DEPUTY DIRECTOR OF INCOME TAX v. SET SATELLITE (SINGAPORE) PTE. LTD
[Citation -2007-LL-0420-7]

Citation 2007-LL-0420-7
Appellant Name DEPUTY DIRECTOR OF INCOME TAX
Respondent Name SET SATELLITE (SINGAPORE) PTE. LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 20/04/2007
Assessment Year 1999-00
Judgment View Judgment
Keyword Tags avoidance of double taxation • opportunity of being heard • permanent establishment • scientific research • foreign enterprise • deeming provision • business activity • commission agent • foreign company • foreign agent • non-resident • advance tax • head office • pe in india • tax treaty
Bot Summary: An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for a period of more than 183 days in any fiscal year in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State. Notwithstanding the provisions of paragraphs 3 and 4, an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for a period of more than 183 days in any fiscal year in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall, in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. For the purpose of paragraph 1, the term 'directly or indirectly attributable to the permanent establishment' includes profits arising from transactions in which the permanent establishment has been involved and such profits shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions, even if those transactions are made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment. Generally enterprise of a contracting state is said to have a permanent establishment in the other contracting state when such an enterprise has a fixed place of business in that other contracting state through which business of the enterprise has wholly or partly carried on.


These cross appeals are directed against order dated 15-10-2003 passed by Commissioner (Appeals) in matter of assessment under section 143(3) of Income-tax Act, 1961, for assessment year 1999-2000. As both of these appeals pertain to same assessee, involve interconnected issues and were heard together, we are disposing of both of these appeals by way of this consolidated order. 2. We will first take up ITA No. 535/Mum/04, i.e., appeal filed by Assessing Officer. 3. grievances of Assessing Officer were articulated by way of following grounds of appeal set out in memorandum of appeal: 1. On facts and in circumstances of case and in law, CIT(A) erred in holding that since agent i.e., SET India Pvt. Ltd. has good profitability record, it can be said that assessee has remunerated agent on arms length basis, and based on provisions of Article 7(2), OECD Commentary on subject, and other contentions made, no further profits should be taxed in India, in respect of advertisement revenues from its own channel ignoring facts: (i) that assessee has dependent agency PE in India in form of SET India Pvt. Ltd.; and (ii) that assessee's income is assessable as business income within meanings of Article 7 of India Singapore DTAA. 2. On facts and in circumstances of case and in law, CIT(A) erred in holding that advertisement revenue pertaining to AXN channel are not taxable in India on ground that assessee has paid arms length price for services rendered by its agent i.e., SET India Pvt. Ltd. and based on provisions of section 9(1)(i) of Act, Article 7(1) of DTAA, and ratio of Circular No. 23 dated 23-7-1969, no income in respect thereof is taxable in India, ignoring fact that: (i) though purchase and sale of airtime is effected in Singapore, receipt in respect of broadcasting advertisement is in territory of India; (ii) income in respect of, or in connection with relay of, advertisements, accrues in India; (iii) assessee has PE in India in form of SET India Pvt. Ltd., and, therefore, advertisement revenue from AXN channel is taxable in India as business income. 3. On facts and in circumstances of case and in law, CIT(A) erred in holding that assessee being non-resident and entire income being subject to tax deduction at source under section 195 of Income-tax Act, 1961, no liability under sections 234B and 234C will arise, ignoring fact: (i) that since tax deducted at source was not adequate to meet entire tax liability, it was obligation on part of assessee to make deficit good by making payment towards advance tax; (ii) that since assessee failed to pay advance tax, Assessing Officer was right in charging interest under sections 234B and 234C of Income-tax Act, 1961. 4. In course of hearing of this appeal, we noticed that first ground of appeal, as reproduced above, is not properly worded inasmuch as it does not correctly bring out controversy requiring our adjudication in appeal. When we pointed this out to parties and suggested that ground be reframed to bring out actual controversy, learned senior counsel kly objected to any reframing of ground of appeal and submitted that such action will amount to changing very complexion of grievance of Assessing Officer. He also submitted that at this stage, it cannot be open to Assessing Officer to modify ground of appeal as hearing of appeal is in progress, and that modification in grounds of appeal, subject to permission of Tribunal, can at best be done before hearing actually commences. In response to our suggestion that ground can be reframed by Tribunal, in exercise of powers vested in us under proviso to Rule 11, learned senior counsel stated such reframing of ground of appeal, which goes beyond controversy actually raised by Assessing Officer, is contrary to scheme of Act. We are, however, not persuaded by objections of learned counsel. These objections proceed on fallacious assumption that Firstly, we do not think that by reframing ground before us, there is any enlargement of subject matter of appeal. reframing of ground has been considered desirable not with view to enlarge scope of appeal, but only with view to provide clarity to real controversy. Secondly, Rule 11 of Appellate Tribunal Rules 1963 specifically provides that 'the Tribunal, in deciding