TMI Blog1996 (2) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... ty: (A) Whether any of the situations detailed below give rise to the existence of a business connection in India of the applicant, thus, invoking the provisions of section 9(1)(i) of the Income-tax Act, 1961, and entailing tax liability on the applicant in India of the deemed income accruing or arising in India: (a) Signing and submission of tenders by - a.1 An employee of the Indian subsidiary company and/or the Indian subsidiary company of the applicant who is given specific powerof- attorney to sign and submit tenders within the parameters fixed by the applicant. a.2 An independent agent who is given specific power-of-attorney for this purpose. (b) Signing contracts for and on behalf of the applicant by: b.1 An employee of the Indian subsidiary company authorised to sign contracts in India on behalf of the applicant. b.2 An independent agent authorised to sign contracts in India on behalf of the applicant. (c) Routine follow-up of tenders and contracts by: c.1 The subsidiary company in India. c.2 The independent agent authorised in this behalf. c.3 The applicant directly through its own employees based overseas. (d) Documentation relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the answers to which the applicant would like to decide upon the kind of transactions it would actually undertake and this was hardly the scope of the provisions for Advance Ruling. It was suggested that it should set out the terms of its proposed transaction and then seek a ruling. It was in the light of this that the letter dated January 12, 1996, was filed and the Authority, therefore, proceeds to consider the questions on the basis that the applicant proposes to form a subsidiary and entrust to it various functions in terms of the four draft agreements placed before it. The scope of work envisaged by the subsidiary company in India for the applicant as enumerated in these four service agreements is as given below: 1. Agreement for clerical and secretarial assistance: 2.1. The consultant shall provide ABC with secretarial and clerical assistance to complete documentation of tenders, contracts and subsequent documentation required to enable the Indian customers who have purchased commodities from ABC overseas, to obtain delivery of the said commodity on its arrival in India. 2. Service agreement for assistance in responding to tenders: 2.1. The consultant sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ABC. 2.1.2. ABC shall thereafter pick those tenders that need to be responded to and shall lay down parameters within which quotations shall be made. 2.1.3. The consultant shall submit/re-submit such tenders as directed by ABC within the parameters identified by it and shall also sign the tenders, authority for which only shall be granted by ABC through a specific power-of-attorney. 2.2. Follow-up and signing of contracts: 2.2.1. ABC shall inform the consultant of global tenders floated in the markets of India which it has responded to and which need to be followed up and discussed by the consultant with the tendering authority, including such tenders responded to with the assistance of the consultant as stated in article 2.1 above. 2.2.2. The consultant shall, after discussing with the tendering authority, revert to ABC by means of facsimile/telex/e.mail messages as to the fate of the tender. 2.2.3. Should the terms of the quotation made by ABC not be acceptable to the tendering authority, ABC shall intimate the consultant of its revised terms to be offered to the tendering authority. In the alternative, should ABC not be willing to accept any revision of the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questions, it may be relevant to refer to some of the provisions of the agreement between the Republic of India and the Swiss Confederation for the Avoidance of Double Taxation with reference to taxation of income as notified in the Gazette of India, dated April 21, 1995 (hereinafter referred as DTA ). Article 5 of the DTA deals with the meaning and purport of the term permanent establishment . The relevant provisions of article 5 are reproduced hereinbelow (see [1995] 214 ITR (St.) 226 ): Article 5: 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 shall include especially: (a) a place of management; (b) a branch; (c) an office; (d) a store or other sales outlet; (e) a factory; (f) a workshop; (g) a warehouse in relation to a person providing storage facilities for others; (h) a permanent sales exhibition; (i) a mine, a quarry, an oil or gas well, or any other place of extraction of natural resources; (j) a building site or construction, installation or assembly project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or on behalf of the enterprise; or (iii) in so acting, he manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise, provided that this provision shall apply only in relation to the goods or merchandise so manufactured or processed. 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 status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it, he would not be considered an agent of an independent status within the meaning of this paragraph. 6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; it may include carrying on a part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business. A relation to be a business connection must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the non-resident. The Supreme Court also explained the scope of the income which would arise in India as a result of a business connection. While explaining the scope of the Explanation to section 9(1)(i) of the Act, the court explained that in the case of a business of which some operations are carried out in India and some outside India, the income of the business deemed under section 9(1)(i) shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the context of the provisions of section 9(1)(i) with reference to the relationship between the applicant-company and the subsidiary company in India and the scope of work as stated hereinbefore undertaken by the subsidiary company as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the non-resident and became binding only after being so accepted. It was in this context that the Supreme Court held that there was no business connection between the Indian assessee and the non-resident. In the present case, however, the four agreements proposed to be made with the subsidiary show that such wide authority will be given to the subsidiary as to justify upholding the existence of a business connection. The subsidiary will have an extensive and effective role to play in the matter of the business of the non-resident. Every stage of the operations pertaining to the non-resident s activities connected with India, starting from the flotation of tenders right down to the acceptance of the agreements will be looked after by the subsidiary. It is true that a limitation is placed on the role of the subsidiary by saying that it should act within the parameters prescribed by ABC. Nevertheless, such parameters have not been defined and, even acting within such parameters, the subsidiary will have to undertake such substantial and important commercial activities systematically and continuously for ABC as to justify an inference that ABC will be deriving income through or fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other agent of an independent status, where such persons are acting in the ordinary course of their business. This clause envisages brokers, commission agents and other agents having a business of their own who are entrusted by the enterprise of the other State with some activities falling in the normal course of their business. It is difficult to say whether the subsidiary in this case which possibly may have no business activities at all other than those of the principal, can be said to fall within the scope of paragraph 5 of this article. Moreover, paragraph 5 also provides that when the activities of such an agent are devoted wholly on behalf of that enterprise or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it, he would not be considered an agent of an independent status within the meaning of that paragraph. For ascertaining the position in this regard, the exact working of the subsidiary, the correspondence between the subsidiary and the principal and the mode of their functioning and operations would have to be examined in toto. The quantum of work done, the services rendered, the contracts undertaken for outsider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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