TMI Blog2012 (3) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... er in other cases so as to indicate that the agents were discriminated against. The higher rate of compensation in the case of the Department of Posts is probably because its reach is much wider compared to the commercial banks, NBFCs or tour operators. The terms of appointment of sub-agents are uniform in all cases. Thus there seems to be no basis for the charge that the compensation paid is not adequate for the services rendered by the agents. - there is no merit in the claim that the transactions between the assessee and the agents are not under arm's length. Existence of PE in India - held that:- the fact that the agents in India payout the money to the beneficiaries or claimants, which they are bound to under the agreement with the assessee for which they are remunerated does not appear to us to be a case of exercise of any authority. Thus, the agents do not habitually exercise the authority to conclude the contracts on behalf of the assessee. - there is no agency PE of the assessee in India. In the absence of any PE in India, it follows that the profits, if any, attributable to the Indian operations cannot be assessed as business profits under article 7 of the treaty. - IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue and ground no.1 in the appeal of the assessee for these three assessment years, facts, in brief, as per relevant orders for the AY 2002-03 are that in response to a notice dated 31.3.2007 u/s 148 of the Income-tax Act,1961[hereinafter referred to as the Act ] the assessee, a company incorporated in USA and engaged in money transfer business world-wide, submitted return declaring nil income on 7.5.2007. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the business of the assessee included transfer of money across the world. In the business of the assessee a person in USA, if he wanted to remit money to a relative in India, approached the agents of the assessee in USA and paid the money in dollars together with the charges. He would be given a receipt by the assessee along with a computer-generated unique 10 digit number referred to as MTCN (Money Transfer Control Number). The remitter would send the said unique number to his relative in India ,who would approach the assessee's representative/agent in India. There upon MTCN would be fed into the computer with the help of a software and the mainframe computer of the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son office were preparatory and auxiliary in nature, the AO was of the opinion that these liaison offices were actively engaged in marketing for the assessee, negotiating with agents, send the agents to USA for training and installing as also use of software and solving day to day problems in the normal course of business. Moreover, the employees of the assessee in liaison office would coordinate with the agents .Thus, the liaison office actively participated 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. In nutshell, the AO was of the opinion that liaison office was a virtual projection of head office in India. While referring to his findings in the assessment order for the AY 2004-05 and the fact that the assessee subsequently closed liaison office and established a subsidiary namely Western Union Services India Pvt. Ltd, the AO concluded that activities of the liaisons office were not of preparatory or auxiliary in nature. The AO further observed ,while referring to Articles 5 7 of the DTAA between India and USA as also OECD commentary that the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -fledged office in India which was conducting aggressive marketing activities together with negotiations with the agents, providing software to them and imparting training about the product. There was continuity of the transaction which was completed only when the money was paid to the claimant in India through the agents. While referring to the findings of the ITAT in the AY 2001-02, the AO concluded that there was "business connection" in India and the assessee was liable under section 9(1) of the Act to pay income-tax on the profits arising from its activities in India. 2.4 The AO also pointed out that the ITAT in assessee s own case for assessment year 2001-02 did not correctly appreciate the activities of the liaison offices and the judgment in M/s. Mitsui and Co. 39 I.T.D. 59 was distinguishable on facts. While referring to OECD commentary, the decision of AAR in UAE Exchange Centre LLC, the AO observed that the agents in India were even provided with a software to access the connectivity and the application software installed in stand-alone machines, having inbuilt dial up modems at various branches and sub agent locations. These systems had not been on the agents network ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us against the aforesaid findings of the ld. CIT (Appeals). The ld. DR, in his written submissions, while narrating the facts of the case, merely relied upon a decision of a co-ordinate Bench of ITAT Delhi in Amadeus Global Travel Distribution SA, reported in 113 TTJ 767 (Del) and submitted as under: . It is to be noted that decision of Hon 'ble ITAT in assessee' own case is dated March 10, 2006, whereas decision in case of Amadeus Global Travel Distribution SA is dated November 30, 2007 and therefore a later one. The vital facts in that case are that the assessee, a tax resident of Spain has developed a fully automatic computer reservation and distribution system, with the ability to perform comprehensive information. communications. reservations, ticketing, distribution