TaxTMI 
TaxTMI 
2006 (3) TMI 220
X X X X Extracts X X X X
X X X X Extracts X X X X
....fits can be attributed to the PE and further if so, what would be the percentage of such profits. Facts 2. The assessee is a non-resident company registered in USA. It is engaged in the business of rendering money transfer services since 1890. The business includes transfer of monies across international borders. A person who is in USA, if he wants money to be transferred to his relative in India, first approaches the assessee's outlet in USA. He remits the money in dollars together with the charges. He is given a receipt by the assessee along with a computer-generated unique number which is referred to as MTCN (Money Transfer Control Number). The remitter sends the number to his relative in India who takes it to the assessee's representative/agent in India. The MTCN is fed into the computer with the help of a software and the mainframe computer of the assessee in the USA is accessed by the agent. He matches the number, which means that the transaction has to be honoured. He then satisfies himself about the identity of the recipient/claimant of the money from his passport, election identity card and so on. Once he is satisfied, the money is paid to the claimant in Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the assessee wanted to open a liaison office ("LO") in Mumbai with one manager and support staff and that the territorial jurisdiction of the office will extend to the whole of India. Mr. Harsh Lambah, a person of Indian nationality, would be in-charge of the office. The estimated annual expenses of the office was around US $ 2,00,000. It was further stated in the application that the "office will not represent any party other than Western Union Financial Services, Inc., group of companies". The annexure to the application' listed the following as the activities/services to be undertaken/rendered by the liaison office: "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 activi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t our prior permission. (ii) No commission/fees will be charged or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India. (iii) The entire expenses of the office in India will be met exclusively out of 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 audi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld later appear to have opened additional liaison offices in Bangalore and Gurgaon, the Mumbai office being called the "nodal LO". 8. The assessee, in accordance with the arrangements with the agents/representatives in India, started remitting monies to India and remunerated them with the compensation. The figures of commission for the period from April 2000 to March 2001, relevant to the assessment year 2001-02 which is the year under appeal, are given in page 24 of the report month-wise. Suffice to note that the assessee paid a total commission of Rs. 12,16,94,036 to the Indian agents/ representatives, equivalent to US $26,63,472. Assessment proceedings 9. The Assessing Officer issued notice under section 142(1) of the Act to the assessee calling upon it to file its return of income under the Income-tax Act. The assessee did not file any return, but objected to the notice on the ground it was beyond jurisdiction but later withdrew the objection and filed a return on 8th December, 2003 declaring "nil" income. Apparently the assessee claimed that it was not taxable in India. Briefly speaking, the Assessing Officer took the view that the income arising to the assessee in In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ude contracts on behalf of the assessee in the sense that they carry out in India the commitment given by the assessee that the money will be paid. The compensation paid to the agents is 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 - is carried out by the agents in India and thus merits adequate compensation. Since the compensation paid is not adequate, the transaction is not at arm's length. (c) The LO takes active part in the business of the assessee in the form of marketing, appointment of agents, brand building, providing software to the agents and imparting training to them in India. Therefore, the LO is a PE of the assessee in India. (d) The assessee has not submitted its global accounts :or balance sheet or the India-specific accounts. The only information given is that the assessee had transferred Rs. 520,34,20,247 on which commission amounting to Rs. 42,33,16,919 was paid. The rate of commission varied from 25 per cent to 30 per cent to the Indian agents and was about 15 per cent for the agents abroad. Taking note of the expenses to be incurre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction is completed only in India, there is business connection between the assessee and India. (f) As regards attribution of the profits to the PE in India under article 7 of the DTAA, the estimate made by the Assessing Officer was reasonable and justified. For the above reasons, the CIT(A) dismissed the appeal. Hence the present appeal. 11. We have merely summarised the reasons and findings of the income-tax authorities and they will be dealt with in detail, wherever necessary, at the appropriate juncture. Arguments of the assessee 12. The arguments on behalf of the assessee were these: (a) There was no business connection in India at all, so that the profits, if any, attributable to the Indian operations could be brought to tax under section 9 of the Income-tax Act. (b) As regards the DTAA, considerable arguments were advanced to deny the existence of any PE in India within the meaning of article 5. The LO, it was contended, cannot be regarded as a PE since it is prohibited by the RBI from carrying on any business or commercial or trading activity under the conditions imposed for granting approval. The status reports filed, it was pointed ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o say or control in the matter of appointing the subagents. It was not the obligation of the assessee to remunerate the sub-agent, if one were to be appointed by the agent. Even the termination of the services of the subagent was not a matter within the control of the assessee. Thus the agents were not dependent on the assessee in the matter of appointment, termination or remunerating the sub-agents. (e) Turning to the question whether the agents were "independent agents" within the meaning of article 7.5 of the DTAA, it was argued that they were acting in the ordinary course of their business in undertaking the activity of disbursing the payments in India, that this activity constituted a fraction of the overall activities of the agents, that the activities of the agents were not devoted wholly or almost wholly for the foreign enterprise (the assessee), that the compensation paid to them is uniform throughout the world and thus the dealings between the assessee and the agents were at arm's