Income Tax Appellate Tribunal - Delhi
Western Union Financial Services Inc. vs Additional Director Of Income Tax on 10 March, 2006
Equivalent citations: [2007]104ITD40(DELHI), [2007]291ITR176(DELHI), (2006)101TTJ(DELHI)56
ORDER
R.V. Easwar, Vice President
1. The assessee, the appellant herein, is a non-resident company incorporated in the United States of America ("USA"). The main question that arises in this appeal is whether it is liable to pay income-tax in India on the footing that a part of its activities are carried out in India. Several incidental questions also arise, such as whether it has a business connection in India, as understood by the IT Act, 1961, whether it has a "permanent establishment" ("PE") in India as understood by the Agreement for Avoidance of Double Taxation between India and USA, and whether if it is found to have a PE in India then whether any profits can be attributed to the PE and further if so, what would be the percentage of such profits.
Facts:
2. The assessee is a non-resident company registered in USA. It is engaged in the business of rendering money transfer services since 1890. The business includes transfer of monies across international borders. A person who is in USA, if he wants money to be transferred to his relative in India, first approaches the assessee's outlet in USA. He remits the money in dollars together with the charges. He is given a receipt by the assessee along with a computer-generated unique number which is referred to as MTCN (Money Transfer Control Number), The remitter sends the number to his relative in India who takes it to the assessee's representative/agent in India. The MTCN is fed into the computer with the help of a software and the mainframe computer of the assessee in the USA is accessed by the agent. He matches the number, which means that the transaction has to be honoured. He then satisfies himself about the identity of the recipient/claimant of the money from his passport, election identity card and so on. Once he is satisfied, the money is paid to the claimant in India. For his services the agent is remunerated by the assessee by way of a commission at an agreed percentage. This in very brief is the transaction.
3. For the purpose of carrying out its business in India, the assessee has entered into agreements appointing agents in India. There are four types of agents-the Department of Posts, commercial banks, non-banking financial companies and tour operators. Generally the appointment of the agents is for a period of 5 years in the beginning and can be extended any number of times for periods of one year at a time. The agents are remunerated at 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. The percentage may be reduced if the assessee assumes responsibility for advertising and promotion of the services in India or establishes a customer service centre to handle telephonic queries. One other feature of the agreement is that the money is to be first paid out by the agent in India and thereafter he will be reimbursed the same together with the commission due to him. The commission is called the "base compensation" in the agreement. The agreements, specimen copies of which have been filed in the paper book, are elaborate and provide for various contingencies. One more noticeable feature of the agreement is that the agent has been given the power to appoint sub-agents/representatives. However, it is the responsibility of the agents to pay the sub-agents. The assessee can ask the agent to terminate the services of a sub-agent if it is found that the sub-agent is acting in a manner prejudicial to the interests of the assessee. There are 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. There is a clause which enjoins the agent to maintain records of all the transactions of money transfer routed through him.
4. In order to set up shop in India, the assessee first applied to the RBI by application dt. 17th July, 1993 as required by Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 "to establish an office or to post a representative in India by an overseas company for carrying on liaison activities or to open a project/site office in India" (p. 28 of the paper book filed by the assessee). The application stated that the assessee wanted to open a liaison office ("LO") in Mumbai with one manager and support staff and that the territorial jurisdiction of the office will extend to the whole of India. Mr. Harsh Lambah, a person of Indian nationality, would be in charge of the office. The estimated annual expenses of the office was around US $ 2,00,000. It was further stated in the application that the "office will not represent any party other than Western Union Financial Services, Inc., group of companies". The annexure to the application listed the following as the activities/services to be undertaken/rendered by the LO :
The LO shall undertake the following liaison activities/services :
(a) Distribute brochures and literature describing the activities of Western Union Financial Services, Inc. ("Western Union").
(b) Maintain liaison contact with Government authorities and officials of the Government, its agencies and other organizations and associations.
(c) Maintain and develop the relationship of mutual understanding and cooperation between Western Union and India.
(d) Address seminars on Western Union's activities.
(e) Put interested parties in direct contact with Western Union's principal offices.
(f) Explore legal, commercial and regulatory feasibility of setting up subsidiaries, affiliates, partnerships, joint ventures, licensing arrangements, etc.
(g) Keep in touch with the economic developments.
(h) Gather commercial and marketing data and information, including its assessment of the requirements of the private sector and of the Government.
(i) Gather, receive and transmit message/information from customers and other interested parties to Western Union's offices.
(j) Assist personnel from Western Union during their visits to India, making travel arrangements and arranging appointments with customers and other concerned parties, agencies, Government officials, etc.
(k) Investigate business opportunities in the Western Union range of activities and develop business contacts.
The LO will not:
(a) Undertake any commercial, trading or industrial activity in India.
(b) Sign any commercial agreement (except those directly incidental to the conduct of operations of the LO such as office leases, employment of local personnel, car rental, etc.)
(c) Have any power of attorney to participate in any commercial, trading or industrial activity and/or negotiate any related contracts;
(d) Have any authority to bind Western Union companies in any manner in connection with commercial, trading or industrial matters;
(e) Be allowed or entitled to receive any monies on account of commissions, fee or remuneration or otherwise in regard to any commercial, trading or industrial activity.
5. The RBI approved the setting up of the LO and a copy of the approval is at p. 37 of the paper book filed by the assessee (separate typed copy also filed). Therein, the assessee was advised that the RBI was agreeable to the establishing of a LO initially for a period of three years "for the purpose of undertaking liaison activities viz., to act as a communication channel between head office and parties in India". The following were the further conditions of approval:
(i) Except the liaison work, the office in India will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without our prior permission.
(ii) No commission/fees will be charged or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India.
(iii) The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels.
(iv) The office in India shall not borrow or lend any money from/to any person in India without our prior permission.
(v) The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the RBI under Section 31 of the Foreign Exchange Regulation Act, 1973.
(vi) The office in India will furnish to our Mumbai Regional Office (on a yearly basis) :
(a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India;
(b) details of remittances received from abroad duly supported by Foreign Inward Remittance Certificate;
(c) certified copy of the audited final accounts of the office in India; and
(d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during the period in respect of which the office had rendered liaison services.
(e) The number of staff engaged/appointed and duties assigned to each staff,
(vii) The LO will not render any consultancy or any other services directly/indirectly with or without any consideration.
(viii) The LO will not have signing/commitment powers except than those which are required for normal functioning of liaisoning office on behalf of the head office.
