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Reuters Limited Versus Dy. Commissioner of Income Tax (International Taxation) -Range 2 (1) , Mumbai

2015 (9) TMI 844 - ITAT MUMBAI

Dependent agency Permanent Establishment (PE) in India under Article 5(4) and 5(5) and Service PE under Article 5(2)(k) of Indo-UK DTAA - DRP taxing the ‘Distribution’ revenues on gross basis u/s 44D - whether if the assessee does constitute a PE in India then no further profits can be said/sought to be attributable to the PE as the transaction with the assessee have been found to be at arm’s length by the Transfer Pricing Officer (TPO), in subsequent years? - Held that:- The assessee is a tax r .....

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terms of the agreement, it is quite apparent that nowhere it has been specified or there is any mandate that RIPL is habitually exercising its authority to negotiate and to conclude the contracts on behalf of the assessee in the territory of India which binding or can bind the assessee. It envisages simply delivering of Reuter services for a price which can be further distributed by the RIPL for earning of its own revenue. There is no clause that RIPL will act as an agent on behalf of assessee q .....

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Indo-UK treaty is that whether the agent has an authority to conclude contracts in the name of the enterprise i.e. the agent has sufficient authority to bind enterprise’s participation in the business activities and the agent’s activities involved the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is authorization to act on behalf of somebody else so much as to conclude the contracts. Here in this case, there is no such terms which is bo .....

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and generating its revenues. In fact revenue from third party subscribes are far excess than transaction with the assessee. It is not the case here that it has completely or wholly doing activity for ‘Reuters’ and earning income wholly from ‘Reuters’ only. Thus, the conditions laid down in Article 5(5) also does not fulfill.

As per terms of clause 3 of the agreement, the assessee is merely delivering Reuters services to the distributors. The Bureau Chief has nothing to do for providi .....

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under Article 5(4) read with 5(5), the assessee has a PE in India and, therefore, the distribution fee received by the assessee can not be held to be taxable in India. - Decided in favour of assessee.

Levy of interest u/s 234B - Held that:- It has been admitted by both the parties that same is covered by the decision of Hon’ble Bombay High Court in the case of NGC Network [2009 (1) TMI 174 - BOMBAY HIGH COURT] - ITA No. : 7895/Mum/2011 - Dated:- 28-8-2015 - SHRI B R BASKARAN AND SHRI .....

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shment (PE) in India under Article 5(4) and 5(5) and also has a Service PE under Article 5(2)(k) of Indo-UK DTAA and thereby taxing the Distribution revenues on gross basis u/s 44D. The other grounds are merely reiteration of this issue on many counts. Lastly, the assessee has also challenged the levy of interest u/s 234B & 234D. Besides this, the assessee has also raised additional ground stating that : Without prejudice, if the assessee does constitute a PE in India then no further profits .....

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roducts ). The news and financial information products are produced, compiled and distributed by the assessee company through Reuters Global Network with a vast global communication network consisting of data storage facilities situated in three locations i.e. London, New York and Singapore, which are linked by satellite links and terrestrial lines. The assessee uses the network to receive and transmit information and provide access of the compiled news and edited financial information to distri .....

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clusive license to use the trademark Reuters and in consideration thereof the RIPL pays a license fee, which is a Royalty amounting to 1 percent of its total subscription revenues received from its subscribers in India. Such a receipt of royalty is offered to tax in India, which is not the issue of dispute in the present appeal; (ii) Product Distribution Agreement: Under this Agreement with RIPL, a product distribution fees for distribution of some of the assessee s specific software products is .....

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rovides RIPL connection to the Reuters Global Network whereby products are made available to the RIPL, which are then distributed by RIPL to various subscribers in India independently. In the present case, the revenue resulting from distribution agreement to the assessee is the subject matter of dispute whether the same is to be taxed in India on the ground that the assessee has PE in India either under Article 5(2)(k) or under Article 5(5) or both. 3. In this case, original assessment order was .....

