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

Recently, ITAT Mumbai (the Tribunal) in case of ACIT Vs. ACM Shipping India Ltd (2011) ITA No. 5085/MUM/2009 held that the commission received by the UK company for assisting the taxpayer in arranging cargo transportation was taxable as business income by virtue of their business connection in India. The Tribunal observed that reliance cannot be placed on Circular No. 23 dated 23 July 1969 since it has been withdrawn. The circular was issued in the context of sale of goods and may not apply to the current case since it relates to rendering of services.

Facts

1. The taxpayer is a wholly-owned subsidiary of ACM Shipping India Ltd., UK (ACM UK). The taxpayer was involved in the business of ship broking and arranging for transportation of cargo from India to other countries.

2. ACM UK has an extensive worldwide network and connection with large number of international ship owners and has substantial experience in dealing with them. Since the taxpayer needed contact information of international ship owners for arranging international shipments, it entered into a service agreement dated 1 April 2008 with ACM UK.

3. As per the service agreement, ACM UK was to provide the following services to the taxpayer outside India on a commission basis:

• Identifying potential international ship owners outside India and referring them to taxpayer.
• Facilitating interaction of taxpayer 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 taxpayer requested the Assessing Officer (AO) to issue a Nil withholding tax certificate under section 195(2) of the Income Tax Act, 1961 (the Act) for remitting payments to ACM UK.

5. The AO observed that the ACM UK held majority shares of the taxpayer. Further, the taxpayer was also procuring business for ACM UK. Accordingly, the taxpayer became an agent of ACM UK as per article 5 of the India-UK tax treaty (the tax treaty). Accordingly, the profits attributable to Indian operations were taxable in India.

6. The Commissioner of Income-tax Appeals [CIT (A)] held that:

• The commission was payable by the ship owners to ACM UK directly but was routed through the taxpayer because the customers were based in India. As per the contract with the ship owner and the customer, the customer had to deduct the commission payable out of the gross freight and the commission was paid to the taxpayer, which in turn was shared between the taxpayer and ACM UK.
• ACM UK was getting commission for services rendered by them in UK for arranging the contracts with ship owners for the taxpayer. The commission earned for services which were rendered outside India cannot be deemed to have accrued or arisen in India and hence not taxable in India.
• As per circular no. 23, there was no accrual of income to ACM UK in India.

Tax Department’s contention

1. The CIT(A) held that commission earned by ACM UK was not taxable in India placing reliance on Circular No. 23, dated 23 July 1969, which has been withdrawn  by the Central Board of Direct Taxes vide Circular No. 7 of the 2009 dated 22 October 2009.

2. Income earned by ACM UK was by virtue of a business connection in India, therefore, income is deemed to have accrued in India under Section 9 of the Act.

Tribunal’s ruling

1. 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.

2. 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.

3. Reliance placed on circular No. 23 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 realized by the appellant in India therefore Circular No.23 would not be applicable.

4. 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.

Our comments

This is an important ruling given by the Mumbai Tribunal where it is held that commission received by the UK company for assisting the taxpayer in arranging cargo transportation was taxable as business income by virtue of business connection in India.

The Tribunal observed that services rendered ultimately resulted in business to the taxpayer in India and therefore the foreign parent was having a business connection in India. Accordingly, the payment was taxable as business income in India.

It may be noted that the Circular No. 23 (which provided clarifications in deciding questions regarding the applicability of the provisions of section 9 of the Act in certain specific situations), has been withdrawn. However, the implications of such withdrawal on the specific facts of each case needs to be analyzed.

The Tribunal has held that the income of ACM UK was taxable in India as per the Act. However if the CIT(A) establishes the fact that ACM UK does not have a PE in India as per the tax treaty, ACM UK may still not be taxable in India in view of Section 90(2) of the Act which provides that provisions of Act shall apply over the tax treaty only if they are more beneficial to the taxpayer.