6. In accordance with the legal requirements, the assessee kept the RBI posted with the activities of the LO. Page 27 of the paper book contains one such report sent for the period 1st Jan., 2000 to 31st Dec, 2000. It was reported that :
Activity Report of the Liaison Office Report for the period : 1st Jan., 2000 to December, 2000 The liaison office acted as a communication link between the agents and the head office of Western Union International.
The liaison office trained and installed one new agent-Bank of Madura Ltd. After they received final approval from the RBI.
The liaison office visited the head office locations of the agents and offered training and refresher courses in the areas of Western Union operations, customer service standard, security standard, accounting and reconciliation procedures, telecommunications and systems configuration, merchandising standards and RBI guideline.
The liaison office communicated procedures to all agents to ensure a smooth roll over Y2K.
The liaison office organized local production of posters and merchandising material for the agents to display at their locations.
The liaison office facilitated the visit of the director operations of Western Union International to visit with agents and review their quality operational standards.
The liaison office provided the latest Western Union Agent Management Software-VOYAGER to the agents and trained the staff on the usage and versatility.
List of employees :
Harsh Lambah Business Development Manager Shekhar Nair Regional Operations Manager.
7. The assessee would later appear to have opened additional LO in Bangalore and Gurgaon, the Mumbai office being called the "nodal LO".
8. The assessee, in accordance with the arrangements with the agents/representatives in India, started remitting monies to India and remunerated them with the compensation. The figures of commission for the period from April, 2000 to March, 2001, relevant to the asst. yr. 2001-02 which is the year under appeal, are given in p. 24 of the report month-wise. Suffice to note that the assessee paid a total commission of Rs. 12,16,94,036 to the Indian agents/representatives, equivalent to US % 26,63,472.
Assessment proceedings:
9. The AO issued notice under Section 142(1) of the Act to the assessee calling upon it to file its return of income under the IT Act. The assessee did not file any return, but objected to the notice on the ground it was beyond jurisdiction but later withdrew the objection and filed a return on 8th Dec, 2003 declaring "nil" income. Apparently the assessee claimed that it was not taxable in India. Briefly speaking, the AO took the view that the income arising to the assessee in India from the activities carried out in India was taxable both under the IT Act and under the Agreement for Avoidance of Double Taxation between India and the USA. The following in brief are the findings and reasons recorded by the AO for rejecting the assessee's contention that it was not taxable in India :
(a) 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. The money is paid to the recipient in India on behalf of Western Union by its agents in India and thus there is no difference between various branches of banks dealing international transactions and the system adopted by the assessee. There is continuity of the transaction which gets completed only when the money is paid to the claimant in India through the agents. The software through which the agents access the mainframe computer in the USA is owned by the assessee. There is supervision of the transaction through the employees of the assessee. Thus there is "business connection" in India and the assessee is liable under Section 9(1) of the IT Act to pay income-tax on the profits arising from its activities in India.
(b) That the assessee is also liable to tax in India under the DTAA between India and the USA as it is carrying on business in India through a PE within the meaning of Article 5 of the DTAA, The assessee has a PE in India in the form of various systems installed at the premises of various agents through which the business is carried on. There is a fixed place of business at the premises of each agent where the software is installed. The software ensures connectivity between the assessee and the premises of the agent. The agents are "dependent agents" within the meaning of Article 5.4(a) of the DTAA. For instance, the agreement between the assessee and Weizmann Ltd. prohibits the latter from carrying on a similar business during the term of the agreement and for 6 months after the expiry of the agreement, which shows that Weizmann is working wholly and exclusively for the assessee. The case of other agents is the same. Thus they are all dependent agents of the assessee. Further, they have the authority to conclude contracts on behalf of the assessee in the sense that they carry out in India the commitment given by the assessee that the money will be paid. The compensation paid to the agents is 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-is carried out by the agents in India and thus merits adequate compensation. Since the compensation paid is not adequate, the transaction is not at arm's length.
(c) The LO takes active part 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. Therefore, the LO is a PE of the assessee in India.
(d) The assessee has not submitted its global accounts or balance sheet or the India-specific accounts. The only information given is that the assessee had transferred Rs. 520,34,20,247 on which commission amounting to Rs. 42,33,16,919 was paid. The rate of commission varied from 25 per cent to 30 per cent to the Indian agents and was about 15 per cent for the agents abroad. Taking note, of the expenses to be incurred such as maintenance of network, communication charges, mainframe expenses, etc., the profit attributable to the Indian operations may be estimated at 10 per cent of the gross commission which comes to Rs. 4,22,31,691. This amount was considered to be the. taxable income of the assessee in India. Tax at the rate of 48 per cent was charged which came to Rs. 2,02,71,212.
10. The assessee filed an appeal against the assessment to the CIT(A) who agreed with the AO and recorded the following findings :
(a) Considering the nature of the activities of the LO, it has to be held to be the fixed place PE of the. assessee in India within the meaning of Article 5.1 of the DTAA, through which the assessee was carrying on the business in India.
(b) The business was also being carried out through the software which has been installed in all the fixed premises of the agents. The agents and their personnel were grained in the use of the software. Without the software, the business of transmitting the money cannot be completed. Therefore the software is an installation at a fixed place through which the business is carried on and would constitute a PE within the meaning of Article 5.2 of the treaty.
(c) Since the agents have been authorized to appoint sub-agents, and cannot carry on the same business for any other entity during the currency of the agreement with the assessee and for a further period after the expiry of the agreement, they are "dependent agents". The agents are also not carrying on the activity for the assessee in the ordinary course of their business.
(d) The agents have authority to conclude contracts on behalf of the assessee. This can be inferred from the fact that they are empowered to appoint sub-agents and the lack of active involvement by the assessee in the transactions which indicates the grant of authority to agents to conclude the contracts. For these reasons also, the agents must be considered as "dependent agents".
(e) As regards the "business connection" under the Act, it exists because until and unless there is delivery of the money in India the services are not complete and the agents would not be entitled to the compensation. There is intimate and real relationship between the receipt of money abroad to be remitted to India and the actual delivery of the same in India. Since the transaction is completed only in India, there is business connection between the assessee and India.
(f) As regards attribution of the profits to the PE in India under Article 7 of the DTAA, the estimate made by the AO was reasonable and justified.
For the above reasons, the CIT(A) dismissed the appeal. Hence the present appeal.
11. We have merely summarised the reasons and findings of the IT authorities and they will be dealt with in detail, wherever necessary, at the appropriate juncture.
