TMI Blog2000 (10) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... which was to expire on 31-12-1988. This agreement shall hereinafter be referred as old agreement . The terms and conditions of the agreement were such on the basis of which it was not disputed that DHL International had business connection in India. The tax was accordingly levied under section 9(1) (i) read with section 5 on the income attributable to the activities of DHL International in India. The respondent is a part of DHL Worldwide Express Group, which is engaged in the business of operating courier service. Initially DHL International used to enter into operating agreements with different companies in different parts of the World. However, it has been stated by the respondent that in view of the uncertainty as to the status of Hongkong after its takeover by China in 1997, a conscious decision was taken that after the expiry of the existing agreements, new agreements would be arrived at with the respondent. The respondent company, viz DHL Operations B.V. Netherlands was incorporated in the Netherlands on 13-8-1979. At the time of its incorporation it was a subsidiary of DHL International. (However, from August 1992 the respondent ceased to be a subsidiary of DHL Internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are residents in India. The respondent had filed the return of income for the assessment years under appeal claiming that no part of the amount receivable from Airfreight Ltd. was chargeable to tax in India. 3. The Assessing Officer, however, vide his order dated 15-7-1991, came to the conclusion that the respondent is liable to tax in India on a portion of income which is deemed to accrue or arise to them in India. The Assessing Officer held that there is no difference in the arrangement embodied in the old agreement entered between DHL International and Airfreight Ltd. and the agreement entered into between DHL Netherlands and Airfreight Ltd. The Assessing Officer has also recorded a finding that the respondent has business connection in India through or from which it receives income in India, which is chargeable to tax under the provisions of section 9(1) (i). In coming to the conclusion that the respondent is having business connection in India, the Assessing Officer has referred to the following circumstances. (i) That the respondent has allowed Airfreight Ltd. to exploit the name of DHL Worldwide Express , which is a very valuable asset. (ii) That the income that or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... col Road, Bombay. (4) That as per clause 5(2) (h) DTAA, premises used as sales outlet is to be considered as permanent establishment in India. In this particular case sales outlet means the receipt of parcels/articles and then sending to hubs constitutes the premises as business premises as sales outlet. (5) That even article 6 of the Double Taxation Agreement is applicable in this case as from the above facts it is clear DHL habitually exercises the authority to conclude contracts on behalf of the enterprise. The above also is well supported that whenever the directors of foreign company visits India, it uses the premises of Airfreight Ltd. for its business. As per Assessing Officer, this has been admitted by the respondent in proceedings for 1989-90 when they were called to give evidence for finalization of assessment. (6) That article 5(4) is also applicable in this case and it established that the respondent is having permanent establishment in India. (7) That at the time of inbound parcels/articles the address of Airfreight Ltd. is used and it is Indian company who looks after the customs clearances and other formalities. 6. The CIT(A) accepted the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent and Airfreight Ltd. Reliance was also placed on the decision of the Bombay High Court in the case of Blue Star Engg. Co. (Bombay) Pvt. Ltd. v. CIT (1969) 73 ITR 283 - 290 in which the principles laid down by the Supreme Court in the case of CIT v. R.D. Aggarwal Co. (1965) 56 ITR 20 were reiterated. Relying upon the said decisions it was contended by the learned DR that assessee having a business connection in India, part of the income was liable to tax under section 9(1) (i). Reliance was also placed on the decision of the Rajasthan High Court in the case of Bikaner Textile Merchants Syndicate Ltd. v. CIT (1965) 58 ITR 169 in support of the contention that in order to ascertain as to whether there is any business connection in India of the non-resident, it is to be seen as to whether there has been continuity and regularity in their relationship with the Indian Establishment in the taxable territories. Since there was continuity and regularity of relationship between the respondent and Airfreight Ltd., it was contended that the principles laid down by the Supreme Court in the case of R.D. Aggarwal Co. (supra) are applicable in this case. It was accordingly conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n effect acting as an agent solely for DHL Worldwide Express, therefore, the respondent was having permanent establishment in India for carrying out their operations. Reliance was also placed by the learned DR on the decision of the Advance Ruling P. No. 8 of 1995, In re (1997) 223 ITR 416 in support of the contention that the respondent was having permanent establishment in India on the ground that the activities of Airfreight Ltd. are devoted wholly on behalf of the respondents in regard to DHL Worldwide Express operations and that Airfreight Ltd. was thus not having an independent status vis- -vis such activities. It was accordingly contended that the decision of the CIT(A) for assessment year 1989-90 as well as for assessment year 1990-91 may be set aside and those of the Assessing Officer restored. 