Non-resident French shipping company not to pay tax on business income unless it is having PE in India

IN THE ITAT MUMBAI BENCH ‘L’

Delmas France S.A.

Versus

Assistant Director of Income-tax (International Taxation)

IT Appeal No. 8991 (Mum.) of 2010

[Assessment year 2007-08]

January 16, 2013

ORDER

Dinesh Kumar Agarwal, Judicial Member – This appeal preferred by the assessee is directed against the assessment order dtd. 25-10-2010 for the A.Y. 2007-08 passed by the A.O. u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) after considering the directions dtd. 28-9-2010 of the Dispute Resolution Panel – I, Mumbai.

2. Briefly stated facts of the case are that the assessee, Delmas France, is a foreign company incorporated in France, engaged in the business of operation of ships in India. The assessee filed its return of income declaring taxable income at Rs. 128,33,554/- claiming tax and interest payable at ‘nil’ on the ground that it is a tax resident of France, entitled to the tax benefit of Double Taxation Avoidance Agreement (DTAA) between India and France. According to the assessee, Article -9 of the DTAA is for an enterprise engaged in shipping activity and since the assessee is in the business of shipping, it is entitled to the benefit of Article-9 and accordingly its income from shipping operation is taxable in France and cannot be taxed in the source country i.e. India. It was further contended that since the assessee does not have Permanent Establishment (PE) in India, its business profit cannot be taxed in India at all. However, the A.O. did not accept the assessee’s claim. The A.O. while observing that all the work of the assessee in India is carried out by its Agents namely Barwil and CMA CGM applied the ratio of the decision of the Tribunal in Asstt. CIT v. DHL Operations B.V. [2005] 142 Taxman 1 (Mum.) (Mag.) and held that there exists a PE of Delmas in India. He further observed that since the income shown by the assessee was not from the operations of the ships but the business income and since the assessee has a PE in India, the assessee’s case is not covered by section 44B of the Act as it is not in the business of operation of ships. He further observed that the assessee has shown gross receipts of Rs. 16,15,77,754/- under the head freight earning and Rs. 95,36,293/-under the head Import Thc, Export Thc, Inland Haulage and Detention charges totalling to Rs. 17,11,14,047/-. The A.O. after including the service tax amount of Rs. 9,21,957/- collected by the assessee during the year, computed the gross receipt of the assessee at Rs. 17,20,36,004/-and in the absence of any other details, the A.O. estimated assessee’s total income at 10% of the gross receipts as per Rule 10 of the Income tax Rules and determined the assessee’s total income at Rs. 17,20,36,004/-. The assessee filed objection before the DRP who has directed the A.O. to examine the fresh evidences and allow relief to the assessee if conditions are fulfilled. Pursuant to the directions of the DRP, the A.O. observed that the assessee has produced the details of transfer of cargo from feeder vessel to mother vessel owned/pooled/chartered by the assessee, however, no evidence has been produced in respect of the income of Rs. 66,947/- and, hence, computed the disallowance as under:-

Accordingly the A.O. completed the assessment at an income of Rs. 66,947/- vide order dtd. 25-10-2010 passed u/s 143(3) r.w.s. 144C(13) of the Act.

3. Being aggrieved, the assessee is in appeal before us.

4. At the time of hearing the ld. Counsel for the assessee submits that he does not want to press ground No. 1, 2, 3 & 12 being pre-matured, which was not objected to by the ld. D.R.

5. That being so and in the absence of any supporting material placed on record by the ld. Counsel for the assessee, the above grounds taken by the assessee are, therefore, rejected being not pressed.

6. At the time of hearing the ld. Counsel for the assessee further submits that grounds No. 6,7,8 & 9 are alternative grounds of main grounds No. 4 & 5 which are as under:-

“4. erred in holding that the Appellant has a fixed place Permanent Establishment (PE) in India in terms of India-France DTAA i.e. the business of the Appellant in India is carried out through a fixed place through its agent in India, without appreciating the facts and circumstances of the case.

5. erred in holding that the agent of the Appellant in India is dependent on the Appellant and, such dependent agent constitutes a PE of the Appellant in India, without appreciating the facts and circumstances of the case”.

7. The ld. Counsel for the assessee further submits that the above issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case in Delmas, France v. Asstt. DIT (International Taxation) [2012] 49 SOT 719  wherein the Tribunal on the similar issue has vacated the A.O’s finding with regard to existence of assessee’s PE in India, therefore, the order passed by the A.O. be set aside and the assessee may be declared as not liable to tax in India. He further submits that in the case of Agent i.e CMA CGA Global India Pvt. Ltd., the A.O. after considering the directions of the DRP, deleted the addition in the hands of the Agent vide assessment order for A.Y. 2007-08 dtd. 27-10-2011 passed u/s 143(3) r.w.s. 144C (13) of the Act. He, therefore, submits that the addition made by the A.O. be deleted and in view of this, alternative grounds raised by the assessee do not survive.

