TMI Blog1997 (3) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The applicant (TVM) has five shareholdres whose names and extent of shareholding are set out below : S. No. Name of the shareholder* Extent of share holding 1. Hindustan Times Ltd. (India) 30% 2. Westpoint Media Holdings Ltd. (Mauritius) 25% 3. TVB (Mauritius) Ltd. 15% 4. CTV Mauritius Ltd. 15% 5. Pearson Mauritius Ltd. 15% *What appear above are not the actual individual shareholders but of five groups to which the shareholders are said to belong. It is stated that Hindustan Times Limited had experience in making presentations of programmes produced by it on the Indian National Television Network-the Doordarshan. Westpoint Media Holdings Limited is stated to be primarily a financing company, being a subsidiary of Schroedar Capital Investments Ltd. TVB (Mauritius) Ltd. is stated to be a subsidiary of U. K. T. V. B. Broadcast Ltd., runn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iewing through the television sets in the countries concerned. The revenues of the TV broadcaster are derived principally by way of advertisement revenues from persons who desire to advertise their wares on the channel. The wider the field of propagation of a particular channel, the more extensive will be its customers for advertisement. The Hindi software programme and the other programmes broadcast by TVM are viewed by millions of viewers all over the world (a list of such countries has been placed before us). Naturally advertisers in these countries, and particularly from India, would like to advertise their goods and commodities on this channel. TVM was desirous of selling air-time on the channel to parties in India. It, therefore, proposed to enter into a solicitation agreement for such sale with TVI, whereunder the latter would solicit orders from purchasers of air-time and pass on those orders to TVM for acceptance. TVI would also be responsible for remitting the advertisement revenue so collected to TVM and be entitled to a commission for the services rendered by it in this regard. The relevant clauses of the proposed agreement are as follows : Solicitation agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot exceeding 10 (ten) per cent. of the amount of the invoice issued to that purchaser by TVM in respect of that sale. TVM shall deliver to TVI all invoices that TVM intend to send to purchasers in order for TVI to forward the same to the purchaser. 5. Independent contractor : The parties agree that they are entering into this agreement as independent contractors and not as the agent of the other for any purpose whatsoever, and neither has any authority to enter into any agreements or assume any obligation for or on behalf of the other or to make any warranties or representations on behalf of the other, and nothing herein shall be construed to establish a relationship of copartner or joint-venture between TVI and TVM. It has been mentioned that TVI claims to have been successful in preparing software programmes and is negotiating with various broadcast channels. In particular, it has prepared programmes for a channel labelled Home T. V. and that under separate agreements with TVM, the latter has been licensed to telecast these programmes and also use this label. It does not, however, appear that TVI has so far produced any programmes apart from those which are exclusively uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the preceding provisions of this article, the term permanent establishment shall be deemed not to include- (a) the use of facilities solely for the purpose of storage or display of merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; (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 for collecting information for the enterprise ; (e) the maintenance of a fixed place of business solely- (i) for the purpose of advertising, (ii) for the supply of information, (iii) for scientific research, or (iv) for similar activities, which have a preparatory or auxiliary character for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2 of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a permanent establishment of TVM. This paragraph is based on the principle that for the DTAA purposes, a corporation cannot be treated as a permanent establishment of another company simply because the latter owns, controls or is associated with it. It is, therefore, difficult to characterise TVI as the permanent establishment of TVM, merely on the ground that the shareholding groups of the two companies are identical. What, then, is the relationship between TVM and TVI ? The simple answer seems to be that TVI is just an agent for the collection of advertisements for TVM to broadcast on its channels. This is exactly the situation dealt with by para. 5 of article 5. It negates the existence of a permanent establishment where the enterprise of one Contracting State carries on business in the other Contracting State through a broker, general commission agent or any other agent of an independent status. Thus, a broker or commission agent of such an enterprise cannot be termed as a permanent establishment where such person is carrying on his own business and is dealing with the enterprise only as one of his many clients and the dealings between the two are on a commercial basis. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agent. That agent, the clauses say, will be considered to be of independent status if it carries on the activities on behalf of the non-resident in the ordinary course of its business and if those agency activities are not, substantially speaking, confined to a single principal, viz., the foreign enterprise. One has, therefore, to see first whether in carrying on the profit-earning activities here in question-viz. the sale of advertisements and collection of advertisement revenue-TVI is acting in the ordinary course of its business. There is no material placed by the applicant to enable the authority to answer this question in the affirmative. The object clauses in the memorandum of association of TVI to which the attention of the authority has been drawn are not specific in this regard though, no doubt, quite broad in their canvass as is usual with objects clauses in the memoranda of companies. The relevant clauses are, among the main objects : III. A.-1. To engage in the business of import, export, syndication, bartering, research, development, production, editing, marketing, distributing, buying, selling and all other activities related to programmes, footage and softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisements for the programmes developed by it is an ordinary incident of TVI s business comprising of the preparation and licensing of software. There is also some difficulty in the present case arising out of the fact that TVI has started business only recently and thus far its activities are confined to dealings with TVM though it is said that it proposes to launch out on a large scale. When such expansion will take place and what the scope of activities thereafter would be, remain to be seen. But, even assuming that, on a pragmatic consideration of the nature and type of business carried on, the procurement of advertisements is also regarded as an integral part of the business of TVI, the answer to the second part of the question posed, viz., whether its activities in this regard are confined to one principal viz., TVM, has to be answered in the affirmative. Admittedly, TVI is at present canvassing for advertisements only on behalf of TVM. Whatever the position may be at a future date, in the event of TVI expanding the list of the broadcasters for its software and extending the scope of its advertisement canvassing there is no real doubt that the advertisement activities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para. 5 had stood alone. But para. 4 is, unambiguously and definitely, attracted to cases where there is a person in one State acting on behalf of the other State-that