“Sham Transaction” + Dependent Agent PE + House Property vs. Biz Profits

The assessee’s act of getting its’ wholly owned subsidiary (‘WOS’) to distribute tax-free dividend, and thereby reduce the FMV of the shares of the WOS, just prior to the sale of those shares, did result in a tax advantage to the assessee because it paid lower tax on capital gains. However, the transaction of dividend distribution by the WOS cannot be regarded as a "colourable device" or as an "impermissible tax avoidance scheme". A transaction can be regarded as a "sham" where "the document is not bona fide nor intended to be acted upon, but is only used as a cloak to conceal a different transaction" or where "it is intended to give to third parties the appearance of creating between the parties legal rights and obligations which are different from the actual legal rights and obligations which the parties intend to create". On facts, the transaction cannot be regarded as a "sham" or a "colourable device" because (a) the WOS had sufficient reserves and cash surplus for the distribution of dividend & (b) the WOS paid dividend distribution tax which was duly accepted in its assessment.

Contrast with In Re A Mauritius (AAR) where selective buy-back of shares were held to be dividend distribution

(i) The fees received by the assessee, a Swiss company, from enabling sellers registered on its offshore website to sell goods to buyers in India is not assessable as “fees for technical services” u/s 9(1)(viii) as the assessee does not render any “managerial, technical or consultancy services” to the payers. The assessee’s websites are analogous to a market place where the buyers and sellers assemble to transact. By providing a platform for doing business the assessee is not rendering services either to the buyer or to the seller which can be assessed as “fees for technical services“;

(ii) In order to constitute a “Dependent Agent Permanent Establishment” of the assessee under Article 5(5) of the DTAA, it is essential that the agent should “habitually exercise an authority to negotiate and enter into contracts for or on behalf of’ the assessee”. On facts, though eBay India & eBay Motors conducted activities exclusively on behalf of the assessee and thus became its dependent agents, they did not constitute a “Dependent Agent Permanent Establishment” because they did not conduct any of the activities set out in the three clauses of Article 5(5) of the DTAA. By simply providing marketing services to the assessee or making collection from the customers and forwarding the same to the assessee, it cannot be said that eBay India entered into contracts on behalf of the assessee. There are also no examples of any contract entered into by eBay India or eBay Motors for or on behalf of the assessee. Thus the test laid down in Article 5(5)(i) of the DTAA is not satisfied.

(iii) eBay India & eBay Motors also do not constitute a “place of management” so as to be a PE under Article 5 (2)(a) of the DTAA. A “place of management” ordinarily refers to a place where overall managerial decisions of the enterprise are taken. eBay India & eBay Motors are not taking any managerial decision. They are simply rendering marketing services to the assessee in the form of collection of amount from the customers and remitting the same to the assessee, apart from creating awareness amongst the Indian sellers about the availability of the assessee’s websites in India. All business decisions and deals are settled through the assessee’s websites. eBay India & eBay Motors have no role to play either in the maintenance or the operation of the websites. They have absolutely no say in the matter of entering into online business agreements between the sellers and the assessee or the finalization of transactions between the buyers and sellers resulting into the accrual of the assessee’s revenue. Consequently, they are not a “place of management” of the assessee’s overall business.

U/s 22, income from the rental of building or land appurtenant thereto is assessable as “Income from house property”. However, where complex and varied services are provided and huge investment in the nature of plant and machinery is made, the income is assessable as “Profits & gains of business”. On facts, the assessee had conducted systematic activity and rendered extensive and specialized services which could only be utilised by the IT/Software/BPOs businesses to be located in the I.T. Park. Such income cannot be treated as forming part of income from house property but is a constitution of organized structure for carrying out business activities to earn profit and accordingly the income is assessable as income from business.