and related functions on a worldwide basis for the travel industry, particularly participating airlines, hotels etc. (hereinafter referred to as 'CRS ). Various Airlines all over the world have entered into 'Participating Carriers Agreements' (the PCA') with the assessee for display of their information/products. etc. through the CRS. The assessee receives payment from the Airlines in the form of 'booking fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the premises of the subscriber, leave apart the shifting of such computers from one person to another. Thus the appellant exercises complete control over the computes installed at the premises of the subscribers. In view of our discussion in the immediately preceding paragraph, this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computes and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part if its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of paragraph 1 of Article 5 of Indo-Spain Treaty." Hon'ble IT AT has further held that:- "23.2 The next question to be considered is if there is a permanent establishment, whether the exception provided in paragraph 3 of Article 5 applies so as to hold that there is no permanent establishment in India. The case for the appellant is that the existence of such computers are merely for the purpose of advertising and the activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issimilarities in the two decisions as under: :- (i) Whereas Amadeus case deals with initiation of contract in India, estern Union's case deals with execution of contract outside India. This is because in Amadeus's case the source of income was in India due to the order booking activity carried out by the travel agents through CRS systems in India. In this case it has been held by Hon'ble ITAT at page 851, para 23.2 of TTJ citation that "The computers installed at the premises of the subscribers are connected to the global CRS owned and operated by the appellant. Using part of the CRS system, the subscribers are capable of reserving and booking a ticket". Whereas in the case of Western Union in the absence of such activity in India (as order for money transfer takes place entirely outside India), there is no source of income in India. In Western Union's case it has been held by the Hon'ble ITAT (at page 73, para 40) that "the contract is between the remitter abroad and the assessee. It is entered into outside India. The agents are not party thereto. The agents merely carry out the concluding step in the arrangement embodied in the contract. In other words, the assessee undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case we find that AIPL is totally dependent on the appellant. The entire business of AIPL is to provide data and software services together with relative of 'Amadeus products' to the subscribers in India." (page 852, para 23.3 of TT J citation) (b) "Thus AIPL can be said to have and having exercised an authority to conclude contracts on behalf of the appellant. What the appellant could have done directly by entering into an agreement with the subscribers, was done through AIPL. The subscribers agreements were entered into by AIPL under an authority available to it in view of the Whereas in Western Union s Case it has been held by the Hon ble ITAT that : (a) The activities of the agents were not wholly or almost wholly devoted on behalf of the assessee (pgs. 67 to 69, paras 33 and 34 of ITD citation), and that the agents are not dependent agents of the assessee and that (b) The agents have no authority to conclude contracts in India on behalf of Western Union (pages 72 and 73, paras 39 and 40 of ITD citation). distribution agreement. What could have been done directly is now done indirectly through the offices of AIPL under an authority granted to it. (pages 852 and 85 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even attempt to explain the similarities between facts and circumstances in these two decisions. In the instant case, the ld. CIT(A) concluded that facts and circumstances in the years under consideration are similar to facts and circumstances in the AY 2001-02,wherein the ITAT on the existence of PE business connection, concluded as under:- 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 the income-tax authorities are right in applying section 9 of the Act to hold that there is a business connection. Only if we find that there is a business connection, need w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 that there is a distinction between the two. "Business connection" seems to us to be a much wider concept than a PE. The former has not been statutorily defined whereas the latter has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suasive 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 business of the foreign enterprise shall be carried on (wholly or partly) through the said place. The assessee admittedly does not have an outlet of its own in India. That way, there is no fixed place of business in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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. On the above facts, we are of the view that the LO cannot be considered to be the fixed place PE of the assessee as it carries out activities which are of a preparatory or auxiliary character. It has not carried on any tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) an 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 the assessee permitted withdrawal of monies from its outlets by the use of credit cards. In fact, the existence of the assessee's own "outlets" in India has been stoutly denied. The observations of the Assessing Officer not bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 with international ramifications is just an extension of their business. It cannot be said that it is not in the ordinary course of their business. The same is the case with commercial banks. Though strictly speaking it may not be part of thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the agents have not acted in that capacity for any other entity engaged in the money transfer business and therefore their activities are wholly or almost wholly devoted to the assessee. We do not see how this conclusion follows. The agents, as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 therefore liable to any risk on this account. 