is, an agent-who is other than an agent of independent status to whom the provisions of para. 5 apply . The consequence is that when an agent fails to come up to the standard of independence referred to in para. 5, the issue regarding permanent establishment is not closed but has to be resolved in terms of para. 4. The wording of para. 4 is somewhat ambiguous. The presence of the words unless his activities are limited to the purchase of goods or merchandise for the enterprise in clause (i) and the terms of clause (ii) may suggest a narrower interpretation for this paragraph restricting its application to agents involved in the purchase and sale of goods and no others 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 permanent establishment. But the Authority is of the view that it will not be a proper canon of construction to ignore the generality of the preceding words of the paragraph merely because exceptions are carve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pes of regulations and controls on the matter that is to be broadcast. It is only TVM that can fully appreciate and regulate the beaming of advertisements and control it from Mauritius in such a way as not to offend the susceptibilities and regulations of the several countries concerned. TVI, though composed of the same controlling shareholders, operates primarily in production of software in India and may not be fully cognisant of the limitations of TVM in this regard. That is why, it is said, final acceptance of the advertisement is made to rest with TVM and payment therefor is made only after the broadcast takes place. It is submitted, therefore, that the agreement gives expression to a practical necessity and does not merely voice an empty or non-genuine declaration. There is force in these contentions which have to be accepted but with a note of reservation. Para. 4 uses two expressions : has and habitually exercises an authority to conclude contracts on behalf of the enterprise in question. While the expression has may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression habitually exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave a fixed place of business in that State within the meaning of paragraphs 1 and 2. This provision intends to give that State the right to tax in such cases. Thus, paragraph 5 stipulates the conditions under which an enterprise is deemed to have a permanent establishment in respect of any activity of a person acting for it. The paragraph was redrafted in the 1977 Model Convention to clarify the intention of the corresponding provision of the 1963 Draft Convention without altering its substance apart from an extension of the excepted activities of the person. Para 32. [Dependency test] Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents, i.e., persons, whether employees or not, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies. It would not have been in the interest of international economic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of those dealings if the agent is acting in the ordinary course of his business (of paragraph 31 above). Although it stands to reason that such an agent, representing a separate enterprise, cannot constitute a permanent establishment of the foreign enterprise, paragraph 6 has been inserted in the article for the sake of clarity and emphasis. Klaus Vogel adds : The question whether such a person has an authority to conclude contracts within the meaning of treaty law must be decided not only with reference to private law but must also take into consideration the actual behaviour of the contracting parties. An approach relying solely on aspects of private law (the law of contracts) would make it easily possible to prevent an agent being deemed a permanent establishment (and, therefore, to prevent the enterprise from being taxed by the State in question) even where he is engaged most intensively in the enterprise s business ; he would be allowed only to negotiate contracts up to the point when they were finalised and ready to be signed, but the final signature, to satisfy the proprieties, would be reserved to someone from the enterprise s headquarters in the other contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specially in the cases of those companies which do not have any branch office in India or are not maintaining country-wise accounts of their operations. 2. The matter has been examined by the Board and the assessment records of some of these companies have also been looked into. Since this is a new area of commercial activity, no uniform basis is being adopted by the Assessing Officers at different stations for computing the income in the absence of country-wise accounts of the foreign telecasting companies. It has, therefore, been decided by the Board to prescribe guidelines for the purpose of proper and efficient management work of the assessment of foreign telecasting companies. 3. It is seen that out of the gross amount of bills raised by a foreign telecasting company, the advertising agent retains commission at 15 per cent. or so. Similarly, the Indian agent of the foreign telecasting company retains his service charges at 15 per cent. or so of the gross amount. The balance amount of approximately 70 per cent. is remitted abroad to the foreign company. So far as the income of India, advertising agent and the agent of the non-resident telecasting company are concerned, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition in law. A point was also made on behalf of the Department that there was no ostensible need for establishing a company at Mauritius with the same group shareholding as TVI except perhaps as a design to avoid tax. Shri Vaish pointed out that this objection was not valid. Though TVI was preparing a software and had enough material for feeding a channel, the Indian law does not permit uplinking of TV programmes from India and that many TV organisations in India have proceeded to obtain such facilities from Mauritius. The business of TVI could not have been carried on without the creation of an organisation which can obtain such facilities elsewhere. As already pointed out all the other shareholder groups were running several channels and transmitting programmes all over the world. It was with a view to obtain the benefit of their technical expertise, financial capabilities and well-established reputation in this field of entertainment and education that Hindustan Times entered into collaboration with them to form TVI (to prepare software programmes for TV, particularly in Hindi) and TVM (to avail of the transponder on PanAmSat-4 available to it through the good offices of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar undertaking carried on by a resident of a Contracting State and an industrial, mining, commercial, plantation or agricultural enterprise or similar undertaking carried on by a resident of the other Contracting State ; . . . the reference to tax being to the income-tax in Mauritius : vide article 2(1) read with article 3(d). It is, therefore, important for the applicant to establish that it is liable to pay income-tax in Mauritius. The applicant was called upon, in the course of the hearing, to produce before the Authority the particulars of the income-tax law in Mauritius but this has not been done. Apart from an averment in a letter by counsel confirming that TVM is liable to tax in Mauritius in respect of its global income , no relevant statutes or regulations of Mauritius in this regard have been placed on record. The Authority has been able to gather some information, the strict and full accuracy of which, however, is subject to verification. It appears that Mauritius is one of those countries which permit the formation of off-shore companies. There are two types of companies in Mauritius : international business companies and ordinary status companies . T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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