In Director of Income tax (IT)I vs. Delmas France, the Tribunal was of view that the Revenue did not demonstrated that transaction between assessee and its agent were not at arm’s length conditions. Thus, the assessee was allowed to claim the benefit of Section 44B of the Income Tax Act, 1961.   

Facts of the case

The assessee, a French company, is engaged in operating Indian business of shipping in international traffic through an agent in India. The assessee claimed the benefit of section 44B. The Assessee claims that it did not have any Permanent Establishment (PE) in India and therefore, its business profits cannot be taxed in India.

The Assessing Officer (AO) noticed that the Indian agent of the assessee was responsible for concluding contracts of the assessee and also various other functions, such as broking, liaison and contact contracting parties for loading of cargo etc. This agent was also managing an office of the assessee. These all indicated that the assessee have a PE in India. Thus, AO rejected the assessee’s claim of benefit of Section 44B with respect to freight earning of Rs. 23,66,57,986 and assessed the income at 10% of the total freight earned. The above draft assessment was challenged by the assessee before the Dispute Resolution Panel (DRP). After considering the directions issued by thr DRP, the AO passed his order. The assessee challenged the order of AO before the Tribunal and leading to the impugned order.

It was held that:

The AO submits that the factual position of the case fall under Article 5(1) and (2) of the Double Taxation Avoidance Agreement (DTAA).

The Article read as follows:

“Article 5 Permanent Establishment

1. For the purposes of this Convention, the term permanent establishment means a fixed place of

business through which the business of an enterprise is wholly or partly carried on.

2. The term permanent establishment includes especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(g) a warehouse in relation to a person providing storage facilities for others;

(h) a premises used as a sales outlet;

(i) an installation or structure used for the exploration of natural resources provided that the

activities continue for more than 183 days.

The assessee argued that all the findings and which have been brought to our notice and assailed before us by the Revenue are factual yet, its essential conclusion is based on Article 5(6). The assesee brought to the notice that the Tribunal’s order recorded that the concession of the departmental representative did not disputed that the permanent establishment in this case is an aspect which would be governed by Article 5(5) read with Article 5(6) of the DTAA. In these circumstances, if Revenue allowed to now raise all together different issues and about applicability of Article 5(1) and 5(2) would cause serious prejudice and would require this Court to consider something which is expressly given up. Therefore, the factual findings on Article 5(5), Article 5(6) of the DTAA and as rendered in the present case do not raise any substantial question of law.

The other relevant provision of the Article read as:

5. Notwithstanding the provisions of paragraphs 1 and 2 where a person other than an agent of an independent status to whom paragraph 6 applies is acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first mentioned Contracting State, if:

(a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless, his activities are limited to the purchase of goods or merchandise for the enterprise; or

(b) he has not such authority, but habitually maintains in the first mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

6. An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm’s length conditions.

On this the revenue proceeded that the assessee in India is through an agent. The matter of consideration is the work and function of the agent and whether the business of the assessee being carried out through an Indian agent would establish its permanent presence in India  or not.. The Tribunal has clarified that it may have referred to the DTAA Articles or parts thereof, but the decision is confined to the facts of the case and for the assessment year before the Tribunal. Meaning thereby, it was not deciding any larger issue or controversy.

As Article 5(5) and para 6 is concerned, there is a deeming fiction, and by virtue of that, the enterprise of one of the Contracting States is deemed not to have permanent establishment in other Contracting State merely because it carries  on business in that other Contracting State through broker, general commission agent or any other agent of an independent status, provided that such persons are acting in ordinary course of their business. Then comes the provision, whether activities of an agent who may be an agent of independent status but devoted wholly or almost wholly to that enterprise, but he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm’s length conditions.

The Tribunal has rightly observed that even during the course of the proceedings before it, no material was placed on record, which would prima facie indicate that the transactions between the principal namely the assessee and the agent are not under at arm’s length conditions. Once this onus is not discharged by the Revenue and the Tribunal has confined its observations and conclusions to the facts and circumstances peculiar to the assessee’s case and for the particular assessment year, then this Appeal does not raise any substantial question of law.

As a result of the above discussion, this Appeal fails. It is accordingly dismissed. No order as to costs.

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