11. The learned counsel for the assessee on the other hand contended that the decision of the CIT(A) was just and reasonable on the facts and in the circumstances of this case. It was submitted that in the case of a non-resident income tax is charged in respect of the income which is received in India or deemed to be received in India or in respect of income which accrues or aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orized to collect charges from the customers as authorized by DHL International in writing. Under the new agreement Airfreight Ltd. is free to charge from customers at such rates as it thinks fit. 14. The learned counsel further pointed out that under the old agreement considerable restrictions were placed on Airfreight Ltd. in the matter of operating procedure, employment of persons, assignment of the benefit of the agreement, use of trade name or any other mark, billing with customers, forwarding of consignment in consolidated from and application of forward consignment faster than the competitors of DHL International. It was pointed out that there are no such restrictions under the new agreement. It was also pointed out that under the old agreement Airfreight Ltd. acted as an agent of DHL International and was accordingly under an obligation to promote business of the latter. Under the new agreement the business of outward consignments from India has been carried on by Airfreight Ltd. exclusively on its own account and accordingly no activity was carried on by the respondent in respect of that part of the business. 15. The learned counsel further contended that since the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the revenue may be dismissed. 18. We have given our thoughtful consideration to the rival contentions. The common issue involved in these appeals is relating to the taxability of the income attributable to the activities of the respondent, if any, in India relating to their business. The facts have been elaborated in the preceding paragraphs and unless it is absolutely necessary we do not propose to repeat the same. The assessee company is incorporated in Netherlands and there is a Double Taxation Avoidance Agreement entered between India and Netherlands. The said agreement has come into force on 21st day of January, 1989 after completing the procedure required under the law of the respective states for bringing into force of the said Convention in accordance with paragraph 1 of Article 29 of the Convention. It would be useful to refer to Article 29 of the DTAA reproduced hereunder:- Article 29: Entry into force. 1. Each of the states shall notify to the other the completion of the procedures required by its law for the bringing into force of this Convention. This Convention shall enter into force on the thirtieth day after the latter of the dates on which the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able by virtue of provisions of section 9(1) (i) for the assessment year 1989-90 insofar as the assessment year 1990-91 is concerned one would also have to consider the impact of Double Taxation Avoidance Agreement entered into between India and Netherlands (hereinafter referred to as DTAA ). 21. We therefore proceed to consider the taxability of the respondent for assessment year 1989-90 under section 9(1) (i). 22. Before we refer to section 9(1) (i) it would be useful to refer to section 5(2) of the Income-tax Act, 1961, which is reproduced hereunder: 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is resident includes all income from whatever source derived which- (a) to (c) ** ** ** (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. 23. Section 9(1) (i) reads as under :- 9(1) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. 26. In the case of Advance Ruling P. No. 8 of 1995 (supra) it has been held that the expression business connection means something more than a business. It presupposes an element of continuity between the business of the non-resident and the activity in the taxable territory. A stray or isolated transaction would normally not be regarded as a business connection. Business connection may take several forms; it may include carrying on part of the main business or activity incidental to the non-resident through an agent or it might 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 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. Such a business connection could be spelt out on the terms of the agreements in question . 27. In the case of Anglo-French Textile Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of CIT v. R.D. Aggarwal Co. (1965) 56 ITR 20 it was observed business connection contemplated by section 42 involves a relation between a business carried on by a non-resident which yield profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection. Business connection may take several forms : it may include carrying on a part of the main business or activity incidental to the main business of 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 territories, which facilitates or assists the carrying on of that business. In such cases the question whether there is business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. The expression business connection postulates a real and intimate relation be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the uncertainty as to the status of Hongkong after the takeover by the Chinese in 1997 a decision was taken that after the expiry of the existing agreements, new agreements would be arrived at with the respondent. A list of agreements entered into by the respondent with the other companies in different countries of the world is set out at pages 35 and 36 of the compilation. 33. Accordingly an agreement between DHL Netherlands, a subsidiary of DHL International and Airfreight Ltd. was executed on 19th of May 1989. Though there was neither any agreement nor were any conditions spelt out between the parties from 1st of January 1989 to 18th May 1989, yet the agreement executed between DHL Netherlands and Airfreight Ltd. was given retrospective effect from 1-1-1989. There was no change in the business between the respondent and Airfreight Ltd., but the terms and conditions of the agreement had been drastically changed. Whereas under the old agreement between DHL International and Airfreight Ltd. the former was having control over the establishment and their business in India carried out through Airfreight Ltd., under the new agreement there was no such control over the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company, the company agrees not to use the trade names or either of them or any other similar name or the operating procedure or any part thereto for the purpose of engaging in the business of forwarders, document handlers or couriers and transport agents for a period of three years thereafter. This condition is deemed by the parties hereto to be essential to this agreement because of the goodwill development by International to its Worldwide business as recited above. (DHL International being described as International and Airfreight Pvt. Ltd. as Company ). 