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TMI Blog2024 (12) TMI 1067X X X X Extracts X X X X X X X X Extracts X X X X ..... otional activities, training or deployment of software would clearly not breach the threshold of auxiliary functions as are envisaged under the DTAA. For the purposes of being held to be a dependant agent, it was incumbent for the appellants to establish that such an entity habitually exercised an authority to conclude contracts. It could have also been proved by the appellants that the LO habitually secured orders for Western Union Financial Services. However, none of these conditions are met in the facts of the present case. In the absence of these conditions being found to exist, it would be wholly incorrect in law for the LO to be classified as a DAPE. Software only constituted a medium of communication and which enabled the Indian agents to talk and communicate with the servers of Western Union housed in USA. The Voyager software merely enabled the Indian agents to verify details and correlate data relevant to the remittance. There was no installation of hardware in the premises of those agents or for that matter a placement of their premises or a part thereof at the disposal of Western Union. We are thus unconvinced that the deployment of the software is entitled to be viewed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the stand of the appellant and principally holding that the respondent-assessee did not have a Permanent Establishment [PE] in India in the relevant Assessment Years [AY] as contemplated under Article 5 of the Double Taxation Avoidance Agreement [DTAA] between India and the United States of America [USA]. The appeals themselves pertain to AYs 2001-02 [ITA 1288/2006], 2002-03 [ITA 126/2016], 2003-04 [ITA 141/2016] 2004-05 [ITA 724/2016], 2006-07 [ITA 597/2019], 2007-08 [ITA 237/2019], 2008-09 [ITA 235/2019], 2011-12 [ITA 192/2019], 2013-14 [ITA 111/2024] and 2015-16 [ITA 110/2024]. 2. The Tribunal had rendered its principal decision on 10 March 2006 while dealing with the appeal pertaining to AY 2001-02 and which decision has been followed in the subsequent years. We had in terms of our order dated 20 July 2009 admitted ITA 1288/2006 on the following question of law:- Whether on facts, income earned from customers outside India is liable to tax in India under AADT with USA The remainder of the appeals subsequently came to be tagged with ITA 1288/2006 and were admitted on similar questions of law. 3. From the material placed before us as well as the submissions addressed by lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I] for grant of requisite permissions as contemplated under Section 29 (1) (a) of the Foreign Exchange Regulation Act, 1973 [1973 Act] . Basis the permission granted, it also established an office in India and posted a representative therein. This office was described to be the Liaison Office [LO] , manned by one manager and supporting staff. 8. As per the disclosures made, the respondent-assessee had made a declaration before the RBI that the said LO would not represent any party other than Western Union Financial Services. The annexure to that application enumerated the following activities/services which would be undertaken by the LO:- The Liaison office shall undertake the following liaison activities/services: (a) Distribute brochures and literature describing the activities of Western Union Financial Services, Inc. ( Western Union ). (b) Maintain liaison contact with government authorities and officials of the government, its agencies and other organizations and associations. (c) Maintain and develop the relationship of mutual understanding and co-operation between Western Union and India. (d) Address seminars on Western Union s activities. (e) Put interested parties in direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (iii) The entire expenses of the office in India will be met exclusively out the funds received from abroad through normal banking channels. (iv) The office in India shall not borrow or lend any money from/to any person in India without our prior permission. (v) The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. (vi) The office in India will furnish to our Mumbai Regional office (on a yearly basis): (a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; (b) details of remittances received from abroad duly supported by Foreign Inward Remittance Certificate; (c) certified copy of the audited final accounts of the office in India; and (d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during the period m respect of which the office had rendered liaison services. (e) The number of staff e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, as would be evident from its letter of 03 October 2003. However, notwithstanding that objection being raised, it ultimately furnished a return of income on 08 December 2003 declaring its income as nil . 12. The Assessing Officer [AO] , however, assessed the total income to be INR 4,90,22,316/-, as a consequence of which notices under Section 143 (2) came to be issued on 04 March 2004. The AO, while framing the order of assessment essentially came to hold as under. It firstly opined that the income of the respondent-assessee had accrued and arisen in India and would consequently be exigible to tax. It further held that the respondent-assessee would be liable to tax under the provisions of the DTAA. 13. Tested on the anvil of the activities that occurred in India, the AO came to conclude that not only did the respondent have a fixed place of business and which constituted a Fixed Place Permanent Establishment [PE] , the activities undertaken by the LO were sufficient to treat it as a Dependent Agent being present in India and thus the test of existence of a Dependent Agent Permanent Establishment [DAPE] were also met. 14. Apart from what was construed by the AO and is noticed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be viewed as being merely preparatory or auxiliary in character. 