8. The ld. D.R., on the other hand supports the order of the A.O.

9. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the A.O. while observing that the facts of the present case are identical to the facts of the case for the A.Y. 2007-08 wherein similar addition was made, held that the income of the assessee is not to be considered u/s 44B of the Act. However, the Tribunal in assessee’s own case (supra) on the similar issue has observed and held as under (para 6 to 9):-

“6. When this called out for hearing and it was noticed that it is admittedly a case of dependent agent permanent establishment (DAPE), it was put, as a proposition, to the parties that in view of Hon’ble jurisdictional High Court’s judgment in the case of Set Satellite (Singapore) Pte Ltd v. DDIT4, the controversy regarding existence of permanent establishment could perhaps be a wholly academic issue inasmuch as once the agent is paid an arm’s length remuneration for the services rendered, as is not even in dispute in the present case, no further -profit can be attributed to the PE. In other words, the proposition was that, as the law stands now, existence of a DAPE is tax neutral except in a situation in which agent is not paid an arm’s length remuneration for services rendered, and since it is nobody’s case that agent has not been paid arm’s remuneration, nothing turns on existence of PE because, even if there is a PE, no further profits can be attributed to the DAPE. While learned representatives did not dispute this legal position, both the parties objected to the matter being decided on this short ground. While learned counsel for the assessee was of the view that since Hon’ble Supreme Court is right now hearing revenue’s appeal against the said jurisdictional High Court decision, and assessee’s interest can be +-adversely affected in the eventuality of the said judgment being reversed, learned Departmental Representative was of the view that since Circular No. 235, which was foundation of Set Satellite judgment (supra) by Hon’ble Supreme Court, now stands withdrawn, the said judgment ceases to hold good in law. She also submitted that if DAPE profit neutrality theory is to -be accepted as such, the very existence of DAPE is meaningless. We were -thus urged to adjudicate the matter on merits in entirety, and not to simply go by DAPE profit neutrality theory. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

7. There are two issues that we need to deal with – first, existence of assessee’s PE in India, and, second – quantification of the profits which can be said to be attributed to assessee’s PE in India. Let us deal with the first (4 307 ITR 205 5 dated 23rd July 1969 issued by the Central Board of Direct Taxes) issue first, but before we address ourselves to the question as to whether or not the assessee can be said to have a permanent establishment in India, on the facts of this case, it will be useful to take a look at the relevant provision in the Indo French DTAA, which is reproduced below for ready reference:

Article 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.

2. The term permanent establishment includes especially :

 (a)  a place of management ;

 (b)  a branch ;

 (c)  an office ;

 (d)  a factory ;

 (e)  a workshop ;

 (f)  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;

 (g)  a warehouse in relation to a person providing storage facilities for others ;

 (h)  a premises used as a sales outlet ;

 (i)  an installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days.

(3 and 4 ……….not relevant for our purposes)

5. Notwithstanding the provisions of paragraphs 1 and 2 where a person other than an agent of an independent status to whom paragraph 6 applies is acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if :

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

(b)  he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

6. An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm’s length conditions.

(7 ……….not relevant for our purposes)

8. A plain reading of the above provisions indicates that the provisions of Article 5(5) read with article 5(6), which deal with the agency situations, are concerned, these provisions specifically override the provisions of Article 5(1) and 5(2), inasmuch as if a foreign enterprise is carrying on business in the other contracting state through an agent, the provisions of Article 5(1) and 5(2) do not come into play. That is, however, an academic aspect, because, the very business model of business of a foreign enterprise being carried out through an agency is such that it does not ordinarily admit the possibility of a fixed base PE under article 5(1) and 5(2). As observed by a coordinate bench in the case of Airline Rotables Ltd. v. DDIT6, in order that there exists a fixed (6 44 SOT 368) base PE, under article 5(1) and 5(2), “there are three criteria embedded in this definition-physical criterion i.e., existence of physical location, subjective criterion i.e., right to use that place, and functionality criterion i.e., carrying out of business through that place” and that “It is only when these three conditions are satisfied, a PE under the basic rule can be said to have come into existence”. The very business model of the agency PE is such that the subjective criterion, i.e. “right to use that place”, can never be satisfied inasmuch as while it is a sine qua non for existence of a fixed base PE that “the place of business should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well”, that “a place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities, and that such “place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice”, as against the business agency model wherein business of the foreign enterprise is carried on by the agent and the foreign principal does not have the powers, as a matter of right, to use the said place for carrying on its business. The use of physical location is, in this business model, always by the agent – though for furtherance of business interests of the principal. Clearly, therefore, the subjective criterion for existence of PE is not satisfied, and, therefore, PE under the basic rule cannot be said to have come into existence. On the facts of this case, therefore, the assessee cannot be said to have a PE under the basic rule, as the assessee is doing business through agent and even though business of the assessee is carried out from the premises owned by the agent, it is not even revenue’s case that the foreign enterprise has, its disposal and as a matter of right, agent’s premises for carrying out business of the foreign enterprise. A Special Bench of this Tribunal in the case of Motorola Inc. 7 upheld this school of thought, and has, inter alia, observed as follows:

“……….. The OECD Commentary on Double Taxation Conventions refers to a fixed place as a link between the place of business and a specific geographical point. It has to have certain degree of permanence. It is emphasized that to constitute a ‘fixed place of business’, the foreign enterprise must have at its disposal certain premises or part thereof. Philip Baker, in his commentary on Double Taxation Conventions (Third Edition), states that the fixed place is very much that of a physical location, i.e., one must be able to pinpoint to a physical location at the disposal of the enterprise through which the business is carried on. On the other hand, possession of a mailing address in a State without an office, telephone listing or bank account-has been held not to constitute a PE. Further, the fixed place of business need not be owned or leased by the enterprise provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purpose of project undertaken on behalf of the owner of the premises….”

9. Let us now deal with the scope of dependent agent permanent establishment (DAPE) as set out in Article 5(5) and Article 5(6) of the Indo French DTAA. Article 5(5) provides the situations in which business being carried on through a dependent agent results in creation of PE in the source state. The provisions of Article 5(6) are, however, slightly at variance with standard tax treaty provisions, and need to be analysed in some detail. The significant feature of Article 5(6) of Indo French DTAA, which is somewhat unique in the sense that this provision is in clear deviation from the standard UN and OECD Model conventions, is that even when an agent is wholly or almost wholly dependent on the foreign enterprise, he will still be treated as an independent agent unless additional condition of the transactions being not an arm’s length conditions is fulfilled. It is so for the reason that Article 5(6) provides (7 95 ITD SB 269) that even when an agent is wholly or almost wholly dependent on the principal, i.e. foreign enterprise, “he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arms length conditions” (emphasis by underlining supplied by us). In other words, as long as it is not shown that the transactions between the agent and the principal are not made under arm’s length conditions, the agent is treated to be an independent agent. The implication of the agent being treated as an independent agent is that the provisions of dependent agent PE, as set out in Article 5(5), can never come into play in the cases in which the business is carried out by the foreign enterprise through an independent agent, because Article 5(5), which overrides the provisions of Article 5(1) and 5(2), specifically provides that “where a person other than an agent of an independent status to whom paragraph 6 applies (emphasis by underlining supplied by us) is acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State” subject to fulfilment of certain other conditions which are admittedly fulfilled in the present case. Therefore, as long as the agent is of independent status, the provisions of Article 5(5) cannot be invoked. It is also important to bear in mind that since provisions of Article 5(5) override the provisions of Article 5(1) and 5(2), no permanent establishment under article 5(1) and (2) can be said to come into existence, so far agency situations are concerned, until the conditions of Article 5(5) are also satisfied. Learned Departmental Representative fairly does not dispute, and rightly so, that the permanent establishment in the present case will be governed by Article 5(5) read with Article 5(6). Learned Departmental Representative’s only objection is that since an important aspect, i.e. aspect relating to the transactions having been done in arm’s length conditions, has not been examined by the Assessing Officer, the matter should be restored to the file of the Assessing Officer for specific adjudication on the transactions between principal and agent having been done in arm’s length conditions. We are unable to see any merits in this plea. As held by a coordinate bench of this Tribunal, in the case of Airlines Rotables Ltd v. DDIT8, “It is a settled position of law, as noted by the Special Bench of this Tribunal in the case of Motorola Inc. 9, that the onus is on the Revenue to demonstrate that a PE of the foreign enterprise exists in India”. In the present case, i.e. in the case of DAPE in accordance with provisions of Indo French DTAA, the onus is even greater inasmuch the very foundation of DAPE rests on a negative finding with respect to the wholly dependent or almost wholly dependent agent i.e. “if it is shown that the transactions between the agent and the enterprise were not made under at arms length conditions”. Unless this negative finding is on record, it cannot be inferred that the agent is not of an independent status. No such finding was given by the Assessing Officer, or even by the Dispute Resolution Panel. Even in the proceedings before us, no material has been brought on record which at least prima facie demonstrates, or even indicates, that the transactions between the principal and agent are not under arm’s length conditions. Once