length and therefore it cannot be said that the agents were not independent agents. (f) The observation of the Assessing Officer that the assessee permits the use of credit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that it is a new business in which it had not so far engaged. Turning to the case of banks which were appointed as agents, he pointed out that though under section 6(1)(a) of the Banking Regulation Act, 1949 banks are allowed to carryon the business of "collecting and transmitting money", but since the said Act extends only to India under section 1(2) thereof, the money transfer business involving trans-border transfer of funds cannot be said to be in the ordinary course of banking business. Referring to the cases of non-nationalised banks (such as the Karnataka Bank Ltd., Bank of Punjab Ltd. etc.) appointed as agents of the assessee, Mr. Rajneesh Kumar submitted that section 6(2) of the Banking Regulation Act, prohibited a banking company from engaging itself in any form of business other than those referred to in sub-section (1) and therefore the money transfer business undertaken by the banks as agents of the assessee cannot be considered to be their lawful business and hence not in the ordinary course of their business. It was argued that it was because of the prohibition contained in section 6(2) of the aforesaid Act that the non-nationalised banks (such as the Karnataka Bank....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ior level with a small staff. (b) The software only gives access to information which is no doubt crucial, but on that score it cannot be considered to be a PE under article 5.1 or 5.2 of the treaty, as it cannot be a "place", much less a "fixed place". (c) The assessee has no access as of right to the offices or premises of its agents or representatives in India. (d) The non-compete clause in the agreement of appointment of agent does not make the agent dependent on the foreign enterprise (assessee). It is the usual clause found in all such arrangements, mainly intended to protect the assessee. (e) The training of the agents is an activity auxiliary or preparatory and therefore by virtue of article 5.3(e) of the DTAA the LO cannot be deemed to be a PE. (f) The words "ordinary course of their business" appearing in article 5.5 of the treaty shall be construed broadly and it must be accordingly held that the agents' activity constituted his regular business. There is no allegation that any of the conditions prescribed by any law were violated, nor is there any evidence to show that the transactions were not at arm's length. Theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the income to the PE (agents) and if the compensation so paid is allowed as a deduction, it will extinguish the assessment. 15. Wherever necessary, the written submissions dated 10-8-2004 filed before the CIT(A) were explained in the course of the reply. A copy of the same was filed. Decision 16. The following broad questions arise for consideration in the case: 1. Is there a business connection within the meaning of section 9 of the Income-tax Act? 2. If the DTAA between India and USA is applicable, then is there a PE of the assessee in India? If so, what kind of PE is it? 3. If there is a PE in India, how much income is attributable to the same? Several incidental or sub-questions also arise which will all be dealt with in the following paragraphs. 17. Before we proceed to decide the above questions, certain fundamental propositions which now seem to be well-settled, need to be noticed. Wherever there is a DTAA between India and another country, then the provisions of the DTAA will override those of the Income-tax Act. In Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, the position was summed up thus by the Supreme Court: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 90(2) makes it clear that "where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee" meaning thereby that the Act gets modified in regard to the assessee insofar as the agreement is concerned if it falls within the category stated therein." 19. The result is that the case in hand has to be approached first from the point of view of the Act and it is required to be seen if any tax liability arises. In case no tax liability arises under the Act, nothing further requires to be done. But if there is a tax liability arising under the Act, it is open to the non-resident (foreign enterprise) to claim that either there is no or less tax liability if the provisions of the DTAA are applied and if such a claim is made it has to be enquired into. If the claim is found to be correct, then it has to be given effect in preference to the provisions of the Act. Thus, in the present case we need to first examine whether....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iality. 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 in our opinion sufficient to justify the conclusion that there is business connection within the meaning of section 9(1) of the Act. We uphold the conclusion of the income-tax authorities to this effect. 2. Is there a PE of the assessee in India? 21. Under this head we propose to examine whether there is a PE as alleged by the income-tax authorities under any of the four categories: (a) fixed place PE; (b) dependent agents PE; (c) software as PE or (d) LO as PE. Before doing so, a clarification has to be made. A question may arise as to whether, having held that there is a "business connection" it is at all open or necessary to examine the question whether there is a PE. In other words, a doubt may arise as to whether there is any difference between the two concepts - the concept of "business connection" and the concept of "PE" - and whether once a foreign enterprise is found to have a business connection in India, can it not also automatically be held to have a PE in India. It appears to us ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 value." 