International Air Transport Association (Canada) Vs ACIT (ITAT Mumbai)
At this stage, we may herein observe that as in the present case before us, in the case of Delmas France (supra) also there was no finding of the lower authorities that the transactions between the principal and agent were done in arm’s length conditions. Under such circumstances, the Tribunal relying on the order of the ‘Special bench’ of the Tribunal in the case of Motorola Inc. Vs. Dy. CIT (2005) 95 ITD 269 (Del)(SB), had held, that the onus was on the Revenue to demonstrate that a PE of the foreign enterprise exists in India. In its aforesaid order it was observed by the Tribunal, that in the case before them, the onus was even greater inasmuch the very foundation of DAPE did rest 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 arm’s length conditions”. As such, in the absence of any such negative finding being available on record, it was observed by the Tribunal that it could not be inferred that the agent was not of an independent status. Further, noticing that neither any such finding was given by the A.O or by the Dispute Resolution Panel, nor in the course of the proceedings before the Tribunal any material was brought on record which could at least prima facie demonstrate, or even indicate, that the transactions between the principal and agent were not under arm’s length conditions, the Tribunal concluded that it was to be held that the assessee did not have any PE in India. We may herein observe, that the Tribunal taking cognizance of the fact that there was nothing on record to even remotely suggest a prima facie case that the transactions between the foreign enterprise and the agent were not at arm’s length, had thus, declined to remand the matter and allow a fresh inning to the A.O for making roving and fishing enquiries on the aspect of transactions not having been done in arm’s length conditions. On further appeal, the Hon’ble High Court approved the view taken by the Tribunal. In the case before us also neither the lower authorities had established that the transactions between the assessee viz. IATA, Canada and the ATC’s were not done under arm’s length condition, nor any material was placed on our record by the ld. D.R to demonstrate any such fact. Accordingly, in the absence of any finding by the lower authorities that the transactions between the assessee and the ATC’s were not at arm’s length, we thus on a similar footing conclude that as per a conjoint reading of Article 5(4) and Article 5(5) of the India-Canada tax treaty, the ATC’s being an independent agent within the meaning of Article 5(5) of the India-Canada tax treaty could not have been held to be the DAPE of the assessee in India.
FULL TEXT OF THE ITAT JUDGEMENT
The present cross-appeals arises from the order passed by the A.O under Sec. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short „Act’), dated 30.12.2015. The assessee has assailed the impugned order on the following grounds of appeal before us:
“Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income tax (International taxation) – 2(2)(1), under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (‘Act’) (‘Assessment order’), in pursuance of the directions issued by Dispute Resolution Panel – I (‘Hon’ble DRP’), Mumbai, on the following grounds:
On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon’ble DRP has:
Ground No. 1 – General ground
Erred in determining the total taxable income of the Appellant at Rs.24,51,25,623/- and computing tax and interest payable thereon at Rs.7,42,29,180/-.
Ground No. 2 – Provision of distance learning courses
a. Erred in treating the Authorized Training Centers (‘ATCs’) to be the dependent agent permanent establishment (‘PE’) of the Appellant in India under Article 5(4) of the India – Canada tax treaty and accordingly, taxing the revenues of Rs.12,12,38,736 received by the Appellant on account of sale of distance learning courses as being in the nature of ‘business profits’ under Article 7 of the India – Canada tax treaty.
b. Without prejudice to the above, erred in not appreciating that the income received by the Appellant on account of sale of distance learning courses cannot be said to be attributable to India, considering that the activity relating to the distance learning courses has been undertaken by the Appellant outside India.
c. Without prejudice to the above, erred in assuming that the entire revenues received by the Appellant from sale of distance learning courses in India is from ATCs, without appreciating the fact that the said revenues also include revenue directly received from students in India.