appeal, shall not be confined to grounds set forth in memorandum of appeal...' as long as 'the party who may be affected thereby has had sufficient opportunity of being heard on that ground'. This rule is in conformity of powers of Tribunal laid down under section 254(1) of Act. This sub-section provides that 'Tribunal may, after giving both parties opportunity of being heard, pass such orders thereon as it thinks fit'. We do not see how our reframing of grounds of appeal comes in conflict with scheme of Act. In any event, while learned counsel did submit that such action on our part will amount to functioning of Tribunal contrary to scheme of Act, he did not set out, even after taking note of suggested reframed ground of appeal, any specific propositions in respect of same, or elaborate any further on this issue. In view of foregoing discussions, and bearing in all related facts, we deem it fit and proper to overrule objection of learned senior counsel, and proceed with reframing ground of appeal to bring out true controversy requiring our adjudication. 5. first ground of appeal, having regard to facts and pleadings on record, rival submissions before us, suggestions of parties on reframing ground of appeal, as well as our understanding of core issue requiring our adjudication, is reframed as follows: 'On facts and circumstances of case, learned CIT(A) erred in holding that since assessee has remunerated agent on 'arms' length price' (ALP), no further profits of assessee could be taxed in India other than profits so earned by 'dependent agent' (DA).' outcome of this ground of appeal, as learned representatives agree will solely depend on interpretation of provisions of applicable tax treaty. This reframed ground of appeal was conveyed to parties during course of hearing itself, and both parties have been heard at length on this ground of appeal. It is this ground of appeal which constitutes main issue in cross appeals before us. 6. core issue requiring our adjudication in this case, therefore, is whether or not once 'dependent agent' (DA, in short) is paid arms length price for services rendered by him to foreign company, any further income, other than income so earned by dependent agent, can be said to be attributed to 'dependent agent permanent establishment' (DAPE, in short), and, accordingly, be brought to tax in PE State. This question is in context of India - Singapore Double Taxation Avoidance Agreement [(1994) 209 ITR (Statute)1] - tax treaty, in short. 7. Let us first briefly set out scheme of tax treaty which requires our interpretation. India and Singapore have entered into tax treaty for avoidance of double taxation, titled as India - Singapore Double Taxation Avoidance Agreement [(1994) 209 ITR (Statute)1]. Since dispute before us essentially concerns correct interpretation of this tax treaty, it is essential to set out some of relevant provisions of treaty, and to appreciate connotations and scope of certain technical expressions used therein. We consider it appropriate to first of all take up provisions of Article 5 and Article 7 of tax treaty. These articles are set out below for ready reference: 'Article 5 - Permanent Establishment.-(1) For purposes of this Agreement, term 'permanent establishment' means fixed place of business through which business of enterprise is wholly or partly carried on. (2) term 'permanent establishment' includes especially: (a) place of management; (b) branch; (c) office; (d) factory; (e) workshop; (f) mine, oil or gas well, quarry or any other place of extraction of natural resources; (g) warehouse in relation to person providing storage facilities for others; (h) farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) premises used as sales outlet or for soliciting and receiving orders; (j) installation or structure used for exploration or exploitation of natural resources but only if so used for period of more than 120 days in any fiscal year. (3) building site or construction, installation or assembly project constitutes permanent establishment only if it continues for period of more than 183 days in any fiscal year. (4) enterprise shall be deemed to have permanent establishment in Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for period of more than 183 days in any fiscal year in connection with building site or construction, installation or assembly project which is being undertaken in that Contracting State. (5) Notwithstanding provisions of paragraphs 3 and 4, enterprise shall be deemed to have permanent establishment in Contracting State and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for period of more than 183 days in any fiscal year in connection with exploration, exploitation or extraction of mineral oils in that Contracting State. (6) enterprise shall be deemed to have permanent establishment in Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within Contracting State through employees or other personnel but only if: (a) activities of that nature continue within that Contracting State for period or periods aggregating to more than 90 days in any fiscal year; or (b) activities are performed for related enterprise (within meaning of Article 9 of this Agreement) for period or periods aggregating to more than 30 days in any fiscal year. (7) Notwithstanding preceding provisions of this Article, term 'permanent establishment' shall be deemed not to include: (a) use of facilities solely for purpose of storage, display, or occasional delivery of goods or merchandise belonging to enterprise; (b) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage, display or occasional delivery; (c) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of processing by another enterprise; (d) maintenance of fixed place of business solely for purpose of purchasing goods or merchandise, or of collecting information, for enterprise; (e) maintenance of fixed place of business solely for purpose of advertising for supply of information, for scientific research, or