TMI Blog2021 (8) TMI 1405X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s judgment in the case of Set Satellite ( 2008 (8) TMI 96 - BOMBAY HIGH COURT ), so far as profit attribution of a DAPE is concerned, the legal position is that as long as an agent is paid an arm's length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment. Viewed thus, the existence of a dependent agency permanent establishment is wholly tax neutral. As transactions in question were at arm s length price, no taxability survives in the hands of the assessee. Once basic taxability under the DAPE itself comes to an end, all other issues raised in the appeal are rendered academic and infructuous. - PRAMOD KUMAR, VICE PRESIDENT AND AMARJIT SINGH JUDICIAL MEMBER For the Appellant : Ketan Ved For the Respondent : S.S. Iyangar ORDER PER PRAMOD KUMAR, VP: 1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 18th September 2019, passed by the Disputes Resolution Panel-3, Mumbai in the matter of assessment under section 144C(1) of the Income Tax Act, 1961, for the assessment year 2015-16. 2. Grievances raised by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer erred in arriving at a conclusion that the Assessee company has not provided the relevant Transfer Pricing documentation of NSDIPL so as to assessee the arm s length arrangement between the parties although the same were duly submitted during the course of assessment proceedings. 6. Without Prejudice to the Ground No. 1 to Ground No. 5, on the facts and in the circumstances of the case and in law, the Learned AO erred in taxing the receipts from supply of Novell Software products on gross basis by applying Gross Profit Ratio of 41.07 percent instead of applying the Net Profit Ratio of Novell Inc. or by not reducing at least 38 percent of remuneration retained by NSDIPL for sale of such Novell Software products in relation to which the income is sought to be taxed in India. 7. Without Prejudice to the Ground No. 1 to Ground 6, on the facts the circumstances of the case and in law, the Learned Assess Officer erred in attributing the revenues of INR 12,66,92,88 from sale of Novell Software products made by appellant directly to third parties to the alleged DAPE without appreciating the fact that such sales as third parties were not effected through NSDIPL and taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt's path-breaking judgment in the case of Vishakhapatnam Port Trust (supra), 'permanent establishment' postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country and it should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country [Emphasis, by underlining, supplied by us, here as also elsewhere in this order]. What is equally important is in the fundamental analysis justifying the existence of permanent establishment under Article 5(1) and 5(2), as we have reproduced earlier, there is not even a whisper of a mention about any fixed place of business. All this analysis points out is that The assessee could not have earned any income from India but for its Indian agent, ZTL/EI Zee and that The employees of ZTL/EI Zee are employees of Zee group as a whole and they perform functions as required by ATL also , but then the agent and the principal being from the same busines group would not obliterate their separate legal existence. It is only elemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agency, for example. There can be virtual projections even without a fixed place of business, such as in the case of a dependent agency permanent establishment, but such cases will be covered by article 5 (4) rather than article 5(1) and 5(2). The detailed analysis by the Assessing Officer, as extracted earlier in this order, also makes that position evident. At best, therefore, it is a case of dependent agency permanent establishment under Article 5(4), and learned Departmental Representative also accepts that. There is no conflict between 'virtual projection of a foreign enterprise' and the 'dependent agency permanent establishment', and it's in this light that we have to take note of the analysis of legal position. There can be simple situations in which a foreign enterprise operates through an agent, acting as a franchise, and such a franchise can virtually project business of the foreign enterprise on the soil of another country. Clearly, therefore, just because there is virtual projection of business, as the case is made out by the Assessing Officer, it is to be inferred that that there is a permanent establishment under the basic rule, i.e., Article 5(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of advertising, (ii) for the supply of information, (iii) for scientific research, or (iv) for similar activities, which have a preparatory or auxiliary character for the enterprise. 