Commission received by a foreign company for assistance in arranging cargo transportation taxable in India on account of ‘business connection’

ADIT v ACM Shipping India Ltd. (ITAT Mumbai) -  Commission income paid by Indian company to non-resident parent company for arranging the contracts with ship owners is taxable in India as business income on account of business connections.

The taxpayer was wholly or almost wholly securing orders only for ACM UK. The freight invoice issued by the carriers show that the commission was paid by the Indian exporter to the taxpayer directly on behalf of the carriers. Further, the taxpayer was paying 50 percent of the commission earned to ACM UK for their services in getting contract with the ship owners and the customers. There is no evidence to show that the commission paid by the taxpayer was for services rendered outside India. The commission was paid to ACM UK by the appellant only in respect of services rendered which might ultimately result in business to the appellant in India. Accordingly, the income earned by ACM UK was by virtue of business connection in India and therefore taxable in India as business income. Reliance placed on circular No. 23  dated 23 July 1969 was no longer relevant since it has been withdrawn. Even otherwise, the circular was issued in the context of sale of goods and may not apply to the current transaction since it relates to rendering of services. Further, the payment to ACM UK by the taxpayer was dependent upon the service charges realised by the appellant in India therefore Circular No.23 would not be applicable.  The CIT(A) has not examined whether the taxpayer constituted an agency Permanent Establishment (PE) of ACM UK in India as per Article 5(4)(c) and Article 5(5) of the tax treaty. Accordingly, the Tribunal remanded the matter back to the CIT(A) for examination. The CIT (A) was asked to keep in mind the fact that the appellant is a wholly-owned subsidiary of ACM UK and that it works only for ACM UK.

ADIT v ACM Shipping India Ltd.

ITAT, Mumbai

ITA Nos. 5085 and 5087 (Mum.) of 2009

Assessment Year: 2009-10 and 2010-11

Decided on: 10 June 2011

Order

N.V. Vasudevan, JM

1. These are appeals by the revenue against two orders both dated 25-6-2009 of CIT(A) XXXI, Mumbai relating to assessment years 2010-11 and 2009-10.

2. The appellant is ACM Shipping India Limited, a company (hereinafter referred to as “the Appellant”). It is engaged in the business of ship broking and arranges for transportation of cargo from India to other countries. The appellant is a subsidiary of ACM Shipping Ltd. (‘ACM UK’) is a foreign company incorporated in UK, having its office at Kinnaird House, 1 Pall Mall, London SWIY 5AU. ACM UK is engaged in international business of ship broking services. According to the appellant ACM UK has an extensive worldwide net work/connection with large number of international ship owners and has substantial experience in dealing with them. ACM UK is a tax resident of the United Kingdom. A copy of the Tax Residency Certificate was also filed before the Assessing Officer.

3. According to the appellant, it needs contact information/details of international ship owners for arranging international shipments. The appellant therefore entered into a service agreement dated 1-4-2008 with ACM UK. As per the agreement, ACM UK was required to provide the following services to ACM India outside India. Identifying potential international ship owners outside India and referring them to ACM India. Facilitate interaction of ACM India with the international ship owners. Extend help by way of assistance with establishing contact with ship owners regarding availability of ships on requisite dates and freight charges.

4. The appellant approached the Assessing Officer for issue of a Nil deduction of tax at source certificate under section 195(2) of the Income-tax Act, 1961 for remitting payments to ACM, UK for the financial year 1-4-2008 to 31-3-2009. It was submitted that the aforesaid commission payable to ACM UK cannot be characterized as fees for technical services (FTS) as contemplated in Article 13(4) of the India-UK Tax Treaty as the payment is not in the nature of technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Therefore, the same would not qualify as FTS under the India-UK Tax Treaty. The payments to be received by ACM UK are in the nature of business income in the hands of ACM UK. It was submitted by the appellant that in terms of Article 7(1) of the DTAA between India and UK, in the absence of any of Permanent Establishment (‘PE’) of ACM UK in India, its income cannot be subject to tax in India. In view of the above the appellant requested for a Nil withholding tax certificate.

5. The Assessing Officer did not agree with the submissions of the Appellant. He found that ACM UK is the holding majority of the shares of the appellant. The appellant was also procuring business for ACM UK and that the activities of the appellant were carried out wholly for the ACM UK and therefore, the Indian company becomes agency PE of the UK company as per article 5 of the Indo-UK DTAA. Hence the profits attributable to Indian operations are taxable in India. Accordingly the appellant herein was directed to deduct tax at source before making payments to ACM UK.

