9911796707
TMI Blog2024 (12) TMI 1067X X X X Extracts X X X X X X X X Extracts X X X X ..... Double Taxation Avoidance Agreement [DTAA] between India and the United States of America [USA]. The appeals themselves pertain to AYs 2001-02 [ITA 1288/2006], 2002-03 [ITA 126/2016], 2003-04 [ITA 141/2016] 2004-05 [ITA 724/2016], 2006-07 [ITA 597/2019], 2007-08 [ITA 237/2019], 2008-09 [ITA 235/2019], 2011-12 [ITA 192/2019], 2013-14 [ITA 111/2024] and 2015-16 [ITA 110/2024]. 2. The Tribunal had rendered its principal decision on 10 March 2006 while dealing with the appeal pertaining to AY 2001-02 and which decision has been followed in the subsequent years. We had in terms of our order dated 20 July 2009 admitted ITA 1288/2006 on the following question of law:- "Whether on facts, income earned from customers outside India is liable to tax in India under AADT with USA" The remainder of the appeals subsequently came to be tagged with ITA 1288/2006 and were admitted on similar questions of law. 3. From the material placed before us as well as the submissions addressed by learned counsels appearing for respective sides, the following would appear to be the uncontested facts and which we for the sake of convenience glean from the material placed on the record by way of ITA 1288/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a and posted a representative therein. This office was described to be the Liaison Office [LO], manned by one manager and supporting staff. 8. As per the disclosures made, the respondent-assessee had made a declaration before the RBI that the said LO would not represent any party other than Western Union Financial Services. The annexure to that application enumerated the following activities/services which would be undertaken by the LO:- "The Liaison office shall undertake the following liaison activities/services: (a) Distribute brochures and literature describing the activities of Western Union Financial Services, Inc. ("Western Union"). (b) Maintain liaison contact with government authorities and officials of the government, its agencies and other organizations and associations. (c) Maintain and develop the relationship of mutual understanding and co-operation between Western Union and India. (d) Address seminars on Western Union's activities. (e) Put interested parties in direct contact with Wester Union's principal offices. (f) Explore legal, commercial and regulatory feasibility of setting up subsidiaries, affiliates, partnerships, joint ventures, licensing arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice in India shall not borrow or lend any money from/to any person in India without our prior permission. (v) The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. (vi) The office in India will furnish to our Mumbai Regional office (on a yearly basis): (a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; (b) details of remittances received from abroad duly supported by Foreign Inward Remittance Certificate; (c) certified copy of the audited final accounts of the office in India; and (d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during the period m respect of which the office had rendered liaison services. (e) The number of staff engaged/appointed and duties assigned to each staff. (vii) The liaison office will not render any consultancy or any other services directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g raised, it ultimately furnished a return of income on 08 December 2003 declaring its income as 'nil'. 12. The Assessing Officer [AO], however, assessed the total income to be INR 4,90,22,316/-, as a consequence of which notices under Section 143 (2) came to be issued on 04 March 2004. The AO, while framing the order of assessment essentially came to hold as under. It firstly opined that the income of the respondent-assessee had accrued and arisen in India and would consequently be exigible to tax. It further held that the respondent-assessee would be liable to tax under the provisions of the DTAA. 13. Tested on the anvil of the activities that occurred in India, the AO came to conclude that not only did the respondent have a fixed place of business and which constituted a "Fixed Place" Permanent Establishment [PE], the activities undertaken by the LO were sufficient to treat it as a Dependent Agent being present in India and thus the test of existence of a Dependent Agent Permanent Establishment [DAPE] were also met. 14. Apart from what was construed by the AO and is noticed above, it was further observed and held that the software installed in the office of the Indian agents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that a decision of the Authority for Advance Rulings [AAR] in UAE Exchange Centre LLC, In re. (2004) 268 ITR 9 (AAR) was also cited. The applicant in that case also was engaged in money transfer business and had adopted a similar model of remitting money to India through its LOs. The LOs were stated to have engaged in downloading of data pertaining to the beneficiaries in India, printing of cheques and dispatching the same to the beneficiaries. It was on the basis of these facts that the AAR had proceeded to hold that the LOs constituted a PE in India. 