UPS Asia Group Pte. Ltd. Vs ACIT (ITAT Mumbai)
ITAT held that when Indian Associated Enterprise (AE) is remunerated at arm’s length price (ALP) no further profit attribution is required and the issue of existence of Permanent Establishment becomes wholly tax neutral.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The captioned appeal has been filed by the assessee against the final assessment order dated 29.04.2021 passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (“the Act”) by the Assessing Officer for the assessment year 2017–18.
3. In the present appeal, primarily, two issues arise for our consideration viz., (i) whether or not the assessee has a Business Connection under section 9(1)(i) of the Act and a Permanent Establishment (hereinafter referred to as ―P.E.“) under Article–5 of the India–Singapore Double Taxation Avoidance Agreement (hereinafter referred to as ―India– Singapore DTAA“); and (ii) if the assessee is said to have Business Connection / P.E., then how much of the profit can be attributed to the said Business Connection / P.E. particularly when the transaction is at arm’s length price.
4. The brief facts of the case as emanating from the records are: During the relevant assessment year, the assessee filed its return of income on 30.11.2017, declaring total income of Rs.1,35,759. The assessee is a company incorporated under the laws of Singapore and is engaged in the business of provision of supply chain management including the provision of freight forwarding and logistic services. The assessee had entered into a ―Regional Transportation Services Agreement” e.f. 01.01.2012 with Indian Associated Enterprise (“Indian A.E.”) namely UPS SCS (India) Pvt. Ltd. for the provisions of freight and logistics services. Under the Transportation Agreement, the assessee arranged to perform international freight transportation through the Ocean Liner / Airlines and provides overseas support services, while the Indian A.E. performed freight and logistics services in India to its India customers and to the assessee.
4. During the course of assessment proceedings, the assessee was asked to explain as to why the Indian A.E. should not be treated as Business Connection of the assessee in India under section 9(1)(i) of the Act and profit be attributable thereto for the relevant assessment year. The Assessing Officer, vide draft assessment order dated 27.12.2019, passed under section 144C of the Act held that the assessee had a Business Connection in India under section 9(1)(i) of the Act in the form of its Indian A.E. and thus its business income attributable to operation in India is taxable in India. The Assessing Officer further held that the Indian A.E. of the assessee constitutes P.E. of assessee in India within the meaning of Article–5(1), 5(2) and 5(8) of India–Singapore DTAA. The Assessing Officer following the approach adopted in the assessment order for the assessment year 2015–16, in assessee’s own case, attributed profit of Rs.2,09,53,496 to the said P.E. of the assessee in India.
5. The assessee filed objections before the Dispute Resolution Panel (hereinafter referred to as ―the DRP‖) against the addition proposed in the draft assessment order. The DRP, vide its directions dated 17.03.2021, following its directions issued in assessee’s own case for the assessment year 2015–16, rejected the objections filed by the assessee. The Assessing Officer, in conformity with the directions issued by the DRP, passed the final assessment order under section 143(3) r/w section 144C(13) of the Act. Being aggrieved, the assessee is in appeal before us.
6. During the course of hearing, Shri Nitesh Joshi, the learned Authorised Representative (hereinafter referred to as ―the learned A.R.”) appearing for the assessee submitted that the Indian A.E. of the assessee was remunerated at arm’s length price and, therefore, no further profit is required to be attributed in the present case. In support of his submissions, the learned A.R. placed reliance upon the decision of the Co–ordinate Bench of the Tribunal rendered in assessee’s own case for the assessment years 2013–14, 2014–15 and 2015–16.
7. On the other hand, Shri Milind S. Chavan, the learned Departmental Representative (hereinafter referred to as “the learned D.R.‖) appearing for the Revenue submitted that the decision relied upon by the Tribunal in assessee’s own case for the preceding assessment years pertained to DTAA between India and Mauritius and thus is not applicable to the facts of the present case. The learned D.R. further submitted that the determination of the profit attributable to the A.E. should be on the basis of the provisions of the Act.