35. We now proceed to consider the question whether the transactions between the agents and the assessee are under arm's length. The agreements filed before us show that the "base compensation" is 30 per cent in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (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 (agents) have the authority to conclude contracts. The terms of appointment of sub-agents given at page 22 of the paper book as attachment to the contract of agency with Karnataka Bank Ltd. lists the duties and responsibilities of the sub-agents regarding money transfer service requiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to perform. Per contra, "authority" in law belongs to the province of power. According to Salmond, "the ability conferred upon a person by the law to alter, by his own will directed to that end, the rights, duties, liabilities or other legal relations, either of himself or of other persons must be present ab extra to make a person an 'authority"'. Judged by these tests, the fact that the agents in India payout the money to the beneficiaries or claimants, which they are bound to under the agreement with the assessee for which they are remunerated does not appear to us to be a case of exercise of any authority. Thus, the agents do not habitually exercise the authority to conclude the contracts on behalf of the assessee. 41. For the above reasons, we are of the view that there is no agency PE of the assessee in India. In the absence of any PE in India, it follows that the profits, if any, attributable to the Indian operations cannot be assessed as business profits under article 7 of the treaty. 42. Since we have held that there is no PE in India, the question of attributing any income to the same for the purpose of article 7 of the DTAA does not arise. We therefore consider it unn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contract. The contract was already concluded outside India.. By making payment to the beneficiary, the agent in India was only performing his duty under the agreement of agency, for which he was remunerated; he was not exercising any "authority", certainly not an authority to conclude contracts on behalf of the assessee. In nutshell, the ITAT held that there was business connection and hence the assessee was liable to tax under s. 9(1) of the IT Act; but since there was no PE in India under Art. 5 of the DTAA between India and the USA, no profits could be attributed to the Indian operations of the assessee and taxed in India. 6.2 The ld. DR contended in his written submissions that the aforesaid decision of the ITAT in the assessee s own case for the AY 2001-02 was not applicable in the years under consideration on the issue of PE in view of decision of the ITAT in Amadeus Global Travel Distribution SA(supra). We are not inclined to accept this contention of the ld. DR. There is nothing to suggest that the facts and circumstances in the cited decision are similar to the facts and circumstances in the case before us. In the Amadeus case, the issue was as to whether Computer hard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connectivity which were provided by the assessee either directly or through its agent AIPL would amount to operating part of its CRS system through such subscribers in India and accordingly, assessee could be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty. Besides , the ITAT found that AIPL was dependent agent of the assessee and had authority to conclude contract on behalf of the assessee and in fact, entered into contract with the travel agents in India on behalf of the assessee. Accordingly, the ITAT concluded that the assessee had a PE in India. But such are not the facts and circumstances in the instant case the assessee did not exercise any control over the computer systems which were independently owned by agents and were not provided by the assessee. The activities of the agents were not wholly or almost wholly devoted on behalf of the assessee and that the agents were not dependent agents of the assessee nor had they any authority to conclude contracts in India on behalf of Western Union .In the instant case before us, the contract is between the remitter abroad and the assessee and is entered into outside India. The agents are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context. These observations must be read in the context in which they appear to have been stated. Judgments of courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes . 8. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper. 9. The following words of Lord Denning in the matter of applying precedents have become locus classicus: "Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide therefore, on which side of the line a case falls ..... X X X X Extracts X X X X X X X X Extracts X X X X
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