....." The learned authors proceed to opine that for understanding the meaning of business connection one has to particularly go by the precedents under the Indian law, while the permanent establishment is a concept which "finds almost identical definition in almost all the DTAAs, which are modeled on UN or DECD drafts, the result being that the decisions under different agreements in different countries can offer guidance though these are not binding on domestic courts, but have only a persuasive v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter 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)? 24. That takes us to the more important aspects of the broader question. The first is whether the LO can be considered to be the fixed place of business of the assessee in India. Under article 5.3(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character cannot be considered to a PE. We have already noticed the activities which the LO has been authorized to carry on in India. It has acted as communication link between the agents and the assessee's head office, has trained and installed agents after obtaining approval from the RBI, has visited the agents and offered training and refresher courses in connection with the operation of the assessee, about the standards of service and security, accounting procedures, telecommunication systems and configuration, mercha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no part of the contract of remitting the money into India. Further, as we have already noticed from the nature of the activities carried on by the LO, its activities can properly be called auxiliary or preparatory in nature. We therefore hold that the LO cannot be considered to the PE of the assessee in India. (c) Is the software "VOYAGER" the PE of the assessee? 26. The department has made out a case that the software, which affords access to the agents to the assessee's mainframe, computers in USA for the purpose of finding out the matching of the MTCN numbers, has been installed in the premises of the agents and hence taken together with the premises constitutes the PE. The premises of the agents are either owned or hired by them. There is no evidence to show that the assessee can as a matter of right enter and make use of the premises for the purpose of its business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that business connotes some real, substantive and systematic course of activity or conduct with a set purpose. In Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265, the Supreme Court held that underlying the expression "business" is the fundamental idea of continuous exercise of an activity. In Barendra Prasad Ray v. ITO [1981] 129 ITR 295 the Supreme Court again held that the word is of wide import and means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning income. Therefore any activity which is being systematically and continuously carried on with the object of earning profits is a business activity. That way, the activity engaged in by the agents of paying the monies to the beneficiaries or claimants in India, after satisfying themselves about their identity and after accessing the MTCN number to verify the genuineness of the claim, amounts to carrying on of the business of money transfer. The agreement of agency is initially for a period of 5 years and to be renewed for successive periods of one year each. The agents could appoint sub-agents for carrying out the activity. They have to maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir business activity. In the case of tour operators, acting as agents of an established firm engaged in the international money transfer business may be conducive to their business. A broad view of the matter has to be taken in these matters. We are therefore satisfied that the objection of the Department cannot be accepted. 33. The second question to be considered is whether the activities of the agent are wholly or almost wholly devoted to the assessee. So far as the Department of Posts and commercial banks are concerned, the objection of the Department cannot be countenanced at all. The Department of Posts, as noted earlier, functions under the aegis of the concerned Ministry of the Government of India. Its main activity is to serve the public in India in the matter of sending/receiving letters, parcels, packets etc. within or to/from outside India, money orders within India, maintaining small savings account in several forms such as savings certificates, time-deposit accounts, postal life insurance etc. They have a vast network throughout the country. They are a service organization for the benefit of the general public and it would be a misnomer to say that their activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... almost wholly devoted to the foreign enterprise. This is the test laid down in the article. Even on this aspect, paragraph 38.6 of the revised commentary has this to say: "Another factor to be considered in determining independent status is the number of principals represented by the agent. Independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative. All the facts and circumstances must be taken into account to determine whether the agent's activities constitute an autonomous business conducted by him in which he bears risk and receives reward through the use of his entrepreneurial skills and knowledge. Where an agent acts for a number of principals in the ordinary course of his business and none of these is predominant in terms of the business carried on by the agent legal dependence may exist if the principals act in concert to control the acts of the agent in the course of his business on their behalf." What we thus understand from the language used in article 5.5 is that the agent's activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the world. In these circumstances, there is no merit in the claim that the transactions between the assessee and the agents are not under arm's length. 