Arguments of the assessee :
12. The arguments on behalf of the assessee were these.
(a) There was no business connection in India at all, so that the profits, if any, attributable to the Indian operations could be brought to tax under Section 9 of the IT Act.
(b) As regards the DTAA, considerable arguments were advanced to deny the existence of any PE in India within the meaning of Article 5. The LO, it was contended, cannot be regarded as a PE since it is prohibited by the RBI from carrying on any business or commercial or trading activity under the conditions imposed for granting approval. The status reports filed, it was pointed out, showed that there was no violation of the conditions. The activities of the LO are continuously monitored by the RBI which has not alleged any violations of the relevant conditions. In IAC v. Mitsui & Co. Ltd. (1991) 41 TTJ (Del)(SB) 569 : (1991) 39 ITD 59 (Del)(SB), a Special Bench at Delhi has held that an LO cannot be regarded as a PE and a similar view has been taken by the Delhi Bench in BKI/HAM V.O.F. c/o Arthur Anderson & Co. v. Addl. CIT (2001) 70 TTJ (Del) 480. Our attention was also invited to the order of the Authority for Advance Rulings ("AAR") in UAE Exchange Centre LLC, In re in which case some of the activities in which the LO engaged itself were regarded as sufficient to constitute it as a PE. It was submitted that the LO in the present case has not carried on any such activity which the AAR regarded as sufficient to constitute a PE. It was thus argued that the LO cannot be regarded as the PE of the assessee in India.
(c) With reference to the finding of the IT authorities that the software provided to the agents and installed in their premises, through which they gained access to the mainframe computer in the USA, to match the MTCN number, constituted a PE, it was argued that this is an extreme and unacceptable view taken by them, since the software only enabled the agents to gain access to the mainframe of the assessee located outside India so that they can match the MTCN number, without which the claimant would not be paid the money and thus it acted only as a tool for verification of the genuineness of the claim and nothing more. The intellectual property rights in the software remained with the assessee. The mere use thereof, it was argued, cannot lead to the result that the premises where it is being used can be regarded as the PE of the assessee.
(d) As regards the finding of the Departmental authorities that the agents were "dependent agents" within the meaning of Article 7.4 of the treaty, it was pointed out that the terms of the agreement did not provide for any authority to the agents to conclude contracts on behalf of the assessee and that even as a matter of fact there was not a single instance in which an agent or representative concluded any contract for the assessee. The assessee no doubt authorized the agents to appoint sub-agents but that was only for the purpose of enabling the agent to carry on his part of the transaction and that the assessee had no say or control in the matter of appointing the sub-agents. It was not the obligation of the assessee to remunerate the sub-agent, if one were to be appointed by the agent. Even the termination of the services of the sub-agent was not a matter within the control of the assessee. Thus the agents were not dependent on the assessee in the matter of appointment, termination or remunerating the sub-agents.
(e) Turning to the question whether the agents were "independent agents" within the meaning of Article 7.5 of the DTAA, it was argued that they were acting in the ordinary course of their business in undertaking the activity of disbursing the payments in India, that this activity constituted a fraction of the overall activities of the agents, that the activities of the agents were not devoted wholly or almost wholly for the foreign enterprise (the assessee), that the compensation paid to them is uniform throughout the world and thus the dealings between the assessee and the agents were at arm's length and therefore it cannot be said that the agents were not independent agents.
(f) The observation of the AO that the assessee permits the use of credit cards for drawing cash from its outlets in India is wholly erroneous and not based on facts. It is contended that the assessee has no outlets of its own in India where credit cards could be used. It was emphatically denied that any credit cards were issued at all, in the first place. It was submitted that the assessee specifically denied the observation of the AO before the CIT(A) by means of a letter which was read out before us. It was pointed out that the CIT(A) has not doubted the denial and has not pursued the issue, suggesting that there is no basis for the AO' s remarks.
It was thus contended that there was no tax liability either under the IT Act or under the DTAA.
Arguments of the Department:
13. The arguments of Mr. Rajnish Kumar, the learned CIT (Departmental Representative), are summarized as under:
(a) The AO and the CIT(A) have rightly held that the assessee has a business connection in India and hence the profits arising from the Indian operations are taxable under Section 9 of the Act.
(b) With reference to the finding that the agents were "dependent agents" within the meaning of Article 5.4(a) of the treaty, it was contended that the impact of the authority to appoint sub-agents was really that the agent habitually exercises an authority to conclude contracts on behalf of the assessee (foreign enterprise). It is argued that thus the finding is correct.
(c) As regards the question whether the agents were "independent agents" under Article 5.5 of the treaty as contended on behalf of the assessee, it was contended that the first condition, viz., that the money transfer business must be in the ordinary course of the business of the agents is not satisfied. An interesting argument was raised by Mr. Rajnish Kumar, the learned CIT (Departmental Representative) appearing for the Department. He pointed out that so far as the Department of Posts is concerned, which was appointed as the agent of the assessee in India, though it was engaged in the money order business facilitating transfer of funds within India, the activity of paying out monies in India in the course of "trans-border money transfer business" was not in the ordinary course of its business and hence the primary condition of the article was not fulfilled. It was further pointed out that Clause 3.1 of the agreement with the Department of Posts shows that it is a new business in which it had not so far engaged. Turning to the case of banks which were appointed as agents, he pointed out that though under Section 6(1)(a) of the Banking Regulation Act, 1949 banks are allowed to carry on the business of "collecting and, transmitting money", but since the said Act extends only to India under Section 1(2) thereof, the money transfer business involving trans-border transfer of funds cannot be said to be in the ordinary course of banking business. Referring to the cases of non-nationalised banks (such as the Kamataka Bank Ltd., Bank of Punjab Ltd. etc.) appointed as agents of the assessee, Mr. Rajneesh Kumar submitted that Section 6(2) of the Banking Regulation Act, prohibited a banking company from engaging itself in any form of business other than those referred to in Sub-section (1) and therefore the money transfer business undertaken by the banks as agents of the assessee cannot be considered to be their lawful business and hence not in the ordinary course of their business. It was argued that it was because of the prohibition contained in Section 6(2) of the aforesaid Act that the non-nationalised banks (such as the Kamataka Bank Ltd., Bank of Punjab Ltd., etc.) have had to seek the approval of the RBI under Section 3(c) of the Foreign Exchange Management Act, 1999. A similar argument was advanced in regard to the non-banking financial companies (NBFCs) and tour operators appointed as the assessee's agents.
