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TMI Blog2012 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... onclude contracts. In the case on hand, there is neither legal existence of such authority, nor is there any evidence to prove that the agent has habitually exercised such authority. In fact, the Principal has raised all the invoices. Thus Article 5.4 of indo- Mauritius DTAA is not attracted in this case. Further, Article 5.5 states that “when the activities of such an agent are devoted exclusively or almost exclusively on behalf of the assessee enterprises”. These wordings refer to the activities of an agent and its devotion to the non-resident and not the other way round. In present case, Indian agent's revenue from Non-resident constituted merely 4.69% of the total income and hence cannot be termed as dependent agent. Neither Article 5.4 nor Article 5.5 of the Indo-Mauritius DTAA are attracted this case. Hence, the assessee has no P.E. in India. Alternatively, even if it is held that there is a PE of the assessee in India, then we hold that as the rate of commission of 15%, was accepted as ALP by the TPO for A.Y. 2003-04 to 2003-04 and 2004-05, no further profit is attributable to the P.E. This is the rate mentioned in Board Circular No. 742 of the order 1996 - I.T.A.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation (a) to section 9(1)(i) of the I.T. Act, 1961 will have no application. (iii) CBDT s Circular No. 742 is not applicable in its case as it has prepared countrywide accounts. 3. M/s. B4U Multimedia International Ltd. and M/s. B4U Broad Band Ltd. are hereinafter referred to as B4U India . 4. The Assessing Officer did not accept the contention of the assessee that it did not have a PE in India in the form of B4U India. He also did not agree to the contention of the assessee that the payment of arm s length remuneration by the assessee to B4U India does extinguish the tax liability of the assessee in India. The Assessing Officer set out the reasons at paragraph 5.1 to 5.9 of his order which are extracted for ready reference : 5.1 Paragraph 5 of Article 5 of the DTAA between India and Mauritius, states the following :- An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2001- 02, BBB and BMM are dependent agents of the assessee and constitute a PE of the assessee within the meaning of Article 5 of the DTAA. The business of the PE of the assessee is to generate advertisement revenues in India. 5.7 Thus, the business income of the PE is assessable under Article 7 of the DTAA. In this regard, paragraph 2 of Article 7 of the DTAA is being reproduced below :- Subject to the provisions of paragraph (3) of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a district and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Where the correct amount of profits attributable to a permanent establishment cannot be readily determined or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried the matter in appeal. The contentions raised before the Assessing Officer were repeated before the first appellate authority. The first appellate authority held that: - (i) the assessee carries out its entire activities from Mauritius, and (ii) all the contracts are concluded in Mauritius. He further observed that the only activity which is carried out in India is incidental or auxiliary/ preparatory in nature which is carried out in a routine manner as per the direction of the principals without application of mind and hence not a dependent agent. On facts he pointed out that merely 4.69% of the total income of B4U India, is commission/service income received from the assessee-company and hence it cannot be termed as a dependent agent. On the alternative contentions he held that the assessee and B4U India were dealing with each other on an arm's length basis. 15% service fee is supported by Circular No. 742. Thus he held that no further profits should be taxed in the hands of the assessee. He granted relief. 7. Aggrieved, the revenue is in appeal before us, on the two grounds listed at page 1 of this order. 8. Learned Departmental Representative, Shri Mahesh Kumar, subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority to conclude contracts in the nature of enterprises does not confine the application of the paragraph to the agent who entered into contract literally in the name of the enterprises, but it also applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. He also pointed out that the Assessing Officer at page 6 of the assessment order for A.Y. 2002-03 observed that despite a requisition, the assessee did not submit a copy of the contracts with the advertising agency and hence the actual conduct of the parties involved could not be examined. He relied on the page 17 paragraph 19 of learned CIT(A) s order. He concluded his arguments by submitting that as the agent had power to conclude contracts, the issue falls within Article 5(4) of Indo-Mauritius Double Taxation Avoidance Agreement and hence there is a PE. That it is also covered by Article 5(5) as the issue whether there is a dependent agency has to be viewed from the angle of the assessee and not the agent and as the assessee is doing its entire operation through the agent, the agent is a dependent agent and hence a PE. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract in India. He relied on the judgment in the case of TVM Ltd. Vs. CIT (237 ITR 230) (AAR) and submitted that the term has means the legal existence and argued that if the agreement is read there is no legal existence. On the word habitually exercised the learned counsel for the assessee submitted that there is no evidence produced by the Revenue to prove such exercise and entire argument relied on the interpretation of the Agreement. 14. On applicability of Article 5.5, he submitted that the same comes into play only when the entire activities of an agent are devoted exclusively to the Principal. He relied on the following case laws :- DIT Vs. Morgan Stanley (292 ITR 416)(SC), paragraph 9 on page No. 426 for the proposition that when there is no authority to enter into or conclude contracts, there is no agency PE. Order of Delhi Bench of the Tribunal in the case of Western Union Finance Services Inc. Vs. ADIT (104 ITD 34) (Del) KnowWerX Education (India) P. Ltd (301 ITR 207) (AAR) Speciality Magazines P. Ltd. (274 ITR 310)(AAR) DDIT Vs. Dailmer Chrysler A.G (39 SOT 418)(Mum) 15. On DHL Operations B.V.(142 Taxman-1), he submitted that Hon'ble High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas the assessee was non-resident recipient of amounts and that Star purchased air-time but in the case of the assessee it sold air-time and hence the facts were different. Thus he argued that the model was different from that of the assessee. He submitted that the decision of Delhi Bench of the Tribunal in the case of DIT Vs. BBC Worldwide Ltd. (37 SOT 253) applies to the facts of the case. He further relied on the judgment of the Hon ble Delhi High Court in the case of BBC Worldwide Ltd. 203 Taxman 554. 19. On the second issue of arm s length price, he submitted that there are two facets to this argument, the first being whether it is arm s length price or not and, second being, when arm s length price is paid whether the liability of the Principal gets extinguished. On the first facet, he submitted that 15% is the norm for advertising agency and this is supported by the Circular No. 742 dated 2.5.1996. He also relied on the Jurisdictional High Court decision in the case of Set Satellite (Singapore) Pte Ltd. Vs. DDIT (307 ITR 205) (Bom), DIT Vs. Galileo International Inc. (180 Taxman 357) for the proposition that 15% commission is arm s length price. He further submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready reference we extract important clauses of the Agreement:- 1.2 It will create a rate card for the sale of advertising time on the (B4U channels), which will be used only after it is approved by B4U Int l. Any sales, which deviate from the approved rate card, must be approved by B4U Int l which will be provided time to time to R.B.I. (This shows that the decision on pricing is controlled by the assessee.) 1.4 B4U Int l shall invoice advertisers and agencies who are buying time on the (B4U channels) : In instances where the advertisers and agencies cannot or do not use a EEFC A/C, B4U Multi will collect and keep all Sales revenue till such time the approval of Reserve Bank of India is obtained to remit such sales revenue B4U Multi shall then make all efforts to apply to the Reserve Bank of India to obtain approvals for remittance of such sales revenue to B4U Int l, and remit it to HSBC, Port Louis, Mauritius to their A/C. No. 080050800020. (This shows that invoices were raised by the N.R. assessee only. The agent only obtain R.B.I. approval, collects money and remits it to the N.R. owner.) 1.9 It acknowledges that B4U Int l shall retain the absolute right to reject any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te card, without permission from the Principal. (c) To ensure all advertisers have the valid Indian documentation. (d) The agent shall not represent other Television network which contains non-fictional programming broadcast in the same languages as B4U channels. (e) To undertake market analysis. (f) To forward advertisement to the principle. The Principal has the absolute right to reject any advertisement. (g) The principal retains the right to sell advertisement time and such right is not given to the agent. (f) All activities are subject to the control of the Principal. The agent cannot bind the Principal without prior written consent. It can only forward requests of advertisers, collect payment and obtain approvals. Agent shall process RBI s approval. 