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der the distribution fees is not FTS and therefore, cannot be taxed under Article 13. It was further held that RIPL is not an agent of the assessee and, therefore, do not constitute Agency PE for taxing the distribution fee in India. Uptil this stage, there was no issue regarding service PE under Article 5(2)(k). Against this order, second appeal was preferred by the Revenue before the Tribunal. The Tribunal vide order dated 29th July, 2009, remanded the matter to the Assessing Officer for fresh .....

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es 3 to 8 of the assessment order. In the draft assessment order, the Assessing Officer held that assessee has an agency PE in India as RIPL has done exclusive business for the assessee in India and had all the authority to market the assessee s product in India; secondly, the assessee has deputed one, Mr. Simon Cameron Moore, as Bureau Chief of Bombay from 19.08.1996 and he was in India during the relevant financial year and accordingly, the assessee had service PE also in India under Article 5 .....

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ing on how Mr. Simon Moore, the employee constitutes a service PE for the assessee in India. The employee works under the direction supervision and control of RIPL s Board and does not render services to RIPL for or on behalf of the assessee; (v) Section 44D is not applicable; (vi) No attribution can be done since the agent has been compensated at arm s length. 5. The DRP, rejected the assessee s objection on all the counts and held that the assessee has a PE in India under Article 5(4) & 5( .....

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a PE under Article 5(5) of the DTAA exists for the Assessee. On the basis of the agreements and after considering the submissions of the assessee, it was concluded during the assessment proceeding the submissions of the assessee, it was concluded during the assessment proceedings that the assessee has an agency PE in India as RIPL has only done the business of the assessee and had all the authority to market the assessee s products in India. Accordingly, considering the submission of the Assess .....

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-98 before the ITAT. The Assessee has not brought any document or third party evidence like passport copies on record to prove that Mr. Simon Moore was in fact not in India during the period 1996- 97. The Assessee has therefore was in fact not in India during the period 1996-97. The Assessee has therefore deputed its employee to RIPL in senior capacity. Thus, as Mr. Simon Moore was in India since 12.06.1996, the Assessee has PE in India under Article 5(2)(k) of the DTAA for AY 1997-98 . Thereaft .....

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inly for the distribution of Reuters Products in India and supply of news, reports etc., by the assessee to the distributor, and from the distributor to the assessee. This agreement was on principal-to-principal basis. Regarding application of service PE under Article 5(2)(k) on the ground that, Chief Bureau, Mr. Simon Moore was an employee of an assessee who was deputed to serve in India and, hence, assessee is furnishing services in India and, therefore, there is service PE in India, Mr. Pardi .....

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he assessee qua the Distribution Agreement . No profit is attributable under the Distribution fee on account of functioning of Chief Bureau. In support of roles and functions performed by the Bureau Chief he has filed an article available in public domain in the internet illustrating the functions and duties of a News Bureau Chief and pointed out that by no stretch of imagination it can be held that Bureau Chief was rendering any service qua the DA or any fee under the DA is attributable to Bure .....

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e; and secondly, he habitually maintains stock of goods or merchandise from which he regularly delivers the goods or merchandise for on behalf the enterprise; and lastly, habitually secures the order wholly for the enterprise. None of these conditions for being dependent agency PE is established qua the distribution agreement in the case of the assessee, because the RIPL is not exercising any authority to negotiate and enter into a contract for and on behalf of the assessee so as to bind the ass .....

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has substantial receipts/income from transaction with third parties. He submitted that for being a dependent agent, all these conditions as enumerated in Article 5(4) have to be fulfilled and in support of his contention he strongly relied upon the decision of the Co-ordinate Bench in the case of Varian India Pvt Ltd vs ADIT [2013], reported in 142 ITD 692 (Mum). He also drew our attention to the agreement between RIPL and various other customers in India to show that RIPL entered into a contra .....