(d) Strong reliance was placed on the view expressed in paras 36 to 38.8 of the revised commentary on the OECD model of treaties and extracts thereof were filed. These paragraphs discuss the question of dependent and independent agents for the purpose of PE.
(e) As regards the question of attribution of income to the PE, it was contended that the Departmental authorities rightly rejected the proposal of the assessee that at best, and if at all, the cost of maintaining the LO plus 10 per cent thereof alone can be attributed to the PE, because such a rule cannot be an acceptable yardstick for attributing the income to the PE which must largely depend on the facts of each case. It was submitted that in case it is felt that all the facts have not been brought on record, the matter may be remanded to the AO for reconsideration.
(f) As regards RBI's permission or approval for opening the LO under the Foreign Exchange Management Act, 1999 ("FEMA"), it was submitted that it is given only for a limited purpose and under the relevant statutes and cannot be considered as a blanket permission to carry on the business in India, as is made clear in the approval/permission itself.
(g) The general argument was that the transaction of remitting monies from abroad to India is a single unified transaction and cannot be severed into two or more transactions, so as to say that at the Indian border it assumes a different character. Both the receiving aspect and the payment aspect are a single integrated whole, incapable of being split.
Reply on behalf of the assessee :
14. The following clarifications were made in the course of the assessee's reply:
(a) The LO has no role to play in the actual money transfer transactions and hence cannot be considered to be a "fixed place of business through which the business of an enterprise is wholly or partly carried on" within the meaning of Article 5.1 of the DTAA. The LO has no authority to conclude any contract. It is pointed out that the LO is manned by only two employees at a junior level with a small staff,
(b) The software only gives access to information which is no doubt crucial, but on that score it cannot be considered to be a PE under Articles 5.1 or 5.2 of the treaty, as it cannot be a "place", much less a "fixed place".
(c) The assessee has no access as of right to the offices or premises of its agents or representatives in India.
(d) The non-compete clause in the agreement of appointment of agent does not make the agent dependent on the foreign enterprise (assessee). It is the usual clause found in all such arrangements, mainly intended to protect the assessee.
(e) The training of the agents is an activity auxiliary or preparatory and therefore by virtue of Article 5.3.(e) of the DTAA the LO cannot be deemed to be a PE.
(f) The words "ordinary course of their business" appearing in Article 5.5 of the treaty shall be construed broadly and it must be accordingly held that the agents' activity constituted his regular business. There is no allegation that any of the conditions prescribed by any law were violated, nor is there any evidence to show that the transactions were not at arm's length. Therefore, the agents were all independent agents.
(g) There is no evidence to show that the agents had as a matter of fact the authority to conclude contracts on behalf of the assessee, nor is there any evidence to show that the agent was habitually exercising such authority as required in Article 5.4 of the treaty. Therefore, they are not dependent agents. It was argued that the mere grant of power to appoint sub-agents does not amount to grant of authority to conclude contracts nor does it amount to habitual exercise of the authority to conclude contracts. Further, the authority to conclude contracts refers to the contracts entered into by the assessee in relation to its business, which is absent in the present case. The appointment of sub-agents is not on behalf of the foreign enterprise. The sub-agents are not accountable to the foreign enterprise; they are not remunerated by the foreign enterprise. The approval granted by the RBI clarified in para 4 that the sub-agents are not to deal with the assessee directly.
(h) The assessee does not exercise any control over its agents, except that the agents are to maintain records in conformity with the assessee's systems.
(i) It is only because the RBI has been constituted the ultimate controlling authority for transactions involving foreign remittances that its permission is required under Section 3(c) of FEMA, It does not necessarily mean that the activity is not in the ordinary course of the business of the assessee or representative.
(j) As regards attribution of profits under Article 7.1 of the DTAA, reference was made to the judgment of the Supreme Court in the case of Carborundum Co. v. CIT , rendered with reference to Section 42(3) of the 1922 Act, the provisions of which now find place in Expln. (a) to Section 9(1) of the 1961 Act. It was contended that it was only those profits which can be reasonably attributed to the Indian operations of the foreign enterprise that can be taxed and if it can be shown, as explained in Board's circular dt. 23rd July, 1969 that the agent's commission fully represents the value of the profit attributable to his service, it should prima facie extinguish the assessment. It was submitted that the compensation paid to the agents at the rate of 25 per cent to 30 per cent of the fees received by the assessee is a reasonable attribution of the income to the PE (agents) and if the compensation so paid is allowed as a deduction, it will extinguish the assessment.
15. Wherever necessary, the written submissions dt. 10th Aug., 2004 filed before the CIT(A) were explained in the course of the reply. A copy of the same was filed.
Decision :
16. The following broad questions arise for consideration in the case:
1. Is there a business connection within the meaning of Section 9 of the IT Act ?
2. If the DTAA between India and USA is applicable, then is there a PE of the assessee in India? If so, what kind of PE is it ?
3. If there is a PE in India, how much income is attributable to the same ?
Several incidental or sub-questions also arise which will all be dealt with in the following paragraphs.
17. Before we proceed to decide the above questions, certain fundamental propositions which now seem to be well-settled, need to be noticed. Wherever there is a DTAA between India and another country, then the provisions of the DTAA will override those of the IT Act. In Union of India v. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), the position was summed up thus by the Supreme Court (pp. 724-5) :
A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which, where they apply, would operate even if inconsistent with the provisions of the IT Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the IT Act in the matter of ascertainment of chargeability to IT and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.
18. In CIT v. P.V.A.L. Kulandagan Chettiar , the Supreme Court again observed and held as under (@659-660) : "Where liability to tax arises under the local enactment the provisions of Sub-section 4 and 5 of the Act provide for taxation of global income of an assessee chargeable to tax thereunder. It is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under Section 90 to the contrary, if any, and such an agreement will act as an exception or modification of Sub-section 4 and 5 of the IT Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of Section 90(2) of the Act. Section 90(2) makes it clear that 'where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee" meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein.
19. The result is that the case in hand has to be approached first from the point of view of the Act and it is required to be seen if any tax liability arises. In case no tax liability arises under the Act, nothing further requires to be done. But if there is a tax liability arising under the Act, it is open to the non-resident (foreign enterprise) to claim that either there is no or less tax liability if the provisions of the DTAA are applied and if such a claim is made it has to be enquired into. If the claim is found to be correct, then it has to be given effect in preference to the provisions of the Act. Thus, in the present case we need to first examine whether the IT authorities are right in applying Section 9 of the Act to hold that there is a business connection. Only if we find that there is a business connection, need we examine the DTAA (with USA) to find out if the case can be brought under those provisions as claimed by the assessee. We proceed accordingly.
