TMI Blog2004 (10) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 40 per cent. equity shares. The US JV partner is engaged in the business of international integrated transportation services. The Indian JV partner is engaged in the business of a general sales agent for and on behalf of international domestic airline companies in India. The American company is also another company incorporated in and a tax resident of the USA (referred to in this ruling as the American company ). All these and some other companies are members of an international group of companies which are engaged in the business of international transportation services and use an international group logo/trademark. On October 30, 2000, the applicant entered into an agreement with the American company in regard to international transportation services (hereinafter referred to as the transportation agreement ) for the movement of parcels/packages within and outside India. Under the agreement the applicant is to provide services to the American company for transportation of packages in India and the American company has to provide services to the applicant for transportation of packages throughout the world. For the services rendered by the American company to the applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iver parcels to consignees in India either directly or through its agents. Further, the stipulation that the American company has to bear the loss or damage to the shipment, indicates that the risk is that of the American company and not of the applicant. Activities of the applicant in regard to inbound consignments constitute an integral part of worldwide business of the American company and contribute to the American company earning income in India. Therefore, they constitute activities of the American company in India. The Indian company is a dependent agent of the American company because the former habitually procures orders in India wholly or almost wholly for the latter which has business connection in India within the meaning of section 9(1)(i) of the Act. The applicant is a permanent establishment (PE) of the American company in India. The profits attributable to the American company from all its operations in India are, therefore, taxable under the Act. 5. In the rejoinder of the applicant it is denied that the CEO and the general managers of the applicant are deputed by the American company. It is also denied that the directors of the applicant are nominated by the Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference of the question of law, namely, whether any deemed income could be said to accrue or arise under section 9(1)(i) read with Explanation 1(a), was dismissed by the High Court. 7. Mr. S. P. Singh who had put forth the case of the Revenue, drew our attention to the transport agreement and submitted that : (i) the applicant is described as a contractor to perform services as required by the American company and in so doing it has to follow the international group manual and will be subjected to audit by the American company ; Page No : 0507 (ii) the applicant is working directly under the control and supervision of the international group and the CEO and general managers are deputed in India by the American company to look after the overall working ; (iii) the applicant gets its commission/compensation from their American company for the services rendered by it in respect of import consignments as well as export consignments and is therefore agent of the American company and not an independent contractor dealing on prin cipal to principal basis, which has business connection in India through which it is earning income directly or indirectly from operations carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a or from any property in India or through any assets or source of income in India or through transfer of capital assets situate in India, shall be deemed to accrue or arise in India. The mandate contained in Explanation 1(a) is that for the purpose of the aforementioned clause where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India, shall be only such part of the income as is reasonably attributable to the operations carried out in India. 11. It follows that to invoke the said deeming provisions, two requirements have to be satisfied ; (1) income must accrue or arise to the American company (whether directly or indirectly) through or from any business connection in India and (2) some business operations of the American company must be carried out in India. The first requirement, namely, the American company has business connection in India is not put in issue. 12. The second requirement that there must be some business operations of the American company in India, emanates from the said Explanation 1(a) which limits the taxable income to only such part of the income as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the applicant replied in its rejoinder without demur, it has become necessary to determine whether the aforementioned requirement is satisfied. This takes us to the question whether under the aforementioned agreement the applicant was acting as an agent of the American company or was acting as an independent contractor doing its own business. In the light of the contentions of the parties we shall advert to this aspect. 14. The international group has an international group logo/trade mark (the brand name) which is owned by (omitted). It has compiled manuals of the standard forms, operating procedures rates for invoices and allied matters relevant to international transportation business, which are required to be followed by all the members of the international group for the sake of uniformity in functioning and inter se operations. Both the American company as well as the applicant, being the member of the international group, are committed to adhere to the standard procedure, etc., laid down in the said manual. Undoubtedly it is open to the parties to incorporate any term in their agreement or to refer to a code or manual to describe their rights and obligations. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the packages to the consignees outside India for which it is paid. The second is inbound consignments where the American company enters into contract with the consignors outside India, raises invoices on them collects necessary charges and picks up all the packages from them. The packages are transported to India through airlines. The privity of contract is between the American company and the consignors abroad. The parties differ on the point as to whether the consignments are handed over by the American company directly to the applicant in India or tendered to international airlines or on board couriers for delivery in India. This, however, is not relevant because admittedly on such consignments reaching India, the applicant gets them cleared and delivers them to the consignees for consideration paid by the American company. It may be that the applicant directly deals with the consignee, collects the charges expended by it and bears the risk of not collecting those charges. But that is in regard to customs clearance, etc., and not for delivery of packages received by it from airlines/couriers for which the American company pays compensation. Now we take the question, whether i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders given to him in the course of his work ; an independent contractor, on the other hand, is entirely inde pendent of any control or interference and merely undertakes to pro duce a specified result, employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in his exercise to the direct control or supervision of the principal. 