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. On the other hand, Ld. CIT DR, Ms. Vandana Sagar, after referring to various clauses of distribution agreement, submitted that the assessee did had an agent in India in the form of RIPL, which worked mostly for the assessee and activities done by the RIPL is quite akin to activities given in clause (a) of para 4 of Article 5. She also referred to certain Reuters Service Contract to point out that and most of the income of the RIPL is from service fee from the distribution of Reuters Products a .....

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v) Nortel Networks India International vs JDIT [2014] 49 Taxman.com 147; (v) Nimbus Sports International Pte. Ltd vs DCIT [2013] 18 Taxman.com 105; (vi) Galileo International Inc. vs DCIT [2008] 19 SOT 257; and (vii) Rolls Royce Singapore Pvt Ltd vs ADIT [2011] 13 taxman.com (Del High Court). Regarding service PE, she submitted that the Bureau Chief has been seconded by the assessee to the RIPL for furnishing of service in India and remuneration is paid to him in London. This shows that he was c .....

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only for the assessee. As regards decisions relied upon by the DR, he submitted that all the decisions are squarely distinguishable on facts and none of them are remotely applicable to the facts of the assessee s case. Regarding Delhi High Court decision in Rolls Royce Singapore Pvt Ltd (supra), Mr. Pardiwala submitted that subsequently the said decision has been recalled by the Hon ble Delhi High Court itself in a review petition vide order dated 27th July, 2007 and fresh hearing will take pla .....

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om and has worldwide business of providing news and financial information distributed through Reuters Global Network. In India, it has entered into distribution agreement with RIPL for distribution of news and information service compiled by the Reuters from the materials collected either by the Reuters itself or from its subscribers in the territory of India and also supply of news and information by the distributor. First, we shall examine whether the payment made under the Distribution Agreem .....

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has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) He habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) He habitually secures orders in the first-mentioned State, wholly or alm .....

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business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph . It can be seen that an agent is deemed to be P.E., if he is not independent and habitually exercises an authority to conclude contracts .....

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ment. Under the terms of distribution agreement, the Reuters (i.e. assessee) agreed to provide Reuters Services to the RIPL (distributor) and for further re-distribution by the distributor to the subscribers in the territory of India. Distributor will put best of its efforts to promote and sell the Reuter services/products throughout India. The preamble sets out following arrangements :- (A) Reuters carries on the business of producing and distributing news and information services compiled by R .....

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o arrangements for;  distribution of the said services and facilities (hereinafter defined as the Reuter Services ) in the Territory; and  the supply by the Distributor to Reuters of news reports, pictures and television news film from the Territory for use in the Reuter Services . Clause 3 of the agreement provides for supply by Reuters of the Reuter services to the distributor and Article 4 provides for the duties carried out by the distributor of news and materials. The releva .....

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rning such new service or facility as shall be necessary for the proper performance of this Agreement by the Distributor. 3.3 Reuters shall at its cost supply the Distributor with examples of current catalogues and other sales promotion material as developed by Reuters from time to time. Article 4 - General Duties of Distributor - Supply of News Materials 4.1 General The Distributor shall: (a) use its best endeavours to market promote the sales of and achieve maximum distribution of the Reuter S .....

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no action is taken by Reuters within twenty one (21) days from receipt of the said material. (b) in order to maintain the standard of Reuter group contracts and continuity with Reuters multicentre contracts utilize for contracts to be entered into between the Distributor and Subscribers forms of contract consistent with the standard forms from time to time in use by Reuters; and (c) notify Reuters of the names and addresses of any new Subscribers to the Reuter Services not later than four (4) we .....

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the Reuter Services. (b) Withdrawing the contributor facility under the Reuter Services from any Subscriber who, in the reasonable opinion of the Distributor or Reuters, has misused such facility, and withdrawing from the Reuter Services any information contributed by any such Subscriber the insertion of which, in the reasonable opinion of the Distributor or Reuters has been a misuse of the facility; (c) Ensuring that the contributor facility is supplied to subscribers on such terms and conditio .....

