TMI Blog2016 (5) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to tax in India, either under Section 9(1) or otherwise or at all. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of Section 9(1)(i) of the Income Tax Act, 1961. Since there is no business connection within the meaning of section 9(1)(i) of the said Act between the Appellant Company and the overseas entities, the overseas entities are not chargeable to tax in India on their profits, which wholly accrued and arose outside India and through rendering of services by them wholly outside India. None of the non-resident Entities had any permanent establishments in India. The Appellant Company as well as each of the nonresident entities were acting on Principal to Principal basis; and that none of them were agents of each other. The mere fact that the Agreements executed in between the Appellant Company and each of the different non-resident entities used the nomenclature “Reciprocal Appointment as Agents”, both ways, for Air / Ocean import and export transportation between India and the respective establishments in the overseas countries, it cannot and does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly holding and/or confirming that the overseas entities had appointed the Appellant Company as its Exclusive Agent in respect of import from their respective Countries on a long term basis. 3. That the learned Commissioner of Income Tax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly holding and/or confirming that the Appellant Company acted as a Dependent Agent - Permanent Establishment in India of different Non-Resident Entities, in terms of the various Double Taxation Avoidance Agreements (DTAA). 4. That the learned Commissioner of Income Tax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly holding and/or confirming that though income is received by the Overseas Entities outside India, it accrued or arose in India, and is, therefore, chargeable to tax in India, as per section 5(2)(b) of the said Act. 5. That the learned Commissioner of Income Tax (Appeals)VI, Kolkata erred in arbitrarily and wrongly upholding the application, in the instant case, of the principles laid down by the Hon'ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. CIT (1999) 239 ITR 587 (SC), n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is a single and common issue in all the grounds of appeal, so all the grounds are clubbed together for the sake of convenience. The solitary issue raised by the assessee in all the grounds of appeal is that the assessee failed to deduct the TDS on the payment made to overseas entities for logistic services. 2. The facts in brief as culled out from the records are that the assessee in the present case is a Government company and inter alia engaged in the business of providing the logistic services worldwide. The only issue in this case relates to non deduction of TDS on the payment to its overseas agents towards the logistic services. The assessee has business arrangement from the various commercial organizations which are in the same line of business all the world. As and when the assessee receives the contract from its client based in India for the logistic services for a country outside India then the assessee approaches to his overseas agent of that country for such services. The major role of the overseas agents is to coordinate with the shipping companies, arrange local transportation as required and book the shipment either by the Sea or the Air as per the instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir consignments. (b) The parties shall undertake delivery of the individual shipment on the other party s consolidations if so required by the individual consignee. All such clearance and delivery charges will be recoverable from the consignee. (c) If the consignor want the parties to perform customs clearance, the parties shall render all possible help to the consignor or consignor s representative with reasonable service charges plus the normal charges required for the issue of delivery orders. (d) Upon effecting final delivery to the consignee or consignee s representative, the parties shall obtain a signed delivery receipt for each shipment in token of having delivered the consignment in good order and condition. (e) Where the consignee of a consignment is at a place beyond the deconsolidation point and sector carriage by air or land is effected by either party, such sector charges (Actual Sector Freight + Transhipment Charges) will be invoiced at 50% by the receiving party to the other after the transactions, in respect of consolidations from Austria, Bosnia, Czech Republic, Slovenia, Slovakia, Ukraine to India and from India to the countries mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, to the origin agent and will be replied to within 7/15 days by both sides. The origin agent to raise a credit not if the query is accepted. (e) The origin agent will invoice the Agent with the total collect charges for all HAWB/HBL where origin agent prepays the MAWB/MBL. When the origin agent sends MAWB/MBL on a charges collect basis to the destination agent, a credit note will be given to the agent for the amount of the collect charges for freight, and any applicable airline disbursements. At this juncture the AO has also highlighted the provision of Permanent Establishment (for short PE) in the light of Double Taxation Avoidance Agreement (for short DTAA) with various countries. Accordingly for the sake of clarity the provisions of PE in relation to DTAA with UAE - United Arab Emirates is reproduced below:- UAE: Article 5- Permanent