19. However and was noticed by the Tribunal, the AAR had observed that the role of the LO must involve performing the contract of remittance of amounts at least in part before it could be said to be a PE of the foreign enterprise. The Tribunal while contrasting the facts of the AAR ruling to the present case, noted that the LO performed no part of the contract of remittance of monies to India because of which it could not be considered to be a PE of the respondent-assessee in India. 20. It is pertinent to note that the decision of the AAR thereafter came to be overturned by the Delhi High Court in UAE Exchange Centre Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efuting those submissions, Mr. Vohra, learned senior counsel appearing for the respondents, firstly urged us to dismiss the appeals outrightly since according to learned senior counsel, the determination of whether a PE exists or not is essentially a question of fact. According to Mr. Vohra, the Tribunal being the final fact finding authority having come to the conclusion that no PE existed, the same would clearly not give rise to any substantial question of law. 26. Mr. Vohra then cited for our consideration the decision of the Supreme Court in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi and Another (2017) 15 SCC 602 and which, according to learned senior counsel, had identified the principal elements for a Fixed Place PE being assumed to have come into existence to be: (a) an identified fixed place, (b) that fixed place being made available and placed at the disposal of the foreign enterprise and (c) business of that foreign enterprise being carried on through such fixed place. Mr. Vohra in order to buttress his submissions adverted to the following paragraphs from the Formula One decision of the Supreme Court:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss; and (b) through that place business of an enterprise is wholly or partly carried out ." 27. Learned senior counsel then took us through the decision rendered by this Court in Director of Income Tax v. E-Funds IT Solution 2014 SCC OnLine Del 555 and which had underscored the requirement of the core business of the foreign enterprise being carried out through an identified fixed place in order to constitute a Fixed Place PE. Our attention was drawn to the following paragraphs of that decision:- "53. Reference to core of auxiliary or preliminary activity is relevant when we apply para 3 of Article 5 or when sub-clause (a) to para 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place PE. Paragraph 3 of Article 5 lists negative activities which when performed from a fixed placed in the other contracting State would not create a PE. The activities specified in Article 5, para 3 would not create a PE, even when the conditions specified in paras (1) and (2) of Article 5 are satisfied. Paragraph 3 is not a positive provision but a negative list. The said paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7 (1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5 (1) and 5 (2) (a) to 5 (2) (k); service PE under Article 5 (2) (l) and agency PE under Article 5 (4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents are brought within any of the sub-clauses of Article 5. 17. Since the Revenue originally relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pace within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term "establishment". As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term "fixed" rather than the term "place", given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term "establishment" makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5 (1) OECD MC which uses the term "installation" instead of "place".' The term "place" is used to define the term "establishment". Therefore, "place" includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) OECD MC and Article 5 (5)(a) UN MC and the notion of agent PEs were superfluous! This can be illustrated by the example of a salesman who regularly visits a major customer to take orders and conduct negotiations in the purchasing Director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.' 38. Taking cue from the word 'through' in the Article, Vogel has also emphasised that the place of business qualifies only if the place is "at the disposal" of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, "disposal" is the power (or a certain fraction thereof) to use the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop [cf. Article 5 (2) (e) OECD and UN MC] of 10 or 12 sq m can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine.' 39. OECD Commentary on Model Tax Convention mentions that a general definition of the term "PE" brings out its essential characteristics i.e. a distinct "situs", a "fixed place of business" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vohra then submitted that the assumption of the LO carrying on business activities in India is factually flawed and had come to be rendered by the AO as well as the CIT (A) in ignorance of Article 5 (3) (e) of the India-USA DTAA and the fundamental functions and attributes which must be found to vest in an agent before a DAPE could be said to have come into being. 31. Elaborating on that aspect, Mr. Vohra also vehemently assailed the view expressed by the AO as well as the CIT (A) insofar as the question of DAPE was concerned. It was submitted that the Department of Posts, NBFCs were all independent third parties having substantial business and revenue of their own and were thus clearly not dependent upon the revenue that came to be generated while discharging certain functions under the agency agreements. It was submitted that the conclusions to the contrary as drawn by the AO as well as the CIT (A) would in any case not sustain in light of the decision of this Court in E-Funds. 