d. Without prejudice to the above, even assuming (without admitting) that the Appellant has a dependent agent PE in India, erred in:
i. Arbitrarily attributing 40% of the gross receipts of the Appellant on account of sale of distance learning courses as income attributable to the dependent agent PE in India; and International Air Transport Association (Canada) Vs. The Asst. Commissioner of Income-tax (I.T)-2(2)(1), Mumbai The Asst. Commissioner of Income Tax Act (I.T)-2(2)(1),Mumbai Vs. International Air Transport Association (CANADA)
ii. Arbitrarily and on an ad-hoc basis estimating the profits at 100% of the gross receipts attributed to the dependent agent PE of the Appellant on account of sale of distance learning courses.
e. Without prejudice to the above, erred in holding that the entire income received by the Appellant on account of sale of distance learning courses is alternatively taxable as royalty, both under the Act and the India – Canada tax treaty.
Ground No. 3 – Sale of physical publications (ie, DGR manuals)
Erred in taxing the income from sale of physical publications (ie, DGR manual) as ‘royalty’ Erred in income under Article 12 of the India – Canada tax treaty, as being in the nature of information concerning any industrial, commercial or scientific experience.
Ground No. 4 – Application fees for sale of DGR manuals
Erred in taxing the application fee received for DGR manuals/ publications (which was inadvertently offered to tax as ‘Collection of royalties from ATS’) as ‘royalty’ income under Article 12 of the
India – Canada tax treaty, as being in the nature of information concerning any industrial, commercial or scientific experience.
Ground No. 5 – Provision of advertising space on websites and publications
Erred in taxing the receipts from provision of advertising space as ‘royalty’ income under the Act and Article 12 of the India – Canada tax treaty, on the ground that the customers use the logo, brand and goodwill of the Appellant by advertising on the Appellant’s website and publications.
Ground No. 6 – Collection of membership fees, BSP Link charges and fees for IATA Clearing House facility’ (‘ICH facility’)
In relation to collection of membership fees
a. Erred in taxing the membership fees as „business profits’ under Article 7 of the India – Canada tax treaty, by treating the Indian office of the Appellant as a PE of the Appellant under Article 5 of the India – Canada tax treaty, without appreciating the fact that the membership fees collected by the Appellant is independent and not related to the BSP activities undertaken by the Indian branch office.
b. Erred in failing to provide any reason or basis for deeming the contribution/ membership fees received from the members, by which they obtain membership with the Appellant and get access to information pertaining to the various services provided by the Appellant, as being related to IATA branch office which is specifically involved in providing BSP services only as per the approval of the RBI.
c. Without prejudice to the above, erred in not appreciating the contention of the Appellant that it qualifies as a mutual association and hence, the membership fees received from the members should not be liable to tax having regard to the principle of mutuality under the Act.
In relation to BSP Link charges from airlines and IATA branch for onward remittances to Accelya World SLU, Spain (‘Accelya Spain) (categorized as ‘Provision of E-Services)
d. Erred in considering the incorrect amount of Rs.2,81,04,800 as being the BSP Link charges collected by the Appellant for onward payment to Accelya Spain, instead of the correct amount of Rs.2,29,29,020.
e. Erred in not accepting the contentions of the Appellant that the BSF Link charges collected by the Appellant for onward payment to Accelya Spain are in the nature of reimbursement of expenses/ cost, without any mark up, and hence, in the absence of any income element in respect of such charges, the same cannot be taxed as ‘business profits’ under Article 7 of the India – Canada tax treaty.
In relation to fees for ICH facility
f. Erred in treating the Indian branch office of the Appellant as being the FE of the Appellant in India as per Article 5 of the India – Canada tax treaty, without appreciating the fact that the activity of provision of ICH facility is completely independent and separate from the BSP services provided by the Indian branch office and accordingly, taxing the said receipts as ‘business profits’ under Article 7 of the India – Canada tax treaty.
g. Erred in not accepting the contentions of the Appellant that as the ICH facility is provided by the Appellant outside India and the income is also received by the Appellant in a bank account maintained outside India, the revenues pertaining to the said ICH facility cannot be taxed as business profits in India under Article 7 of the India – Canada tax treaty.
h. Erred in failing to provide any reason or basis for deeming that the receipts in relation to the ICH facility provided by the Appellant outside India are related to the IATA branch office in India which is specifically involved in providing BSP services as per the approval of the RBI.