27. From the above it is clear that the agent does not have any power to conclude contracts. The revenue has not brought out anything on record to prove that the agent has power to conclude contracts. The inferences drawn by the revenue based on the agreement are factually incorrect. Other than the agreement there is no material or evidence with the AO to disprove the claim of the assessee that the Agent has no power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised all the invoices. When it is the case of the assessee that the agent has no authority to conclude contracts, the revenue cannot ask for contrary evidence as nobody can prove the negative. Thus Article 5.4 of indo- Mauritius DTAA is not attracted in this case. 30. Coming to Article 5.5, the wording reads as follows when the activities of such an agent are devoted exclusively or almost exclusively on behalf of the assessee enterprises . In our opinion these wordings refer to the activities of an agent and its devotion to the non-resident and not the other way round. The perspective should be from the angle of the agent and not of the non-resident. This view of ours is contrary to the decision of the Tribunal in the case of DHL Operations B.V. (supra). Our view is in line with the decision of AAR in the case of Morgan Stanley Co., 272 ITR 416 (AAR), wherein it was held as follows: There is no merit in the plea of the CIT that the difference between 'dependent' and 'independent' agents has to be seen from the perspective of the 'principal' and not from that of 'agent'. In our view for a proper understanding of the deeming provisions contained in paras 4 and 5 of Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be of independent status. The second condition to be satisfied for application of para 6 is that the agent of independent status should not be carrying on the business of the non-resident wholly or almost wholly. We have no hesitation to state that second condition is capable of being misinterpreted unless one keeps in mind the first condition. For application of para 6 of Article 5, agent has to be of independent status. If a person carries on wholly or almost wholly all the activities of the non-resident and does not carry on any other activity, that person will not be an agent of independent status. Therefore, the contention that since Airfreight Ltd. is carrying on activities of business other than the activities of respondent they are excluded from operation of para 5, does not hold water. It is well-settled principle of law that the words in a statute or document take its colour from the context. When we keep in mind that the enquiry to be made is relating to the activities of the non-resident vis-avis the activities of the agent of independent status, it is not difficult to appreciate that the enquiry to be made as per para 6 is not as to whether the agent is carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the mischief of the second part of para. 5. In this context, the aspect which remains to be considered is, when SMPL earns 75 per cent. to 78 per cent. of its income from TENL and 22 per cent. to 25 per cent. of its income from other clients, could it be said that its activities are carried out wholly or almost wholly for TENL. The terms wholly and almost wholly are not technical terms or terms of art. They must receive their ordinary meaning as understood by English speaking people. The word wholly means entirely, completely, fully, totally; almost wholly would mean very near to wholly, a little less than whole. In terms of percentage almost wholly would mean anything less than 90 per cent. It is shown that though SMPL has other clients, the fact remains that the activities of SMPL for TENL yield 75 per cent. to 80 per cent. of its income and income from other clients is between 22 per cent. to 25 per cent., so it cannot be said that the activities of the SMPL are carried out wholly or almost wholly for TENL. It follows that SMPL does not fall in the second part of para. 5 of article 5 of the Treaty. 32. This decision as well as the decision in the case of Morgan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is, an agent who is other than an agent of independent status to whom the provisions of para. 5 apply . The consequence is that when an agent fails to come up to the standard of independence referred to in para. 5, the issue regarding permanent establishment is not closed but has to be resolved in terms of para 4. The wording of para 4 is somewhat ambiguous. The paragraph is applicable in all cases where the enterprise in a Contracting State has an agent in the other who does not have an independent status. Such a person will be deemed to be a permanent establishment only if he has, and exercises, the authority to conclude contracts in the name of the enterprise. But even the existence of such authority will not make him a permanent establishment (i) if he is a mere agent for purchase of goods or merchandise; or (ii) being an agent for sale of goods or merchandise is allowed to habitually maintain a stock of the goods of the enterprise and effect sales therefrom. He can be deemed to be a permanent establishment only if he can of the principal, on his freely and without control from the latter . 