1. Is there a business connection ?
20. This question need not detain us long for the reason that the term "business connection" is so broad in scope according to the judgments that it is not possible to hold in the present case that there was no business connection. Expln. 2 inserted below Section 9(1) by the Finance Act, 2003 w.e.f. 1st April, 2004 expands the scope of the expression. Though the Explanation does not apply to the year under consideration, even applying the tests laid down in decided cases, the issue has to be resolved against the assessee. In CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) the Supreme Court held that the expression means something more than a business, that it presupposes an element of continuity between the business of the non-resident and the activity in the taxable territory though a stray or isolated transaction would not be taken in, that the connection may take several forms, that it may include carrying on a part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business We are of the view that applying these tests to the present case, particularly the test [underlined, italicised in print, by us], it must be held that there is a business connection. The business of the assessee is to transfer monies across countries. There is thus a receiving aspect and a paying aspect to the transaction. They cannot be segregated; to do so would be artificial. There is a seamless integration between the two. The transaction, as has been rightly noticed by the IT authorities, is not complete unless the monies are paid in India to the claimant. Further, the agreements with the agents are initially for a term of 5 years, renewable for periods of One year at a time, but this could go on endlessly. The agents are bound to render services for the'assessee as stipulated in the agreements. The agreement provides for security and confidentiality. The assessee has provided the software to the agents, though retaining the copyright in the same, to enable them to access the assessee's mainframes in the USA. All these are in our opinion sufficient to justify the conclusion that there is business connection within the meaning of Section 9(1) of the Act. We uphold the conclusion of the IT authorities to this effect.
2. Is there a PE of the assessee in India ?
21. Under this head we propose to examine whether there is a PE as alleged by the IT authorities under any of the four categories : (a) fixed place PE; (b) dependent agents PE; (c) software as PE or (d) LO as PE. Before doing so, a clarification has to be made. A question may arise as to whether, having held that there is a "business connection" it is at all open or necessary to examine the question whether there is a PE. In other words, a doubt may arise as to whether there is any difference between the two concepts-the concept of "business connection" and the concept of "PE"-and whether once a foreign enterprise is found to have a business connection in India can it not also automatically be held to have a PE in India. It appears to us that there is a distinction between the two. "Business connection" seems to us to be a much wider concept than a PE. The former has not been statutorily defined whereas the latter has been defined in the DTAA where the criteria has been more specifically laid down. The Board in its Circular No. 23 dt. 23rd July, 1969, referred to before us in a different context, recognizes that the "expression,'business connection' admits of no precise definition". The following passage from pp. 1.149-1.150 of Part 1 of the "Commentary on Double Taxation Avoidance Agreements" by S. Rajaratnam and B.V. Venkataramaiah (2nd Edn., 2004) may be usefully referred to in this behalf;
While the concept of business connection earlier enacted as part of the law is a test of nexus in Indian law, PE is now a concept universally accepted for purposes of relief under DTAA. Where there is no business connection, there may not be any liability under the Indian law, unless there are other specific provisions as for royalty, technical fees, interest and salary as provided under Section 9 of. the Act. Where there is no liability under the Indian law, there is no need for considering the further question, whether the same set of facts could justify the inference of PE. Since there could be no liability in domestic law, the question of application of the concept of PE does not arise. Having a mere liaison office for example, which could be treated as an office in India, may not constitute business connection in the absence of any role which liaison office plays in finalization of contracts of such other business needs, but merely acting as a post office. But the existence of the office itself may constitute PE but still there may be no liability, because either in the concept of business connection under Section 9 or in the concept of PE under DTAA, there should be income arising out of such business connection in Indian law and from the PE under the DTAA....
The learned authors proceed to opine that for understanding the meaning of business connection one has to particularly go by the precedents under the Indian law, while the PE is a concept which "finds almost identical definition in almost all the DTAAs, which are modeled on UN or OECD drafts, the result being that the decisions under different agreement in different countries can offer guidance though these are not binding on domestic Courts, but have only a persuasive value.
22. In Advance Ruling A.No. p-8 of 1995, ABC, In re , the authority speaking through Hon'ble Justice S. Ranganathan expressed that (at p. 431) "There may be a difference in the scope of these concepts in some cases but, for the present case, we can assume that it is the same as it is the subsidiary company which is being looked on as the business connection or the PE for ABC in India.
(a) Fixed place PE :
23. Article 5.1 of the DTAA says that PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5.2 includes several places as a PE of the foreign enterprise. Neither the AO nor the CIT(A) has pin-pointed which particular description of the PE in Article 5.2 would apply to the assessee. The general definition of the PE in the first part of the article postulates (a) the existence in India of a fixed place of business in India and (b) that the business of the foreign enterprise shall be carried on (wholly or partly) through the said place. The assessee admittedly does not have an outlet of its own in India. That way, there is no fixed place of business in India. A PE should project the foreign enterprise in India. The assessee before us has appointed different agents in India. These agents are the Department of Posts of the Government of India, commercial banks, non-banking financial companies and tour operators. These agents have their own or hired premises from which they operate. All that they have to show that they are agents of the assessee is a display board which shows that they are the agents of the assessee. This cannot by any stretch of imagination amount to projection of the assessee in India. It cannot be postulated that the post offices of the Department of Posts which functions under the concerned ministry of the Government of India would permit themselves to be looked upon as projecting the presence of Western Union Financial Services Inc., in India. The same would be the case of commercial banks such as the Karnataka Bank Ltd., Bank of Punjab Ltd., etc. and others which have been appointed agents. They have their own presence and business with which they are perhaps more concerned and may be surprised to find themselves characterised as projecting the assessee in Indian soil. There is no evidence to show that the assessee can, as a matter of right, enter and make use of the premises of these agents for its business. We therefore hold that there is no fixed place PE of the assessee in India within the meaning of Article 5.1 of the DTAA.
(b) Is LO the fixed place of business (and hence a PE) ?
