Income Tax, Issue Update

Factors leading to formation of Dependent Agency Permanent Establishment

Case: Mitsui And Co. Ltd vs Dy. DIT, Delhi ITAT

The issue in this case revolves around factors leading to formation of Dependent Agency Permanent Establishment.

Based on an earlier decision, involving the assessee, Delhi ITAT inferred that MIPL, its Indian entity, was economically dependent on Mitsui & Co. as major revenue came from it.

To qualify as a PE based on the India-Japan tax treaty, MIPL the Indian entity of Mitsui and Co. had to meet one of the following conditions:

  1. Habitually exercise authority to conclude contracts. 
  2. Habitually maintain a stock of goods or merchandise.
  3. Habitually securing orders for the Assessee.

While conditions 1 & 2 were not true, the only condition in question was the third.

As per the bench none of the activities performed by MIPL could be concluded as securing orders for Mitsui, especially not on a habitual basis. See Facts & Key Points.


  • The Assessee was a company incorporated in Japan and was one of biggest trading houses of the world. The Assessee was involved in trading from needle to airplane engines. The Assessee also undertook several projects in connection with big industrial installations power projects. The Assessee filed the return of income on 15.10.2010 declaring income of Rs. 2.87 crore. The Assessing Officer during the course of assessment proceedings noted that the Assessee had received consideration for executing two projects, namely, Teesta & Purulia Projects.
  • The Assessee had entered into contracts with National Hydroelectric Power Corporation Ltd. (NHPC) on 06.12.2001 for carrying out Electrical and mechanical Works of Teesta H.E. Project [3 X 1 70 MW (Stage-V) Sikkim, India]. In view of the discussions between the Assessing Officer and the Assessee, the Assessing Officer had held that MIPL was Dependent Agent Permanent Establishment(DAPE) of Mitsui & Co. Japan in India. Accordingly, the Assessing Officer computed the taxable profits attributable to Indian operation at 50% and made addition of Rs. 1.86 crore to the total income of the Assessee.

Key points

  • Reliance was placed on the decision of Delhi Income Tax Appellate Tribunal in Assessee’s own case for the A.Y. 2005-06, wherein it was concluded that as per clause 7 of India-Japan tax treaty, a person other than an independent agent is treated as Permanent Establishment if he fulfilled any of the three conditions, (a), (b) or (c) of clause 7. It was not the case of the Assessing Officer that MIPL habitually exercised authority to conclude contracts. It was also not the case of the Assessing Officer that MIPL habitually maintained a stock of goods or merchandise. Thus, the conditions of (a) and (b) were not fulfilled. The third condition in (c) was habitually securing orders for the Assessee. As per the agreement which had been quoted by the Assessing Officer in the assessment order, MIPL was supposed to put best effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/ take care of the visitor from Japan, to make the best effort to analyse the feasibility report. None of these clauses could be interpreted to mean that MIPL was securing orders. On the basis of this clause, the Assessing Officer was wrong in assuming that MIPL is securing orders. The Assessing Officer had not brought any other material to substantiate his allegation that may demonstrate that MIPL had secured orders for the Assessee. It was to be noted that this clause (c) uses the word ‘habitually secures orders’. Thus, there had to be procurement of orders habitually. As against this the Assessee’s contention had been that MIPL was only providing support services and it was not securing order on behalf of Assessee company. It was further relevant to further mention that the expression ‘has’ shall mean a legal existence. Whereas ‘habitually secures orders’ shall mean a systematic conduct on the part of the agent. Thus, it was not only a legal right to secure order but also it was to be found, as a matter of fact that agent has habitually secured order. Further, in this case the Transfer Pricing study of MIPL was subject matter of examination by the Transfer Pricing Officer. The FAR (Function performed, Assets deployed and Risk assumed) analysis was accepted by the Transfer Pricing Officer. These agreements on the basis of which Assessing Officer had levied the allegation were also before the Transfer Pricing Officer. Thus, there could not be any allegation that MIPL had performed any function beyond what had been stated. Functional and economic analysis of the transactions entered into having been examined nothing further could be imputed. The services of MIPL to Assessee Company were support services similar to the activities of a Liaison Office. This fact also got supported from the finding recorded by the Assessing Officer himself, whereby it had been stated by the Assessing Officer that MIPL was functioning in the same manner as the Liaison Offices of the Assessee were functioning in India. It had already been held that Liaison Offices did not constitutes Permanent Establishment in India. Thus, the functioning of MIPL though a subsidiary and a company incorporated in India but its activities vis-à-vis Assessee Company were akin to liaison office. It did not have authority to conclude contract, it was not maintaining any stocks of goods and merchandise nor it was securing order for the Assessee Company. In view of the these facts the contention that MIPL habitually secured order for the Assessee Company was rejected and accordingly, none of the conditions prescribed in Article 5(7) were fulfilled. The second contention was that MIPL was economically dependent on Assessee Company as major revenue of MIPL was from Assessee Company. This per se could not be ground to hold that MIPL was a Dependent Agent. For invoking this clause, first one of the three conditions needed to be fulfilled. It was already held that MIPL did not get covered as Permanent Establishment under Article 5(7), it could not be considered to be a Dependent Agent. Thus, the fact that MIPL was controlled by the Assessee Company did not mean that MIPL was a Permanent Establishment of the Assessee Company.
  • Hence, it was inferred that Assessee was not a Dependent Agent Permanent Establishment and accordingly, no income was attributable.

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