36. Another factor that establishes the fact that the business connection between DHL Organization and Airfreight Ltd., continued uninterrupted is that after the expiry of the agreement on 31st December, 1988 between DHL International and Airfreight Ltd., the business between the two parties continued from 1-1-1989 to 18-5-1989 without then being any agreement between the parties. The agreement executed between DHL Netherlands and Airfreight Ltd. has been given retrospective effect from 1-1-1989. However, fact remains that there was neither any oral agreement between the parties nor any written agreement for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was liable to tax in India under section 9(1) (i). However, as per Explanation (a) to section 9(1) (i) (Para 23 of this order) in case of a business, of which all the operations are not carried out in India, the income of the business deemed under the clause to accrue or arise in India is only such part of income as is reasonably attributable to the operations carried out in India. As per the terms and conditions of the agreement between the respondent and Airfreight Ltd. the latter was responsible to deliver the parcels of DHL Netherlands in India for which a payment of ₹ 25 per kg. was payable to them. It was the obligation of the respondent to deliver the parcels in India. The activity of such delivery in India through Airfreight Ltd. amounts to their operations carried out in India in respect of which a reasonable estimate of income attributable to such operations is assessable to tax under section 9(1) (i). Therefore the Assessing Officer was justified in assessing the income of the respondent for assessment year 1989-90 in respect of inbound consignments. 39. With regard to outbound consignments Airfreight Ltd. was acting as an agent of DHL International. The parce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consignments. We therefore uphold the assessment of income of the respondent in regard to inbound parcels owing to respondent having business connection in India. However, in regard to outbound parcels no operations being carried out in India by the respondent, accordingly no income is attributable to the operations carried out in India by them within the meaning of Explanation (a) to section 9(1) (i). We hold accordingly. 40. This brings us to assessment year 1990-91. For assessment year 1990-91, the DTAA between Netherlands and India was in force. It is well settled principle of law that the assessment of non-resident of any country with which there exists a Double Taxation Avoidance Agreement with India, the assessment of non-resident has to be in accordance with the provisions of DTAA. The Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 and the Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 have affirmed this position of law. The Central Board of Direct Taxes vide Circular No. 333 dated 2-4-1982 (137 ITR St. 1) have also accepted this position of law. Section 90(2) of the Income-tax Act, 1961 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of storage or display of goods 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 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 other activities which had a preparatory or auxiliary character, for the enterprise; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. (5) Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountry. It was further held that when there is a virtual projection of the foreign enterprise of one country into the soil of another country, the foreign enterprise would be considered to have a permanent establishment in the other country. 43. In order to determine as to whether the respondent had permanent establishment in India, it may be useful to give the background of the organization as described in the assessment order as under: The Worldwide activity, an organization of DHL International Hongkong, had been assigned the right to exploit the name DHL patented by DHL California throughout the world outside United States of America. In order to carry out the activity as handlers and forwarders it has developed a network on worldwide basis. Since there are number of activities involving various countries, control is exercised through a number of subsidiaries. DHL Operations B.V. Netherlands Ltd. (the respondent) is 100 per cent subsidiary of DHL International Ltd. Hongkong. (It has been stated before us the present respondent is no longer subsidiary of International). 44. There was an agreement between DHL International and Airfreight Ltd. from 1979, which was ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oit and market the Network within their prescribed countries or territories. (B) The Company, which has hitherto been actively engaged in the collection of urgent business documents and other air express material to be forwarded to destinations outside India, and any other activities related to the courier and air cargo business, has now applied to International to act as principal in relation to local Indian consignors, sub-contracting to the DHL Express Network obligations of international transportation and delivery while at the same time having access to DHL s tracking and tracing facilities and other computerized service enhancements. (C) International has agreed to this and to this end has procured its subsidiary DHL to enter into this Agreement and to grant the rights contained herein. (D) The parties have now agreed that each shall render certain services to the other as forwarders, document handlers or couriers and transporters, that is to say, the Company shall render such services to DHL in the Republic of India (hereinafter called the Territory ) and DHL shall render such services to the Company outside the Territory, on a principal to principal basis and upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essence of the agreement rather than its form. We have therefore to consider the substance of the agreement between the parties rather than its form. 47. Proceeding in that direction it is observed that the business of DHL Netherlands is that of couriers. The consignments are accepted in the territories outside India for delivery in various parts of the world, including India. The contract of DHL starts from the point of accepting the consignment and ends with its delivery to the consignees. When it is the obligation of the respondent to deliver the consignments in India, any person undertaking to deliver such consignments in India would be doing so for the respondent as it is their obligation to deliver the consignments in India. That is specifically provided in the agreement. We accordingly reject the contention on behalf of the assessee that Airfreight Ltd. had acted as principal even in regard to the inbound consignments. 48. Let us now revert back to the issue as to whether the respondent can be said to have carried on any part of its business activity in India through a permanent establishment. Permanent establishment, as already pointed out, is a fixed place of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Interpretation.- (a) In this Agreement save where the context otherwise requires the terms offices and agents and licensees of DHL shall include every person, firm or company directly or indirectly associated with DHL in the conduct of its business herein described throughout the world whether associated by any proprietary interest or formal agency or other agreement or not and every person, firm or company to by, from or through whom Consignments carried by or for DHL in the conduct of its business are delivered or received (other than the original consignor or ultimate consignee thereof). (b) The hearings included in this Agreement are inserted for convenience and shall not affect the interpretation of any of its provisions. 50. As per clause 10 above, the offices, agents and licensees of DHL includes every person, firm or company directly or indirectly associated with DHL in the conduct of its business whether associated by any proprietary interest or formal agency or other agreement or not and every person, firm or company to by, from or through whom consignments carried by or for DHL in the conduct of its business are delivered or received. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the business of the enterprise is wholly or partly carried on. Since the respondent is established to have carried on part of its business through a fixed place of business, viz., through Airfreight Ltd. the respondent falls within the definition of permanent establishment under paragraph 1 of Article 5. 53. It may also be pertinent to mention that paragraph 2 of Article 5 provide certain places to include in the definition of permanent establishment. As per paragraph 2(h) , premises used as a sales outlet is also included in the definition of permanent establishment. The Assessing Officer has held that the business of DHL being of accepting the consignments for delivery, a place used for effecting the delivery would amount to its sales outlet. In our considered view, a place of business used by the respondent through the agency of Airfreight Ltd. for carrying out part of its activity falls within the definition of permanent establishment, but at the same it cannot be equated with the premises used as a sales outlet. It has also to be borne in mind that paragraph 2 of Article 5 gives inclusive definition of permanent establishment and it does not by necessary implication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preted unless one keeps in mind the first condition. For application of paragraph 6 of Article 5, agent has to be of independent status. If a person carries on wholly or almost wholly all the activities of the non-resident and does not carry on any other activity, that person will not be an agent of independent status. Therefore the contention that since Airfreight Ltd. is carrying on activities of business other than the activities of respondent they are excluded from operation of paragraph 5, does not hold water. It is well settled principle of law that the words in a statute or document take its colour from the context. When we keep in mind that the enquiry to be made is relating to the activities of the non-resident vis-a-vis the activities of the agent of independent status, it is not difficult to appreciate that the enquiry to be made as per paragraph 6 is not as to whether the agent is carrying on various activities other than the activity of being an agent of the non-resident but as to whether the entire activities relating to the non-resident are carried on wholly or almost wholly by the agent on behalf of the non-resident enterprise. In this case Airfreight Ltd. is an age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the respondent having allowed Airfreight Ltd. to use its trade name in India in respect of inbound consignments as well as for outbound consignments without any apparent consideration. Nevertheless, it is well-established principle of law that suspicion does not take the place of proof. Suspicion is mother investigation but not a substitute for evidence. Since there is nothing on record except the suspicion, we are bound to give effect to the terms conditions of the agreement between the parties especially when the said agreement has been approved by the Government in India. 58. Reverting back to the agreement, it is clear that the respondent had agreed to provide services to Airfreight Ltd. outside India in regard to outbound consignments. Airfreight Ltd. was allowed to collect the consignment as principal without the respondent being involved in regard to such consignments. It was the obligation of Airfreight Ltd. to deliver the consignments to respondent outside after necessary clearance from custom authorities. Therefore, in regard to outbound consignments, no activity was carried out by the respondent in India. By allowing the use of trade name in respect of even outbo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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