establishment- 1. For the purposes of this Agreement, the term permanent establishment mans a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially: (a) A place of management; (b) A branch; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that 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 their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph. 2.2 For the year under consideration the assessee has made the payment to its overseas agents towards the logistic services for an amount of ₹ 9785.36 lacs. The breakup of such services stands as under : i) Remittances towards Air Logistic Services from Kolkata 8724.53 ii) Remittance towards Sea Logistic Services from Kolkata 641.38 iii) Remittance towards Logistic Services from Mumbai 415.03 iv) Remittance towards Logistic Services from Bangalore 4.42 9785.36 The further breakup of the amount paid towards logistic services in the form of reimbursement and profit stands as under : S.No. Particulars Reimbursement exp. Profit Total 1. Air Logistic services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le amount of payment made to the overseas agents i.e. actual cost of reimbursement plus the amount of share of profit as the assessee or the overseas agent has not submitted any application under section 195(2), 195(3) or 197 of the Act. The AO has relied in the decision of Hon ble Supreme Court in the case of Transmission Corporation of AP Vs CIT 105 Taxman 742 while holding the assessee in default. 3. Aggrieved, assessee preferred an appeal to Ld CIT(A). Before the ld. CIT(A) the assessee submitted that the payment made to the overseas agents is not liable to tax by virtue of the provisions of the Double Taxation Avoidance Agreement. Therefore the question of TDS in accordance with the provisions of section 195 of the act does not arise. None of the overseas agents has any permanent establishment in India so the instant transaction is out of the purview of the provisions of section 9 of the income tax Act. It is well settled law that the reimbursement of expenses paid to non-residents is not chargeable to tax, therefore there is no requirement to deduct any tax. The assessee was dealing with the overseas agents on principal to principal basis and none of them is agent to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusively on behalf of entity in India, was negotiating and concluding contracts including rates on behalf of the overseas entity and represented its interest in India on long term basis. It is well known that concept of permanent establishment includes agency PE. The UN model convention contains Article-5(5) dealing with agency PE. It has been mentioned therein that where an enterprise does not have its own establishment, it could have a PE though an agent. The agent should be authorized to conclude contracts on behalf of the principal in such a manner that agent s action would bind the enterprise. Agents who are dependent upon the principal may constitute a PE and the authority to bind should be for the purposes which are essential and significant to the principal s business. Such provisions regarding agency PE are present in practically all the DTAAs signed by India with several counties. The ITO has, in his order extensively quoted such provisions in some of the DTAAs, such as those with UAE, Germany, Singapore, as well as UN model. If one analyses the relationship between the overseas entities and the appellant, it fulfils all of the tests mentioned therein. As discussed earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted on the entire payment in view of the ratio given by the Hon'ble Supreme Court in the aforesaid case. On carefully going through the said decision, it is seen that the issue before the Hon'ble Supreme Court in that case was whether in a case where any sum is payable to the nonresident was a trading receipt, whether the assessee was liable to deduct tax on the entire payment or on the net income. In that context, it was held by the Hon'ble Supreme Court that where the sum paid was chargeable to tax, tax should be deducted on the entire sum at the prescribed rate. In other words, the payer was not supposed to go into as to what would be income imbedded in such a sum and that aspect could only be seen by the AO if an application u/s. 195(2), 195(3) or u/s. 197 of the Act was made to him. However, Hon'ble Supreme Court was, in that case, not concerned with a situation where the amount under consideration was not chargeable to tax at all and hence, in such a situation, ratio of the said decision shall not apply. Hon'ble Delhi High Court has also taken such view in its decision the case of Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del), after a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble ITAT that since the major part of operation took place outside India and only generation of request and receiving the results had occurred in India, only a small component of income shall be taxable in India. Therefore, in the appellant s case also there could be a divergence of view as to what portion of the income was taxable in India. However, since some part of such income was taxable in India and the appellant/payees had not made any application u/s 195(2), 195(3) or u/s. 197 of the Act, the entire sum paid to the overseas entities towards share in profit was liable to be TDS in view of the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. (supra). 