36. The result is that (1) the agents are acting in the ordinary course of their business; (2) their activities are not devoted wholly or almost wholly to the foreign enterprise and (3) the transactions are under arm's length. Therefore the agents are independent agents under article 5.5 of the treaty. 37.(B) Are the agents "dependent agents"? 38. It is now well-settled that merely because the agents are not "independent agents" it does not automatically follow that they are "dependent agents" under the DTAA and that the question has to further examined under article 5.4 of the DTAA. In other words, even if the agent is shown to be not an independent agent, it has to be further shown that he is a dependent agent within article 5.4 and that it must be shown that he has and habitually exercises an authority in India to conclude contracts in the name of the foreign enterprise. In TVM Ltd. v. CIT [1999] 237 ITR 230, a decision rendered by the AAR, it has been accepted that when an agent failed to come up to the standard of indep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to a systematic course of conduct on the part of the agent. If, despite the specific provision of the soliciting agreement, it is found, as a matter of fact that TVI is habitually concluding contracts on behalf of TVM without any protest or dissent, perhaps it could be presumed either that the relevant provisions of the agency contract are a dead letter ignored by the parties or that the principal has agreed implicitly to TVI exercising such powers notwithstanding the terms of the "contract". The AAR has further observed that this view is reinforced by the Commentary on the OECD Model of Double Tax Conventions as well as the views of text book writers like Klaus Vogel and Baker. 39. In line with the above, we have to examine the facts of the case to find out first whether the agents have the authority to conclude contracts (on behalf of the assessee). There is no express authority given to them in the agreement and our attention was not drawn to any clause therein to that effect. All that the income-tax authorities have stated is that (a) that the agents carry out in India the commitment given by the assessee to the remitter of the money abroad and (b) that the agents have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment part of the undertaking that is executed by the agents in India. The contract is already concluded outside India. The agent has no say over the contract. He has to merely execute the payment part, after satisfying himself as to the genuineness of the transaction and the identity of the beneficiary in India. 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. The words "duty" and "authority" are incompatible with each other. The dictionary meaning of the word "duty" is "assignment/burden/commitment that one is obliged to do by law or by calling of one's business". It connotes an obligation, which a person is bound to perform. Per contra, "auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight, enter and make use of the premises of these agents for its business. Accordingly, it was concluded that there was no fixed place PE of the assessee in India within the meaning of article 5.1 of the DTAA. The ITAT further concluded that since i) the agents were acting in the ordinary course of their business; ii) their activities were not devoted wholly or almost wholly to the foreign enterprise and (3) the transactions were under arm's length, they were independent agents under article 5.5 of the treaty. Moreover, there being no express authority given to the agents in the agreement to conclude contracts on the behalf of the assessee, the ITAT observed that the fact that the agents had the authority to appoint sub-agents did not mean that they (agents) had the authority to conclude contracts. The fact that the agents complete in India the commitment of the assessee made abroad, could not be considered as an authority to conclude contracts. The contract was between the remitter abroad and the assessee and entered into outside India. The agents were not party thereto. The agents merely carried out the concluding step in the arrangement embodied in the contract. The contract was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the vendor was executed in India. The CRS, which was the source of revenue, was found to be partially existent in the machines namely various computers installed at the premises of the subscribers and in some cases, the assessee itself placed those computers and in all the cases the connectivity in the form of nodes leased from SITA were installed by the assessee through its agent and the computers so connected and configured which could perform the functions of reservation and ticketing was a part and parcel of the entire CRS and without the authority of AIPL such computers were not capable of performing the reservation and ticketing part of the CRS system. The computer so installed could not be shifted from one place to another even within the premises of the subscriber, leave apart the shifting of such computer from one person to another. On these facts, the ITAT concluded that the assessee exercised complete control over the computers installed at the premises of the subscribers and this amounted to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computers and connectivity which were prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC)." 6.3 Hon'ble Supreme Cour t cautioned in their decision dated 6.3.2009 in the case of State of AP Vs. M. Radha Krishna Murthy,[Criminal Appeal no. 386 of 2002] "6. Courts should not place reliance on decisions without discussing as tohow the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of their context. These observations mus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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