18. From the record we find that a decision of the Authority for Advance Rulings [AAR] in UAE Exchange Centre LLC, In re. (2004) 268 ITR 9 (AAR) was also cited. The applicant in that case also was engaged in money transfer business and had adopted a similar model of remitting money to India through its LOs. The LOs were stated to have engaged in downloading of data pertaining to the beneficiaries in India, printing of cheques and dispatching the same to the beneficiaries. It was on the basis of these facts that the AAR had proceeded to hold that the LOs constituted a PE in India. 19. However and was noticed by the Tribunal, the AAR had observed that the role of the LO must involve performing the contract of remittance of amounts at least in part before it could be said to be a PE of the foreign enterprise. The Tribunal while contrasting the facts of the AAR ruling to the present case, noted that the LO performed no part of the contract of remittance of monies to India because of which it could not be considered to be a PE of the respondent-assessee in India. 20. It is pertinent to note that the decision of the AAR t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a factor which would render the conclusions of the Tribunal unsustainable. 25. Refuting those submissions, Mr. Vohra, learned senior counsel appearing for the respondents, firstly urged us to dismiss the appeals outrightly since according to learned senior counsel, the determination of whether a PE exists or not is essentially a question of fact. According to Mr. Vohra, the Tribunal being the final fact finding authority having come to the conclusion that no PE existed, the same would clearly not give rise to any substantial question of law. 26. Mr. Vohra then cited for our consideration the decision of the Supreme Court in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi and Another (2017) 15 SCC 602 and which, according to learned senior counsel, had identified the principal elements for a Fixed Place PE being assumed to have come into existence to be: (a) an identified fixed place, (b) that fixed place being made available and placed at the disposal of the foreign enterprise and (c) business of that foreign enterprise being carried on through such fixed place. Mr. Vohra in order to buttress his submissions adverted to the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out . 27. Learned senior counsel then took us through the decision rendered by this Court in Director of Income Tax v. E-Funds IT Solution 2014 SCC OnLine Del 555 and which had underscored the requirement of the core business of the foreign enterprise being carried out through an identified fixed place in order to constitute a Fixed Place PE. Our attention was drawn to the following paragraphs of that decision:- 53. Reference to core of auxiliary or preliminary activity is relevant when we apply para 3 of Article 5 or when sub-clause (a) to para 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place PE. Paragraph 3 of Article 5 lists negative activities which when performed from a fixed placed in the other contracting State would not create a PE. The activities specified in Article 5, para 3 would not create a PE, even when the conditions specified in paras (1) and (2) of Article 5 are satisfied. Paragraph 3 is not a positive provision but a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the following terms:- 16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7 (1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5 (1) and 5 (2) (a) to 5 (2) (k); service PE under Article 5 (2) (l) and agency PE under Article 5 (4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents are brought within any of the sub-clauses of Article 5. 17. Since the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term establishment . As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term fixed rather than the term place , given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term establishment makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5 (1) OECD MC which uses the term installation instead of place . The term place is used to define the term establishment . Therefore, place includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in common law countries) or immo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notion of agent PEs were superfluous! This can be illustrated by the example of a salesman who regularly visits a major customer to take orders and conduct negotiations in the purchasing Director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.' 