24. That takes us to the more important aspects of the broader question. The first is whether the LO can be considered to be the fixed place of business of the assessee in India. Under Article 5.3(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character cannot be considered to a PE. We have already noticed the activities which the LO has been authorized to carry on in India. It has acted as communication link between the agents and the assessee's head office, has trained and installed agents after obtaining approval from the RBI, has visited the agents and offered training and refresher courses in connection with the operations of the assessee, about the standards of service and security, accounting procedures, telecommunication systems and configuration, merchandising standards, etc. It has also helped the agents to overcome the Y2K problem. It has organized local production of posters for display at the agents' locations. Further, the LO has facilitated the visit of the director-operations of the assessee to the agents so that he can satisfy himself about the quality standards. Finally, the LO has provided the management software (VOYAGER) to the agents (free of cost) and trained their staff on the usage and versatility thereof. These activities are in line with the activities mentioned in the annexure to the application to the RBI seeking permission to open the LO. We have already extracted those activities in the earlier part of our order. The annexure also states what activities will not be undertaken by the LO. There are no activities which the LO has undertaken, which do not conform to the list of activities given in the annexure. There is no allegation of any violation of the conditions of approval.
25. On the above facts, we are of the view that the LO cannot be considered to be the fixed place PE of the assessee as it carries out activities which are of a preparatory or auxiliary character. It has not carried on any trading activity for the assessee in India. It has only a small number of executives and a support staff. The LO has also filed status reports to the RBI listing out the activities which it actually carried on during the years. None of the activities can be described as anything other than of preparatory or auxiliary character. In UAE Exchange Centre LLC, In re (supra), the AAR noticed that the applicant, which was engaged in money transfer business, had adopted the mode of remitting money to India through the LO in India. The LOs downloaded the data about the beneficiaries in India, printed cheques/drafts and dispatched them to the beneficiaries. On these facts, it was held that the LOs constituted PE in India. The test laid down by the AAR was that the role of the LO should be nothing short of performing the contract of remitting the amounts at least in part, before it could be called a PE of the foreign enterprise. The performance of the contract of remitting the amounts, at least in part, was held to constitute an essential activity in the performance of the contractual obligation, and such activity was held not to constitute an auxiliary activity. In the present case, the LO performs no part of the contract of remitting the money into India. Further, as we have already noticed from the nature of the activities carried on by the LO, its activities can properly be called auxiliary or preparatory in nature. We therefore hold that the LO cannot be considered, to the PE of the assessee in India.
(c) Is the software "VOYAGER" the PE of the assessee ?
26. The Department has made out a case that the software, which affords access to the agents to the assessee's mainframe computers in USA for the purpose of finding out the matching of the MTCN numbers, has been installed in the premises of the agents and hence taken together with the premises constitutes the PE. The premises of the agents are either owned or hired by them. There is no evidence to show that the assessee can as a matter of right enter and make use of the premises for the purpose of its business. The software is the property of the assessee and it has not parted with its copyright therein in favour of the agents. The agents have only been allowed the use of the software in order to gain access to the mainframe computers in the USA. Mere use of the software for the purpose from the premises of the agents cannot in our opinion lead to the decision that the premises-cum-software will be the PE of the assessee in India. Under Article 5.2(j) an installation may amount to a PE provided it is used for the exploration of natural resources. Therefore, even if the software is to be considered as an installation, since it is not used for exploration or exploitation of natural resources it cannot per se be treated as a PE.
(d) Credit cards and PE :
27. Though the AO has stated that the assessee permits the use of credit cards for drawing cash from its outlets in India, this has been specifically denied before the CIT(A) in writing (letter read out before us). The CIT(A) has not doubted or rejected the denial. Even before us, the learned CIT (Departmental Representative) did not touch the point, There is no material to which our attention has been drawn, either in the assessment order or in the course of the arguments before us, from which it can be gathered that the assessee permitted withdrawal of monies from its outlets by the use of credit cards. In fact, the existence of the assessee's own "outlets" in India has been stoutly denied. The observations of the AO not being supported by any evidence and the CIT(A) not having specifically approved them, we hold that there can be no PE on account of the use of the credit cards.
(e) Agency PE :
28. The stand of the IT Department is that the agents are not "independent agents" under Article 5.5 of the treaty but are "dependent agents" under Article 5.4(a) of the treaty.
29. (A) Are the agents "independent agents?
30. We shall first address the question whether the agents are "independent agents" under Article 5.4, Three conditions are required to be satisfied in order that an agent may be said to be an independent agent: (1) he should be acting in the ordinary course of his business; (2) his activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as agent and (3) the transactions between the foreign enterprise and the agent should be at arm's length.
31. The argument of the learned CIT (Departmental Representative) was that the agents were not carrying on the activity in the ordinary course of their business. What is "business" has been explained in various decisions. In the leading case of Narain Swadeshi Weaving Mills v. CEPT (1954) 26ITR 772 (SC) the Supreme Court explained that business connotes some real, substantive and systematic course of activity or conduct with a set purpose. In Liquidators of Pursa Ltd. v. CIT , the Supreme Court held that underlying the expression "business" is the fundamental idea of continuous exercise of an activity. In Barendra Prasad Ray v. ITO the Supreme Court again held that the word is of wide import and means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning income. Therefore any activity which is being systematically and continuously carried on with the object of earning profits is a business activity. That way, the activity engaged in by the agents of paying the monies to the beneficiaries or claimants in India, after satisfying themselves about their identity and after accessing the MTCN number to verify the genuineness of the claim, amounts to carrying on of the business of money transfer. The agreement of agency is initially for a period of 5 years and to be renewed for successive periods of one year each. The agents could appoint sub-agents for carrying out the activity. They have to maintain records and measure up to the standards set by the assessee. They have received training from the assessee in the use of the software and in the communication systems. All these are activities which are carried on systematically and continuously with a set purpose and hence amount to business.
32. But then Mr. Rajnish Kumar contended that this was not an activity in the "ordinary course of the business" of the agents, as their ordinary business is in local money transfer in the case of the Department of Posts and banks and not in trans-border money transfer and that in the case of non-banking financial companies and tour operators appointed as agents money transfer business, whether locally or internationally, is not in their ordinary course of business. In the case of the Department of Posts, it is well-known that they accept money orders for transfer of funds within India. Engaging themselves in the same type of business with international ramifications is just an extension of their business. It cannot be said that it is not in the ordinary course of their business. The same is the case with commercial banks. Though strictly speaking it may not be part of their banking business, as the expression is defined in the Banking Regulation Act, 1949 and as contended by Mr. Rajnish Kumar, still it is nobody's case that it is not a lawful activity which they have embarked upon. In fact, they have obtained the approval for such activity from the RBI under Section 3(c) of the FEMA. The approval granted by the RBI to Bank of Punjab Ltd. has been filed in the paper book. Though the approval is only for the purpose of FEMA, as rightly pointed out by the learned CIT (Departmental Representative), the activity engaged in would still, in our opinion, amount to a business, though not banking business, because it has been carried on systematically and continuously with the objective of earning commission. Having regard to the variegated services provided by the banks these days, which cannot be ignored, all with a business motive, it seems to us too technical an objection to say that the activity carried on by the assessee's agents in India is not a business activity in the ordinary course of their business. Non banking financial companies deal with money belonging to others and the activity of paying out monies on behalf of the Western Union Financial Services Inc., must be viewed as part of their business activity. In the case of tour operators, acting as agents of an established firm engaged in the international money transfer business may be conducive to their business. A broad view of the matter has to be taken in these matters. We are therefore satisfied that the objection of the Department cannot be accepted.
