TaxTMI 
TaxTMI 
2018 (10) TMI 489
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....tour operators. 2.1 During the course of assessment proceedings for the year under consideration, the Assessing Officer (AO) found that the assessee has a business connection in India u/s 9 of the Income Tax Act, 1961 (hereinafter called "the Act") and that the assessee also had a Permanent Establishment (PE) in India under Article 5 of the Indo-US Taxation Avoidance Agreement. The AO observed that, although, in the past the assessee had three liaison offices in India, however such offices have been closed w.e.f. 31July 2005. The AO, however, held that assessee has an agency PE and a Software PE in India by observing as under: "The application of aforesaid commentary in the assessee case clinches the issue of PE as the agents who are appointed in India, have been provided with a software to access the connectivity and the application software installed in standalone machines having in built dial up modems at various branches & sub agent locations. These systems are not on the agents/bank's network and are driven by a user ID and password and are validated by a terminal ID which automatically connects to the international host server of Western Union for marking of trans....
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.... a sub-agent if it is found that the sub-agent is acting in manner prejudicial to the interests of the assessee. There are the usual clauses providing for security and confidentiality and reserving the intellectual property rights of both the parties in the trade name, trademarks, copyrights etc. belonging to them. There is a clause which enjoins the agent to maintain records of all the transactions of money transfer routed through him. D.3 Now we examine that whether the agents appointed are of independent status. The OECD commentary elaborates that: ..... ...... Now take an example of one of the agent M/s Wall Street Finance Ltd. as per the annual report of the Wall Street Finances Ltd. For the previous year relevant to assessment year 2004-05, out of total income of 2296.86 lakhs, the commission received from the assessee company amount of '950.30 lakhs, it showed that 42% of revenue of the agent of the assessee accounted from the commission received from the assessee company. This showed the economic dependence of one of the agent of the assessee, the same situation will be applicable for other NBFC and tour operators agents appointed in India. Theref....
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....t the Weizmann Ltd. as working wholly and exclusively for the assessee. Similar is the case with other agents as well as therefore Weizmann Ltd. and other agents are dependent agents of the assessee. D.4.2 The agents are working on behalf of the assessee and are rendering services on behalf of the assessee. They are interacting with the recipients of the money in India as in the name of Western Union and entering into subcontracts on behalf of the assessee. In fact the commitment given by Western Union to the sender is carried out in India by its agents. All the activities of the agents in the course of the business are binding on the assessee. Therefore, the important test of dependent agency plea that the agent must have the authority or give this impression that it has the authority to bind the principle of which it is an agent is fully satisfied in the case of the assessee. When the recipient of the money approaches any agent, he in fact goes to Western Union to collect the money. ..... ..... The agents or representatives appointed in India by the assessee conclude the contract on behalf of the assessee by delivering money to the beneficiary in India.....
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....n'ble ITAT in case of assessee for AY 2001-02 on the issue of permanent establishment. The matter is now pending before the Hon'ble Delhi High Court. In view of the same, the order of Hon'ble ITAT, on which reliance has been placed by the assessee, has not been followed." 2.1 Being aggrieved, the assessee filed an appeal before the Ld CIT (A) and the Ld. CIT (A) followed the order of the Tribunal for the AY 2001-02 in assessee's own case and allowed the appeal of the assessee. 2.2 Now the Revenue is in appeal before us and has raised the following grounds of appeal: "1. Whether on the facts and in the circumstances of the case, the ld. CIT(A) has erred in holding that the income earned by the assessee from the business of money transfer services in respect of remittances made to individuals in India is not liable to tax in India. 2. Whether on the facts and in the circumstances of the case, the ld. CIT (A) has erred in holding that the assessee does not have a Permanent Establishment ('PE') in India and, therefore, the profits attributable to operations in India are not liable to be taxed in India as business profits in terms of Article 7 of the India-USA DT....
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..... It was also held that the agents engaged by the assessee in this matter are independent agents under Article 5(5) of the Treaty and they do not habitually exercise the authority to conclude the contracts on behalf of the assessee, and, on that premise it was held that there is no agency PE of the assessee in India. The sum and substance of the order of the Co-ordinate Bench of the Tribunal is that though the assessee had business connection, it did not have any fixed place PE or agency place PE in India, and, in the absence of any PE in India, the profits, if any, attributable to India's operation could not be assessed as business profits under Article 7 of the Treaty. We extract the relevant portion of Tribunal order for AY 2001-02 as under: "(c) Is the software "VOYAGER" the PE of the assessee? 26. The department has made out a case that the software, which affords access to the agents to the assessee's mainframe, computers in USA for the purpose of finding out the matching of the MTCN numbers, has been installed in the premises of the agents and hence taken together with the premises constitutes the PE. The premises of the agents are either owned or hired by them. The....
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....activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning income. Therefore any activity which is being systematically and continuously carried on with the object of earning profits is a business activity. That way, the activity engaged in by the agents of paying the monies to the beneficiaries or claimants in India, after satisfying them- selves about their identity and after accessing the MTCN number to verify the genuineness of the claim, amounts 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 subagents 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" ....
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....ent are wholly or almost wholly devoted to the assessee. So far as the Department of Posts and commercial banks are concerned, the objection of the Department cannot be countenanced at all. The Department of Posts, as noted earlier, functions under the aegis of the concerned Ministry of the Government of India. Its main activity is to serve the public in India in the matter of sending/receiving letters, parcels, packets etc. within or to/from outside India, money orders within India, maintaining small savings account in several 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....
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....wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative. All the facts and circumstances must be taken into account to determine whether the agent's activities constitute an autonomous business conducted by him in which he bears risk and receives reward through the use of his entrepreneurial skills and knowledge. Where an agent acts for a number of principals in the ordinary course of his business and none of these is predominant in 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 ma....
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....r arm's length. Therefore the agents are independent agents under article 5.5 of the treaty. 37. (B) Are the agents "dependent agents"? 38. It is now well-settled that merely because the agents are not "independent agents" it does not automatically follow that they are "dependent agents" under the DTAA and that the question has to further examined under article 5.4 of the DTAA. In other words, even if the agent is shown to be not an independent agent, it has to be further shown that he is a dependent agent within article 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....
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.... the agency contract are a dead letter ignored by the parties or that the principal has agreed implicity to TVI exercising such powers notwithstanding the terms of the "contract". The AAR has further observed that this view is reinforced by the Commentary on the OECD Model of Double Tax Conventions as well as the views of text book writers like Klaus Vogel and Baker. 39. In line with the above, we have to examine the facts of the case to find out first whether the agents have the authority to conclude contracts (on behalf of the assessee). There is no express authority 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....
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....and the identity of the beneficiary in India. By executing the last leg of the contract which has already been concluded (outside India) he is not concluding the contract for the assessee, much less habitually. The appointment of sub-agents is merely to facilitate the work of the agent. That apart, what is considered to be a "duty" cannot be considered to be an "authority". By making payment to the beneficiary, the agent in India is only performing his duty under the agreement of agency, for which he is remunerated; he is not exercising any "authority", certainly not an authority to conclude contracts on behalf of the assessee. The words "duty" and "authority" are incompatible with each other. The dictionary meaning of the word "duty" is "assignment/burden/commitment that one is obliged to do by law or by calling of one's business". It connotes an obligation, which a person is bound to perform. Per contra, "authority" in law belongs to the province of power (Page 124 of K.J. Aiyar's Judicial Dictionary, 13th edition, Butterworths). According to Salmond (Jurisprudence, 10th ed., page 243), "the ability conferred upon a person by the law to alter, by his own will directed to that end....