38. Taking cue from the word through in the Article, Vogel has also emphasised that the place of business qualifies only if the place is at the disposal of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, disposal is the power (or a certain fraction thereof) to use the place of business directly. Some of the instances g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usually exist only where the taxpayer is free to use the POB: at any time of his own choice; for work relating to more than one customer; and for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop [cf. Article 5 (2) (e) OECD and UN MC] of 10 or 12 sq m can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine.' 39. OECD Commentary on Model Tax Convention mentions that a general definition of the term PE brings out its essential characteristics i.e. a distinct situs , a fixed place of business . This definition, therefore, contains the following conditions: (i) the existence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed and had come to be rendered by the AO as well as the CIT (A) in ignorance of Article 5 (3) (e) of the India-USA DTAA and the fundamental functions and attributes which must be found to vest in an agent before a DAPE could be said to have come into being. 31. Elaborating on that aspect, Mr. Vohra also vehemently assailed the view expressed by the AO as well as the CIT (A) insofar as the question of DAPE was concerned. It was submitted that the Department of Posts, NBFCs were all independent third parties having substantial business and revenue of their own and were thus clearly not dependent upon the revenue that came to be generated while discharging certain functions under the agency agreements. It was submitted that the conclusions to the contrary as drawn by the AO as well as the CIT (A) would in any case not sustain in light of the decision of this Court in E-Funds. 32. Mr. Vohra also highlighted the fact that the Indian agents were remunerated at arm s length and were, in that sense, independent. This according to learned senior counsel more so since undisputedly they stood conferred with no authority to conclude contracts on behalf of the principal in India. 33. Mr. Vohra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us propose to confine and focus our discussion in evaluating the correctness of the view expressed by the Tribunal primarily on the anvil of the DTAA. 36. Having chronicled the submissions which were addressed by respective sides before us, we proceed further and firstly take up for consideration Article 5 of the DTAA and which defines the concept of a PE. Article 5 of the India-USA DTAA reads 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. 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 farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or premises used as a sales outlet; (j) an installation or structure used for the exploration or exploitation of natural resource ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. 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, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. It had also made due disclosure of the initiatives undertaken by it and which included training agents, administering training and refresher courses as well as providing the updated versions of the Voyager software to agents and training their staff with respect to its usage. The respondent-assessee had in the aforesaid light argued that the activities undertaken by the LO would clearly fall within the category of activities which could at best be described as preparatory or auxiliary and thus falling within the ambit of Article 5 (3) of the DTAA. 40. It is pertinent to note that Article 5 (3) sets out the exclusions from the term Permanent Establishment and thus excludes a fixed place of business from where preparatory or auxiliary activities may be undertaken. Although Mr. Chawla had sought to lay stress on the phrase or for other activities as it appears in Article 5 (3) (e), we find no merit in that contention since the said expression would have to be read in conjunction with the phrase which have a preparatory or auxiliary character to which it is prefaced. The scope of the words preparatory and auxiliary had directly arisen for the consideration of this Court in UAE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as ones which would not fall within the ambit of the expression permanent establishment . One such exclusionary clause is found in article 5 (3) (e) which is : maintenance of fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a reparatory or auxiliary character. The plain meaning of the word auxiliary is found in the Black's Law Dictionary 7th Edition at page 130 which reads as aiding or supporting, subsidiary . The only activity of the liaison offices in India is simply to download information which is contained in the main servers located in the UAE based on which cheques are drawn on banks in India whereupon the said cheques are couriered or despatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. Can such an activity be anything but auxiliary in character. Plainly to our minds, the instant activity is in aid or support of the main activity. The error into which, according to us, the Authority has fallen is in reading article 5 (3) (e) as a clause which permits making a value judgment as to whether the transaction would or would not have been complete till the role played by liaison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as data processing support centre, technical services and reconciliation of accounts being back office operators would not fall within article 5 (1) of the Indo-US DTAA. 42. Our Court found that the LOs were merely aiding and supporting the entity, UAE Exchange Centre. Thus, and viewed in that light, the said offices could not possibly be held to constitute a PE. It also bore in consideration that every aspect of the principal transaction had been concluded in the UAE and the remittances as well as the commission was deposited and earned in that territory. It pertinently observed that the functions performed by the LOs were merely supportive of the transaction which had occurred in the UAE. It thus observed that the LOs did not contribute to the earning of profits by the assessee. 