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2006 (3) TMI 220 - AT - Income TaxIncome attributable - liability to pay tax u/s 9(1) - business connection - whether "Permanent Establishment" ("PE") in India as understood by the DTAA between India and USA - Profits. Business connection - HELD THAT:- The business of the assessee is to transfer monies across countries. There is thus a receiving aspect and a paying aspect to the transaction. They cannot be segregated; to do so would be artificial. There is a seamless integration between the two. The transaction, as has been rightly noticed by the income-tax authorities, is not complete unless the monies are paid in India to the claimant. Further, the agreements with the agents are initially for a term of 5 years, renewable for periods of one year at a time, but this could go on endlessly. The agents are bound to render services for the assessee as stipulated in the agreements. The agreement provides for security and confidentiality. 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. PE of the assessee in India? - 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. (a) Fixed place PE - The assessee before us has appointed different agents in India. These agents are the Department of Posts of the Government of India, commercial banks, non-banking financial companies and tour operators. These agents have their own or hired premises from which they operate. All that they have to show that they are agents of the assessee is a display board which shows that they are the agents of the assessee. This cannot by any stretch of imagination amount to projection of the assessee in India. It cannot be postulated that the post offices of the Department of Posts which functions under the concerned Ministry of the Government of India would permit themselves to be looked upon as projecting the presence of Western Union Financial Services Inc., in India! The same would be the case of commercial banks such as the Karnataka Bank Ltd., Bank of Punjab Ltd., etc. and others which have been appointed agents. They have their own presence and business with which they are perhaps more concerned and may be surprised to find themselves characterised as projecting the assessee in Indian soil. There is no evidence to show that the assessee can, as a matter of right, enter and make use of the premises of these agents for its business. We therefore hold that there is no fixed place PE of the assessee in India within the meaning of article 5.1 of the DTAA. (b) Is LO the fixed place of business (and hence a PE)? - 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 trading activity for the assessee in India. It has only a small number of executives and a support staff. The LO has also filed status reports to the RBI listing out the activities which it actually carried on during the years. None of the activities can be described as anything other than of preparatory or auxiliary character. (c) Is the software "VOYAGER" the PE of the assessee? - The software is the property of the assessee and it has not parted with its 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 - The existence of the assessee's own "outlets" in India has been stoutly denied. The observations of the Assessing Officer not being supported by any evidence and the CIT(A) not having specifically approved them, we hold that there can be no PE on account of the use of the credit cards. 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 requirements, advertising and promotion, exclusivity, locations and hours of operations, payment for the service, delivery standards, maintenance of records, security and confidentiality, accounting, use of software, indemnity, conditions of termination etc. Nowhere in the sub-agency agreement has any authority to conclude contracts has been given to them. In fact, when the agents themselves have no such authority under their agreement, they cannot delegate the same to their sub-agents (delegates non potest delegare). There is also no material to hold that the agents have "habitually" exercised the authority to conclude contracts. As already noted, the authority must be to conclude contracts in the conduct of the business proper of the foreign enterprise. The fact that the agents conclude in India the commitment of the assessee made abroad cannot be considered as an authority to conclude contracts. 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. 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. Thus, 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. 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 unnecessary to examine the question whether the attribution of income is fair and reasonable. In the result, we hold that (a) there is business connection and hence the assessee is liable to tax u/s 9(1) of the Income- tax Act; (b) but since there is no PE in India under article 5 of the DTAA between India and the USA, no profits can be attributed to the Indian operations of the assessee and taxed in India. The appeal is accordingly allowed but with no order as to costs.
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