22. In Advance Ruling A.No. P-8 of 1995, In re [1997] 223 ITR 416 (AAR), the authority taking through Hon'ble Justice S. Ranganathan expressed that "There may be a difference in the scope of these concepts in some cases but, for the present case, we can assume that it is the same as it is the subsidiary company which is being looked on as the business connection or the permanent establishment for ABC in India". (a) Fixed place PE: 23. Article 5.1 of the DTAA says that PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on article 5.2 includes several places as a PE of the foreign enterprise. Neither the Assessing Officer nor the CIT(A) has pin-pointed which particular description of the PE in article 5.2 would apply to the assessee. The general definition of the PE in the first part of the article postulates (a) the existence in India of a fixed place of business in India and (b) that the busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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, merchandising standards etc. It has also helped the agents to overcome the Y2K problem. It has organized local production of posters for display at the agents' locations. Further, the LO has facilitated the visit of the Director Operations of the assessee to the agents so that he can satisfy himself about the quality standards. Finally, the LO has provided the management software (VOYAGER) to the agents (free of cost) and trained their staff on the usage and versatility thereof. These activities are in line with the activities mentioned in the annexure to the application to the RBI seeking permission to open the LO. We have already extracted those activities in the earlier part of our order. The annexure also states what activities will not be undertaken by the LO. There are no activities which the LO has undertaken, which do not conform to the list of activities given in the annexure. There is no allegation of any violation of the conditions of approval. 25.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts 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 agents cannot in our opinion lead to the decision that the premises-cum-software will be the PE of the assessee in India. Under article 5.2(j) and installation may amount to a PE provided it is used for the exploration of natural resources. Therefore, even if the software is to be considered as an installation, since it is not used for exploration or exploitation of natural resources it cannot per se be treated as a PE. (d) Credit cards and PE: 27. Though the Assessing Officer has stated that the assessee permits the use of credit cards for drawing cash from its outlets in India, this has been specifically denied before the CIT(A) in writing (letter read out before us). The CIT(A) has not doubted or rejected the denial. Even before us, the learned CIT(DR) did not touch the point. There is no material to which our attention has been drawn, either in the assessment order or in the course of the arguments before us, from which it can be gathered that....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 maintain records and measure up to the standards set by the assessee. They have received training from the assessee in the use of the software and in the communication systems. All these are activities which are carried on systematically and continuously with a set purpose and hence amount to business. 32. But then Mr. Rajnish Kumar contended that this was not an activity in the "ordinary course of the business" of the agents, as their ordinary business is in local money transfer in the case of the Department of Posts and banks and not in trans-border money transfer and that in the case of non-banking financial companies and tour operators appointed as agents money transfer business, whether locally or internationally, is not in their ordinary course of business. In the case of the Department of Posts, it is well-known that they accept money orders for transfer of funds within India. Engaging themselves in the same type of business ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....everal 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 are wholly or almost wholly devoted to the Western Union Financial Services Inc., of the USA. The income-tax authorities have not brought out any data, as they ought to have, to show that the activities undertaken by the Department of Posts on behalf of the assessee herein constitute such a large part of their activities that it can be said that the Department of Posts are dependent on the assessee for their revenues. The position is the same in the case of commercial banks, non-banking financial companies and tour operators appointed as the agents of the assessee. There is no evidence to show that the extent of their activities for the assessee, compared to all their activities, is so large that it can be said that they are dependent on the assessee for their earnings or revenues. The agents in the present case have not been shown to be economically dependent on the assessee. The income-tax authorities have stated tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 activities for the foreign enterprise must constitute a large chunk of all his activities taken together so that it can be said that he is economically dependent largely on the activity. Nothing has been brought on record to suggest this. Even if you take the risk factor, the "to send" specimen form which was filed before us in the course of the hearing while explaining the transaction makes it clear on the reverse that the assessee will be liable to refund the principal amount of a money transfer (at the applicable rate of exchange at the time the refund is made) upon the written request of the sender if payment to the recipient is not made within 30 days excluding Sundays and holidays and that the same will be the case of the fees charged. It goes on to say that the assessee or his agent will in no case be liable for damages for the delay, non-payment or underpayment of the money transfer. The agent is not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 independence referred to in article 5.5, the issue regarding PE is not closed but has to be resolved in terms of article 5.4. It was further held that the presence of the words "unless his activities are limited to the purchase of goods or merchandise for the enterprise" in clauses (i) and (ii) may suggest a narrower interpretation restricting the article to agents involved in such activity and as saying that mere purchase or sporadic sale of goods through an agent will not be sufficient to merit such an agent being considered a PE, but that this is not the correct view as it would ignore the generality of the preceding words of the paragraph merely because exceptions are carved out in the latter part of the aforesaid clauses only in respect of a particular category of agents (viz., those buying or selling goods). It was held that paragraph 4 of the article "is applicable in all cases whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ority 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 the power to appoint sub-agents to do their work. From these facts, taken singly or together, it cannot be inferred that the agents either have the authority to conclude the contracts or have habitually exercise the authority without any protest from the assessee. In paragraph 33 of the commentary referred to in the preceding paragraph, under the heading "Authority to conclude contracts", it has been stated: "the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. It would be irrelevant, for instance, if the person had authority to engage employees for the enterprise to assist that person's activity ...". This paragraph has been quoted approvingly by the AAR in TVM Ltd.'s case. Thus the fact that the agents (in the present case) have the authority to appoint sub-agents does not mean that they (age....