|CORAM:||R. S. Syal (AM), Suchitra Kamble (JM)|
|SECTION(S):||Article 5, Article 7|
|CATCH WORDS:||attribution of profits to PE, Dependent Agent Permanent Establishment, Permanent Establishment|
|COUNSEL:||S. Ganesh, Sachit Jolly|
|DATE:||January 27, 2017 (Date of pronouncement)|
|DATE:||January 31, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Permanent Establishment: Entire law explained on whether the deputation of personnel by a foreign company to assist the Indian subsidiaries in negotiations, marketing etc leads to a “fixed place PE” or a “Dependant Agent PE” under Article 5 of the DTAA and if so, the manner in which the profits of the foreign company are attributable to operations in India|
The A.O. examined the taxability of income of GE Overseas under the Act as well as the Double Taxation Avoidance Agreement. He did not accept the contention of the assessee that the sale consideration was not taxable in India as the title in respect of the equipments was transferred outside India and the payments were also received outside India. He held that a lot of activities relating to marketing and sales took place in India. Expatriates from GEII along with the employees of GEIIPL constituting the Indian team (GE India) were always involved and participated in the negotiation of prices. Such negotiations of prices took place in India. The Indian customers discussed MOU terms with the Indian team. These facts, in the opinion of the AO, were clear indicators of the GE India securing orders for GE Overseas. He further found that GE Overseas, by remotely sitting in foreign countries, could not make any sales, without the active involvement of GE India. This was held to be a business connection of GE Overseas in India in terms of section 9 of the Act. The AO, therefore, held that all the profits did not accrue or arise to the assessee in the foreign soil, but part of such profits arising in India, corresponding to the activities carried out in India, was chargeable to tax under the Act. Considering the fact that sales were made to Indian customers on a regular basis and the GE overseas entities were physically present in some form or the other in India and such physical presence had full role in these sales, the AO held that the business connection of GE Overseas was established in India and, consequently, income accrued or arose to them in India. Such income accruing or arising was held to be liable to tax as per the provisions of section 5(2) of the Act. Simply put, the AO has made out a case that the GE overseas entities were having business connection under the Act as well as permanent establishment under the DTAA in India in all the years under consideration. The position about the taxability under the Act has not been challenged by the assessee before us inasmuch as the ld. AR has assailed only the existence of PE in terms of the DTAA, more particularly, the activities carried out in India, which in his opinion, were of preparatory or auxiliary character. HELD by the Tribunal:
FIXED PLACE P.E.
(i) The AO held that all the GE overseas entities had PE in India in all the years under consideration in two forms, namely, AIFACS premises of GEIOC, constituting a `fixed place PE’; `GE India’ comprising of expatriates of GEII and employees of GEIIPL constituting `dependent agent PE’. The ld. AR argued that none of the activities carried out by the assessee in India lead to the creation of PE.
(ii) All the three conditions for constituting a fixed place PE in terms of paras 1, 2 and 3 of the Article 5 are fully satisfied as AIFCAS building is a fixed place from which business of GE Overseas is partly carried on in India and the activities carried out from such fixed place are not of preparatory or auxiliary character. Our view is also fortified by the judgment in Jebon Corporation India (supra), the facts of which case are similar. In that case also the liaison office was permitted to act as a communication channel and there was a prohibition in doing any trading or commercial activities. A survey was conducted on the premises of the LO which transpired that it was actually carrying on commercial activities of identifying the buyers, negotiating with the buyers, agreeing to the price, procuring purchase orders and forwarding the same to the head office. The Department came to hold that LO was PE under Article 5 of the DTAA and the business profits earned in India through such LO was taxable in India. Contention of the assessee that the buyers were placing orders directly with the head office and making payments directly to the head office and it was the head office which was directly sending the goods to the buyers, was held to be not sufficient for holding that the activity done by the LO was only liaison work. The Hon’ble High Court upheld the view of the Revenue that PE was constituted in such circumstances and business profits earned in India through this liaison office were taxable in India.
(iii) Reliance of the AR on DIT VS. E-Funds IT Solutions (2014) 364 ITR 256 (Del) is misconstrued. In that case, the tribunal held that the activities of e-funds India were not preparatory or auxiliary in character in terms of paragraph 3 of Article 5 and hence PE was created in India. The Hon’ble High Court did not concur with this view by holding that, first and foremost, Article 5(1)/(2) should be applicable but then if the activities fall within parameters of paragraph 3, PE is not created for imposing tax in the second state. It was further held that it did not follow that if activities are not covered in the negative or exclusions set out in paragraph 3, a PE is established or deemed to be established under paragraphs 1 or 2 of Article 5. We fail to comprehend as to how the position stated by the Hon’ble High Court is missing here. It has been discussed above that paras 1 and 2 of Article 5 apply and the activities done by GE Overseas are not covered by para 3(e) of Article 5 of the DTAA.
(iv) Reliance of the AR on CIT VS. Sumitomo Corporation (2016) 382 ITR 75 (Delhi) for contending that no fixed ITA No.671/Del/2011 145 place PE was constituted, is misplaced. We do not find any relevance of this case to the issue under consideration. In that case, the question was of supervisory PE, in which the tribunal held that assessee had no PE in India and that supervisory services were not connected through any of its other PE in India and that since supervision fee was earned in India, it was taxable under Article 12(2) of DTAA at 20%. The Hon’ble Court approved the view of the tribunal that FTS was liable to be taxed at 20% under Article 12(2) of the DTAA. It is thus clear that this case does not involve the issue as is under consideration in the extant appeals. 32. The ld. AR further contended that para 33 of the OECD Commentary mandating that a person attending or even participating in negotiations does not constitute PE and further unless a person is authorized to negotiate all the elements of a contract (not some of them), he does not constitute PE, applies to preparatory or auxiliary services in the context of Fixed place PE. We are not in agreement with this proposition as has been elaborately discussed infra while dealing with Agency PE. It is therefore, held that AIFACS building constituted fixed place PE of the assessee and all the GE Overseas entities in this batch of appeals.
(v) It is an admitted position that the expats were rendering services to multiple GE entities in India. In fact, the ld. DR has successfully contended, while arguing for the validity of initiation of re-assessment proceedings, that the expats were looking after one of the three major lines of business, such as Infrastructure etc., catering to various GE overseas entities. Thus, there remains no doubt that GE India comprising of expats and other employees of GEIIPL etc., were not working for a particular enterprise, but, for multiple enterprises dealing in one of the three major businesses of GE group. Reverting to part 2 of para 5 of Article 5, it is clear that the activities of agent should be ‘devoted wholly or almost wholly on behalf of that enterprise.’ The term ‘that enterprise’ refers to part 1 of para 5, being, an enterprise of a contracting State. The term ‘enterprise of a contracting State’ has been defined in Article 3(g) of the DTAA to mean: ‘an enterprise carried on by a resident of a Contracting State.’ On a conjoint reading of part 2 of para 5 of Article 5 and Article 3(g), it is ostensible that part 2 of para 5 refers to an agent looking after the activities of a single enterprise and not multiple enterprises. The ld. AR has relied on the decision of the Mumbai Tribunal in Varian India (P) Ltd. vs. Asstt. DIT (2013) 142 ITD 692 (Mum) in which it has been held that in order to be covered within this part of para 5, it is necessary that the activities of agent must be devoted wholly or almost wholly to one enterprise.
(vi) Now, we take up the contention of the ld. DR that since the transactions were not at ALP, or for that matter, the international transactions were not even disclosed, the assessee cannot claim not to have an agency PE. There is no doubt about the fact that the transactions of making sales by GE India (consisting of expats and employees of GEIIPL etc.) on behalf of GE Overseas were not disclosed and, as such, question of deeming such transactions at ALP does not arise. The ld. DR is right to this extent. However, we find that the second part of para 5 clearly provides that a person shall not be considered an agent of independent status only if he satisfies both the conditions simultaneously. In other words, when the activities of such an agent are devoted wholly or almost wholly on behalf of an enterprise and the transactions between the agent and the enterprise are not at ALP, then, he shall not be considered an agent of independent status. Use of the word ‘and’ between the two conditions makes it amply clear that the concurrent satisfaction of both of them is a prerequisite for not considering such a person an agent of independent status. If only one condition is satisfied and the other is not, the person is considered as an agent of independent status. In the facts and circumstances of the instant case, although the transactions were not at ALP, but, since GE India worked for multiple entities, it fails to fall within the exception carved out in part 2 of para 5.
(vii) In spite of turning down the contention of the ld. DR in this regard, we find that the GE India still qualifies as a person in para 4 of Article 5, whose activities constitute agency PE in India. Reason for such a conclusion is that part 1 of para 5 refers to an ‘enterprise’ carrying on business in the other State through certain ‘persons’, who are agents of independent status acting in the ordinary course of their business. It, therefore, follows that the three categories of persons, namely, brokers, general commission agent and any other agent are agents of independent status acting in the ordinary course of their business. Thus, part 1 of para 5 refers to agents of an independent status. We have noticed above that part 2 of para 5 is an exception to part 1. When the twin conditions, as noted above, are not satisfied, such an agent of independent status ‘shall not be considered an agent of independent status within the meaning of this paragraph.’ It is, therefore, obvious that part 2 of paragraph 5, firstly refers to an agent of independent status and, then, says that if the conditions are not satisfied, then, such an agent of independent status `shall not be considered an agent of independent status’. It is further clarified from the use of words ‘such an agent’ in the opening portion of part 2 of para 5, which relates back to an agent of independent status discussed in first part of para 5. The same analogy follows from last few words of part 2 of para 5 which read that he `shall not be considered an agent of independent status within the meaning of this paragraph.’ Since the second part of the para 5 refers to ‘such an agent’ and ‘an agent of independent status within the meaning of this paragraph’, it, therefore, becomes utterly obvious that the exclusion enshrined in part 2 of para 5 is of an agent who is otherwise of an independent status. When we read both the parts of para 5, it follows that whereas the first part refers to an agent of an independent status, the second part carving exception to the first part makes it lucid that upon the fulfillment of the given conditions, such an agent of otherwise independent status shall not be considered an agent of independent status within para 5. To sum up, the first part of para 5 refers to an agent of independent status and the second part of para 5 refers to an agent of independent status who is not considered an agent of independent status because of the conditions set out in this paragraph. A foreign company may appoint or set up a person as an agent in India for its exclusive purpose, who obviously will be called as an agent of dependent status. The position will remain so, even if there are more than one related companies of the same group. Such a person will now be dependent on such more number of related companies of the same group. He will not lose his character of an agent of dependent status simply because he is looking after more than one related companies. Such more than one related companies will be considered as one unit. This position needs to be seen in contrast to an agent of an independent status, whose normal course of business extends to multiple independent customers. The fact that transactions between such an agent of dependent status and multiple related enterprises are or are not at ALP, is not relevant at the stage of establishment of a dependent agent PE in India, which is created solely due to the nature of activities of such an agent for the overseas entity(ies). This aspect assumes significance at the later stage of attribution of income. If the transactions between the agent and such related enterprises are at ALP, there can be no further attribution of income to the PE because the agent got remunerated at ALP and his income got taxed in India. If, however, the transactions are not at ALP, then, of course, income needs to be attributed to the PE. In any case, the fact of the transactions at or not at ALP gains prominence only when the question of attribution arises and not before that. Establishment of PE is a stage anterior to the stage of attribution of income, which gets concluded by seeing the nature of activities carried on by such a dependent agent in the other contracting State.
(viii) We again revert to the language of para 4 of Article 5, which states that ‘where a person – other than an agent of independent status to whom paragraph 5 applies -’ fulfills the conditions as set out in this para, he will constitute PE of the enterprise. It follows that the person must be ‘other than an agent of independent status to whom paragraph 5 applies.’ The term ‘other than’ an agent of independent status to whom para 5 applies, encompasses not only an agent of independent status covered within second part of para 5, but also a dependent agent as such, who is otherwise not an independent agent acting in the ordinary course of his business. Thus, it is axiomatic the ‘person’ referred to in para 4 refers to an agent of dependent status as such and also an agent of an independent status who is covered in part 2 of para 5. Exception to the first part of para 5 created in part 2 is restricted only to `an agent of independent status’, who is otherwise `acting in the ordinary course of his business’, but for the time being, his activities are devoted wholly or almost wholly devoted to one enterprise. On the other hand, if there is an agent of dependent status per se whose activities are devoted to one or multiple related enterprises, he will be directly covered within the scope of para 4 of Article 5 of the DTAA.
(ix) Coming back to the facts of the present case, we find that the expats of GEII and employees of GEIIPL were appointed to act as agent of multiple GE overseas enterprises. It is nobody’s case that they were otherwise acting as agents of independent status working for other third parties in India. This proves that expats and employees of GEEIPL acted as agents of dependent status in the first place itself. Although, the number of GE overseas entities looked after by each of them is more than one, but the fact that such entities were in one of the three broader ITA No.671/Del/2011 160 lines of businesses of GE group, makes them agents of dependent status per se.
ATTRIBUTION OF INCOME
(x) Adverting to the factual matrix of the case, the assessee demonstrated before the AO by way of a chart on pages 87-90 of the assessment order that the nature of activities done by Rolls Royce in India were more than those done by GE overseas entities. Similar chart has also been given showing difference in the activities carried out by ZTE Corporation in India vis-à-vis the assessee. From such a comparative analysis, we are satisfied with the contention advanced by the ld. AR that the activities carried out by Rolls Royce and ZTE Corporation in India are not similar to those done by the PEs of GE overseas entities in India. While discussing above the nature of activities performed by GE India in generating sales of GE Overseas in India, we have elaborately taken note of the lead role played by GE India and GE overseas playing only a supporting role. In circumstances, we cannot approve attribution of whole of 35% of the profits relating to sales and marketing to the PE in India. Considering all the relevant facts and adopting a holistic approach, we hold that GE India conducted core activities and the extent of activities by GE Overseas in making sales in India is roughly one fourth of the total marketing effort. Ergo, we estimate 26% of total profit in India as attributable to the operations carried out by the PE in India. Therefore, as against the AO applying 3.5% to the amount of sales made by the assessee in India, we direct to apply 2.6% on the total sales for working out the profits attributable to the PE in India.