12. In the light of the above discussion it is held, that while the reimbursement of cost incurred by non-resident entity shall not be liable to TDS, remittance of their share in profit was liable to TDS u/s 195 of the Income tax Act, 1961. According to the appellant, the figures stated in his order by the ITO in this regard are not correct. The appellant is directed to produce break up of remittance between the reimbursements of cost and share in profit before the ITO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hatsoever be treated as an assessee in default. 4.2. In order to treat the payer as assessee in default, it is of the utmost importance that the amount so paid or credited to the account of the payee is capable of being brought within the purview of the tax net and such assessment can be lawfully made on the payee. 4.3. In support of the aforesaid settled position in law, reliance is placed on the decision of the Hon ble Supreme Court in Vijay Ship Breaking Corporation v. CIT (2009) 314 ITR 309, 313 (SC), which decision was followed and reiterated in GE India Technology Centre Pvt. Ltd. v. CIT (2010) 327 ITR 456, 463-465 (SC). In Vijay Ship Breaking s case, the Hon ble Supreme Court clearly held and observed at page 313 of the Reports that liability to deduct TDS arises only if the tax is assessable in India . Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. In GE India Technology s case, the Hon ble Supreme Court following its earlier decision in Vijay Ship Breaking , held and observed at pages 463-465 of the Reports inter alia as under : If the contention of the Department that the moment there is remittance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income-tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly and Co. (India) (P.) Ltd. [2009] 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are chargeable to tax under the Income-tax Act. It is true that the judgment in Eli Lilly [2009] 312 ITR 225 was confined to section 192 of the Income-tax Act. However, there is some similarity between the two. If one looks at section 192 one finds tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is illfounded . 5. The aforesaid view was also taken by the Hon ble Delhi High Court in Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del). 6. It is also well settled that in order to rope in the income of a non-resident under the deeming provisions of law as contained in section 9 of the 1961 Act corresponding to section 42 of the 1922 Act, it must be shown by the Department that the non-resident carried out some operations or rendered some services in India, in respect of which the income is sought to be assessed to tax in India on deemed accrual basis. Reliance in this connection is placed on the decisions of the Hon ble Supreme Court in Carborandum Co. v. CIT (1977) 108 ITR 335 (SC), CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC) and in Ishikawajima-harima Heavy Industries Ltd. v. Director of Income Tax (2007) 288 ITR 408 (SC). 7. The aforesaid view was followed and reiterated by the Hon ble Karnataka High Court in Jindal Thermal Power Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. If the whole of the deemed income can be roped in for the levy of tax under sub-section (1) of section 42, no question of any apportionment arises. If not, sub-section (3) is attracted. It says : In the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. xxxx xxxx xxxx On a plain reading of sub-sections (1) and (3) of section 42 it would appear that income accruing or arising from any business connection in the taxable territories-even though the income may accrue or arise outside the taxable territories-will be deemed to be income accruing or arising in such territory provided operations in connection with such business, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncometax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the nonresident, and if through or from that connection income directly or indirectly arises. The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt inter alia held and observed at page 437 of the Repots Mere existence of business connection may not result in income of the non-resident assessee from transaction with such a business connection accruing or arising in India. The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment s non-involvement in this transaction excludes it from being a part of the cause of the income itself, and thus there is no business connection. xxx xxx xxx For attracting the taxing statute there has to be some activities through the permanent establishment. If income arises without any activity of the permanent establishment, even under the DTAA the taxation liability in respect of overseas services would not arise in India. Section 9 spells out the extent to which the income of non-resident would be liable to tax in India. Section 9 has a direct territorial nexus. Relief under a Double Taxation Treaty having regard to the provisions contained in section 90(2) of the Income-tax Act would arise only in the event a taxable income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the same have been used here, they have not been rendered in India. xxx xxx xxx 12. It is an undisputed fact that none of the overseas independent Entities with whom the Appellant Company has been dealing with is having any permanent establishment in India. It is by now well settled that even when Section 9 of the Income Tax Act, 1961 applies to a given case, considering the provisions of the Double Taxation Avoidance Agreement, if beneficial, than the provisions of the Income Tax Act, the provisions of the Double Taxation Avoidance Agreement would prevail. In the absence of a permanent establishment, the industrial or commercial profits derived by a non-resident are not assessable to tax in India, particularly when all activities are carried by the independent Overseas Agents only outside India. Reliance in this connection is placed on the decision of the Hon ble Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC). The said view was also stated by the Central Board of Direct Taxes in its Circular No.333 dated 2nd April, 1982 reported in (1982) 137 ITR(St.) 1 as well as by the Hon ble Calcutta High Court in CIT v. Davi Ashmore India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsolidated at a warehouse / central warehouse and sent to a break bulk warehouse where they are broken down into individual orders and distributed. Since these warehousing facilities were used for consolidating the consignments received from the overseas entities and therefrom ensuring delivery of the parcels in India, the warehouse(s) itself / themselves constituted a place of business for the operations of the business activity of the overseas entities in India . kindly see para 5, at page 7 of the said Written Submissions ; e. It thus becomes absolutely clear that the overseas entities had substantial interest of enduring nature in India attributable to the Appellant Company. There was, thus, a virtual projection of each such overseas entity into the territory of India through the Appellant Company . kindly see para 5, at page 7 of the said Written Submissions ; f. As per paragraph 1 of Article 5 of the DTAAs, permanent establishment means a fixed place of business through which the business of the foreign enterprise is wholly or partly carried on. Since, in the instant case, each of the overseas entities was established to have carried on a part of its business th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Written Submissions ; m. Once, the applicability of paragraph 6 is excluded, the existence of an agency PE in India vis-a-vis each nonresident entity is inevitable in so far as the Appellant Company was acting as an agent on behalf of each of the overseas entities on a fairly long term basis, negotiating contract on their behalf having direct dealing on their business activity in India and was also acting in a manner which bound the overseas entities in relation to profits derived from their Indian operations . kindly see para 5.2, at page 8 of the said Written Submissions ; n. The existence of such an agency PE in India under paragraph 5 of Article 5 will get further support from the fact that the Appellant Company maintained the stock of inbound parcels / consignments in warehouse(s) from which the delivery was made on regular basis . kindly see para 5.2, at page 9 of the said Written Submissions ; o. Therefore, considering the provisions under paragraph 5 of Article 5 of DTAAs between India and the foreign Countries, it is now amply clear that the Appellant Company constituted an agency PE in India for each of the nonresident overseas entities, in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected with the business activity of those entities and such a connection was contributed to the earning of the profit by the overseas entities . kindly see para 4.1, at page 6 of the said Written Submissions ; vii. There being a business connection of the overseas entities in India within the meaning of section 9(1)(i), they are liable to tax in India under section 9(1)(i), subject to Explanation (a) to section 9(1)(i) , which stipulates that in the case of a business of which all 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 . kindly see para 4.1, at page 6 of the said Written Submissions ; viii. As per the terms and conditions of the Agreement between the respective overseas entities and the Appellant Company, the later was responsible to perform various services as stipulated in the Agreements and deliver the parcels of the overseas entities in India for which the charges to be collected and shared were distinctly stipulated in those Agreements . kindly see para 4.1, at page 6 of the said Written S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis etc.) to be imported to India from overseas s. The customers concerned engage the Appellant Company to render logistic services in relation to such imports against the particular Purchase Order already placed by the concerned Indian customers with the overseas suppliers. The privity of contract is always in between the Appellant Company and its Indian Customers, who wish to import goods from overseas; t. There is no contract at any time whatsoever in between the said Indian customers and the overseas entities, who are engaged by the Appellant Company, only for rendering logistic services overseas; u. The Appellant Company, through its concerned branch office in India, communicates with the entities overseas, who are independently engaged for rendering such logistic services overseas. It may be appreciated that the materials ordered by the Indian customers are to be imported from overseas to India; v. As such, the logistic services viz. engaging Carrier overseas, arranging, if required, stuffing / lashing / packing and transportation of materials from the overseas manufacturers / suppliers / consignors to the Carrier overseas, arranging customs clearance in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on thereto accrues or arises in India; bb. At no stage of operations, the overseas entities act as Agents of the Appellant Company. The overseas entities engage the Airlines company and/or the Shipping Lines and/or the local transporters etc. on Principal to Principal basis, and not as agent of the Appellant Company herein; cc. The overseas