33. The second question to be considered is whether the activities of the agent are wholly or almost wholly devoted to the assessee. So far as the Department of Posts and commercial banks are concerned, the objection of the Department cannot be countenanced at all. The Department of Posts, as noted earlier, functions under the aegis of the concerned ministry of the Government of India. Its main activity is to serve the public in India in the matter of sending/receiving letters, parcels, packets, etc. within or to/from outside India, money orders within India, maintaining small savings account in several forms such as savings certificates, time-deposit accounts, postal life insurance, etc. They have a vast network throughout the country. They are a service organization for the benefit of the general public and it would be a misnomer to say that their activities are wholly or almost wholly devoted to the Western Union Financial Services Inc., of the USA. The IT authorities have not brought out any data, as they ought to have, to show that the activities undertaken by the Department of Posts on behalf of the assessee herein constitute such a large part of their activities that it can be said that the Department of Posts are dependent on the assessee for their revenues. The position is the same in the case of commercial banks, non-banking financial companies and tour operators appointed as the agents of the assessee. There is no evidence to show that the extent of their activities for the assessee, compared to all their activities, is so large that it can be said that they are dependent on the assessee for their earnings or revenues. The agents in the present case have not been shown to be economically dependent on the assessee. The IT authorities have stated that the agents have not acted in that capacity for any other entity engaged in the money transfer business and therefore their activities are wholly or almost wholly devoted to the assessee. We do not see how this conclusion follows. The agents, as we have seen earlier, have their own businesses or activities amounting to business. They are not carrying on 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 agents for any other company carrying on money transfer business it cannot be said that their activities are wholly or almost wholly devoted to the assessee.
34. The learned CIT (Departmental Representative) has drawn our attention to paras 36 to 38.8 of the revised commentary on the OECD model and has relied on the same in support of his argument that the agents in the present case are not independent agents within the meaning of Article 5.5 of the DTAA. The commentary discusses what in general are the tests to be applied to ascertain whether the agent is an independent agent or not. The extent, of legal dependence or control, the undertaking of risks, the fact whether the agent is subject to the control of the principal for the manner in which the work is to be carried out, etc. have been discussed. Much of the discussion loses relevance to the controversy before us where we have to apply Article 5.5 which requires that the activities of the agent must be wholly or almost wholly devoted to the foreign enterprise. This is the test laid down in the article. Even on this aspect, para 38.6 of the revised commentary has this to say:
Another factor to be considered in determining independent status "is the number of principals represented by the agent. Independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative. All the facts and circumstances must be taken into account to determine whether the agent's activities constitute an autonomous business conducted by him in which he bears risk and receives reward through the use of his entrepreneurial skills and knowledge. Where an agent acts for a number of principals in the ordinary course of his business and none of these is predominant in terms of the business carried on by the agent legal dependence may exist if the principals act in concert to control the acts of the agent in the course of his business on their behalf.
What we thus understand from the language used in Article 5.5 is that the agent's activities for the foreign enterprise must constitute a large chunk of all his activities taken together so that it can be said that he is economically dependent largely on the activity. Nothing has been brought on record to suggest this. Even if you take the risk factor, the "to send" specimen form which was filed before us in the course of the hearing while explaining the transaction makes it clear on the reverse that the assessee will be liable to refund the principal amount of a money transfer (at the applicable rate of exchange at the time the refund is made) upon the written request of the sender if payment to the recipient is not made within 30 days excluding Sundays and holidays and that the same will be the case of the fees charged. It goes on to say that the assessee or his agent will in no case be liable for damages for the delay, nonpayment or underpayment of the money transfer. The agent is not therefore liable to any risk on this account.
35. We now proceed to consider the question whether the transactions between the agents and the assessee are under arm's length. The agreements filed before us show that the "base compensation" is 30 per cent in the case of the Department of Posts and 25 per cent in the case of others. It may be reduced under Clause 6.2 of the agreement with the Department of Posts if the assessee were to assume responsibility for the advertising and promotion of the services or to establish a customer service center to handle customer queries. The reduction shall not exceed 10 per cent of the gross revenues earned by the agent concerned from the money transfer business done by it in the relevant year. In the case of banks appointed as agents, the amount of reduction is left to the determination of the assessee. There is no material to show that the rates of compensation are higher in other cases so as to indicate that the agents were discriminated against. The higher rate of compensation in the case of the Department of Posts is probably because its reach is much wider compared to the commercial banks, NBFCs or tour operators. The terms of appointment of sub-agents are uniform in all cases. Thus there seems to be no basis for the charge that the compensation paid is not adequate for the services rendered by the agents. There is no finding contrary to the claim made by the assessee that the rates of compensation are uniform throughout the world. In these circumstances, there is no merit in the claim that the transactions between the assessee and the agents are not under arm's length.
36. The result is that (1) the agents are acting in the ordinary course of their business; (2) their activities are not devoted wholly or almost wholly to the foreign enterprise and (3) the transactions are under arm's length. Therefore the agents are independent agents under Article 5.5 of the treaty.
37. (B) Are the agents "dependent agents"?
