DDIT vs. B4U International Holdings Ltd (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: May 29, 2012 (Date of publication)

Click here to download the judgement (B4U_dependent_agent_PE.pdf)

Tax implications of a “Dependent Agent Permanent Establishment” explained

The assessee, a Mauritius company, was engaged in telecasting TV channels. It had an advertisement collection agent in India who collected revenue from time slots given to Indian advertisers. The assessee claimed that its profits from India were not chargeable under the DTAA because (i) it did not have a PE and (ii) assuming the agent was a PE, the agent had received an arms’ length fee from the assessee and further profits could not be attributed. The department relied on DHL Operations B.V. 142 TM 1 (Mum) and claimed that as the assessee was dependent on the Indian agents, the Indian agents constituted a “Dependent Agent PE” and that despite arms’ length fee to the agents, profits were attributable to the DAPE. HELD by the Tribunal:

(i) Under Article 5(4) of the DTAA, an “agent” (other than one of independent status) is deemed to be a PE if he “habitually exercises” the authority to conclude contracts. On facts, the agent was not the decision maker and had no authority to conclude contracts or to fix the rate or to accept an advertisement. It merely forwarded the advertisement to the assessee. Accordingly, there was neither legal existence of authority, nor evidence to show “habitual exercise” of authority.

(ii) Under Article 5(5), an agent is deemed not to be of independent status when his activities are devoted exclusively or almost exclusively to the non-resident enterprises. Though in DHL Operations B.V. 142 TM 1 (Mum) it was held that the question whether the agent is “dependent” has to be seen from the perspective of the non-resident principal, this view cannot be followed because it is contrary to the language of Article 5(5). The wordings refer to the activities of an agent and its devotion to the non-resident and not the other way round. The perspective should be from the angle of the agent and not of the non-resident. As the income from the assessee was only 4.69% of the agent’s income, the agent was not a “dependent agent” (Morgan Stanley 272 ITR 416 (AAR) & Rolls Royce (Del) followed);

(iii) Even assuming that there was a DAPE, as the agent had been remunerated at arms’ length basis, no further profit is attributable to the PE as per Circular No. 742 dated 2.5.1996, Set Satellite 307 ITR 205 (Bom) & BBC Worldwide 203 TM 554 (Del)

Note: Though the issue is pending before the Special Bench in DHL Operations, the hearing has been stayed by the Bombay High Court. For more on DAPE see Delmas France, Dell Products (SC Norway) & Article

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