this onus is not discharged by the revenue authorities at any of these stages, and in accordance with the law laid down by Special Bench decision in the case of Motorola Inc 10, we have to hold that the assessee did not have any PE in India. We are not inclined to grant a fresh inning to the Assessing Officer for making roving and fishing enquiries on the aspect of transactions not having been done in arm’s length conditions – particularly as there is nothing on record to even remotely suggest a prima facie case in this regard. A negative finding in this regard is a sine qua non for making out a case for existence 8 44 SOT 368 9 95 ITD SB 269 10 supra of DAPE in the context of Indo French DTAA, and this finding being absent, we have to hold that the stand of the Assessing Officer, with regard to existence of PE, is not sustainable in law. As regards reference to Hon’ble Visakhapatnam Port Trust’s case11, the observations made therein do not apply in this context as it was not dealing with Dependent Agency Permanent Establishment (DAPE) which is now the case before us. As we have seen earlier, the provisions of DAPE override the provisions regarding fixed place PE, and, therefore, any observations made in the context of fixed place PE donot apply to the DAPE situations. As regards the reference to the OECD Model Convention commentaries or other standard literature in the context of DAPE, it cannot be of any help in interpretation of DAPE provisions in Indo French DTAA because of a somewhat peculiar provision in Article 5(5) read with Article 5(6), which is not part of OECD or UN Model Convention, and which provides that “However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm’s length conditions.”. We have also noted that the DRP has held that there is a PE on the short ground that assessee’s claim for applicability of Article 9 presupposes existence of a PE, but it is difficult to comprehend as to how existence of a PE can be inferred merely because the assessee has made a particular claim, which is rejected anyway. The onus of establishing that there is a PE, as we have noted earlier in the discussions, is on the revenue authorities and there is no room for inferences being drawn up in this respect merely because the assessee has made a particular claim. Similarly, reference to agent’s authority to conclude contracts, as has been made by the DRP, is not decisive test either because even when 11 supra agent has the authority to conclude contracts, it is still to be established that the agent is not an independent agent. That exercise is not even conducted in this case. The Assessing Officer’s reliance on OECD Commentary, therefore, is of no avail either. In view of these discussions, as also bearing in mind entirety of the case, we set aside and vacate the Assessing Officer’s findings with regard to existence of assessee’s PE in India. We may, at the cost of repetition, clarify that these conclusions are arrived at in the light of the factual position that there are no findings by the Assessing Officer, or the Dispute Resolution Panel, to the effect that the transactions between the agent and the assessee are not at an arm’s length price, and that, in view of the provisions of Article 5(6) of Indo French DTAA, such a finding by the revenue is a sine qua non for existence of DAPE. To this extent, our decision is confined to the facts of this case for the particular assessment year before us”.

10. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the order of the Tribunal in assessee’s own case (supra) hold that the assessee has no PE in India and, hence, not liable to tax and accordingly the grounds taken by the assessee are allowed.

11. Ground No. 10 & 11 read as under:-

“10. erred in levying interest under section 234B and 234C of the Act, without considering the fact that the Appellant, being a non resident, is not liable to pay advance tax, as its entire income is subject to tax withholding under the Act.

11. without prejudice to the above, interest under section 234C of the Act is to be levied on the returned income and not on assessed income.”

12. At the time of hearing the ld. Counsel for the assessee submits that since the assessee is a foreign company not liable to tax in India, therefore, following the decision of the Hon’ble Bombay High Court in DIT(International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 the interest charged by the A.O. u/s 234B & 234C are liable to be deleted.

13. On the other hand, the ld. D.R. supports the order of the A.O.

14. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Counsel for the assessee that the issue is covered in favour of the assessee by the decision of the Hon’ble jurisdictional High Court (supra) wherein it held that “when a duty was cast on the payer to deduct the tax at source, on failure of the payer to do so, no interest could be imposed on the assessee”. Respectfully following the same and keeping in view of our finding recorded in paras 9 and 10 of this order, we delete the interest charged by the A.O. u/s 234B & 234C of the Act and accordingly the grounds taken by the assessee are allowed.

15. In the result, the Revenue’s appeal stands dismissed.