32. Mr. Vohra also highlighted the fact that the Indian agents were remunerated at arm's length and were, in that sense, independent. This according to learned senior counsel more so since undisputedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Section 9 of the Act and thus relating to income which could be said to be deemed to have accrued or arisen in India. We thus propose to confine and focus our discussion in evaluating the correctness of the view expressed by the Tribunal primarily on the anvil of the DTAA. 36. Having chronicled the submissions which were addressed by respective sides before us, we proceed further and firstly take up for consideration Article 5 of the DTAA and which defines the concept of a PE. Article 5 of the India-USA DTAA reads as follows:- "ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means 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 (c) an office (d) a factory (e) a workshop (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; (g) a warehouse, in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned State, if: (a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts. From the activity report which was submitted by that LO to the RBI, we note that it had asserted that it had merely acted as a communication link between the agents and Western Union Financial Services. It had also made due disclosure of the initiatives undertaken by it and which included training agents, administering training and refresher courses as well as providing the updated versions of the 'Voyager' software to agents and training their staff with respect to its usage. The respondent-assessee had in the aforesaid light argued that the activities undertaken by the LO would clearly fall within the category of activities which could at best be described as 'preparatory' or 'auxiliary' and thus falling within the ambit of Article 5 (3) of the DTAA. 40. It is pertinent to note that Article 5 (3) sets out the exclusions from the term 'Permanent Establishment' and thus excludes a fixed place of business from where 'preparatory' or 'auxiliary' activities may be undertaken. Although Mr. Chawla had sought to lay stress on the phrase "or for other activities" as it appears in Article 5 (3) (e), we find no merit in that contention since the said expression would have to be read i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article 5 (2) (c), amongst others, permanent establishment includes an office. However, article 5 (3) which opens with a non obstante clause, is illustrative of instances where under the DTAA various activities have been deemed as ones which would not fall within the ambit of the expression "permanent establishment". One such exclusionary clause is found in article 5 (3) (e) which is : maintenance of fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a reparatory or auxiliary character. The plain meaning of the word "auxiliary" is found in the Black's Law Dictionary 7th Edition at page 130 which reads as "aiding or supporting, subsidiary". The only activity of the liaison offices in India is simply to download information which is contained in the main servers located in the UAE based on which cheques are drawn on banks in India whereupon the said cheques are couriered or despatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. Can such an activity be anything but auxiliary in character. Plainly to our minds, the instant activity is in "aid" or "support" of the main activity. The error ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that the entity located in India which was engaged in only supporting the front office functions of Morgan Stanley and Co., a non-resident, in fixed income and equity research and information technology enabled services such as data processing support centre, technical services and reconciliation of accounts being back office operators would not fall within article 5 (1) of the Indo-US DTAA." 42. Our Court found that the LOs were merely aiding and supporting the entity, UAE Exchange Centre. Thus, and viewed in that light, the said offices could not possibly be held to constitute a PE. It also bore in consideration that every aspect of the principal transaction had been concluded in the UAE and the remittances as well as the commission was deposited and earned in that territory. It pertinently observed that the functions performed by the LOs were merely supportive of the transaction which had occurred in the UAE. It thus observed that the LOs did not contribute to the earning of profits by the assessee. 43. The aforesaid judgment rendered by this Court came to be appealed by the Union before the Supreme Court and which, while affirming the judgment handed down by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as opined by the High Court, that the activities in question of the liaison office(s) of the respondent in India are circumscribed by the permission given by RBI and are in the nature of preparatory or auxiliary character. That finding reached by the High Court is unexceptionable. 