43. The aforesaid judgment rendered by this Court came to be appealed by the Union before the Supreme Court and which, while affirming the judgment handed down by this Court had observed as follows:- 31. While answering the question as to whether the activity in question can be termed as other than that of preparatory or auxiliary character , we need to keep in mind the limited permission given by RBI t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is unexceptionable. 34. The High Court had justly adverted to the exposition of this Court in CIT v. Morgan Stanley Co. Inc. [CIT v. Morgan Stanley Co. Inc., (2007) 7 SCC 1] , which dealt with the case of an assessee having set up office in India to support the main office functions in fixed income and equity research and in providing IT enabled services such as back office operations, data processing and support centres to the entity in the United States. This Court, in paras 10 to 14, observed thus: (SCC pp. 13-14) 10. In our view, the second requirement of Article 5 (1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted, one has to undertake what is called as a functional and factua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the business of MNE is wholly or partly carried on. This is where the difference lies between the definition of the word PE in the inclusive sense under the IT Act as against the definition of the word PE in the exhaustive sense under DTAA. This analysis is important because it indicates the intention of Parliament in adopting an inclusive definition of PE so as to cover service PE, agency PE, software PE, construction PE, etc. 14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5 (3). Under Article 5 (3) (e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5 (3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5 (1) or under Article 5 (2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case, we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Article 5 (3) (e) of DTAA. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only. In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever. 37. Our attention was invited to the dictum in CIT v. E-Funds IT Solution Inc. [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294] Para 2 of the said decision would clearly indicate the background in which the issue was answered by this Court. The same reads thus: (SCC pp. 301-302) 2. The assessing authority decided that the assessees had a permanent establishment (hereinafter referred to as PE ) as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India US Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as DTAA ) was attracted. Consequently, the assessees were liable to pay tax in respect of what they earned from the aforesaid fixed place PE in India. The CIT (Appeals) dismissed the appeals of the assessees holding that Article 5 was attracted, not only because there was a fixed place where the assessees carried on their business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e furnished to a resident of a State does not matter; what matters is that the services are performed in the State through an individual present in that State. *** 26. We entirely agree with the approach of the High Court in this regard. Para 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a service PE would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground, namely, that other personnel would cover personnel employed by the Indian company as well, and that the US companies through such personnel are furnishing services in India. This being the case, it is clear that as the very first part of Article 5 (2)(l) is not attracted, the question of going to any other part of the said Article does not arise. It is perhaps for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Co-operation and Development and UN MC (No. 44 OECD MC Comm. on article 5). 111. But even in the absence of a legal right to use that place, the control test can be met if the taxpayer enterprise has sufficient command of the place of business as a matter of fact (No. 11 et seq. OECD MC Comm. on article 5). Thus, for instance, a permanent establishment could exist where an enterprise illegally occupied a certain location where it carried on its business (as mentioned explicitly in No. 11 et seq. OECD MC Comm. on article 5). Likewise, a company may create a permanent establishment on the premises of an associated company if this associated company grants accommodation to, or tolerates the lasting presence of employees of the first-mentioned company (see infra m. No. 430 et seq.). 68. Klaus Vogel, while seeking to amplify the importance of the expression through when used in the context of the business of the holding company being carried on by the subsidiary, makes the following pertinent observations: 134. Article 5 (1) OECD MC (since 1977; see supra m. No. 45) requires that the business of an enterprise (for these terms, see supra m. No. 27 et seq.) is carried on through the fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or his entrepreneurial activities. This third aspect of the functional integration is by far the most disputed one. 140. Historically, the instrumental character of the place of business for the carrying-on of the enterprise could not be taken for granted. Between 1963 and 1977, the OEEC/Organization for Economic Co-operation and Development did not employ this term. Rather, it was sufficient that the taxpayer carried on his business in the place of business (see supra m. No. 45). Based on the old Model, some older DTCs use the words in which still today. While some authors have denied any divergence in substance, the 1977 amendment is a strong reason to assume a semantic shift indeed. 