TaxTMI 
TaxTMI 
2004 (10) TMI 587
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....e American company" ). All these and some other companies are members of an international group of companies which are engaged in the business of international transportation services and use an international group logo/trademark. On October 30, 2000, the applicant entered into an agreement with the American company in regard to international transportation services (hereinafter referred to as " the transportation agreement" ) for the movement of parcels/packages within and outside India. Under the agreement the applicant is to provide services to the American company for transportation of packages in India and the American company has to provide services to the applicant for transportation of packages throughout the world. For the services rendered by the American company to the applicant in respect of outbound consignments it would make payment ; so also the American company would pay to the applicant for the services rendered by it in respect of in bound consignments. The applicant and the American company work on principal to principal basis. The American company does not own or otherwise operate through any business premises in India. From January, 2001, the applicant has been....
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....he American company earning income in India. Therefore, they constitute activities of the American company in India. The Indian company is a dependent agent of the American company because the former habitually procures orders in India wholly or almost wholly for the latter which has business connection in India within the meaning of section 9(1)(i) of the Act. The applicant is a permanent establishment (PE) of the American company in India. The profits attributable to the American company from all its operations in India are, therefore, taxable under the Act. 5. In the rejoinder of the applicant it is denied that the CEO and the general managers of the applicant are deputed by the American company. It is also denied that the directors of the applicant are nominated by the American company. In regard to the international group logo it is stated that the applicant, being a member of the international group, is allowed to use the international group logo for carrying out its business activities in India like any other member of the group. It is pointed out that in respect of outbound consignments the applicant picks up the parcels/packages in India and raises invoices on its custome....
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....y and in so doing it has to follow the international group manual and will be subjected to audit by the American company ; Page No : 0507 (ii) the applicant is working directly under the control and supervision of the international group and the CEO and general managers are deputed in India by the American company to look after the overall working ; (iii) the applicant gets its commission/compensation from their American company for the services rendered by it in respect of import consignments as well as export consignments and is therefore agent of the American company and not an independent contractor dealing on prin cipal to principal basis, which has business connection in India through which it is earning income directly or indirectly from operations carried out in India and therefore is liable to pay tax in India. 8. Before adverting to the contentions of the parties, it will be appropriate to note that section 5 of the Act deals with the scope of total income which forms the subject matter of charge under section 4 of the Act. We pass over sub-section (1) of section 5 which speaks of total income of a resident. We are concerned with the total income of any previous year ....
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.... India, shall be only such part of the income as is reasonably attributable to the operations carried out in India. 11. It follows that to invoke the said deeming provisions, two requirements have to be satisfied ; (1) income must accrue or arise to the American company (whether directly or indirectly) through or from any " business connection" in India and (2) some business operations of the American company must be carried out in India. The first requirement, namely, the American company has " business connection" in India is not put in issue. 12. The second requirement that there must be some business operations of the American company in India, emanates from the said Explanation 1(a) which limits the taxable income to only such part of the income as is reasonably attributable to the operations carried out in India in the case of a business of which all the operations are not carried out in India. If the American company is not carrying out any business operations in India by itself or through its agents, no tax liability would arise in respect of such income. It is claimed that the American company is not carrying on any business activity in India by itself in regard to the d....
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....The international group has an international group logo/trade mark (the brand name) which is owned by (omitted). It has compiled manuals of the standard forms, operating procedures rates for invoices and allied matters relevant to international transportation business, which are required to be followed by all the members of the international group for the sake of uniformity in functioning and inter se operations. Both the American company as well as the applicant, being the member of the international group, are committed to adhere to the standard procedure, etc., laid down in the said manual. Undoubtedly it is open to the parties to incorporate any term in their agreement or to refer to a code or manual to describe their rights and obligations. In our opinion, the applicant following the manual of the international group, without any thing more, in carrying out its obligations under the said agreement would not advance the case of the Revenue. In so far as audit of the applicant' s accounts by the American company is concerned, we shall revert to it presently. 15. It is disputed that the CEO and the general managers are deputed by the American company. It is also denied by th....
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....the point as to whether the consignments are handed over by the American company directly to the applicant in India or tendered to international airlines or on board couriers for delivery in India. This, however, is not relevant because admittedly on such consignments reaching India, the applicant gets them cleared and delivers them to the consignees for consideration paid by the American company. It may be that the applicant directly deals with the consignee, collects the charges expended by it and bears the risk of not collecting those charges. But that is in regard to customs clearance, etc., and not for delivery of packages received by it from airlines/couriers for which the American company pays compensation. Now we take the question, whether in regard to the " outbound consignments" as well as " inbound consignments", the applicant is acting as an agent of the American company or as an independent contractor while attending to its own business operations. 17. There is a well defined distinction between a contractor and an agent. The word " agent" is defined in the Concise Oxford English Dictionary, inter alia, as under : " 1. a person that provides a particular service, typ....
