9911796707
Advanced Search 
TMI Blog2007 (4) TMI 616X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that since the agent, i.e., SET India P. Ltd. has a good profitability record, it can be said that the assessee has remunerated the agent on an arm' s length basis, and based on the provisions of article 7(2), the OECD Commentary on the subject, and the other contentions made, no further profits should be taxed in India, in respect of advertisement revenues from its own channel ignoring the facts ; (i) that the assessee has dependent agency permanent establishment in India in the form of SET India P. Ltd. ; and (ii) that the assessee' s income is assessable as business income within the meaning of article 7 of the India-Singapore DTAA. 2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that advertisement revenue pertaining to AXN channel are not taxable in India on the ground that the assessee has paid an arm' s length price for services rendered by its agent, i.e., SET India P. Ltd., and based on the provisions of section 9(1)(i) of the Act, article 7(1) of the DTAA, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch goes beyond the controversy actually raised by the Assessing Officer, is contrary to the scheme of the Act. We are, however, not persuaded by the objections of learned counsel. These objections proceed on the fallacious assumption that firstly, we do not think that by reframing the ground before us, there is any enlargement of the subject-matter of appeal. The reframing of ground has been considered desirable not with a view to enlarge the scope of the appeal, but only with a view to provide clarity to the real controversy. Secondly, rule 11 of the Appellate Tribunal Rules 1963 specifically provides that "the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal . . ."as long as "the party who may be affected thereby has had a sufficient opportunity of being heard on that ground". This rule is in conformity of the powers of the Tribunal laid down under section 254(1) of the Act. This sub-section provides that the "Tribunal may, after giving both the parties an opportunity of being heard, pass such orders thereon as it thinks fit". We do not see how our reframing of grounds of appeal comes in conflict with the scheme of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for avoidance of double taxation, titled as India Singapore Double Taxation Avoidance Agreement [see [1994] 209 ITR (St.) 1]. Since the dispute before us essentially concerns the correct interpretation of this tax treaty, it is essential to set out some of the relevant provisions of the treaty, and to appreciate the connotations and scope of certain technical expressions used therein. We consider it appropriate to first of all take up the provisions of article 5 and article 7 of the tax treaty. These articles are set out below for ready reference (page 4) : "Article 5. Permanent establishment.- 1. For the purposes of this Agreement, the term ' permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term ' permanent establishment' includes especially : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; (g) a warehouse in relation to a person providing storage facilities for others ; (h) a farm, plantation or other place whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of storage, display or occasional delivery ; (c) The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of advertising for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise. However, the provisions of sub-paragraphs (a) to (e) shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State through which the business of the enterprise is wholly or partly carried on. 8. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 9 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if,- (a) he ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in each Contracting State, be attributed to that permanent establishment the profits which it might be expected to make if it were a dis tinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. 4. In so far as it has been customary in the Contracting State to determine the profits to be attributed to a permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng orders, an installation or structure used for the exploration or exploitation of natural resources. The common thread in all these things is that an enterprise can carry on business through these establishments. Generally, therefore, enterprise of a contracting state is said to have a permanent establishment in the other contracting state when such an enterprise has a fixed place of business in that other contracting state through which business of the enterprise is wholly or partly carried on. However, in the modern age where a business is not always carried on, particularly outside national frontiers of an enterprise, through a fixed place of business of its own as is the lowest common denominator in all the situations visualized in article 5(2), there is a deeming provision in article 5(8) which deals with a situation when an enterprise carries on business through an agent in the other contracting state. This refers to a deeming fiction whereby even in cases where the enterprise does not have a fixed place of business in the other Contracting State, of the nature described in article 5(2) or otherwise, the enterprise will still be deemed to have a permanent establishment. Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if,- (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise ; (b) he has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise ; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise." 10. The rationale for dependent agent permanent establishment is simple. A foreign enterprise may chose between performing business activity itself, and having it done through a domestic agent. In case, foreign enterprise prefers to perform the business activity through a domestic agent, he does not need to depend on the right to use a fixed place of business. The business acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the classical force of attraction rule but what is in vogue today is a much improvised and subdued form which restricts application of this rule to few specified areas. Even this subdued and improvised form of force of attraction rule, however, does not find much favour in the contemporary tax treaties, and particularly in OECD Model Convention on which the present tax treaty, in material respects, is based. The expression confining taxability of profits to "only so much of them as is directly or indirectly attributable to that permanent establishment" only confirm this paradigm feature. The first step to be taken for computation of profits liable to be taxed in the source country, therefore, is computing profits directly or indirectly attributable to the permanent establishment. Article 7(2) provides the methodology for computation of profits of the permanent establishment. This sub-article, inter alia, provides that when an enterprise of one of the contracting states (General Enterprise, or GE in short), carries on the business in the other contracting state through a permanent establishment, so much of the profits of the enterprise shall be attributed to the permanent establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, taxability of which is on the basis of revenues of the activities of the general enterprise attributable to the permanent establishment, in turn based on the FAR analysis of the dependent agent permanent establishment, minus the payments attributable in respect of such activities, in simple words, whatever are the revenues generated on account of functional analysis of the dependent agent permanent establishment are to be taken into account as hypothetical income of the said dependent agent permanent establishment, and deduction is to be provided in respect of all the expenses incurred by the general enterprise to earn such revenues, including, of course, the remuneration paid to the dependent agent. The second taxable unit in this transaction is the dependent agent itself, but this taxability is in respect of the remuneration of the dependent agent. The provisions of the tax treaty are silent on this issue, and rightly so, because the taxability of the dependent agent is quite distinct of the taxability of the enterprise of the contracting state which is in respect of permanent establishment of such an enterprise. At the cost of repetition, it is not the dependent agent who c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and based on the treaty provisions before us, should be as follows : A. Commission earned by Ind. Co. $9,00,000 Less : Deductible expenses of Ind. Co $8,99,000 Taxable in the hands of the Ind. Co $1,000 B. Profits attributable to Sing. Co.'s DAPE in India Sales consideration 30,00,000 Less : Commission paid to Ind. Co. Cost of purchases Sing. Co.'s handling charges 9,00,000 (-) 10,00,000 (-) 6,00,000 (-) 25,00,000 Profit of the DAPE or, in other words, profits attributable to India operations of the Sing. Co. $5,00,000 13. As far as "A" in the above example is concerned, it does not have anything to do with the income of the foreign company. This taxability is in the hands of the domestic dependent agent and is on net basis after taking into account the expenses incurred by the agent for earning of remuneration whether or not the same relates to the business of the foreign company or not. As regards "B" above, it represents the earnings of the foreign company attributable to the dependent agent permanent establishment, on account of its h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this legal proposition. However, as it sometimes happens, the quality of arguments in support of a legal proposition is inversely proportional, proportional if it is, to the merits of the proposition sought to be advanced. This is one such occasion. Let us set out the reasons why we think so, and, in the process, deal with various arguments of learned counsel one by one. 15. At the outset, we must reiterate that a dependent agent (DA) and a dependent agent permanent establishment (DAPE), in our humble understanding, are two distinct things. As we have stated earlier, it is as a result of existence of a dependent agent that the foreign enterprise is "deemed to have" a permanent establishment in the country in which dependent agent is situated. 16. Under article 7 of the treaty, the taxability is of the foreign company. What is taxable under article 7 is profit earned by the foreign enterprise, as it article 7(1) provides that "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein". Agency remuneration paid by the foreign ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either. 20. A reference is then made to the ruling given by the hon'ble Authority for Advance Rulings in the case of Morgan Stanley and Co. Inc. In re [2006] 284 ITR 260. We have perused the ruling, but, with respect, we are not persuaded. It is also well-settled in law that these rulings have binding value only on the assessee and on the Commissioner with reference to that particular transaction. In this regard, we deem it necessary to produce the following extracts from the judgment of the hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, at page 742 wherein their Lordships of the hon'ble Supreme Court had an occasion to deal with the said Authority for Advance Rulings : "The respondents placed great reliance on the decision by the Authority for Advance Rulings constituted under section 245-O of the Income-tax Act, 1961, in Cyril Eugene Pereira, In re [1999] 239 ITR 650. Section 245S of the Act provides that the Advance Ruling pronounced by the Authority under section 245R will be binding only : ' (a) on the applicant who had sought it ; (b) in respect to the transaction in relation to which the ruling had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. This issue, however, has been discussed in one of the recent Australian Tax Office guidelines titled "Attributing Profits to a Dependent Agent Permanent Establishment"(Product ID 14314-09.2005 ; www.ato.gov.au). These guidelines, inter alia, provide as follows : "The two-step process Taxation Ruling TR 2001/11 states our view that Australia' s permanent establishment attribution rules use a two-step process to apply an arm' s length separate enterprise principle in attributing profits to a permanent establishment : Step 1 : Undertake a functional analysis, which attributes to the permanent establishment the functions performed, assets used and risks assumed (FAR) by the enterprise in respect of the business it carries on through the permanent establishment. Step 2 : Undertake a comparability analysis, which determines an arm' s length return for the FAR attributed to the permanent establishment. This process applies to all permanent establishments, including dependent agent permanent establishments. In performing this process, it is critical to properly distinguish between two different taxpayer enterprises with different FAR and, invariably, different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident enterprise). This also supports the conclusions drawn by us earlier in this order. We may, in this regard, quote some of the relevant extracts from this report : "D-3 Dependent agent permanent establishments 275. As indicated in sections B-6 and D-5 in Part I, this report does not examine the issue of whether a permanent establishment exists under article 5(5) of the OECD Model Tax Convention (a so-called ' dependent agent PE' ) but discusses the consequences of finding that a dependent agent permanent establishment exists in terms of the profits that should be attributed to the dependent agent permanent establishment, it is worth emphasising at the outset that the discussion below is not predicated on any lowering of the threshold of what constitutes a permanent establishment under article 5, and in particular it should be noted that the performance of key entrepreneurial risk-taking functions by a dependent agent enterprise on behalf of a separate enterprise capital provider is a tool for attributing profits, including the reward for capital, to a permanent establishment, not a threshold test for determining the existence of a permanent establishment 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the authorised OECD approach a functional and factual analysis determines the functions undertaken by the dependent agent enterprise both on its own account and on behalf of the non-resident enterprise. On the one hand, the dependent agent enterprise will be rewarded for the ser vices it provides to the non-resident enterprise (taking into account its assets and its risks) usually by means of a fee from the non-resi dent enterprise. On the other hand, the dependent agent permanent establishment will have attributed to it the assets and risks of the non-resident enterprise relating to the functions performed on its behalf by the dependent agent enterprise, together with sufficient free capital to support those assets and risks. The authorised OECD approach then attributes profits to the dependent agent permanent establishment on the basis of those assets, risks and free capital. The analysts focuses on the nature of the functions carried out by the dependent agent on behalf of the non-resident enterprise and in particular whether it undertakes key entrepreneurial risk taking functions. In this regard an analysis of the skills and expertise of the employees of the dependent agent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprise. The analysis applied to the functions performed by the dependent agent for attributing the assets and risks to the dependent agent permanent establishment is the same analysis applicable to determining the assumption of risk within a single enterprise as discussed in section D-1(i)(b). 280. The following illustration is intended to better explain the approach taken under the authorised OECD approach. It is recognised that in practice most situations will be significantly more complex and difficult to deal with. Even where the non-resident enterprise is a special purpose vehicle (as in the example below), and all the trading functions are performed in the dependent agent enter prise, the special purpose vehicle may have employees of its own to maintain the vehicle' s enhanced creditworthiness, or to perform strategic risk management or operational risk management functions. In other cases, where the special purpose vehicle itself does not have employees performing such functions, the functions may be pre formed either by another company in the group or by a dependent agent permanent establishment in a different location from the traders. Similarly the traders in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the reward for the assumption of the market and credit risk by the non-resident enterprise should be attributed to its dependent agent permanent establishment. On the facts of the present example the answer would be yes, since the key entrepreneurial risk-taking functions are undertaken, not by the non resident enterprise itself but by the dependent agent enterprise on behalf of the non-resident enterprise. The reward for the assumption of the market and credit risk, i.e., the return on the associated capital, is therefore attributed to the dependent agent permanent establishment. In this highly simplified example the profits attributed to the permanent establishment would be the profits of the book as a whole less the amount of the arm' s length fee (determined by reference to a suitable comparable) given to the dependent agent enterprise. In more realistic cases, the residual profits attributed to the permanent establishment would be the profits of the book less an arm' s length reward for one or more of the functions described in paragraph 279. 284. The above outcome, in addition to being technically correct, also gives a commonsense result ; if in fact all the key e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent enterprise not only on the profits attributable to the people functions it performs on behalf of the non-resident enterprise (and its own assets and risks assumed), but also on the reward for the free capital which is properly attributable to the permanent establishment of the non-resident enterprise. Such administrative matters related to the taxation of dependent agent permanent establishments are for the domestic rules of the host country and not for the authorised OECD approach to address. 15 It follows that the home country with a permanent establishment in a host country that operated such an administratively convenient procedure would not be obliged to give relief or be entitled to tax on the basis that there was no dependent agent permanent establishment. The taxing rights of the home country are not altered by administratively convenient procedures of the host country." 