22. From the above discussion it follows that though a contractor is independent of any control or interference and is only bound to produce the specified result as per the contract, the agent has to exercise his authority in accordance with the lawful instructions given to him by his principal but he is also not subject in his exercise to the direct control or supervision of the principal. 23. Keeping this distinction in mind, we shall consider the terms of the transportation agreement . The applicant who is referred to therein as an independent contractor has undertaken to perform services of transportation of small packages in the service area for the American company as set forth in (om ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . From a perusal of the various clauses of the agreement and exhibit B, referred to above, it is noticed, inter alia, that the applicant is termed as an independent contractor and it is specifically provided therein that the terms of the agreement shall not be deemed to constitute a partnership relationship between the parties and neither party has any authority to bind or to contract in the name of the other. However, in law, such terms of the agreement cannot be determinative as to whether a person is a contractor or an agent acting for and on behalf of the other party, which has to be decided on a true interpretation of the agreement as a whole in the light of the circumstances of the case. It is evident that for the services rendered by the applicant, the American company would pay to the applicant and for the services rendered by the American company, the applicant has to pay what is termed as compensation in accordance with exhibit B. It is provided in exhibit B that the American company shall pay to the contractor a compensation for the services for each shipment and upon presentation to the American company proof of delivery. Paras. 2 and 3 of exhibit B, as could be seen, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same, go a long way to show that the American company has a vested interest in the said business of the applicant. 29. All these aspects militate against the applicant being an independent contractor in performance of services for the American company as it purports to be. They lead to the conclusion that the applicant is an agent acting for and on behalf of the American company. Though in law the applicant and the American company are independent entities, for the aforementioned reasons we are of the view, in their business operations they are inter-connected and under the transportation agreement the applicant has assumed the role of such an agent that it purports to act on its own behalf but in fact its activities enure to the benefit of the American company and, therefore, the business activities carried out by it in India cannot be said to be its own but are for and on behalf of the American company. In view of this conclusion, the requirement of Explanation 1(a) to section 9(1)(i) that there must be business operations of the American company in India, is satisfied and the tax liability will, however, be limited to the business operations carried out by the applicant u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is contended that in view of : (i) deputation of employees and nomination of directors ; (ii) commercial/functional dependence on the American company ; (iii) securing orders and (iv) not being an independent entity but being a projection of the American company, the applicant is the permanent establishment of the American company. 34. Article 7 of the DTAA, in so far it is relevant for the present purpose, is in the following terms (see [1991] 187 ITR (St.) 102, 109) : Article 7 : Business profits : 1. The profits of an enterprise of a Contracting State shall be tax able only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment ; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph ; (b) he has no such authority but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivered goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of goods or merchandise ; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent sta tus, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in the other State through a broker, general commission agent or any other agent of an independent status provided that such persons are acting in the ordinary course of business. None the less when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm' s length conditions, he shall not be considered as an agent of an independent status within the meaning of those paragraphs. Para. 6 is clarificatory and excludes the possibility of any one of the following companies being construed as permanent establishment of the other : a resident company of a Contracting State controlling or being controlled by a resident company of the other Contracting State or a company which carries on business in the other State (whether through a permanent establishment or otherwise). 39. The definition of permanent establishment (PE) in article 5 of the DTAA is based on the OECD Model. The clauses of the OECD Model are incorporated invariably in all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement and exhibit B it was concluded hereinabove that in the case of outbound consignments, booking orders, collecting parcels, etc., as also in the case of inbound consignment in regard to clearance and delivery of parcels/ packages the applicant was acting for the American company. Therefore, para. 4 will also be applicable. 41. Once it is found that the applicant satisfies the requirements of the definition of permanent establishment-article 5 of the DTAA-the fact that the applicant is an independent legal entity being a company incorporated under the Companies Act will make no difference and will not be a relevant factor in holding that it is a permanent establishment. We may note here that we find in support of our view a judgment of the Supreme Court Cassasione (Italy) in the case of Ministry of Finance (Tax Office) v. Philip Morris GmbH-4 ITLR 903. Philip Morris was assessed to corporate tax and income tax in respect of the period 1992-95 on the ground that it had a permanent establishment in Italy through the activities of Intertaba which was an Italian company. Against the order of assessment Philip Morris appealed to the Provincial Tax Court of Milan. The appeal ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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