8. We have considered the rival submissions and perused the material available on record. At the outset, it is pertinent to note that the Transfer Pricing Officer, vide order dated 28.01.2021, accepted the value of international transactions as reported by the Indian A.E. in Form no.3CEB filed along with its return of income and made no adjustment to same. Thus, it is not disputed that the transaction between the assessee and its Indian A.E. was conducted at arm’s length and the transfer pricing analysis of the same was also accepted by the Transfer Pricing Officer. We find that on identical issues, the Co–ordinate Bench of the Tribunal in assessee’s own case vide order dated 14th July 2021, passed in UPS Asia Group Pte. Ltd. v/s DCIT, ITA no.7171/Mum./ 2017, etc., for the assessment years 2013–14, 2014–15 and 2015–16, has allowed the assessee’s appeal by observing as under:–
”4. So far as the above issue is concerned, learned representatives fairly agree, that admittedly as the assessee has paid arm‘s length remuneration to its Indian agent- as determined by the Transfer Pricing Officer, the issues is covered by the coordinate bench‘s decision dated 29th January 2021 in the case of ADIT Vs Asia Today Limited, in ITA No 1878 & 1879/Mum/2008 for the assessment years 2002-03 & 2004-05. Learned representatives fairly accept that position. We see no reasons to take any view of the matter than the view taken by the coordinate bench in the aforesaid decision wherein the coordinate bench has inter alia observed as follows:-
”6. To adjudicate on these appeals, at this stage, only a minimal facts need to be taken note of. The assessee before us is a foreign telecasting company incorporated in Mauritius and having a tax residency certificate of Mauritius. It sells advertising time and collects subscription revenues through its Indian affiliates Zee Telefilms Limited and El Zee, but its claim was that since it does not have any permanent establishment in India, no part of its income was taxable in India. The Assessing Officer did not accept the claim. He was of the view that its Indian agent constitutes virtual projection of the foreign company, and, therefore, it has a permanent establishment in India, in the light of Hon’ble Andhra Pradesh High Court’s judgment in the case of CIT Vs Vishakhapatnam Port Trust (144 ITR 146). Referring to this judgment, and analyzing the facts of the case of the assessee, in the assessment order for the assessment year 2002-03, for example, the Assessing Officer concluded as follows:
5.2.3 Now keeping the above in view point, one has to look into the factual aspects of the case, particularly the following:
> The assessee could not have earned any income from India but for its Indian agent, ZTL/EI Zee.
> The ‘brand name’ used by the assessee is same as that of its agent in India, that is, ZEE. Thus, for persons desirous of doing business with the assessee in India, there is no difference between ZTL/EI Zee and Asia Today Ltd. it is seen that in a number of TDS certificates issued to the assessee, the name ‘Zee TV’ or ‘Zee ZTL/EI Zee Cinema’ or ‘Zee Telefilms’ were used. There terms were therefore, used interchangeably.
> The income stream of the assessee is from selling of advertising time and these are ‘sold’ by ZTL/EI Zee. Almost all the advertisers are from India and the advertisements are solicited by the Indian company. The advertisers book the slots on the channel by coming into contact with employees of ZTL/EI Zee at their office. The other stream of revenue is ‘subscription revenue’ which is also collected by ZTL/EI Zee on behalf of the assessee.
> The payments are collected by ZTL/EI Zee and the same is remitted to Mauritius by it.
> The employees of ZTL/EI Zee are employees of Zee group as a whole and they perform functions as required by ATL also.
> In the case of other telecasting channels also it is held by the revenue authorities that their agent in India constitute a Permanent Establishment.
5.2.4. The above stated factual position clearly brings out that the assessee’s case falls under Article 5(1) of the Indo-Mauritius treaty when the business of the assessee is carried out through a fixed placed in India and in effect, is a virtual projection of the assessee in India.”
