www.pwc.com/in
Sharing insights
News Alert
16 January, 2012
No dependent agent permanent establishment where Indian agents have independent business without authority to
conclude contracts
In brief
In a recent ruling in the case of Western Union Financial Services Inc.1 (the
assessee), the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal)
held that Indian agents (namely post offices, commercial banks, non-banking
financial companies (NBFCs), tour operators) of the assessee do not create a
dependent agent permanent establishment (DAPE). These agents do not have an
authority to conclude contracts in India under the commercial agreement between
the assessee and them. Further, computer systems installed in the agent’s premises
1
DDIT v. Western Union Financial Services Inc. [TS-5-ITAT-2012 (Del)]
do not constitute a permanent establishment (PE) where the assessee did not
supply or control them. The Tribunal distinguished the ruling in the case of
Amadeus Global Travel Distribution S.A.2 (Amadeus) on the basis of facts.
Facts
•
2
The assessee is incorporated in USA and is engaged in the business of
worldwide money transfer.
Amadeus Global Travel Distribution S.A. v. DCIT [2007] 113 TTJ 767 (Del)
1
PwC News Alert
January 2012
•
For the purpose of carrying out business in India, the assessee entered into
agreements with several agents in India, such as the department of posts,
commercial banks, NBFCs and tour operators.
•
The agents were remunerated at the rate of 30%/25% of the money handed
over by them in India. The money was first paid out by agents in India and
then they were reimbursed the same along with the commission. The agents
were also given the power to appoint sub-agents / representatives.
•
The assessee also opened a liaison office (LO) in India with the approval of
Reserve Bank of India (RBI)’s approval. Later on, it opened additional offices
in Bangalore, Gurgaon, and Mumbai.
•
•
In the assessee’s own case for assessment year (AY) 2001-023, the Tribunal
held that the assessee has a business connection in India under the Income-tax
Act, 1961 (the Act) but no PE in India under Article 5 of Double Taxation
Avoidance Agreement between India and USA (tax treaty). Therefore, no
profits were attributed as taxable in India.
The assessing officer (AO) for AYs 2002-03, 2003-04 and 2005-06, held that
the assessee had a PE in India under India – US tax treaty on account of the
following:
-
The LO in India actively participated in the business of assessee in the
form of marketing, appointment of agents, brand building, providing
software to the agents and imparting training to them in India. Accordingly,
the LO in India was a virtual projection of the assessee in India.
subsequently closed LO and established subsidiary company, thereby
concluding that activities of LO were not of preparatory and auxiliary
nature.
3
The AO also referred to his findings in the assessment order for AY 200405 (not under consideration before the Tribunal), the fact that the assessee
Western Union Financial Services Inc v. ADIT [2007] 291 ITR 176 (Del)
The assessee installed various dedicated systems in the premises of several
of its agents, through which the business of assessee was carried out and
ensured connectivity between the assessee and its agents in India. Hence,
these systems constituted a ‘fixed place PE’ of assessee under India-USA tax
treaty.
-
Further, the agents were ‘dependent agents’ since they were almost wholly
and exclusively working for the assessee in India, had authority to
conclude contracts on behalf of the assessee and appoint sub-agents.
Hence, they constituted a dependent agent PE of assessee in India under
the India-USA tax treaty.
•
The assessee had a business connection in India and was liable to tax under
section 9(1) of the Act on the profits arising from its activities in India.
•
Relying on assessee’s own case in AY 2001-02, the Commissioner of Income
Tax (Appeals) (CIT(A)) held that the assessee had a business connection in
India under section 9 of the Act, but no PE in terms of Article 5 of the India-US
tax treaty in India, observing that there was no change in the facts as compared
with AY 2001-02.
Revenue’s contentions
•
-
-
The Revenue extensively relied on the decision rendered by the Delhi Tribunal
in the case of Amadeus (above). It was contended that the facts of the current
case are similar to the case of Amadeus wherein the assessee, Computer
Reservation System (CRS) owner and operator was held to have a PE in India
within the meaning of paragraph 1 of Article 5 of the Indo-Spain Tax treaty.
2
PwC News Alert
January 2012
The PE was constituted on the basis of computer systems in India, which were
controlled by the appellant, and also the fact that the activities carried out in
India by the agents were not of preparatory or auxiliary nature.
Assessee’s contentions
•
The assessee asserted that the facts of Amadeus (above) are entirely different
from its own facts and in particular highlighting the following:
Amadeus
Western Union Financial
Services Inc.
The contracts were initiated in India.
The contracts were initiated and
executed outside India.
The source of income was in India as
the order booking activity was carried
out by the travel agents through CRS
systems in India.
There is no such activity as the order
for money transfer takes place
entirely outside India.
The customers of the travel agents are
in India.
None of its customers or its
representative is situated in India.
The computers installed in the agent’s
offices were supplied by Amadeus and
it exercised great control over these
computers in as much as these
computers cannot be used without the
permission of Amadeus and they
cannot be shifted from one place to
another without permission.
The assessee does not exercise any
control over the computer systems
which are independently owned by
the agents.
•
Amadeus
Western Union Financial
Services Inc.
The Indian agent of Amadeus was
wholly dependent upon its principal
and also concluded contracts on its
behalf.
The agents are the department of
post, NBFCs or tour operators who
are independently running their
business. These agents do not have
any authority to conclude any
contract on behalf of the assessee.
