Where the assessee had a ‘Dependent Agency Permanent Establishment’ (‘DAPE’) (“SET India”) in India and it was admitted by the Revenue that the assessee had paid ‘arms length’ remuneration to the said dependent agent but the Tribunal still held (106 ITD 75) that notwithstanding the taxability of the said dependent agent in accordance with domestic law, the assessee had to be assessed in respect of the profits attributable to the said DAPE, held, reversing the judgement of the Tribunal that:
(a) In Circular No. 23 dated 23.7.1969, the CBDT had clearly laid down that where a non-resident’s sales to Indian customers was rendered through the services of an agent in India, the assessment in India of the income arising out of the transaction shall be limited to the profit attributable to the agent’s services. This Circular was binding on the Revenue.
(b) The effect of Article 7 (1) of the DTAA and Circular No. 23 dated 23.7.1969 is that the income of a non-resident which is neither directly nor indirectly attributable to the PE cannot be brought to tax.
(c) As the Tribunal had not considered the findings of the CIT (A) based on Circular No. 23, its entire rational and reasoning had to be set aside.
(d) The effect of the judgement of the Supreme Court in DIT vs. Morgan Stanley 292 ITR 416 is that if the correct arms’ length price is applied and paid nothing further would be left to be taxed in the hands of the foreign enterprise.