34. In the case of Sutron corporation, In re-[2004] 268 ITR 156 (AAR) the AAR h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not the sole client of the agent and that activities of the agent were not devoted wholly or almost wholly on behalf of the assessee, there may be no DAPE. The income earned by the agent from other clients and the extent of such income is very relevant to decide whether the criteria stipulated in Article 5(9) is satisfied or not. (Matter remanded for fresh consideration); (ii) While in principle it is correct that if a fair price is paid by the assessee to the agent for the activities of the assessee in India through the DAPE and the said price is taxed in India at the hands of the agent, then no question of taxing the assessee again would arise, this is subject to a Transfer Pricing Analysis being undertaken u/s 92. The facts showed that the manner in which the commission/ remuneration had been fixed was usually not done between independent parties in an uncontrolled transaction. The assessee was in a position to dictate terms to the agent and so it could not be said that the commission was at arms length within the meaning of Article 7 (2) of the DTAA. The Transfer Pricing analysis to determine the arms length price has to be done by taking the Functions, Assets used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not go into the issue of business connection or permanent establishment, which was not addressed before it and confined itself to the issue as to whether the BWIPL had been adequately remunerated on the basis of Transfer Pricing. There is no dispute that if answer to this is in affirmative, then no further income of the assessee is taxable in India. The Tribunal held that once the T.P.O. had himself accepted that commission of 15% paid to BWIPL is a fair transfer price and on the basis of this opinion of the TPO, income declared by the BWIPL for its Assessment Year 2002-03 was accepted by the Department, the Department could not contend otherwise. Referring to the order of the TPO, the Tribunal has noted the following features therein:- In that order, the TPO accepted that the transaction was at arms length price. It was held that the CUP method selected by BWIPL for determining the arms length price of the commission income earned by it, was acceptable; that this was due to the fact that BWIPL with that charged by an uncontrolled party for similar services; that even otherwise, it was found that the rate of commission in the assessee s trade was fairly uniform and almost everyon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose present in TSET Satellite (supra), to the extent noticed above. Both the cases concern years before the onset of the Transfer Pricing regime. As such, we hold that TSET Satellite (supra) has rightly been relied on behalf of the assessee and that it is directly applicable to the assessee s case. 21. So far as the Department s contention that CBDT Circular No.742 (supra) has wrongly been relied on, it is seen that CBDT Circular No.765 dated 15.04.1998 extended Circular No.742 (supra). As per CBDT circular No.742, it was needed to be established, for the applicability of the Circular, that the assessee or a non-resident foreign telecasting company and that it did not have a branch office or a permanent establishment or did not maintain country wise accounts of its operations. The Circular would not apply in the event of any of the said conditions being not satisfied. All the conditions are not to be cumulatively satisfied so as to apply the Circular. In the assessee s case, the assessee had filed before the AO its country accounts for India, wherein the total revenues and expenses of the assessee were allocated to its India activity. A copy thereof has been placed before us. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L for the assessment year 2002-03. In that order, no adverse inference was drawn in respect of the arm s length price of all the international transactions as declared by the assessee except the transaction for availing market services. The arm s length price for the international transaction for availing market support services was determined at Rs.10,90,52,410/- instead of an amount of Rs.7,44,30,694/- as declared by the assessee. However, since this adjustment would have the effect of reducing the income chargeable to tax or increase in the loss, as the case may be, in the case of assessee the provisions of section 92 shall not apply in this case i.e. the effect of the adjustment made in the arm s length price of the transaction availing marketing support services by the assessee shall be ignored while computing the income of the assessee. (iv) Even if the next Assessment Year, i.e., 2003-04, the assessee had submitted the account s report in relation to its international transactions. For this year also, reference was made to TPO, which again passed the orders dated 07.3.2006, once again opining that no adverse inference could be drawn in respect of ALP. Following portion of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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