28. Learned counsel submits that it would be inappropriate for us to be guided by this report because this report what the law should be and not what the law is. Our attention is drawn to paragraph 3 of the preface which indicates that the working group was also assigned the tax of examining whether, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion which is materially the same as in the India Singapore tax treaty that we are concerned with. 30. We may now briefly deal with a report on the proceedings of the International Fiscal Associations 2006 Congress at Amsterdam. This report is by Professor Phillip Baker, QC, of Gray' s Inn Tax Chambers and Dr. Richard Collier, of Price Waterhouse Coopers. Learned counsel has invited our attention to the following observations in the said IFA report : The DD (discussion draft) would, if adopted, lead to significant changes in the current approach and practice in relation to article 7(2), whilst there has been a considerable effort expended upon the nature and operation of new approach, the discussions of the consequences of the AOA (Authorised OECD Approach) has been very limited. (page 80) This may be second important conclusion of this General Report ; that existing case law and guidance may make it very hard in a number of jurisdictions to adopt the AOA without an explicit change in the working of article 7. (page 84) 31. Learned counsel submits that these observations in the IFA report unambiguously show that the OECD report, from which we have quoted earlier in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit attributed to the DAPE over and above the arm' s length agency fees would be accepted in their jurisdiction. Not all the branch reporters responded to this question. A few indicated that the issue was highly controversial in their jurisdiction. Of the branch reporters who responded to the issue, five indicated that it was thought that there might be a profit attached to the DAPE. The Australian report indicated that Australian Tax Office considers that a DAPE might be left in a net profit position. The Australian report mentioned the views of some commentators that a commercial profit might indeed be allocated to DAPE. The Danish report men tions about an unpublished ruling from the Danish Tax Assessment Board which concludes that the income attributed to the DAPE can not be zero. The Norwegian report indicates that tax authorities seem to take the position that a profit should be allocated to the permanent establishment, but accept that permanent establishments profit under these circumstances may be limited. Finally, the Swiss report states that there may be income and expenses of the DAPE which are not identical to the agent' s income and expenses. By contrast ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... school of thought. 35. As a matter of fact, in case the plea of the assessee is to be accepted, the whole concept of agency permanent establishment will be rendered meaningless. The profits earned by the dependent agent, or even independent agent, are anyway to be taxed in the host country of which the dependent agent is resident. The existence of the permanent establishment is therefore rendered meaningless by the interpretation sought to be canvassed by the assessee. It is well-settled that no law or treaty can be interpreted in such a manner so as to make a clause meaningless. The interpretation is required to be made ut res magis valeat quampereat, i.e, making it effective rather than making it redundant. 36. In view of the above discussions above, we are of the considered view that the tax liability of a foreign enterprise, in respect of its dependent agency permanent establishment, is not extinguished by making an arm' s length payment to the dependent agent. There is no dispute in the present case to the extent that the assessee-company has a dependent agent in India, and that the profits of the dependent agent permanent establishment are, therefore, taxable in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal as well. The Assessing Officer succeeds on this ground of appeal as well. 40. Ground No. 2 is also allowed. 41. In the ground of appeal No. 3, the Assessing Officer has raised the following grievance : 3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that the assessee being a non-resident and the entire income being subject to tax deduction at source under section 195 of the Income-tax Act, 1961, no liability under sections 234B and 234C will arise, ignoring the fact : (i) that since the tax deducted at source was not adequate to meet the entire tax liability, it was obligation on the part of the assessee to make the deficit good by making the payment towards the advance tax ; (ii) that since the assessee failed to pay the advance tax, the Assessing Officer was right in charging interest under sections 234B and 234C of the Income-tax Act, 1961. 42. Learned representatives fairly agree that the issue in appeal is covered by a number of decisions of the co-ordinate benches, viz., Sedco Forex International Drilling Inc. v. Deputy CIT [2000] 72 ITD 415 (Delhi), Asia Satellite Telecommunications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax (Appeals) so far as decision on merits is concerned. The grievance of the assessee, against not giving relief from taxation even after holding that the assessee has no tax liability, thus becomes infructuous and academic. It does not call for any adjudication by us. We, therefore, decline to adjudicate on this ground of appeal. 49. Ground No. 1 is thus dismissed as infructuous. 50. In the second ground of appeal, the assessee has raised the following grievance : The learned Commissioner (Appeals) also erred in not confirming that the appellant was not liable to tax in India in respect of advertisement revenues earned (including those relating to AXN channel) under the pro visions of the Income-tax Act, 1961. 51. As regards this grievance of the assessee, we find that the Commissioner of Income-tax (Appeals) has not adjudicated on the assessee' s contentions regarding its non taxability under the provisions of the Income-tax Act. We, therefore, deem it fit and proper to remit the matter to the file of the Commissioner of Income-tax (Appeals) for the limited purposes of adjudication on this aspect of the matter. The Commissioner of Income-tax (Appeals) shall decide t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