In relation to attribution of profits
i. Erred in estimating 40% of the gross receipts of the Appellant as being the income attributable to the FE (i.e, the Indian branch office) in India, on an arbitrary and ad-hoc basis; and
ii. Erred in estimating 90% of the gross receipts attributed to the PE of the Appellant in India, as being the profits attributable to such FE in India, on an arbitrary and ad-hoc basis.
Ground No. 7 – Short grant of credit for self-assessment taxes paid by IATA Canada
Erred in granting short credit of the self-assessment tax of Rs.1,32,10,040 paid by the Appellant for the subject AY.
Ground No. 8 – Non-grant of credit of taxes deducted at source (‘TDS’)
Erred in not granting credit of TDS of Rs.24,21,636 in respect to the income declared by the Appellant.
Ground No. 9 Wrong computation of interest under Section 234A of the Act
Erred in wrongly computing the interest under Section 234A of the Act at Rs.88,10,046, by not granting credit of the TDS to the Appellant.
Ground No. 10 – Wrong levy of interest under Section 234B and 234C of the Act
a. Erred in levying interest under Section 234B and 2340 of the Act, without appreciating the fact that interest under Section 234B and 234C of the Act is not leviable in case of a foreign company.
b. Without prejudice to the above, erred in wrongly computing interest of Rs.2,20,25,115 and Rs.2,26,050 under Section 234B and Section 234C of the Act respectively, without taking into consideration the self-assessment tax and TDS for the subject AY.
Ground No. 11 – Initiation of penalty proceedings
The learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act, on the basis that the Appellant has concealed income and furnished inaccurate particulars of income.
Each of the above grounds of appeal is without prejudice to and independent of one another.
The Appellant craves leave to add, alter, amend, substitute or delete the any of the above grounds of appeal at or before the time of hearing of the appeal, so as to enable the Hon’ble Income Tax Appellate Tribunal to decide this appeal according to law.
The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
On the other hand, the revenue has challenged the impugned order on the following grounds of appeal before us :
“1. Whether on the facts and circumstances of the case the Hon’ble Dispute Resolution Panel (DRP) was justified in directing the A.O to restrict 40% of the entire revenue received by the assessee from the sale of the training materials as income attributable to the PE without appreciating the fact that the assessee does all the work related to sale of various distance learning courses in India. Through its PE in India, thereby making all or almost all the earnings thereof, attributable to PE in India.
2. Whether on the facts and circumstances of the case, the Hon’ble Dispute Resolution Panel (DRP) was justified in directing the A.O to restrict 40% of the gross receipts as income attributable to Indian Branch (PE) on account of membership dues, BSP Link Services and ICH facilities without appreciating the fact an opportunity was given to the assessee during the course of the assessment the interest of justice, A.O in her draft order allowed 10% of the gross receipts as related expenses and only 90% of the revenue was charged to tax.
3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. “
As the issues raised in the cross-appeals are inextricably interlinked or in fact interwoven, therefore, the same are being taken up and disposed off together by way of a consolidated order.
2. Briefly stated, the assessee is a corporation incorporated under the Special Act of the Parliament of Canada and is a tax resident of Canada. The assessee corporation held a valid Tax Residency Certificate during the year under consideration. Being a non-profit organisation, it is stated to have carried out its activities with an object to promote safe, reliable, secure and economical services for the benefit of the stakeholders of the world commercial aviation industry. Further, the assessee has a branch office in India ,viz. IATA Branch, for setting up of which an approval was obtained from the Reserve Bank of India.
3. On a perusal of the records, we find, that the assessee had filed its return of income for A.Y. 2012-13 on 31.03.2014, declaring a total income of Rs.4,26,07,201/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. In the course of the assessment proceedings it was observed by the A.O that the assessee had offered its following incomes for tax:
