Factors leading to the formation of Dependent Agency Permanent Establishment
- The Assessee was an associate company of a company incorporated in Germany and was engaged in the business of manufacturing car and selling them worldwide and was appointed as exclusive distributors of its cars in India. During the year under consideration, the Assessee offered Fees from Technical Services (information technology fees, market fees, conference and training fees and other professional fees consulting fees) and interest income in its return of income.
- During the year under consideration, the Assessee was asked to show cause as to why, as per the draft assessment order of the assessment year 2009-10 to 2013-14, the Assessee was not a permanent establishment in India within the meaning of Article 5(1) and Article 5(5) of the tax treaty through its dependent agent. Accordingly, income attributed to the permanent establishment was proposed to tax in India.
- Merely acting for a non-resident principal would not by itself render an agent to be considered as a permanent establishment to allocate profits taxable in the hands of the principal. There should be some specific activity of the permanent establishment to which profits can be attributed. Unless it was so established, merely calling a person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as an agency permanent establishment and pro-rata part of the profits of the non-resident was liable to be taxed in India.
- In the instant case, the Revenue had not established that the associated company had carried out any activity to which any profit could be attributed. It was merely carrying out the work of a post office transferring communication from one to another. Therefore, the Tribunal held that it was not convinced that the department had established that the activity of Assessee, even if it is to be considered as Permanent Establishment had resulted in any profits to the Assessee and in view of the specific provisions of the Article 7 of the tax treaty between Indian and Germany no part of the profit of the non-resident Assessee could be attributed to the activity in India.
- Thus, the income from the sale of cars was not taxable in India as it did not give rise to any business connection in India or permanent establishment in India in terms of Article 5 of the India-Germany tax treaty.