Dependent agent permanent establishment not created where franchise controls were only protective and business was run independently.

A franchise arrangement did not create a dependent agent permanent establishment in India under Article 5 of the India-USA DTAA because the franchisee and sub-franchisees carried on business independently on a principal-to-principal basis. The assessee's rights to inspect accounts, approve suppliers, and regulate advertising were only protective covenants to safeguard brand value and royalty collection, not operational control. As the franchisee did not sell or store goods on the assessee's behalf, the PE conditions were not met, and the receipts could not be taxed as business income in India on that basis.

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Issues: Whether the franchisee constituted a dependent agent permanent establishment of the assessee in India under Article 5 of the India-USA Double Tax Avoidance Agreement, thereby making the franchise and store-opening receipts taxable as business income in India.

Analysis: The agreement and sub-franchise arrangements showed that the franchisee and sub-franchisees carried on their business independently, with profits and losses belonging to them. The assessee's rights to examine accounts, approve suppliers, and regulate advertisements were only protective covenants to preserve brand value and secure royalty receipts. The franchisee did not sell or store goods on behalf of the assessee, and the conditions for a dependent agent permanent establishment under Article 5 were not satisfied.

Conclusion: No dependent agent permanent establishment existed in India, and the receipts could not be assessed as business income on that basis. The issue was decided in favour of the assessee.

Ratio Decidendi: Protective contractual controls meant to safeguard brand interests and royalty collection do not, by themselves, create a dependent agent permanent establishment where the franchisee functions as an independent business entity on a principal-to-principal basis.

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