141. In a different context (viz., in article 5(4.1) of the Organization for Economic Co-operation and Development and UN MC, (as amended in 2017), the Organization for Economic Co-operation and Development and UN have returned, in one specific regard, to this old line by stating that an enterprise should carry on business at the same place . However, the simultaneous use of this language on the one hand and the terms used or maintained by an enterprise on the other, in one and the same sentence in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxation Avoidance Agreement, Klaus Vogel's work has the following instructive passages: 59. (Determination of the activity's character) It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Each individual case will have to be examined on its own merits. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity. 60. (Preparatory character) As a general rule, an activity that has a preparatory character is one that is carried on in contemplation of the carrying on of what constitutes the essential and significant part of the activity of the enterprise as a whole. Since a preparatory activity precedes another activity, it will often be carried on during a relatively short period, the duration of that period being determined by the nature of the core activities of the enterprise. This, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n article 5 (4) (a) to (f) of OECD and UN MC had to be preparatory or auxiliary (infra m. No. 304 et seq.). This followed from the use of the word other in article 5 (4) (e) of UN MC. This word relates not only to the subsequent word activity (otherwise, one should have expected an if-clause or a provided that -clause after activity , like in article 5 (4)(f) of UN MC) but to the entire phrase activity of a preparatory or auxiliary character . The 2017 update to the OECD MC has made this entirely clear by adding the words provided that such activity or, in the case of sub-paragraph (f), the overall activity of the fixed place of business, is of a preparatory or auxiliary character as a joint supplement to sub-paragraphs (a)-(f). By contrast, other requirements in article 5 (4) (e) of UN MC have no paramount relevance but apply within the ambit of this sub-paragraph only (infra m. No. 315 et seq.). 304. The preparatory or auxiliary character of the activities listed in article 5 (4) of OECD MC can be based on an absolute standard or based on a relative standard. For example, consider a comparison of two enterprises : (1) an integrated enterprise which covers many steps in the creati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he activities of a place of business qualify as being of a preparatory or auxiliary character , as compared to the overall activities of the enterprise if they have not more than a marginal relevance within the enterprise's overall business plan. It should be noted that it is not the share in actual profits or losses on which the comparison should be based. Rather, the characterisation of an activity as preparatory and/or auxiliary depends on the type, sector and intensity of the activity, as compared to the core business of the enterprise as a whole. If the activities of a place of business qualify as preparatory and/or auxiliary under these relative standards, they still do not fall under article 5 (4) of OECD MC if the place of business (and the activities exercised through it) alone, when looked at separately from the rest of the enterprise, exceeds a certain size and degree of professional entrepreneurship. 313. A further group of examples covers rooms and facilities which an employer makes available in order to accommodate his employees or help them to recreate or spend their idle time. This includes hotels, bedrooms, lounges or restrooms maintained outside the ordinary p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder common ownership and control an office, branch, etc., to which he gives his own description as an associated permanent establishment . The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a permanent establishment. Such permanent establishment is given the nomenclature of unassociated permanent establishment by Baker. He, however, pointed out that there is a possibility of a third type of permanent establishment, i.e., a construction or installation site may be regarded as permanent establishment under certain circumstances. In the first type of permanent establishment, i.e., associated permanent establishments, primary requirement is that there must be a fixed place of business through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled : (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) permanent establishment must be a fixed place of business, i.e., a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State in which the fixed place is situated. The term place of business' is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a permanent establishment. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute permanent establishment are : a place of business may thus be constituted by a pitch in a market place, or by a certain pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on Income and on Capital), a permanent establishment must have three characteristics : stability, productivity and dependence. All characteristics are present in this case. Fixed place of business in the form of physical location, i.e., Buddh International Circuit, was at the disposal of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event has taken place in India and the non-resident FOWC is liable to pay tax in India on the income it has earned on this soil. 87. As per the Manual on the Organization for Economic Co-operation and Development Model Tax Convention, and the precedents rendered on the subject, there are two basic conditions which are spelt out and which must be fulfilled for acknowledging a permanent establishment being existent and constituting a fixed place of business. They are: (a) a place which stands placed at the disposal of an enterprise; and (b) The establishment answering the characteristics of stability, productivity and dependence. xxxx xxxx xxxx 89. The principles governing fixed place permanent establishment were again spelt out and enunciated by the Supreme Court in Morgan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5 (1) is not attracted. xxxx xxxx xxxx 91. When we test the stand taken by the respondents, bearing in mind the aforesaid precepts as culled out from the various judgments noticed hereinabove, we find ourselves unable to sustain even the prima facie formation of opinion by the first respondent in this respect. It is pertinent to note that the impugned notices and the reasons set out for initiating action under section 147/148 nowhere allude to a particular space or a part of the premises situated in Noida or Varanasi having been placed under the exclusive or significant control or disposal of the petitioner. The first respondent fails to rest its prima facie opinion with respect to fixed place permanent establishment on any part of the Noida or Varanasi premises which may have been set apart or exclusively placed in and under the control of the petitioner for use of its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoked, even if we were to examine the correctness of the view taken by the first respondent based on sub-clauses (d) and (e), we find ourselves unable to sustain the impugned notices and the reasons set out for initiating action under section 147/148, basis which the impugned notices were issued. 97. In terms of article 5 (3) (d), if a permanent establishment were to be engaged solely for the purposes of purchase of goods or merchandise, or for that matter for collecting information for a foreign enterprise, the same would stand excluded from the ambit of sub-clauses (1) and (2) of article 5. The first respondent appears to have been heavily influenced by the Indian subsidiary - PRIPL routing communications between the petitioner and DLW and other arms of the Indian Railways. The first respondent also alludes to certain supportive functions such as gathering of information and other allied activities allegedly undertaken by PRIPL for and on behalf of the petitioner. It becomes pertinent to note that be it collecting information or for that matter studying market trends or future business prospects, the same would clearly fall not only within the ken of sub-clause (d), but also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be discussed, namely, exclusion of permanent establishment under article 5 (3). Under article 5 (3) (e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a permanent establishment. Article 5 (3) commences with a non obstante clause. It states that notwithstanding what is stated in article 5 (1) or under article 5 (2) the term permanent establishment shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under article 5 (3) (e) of the Double Taxation Avoidance Agreement. Therefore, in our view in the present case MSAS would not constitute a fixed place permanent establishment under article 5 (1) of the Double Taxation Avoidance Agreement as regards its back office operations. xxxx xxxx xxxx 101. The aspect of whether an Indian establishment was performing functions of a preparatory or an auxiliary character was considered by this court in National Petrole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s permanent establishment in India. 102. When tested on the aforesaid principles, it becomes apparent that the activities undertaken by the Indian subsidiary clearly do not appear to travel beyond being preparatory or auxiliary . It is pertinent to note that both entities do not appear to have been established with a commonality of general purpose. The expression preparatory has been understood to mean work which is undertaken in contemplation of the essential and significant part of the principal activity of an entity. The principal or for that matter the essential activity of the petitioner is the manufacture and production of goods needed by railroad companies. The principal activity is concerned with the core business activity of the petitioner. That has clearly not been shown to have been undertaken at the Noida premises. Of equal significance are the observations appearing in National Petroleum, and where the court had held that while activities undertaken by an entity which is asserted to be a permanent establishment may contribute to the productivity of the foreign enterprise, but if those functions be remote from the actual realisation of profits, the tests of a permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hreshold or boundary which Article 5 (3) erects. Regard must be had to the fact that Article 5 (3) constitutes a list of negative stipulations and which removes a fixed places of business from the ambit of a PE. Thus, even if an establishment were to meet the test of a fixed place, it would stand exorcised from the main provision of that covenant if it were found that its activities were confined to preparatory and auxiliary work for the enterprise. 