38. It is now well-settled that merely because the agents are not "independent agents" it does not automatically follow that they are "dependent agents" under the DTAA and that the question has to further examined under Article 5.4 of the DTAA. In other words, even if the agent is shown to be not an independent agent, it has to be further shown that he is a dependent agent within Article 5.4 and that it must be shown that he has and habitually exercises an authority in India to conclude contracts in the name of the foreign enterprise. In TVM Ltd. In re , a decision rendered by the AAR, it has been accepted that when an agent failed to come up to the standard of independence referred to in Article 5.5, the issue regarding PE is not closed but has to be resolved in terms of Article 5.4. It was further held that the presence of the words "unless his activities are limited to the purchase of goods or merchandise for His enterprise" in Clause (i) and (ii) may suggest a narrower interpretation restricting the article to agents involved in such activity and as saying that mere purchase or sporadic sale of goods through an agent will not be sufficient to merit such an agent being considered a PE, but that this is not the correct view as it would ignore the generality of the preceding words of the paragraph merely because exceptions are carved out in the latter part of the aforesaid clauses only in respect of a particular category of agents (viz., those buying or selling goods). It was held that para 4 of the article "is applicable in all cases where the enterprise in a Contracting State has an agent in the other who does not have an independent status. Such a person will be deemed to be a PE only if he has, and exercises, the authority to conclude contracts in the name of the enterprise. But even the existence of such authority will not make him a PE (i) if he is a mere agent for purchase of goods or merchandise; or (ii) being an agent for sale of goods or merchandise is allowed habitually to maintain a stock of the goods of the enterprise and effect sales therefrom. The conclusion seems inevitable that even a non-independent agent can be deemed to be a PE only if he can act independently in the matter of concluding contracts on behalf of the principal, on his own, freely and without control from the latter..." (pp. 241-2 of the report). It is therefore necessary to examine whether the agents in the present case have authority, or habitually exercise authority to conclude contracts for the assessee. Here also, the observations of the AAR in the above case are worth reproducing: At pp. 242-3 it was noted that para 4 of the article uses two expressions: "has" and "habitually exercises" the authority to conclude contracts on behalf of the foreign enterprise. It was held that "While the expression "has" may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression "habitually exercises" has certainly reference to a systematic course of conduct on the part of the agent. If, despite the specific provision of the soliciting agreement, it is found, as a matter of fact that TVI is habitually concluding contracts on behalf of TVM without any protest or dissent, perhaps it could be presumed either that the relevant provisions of the agency contract are a dead letter ignored by the parties or that the principal has agreed implicity to TVI exercising such powers notwithstanding the terms of the contract". The AAR has further observed that this view is reinforced by the Commentary on the OECD Model of Double Tax Conventions as well as the views of text book writers like Klaus Vogel and Baker.
39. In line with the above, we have to examine the facts of the case to find out first whether the agents have the authority to conclude contracts (on behalf of the assessee). There is no express authority given to them in the agreement and our attention was not drawn to any clause therein to that effect. All that the IT authorities have stated is that (a) that the agents carry out in India the commitment given by the assessee to the remitter of the money abroad and (b) that the agents have the power to appoint sub-agents to do their work. From these facts, taken singly or together, it cannot be inferred that the agents either have the authority to conclude the contracts or have habitually exercised the authority without any protest from the assessee. In para 33 of the commentary referred to in the preceding paragraph, under the heading "Authority to conclude contracts", it has been stated: "the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. It would be irrelevant, for instance, if the person had authority to engage employees for the enterprise to assist that person's activity...." This paragraph has been quoted approvingly by the AAR in TVM Ltd. v. CIT (supra) (p. 244 of the report). Thus the fact that the agents (in the present case) have the authority to appoint sub-agents does not mean that they (agents) have the authority to conclude contracts. The terras of appointment of sub-agents given at p. 22 of the paper book as attachment to the contract of agency with Kamataka Bank Ltd. lists the duties and responsibilities of the sub-agents regarding money transfer service requirements, advertising and promotion, exclusivity, locations and hours of operations, payment for the service, delivery standards, maintenance of records, security and confidentiality, accounting, use of software, indemnity, conditions of termination, etc. Nowhere in the sub-agency agreement has any authority to conclude contracts has been given to them. In fact, when the agents themselves have no such authority under their agreement, they cannot delegate the same to their sub-agents (delegatus non potest delegaie).
40. There is also no material to hold that the agents have "habitually" exercised the authority to conclude contracts. As already noted, the authority must be to conclude contracts in the conduct of the business proper of the foreign enterprise. The fact that the agents conclude in India the commitment of the assessee made abroad cannot be considered as an authority to conclude contracts. The contract is between the remitter abroad and the assessee. It is entered into outside India. The agents are not party thereto. The agents merely carry out the concluding step in the arrangement embodied in the contract. In other words, the assessee undertakes outside India to transfer the money to India. It is only the payment part of the undertaking that is executed by the agents in India. The contract is already concluded outside India. The agent has no say over the contract. He has to merely execute the payment part, after satisfying himself as to the genuineness of the transaction and the identity of the beneficiary in India. By executing the last leg of the contract whiph has already been concluded (outside India) he is not concluding the contract for the assessee, much less habitually. The appointment of sub-agents is merely to facilitate the work of the agent. That apart, what is considered to be a "duty" cannot be considered to be an "authority". By making payment to the beneficiary, the agent in India is only performing his duty under the agreement of agency, for which he is remunerated; he is not exercising any " authority", certainly not an authority to conclude contracts on behalf of the assessee. The words "duty" and "authority" are incompatible with each other. The dictionary meaning of the word "duty" is "assignment/burden/commitment that one is obliged to do by law or by calling of one's business".. It connotes an obligation, which a person is bound to perform. Per contra, "authority" in law belongs to the province of power (P. 124 of K.J. Aiyar's Judicial Dictionary, 13th Edn., Butterworths). According to Salmond (Jurisprudence, 10th Edn., p. 243), "the ability conferred upon a person by the law to alter, by his own will directed to that end, the rights, duties, liabilities or other legal relations, either of himself or of other persons must be present ab extra to make a person an 'authority'". Judged by these tests, the fact that the agents in India pay out the money to the beneficiaries or claimants, which they are bound to under the agreement with the assessee for which they are remunerated does not appear to us to be a case of exercise of any authority. Thus, the agents do not habitually exercise the authority to conclude the contracts on behalf of the assessee.
41. For the above reasons, we are of the view that there is no agency PE of the assessee in India. In the absence of any PE in India, it follows that the profits, if any, attributable to the Indian operations cannot be assessed as business profits under Article 7 of the treaty.
42. Since we have held that there is no PE in India, the question of attributing any income to the same for the purpose of Article 7 of the DTAA does not arise. We therefore consider it unnecessary to examine the question whether the attribution of income is fair and reasonable.
43. In the result, we hold that (a) there is business connection and hence the assessee is liable to tax under Section 9(1) of the IT Act (b) but since there is no PE in India under Article 5 of the DTAA between India and the USA, no profits can be attributed to the Indian operations of the assessee and taxed in India.
44. The appeal is accordingly allowed but with no order as to costs.