for similar activities which have preparatory or auxiliary character, for enterprise. However, provisions of sub-paragraphs (a) to (e) shall not be applicable where enterprise maintains any other fixed place of business. In other Contracting State through which business of enterprise is wholly or partly carried on. (8) Notwithstanding provisions of paragraphs 1 and 2, where person - other than agent of independent status to whom paragraph 9 applies - is acting in Contracting State on behalf of enterprise of other Contracting State, that enterprise shall be deemed to have permanent establishment in first-mentioned State, if,- (a) he has and habitually exercises in that State authority to conclude contracts on behalf of enterprise, unless his activities are limited to purchase of goods or merchandise for enterprise; (b) he has no such authority, but habitually maintains in first mentioned State Stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of enterprise; or (c) he habitually secures orders in first-mentioned State, wholly or almost wholly for enterprise itself or for enterprise and other enterprises controlling, controlled by, or subject to same common control, as that enterprise. (9) enterprise of Contracting State shall not be deemed to have permanent establishment in other Contracting State merely because it carries on business in that other State through broker, general commission agent or any other agent of independent status, provided that such persons are acting in ordinary course of their business. However, when activities of such agent are devoted wholly or almost wholly on behalf of that enterprise, itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to same common control, as that enterprise, he will not be considered agent of independent status within meaning of this paragraph. (10) fact that company which is resident of Contracting State controls or is controlled by company which is resident of other Contracting State, or which carries on business in that other Contracting State (whether through permanent establishment or otherwise), shall not, of itself, constitute either company permanent establishment of other. Article 7 - Business Profits.-(1) profits of enterprise of Contracting State shall be taxable only in that State unless enterprise carries on business in other Contracting State through permanent establishment situated therein. If enterprise carries on business as aforesaid, profits of enterprise may be taxed. In other State but only so much of them as is directly or indirectly attributable to that permanent establishment. (2) Subject to provisions of paragraph 3, where enterprise of Contracting State carries on business in other Contracting State through permanent establishment situated therein, there shall, in each Contracting State be attributed to that permanent establishment profits which it might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independently with enterprise of which it is permanent establishment. In any case where correct amount of profits attributable to permanent establishment is incapable of determination or determination thereof presents exceptional difficulties, profits attributable to permanent establishment may be estimated on reasonable basis. (3) In determination of profits of permanent establishment, there shall be allowed as deductions expenses which are incurred for purposes of business of permanent establishment including executive and general administrative expenses so incurred, whether in State in which permanent establishment is situated or elsewhere, in accordance with provisions of and subject to limitations of taxation laws of that State. (4) Insofar as it has been customary in Contracting State to determine profits to be attributed to permanent establishment on basis of apportionment of total profits of enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining profits to be taxed by such apportionment as may be customary; method of apportionment adopted shall, however, be such that result shall be in accordance with principles contained in this Article. (5) No profits shall be attributed to permanent establishment by reason of mere purchase by that permanent establishment of goods or merchandise for enterprise. (6) For purpose of preceding paragraphs, profits to be attributed to permanent establishment shall be determined by same method year by year unless there is good and sufficient reason to contrary. (7) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then provisions of those Articles shall not be affected by provisions of this Article. (8) For purpose of paragraph 1, term 'directly or indirectly attributable to permanent establishment' includes profits arising from transactions in which permanent establishment has been involved and such profits shall be regarded as attributable to permanent establishment to extent appropriate to part played by permanent establishment in those transactions, even if those transactions are made or placed directly with overseas head office of enterprise rather than with permanent establishment.' 8. plain reading of Article 5(1) makes it clear that permanent establishment implies 'a fixed place of business through which business of enterprise is wholly or partly carried on'. Article 5(2) describes as to what could constitute fixed place of business and, being illustrative in nature in that respect, it sets out whole list of things which could possibly be construed as fixed place of business. It includes place of management, branch, office, factory, workshop, mine, oil or gas well, quarry or any other place of extraction of natural resources, warehouse in relation to person providing storage facilities for others, farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on, premises used as sales outlet or for soliciting and receiving orders installation or structure used for exploration or exploitation of natural resources. common thread in all these things is that enterprise can carry