7. The Assessing Officer further observed that, without prejudice to the above analysis, the assessee has an agency permanent establishment in India, under article 5(4) of India Mauritius DTAA, inasmuch as its Indian agents are the dependent agents. As for the plea that in case the assessee is held to have a dependent agent permanent establishment, as was held by the Assessing Officer, no further profits can be attributed in the hands of the assessee as the agent has been paid arm’s length remuneration services rendered, the Assessing Officer rejected the said plea, and observed as follows:
5.3.3 No Further Profits can be taxed in view of Article 7(2) of the Treaty:
The next submission of the assesses is that even if it is assumed that there is a PE in India, as per Article 7(2) of the Treaty, where an enterprise carries on business in India through a PE, the profits attributable to such PE shall be the profits that the PE would have made, if it were a distinct and separate enterprise dealing independently with the enterprise of which it is a PE. Thus, the profits attributable to the PE shall be the profits it would have made, if it were an independent enterprise. Since the assessee is making an arm’s length payment to ZTL/EI Zee, ZTL/EI Zee would have made the same profits dealing with an independent enterprise. Since the said profits are already taxed in the hands of ZTL/EI Zee, no further profits can be attributed to the activities performed by it. Further, the assessee has laid Emphasis on CBDT Circular No. 5 dated September 28, 2004 which states that profits attributable to a PE have to be computed having regard to the arm’s length principle. For the detailed reasons given in following paragraphs, I do not find merit in the claim of the assessee that if payment to ZTL/EI Zee is made at arm’s length, then it extinguishes the tax liability of the assessee in India.
8. It was in this backdrop that the taxability of the assessee, in respect of advertisement revenue and subscription revenues earned through its agents in India, was confirmed. However, when he carried the matter in appeal before the learned CIT(A), he held that the assessee does not have any permanent establishment in India. Therefore, the assessee cannot be taxed in respect of its income from Indian operations. The relevant facts for the other assessment year are, as learned representatives fairly agree, materially similar. The Assessing Officer is aggrieved and in appeal before us. The assessee’s cross-objections, however, deal with an even more fundamental aspect. That aspect is that given the fact that the assessee has paid arm’s length remuneration to its Indian agents, no further taxability can be attributed to its income earned through the agents in India.
9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
10. We find that it’s an admitted position that the assessee does not have any office or place of management of its own, and its presence in India is only through its agents. Undoubtedly, in terms of Hon’ble Andhra Pradesh High Court’s path-breaking judgment in the case of Vishakhapatnam Port Trust (supra), ” ‘permanent establishment’ postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country” and “it should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country” [Emphasis, by underlining, supplied by us, here as also elsewhere in this order]. What is equally important is in the fundamental analysis justifying the existence of permanent establishment under Article 5(1) and 5(2), as we have reproduced earlier, there is not even a whisper of a mention about any fixed place of business. All this analysis points out is that “The assessee could not have earned any income from India but for its Indian agent, ZTL/EI Zee” and that “The employees of ZTL/EI Zee are employees of Zee group as a whole and they perform functions as required by ATL also”, but then the agent and the principal being from the same busines group would not obliterate their separate legal existence. It is only elementary that there cannot be a permanent establishment under the basic rule, i.e., 5(1), unless there is a fixed place of business. It is by now well settled in law that in order to constitute a fixed place permanent establishment under Article 5(1), there has to a fixed place of business from which business of the foreign enterprise is carried out, and such a place of business should be at the disposal of foreign enterprise. As observed by a coordinate bench of this Tribunal, relying upon the landmark Special Bench decision in the case of Motorola Inc Vs DCIT [(2005) 95 ITD SB 269 (Del)] and in the case of Airlines Rotables Ltd Vs JDIT [(1911) 44 SOT 368 (Mum)], “The physical test, i.e., place of business test, requires that there should be a physical location at which the business is carried out. However, mere existence of a physical location is not enough. This location should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well. A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This 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”. Even a case is not made out for the satisfaction of this condition by the Assessing Officer, and, as such, there is no case for the existence of a permanent establishment under Article 5(1). As for the permanent establishment under Article 5(2), even by definition, there cannot be a permanent establishment under Article 5(2) unless it is at least alleged to be covered by one of the specific clauses in article 5(2). As we discuss the case made out by the Assessing Officer, it is also important to note that the Assessing Officer concludes his relevant analysis by adding that “In the case of other telecasting channels also it is held by the revenue authorities that their agent in India constitute a Permanent Establishment”, but in none of these cases the permanent establishment is said to be under basic rule, i.e., Article 5(1) and Article 5(2), and in all these cases, the permanent establishment is dependent agency permanent establishment, i.e., under Article 5(4). Even the case of the Assessing Officer thus hinges on the applicability of Article 5(4). There can be permanent establishments through the presence of the agency, for example. There can be virtual projections even without a fixed place of business, such as in the case of a dependent agency permanent establishment, but such cases will be covered by article 5 (4) rather than article 5(1) and 5(2). The detailed analysis by the Assessing Officer, as extracted earlier in this order, also makes that position evident. At best, therefore, it is a case of dependent agency permanent establishment under Article 5(4), and learned Departmental Representative also accepts that. There is no conflict between ‘virtual projection of a foreign enterprise’ and the ‘dependent agency permanent establishment’, and it’s in this light that we have to take note of the analysis of legal position. There can be simple situations in which a foreign enterprise operates through an agent, acting as a franchise, and such a franchise can virtually project business of the foreign enterprise on the soil of another country. Clearly, therefore, just because there is virtual projection of business, as the case is made out by the Assessing Officer, it is to be inferred that that there is a permanent establishment under the basic rule, i.e., Article 5(1) an 5(2), and negate the existence of a dependent agency permanent establishment, as would at best emerge out of the facts marshalled out by the Assessing Officer. As we are examining this aspect of the matter, it may also be useful to refer to the following extracts, defining permanent establishment, from the India Mauritius Double Taxation Avoidance Agreement [(1984) 146 ITR (St.) 214]:-
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 the enterprise is wholly or partly carried on.
2. The term “permanent establishment” shall include—
(a) a place of management ;
(b) a branch ;
(c) an office ;
(d) a factory ;
(e) a workshop ;
(f) a warehouse, in relation to a person providing storage facilities for others ;
(g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;
(h) a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on ;
(i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months.
(j) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 90 days within any 12 month period.
3. Notwithstanding the preceding provisions of this article, the term “permanent establishment” shall be deemed not to include :
(a) the use of facilities solely for the purpose of storage or display of merchandise belonging to the enterprise ;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise ;
(e) the maintenance of a fixed place of business solely—
(i) for the purpose of advertising,
(ii) for the supply of information,
(iii) for scientific research, or
(iv) for similar activities,
which have a preparatory or auxiliary character for the enterprise.
4. Notwithstanding the provisions of paragraphs (1) and (2) of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph (5) apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if:
(i) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or
(ii) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.
6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not, of itself, constitute either company a permanent establishment of the other.
