DDIT Vs. Western Union Financial Services Inc (ITAT Delhi)– ITAT held that the taxpayer’s agents in India were independent agents under Article 5(5) of the India-USA tax treaty (tax treaty). Accordingly, there was no Dependent Agent Permanent Establishment (DAPE) of the taxpayer in India. Further, the Tribunal observed that the taxpayer did not have right to enter and make use of the premises of the agents for its business. Accordingly, it was concluded that there was no fixed place PE of the taxpayer in India as per Article 5(1) of the tax treaty.
INCOME TAX APPELLATE TRIBUNAL, DELHI
ITA Nos. 1572 to 1574/D/2010 With CO Nos. 163 to 165 /Del./2010
Assessment Years: 2002- 03, 2003- 04 & 2005- 06
Deputy. Director of Income-tax, International Taxation
V/s
M/s. Western Union Financial Services Inc.
Date of pronouncement- 06-01-2012
O R D E R
A.N.Pahuja:- These three appeals filed on 8/04/2010 by the Revenue and the corresponding cross-objection[CO] filed on 22nd June, 2010 by the assessee against a common order dated 1.1.2010 of the ld. CIT(A)-XXIX, New Delhi, for the Assessment Years 2002- 03, 2003- 04 & 2005- 06 , raise the following similar grounds :-
ITA nos. 1572 to 1574/D/2010[ Revenue]
“1. On the facts and circumstances of the case, ld. CIT (A) has erred in inferring that the stand alone machines where software applications of the assessee are installed and the machines are dedicated to business of money transfer cannot be treated as fixed place PE of the assessee;
2. On the facts and circumstances of the case, ld. CIT (Appeals) has erred in deciding that liaison office of the assessee in India does not constitute its PE;
3. On the facts and circumstances of the case, ld. CIT (A) has erred in inferring that representatives of the assessee in India do not constitute its Dependent Agent PE under Article 5(4) / 5(5) of the treaty;
4. On the facts and circumstances of the case, ld. CIT (A) has erred in not attributing any profits against the activities being carried out by the assessee through its PE in India.
5. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.”
CO nos.163 to 165 /Del./2010[Assessee]
“1. That on facts and in law, the ld. CIT (Appeals)-XXIX, New Delhi erred in upholding that the assessee has a ‘Business Connection’ in India under Section 9 of the Income Tax Act, 1961 (the ‘Act’);
2. That on facts and in law, the ld. CIT (Appeals)-XXIX, New Delhi erred in not appreciating that the entire income received by the assessee was such from which tax was deductible at source, the assessee could not be held to have committed default in payment of advance tax and, consequently, was not liable to pay interest under section 234-B of the Act;
3. That on facts and in law to the extent the order of the CIT (Appeals) is prejudicial to the assessee it is bad in law and void ab-initio in whole and in part. ”
2. Adverting first to ground nos. 1 to 4 in the appeals of the Revenue and ground no.1 in the appeal of the assessee for these three assessment years, facts, in brief, as per relevant orders for the AY 2002-03 are that in response to a notice dated 31.3.2007 u/s 148 of the Income-tax Act, 1961 [hereinafter referred to as the ‘Act’] the assessee, a company incorporated in USA and engaged in money transfer business world-wide, submitted return declaring nil income on 7.5.2007. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the business of the assessee included transfer of money across the world. In the business of the assessee a person in USA, if he wanted to remit money to a relative in India, approached the agents of the assessee in USA and paid the money in dollars together with the charges. He would be given a receipt by the assessee along with a computer-generated unique 10 digit number referred to as MTCN (Money Transfer Control Number). The remitter would send the said unique number to his relative in India ,who would approach the assessee’s representative/agent in India. There upon MTCN would be fed into the computer with the help of a software and the mainframe computer of the assessee in the USA was accessed by the agent. After matching the number and satisfying himself about the identity of the recipient/claimant, the money would be paid to the claimant in India. For these services, the agent was remunerated by the assessee by way of a commission at an agreed percentage.
2.1 For the purpose of carrying on its business in India, the assessee entered into agreements with the agents i.e. Department of Posts, commercial banks, non-banking financial companies and tour operators. Generally the agents would be appointed for a period of 5 years in the beginning and period could be extended thereafter. The agents were remunerated @ 30 per cent in the case of the Department of Posts and 25 per cent in the case of others, of the money handed over by the agent in India. This percentage would be reduced if the assessee assumed the responsibility for advertising and promotion of the services in India or established a customer service centre to handle telephonic queries. One other feature of the agreement noticed by the AO was that the money would be first paid out by the agent in India and thereafter, he would be reimbursed the same together with the commission due to him. This commission was termed as the “base compensation” in the agreement. The agent had also been given the power to appoint sub-agents/representatives. However, it was the responsibility of the agents to pay the sub-agents. The assessee could ask the agent to terminate the services of a sub-agent if it was found that the sub agent was acting in a manner prejudicial to the interests of the assessee. Besides, there were the usual clauses providing for security and confidentiality and reserving the intellectual property rights of both the parties in the trade names, trademarks, copyrights etc. belonging to them apart from enjoining the agent to maintain records of all the transactions of money transfer routed through him.