4. Notwithstanding the provisions of paragraphs (1) and (2) of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph (5) apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if: (i) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (ii) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of 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 brok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Klaus Vogel touched a different chord, in his column 'Tax Treaty Monitor' in the 'Bulletin for International Taxation (November 2007 at page 475) and given his approval for two taxpayers approach . The latter is also in consonance with Authorised OECD Approach of the OECD. On materially similar facts of dependent agency permanent establishment for a similarly placed foreign telecasting company as in this case, in the case of DDIT v. Set Satellite (Singapore) Pte Ltd [2007] 106 ITD 175 (Mum), a coordinate bench, speaking through one of us, (i.e. the Vice President), had upheld the two taxpayer approach , in computation of DAPE profits, and observed as follows: 11. The particular difficulty in the case of a dependent agent permanent establishment is that DAPE itself is hypothetical because there is no establishment - permanent or transient- of the GE in the PE state. The hypothetical PE, therefore, must be visualized on the basis of presence of the GE as projected through the PE, which in turn depends on functions performed, assets used and risks assumed by the GE in respect of the business carried on through the PE. The DAPE and DA has to be, therefore, be treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tead of having a regular office in India, and instead of carrying out the marketing activity in India, he projects his business in India through an Indian Co. by the name of Ind. Co. There is no dispute that Ind. Co. is a dependent agent of the Sing Co. In consideration of the services rendered by Ind. Co., Sing Co. pays Ind. Co. commission @ 30 per cent on sales plus reimbursement of expenses. Sing Co., however, procures the electronic equipment from China, shipped directly to India and sells it in India after a mark up of 200 per cent. We further assume that the reasonable handling costs of Sing Co. for souring the merchandise is 60 per cent on cost. In a particular year, Sing Co. sells goods worth $ 3 million in India. Let us further assume that expenses incurred by Ind. Co., to earn the agency remuneration, is $ 8,99,000. The profits taxable in India, in such a case and based on the treaty provisions before us, should be as follows : A. Commission earned by Ind. Co. $9,00,000 Less : Deductible expenses of Ind. Co $ 8,99,000 Taxable in the hands of the Ind. Co. $ 1,000 B. Profits attributable to Sing Co.'s DAPE in India Sales consideration 30,00,000 Less : Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is permanent establishment , the taxable profits of the foreign enterprise cannot extend beyond the profit earned by the dependent commission agent. The line of reasoning adopted by the learned counsel is that PE is nothing but the dependent agent, and, the taxability of PE can only, therefore, be in respect of the earnings of the agent. Learned counsel has, with his inimitable oration, erudition and legal skills, woven a complex web of arguments to support this legal proposition. However, as it sometimes happens, the quality of arguments in support of a legal proposition is inversely proportional, proportional if it is, to the merits of the proposition sought to be advanced. This is one such occasion. Let us set out the reasons why we think so, and, in the process, deal with various arguments of the learned counsel one by one. 13. At the outset, we must reiterate that a dependent agent (DA) and a dependent agent permanent establishment (DAPE), in our humble understanding, are two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are one and the same thing. 17. Learned counsel has then relied upon the order of this Tribunal in the case of Dy. CIT v. Roxon OY [2006] 103 TTJ (Mum.) 8911 which was authored by one of us. This decision, however, did not deal with the peculiarities of a dependent agent permanent establishment. This decision dealt with the taxability of the installation PE, and, the principles dealing with computation of profits of installation PE, in our considered view, do not have any bearing on the computation of profits of the dependent agency PE. We are, therefore, not persuaded by this reasoning either. 12. Late Prof Klaus Vogel, one of the very eminent international tax scholars of our times, had favoured the path adopted by the coordinate bench. In his last in Tax Treaty Monitor (Bulletin for International Taxation, November 2007, page 475), referring to the above coordinate bench decision, he had this to say: One can understand that many have problems imagining how profits should arise to a permanent establishment which, as the Tribunal itself repeatedly stated, does not exist in reality and is a non-entity wholly hypothetical and fictional . Such sceptics should consider, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is simply a licence for arbitrary allocation of profits. Ultimately, that's what Tribunal did here . There is thus a cleavage of academic opinion on the approach to the DAPE profit attribution and that is a highly contentious issue on the first principles. When the matter travelled before Hon'ble High Court, however, these views of the coordinate bench did not find favour with Their Lordships. Rejecting the theory about separate profit attribution for the dependent agency permanent establishment vis- vis the dependent agent, Their Lordships have, in the judgment reported as Set Satellite Pte Ltd. v. CIT [2009] 307 ITR 205 (Bom), observed as follows: 10. From a reading of Article 7(1) of the DTAA it is clear that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. The profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. In para 2 while determining the profits attributable to the permanent establishment the expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sales are made on a principal-to-principal basis. The CIT(A) had recorded a specific finding in favour of the Appellant in the affirmative on all three counts. It is in these circumstances that it was held that the advertisement revenue received by the Appellant may be from the customers in India is not liable for tax in India. That CBDT Circulars are binding needs no repetition. If authorities need be cited. We may now refer to the judgment of the Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889. In that judgment the issue was whether Circular of 9-10-1984 was inconsistent or whether there was contradiction in the circular and Section 145 of the Income-tax Act. The Supreme Court observed that : ... In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, MSCo. ) and one of the group companies of Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short MSAS ). An agreement was entered into for providing certain support services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo. On 5-5-2005 MSCo. filed its advance ruling application . The basic question related to the transaction between the MSCo. and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having PE in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated 14-4-2005 and if so (ii) the amount of income attributable to such PE. It was ruled that MSAS should be regarded as constituting a service PE under Article 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1969 issued by the Central Board of Direct Taxes. This is the key question which arises for determination in these civil appeals. After discussing the various issues the Court in its conclusion held as under: As regards attribution of further profits to the PE of MSCo. where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, which is taxed anyway dehors the existence of a DAPE. Such an approach may sound somewhat incongruous from an academic point of view inasmuch as what was considered to be a threshold limit for source taxation ceases to have any relevance for source taxation, and as, on a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway dehors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may seem incompatible with the underlying scheme of taxation of cross border business profits under the tax treaties. These aspects, however, cannot come in the way of the binding force of judicial precedents from Hon'ble Courts above. The SLP against this decision is said to pending before Hon'ble Supreme Court, but that does not, in any way, dilute the binding nature of this binding judicial precedent. In all fairness to the learned Departmental Representative, however, we may take r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is, it is wholly tax-neutral inasmuch as the Indian agents have been paid arm's length remuneration, and nothing further can, therefore, be taxed in the hands of the assessee. 15. It has not been the case of the revenue authorities at any stage that the remuneration paid to the Indian agent is not an arm's length remuneration for the services rendered by the agents concerned, yet a prayer is now made that the matter should be sent back to the assessment stage for detailed findings in this regard. In a written note filed by the learned Departmental Representative, it has been submitted that, it is humbly submitted that in the case of DIT v. Morgan Stanley (292 ITR 416 (SC) The Hon'ble Apex Court in para 32 of its order (page 124 of PB II) has carved out an exception. It has held that 'The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case, the data placed by the taxpayer has to be examined as to whether the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no reason as to why the assessee should assume risk after having acquired the content in a working state from the content provider , that all risks for up linking and finally relaying the signals in India is borne by the transponder company and not the assessee , and, therefore, concluded that in view of the above discussions, it can be seen that major part of the risk in terms of market risk and technology risks are borne by the ZTL/El Zee and that almost 85% to 90% revenues from advertisement and subscription of the assessee comes through Indian viewership which is undoubtedly linked with the PE i.e., ZTL/El Zee . This is not the Indian viewership which is relevant in this context. What was relevant was the role played by the agent in India and whether the remuneration paid by the assessee company, for the services of the agent, was a fair and arm's length remuneration vis- -vis the functions performed, assets employed and risks assumed by the Indian agent. No issues are raised on the inadequacy of agent's remuneration by the Assessing Officer, and now a fresh inning is sought to find these inadequacies and improve the case of the revenue. That is impermissible. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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