The assessee also contended that its own case, decided by the Tribunal for AY
2001-02, was taken into consideration by the Tribunal while passing orders in
the case of Amadeus. The Bench of Tribunal, considering that the facts of both
Amadeus's case and the assessee’s case were poles apart, did not doubt the
ratio of the assessee’s case.
Tribunal Ruling
•
In assessee’s own case for AY 2001-02, the Tribunal held that:
-
The assessee has a business connection in India under section 9(1) of the
Act.
-
There is no fixed place PE of the assessee in India within the meaning of
Article 5(1) of the India-US tax treaty.
-
The LO has carried out only those activities which were mentioned in its
application seeking RBI’s approval to open an LO. Therefore, it cannot be
considered to be a fixed place PE of the assessee as it carries out activities
which are of a preparatory or auxiliary character. It has not carried out any
trading/commercial activities for the assessee in India.
3
PwC News Alert
January 2012
-
-
•
The assessee provided software to its agents only for their use to provide
them access to the mainframe computers in the USA. The software
continues to be assessee’s property and it does not part with its copyright
therein to the agents/sub-agents/any other parties in India. The Tribunal
observed that mere use of software from the premises of its agents cannot
lead to the conclusion that premises-cum-software constitute PE of the
assessee in India.
The Tribunal noted that the agents of the assessee are independent agents
as they satisfy all three conditions, namely, (1) should be acting in the
ordinary course of his/her/its business; (2) activities should not be
devoted wholly or almost wholly on behalf of the foreign enterprise for
whom he/she/it is acting as an agent; (3) the transactions between the
foreign enterprise and the agent should be at arm’s length.
-
The agents have their own businesses or activities amounting to business
in India. They are not carrying out the activity for the assessee, as agents,
in exclusion of their other businesses or activities. In this situation, just
because they are not acting as an agent for any other company carrying out
money transfer business, it cannot be said that their activities are wholly or
almost wholly devoted to the assessee.
-
The agents did not habitually exercise any authority to conclude contracts
in India on behalf of the assessee. Accordingly, the Tribunal held that there
is no PE of the assessee in India in terms of Article 5 of the India-USA tax
treaty.
•
It was also noted that the Revenue did not even attempt to explain as to how
facts and circumstances in the decision relied upon by them are parallel to
facts and circumstances in the case under consideration. The Tribunal
recognised that the facts in the case of Amadeus were entirely different from
that in the case of assessee and revenues’s reliance on this decision rendered in
different context and circumstances was totally misplaced.
•
Since there is no change in the facts of the assessee’s case from AY 2001-02,
the Tribunal upheld the decision of the CIT(A) in following the earlier decision
of the Tribunal.
Conclusion
The Tribunal has decided the matter on the interpretation of Article 5 of the India US tax treaty being more favourable to the assessee (US tax resident) after
analysing the facts again and then applying the rule of consistency, upheld the
decision of CIT(A). Further in the absence of any adverse findings by the lower tax
authorities relating to the presence of LO in India, it cannot constitute assessee’s
PE in India which was set up with RBI approval to carry out certain approved
activities which are of preparatory and auxiliary nature (excluded from PE
definition).
The Tribunal held that there was business connection, and hence, the assessee
was liable to tax under section 9(1) of the Act; but since there was no PE in
India under Article 5 of the India-USA tax treaty, no profits could be attributed
to the Indian operations of the assessee and taxed in India.
4
Our Offices
For private circulation only
Ahmedabad
President Plaza, 1st Floor Plot No 36
Opp Muktidham Derasar
Thaltej Cross Road, SG Highway
Ahmedabad, Gujarat 380054
Phone +91-79 3091 7000
Bangalore
6th Floor, Millenia Tower 'D'
1 & 2, Murphy Road, Ulsoor,
Bangalore 560 008
Phone +91-80 4079 7000
Bhubaneswar
IDCOL House, Sardar Patel Bhawan
Block III, Ground Floor, Unit 2
Bhubaneswar 751009
Phone +91-674 253 2279 / 2296
Chennai
PwC Center, 2nd Floor
32, Khader Nawaz Khan Road
Nungambakkam
Chennai 600 006
Phone +91-44 4228 5000
Hyderabad
#8-2-293/82/A/113A Road no. 36,
Jubilee Hills, Hyderabad 500 034,
Andhra Pradesh
Phone +91-40 6624 6600
Kolkata
South City Pinnacle, 4th Floor,
Plot – XI/1, Block EP, Sector V
Salt Lake Electronic Complex
Bidhan Nagar
Kolkata 700 091
Phone +91-33 4404 6000 / 44048225
Mumbai
PwC House, Plot No. 18A,
Guru Nanak Road - (Station Road),
Bandra (West), Mumbai - 400 050
Phone +91-22 6689 1000
Gurgaon
Building No. 10, Tower - C
17th & 18th Floor,
DLF Cyber City, Gurgaon
Haryana -122002
Phone : +91-124 330 6000
Pune
GF-02, Tower C,
Panchshil Tech Park,
Don Bosco School Road,
Yerwada, Pune - 411 006
Phone +91-20 4100 4444
For more information contact us at,
[email protected]
The above information is a summary of recent developments and is not intended to be advice on any particular matter. PricewaterhouseCoopers expressly disclaims liability to any person in respect of anything done in reliance
of the contents of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of PricewaterhouseCoopers, this Alert may not be quoted in
whole or in part or otherwise referred to in any documents
©2012 PricewaterhouseCoopers. All rights reserved. "PwC", a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of
PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
5