Case Law Details

Case Name : Delmas, Vs Assistant Director of Income Tax (ITAT Mumbai)
Appeal Number : ITA No. 9001/Mum/10
Date of Judgement/Order : 11/01/2012
Related Assessment Year : 2006- 07
Courts : All ITAT (5330) ITAT Mumbai (1663)

Delmas, France Vs. ADIT (ITAT Mumbai) – Scope of dependent agent permanent establishment (DAPE) is 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 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 fulfillment 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 Vs 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 inquiries 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 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 don’t 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 don’t 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  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.

INCOME TAX APPELLATE TRIBUNAL,MUMBAI

ITA No. 9001/Mum/10

Assessment year: 2006- 07

Delmas, France

Vs.

Assistant Director of Income Tax

Date of pronouncement: January 11, 2012

O R D E R

Per Pramod Kumar:

1. By way of this appeal, the assessee- appellant has called into question correctness of the order dated 27th October 2010, in the matter of assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2006- 07.
2. The core issue that we are really required to adjudicate in this appeal is whether or not, on the facts and circumstances of this case, the assessee can be said to have a permanent establishment (PE)1 in India, and, if it is held that the assessee indeed has a permanent establishment in India how much profits can be taxed as being attributable to such a permanent establishment. We will take up these issues first. These issues are raised by way of grounds of appeal numbers 3 and 4, which are reproduced below for ready reference:
3. Existence of a Permanent Establishment

3.1 The learned ADIT erred in holding that the appellant’s case falls under Article 5(1) of the DTAA as the business was carried out through agents’s fixed place in India wherein the agent was to maintain office for the principal, duly equipped.

3.2 The learned ADIT erred in holding that the appellant’s case is also covered under Article 5(5) of the DTAA

4. Computation of income

4.1 The learned ADIT erred in denying the applicability of provisions of Section 44B of the Act, with respect to freight earnings of Rs. 2 3,66,57,986

4.2 Having denied the applicability of section 44B of the Act, the learned ADIT erred in estimating the income at 10% of freight earnings of Rs. 2 3,66,57,986 in accordance with the provisions of Rule 10 of the Income Tax Rules 1962.

3. The assessee before us is a foreign company incorporated in, and tax resident of, the Republic of France. The assessee claims to be engaged in the business of operations of ships in international traffic. Independent of its claim that, in terms of the distributive rule embedded in Article 9 of Indo French DTAA, entire profits of such business cannot be taxed in the source country i.e. India, the assessee has also contended that since the assessee does not have any PE in India, its business profits cannot be taxed in India at all. It is contended that in terms of the provisions of Article 7 of the Indo French DTAA, unless the assessee has a PE in India, no part of the business profits of the assessee can be taxed in India at all. It was contended that the assessee does not have a PE in India. The Assessing Officer did not approve assessee’s claim of non-taxability in India, in terms of Article 9 of Indo French DTAA, but right now we are not really concerned with application of Article 9. Suffice to say, having rejected the main contention of the assessee regarding applicability of Article 9, the Assessing Officer proceeded to deal with the alternative claim of assessee’s non-taxability under Article 7, and rejected the same as well. The reasoning which prevailed on the Assessing Officer was this. The Assessing Officer noted that “the business of the assessee was carried out from a fixed place through an agent in India wherein the agent was to maintain the, for the principal i.e. the assessee”. A reference was made to Hon’ble Andhra Pradesh High2 Court’s judgment in the case of CIT Vs Vishakhapatnam Port Trust wherein it was held that PE connotes a virtual projection of the foreign enterprise itself into the territory of taxing state in a substantial and enduring form. A reference was made to paragraph 38 of the OECD Model Convention Commentary. It was in this light that the Assessing Officer gave the following finding of fact:

“ Delmas had Barwil as its agents which are doing the agency work in most of the Indian ports. The agents are responsible for concluding contracts on behalf of the assessee in the form of all the clearances from the Government departments. They are doing all the functions such as brokering and contracting with the parties for loading of cargo, dealing with labour for loading, unloading, collecting the freight on behalf of the assessee and maintaining and operating bank account for the assessee”

4. The Assessing Officer further added that “the above stated factual position brings out that the assessee’s case falls under Article 5(1) of the DTAA when business of the assessee is carried out through a fixed place through an agent in India wherein the agent was to maintain the office for the principal duly equipped” and that “it is an admitted position in this case that all the work of the assessee is carried out by its agent , namely Barwil”. In this view of the matter, and relying upon a coordinate bench’s unreported decision in the case of ACIT Vs DHL Operations BV, 3 the Assessing Officer held that the assessee had a permanent establishment in India. Having held that the assessee had a PE in India, and in the absence of details so as to enable him to compute profits of the PE, the Assessing Officer proceeded to adopt total income of the assessee at 10% of gross receipts. Aggrieved by the stand so taken by the Assessing Officer, assessee raised objection to the same before the Dispute Resolution Panel, but without any success. The DRP rejected the objection by observing as follows:

The objection of the assessee is not tenable. Article 9 of the DTAA presupposes the existence of a PE and thus allows exemption of profits from operations of ships in international traffic. The assessee’s agent in India, who is issuing the bill of lading, has the authority to conclude contracts which are legally binding on the assessee. The business of operations of ships of the assessee is being carried out through the office of the agent in India. In view of this, the assessee does have a permanent establishment in India. The Assessing Officer’s action is accordingly confirmed. The ground of objection is dismissed.