34. The High Court had justly adverted to the exposition of this Court in CIT v. Morgan Stanley & Co. Inc. [CIT v. Morgan Stanley & Co. Inc., (2007) 7 SCC 1] , which dealt with the case of an assessee having set up office in India to support the main office functions in fixed income and equity research and in providing IT enabled services such as back office operations, data processing and support centres to the entity in the United States. This Court, in paras 10 to 14, observed thus: (SCC pp. 13-14) "10. In our view, the second requirement of Article 5 (1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Income Tax Act, 1961 (for short "the IT Act") vide Section 92-F(iii-a) which states that the PE shall [Ed.: The matter between two asterisks has been emphasised in original.] include [Ed.: The matter between two asterisks has been emphasised in original.] a fixed place of business through which the business of MNE is wholly or partly carried on. This is where the difference lies between the definition of the word PE in the inclusive sense under the IT Act as against the definition of the word PE in the exhaustive sense under DTAA. This analysis is important because it indicates the intention of Parliament in adopting an inclusive definition of PE so as to cover service PE, agency PE, software PE, construction PE, etc. 14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5 (3). Under Article 5 (3) (e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5 (3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5 (1) or under Article 5 (2) the term PE shall not include maintenance of a fixed place of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be levied or collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE. The activities carried on by the liaison office of the respondent in India as permitted by RBI, clearly demonstrate that the respondent must steer away from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only. In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever. 37. Our attention was invited to the dictum in CIT v. E-Funds IT Solution Inc. [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294] Para 2 of the said decision would clearly indicate the background in which the issue was answered by this Court. The same reads thus: (SCC pp. 301-302) "2. The assessing authority decided that the assessees had a permanent establishment (hereinafter referred to as "PE") as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India US Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as "DTAA") was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(l) is not satisfied. However, the learned Attorney General, relying upon Para 42.31 of the OECD Commentary, has argued that services have to be furnished within India, which does not mean that they have to be furnished to customers in India. Para 42.31 of the OECD Commentary reads as under: '42.31. ... Whether or not the relevant services are furnished to a resident of a State does not matter; what matters is that the services are performed in the State through an individual present in that State.' *** 26. We entirely agree with the approach of the High Court in this regard. Para 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a "service PE" would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground, namely, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace of business to the taxpayer enterprise. Such rights are perfect where the taxpayer enterprise is the legal proprietor of the place of business. Likewise, the position of the taxpayer as a tenant, a lessee (leaseholder, even in cases of short-term lease) or even a co-tenant will usually qualify as a controlling interest under article 5 (1) of Organization for Economic Co-operation and Development and UN MC (No. 44 OECD MC Comm. on article 5). 111. But even in the absence of a legal right to use that place, the control test can be met if the taxpayer enterprise has sufficient command of the place of business as a matter of fact (No. 11 et seq. OECD MC Comm. on article 5). Thus, for instance, a permanent establishment could exist where an enterprise illegally occupied a certain location where it carried on its business (as mentioned explicitly in No. 11 et seq. OECD MC Comm. on article 5). Likewise, a company may create a permanent establishment on the premises of an associated company if this associated company grants accommodation to, or tolerates the lasting presence of employees of the first-mentioned company (see infra m. No. 430 et seq.)." 68. Klaus Vogel, while seeking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty which equals a (temporal or lasting) suspension of the activities which the place of business has been designed for may indicate that the place of business is not 'permanent'. For details, see supra m. No. 87 et seq. 139. Thirdly, the phrase 'through which' indicates that the taxpayer makes use of the place of business in that he employs it an instrument (equalling or resembling an operating asset) for his entrepreneurial activities. This third aspect of the functional integration is by far the most disputed one. 140. Historically, the instrumental character of the place of business for the carrying-on of the enterprise could not be taken for granted. Between 1963 and 1977, the OEEC/Organization for Economic Co-operation and Development did not employ this term. Rather, it was sufficient that the taxpayer carried on his business 'in' the place of business (see supra m. No. 45). Based on the old Model, some older DTCs use the words 'in which' still today. While some authors have denied any divergence in substance, the 1977 amendment is a strong reason to assume a semantic shift indeed. 