53. As was noticed in the previous parts of this decision, the transaction pertaining to the transfer of funds was consummated in the USA itself and it was the Indian agents of Western Union Financial Services which undertook and discharged the essential functions required for the completion of those transactions. The LO was not even remotely involved in the conclusion of those transactions. 54. Regard must also be had to the fact that the RBI permission proscribed that LO from undertaking any trading, commercial or like activities. It was also forbidden from entering into any business contracts in its own name. The activity reports which have been taken note of by the Tribunal do not demonstrate that it had either contravened any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, of crucial significance is the use of the word if , which precedes clauses (a), (b) and (c) and thus being indicative of the clear intent of the contracting parties of recognizing the existence of a DAPE only if one of those were also met. The appellants have not relied on any evidence or material which may have even remotely established the criterion of either clauses (a), (b) or (c) being satisfied by the LO. 58. That only leaves us to evaluate the correctness of the submissions of Mr. Chawla that the installation of the software in the premises of the Indian agents should be acknowledged as being sufficient to recognize a Fixed Place PE coming into existence. We find ourselves unable to countenance this contention in light of paras 1 and 2 of Article 5 essentially envisaging places and premises of business. Neither para 1 nor para 2 appear to ostensibly contemplate an intangible property as constituting a Fixed Place PE. We are, in the facts of the present case, not concerned with automated equipment or a piece of hardware. The submission of the appellants rests solely on the installation of a software and its residence in the systems maintained by the Indian agents. 59. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Providers (ISPs)] The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise (see paragraph 10 to 19 above), even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 4 needs to be examined on a case-by-case basis having regard to the various functions performed by the enterprise through that equipment. Examples of activities which would generally be regarded as preparatory or auxiliary include: - providing a communications link - much like a telephone line - between suppliers and customers; - advertising of goods or services; - relaying information through a mirror server for security and efficiency purposes; - gathering market data for the enterprise; - supplying information. 129. [Essential and significant functions] Where, however, such functions form in themselves an essential and significant part of the business activity of the enterprise as a whole, or where other core functions of the enterprise are carried on through the computer equipment, these would go beyond the activities covered by paragraph 4 and if the equipment constituted a fixed place of business of the enterprise (as discussed in paragraphs 123 to 127 above), there would be a permanent establishment. 130. [Constitution of core functions] What constitutes core functions for a particular enterprise clearly depends on the nature of the business carried on by that ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , because they will not conclude contracts or play the principal role leading to the conclusion of contracts in the name of these enterprises, or for the transfer of property belonging to these enterprises or the provision of services by these enterprises, or because they will act in the ordinary course of a business as independent agent, as evidenced by the fact that they host the web sites of many different enterprises. It is also clear that since the web site through which an enterprise carries on its business is not itself a 'person' as defined in Article 3, paragraph 5 cannot apply to deem a permanent establishment to exist by virtue of the web site being an agent of the enterprise for purposes of that paragraph. 61. As is manifest from a reading of the aforenoted passages, the Vogel Commentary commends a view that while software itself may not constitute tangible property and therefore a location that can constitute a fixed place of business , the computer equipment within which such software is stored can meet that threshold, with or without the presence of personnel. However, this is subject to the computer equipment itself meeting the requirement of being fixed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, to assume a PE once such property has been 'fixed' (infra m.no. 50 et seq.) to the soil. For example , a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformator or generator on board a former railway wagon qualify as places (and may also be 'fixed'; see infra m.no. 50 et seg.). In contrast, purely intangible property cannot qualify in any case. In particular, rights such as participations in a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks etc.) or intangible economic assets a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE. They can only form part of a PE constituted otherwise (see Article 7 at m.no 60 et seq.). Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE (no. 123 OECD MC Comm. on Article 5) 63. One cannot also lose sight of the fact that the software only constituted a medium of communication and which enabled the Indian agents to talk and communicate with the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no PE in India. It is to be noted that Article 5 (4) has three clauses, namely, a, b c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per clause (c) of sub-Article (4), it is found that RRIL habitually secures orders in India for the appellant. It is a set practice that no customers in India are directly to send orders to the appellant in UK. Such orders are required to be routed only through RRIL. This fact is evident from the letter of Mr. L.M. Morgan to Mr. Prateek Dabral and Ms. Usha. In the said letter, it is made clear that even request for quotation/extension could not be communicated directly to the appellant but are to be routed through the office of RRIL. This is applicable even to the orders. The fact is not denied that the orders are firstly received by RRIL from the customers in India and only then communicated to the appellant. Thus, as per Para 4(c) of Article 5, the dependent agent habitually secures orders wholly for the enterprise itself and hence, is deemed to be a permanent establishment of the appellant . The contention of appellant that the role of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which had come to be established at Bangalore. On facts, that High Court in Jebon Corporation had found as follows:- 19. It is on the basis of the aforesaid material, the Tribunal held that the activities carried on by the liaison office are not confined only to the liaison work. They are actually carrying on the commercial activities of procuring purchase orders, identifying the buyers, negotiating with the buyers, agreeing to the price, thereafter, requesting them to place a purchase order and then the said purchase order is forwarded to the head office and then the material is dispatched to the customers and they follow up regarding the payments from the customers and also offer after-sales support. Therefore, it is clear that merely because the buyers place orders directly with the head office and make payment directly to the head office and it is the head office which directly sends goods to the buyers, would not be sufficient to hold that the work done by the liaison office is only liaison and it does not constitute a permanent establishment as defined in article 5 of the Double Taxation Avoidance Agreement. In fact, the Assessing Officer has clearly set out what was discove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the various activities undertaken by the liaison office on behalf of the applicant. We have also noticed that it has about 35 employees divided into 5 teams dealing with material management, merchandising, production management, quality control and administration support constituting teams from finance, human resources and information systems. In addition to assisting the applicant in the actual purchase of the goods direct from the manufacturers in India, various activities are carried on by the liaison office which relate to ensuring the choosing of quality material, occasionally testing them for quality, conveying of requisite design, picking out of competitive sellers, the ensuring of quality, the ensuring of adherence to the policy of the applicant in the matter of procurement and employment, in the matter of compliance with environmental and other local regulations by the manufacturers - suppliers and in ensuring that the payments made by the applicant reach the suppliers. The applicant is obviously in the business of designing, manufacturing and selling branded products, brands over which it has exclusive rights. In the matter of manufacturing of products as per design, q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The extraction of the ore from oil soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) The receipt of the moneys arising from the sale. All these processes are necessary stages which terminate in money, and the result is the money resulting less the expenses attendant on all the stages. The first process seems to their Lordships clearly within sub-section (3), and the second or manufacturing process, if not within the meaning of, trade in sub-section (1) is certainly included in the words any other source whatever in sub-section (4). So far as relates to these two processes, therefore, their Lordships think that the income was earned and arising and accruing in New South-Wales xxxx xxxx xxxx 32. It is true that in terms of the permission taken from the Reserve Bank of India, the liaison office can undertake purely liaison activities, viz., to inspect the quality, to ensure shipments and to act as a communication channel between Head office and parties in India and will not take up any other activity of a trading, commercial or industrial nature. The liaison office, on the applicant s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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