5. The assessee is aggrieved and is in appeal before us.

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 Vs 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 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 Vd DDIT6, in order that there exists a fixed 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 analyzed 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 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 Vs 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 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 donot 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  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. There are some interesting issues with respect to PE profit attribution, raised by the learned Departmental Representative, that we may briefly touch upon, even though, having held that the DAPE did not exist on the facts of this case, it is not really necessary to deal with, on merits, the fine points regarding profit attribution in the case of DAPEs. On a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent’s remuneration in the source country – which is taxable in the source state anyway de hors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may indeed seem clearly incongruous. Similarly, before accepting DAPE profit neutrality theory, we will still have to deal with learned Departmental Representative’s plea that as per the law laid down by Hon’ble Supreme  Court in the case of DIT Vs Morgan Stanley & Co Inc. 12 , the arm’s length remuneration paid to the PE must take into account ‘all the risks of the foreign enterprise as assumed by the PE’, but then in an agency PE situation, unlike a service PE situation which was the case before the Hon’ble Supreme Court, a DAPE assumes the entrepreneurship risk in respect of which agent can never be compensated because even as DAPE inherently assumes the entrepreneurship risk, an agent cannot assume that entrepreneurship risk. To this extent, there may clearly be a subtle line of demarcation between the dependent agent and the dependent agency permanent establishment. The tax neutrality theory, on account of existence of DAPE, may not indeed be wholly unqualified- at least on a conceptual note. However, given the findings in the present case, we need not deal with this matter on merits or give any judicial findings in respect of the same. We leave it at that.

11. Ground Nos. 3 and 4 are thus allowed in the terms indicated above.

12. Let us now deal with the other grounds of appeal.

13. It is a case of reopened assessment. While the assessee has, in the first ground of appeal, taken up a specific grievance against reopening of the assessment, learned counsel for the assessee did not press this ground of appeal. We, accordingly, dismiss the first ground of appeal as not pressed.

14. Ground No. 1 is dismissed as not pressed.

15. In ground nos. 2, the assessee has raised the following grievance:

Relief under Article 9 of the Double Taxation Avoidance

Agreement between India and France DTAA

2.1 The learned ADIT erred in holding that the appellant’s income is taxable in India.

2.2 The learned ADIT erred in rejecting the appellant’s claim for relief under Article 9 of the DTAA in respect of freight earnings of Rs 2 3,66,57,986.

2.3 The learned ADIT erred in denying the relief on the basis that the appellant has failed to provide complete and sufficient documentary evidence, to link and establish voyage wise, that the feeder vessels were actually loading the cargo into mother vessels.

16. Learned counsel fairly states that the issue is covered against the assessee by a coordinate bench’s decision in assessee’s own case for the assessment year 2001-0213 inasmuch as the provisions of Article 9 of India France Double Taxation Avoidance Agreement are held to not applicable to the income in question, but he hastens to add that Hon’ble Bombay High Court has admitted appeal against the said order, that this statement should not be construed as assessee’s conceding the issue and that the assessee would like to keep the issue alive before higher judicial forums. Learned Departmental Representative does not oppose these submissions either. While the issue is thus covered against the assessee so far as this forum is concerned, the assessee is at liberty to, if so advised, take up the issue before Hon’ble Courts above. With these observations, we reject the second ground of appeal as well.

17. Ground No. 2 is thus dismissed.

18. Ground No. 3 and 4, as discussed earlier in this order, are allowed in the terms indicated therein.

19. In ground no. 5, the assessee has raised grievance against levy of interest under section 234 B. Learned representatives, however, fairly agree that the issue is covered, in favour of the assessee, by Hon’ble jurisdictional High Court’s judgment in the case of DIT Vs NGC Netwrok Asia LLC14. Respectfully following Hon’ble jurisdictional High Court in the said case, we uphold the grievance of the assessee and direct the Assessing Officer to grant necessary relief.

20. Ground No. 5 is thus allowed in the terms indicated above.

21. In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open court today on 11th day of January, 2012.

Mumbai; 11th day of January, 2012.

————————————————————————————

1. In terms of the provisions of India France Double Taxation Avoidance Agreement (209 ITR Stat 130) –hereinafter referred to as ‘Indo French DTAA’

2.  144 ITR 146

3. ITA No. 7987 and 7988/Bom/92

4. 307 ITR 205

5. dated 23rd July 1969 issued by the Central Board of Direct Taxes

6. 44 SOT 368

7. 95 ITD SB 269

8. 44 SOT 368

9. 95 ITD SB 269

10. supra

11. supra

12. 237 ITR 889

13 reported as DDIT Vs Delmas, France 27 SOT 441

14. 313 ITR 187

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