141. In a different context (viz., in article 5(4.1) of the Organization for Economic Co- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of 'through' to the first two instead of all three semantic aspects required by article 5 (1) OECD MC (supra m. No. 135 et seq. and 139 et seq.)." 69. Proceeding further to deal with the concepts of "preparatory" and "auxiliary" services and which are intended to remove a place of business which may otherwise fall within the meaning of a permanent establishment and which phraseology is mirrored in article 5 (3) (e) of the India-USA Double Taxation Avoidance Agreement, Klaus Vogel's work has the following instructive passages: "59. (Determination of the activity's character) It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Each individual case will have to be examined on its own merits. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity. 60. (Preparatory character) As a ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n risks in a particular market and in the case of a newspaper bureau set up in a State solely to collect information on possible news stories without engaging in any advertising activities : in both cases, the collecting of information will be a preparatory activity." 70. Speaking in greater detail on the aspect of "preparatory" and "auxiliary" functions, the author observes: "303. Already before the 2017 Update to the OECD MC, all of the activities listed in article 5 (4) (a) to (f) of OECD and UN MC had to be preparatory or auxiliary (infra m. No. 304 et seq.). This followed from the use of the word 'other' in article 5 (4) (e) of UN MC. This word relates not only to the subsequent word 'activity' (otherwise, one should have expected an if-clause or a 'provided that'-clause after 'activity', like in article 5 (4)(f) of UN MC) but to the entire phrase 'activity of a preparatory or auxiliary character'. The 2017 update to the OECD MC has made this entirely clear by adding the words 'provided that such activity or, in the case of sub-paragraph (f), the overall activity of the fixed place of business, is of a preparatory or auxiliary character' as a joint supplement to sub-paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their own, just seem to be small, preparatory or auxiliary from the perspective of the company's headquarters. If they are still the biggest employer in a given municipality, it is hardly justified from the viewpoint of fiscal equivalence to exempt such place of businesses under article 5 (4) of OECD and UN MC. 308. It follows that a combined approach is most appropriate. While relative standards apply at the outset (supra m. No. 304), absolute standards require a second filter: The activities of a place of business qualify as being 'of a preparatory or auxiliary character', as compared to the overall activities of the enterprise if they have not more than a marginal relevance within the enterprise's overall business plan. It should be noted that it is not the share in actual profits or losses on which the comparison should be based. Rather, the characterisation of an activity as preparatory and/or auxiliary depends on the type, sector and intensity of the activity, as compared to the core business of the enterprise as a whole. If the activities of a place of business qualify as preparatory and/or auxiliary under these relative standards, they still do not fall un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 394 ITR 80 (SC); (2017) 15 SCC 602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).] in the following terms (page 100 of 394 ITR): "Emphasising that as a creature of international tax law, the concept of permanent establishment has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of permanent establishments contemplated under article 5 of Organization for Economic Co-operation and Development Model. First, an establishment which is part of the same enterprise under common ownership and control-an office, branch, etc., to which he gives his own description as an 'associated permanent establishment'. The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a permanent establishment. Such permanent establishment is given the nomenclature of 'unassociated permanent establishment' by Baker. He, however, pointed out that there is a possibility of a third type of permanent establishment, i.e., a construction or installation site may be regarded as permanent establishment under certain circumstances. In the first type of permanent establishment, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, therefore, contains the following conditions : (i) the existence of a 'place of business', i.e., a facility such as premises or, in certain instances, machinery or equipment; (ii) this place of business must be 'fixed', i.e., it must be established at a distinct place with a certain degree of permanence; (iii) the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. The term 'place of business' is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP); 1983 SCC OnLine AP 287; (1984) 