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....r supervision of the principal." 22. From the above discussion it follows that though a contractor is independent of any control or interference and is only bound to produce the specified result as per the contract, the agent has to exercise his authority in accordance with the lawful instructions given to him by his principal but he is also not subject in his exercise to the direct control or supervision of the principal. 23. Keeping this distinction in mind, we shall consider the terms of " the transportation agreement" . The applicant who is referred to therein as an independent contractor has undertaken to perform services of transportation of small packages in the service area for the American company as set forth in (omitted) as amended from time to time. It has to calculate the dimensional weight of the packages in accordance with the procedure set forth in exhibit C. The American company is entitled to audit the shipment for the dimensional weight to ensure compliance with the aforementioned procedure by the contractor. The applicant has to submit to the American company its plan for transportation service setting forth at all times proper facilities, equipment and person....
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....rminative as to whether a person is a contractor or an agent acting for and on behalf of the other party, which has to be decided on a true interpretation of the agreement as a whole in the light of the circumstances of the case. It is evident that for the services rendered by the applicant, the American company would pay to the applicant and for the services rendered by the American company, the applicant has to pay what is termed as compensation in accordance with exhibit B. It is provided in exhibit B that the American company shall pay to the contractor a compensation for the services for each shipment and upon presentation to the American company proof of delivery. Paras. 2 and 3 of exhibit B, as could be seen, refer to contractor export shipment and contractor import shipment respectively. (omitted) Admittedly, in the case of inbound consignment only specified amounts, as noted in Table I, are paid to the applicant and the balance remains with the American company. The same position does not prevail in the case of outbound consignments ; here instead of the American company receiving compensation from the applicant, it pays to it compensation for its services which can only b....
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....e aforementioned reasons we are of the view, in their business operations they are inter-connected and under the transportation agreement the applicant has assumed the role of such an agent that it purports to act on its own behalf but in fact its activities enure to the benefit of the American company and, therefore, the business activities carried out by it in India cannot be said to be its own but are for and on behalf of the American company. In view of this conclusion, the requirement of Explanation 1(a) to section 9(1)(i) that there must be business operations of the American company in India, is satisfied and the tax liability will, however, be limited to the business operations carried out by the applicant under the said agreement in India. 30. In so far as the order of the Income-tax Appellate Tribunal, Mumbai Bench B, in the case of CIT (Inv.) v. Elbee Services Ltd. dated May 26, 1999, is concerned, the High Court took note of the finding of fact recorded by the Commissioner of Income-tax (Appeals) to the effect that no part of the operations which are attributable to the dispatch of consignments out of India are carried out by (omitted) in India which finding was not co....
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....ticle 7 : Business profits : 1. The profits of an enterprise of a Contracting State shall be tax able only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment ; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment." 35. A plain reading of this article shows that the business profits of the American company shall be taxable in the USA unless it carries on business in India through a " permanent establishment" (PE) situated therein. If the American company so carries on its business, its profits may be taxed in India but only so much of them as is attributable to the permanent establishment. 36. The other parts of this article are not relevant. 37. The expression " permanent establ....
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.... delivered goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of 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 sta tus, 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 conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whet....
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....made under arm' s length conditions, he shall not be considered as an agent of an independent status within the meaning of those paragraphs. Para. 6 is clarificatory and excludes the possibility of any one of the following companies being construed as permanent establishment of the other : a resident company of a Contracting State controlling or being controlled by a resident company of the other Contracting State or a company which carries on business in the other State (whether through a permanent establishment or otherwise). 39. The definition of " permanent establishment (PE)" in article 5 of the DTAA is based on the OECD Model. The clauses of the OECD Model are incorporated invariably in all the Double Taxation Agreements entered into between various countries. The concept of permanent establishment has assumed considerable significance in view of the development of global trading. A person who is a permanent establishment of a non-resident person is not only instrumental to fasten tax liability but is also eligible to tax benefits available to a resident person. In a recent judgment of the Court of Justice of the European Communities in Case C-307/97 between SaintGobain ....
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....licant is an independent legal entity being a company incorporated under the Companies Act will make no difference and will not be a relevant factor in holding that it is a permanent establishment. We may note here that we find in support of our view a judgment of the Supreme Court Cassasione (Italy) in the case of Ministry of Finance (Tax Office) v. Philip Morris GmbH-4 ITLR 903. Philip Morris was assessed to corporate tax and income tax in respect of the period 1992-95 on the ground that it had a permanent establishment in Italy through the activities of Intertaba which was an Italian company. Against the order of assessment Philip Morris appealed to the Provincial Tax Court of Milan. The appeal having been allowed, a further appeal to the Regional Tax Court of Lombardy failed confirming the judgment of the Provincial Tax Court. The Ministry of Finance carried the matter in appeal to the Supreme Court of the Cassazione. The Supreme Court did not decide as to whether Intertaba was a permanent establishment of Philip Morris, it laid down the following guidelines and remanded the case to the Tax Officer : (i) a joint stock company having its legal seat in Italy may take on the role....