AI Drafter 
TaxTMI 
TaxTMI 
1997 (3) TMI 607
X X X X Extracts X X X X
X X X X Extracts X X X X
....uritius Ltd. 15% 5. Pearson Mauritius Ltd. 15% *What appear above are not the actual individual shareholders but of five groups to which the shareholders are said to belong. It is stated that Hindustan Times Limited had experience in making presentations of programmes produced by it on the Indian National Television Network-the Doordarshan. Westpoint Media Holdings Limited is stated to be primarily a financing company, being a subsidiary of Schroedar Capital Investments Ltd. TVB (Mauritius) Ltd. is stated to be a subsidiary of U. K. T. V. B. Broadcast Ltd., running two T. V. Channels in Hong Kong and one of the largest purchasers of software. CTV Mauritius Limited is said to belong to the Carlton Group having a large number of joint ventures in Singapore. Pearson Mauritius Limited is stated to be a subsidiary of Pearson Plc. of U. K. which owns TV channels in the United Kingdom and Latin American countries. A company known as T. V. India Limited (TVI) had been incorporated a little earlier in India on March 6, 1995. It has the same shareholders or group of shareholders as TVM Limited, Mauritius, with identical proportions of shareholding. The director....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o advertise their goods and commodities on this channel. TVM was desirous of "selling air-time" on the channel to parties in India. It, therefore, proposed to enter into a solicitation agreement for such sale with TVI, whereunder the latter would solicit orders from purchasers of air-time and pass on those orders to TVM for acceptance. TVI would also be responsible for remitting the advertisement revenue so collected to TVM and be entitled to a commission for the services rendered by it in this regard. The relevant clauses of the proposed agreement are as follows : "Solicitation agreement for advertisement time sales : 1.1. TVI shall be responsible for : (a) Canvassing and soliciting orders from purchasers (other than purchasers from whom TVM has previously notified TVI in writing it will not accept orders) for the purchase of advertisement time at the rates and on the terms and conditions which TVM shall have previously notified TVI in writing (provided that TVI shall be entitled where, in the reasonable opinion of TVI, appropriate, to offer purchasers discount of not more than 10 per cent. from the rate so notified as contained within the rate card enclosed under Schedul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e other, and nothing herein shall be construed to establish a relationship of copartner or joint-venture between TVI and TVM." It has been mentioned that TVI claims to have been successful in preparing software programmes and is negotiating with various broadcast channels. In particular, it has prepared programmes for a channel labelled Home T. V. and that under separate agreements with TVM, the latter has been licensed to telecast these programmes and also use this label. It does not, however, appear that TVI has so far produced any programmes apart from those which are exclusively utilised by TVM for telecast on the Home TV channel. But these and other agreements between TVI and TVM are distinct and separate from the solicitation agreement earlier referred to. It is the only one in issue before us. The short questions raised by the TVM in its application before the authority are as follows : "1. Whether, the business profits earned by the applicant from sale of air-time on the television channel broadcast in, inter alia, India, would be liable to tax in India ? 2. Whether, the agent appointed by the applicant to solicit orders from the purchasers of air-time and to pass ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g goods or merchandise or for collecting information for the enterprise ; (e) the maintenance of a fixed place of business solely- (i) for the purpose of advertising, (ii) for the supply of information, (iii) for scientific research, or (iv) for similar activities, which have a preparatory or auxiliary character for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2 of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph 5 apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if- (i) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise ; or (ii) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise. 5. An enterprise of a Contracting State shall not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....its channels. This is exactly the situation dealt with by para. 5 of article 5. It negates the existence of a permanent establishment where the enterprise of one Contracting State carries on business in the other Contracting State through a broker, general commission agent or any other agent of an independent status. Thus, a broker or commission agent of such an enterprise cannot be termed as a permanent establishment where such person is carrying on his own business and is dealing with the enterprise only as one of his many clients and the dealings between the two are on a commercial basis. This is further clarified by the language of the paragraph. Changing the syntax somewhat, it stipulates two conditions as necessary before an agent can be treated as having an independent status : (1) Such agent must be acting in the ordinary course of his business; (2) The activities of such agent should not be devoted exclusively or almost exclusively on behalf of that enterprise. Are these two conditions satisfied in the present case ? Shri Vaish, appearing for the applicant, asks us to answer these questions in the affirmative. He says that, in considering the applicant's positi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he authority to answer this question in the affirmative. The object clauses in the memorandum of association of TVI to which the attention of the authority has been drawn are not specific in this regard though, no doubt, quite broad in their canvass as is usual with objects clauses in the memoranda of companies. The relevant clauses are, among the main objects : "III. A.-1. To engage in the business of import, export, syndication, bartering, research, development, production, editing, marketing, distributing, buying, selling and all other activities related to programmes, footage and software for motion picture, films, television (including cable, terrestrial and satellite), video and audio industry including but not limited to sub-titling, dubbing, mixing, commissioning, licensing, franchising, acquiring any or all intellectual property rights of the same. 2. To engage in the business of import, export, syndication, bartering, research, development, production, exchange, alteration, marketing, distribution and sale of computer software for motion picture, films, television (including cable, terrestrial and satellite), video and audio industry. 3. To manufacture, assemble,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... carried on, the procurement of advertisements is also regarded as an integral part of the business of TVI, the answer to the second part of the question posed, viz., whether its activities in this regard are confined to one principal viz., TVM, has to be answered in the affirmative. Admittedly, TVI is at present canvassing for advertisements only on behalf of TVM. Whatever the position may be at a future date, in the event of TVI expanding the list of the broadcasters for its software and extending the scope of its advertisement canvassing there is no real doubt that the advertisement activities of TVI are to be confined, as on date, only to TVM under the proposed solicitation agreement. Shri Vaish mentioned that though the solicitation agreement between TVI and TVM is pending approval with the Government of India, another agreement entered into with a firm known as CM Airtime Promotion Ltd., on similar lines, has been accorded approval by the Government though its application was later in point of time. But this has no relevance to the question at issue. That TVM has also appointed another advertisement agent, in addition to TVI, for its wares do not change the fact that, so far ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the purchase of goods or merchandise for the enterprise" in clause (i) and the terms of clause (ii) may suggest a narrower interpretation for this paragraph restricting its application to agents involved in the purchase and sale of goods and no others 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 permanent establishment. But the Authority is of the view that it will not be a proper canon of construction to ignore the generality of the preceding words of the paragraph merely because exceptions are carved out in the latter part of clause (i) or clause (ii) only in respect of a certain specific category of agents, viz., those buying or selling goods. 