38 CTR 1 (AP); (1983) 15 Taxman 72 (AP).] fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e., FOWC) on the soil of this country. It is already noted above that as per Philip Baker (A Manual on the Organization for Economic Co-operation and Development Model Tax Convention on Income and on Capital), a permanent establishment must have three characteristics : stability, productivity and dependence. All characteristics are present in this case. Fixed place of business in the form of physical location, i.e., Buddh International Circuit, was at the disposal of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event has taken place in India and the non-resident FOWC is liable to pay tax in India on the income it has earned on this soil." 87. As per the Manual on the Organization for Economic Co-ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advance ruling application made by MSCo inviting the AAR to give its ruling. It is clear from a reading of the above Agreement/ application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing Information Technology enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a permanent establishment stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5 (1) is not attracted." xxxx xxxx xxxx 91. When we test the stand taken by the respondents, bearing in mind the aforesaid precepts as culled out from the various judgments noticed hereinabove, we find ourselves unable to sustain even the prima facie formation of opinion by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons "preparatory" and "auxiliary", we had in Progress Rail held:- "96. We then proceed to test the correctness of the prima facie conclusions arrived at by the first respondent on the anvil of article 5 (3) of the India-USA Double Taxation Avoidance Agreement ((1991) 187 ITR (Stat) 102). As was noticed hereinabove, article 5 (3) excludes permanent establishments which may otherwise fall within the ambit of article 5 (1) or article 5 (2), if it were found that the said permanent establishment were engaged in the discharge of functions enumerated therein. While and undisputedly sub-clauses (a), (b) and (c) of article 5 (3) are not even invoked, even if we were to examine the correctness of the view taken by the first respondent based on sub-clauses (d) and (e), we find ourselves unable to sustain the impugned notices and the reasons set out for initiating action under section 147/148, basis which the impugned notices were issued. 97. In terms of article 5 (3) (d), if a permanent establishment were to be engaged solely for the purposes of purchase of goods or merchandise, or for that matter for "collecting information" for a foreign enterprise, the same would stand excluded from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a permanent establishment stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5 (1) is not attracted.... There is one more aspect which needs to be discussed, namely, exclusion of permanent establishment under article 5 (3). Under article 5 (3) (e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a permanent establishment. Article 5 (3) commences with a non obstante clause. It states that notwithstanding what is stated in article 5 (1) or under article 5 (2) the term permanent establishment shall not include maintenance of a fixed place of business solely for advertisement, scientific res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the assessee. In the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character - an activity which aids and supports the assessee in carrying on its main business. In view of the above, the activity of the assessee's project office in Mumbai would clearly fall within the exclusionary clause of article 5 (3) (e) of the Double Taxation Avoidance Agreement and, therefore, cannot be construed as the assessee's permanent establishment in India." 102. When tested on the aforesaid principles, it becomes apparent that the activities undertaken by the Indian subsidiary clearly do not appear to travel beyond being "preparatory" or "auxiliary". It is pertinent to note that both entities do not appear to have been established with a commonality of general purpose. The expression "preparatory" has been understood to mean work which is undertaken in contemplation of the essential and significant part of the princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e when viewed in juxtaposition with the activities which the LO performed and the functions that it discharged. This becomes evident from the discussion which follows. 51. We note that the position commended for our acceptance by the appellants would have been sustainable, provided the activities and functions performed by that LO met the aforenoted tests. However, we find ourselves unable to sustain those submissions bearing in mind the peripheral character of the actual activities which were undertaken by that office. 52. For the purposes of the LO qualifying the requirements of a PE, it would have been incumbent upon the appellants to establish that its activities breached the preparatory or auxiliary threshold or boundary which Article 5 (3) erects. Regard must be had to the fact that Article 5 (3) constitutes a list of negative stipulations and which removes a fixed places of business from the ambit of a PE. Thus, even if an establishment were to meet the test of a fixed place, it would stand exorcised from the main provision of that covenant if it were found that its activities were confined to preparatory and auxiliary work for the enterprise. 53. As was noticed in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to conclude contracts. It could have also been proved by the appellants that the LO habitually secured orders for Western Union Financial Services. However, none of these conditions are met in the facts of the present case. In the absence of these conditions being found to exist, it would be wholly incorrect in law for the LO to be classified as a DAPE. 57. Regard must be had to the fact that Article 5 (4) introduces a legal fiction in cases where it be found that the enterprise has an agent which is acting on its behalf in the other Contracting State. The first limb of Article 5 (4), when met, gets coupled to the legal fiction embodied in para 4 and which is "shall be deemed to have a permanent establishment". However, of crucial significance is the use of the word 'if', which precedes clauses (a), (b) and (c) and thus being indicative of the clear intent of the contracting parties of recognizing the existence of a DAPE only if one of those were also met. The appellants have not relied on any evidence or material which may have even remotely established the criterion of either clauses (a), (b) or (c) being satisfied by the LO. 58. That only leaves us to evaluate the correctnes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a 'place of business' as there is no 'facility such as premises or, in certain instances, machinery or equipment' (see paragraph 6 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a 'fixed place of business' of the enterprise that operates that server. 124. [Internet Service Providers (ISPs)] The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n no personnel are in fact required to carry on business activities at that location. This conclusion applies to electronic commerce to the same extent that it applies with respect to other activities in which equipment operates automatically, e.g. automatic pumping equipment used in the exploitation of natural resources. 128. [Preparatory or auxiliary activities] Another issue relates to the fact that no permanent establishment may be considered to exist where the electronic commerce operations carried on through computer equipment at a given location in a country are restricted to the preparatory or auxiliary activities covered by paragraph 4. The question of whether particular activities performed at such a location fall within paragraph 4 needs to be examined on a case-by-case basis having regard to the various functions performed by the enterprise through that equipment. Examples of activities which would generally be regarded as preparatory or auxiliary include: - providing a communications link - much like a telephone line - between suppliers and customers; - advertising of goods or services; - relaying information through a mirror server for security and efficiency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered to be merely preparatory or auxiliary. 131. [ISPs as PE] A last issue is whether paragraph 5 may apply to deem an ISP to constitute a permanent establishment. As already noted, it is common for ISPs to provide the service of hosting the web sites of other enterprises on their own servers. The issue may then arise as to whether paragraph 5 may apply to deem such ISPs to constitute permanent establishments of the enterprises that carry on electronic commerce through web sites operated through the servers owned and operated by these ISPs. Whilst this could be the case in very unusual circumstances, paragraph 5 will generally not be applicable because the ISPs will not constitute an agent of the enterprises to which the web sites belong, because they will not conclude contracts or play the principal role leading to the conclusion of contracts in the name of these enterprises, or for the transfer of property belonging to these enterprises or the provision of services by these enterprises, or because they will act in the ordinary course of a business as independent agent, as evidenced by the fact that they host the web sites of many different enterprises. It is also clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .), but one such tangible asset can be sufficient. ' The characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property (in civil law countries) is not authoritative. It is rather the context (including, above all, the terms 'fixed'/'fixe'; see infra no. 50 et seq.), as well as the object and purpose of Article 5 OECD and UN MC itself (supra m.no. 2 et seq.), in the light of which the term 'place' needs to be interpreted. This approach, which follows from the general rules on treaty interpretation (supra Introduction m.no. 87 et seq.), gives a certain leeway for including movable property in the understanding of 'place' and, therefore, to assume a PE once such property has been 'fixed' (infra m.no. 50 et seq.) to the soil. For example, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformator or generator on board a former railway wagon qualify as places (and may also be 'fixed'; see infra m.no. 50 et seg.). In contrast, purely intangible property cannot qualify in any case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question