11. The case of the Revenue is thus clearly confined to the existence of DAPE on the facts of this case. The question thus arises as to what are the tax implications of the existence of a dependent agent permanent establishment (DAPE) under Article 5(4). The DAPE is, after all, a type of permanent establishment, and the very concept of permanent establishment is a compromise between source rule and residence rule inasmuch as it provides justification to trigger source jurisdiction taxation over business activities of a foreign enterprise. Unless there is a PE in the source jurisdiction, there cannot be taxation of business profits of the foreign enterprise in the source jurisdiction, and when there is a PE in the source jurisdiction, only so much of profits of the foreign enterprise, as are attributable to a PE, can be taxed in the source jurisdiction- as is the unambiguous mandate of Article 7(1). It is in this context one has to examine the tax implications of DAPE, and that tax implication is that the profits attributable to the DAPE are brought to tax in the source jurisdiction. The next logical point, therefore, as to how to compute profits attributable to a DAPE, and it is this aspect of the matter which has been a subject matter of academic debates and controversies. There are two approaches to it i.e., to borrow the terminology employed by International Tax Law Reports (see 2007, Volume 9; Part 5; at pages 963-964), first- a “single taxpayer” or “zero-sum approach”, and, second- “two taxpayers” or “non zero-sum approach”. While Philip Banker, a well known international tax lawyer, has all along advocated zero-sum approach, late Klaus Vogel touched a different chord, in his column ‘Tax Treaty Monitor’ in the ‘Bulletin for International Taxation (November 2007 at page 475) and given his approval for “two taxpayers approach”. The latter is also in consonance with Authorised OECD Approach of the OECD. On materially similar facts of dependent agency permanent establishment for a similarly placed foreign telecasting company as in this case, in the case of DDIT Vs Set Satellite (Singapore) Pte Ltd [(2007) 106 ITD 175 (Mum)], a coordinate bench, speaking through one of us, (i.e. the Vice President), had upheld the “two taxpayer approach”, in computation of DAPE profits, and observed as follows:
11. The particular difficulty in the case of a dependent agent permanent establishment is that DAPE itself is hypothetical because there is no establishment – permanent or transient- of the GE in the PE state. The hypothetical PE, therefore, must be visualized on the basis of presence of the GE as projected through the PE, which in turn depends on functions performed, assets used and risks assumed by the GE in respect of the business carried on through the PE. The DAPE and DA has to be, therefore, be treated as two distinct taxable units. The former is a hypothetical establishment, taxability of which is on the basis of revenues of the activities of the GE attributable to the PE, in turn based on the FAR analysis of the DAPE, minus the payments attributable in respect of such activities. In simple words, whatever are the revenues generated on account of functional analysis of the DAPE are to be taken into account as hypothetical income of the said DAPE, and deduction is to be provided in respect of all the expenses incurred by the GE to earn such revenues, including, of course, the remuneration paid to the DA. The second taxable unit in this transaction is the DA itself, but this taxability is in respect of the remuneration of the DA. The provisions of the tax treaty are silent on this issue, and rightly so, because the taxability of the DA is quite distinct of the taxability of the enterprise of the contracting state which is in respect of PE of such an enterprise. At the cost of repetition, it is not the DA who constitutes PE of the GE, but it is by the virtue of a DA that the GE is deemed to have a PE, a DAPE though, in the other contracting state. We are of the considered view that in addition of the taxability of the DA in respect of remuneration earned by him, which is in accordance with the domestic law and which has nothing to do with the taxability of the foreign enterprise of which he is dependent agent, the foreign enterprise is also taxable in India, in terms of the provisions of Article 7 of the tax treaty, in respect of the profits attributable to the dependent agent permanent establishment. As we have elaborated earlier in this order, a dependent agent permanent establishment is distinct from the dependent agent. While computing the profits of this dependent agent permanent establishment, a deduction is to be allowed for the remuneration paid to the dependent agent as that is cost of operation of the dependent agent permanent establishment and as it has been incurred for generating the revenues attributable to such hypothetical permanent establishment. Let us take a very simple example to understand the mechanism of this approach. Let us assume that there is an electronic equipment distributor by the name of Sing Co. based in Singapore. He sources the electronic equipment from all over the globe and sells the same to its customers in India. Instead of having a regular office in India, and instead of carrying out the marketing activity in India, he projects his business in India through an Indian Co. by the name of Ind. Co. There is no dispute that Ind. Co. is a dependent agent of the Sing Co. In consideration of the services rendered by Ind. Co., Sing Co. pays Ind. Co. commission @ 30 per cent on sales plus reimbursement of expenses. Sing Co., however, procures the electronic equipment from China, shipped directly to India and sells it in India after a mark up of 200 per cent. We further assume that the reasonable handling costs of Sing Co. for souring the merchandise is 60 per cent on cost. In a particular year, Sing Co. sells goods worth $ 3 million in India. Let us further assume that expenses incurred by Ind. Co., to earn the agency remuneration, is $ 8,99,000. The profits taxable in India, in such a case and based on the treaty provisions before us, should be as follows :