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly after the broadcast takes place. It is submitted, therefore, that the agreement gives expression to a practical necessity and does not merely voice an empty or non-genuine declaration. There is force in these contentions which have to be accepted but with a note of reservation. Para. 4 uses two expressions : "has" and "habitually exercises" an authority to conclude contracts on behalf of the enterprise in question. While the expression "has" may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression "habitually exercises" has certainly reference to a systematic course of conduct on the part of the agent. If, despite the specific provision of the soliciting agreement, it is found, as a matter of fact, that TVI is habitually concluding contracts on behalf of TVM without any protest or dissent, perhaps it could be presumed either that the relevant provisions of the agency contract are a dead letter ignored by the parties or that the principal has agreed implicitly to TVI exercising such powers notwithstanding the terms of the contract. If such a situation is found to exist, then perhaps it could be sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cy test] Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents, i.e., persons, whether employees or not, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies. It would not have been in the interest of international economic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. Therefore, paragraph 5 proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them. In such a case the person has sufficient authority to bind the enterprise's participation in the business activity in the State concerned. The use of the term "permanent establishment" in this context presupposes, of course, that that person makes use of this authority repeatedly and not merely in isolated cases. Also, the phrase "authority....
X X X X Extracts X X X X
X X X X Extracts X X X X
....behaviour of the contracting parties. An approach relying solely on aspects of private law (the law of contracts) would make it easily possible to prevent an agent being deemed a permanent establishment (and, therefore, to prevent the enterprise from being taxed by the State in question) even where he is engaged most intensively in the enterprise's business ; he would be allowed only to negotiate contracts up to the point when they were finalised and ready to be signed, but the final signature, to satisfy the proprieties, would be reserved to someone from the enterprise's headquarters in the other contracting State. Such a formal split-up of business responsibilities on the one hand and legal authority on the other, is considered by Strobl/Kellmann to constitute a case of 'tax circumvention' (see supra Introduction at m. No. 114) where substance should prevail over form ; a permanent establishment should, therefore, be deemed to exist irrespective of what the formal arrangements were (Strobl, J./Kellmann, C. 15 AWD 405, 408 (1969). It is submitted that the solution is even simpler, since the agent in question had in fact an authority to conclude contracts, even if not under private....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the purpose of proper and efficient management work of the assessment of foreign telecasting companies. 3. It is seen that out of the gross amount of bills raised by a foreign telecasting company, the advertising agent retains commission at 15 per cent. or so. Similarly, the Indian agent of the foreign telecasting company retains his service charges at 15 per cent. or so of the gross amount. The balance amount of approximately 70 per cent. is remitted abroad to the foreign company. So far as the income of India, advertising agent and the agent of the non-resident telecasting company are concerned, the same is liable to tax as per the accounts maintained by them. As regards the foreign telecasting companies which are not having any branch office or permanent establishment in India, tax has to be deducted and paid at source in accordance with the provisions of section 195 of the Income-tax Act, 1961, by the persons responsible for paying or remitting the amount to them. 4. In the absence of country-wise accounts and keeping in view the substantial capital cost, installation charges and running expenses, etc., in the initial years of operation, it would be fair and reasonable ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the creation of an organisation which can obtain such facilities elsewhere. As already pointed out all the other shareholder groups were running several channels and transmitting programmes all over the world. It was with a view to obtain the benefit of their technical expertise, financial capabilities and well-established reputation in this field of entertainment and education that Hindustan Times entered into collaboration with them to form TVI (to prepare software programmes for TV, particularly in Hindi) and TVM (to avail of the transponder on PanAmSat-4 available to it through the good offices of the Carlton group and to broadcast the programmes it acquires from various sources including the Pearson, the Carltons and TVI). The solicitation agreement is but one of a number of agreements entered into between TVI and TVM to realise the above objectives. TVM had been incorporated with a view to operate a TV channel. Since it was considered expedient that such a company should be incorporated in a country neutral to all the parties concerned and from where broadcasting was permitted, it is said, Mauritius emerged as the best choice as it had the facility and also a number of other....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ritius but this has not been done. Apart from an averment in a letter by counsel "confirming" that TVM "is liable to tax in Mauritius in respect of its global income", no relevant statutes or regulations of Mauritius in this regard have been placed on record. The Authority has been able to gather some information, the strict and full accuracy of which, however, is subject to verification. It appears that Mauritius is one of those countries which permit the formation of off-shore companies. There are two types of companies in Mauritius : "international business companies" and "ordinary status companies". The former of these pays no taxes at all in Mauritius and is free from all exchange control. The other can be incorporated in Mauritius or register a branch there. It is accorded a resident status under the law of Mauritius if it has two local directors, provides for board meetings in Mauritius and maintains a local off-shore account. As to the income-tax rates, it seems they are at present negotiable and are on a sliding scale varying between 0 per cent. and 35 per cent, though it is said that from July, 1998, it is proposed to levy a minimum tax of 15 per cent. This somewhat unusu....