as to whether there was any PE in India within the meaning of article 5 of the Indo-UK DTAA. The Tribunal extracted the provisions of article 5 and stated the legal position that emerged therefrom. Thereafter, it referred to various documents in para 22 and narrated its effect in detail. Our purpose would be served by extracting para 23 of the impugned order which reads as under:- "23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as PE, so long such dependent agent has no authority to negotiate and enter into contracts, under Article 5 (4), there is no PE in India. It is to be noted that Article 5 (4) has three clauses, namely, a, b & c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per clause (c) of sub-Article (4), it is found that RRIL habitually secures orders in India for the appellant. It is a set practice that no customers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (4) of the Indo UK DTAA. Since we have found that the appellant has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India." 17. We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRIL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered." 65. Jebon Corporation v. Commissioner of Income-tax and another 2011 SCC OnLine Kar 4420, a judgment rendered by the Karnataka High Court was again concerned with a LO of a South Korean enterprise which had come to be established at Bangalore. On facts, that High Court in Jebon Corporation had found as follows:- "19. It is on the basis of the aforesaid material, the Tribunal held that the activities carried on by the liaison office are not confined only to the liaison work. They are actually carrying on the commercial activities of procuring purchase orders, identifyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial or trading activities. 67. Columbia Sportswear Co. v. Director of Income Tax (International Taxation) AAR No. 862 of 2009 dated 08 August 2011 was yet another decision which came to be cited by Mr. Chawla for our consideration. This too was a matter which pertained to a LO established by Columbia Sportswear in India. The activities which were being undertaken by that office in India and as were identified by the AAR and which is also noticed in the judgment of this Court would become evident from a reading of paras 12 and 32 of the report and which are extracted hereinbelow:- "12. The question, therefore, is whether the activities undertaken by the liaison office on behalf of the applicant are activities limited to or confined to the purchase of goods in India by the applicant. We have referred in detail to the various activities undertaken by the liaison office on behalf of the applicant. We have also noticed that it has about 35 employees divided into 5 teams dealing with material management, merchandising, production management, quality control and administration support constituting teams from finance, human resources and information systems. In addition to assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longer be sustained and has to be repelled in view of the decision of this Court in CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472. ... It was held by this court that the profits of that part of the business, viz., the manufacture of the oil in the Mill in Raichur, accrued or arose in Raichur even though the manufactured oil was sold in Bombay and the price was received there, and, accordingly that part of the profits derived from sales in Bombay which was attributable to the manufacture of the oil in Raichur was exempt from excess profits tax under the proviso to section 5 of the Act.' Their Lordships quoted the following observations of Lord Davy in In re: Commissioners of Taxation v. Kirk 1900 AC 588. 'It appears to their Lordships that there are four processes in the earning or production of this income: (1) The extraction of the ore from oil soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) The receipt of the moneys arising from the sale. All these processes are necessary stages which terminate in money, and the result is the money resulting less the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-paras 1 and 2 of Article 5, so as to constitute a 'fixed place' of business or meet the tests of virtual projection, a takeover of the premises as well as the precepts of control and disposal in order to be a Fixed Place PE. The activities undertaken by the LO even otherwise were clearly auxiliary in character and would thus clearly fall within Article 5 (3) (e) of the DTAA. The LO also did not meet the requirements of a DAPE as per of clauses (a), (b) and (c) of para 4 of Article 5. Furthermore, the software utilised for the purpose of connecting the Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of PE. The argument of the premises of the Indian agents constituting a PE is clearly misconceived since these were independent third parties having their own business portfolio. Their premises, in any case, would not satisfy the test of virtual projection. 70. Accordingly and for all the aforesaid reasons, we find ourselves unable to sustain the arguments of the appellants and who had commended us to upset the conclusions rendered by the Tribunal. In our considered opinion, the Tribunal rightly came to the conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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