entity does not have any permanent establishment in India. In relation to export activity (cases falling under this category are not more than 5%): i. The Indian Exporter(s), who are all customers of the Appellant Company, engage(s) the Appellant Company about the cargo to be exported from India together with the relevant details of the Overseas Importer(s), all in pursuant to specific agreements entered into between the Indian Exporter(s) and the Appellant Company. The privity of contract in all such cases is in between the Indian Exporter(s) and the Appellant Company herein; ii. The Appellant Company, based upon tenders floated by the Indian customers / exporters, and/or on specific nomination basis, enters into contracts for a fixed rate for logistic services, with reference to the weight / volume / unit of the consignm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia; xi. The overseas entity invoices to the Appellant Company for local overseas transportation and other actual expenses incurred by it overseas in connection with the delivery of the exported consignment from India, which is required to be delivered to the overseas importer(s), after collecting the consignment from the carrier(s); xii. The transportation charges and other incidental expenses incurred overseas, on actual basis, by the overseas entity for providing logistic services overseas, is reimbursed and remitted by the Appellant Company to the overseas entity; and the amount representing the prefixed share of the overseas entity in the net profits for each such consignment, is also remitted by the Appellant Company to the overseas entity; xiii. The overseas entity in such cases does not render any service in India; xiv. The Appellant Company, while making remittances to the overseas entity, does not deduct any tax at source, since all services by the overseas entity are rendered by it wholly outside India; and no income in relation thereto accrues or arises in India; xv. At no stage of operations, the Appellant Company act as Agents of the overseas entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be treated as place of business for the operations of the business activities of the overseas entities, as arbitrarily and wrongly alleged by the learned Sr. DR and/or otherwise or at all; hh. In the circumstances, it is wholly incorrect on the part of the learned Sr. DR to wrongly allege that overseas entities had substantial interest of enduring nature in India attributable to the Appellant Company and/or that there was any virtual projection of any such overseas entity into the territory of India through the Appellant Company, as arbitrarily and wrongly alleged by the learned Sr. DR and/or otherwise or at all; ii. In the circumstances, it is also wholly incorrect on the part of the learned Sr. DR to allege that they are existed a fixed place of PE in India within the meaning of paragraph 1 of Article 5 of the DTAA and/or that such PE was in the form of warehouse within the meaning of paragraph 2 of Article 5, as arbitrarily and wrongly alleged by the learned Sr. DR and/or otherwise or at all; jj. It was wholly incorrect on the part of the learned CIT(A) that the Appellant Company acted as a dependent agent on behalf of each of the overseas entities. This finding is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in section 9(1) of the Act would apply so as to tax the income deemed to accrue or arise in India; ss. Since the non-resident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no portion of their business profits earned by them exclusively for services rendered outside India can be brought to tax in India, either under section 9(1) or otherwise or at all; tt. As already stated earlier the delivery of parcels / consignments were handled by the Appellant Company in India wholly on its own behalf and not on behalf of the overseas entities, as arbitrarily and wrongly alleged by the learned Sr. DR or otherwise or at all; uu. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of section 9(1)(i) of the Income Tax Act, 1961; vv. It is wholly incorrect on the part of the learned Sr. DR to allege that the overseas entities, in the facts and circumstances of the instant case carried on any activity of business in India, as wrongly and arbitrarily alleged by the Revenue or otherwise or at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the respective establishments in the overseas countries, it cannot and does not make the Appellant Company as the agent of the non-resident entities in any manner whatsoever, as is by now well settled by several decisions of the Hon ble Supreme Court kindly see Super Poly Fabriks Ltd. v. Commissioner of Central Excise (2008) 11 SCC 398 (SC) = (2008) 10 STR 545 (SC); ddd. the nature of operations and activities carried out by the Appellant Company as well as each of the non-resident entities clearly show that none of them are agents of each other; and that each of them are operating in their respective countries on Principal to Principal basis. As such, the Appellant Company can by no stretch of imagination be treated as the Permanent Establishment of any of the non-resident entities; eee. in the circumstances mentioned hereinabove, the Appellant Company was not required to deduct any tax at source either under section 195 and/or section 195A of the said Act; fff. the decision of the Hon ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. CIT (1999) 239 ITR 587 (SC) = (1999) 105 Taxman 742 (SC) referred to by the learned Income Tax Officer (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The third decision of the Mumbai Bench of the learned Tribunal in Hapag-Lloyod Container Line GMBH v. Addl. Director of Income Tax (International Taxation), Mumbai (2012) 20 taxmann.com 719 (Mum), cited by the Revenue is again distinguishable in facts. In that case, it was clearly recorded by the learned Tribunal as a finding of facts in paragraph 21 of its said Decision that the assessee in that case was carrying out the business of operation of ships in India through its agent Hapag-Lloyod India Pvt. Ltd. The agent in India was concluding the contract of cargo transportation by issuing bill of lading which are legally binding on the assessee; therefore, the assessee was held to be carrying on the business of operation of ships in India and was thus held to be having a PE in India as per Article 5 of DTAA. This decision has no application to the instant case. 24. The fourth decision of the Hon ble Supreme Court in GVK Industries Ltd. v. ITO (2015) 54 taxmann.com 347 (SC), cited by the Revenue is also distinguishable in facts. In paragraph 37 of the said Judgment, it was clearly recorded by the Hon ble Apex Court that NRC had acted as a consultant and the services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conducting its business of quality control and management was liable to tax in India; and therefore there was requirement to deduct tax at source. This decision has no application in the instant case. 28. The eighth and last decision of the Bangalore Bench of the learned Tribunal in Syed Aslam Hashmi v. ITO (International Taxation), Ward 2(1), Bangalore (2013) 55 SOT 441 (Bang), cited by the Revenue, is again distinguishable on facts. The learned Tribunal held that where seller of an immovable property in India was non-resident Indian, according to the address given in the Sale Deed itself, the Indian purchaser ought to have deducted tax at source under section 195 while making payment of the sale consideration payable by him to the NRI Vendor. This decision again has no application in the facts and circumstances of the instant case. 29. On the other hand the ld. DR has submitted that M/s Balmer Lawrie Co. Ltd. ( the appellant company ) is an Indian company, engaged in the business of providing logistic services. It had entered into agreements with several non-resident (overseas) concerns to act as an agency for each such non-resident concern as per the terms conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and condition. (e) Where the consignee is at a place beyond the deconsolidation point and sector carriage by air or land is effected by either party, such sector chares will be invoiced at 50% by the receiving party to the other party after the transaction. (f) Both parties shall ensure that their respective clients do not suffer in any way because of short service (and not getting their consignments in time) due to any difference between the parties at any time. (g) It is the respective party s responsibility to receive payment of all charges due from the consignee before making the final delivery. (h) If the consignee does not want to take delivery of his shipment right away, or refuses to accept it, either party shall communicate this to the other party immediately by e-mail and the first party shall send disposal instructions to the second party after obtaining same from the shipper. (i) The parties shall reply promptly to all tracers and communications which one party may receive from the other. (j) All expenses for telephone, fax or other communication sent in connection with or pursuant to the agreement shall be to the account of the sender. 29.1. As p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been used consciously and for a valid reason. Nevertheless, going beyond the terminology, if one analyses the relationship between the appellant and the overseas entities, it can be seen that the overseas entities have appointed the appellant as exclusive agent in respect of import from their respective countries on a long term basis. As a result, wherever any import is to be made from a particular country, the appellant is dependent upon a single overseas entity relevant to that country for the purpose of meeting requirement of its customers. The appellant has no option of making the import through any other service provider. The appellant negotiates the terms and rates of the contact with the importing party (customer) in India. It has no say over the cost of logistic services provided by the overseas entity. It passes on, in addition to the cost, pre-agreed share in profit to the overseas entity. Such profit obviously depended upon the price negotiated by the appellant with the clients. Thus, the appellant was, on a regular basis, negotiating the rates and other terms with the clients in India, which generated business for the overseas entity and determined, even if indire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is concerned. It, therefore, follows that any business generated for the overseas entity through such PE results in accrual of income in India. Though such income is received by the overseas entity outside India, it accrues or arises in India and is, therefore, taxable as per section 5(2) of the Income-tax Act, 1961. Moreover since the overseas entity has PE in India in the form of its agent (appellant), such income would be taxable in India even after taking into account the beneficial provisions of various DTAAs signed by India with various countries. It may be mentioned that all the DTAAs have a provision that business income accrued in India is taxable if the non-resident has a PE in India. 30.1 Having held so, the Ld. CIT(A) further noted that the amount remitted by the appellant to the overseas entities had two components- cost of logistics services without any profit element embedded therein and the actual profit element in the form of share in profit arising from the activities carried out in India. The Ld. CIT(A) held that the cost of logistic services without profit element constituted mere reimbursement of cost of services provided by the overseas entities and was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on their activity of business in India and there was an intimate and real relationship of a business character of the overseas entities with the appellant company in India, which contributed to the earning of profit by the overseas entities in their business. The connection between the overseas entities with the appellant company in India was undoubtedly a commercial connection intimately connected with the business activity of those entities and such a connection was contributory to the earning of the profit by the overseas entities. There being a business connection of the overseas entities in India within the meaning of section 9(1)(i), they are liable to tax in India under section 9(1)(i), subject to Explanation (a) to section 9(1)(i) which stipulates that in case of a business, of which all 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 agreements between the respective overseas entities and the appellant company, the latter was responsible to perform various services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warehouse/ central warehouse and sent to a breakbulk warehouse where they are broken down into individual orders and distributed. Since these warehousing facilities were used for consolidating the consignments received from the overseas entities and therefrom ensuring delivery of the parcels in India, the warehouse(s) itself/themselves constituted a place of business for the operations of the business activity of the overseas entities in India. This arrangement is for fairly long period under the agreement between the appellant company and each overseas entity. It, thus, becomes absolutely clear that the overseas entities had substantial interest of enduring nature in India attributable to the appellant company. There was, thus, a virtual projection of each such overseas entity into the territory of India through the appellant company. As per paragraph 1 of Article of the DTAAAs, ' permanent establishment ' means a fixed place of business through which the business of the foreign enterprise is wholly or partly carried on. Since, in the instant case, each of the overseas entities was established to have carried on a part of its business through a fixed place of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... graph 6 was not applicable in the instant case. Moreover, in each agreement it is specifically mentioned that the overseas entity will not establish an operating company doing the business of air and ocean, import and export transportation in the Indian territory, without the express consent of the appellant company, during the continuance of the said agreement between them. This clearly establishes that the appellant company had carried on the activities of each of the nonresident overseas entities wholly in India. Therefore, even if it is assumed that the appellant company was an agent of independent status, still it had carried on the activities of the overseas entity wholly in India and in the result, paragraph 6 would have no application in the instant case. Once the applicability of paragraph 6 is excluded, the existence of an agency PE in India vis-a-vis each non-resident entity is inevitable insofar as the appellant company was acting as a agent on behalf of each of the overseas entities on a fairly long term basis, negotiating contracts on their behalf having direct bearing on their business activity in India and was also acting in a manner which bound the overseas entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sable in India and place of assessee in itself is permanent establishment for non-resident entities in terms of the provisions of DTAA. So the profit made by them from the transactions made with the assessee is assessable to tax in India. The AO further held that the assessee was to deduct the TDS on the whole amount of payment made to the overseas agents i.e. actual cost of reimbursement plus the amount of share of profit as the assessee or the overseas agent has not submitted any application under section 195(2), 195(3) or 197 of the Act. However the ld. CIT(A) has partly granted the relief to the assessee by holding that only the profit element attributable to the overseas entities shall be subject to TDS. Now before us the following question emerges for the adjudication: 1. Whether the assessee is liable to deduct tax at source under section 195 of the Income Tax Act, 1961 on account of remittance of profits made to the Non-Resident Companies / Organizations towards Logistic Freight and Other Services provided by such entities overseas and wholly outside India. 2. Whether the income received by the Overseas Entities outside India, it accrued or arose in India, and is, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tre Pvt. Ltd. v. CIT (2010) 327 ITR 456, 463-465 (SC). In Vijay Ship Breaking s case, the Hon ble Supreme Court clearly held and observed at page 313 of the Reports that liability to deduct TDS arises only if the tax is assessable in India . Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. In GE India Technology s case, the Hon ble Supreme Court following its earlier decision in Vijay Ship Breaking , held and observed at pages 463-465 of the Reports inter alia as under : If the contention of the Department that the moment there is - remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See : Vijay Ship Breaking Corporation v. CIT [2009] 314 ITR 309). Now whether the payment made to overseas entities is the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who, acting on behalf of the nonresident,- (a) Has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) Has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly0 delivers goods on merchandise on behalf of the non-resident; or (c) Habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crual or arising of the income, The High Court does not appear to have kept this distinction in view and mixed the one with the other while deciding the reference in question. Section 42 of the Act concerns itself with a deemed accrual or arising of the income within the taxable territories. Under subsection (1): All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories... shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. If the whole of the deemed income can be roped in for the levy of tax under sub-section (1) of section 42, no question of any apportionment arises. If not, sub-section (3) is attracted. It says : In the case of a business of which all the operations are not carried out in the taxable territories, the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion whether there is a 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 learned judge says further: 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. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. 32.4 In Ishikawajima-harima s vs DIT (2007) 288 ITR 408, their Lordships of the Hon ble Supreme Court inter alia held and observed at page 437 of the Repots Mere existence of business connection may not result in income of the non-resident assessee from transaction with such a business connection accruing or arising in India. The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment s non-involvement in this transaction excludes it from being a part of the cause of the income itself, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g been excluded from the scope of taxation under the Act, the application of the double taxation treaty would not arise. The Double Tax Treaty, however, was taken recourse to by the appellant only by way of an alternate submission on income from services and not in relation to the tax of offshore supply of goods. Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. The petitioners in the present case have provided services to persons resident in India, and though the same have been used here, they have not been rendered in India. 32.5 From the analysis of above judgments it is beyond doubt that none of the overseas independent Entities with whom the assessee has been dealing with is having any permanent establishment in India. It is by now well settled that even when section 9 of the Income Tax Act, 1961 applies to a given case, considering the provisions of the Double Taxation Avoidance Agreement, if beneficial, than the provisions of the Income Tax Act, the provisions of the Double Taxation Avoidance Agreement would prevail. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal relationship between the assessee and overseas entities and vice versa. Merely the word used in the agency in the agreement does not amount that there exist the relationship of agency. In this connection we are relying in the decision of Apex Court in the case of Super Poly Fabriks Ltd. Vs. Commissioner of Central Excise Punjab (2008) 11 SCC 398 (SC) civil appeal No. 1713 of 2007, decided on April 24, 2008 wherein it was held as under : the expressions principal and agent is rules to our not this is it the nature of transaction is required to be to come mind on the basis of such expense the and not by the Norman later used documents are to be construed having regard to the context thereof 04 labours and may not be of much relevance 32.6 We also rely in the Article 5 of the DTAA with UAE which speaks as under : An enterprise of all 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, provided that such person acting in the ordinary course of their business. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in between the Appellant Company and each of the different non-resident entities used the nomenclature Reciprocal Appointment as Agents , both ways, for Air / Ocean import and export transportation between India and the respective establishments in the overseas countries, it cannot and does not make the Appellant Company as the agent of the non-resident entities in any manner whatsoever, as is by now well settled by several decisions of the Hon ble Supreme Court kindly see Super Poly Fabriks Ltd. v. Commissioner of Central Excise (2008) 11 SCC 398 (SC) = (2008) 10 STR 545 (SC); the nature of operations and activities carried out by the Appellant Company as well as each of the non-resident entities clearly show that none of them are agents of each other; and that each of them are operating in their respective countries on Principal to Principal basis. As such, the Appellant Company can by no stretch of imagination be treated as the Permanent Establishment of any of the non-resident entities. in the circumstances mentioned hereinabove, the Appellant Company was not required to deduct any tax at source either under section 195 and/or section 195A of the said Act; the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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