2.2 For its business in India, initially, the assessee ,with the approval of RBI opened a liaison office in India. The activities of the liaison office and the terms and conditions stipulated in the approval of the RBI are detailed in the order of the ITAT for the AY 2001-02. Subsequently, the assessee opened additional liaison offices in Bangalore and Gurgaon, the Mumbai office being called the “nodal LO”. Though the assessee claimed that the activities of the liaison office were preparatory and auxiliary in nature, the AO was of the opinion that these liaison offices were actively engaged in marketing for the assessee, negotiating with agents, send the agents to USA for training and installing as also use of software and solving day to day problems in the normal course of business. Moreover, the employees of the assessee in liaison office would co¬ordinate with the agents .Thus, the liaison office actively participated in the business of the assessee in the form of marketing, appointment of agents, brand building, providing software to the agents and imparting training to them in India. In nutshell, the AO was of the opinion that liaison office was a virtual projection of head office in India. While referring to his findings in the assessment order for the AY 2004-05 and the fact that the assessee subsequently closed liaison office and established a subsidiary namely Western Union Services India Pvt. Ltd, the AO concluded that activities of the liaisons office were not of preparatory or auxiliary in nature. The AO further observed ,while referring to Articles 5 & 7 of the DTAA between India and USA as also OECD commentary that the assessee was liable to tax in India as it was carrying on business in India through a permanent establishment within the meaning of article 5 of the DTAA, the activities of liaison office being more or less same as that of head office and thus, liaison offices constituted PE of the assessee company in India. Moreover, the assessee had a PE in India in the form of various dedicated systems installed in the premises of various agents through which the business was carried on. There was a fixed place of business at the premises of each agent, where the software was installed. The software ensured connectivity between the assessee and the premises of the agent. The agents were “dependent agents” within the meaning of article 5.4(a) of the DTAA. For instance, the annual report of Wall Street Finances Ltd. for the AY 2004-05 revealed that out of their total income of ~2296.86 lacs, ~950.30 lacs were received from the assessee , thereby reflecting the economic dependence of one of the agents. Likewise, most of the agents were economically dependent on the assessee company, agents being dependent upon technology and software. According to the AO, the agents were not independent agent within the meaning of Art 5(5) of the DTAA. The AO further observed that the agents were ,in fact, dependent agents as revealed from an agreement between the assessee and Weizmann Ltd., which prohibited the latter from carrying on a similar business during the term of the agreement and for a period of 6 months after the expiry of the agreement, which showed that Weizmann was working wholly and exclusively for the assessee. The case of other agents was the same. Further, they had the authority to conclude contracts on behalf of the assessee in the sense that they carried out in India the commitment given by the assessee that the money would be paid. The agents were also given the authority to appoint sub-agents. The compensation paid to the agents was not adequate in comparison to the revenue received by the assessee for the work. The main part of the transaction- the payment of the money to the claimant was carried out by the agents in India and thus, merited adequate compensation. Since the compensation paid was not adequate, the transaction was not at arm’s length, the AO concluded
2.3 The AO further observed that the assessee had a business connection in India, as it had a full-fledged office in India which was conducting aggressive marketing activities together with negotiations with the agents, providing software to them and imparting training about the product. There was continuity of the transaction which was completed only when the money was paid to the claimant in India through the agents. While referring to the findings of the ITAT in the AY 2001 -02, the AO concluded that there was “business connection” in India and the assessee was liable under section 9(1) of the Act to pay income-tax on the profits arising from its activities in India.
2.4 The AO also pointed out that the ITAT in assessee’s own case for assessment year 2001 -02 did not correctly appreciate the activities of the liaison offices and the judgment in M/s. Mitsui and Co. 39 I.T.D. 59 was distinguishable on facts. While referring to OECD commentary, the decision of AAR in UAE Exchange Centre LLC, the AO observed that the agents in India were even provided with a software to access the connectivity and the application software installed in stand-alone machines, having in¬built dial up modems at various branches and sub agent locations. These systems had not been on the agents’ network and were driven by a user ID and these were validated by a terminal ID, which automatically connected to the international host server of Western Union for marking of transactions as well as storage of data. Since Western Union provided software ‘Voyager 2.16’ to agents a software which generated a complete summary of transactions of Western Union handled by the agents/ bank, these stand-alone machines where Western Union Financial Services Inc. applications were installed and dedicated to the business of money transfer, can be construed as facilities used for carrying on the business of the enterprise as stated in the OECD commentary even if the premises and facilities were not owned or rented by the assessee company but belonged to the representative of the assessee in India.
2.5. The AO also rejected the claim of the assessee that the whole income earned as commission was not taxable in India since the fee had not been received in India. While observing that since fees were paid for service in India, the amount was taxable in India alone, the activities of the agent on behalf of the assessee being undertaken in India. Accordingly, the AO brought to tax income of the assessee in these three assessment years as under :-