6. On appeal by the assessee, the CIT(A) held:

“(a) The commission earned by the non-resident selling agent for services which were rendered outside India cannot be considered as deemed to have accrued or arisen in India and hence not taxable in India. In this regard the CIT(A) held that ACM, UK is getting commission for services rendered by them in UK for arranging the contracts with ship owners and the appellant is getting commission in respect of arranging clients in India for carrying their cargo. According to the CIT(A) the appellant was paying 50 per cent of the commission it earned to ACM UK for the services rendered for getting contract with the ship owners and the customers. According to the CIT(A) the commission is payable by the ship owners to ACM, UK directly, but is routed through the appellant because the customers is based in India. As per the contract with the ship owner and the customer, the customer has to deduct the commission payable out of the gross freight and the commission is paid to the appellant which in turn is shared between the appellant and the foreign company. The CIT(A) relied on Circular No. 23, dated 23-7-1969 wherein it has been clarified that where there are transactions with the non-resident on a principal to principal basis there will be no liability on accrual basis to the non-resident on the profits made by him. It has further been clarified that the real relationship between the parties has to be looked into on the basis of the agreement existing between the resident and the non-resident. Thus the CIT(A) held that there is no accrual of income to the non-resident in India.

(b) ACM Shipping Ltd., UK does not carry on any business in India. They do not have any place of business in India. Further, the appellant company, though it is a wholly owned subsidiary of ACM Shipping Ltd., UK but is independently and completely managed by different set of employees. All the decisions of the appellant company are independently taken by its employees. Also, the Board of Directors are common, other than one director who is appointed by the U.K. Company and the other two directors are not related to ACM Shipping Ltd., UK and hence, the question of appellant company becoming agency P.E. of ACM Shipping Ltd., U.K. as per Article 5 of DTAA between India and U.K. does not arise. Also, none of the employees of the appellant company have previously worked or have been sent on deputation by ACM, UK. The appellant is not an Agency PE of the UK company as the agreement between the appellant company and the UK company is an agreement between two principals and the appellant company is not appointed as an agent by ACM UK for procuring any business for them as sales agents or purchase agents. On the contrary, the appellant company is utilizing the services of ACM UK for which commission is remitted and merely because the appellant company is a subsidiary of ACM UK does not create Agency PE as per Article 5 of Indo-UK DTAA.

(c) No services were rendered in India by ACM UK. In this regard the CIT(A) also referred to the decision of the Hon’ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. v. DIT (288 ITR 408) and the decision of the Hon’ble Bombay High Court in the case of Clifford Chance v. Dy. CIT (221 CTR 1).”

For all the above reasons the CIT(A) held that the payment of commission by the appellant to ACM UK was not chargeable to tax and, therefore, there was no obligation on the part of the appellant to deduct tax at source. Aggrieved by the order of the CIT(A) the revenue has preferred the present appeal before the Tribunal.

7. The facts in ITA No. 5085/M/09 are also identical except for the financial year which is 2009-10 relevant to assessment year 2010-11.

8. We have heard the rival submissions. The primary reliance by the ld. D.R. was on the fact that the CIT(A) in holding that the commission earned by ACM UK is not chargeable to tax in India relied Circular No. 23, dated 23-7-1969 and this circular has been withdrawn by the CBDT by Circular No. 7 of 2009, dated 22-10-2009. It was also submitted by the ld. D.R. that the finding of the CIT(A) that ACM UK was being paid commission for services rendered abroad is without any basis. It was her submission that the income earned by ACM UK was by virtue of a business connection in India, therefore, income is deemed to have accrued to ACM UK in India under section 9 of the Act. With regard to the finding of the CIT(A) that the appellant was not PE of ACM UK, the ld. D.R. submitted that the provisions of Article 5(4)(c) and Article 5(5) of the DTAA will be applicable. In this regard it was pointed out by the ld. D.R. that the appellant habitually secures orders for ACM UK. It was further submitted that the appellant is a subsidiary of ACM UK. In this regard ld. D.R. also pointed out that the appellant cannot be considered as a person acting independently. It was further submitted that since CIT(A) has not examined the issue from this perspective, the CIT(A) should be directed to examine the same.

9. The ld. counsel for the appellant reiterated the stand of the appellant as put forth before the CIT(A).

10. We have considered the rival submissions. The agreement between appellant and ACM UK is at pages 10 to 13 of the appellant’s paper book. The other terms of the agreement have already been narrated in the earlier part of this order and they are not repeated. It will be worthwhile to refer to the clause of the agreement regarding remuneration. The same reads as follows:

“Commission and Mode of Payment:

It is agreed that on occasions where the first party utilizes the second party’s services in establishing contact with international ship owners and benefits from it from time to time, the second party shall be entitled to 50 per cent of the commission earned by the first party from the Charterer.”

It is also a fact that the appellant wholly or almost wholly secures orders only for ACM UK. The appellant arranges for transportation of cargo from India through a carrier or ship owner or charterer. The freight invoice issued by the carrier shows that the commission is paid by the Indian exporter to the appellant directly on behalf of the carriers. Thus the income is earned by virtue of the services rendered in India. It is the plea of the appellant that ACM UK gives information about carrier and this helps the appellant to engage the services of the carrier on behalf of an Indian exporter and, therefore, part of the commission is shared between the appellant and ACM UK. The appellant has however been taking the stand that ACM UK rendered services to the carrier outside India and carrier instead of paying commission to ACM UK directly pays commission to the appellant and later the commission is shared between the appellant and ACM UK. This stand of the appellant is self-serving and there is no evidence on record to show that the commission in question is paid for services rendered outside India. As we have already seen the commission is paid to ACM UK by the appellant only in respect of services rendered which might ultimately result in business to the appellant in India. In the light of the above factual background, we are of the view that the commission income which the appellant pays to ACM UK accrues to ACM UK by virtue of business connection in India and, therefore, the same is taxable in India as business income. The reliance placed on Circular No. 23, dated 23-7-1969 is no longer relevant because the same has been withdrawn by Circular No. 7 of 2009, dated 22-10-2009. Even otherwise it is doubtful as to whether the said circular issued in the context of sale of goods can be applied to a case of rendering of services. In any event the payment to the non-resident by the appellant is dependent upon the service charges realized by the appellant in India. Therefore Circular No. 23 would not be applicable. The decision of the Hon’ble Bombay High Court in the case of Set Satellite Singapore Pte. Ltd. v. Dy. CIT [2008] 307 ITR 205/173 Taxman 475 would also be not relevant because the said decision is based on Circular No. 23 which has already been withdrawn by the CBDT.

11. As far as the existence of PE in India is concerned, the CIT(A) has not examined the applicability of Article 5(4)(c) and 5 of the DTAA between India and UK in proper perspective. The same is as follows:

“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,

** ** **

4. A person acting in a Contracting State for or on behalf, of an enterprise of the other Contracting State other than an agent of an independent status to whom paragraph 5 of this article applies shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if:

(a) he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or

(b) he habitually maintains in the first mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or

(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that 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, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.”

As can be seen from the order of the CIT(A), he has not examined the applicability of Article 5(4)(c) and Article 5(5) of the India-UK DTAA. He has examined only applicability of Article 5(4)(a) of the India-UK DTAA. We are of the view that it would be appropriate to set aside the order of CIT(A) and remand the issue to CIT(A) for fresh consideration regarding applicability of Article 5(4)(c) and Article 5(5) of the India-UK DTAA. The facts regarding applicability of Article 5(4)(c) and Article 5(5) of Indo-UK DTAA have to be properly examined. In this regard the fact that the appellant is a wholly owned subsidiary of ACM UK and the fact that the appellant works only for ACM UK are factors which will have a bearing. These aspects have not been examined by the CIT(A). The case of the Assessing Officer is based on Article 5(4) and Article 5(5) of the India-UK DTAA. Even though the Assessing Officer has not examined the case from any particular sub-clause of Article 5(4) of the India-UK DTAA, it is clear from his order that he had applied Article 5(4)(c) of the India-UK DTAA.

The CIT(A) while reversing the order of the Assessing Officer ought to have dealt with that aspect. The learned D.R. in this regard also raised an issue that there was no justification for the Appellant to pay 50 per cent of the commission that it earns to ACM UK. At this stage, we shall restrict our discussion only to chargeability to tax of the receipts in the hands of ACM UK in India. The revenue in an assessment in the case of either the appellant or ACM UK, if they are ultimately found to be liable to tax in India, is free to examine this aspect. As far as the present appeal is concerned, the applicability of Article 5(4)(c) and Article 5(5) of Indo-UK DTAA, needs to be examined afresh by the CIT(A). We therefore set aside the order of CIT(A) and direct the CIT(A) to examine the applicability of Article 5(4)(c) and 5 of the DTAA between India and UK in proper perspective. The appellant will be given opportunity of being heard by the CIT(A) before deciding the issue. For statistical purposes the appeals of the revenue are treated as allowed.

12. In the result, both the appeals are allowed for statistical purposes.

Related posts:

1. Commission received by foreign company for assistance in arranging cargo transportation was taxable in India on account of ‘business connection’
2. Technical assistance and technical know-how received by an Indian company from a foreign company for period November, 1998 to December, 2000 is neither taxable u/s 65(31) nor u/s 66A of the Finance Act, 1994
3. Sale of equipment to an Indian party by a foreign company cannot be construed as resulting into any business connection in India
4. Taxability of commission paid by Indian Company to foreign company to promote its business in that country
5. Procurement of orders by South African company for Indian company on commission basis is not taxable in India