on business through these establishments. Generally, therefore, enterprise of contracting state is said to have permanent establishment in other contracting state when such enterprise has fixed place of business in that other contracting state through which business of enterprise has wholly or partly carried on. However, in modern age where business is not always carried on, particularly outside national frontiers of enterprise, through fixed place of business of its own, as is lowest common denominator in all situations visualized in Article 5(2), there is deeming provision in Article 5(8) which deals with situation when enterprise carries on business through agent in other contracting state. This refers to deeming fictions whereby even in cases where enterprise does not have fixed place of business in other contracting state, of nature described in Article 5(2) or otherwise, enterprise will still be deemed to have permanent establishment. Article 5(8) provides that where agent, other than independent agent to which Article 5(9) applies, satisfies one of conditions set out in Article 5(8)(a), 5(8)(b) or 5(8)(c), 'the enterprise shall be deemed to have permanent establishment' in other contracting state. In simple terms, therefore, when enterprise acts in other contracting state through 'dependent agent' who satisfies at least one of tests set out in Article 5(8), such enterprise is deemed to have permanent establishment in other contracting state. This deemed PE, for sake of convenience, we shall refer as 'Dependent Agent PE' (DAPE, in short). It is wholly hypothetical and fictional, because, in strict-sense of word, there is no PE at all. How can one have permanent or even non-permanent establishment, when there is no establishment at all. It is, however, important to note that what is defined as permanent agent is not dependent agent per se, but, on contrary, it is by virtue of enterprise having dependent agent that enterprise is 'deemed to have permanent establishment'. dependent agent cannot, strictly speaking, be termed as PE because neither Dependent Agent belongs to PE, nor can one have something as result of having same thing, i.e., if dependent agent is itself PE, one cannot have PE as result of having dependent agent. In such case, treaty could have simply stated that dependent agent or agency shall be deemed to be PE of enterprise; there w s no need to say, as has actually been said, that enterprise shall be deemed to have PE by virtue of having dependent agent and meeting one of tests set out in relevant sub-article. Dependent Agent and Dependent Agent PE, therefore, cannot be one and same thing. Though at cost of repetition, we consider it necessary to reproduce provisions of Article 5(8) which deal with this provision. '8. Notwithstanding provisions of paragraphs 1 and 2, where person - other than agent of independent status to whom paragraph 9 applies - is acting in Contracting State on behalf of enterprise of other Contracting State, that enterprise shall be deemed to have permanent establishment in first-mentioned State, if,- (a) he has and habitually exercises in that State authority to conclude contracts on behalf of enterprise, unless his activities are limited to purchase of goods or merchandise for enterprise; (b) he has no such authority, but habitually maintains in first mentioned State Stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of enterprise; or (c) he habitually secures orders in first-mentioned State, wholly or almost wholly for enterprise itself or for enterprise and other enterprises controlling, controlled by, or subject to same common control, as that enterprise.' [Emphasis Supplied] 9. rationale for dependent agent permanent establishment is simple. foreign enterprise may chose between performing business activity itself, and having it done through domestic agent. In case, foreign enterprise prefers to perform business activity through domestic agent, he does not need to depend on right to use fixed place of business. business activity is carried out through agent, and dependent agent at that. However, taxation would infringe neutrality in event tax position of foreign enterprise is to depend on whether business activity is carried out by foreign agent directly or whether foreign enterprise conducts business activity through agent - who, being dependent agent, is integrated into principal's business to large extent. In case, tax position is to vary based only on whether or not business activities are carried out directly or through agent, it would be bit too easy to circumvent PE taxation if no PE taxation is to be applied to dependent agent permanent establishment. Whether one carries on business directly or through dependent agent, profit attributable to such business continue to be taxable in source country. This is unmistakable underlying principle behind dependent agent permanent establishment clause in treaties. This next issue is then how do you compute profits of this fictional or hypothetical PE. 10. Article 7(1) provides that when enterprise has PE in other contracting state, profits of enterprise shall be taxed in that other state but 'only so much of them as is directly or indirectly attributable to that permanent establishment'. This expression in fact narrows down scope of taxability in that other contracting state by excluding profits derived by such enterprise in source state independently of permanent establishment. There is no scope of application of any specific or implied force of attraction rule, as, for example, embedded in Article 7 of UN Model Convention. basic philosophy underlying force of attraction rule is that when enterprise sets up permanent establishment in another country, it brings itself within fiscal jurisdiction of that another country, to such degree that such another country can properly tax all p *** DEPUTY DIRECTOR OF INCOME TAX v. SET SATELLITE (SINGAPORE) PTE. LTD.
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