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r undertakes with Reuters to collect such fees from its Subscribers and remit the same to Reuters or as Reuters may direct. (b) where the Reuter Services supplied by Reuters to the Distributor contain prices or information relating to securities commodities or other financial markets in respect of which the supplier requires Reuters and/or its distributors and licensees to pay an additional fee or fees calculated upon the number of recipients to whom or number of items of terminal equipment thro .....

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butor of such requirement and the Distributor shall procure Subscribers in the Territory to enter into such agreements and notify Reuters monthly with respect to each such Subscriber of its name the address of its premises and the number of terminals over which the relevant information is being received. 4.6 News Materials The Distributor undertakes to gather edit compile and supply to Reuters a file of news reports pictures and television news video material ( News Materials ) on the news and f .....

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vides for multi centre agreement wherein it has been provided that RIPL acknowledges to Reuters that it may from time to time conclude agreements with subscribers. Clause 9 provides for payment to Reuters by the distributor in consideration for supply of Reuters services and if the distributors supply news material to the Reuters then Reuters shall pay to the distributors for supply of news material as a news fees. 12. From the plain reading of the relevant terms of the agreement, it is quite ap .....

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fact, the RIPL is having independent contract with the subscribers, which is evident from the contract agreement between RIPL and Third party subscribers in India as pointed out by the Ld. Counsel from pages 174 of the Paper Book. Further RIPL also files suits for any recovery of debts independently. Similarly, when RIPL is supplying news and material to the assessee, the same is again on principalto- principal basis. The second condition as mentioned in para 4 of Article 5, also does not fulfi .....

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as on 31st March, 1997 is at ₹ 64,14,97,984/- whereas, the service fee shown under the head other income is ₹ 4,80,79,626/-. There is no income by way of commission income shown by RIPL under the Distribution agreement. Nothing is flowing from the D A or financial accounts that RIPL is acting as an agent of the assessee. The character of an agent under Article 5(4) which can be said to be dependent is that the commercial activities of the agent for the enterprise are subject to instr .....

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act on behalf of somebody else so much as to conclude the contracts. Here in this case, there is no such terms which is borne out from the distribution agreement that RIPL is only acting on behalf of Reuters or is in kind of dependent agent. It is completely an independent entity and the relationship between the assessee and RIPL is on principal-to-principal basis. 13. Even under Para 5, the foremost condition is that the activities of such an agent are devoted wholly or almost wholly on behalf .....

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Reuters only. Thus, the conditions laid down in Article 5(5) also does not fulfill. 14. Now coming to the second limb of the controversy as to whether there is a service PE within the scope and ambit of Article 5(2)(k), which reads as under :- (k) the furnishing of services including managerial services, other than those taxable under Article 13 (royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activiti .....

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ate and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire or to be used in, the prospecting for, or extraction or production of, mineral oils in that State. It is clear from the provisions of Article 5(2)(k) that an Enterprise shall be deemed to have a PE in India if it furnishes managerial or other services except services which are taxable as royalty or fees for technical services , throug .....

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thrust of Article 5(2)(k) is furnishing of services through employees or other personnel in the other contracting State. The revenue s case is that one, Mr. Simon Moore who has been deployed by the assessee in India as Bureau Chief of Bombay and was in India during the relevant period therefore, by virtue of his employment, the service PE of the assessee has been constituted. In the present context, we have to examine first, whether the Bureau Chief is providing any services to RIPL under the di .....

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by the assessee as a Text Correspondent to perform functions of a Bureau Chief. Here his functions and duties has nothing to do with so far as distribution agreement is concerned, which is evident from Article 3 of the said agreement itself as incorporated above. There is no furnishing of services by the Bureau Chief to the RIPL which has lead to earning of a distribution fee to the assessee. Here, what we have to see is, whether the assessee is furnishing services as postulated under Article 5( .....

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