Factors leading to formation of Dependent Agency Permanent Establishment
- The Assessee was a company, incorporated and fiscally domiciled in the United Kingdom, and was said to be engaged in the business of shipping. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the Assessee had earned freight income of Rs 5.48 crores, which was claimed to be exempt under article 9 of the Indo UK Double Taxation Avoidance Agreement. The Assessing Officer did not accept the claim. The Assessing Officer was of the view that the provisions of Article 9 did not apply to the facts of this case.
- Suffice to say that having rejected the claim as such, the Assessing Officer proceeded to hold that the Assessee had a Dependent Agency Permanent Establishment in India, inasmuch as the Assessee had a dependent agent in India by way of Freight Connections India Pvt Ltd, and, in support of this conclusion, the Assessing Officer highlighted certain parts of the agency agreement between the Assessee and Freight Connections India Pvt Ltd. The Assessing Officer then proceeded to attribute 10% of the freight income as income attributable to the Dependent Agency Permanent Establishment. The income of the Assessee was, accordingly, assessed at Rs. 54.84 lakhs.
- Reliance was placed on the decision of Hon’ble High Court in the case of Set Satellite, wherein reliance was placed on Hon’ble Supreme Court’s judgment in the case of CIT Vs Morgan Stanley & Co Inc, which concluded that if the correct arm’s length price was applied and paid then nothing further would be left to be taxed in the hands of the Foreign Enterprise. Having regard to the fact that the payment of arm’s length remuneration to the agent, and taxability of income embedded in such payment in India, was not even in dispute before the Court, the stand of the authorities could not be approved. Given this finding, it was immaterial as to whether the Dependent Agency Permanent Establishment existed or not, for the simple reason that, as the binding legal position was, the existence of Dependent Agency Permanent Establishment was wholly tax neutral. On a conceptual note, a permanent establishment, whether a fixed base permanent establishment, Dependent Agency Permanent Establishment or any other type of permanent establishment, provides for threshold limits to trigger taxation in the source state, but then if as a result of a Dependent Agency Permanent Establishment, no additional profits, other than agent’s remuneration in the source country – which was taxable in the source state anyway de hors the existence of permanent establishment, become taxable in the source state, the very approach to the Dependent Agency Permanent Establishment profit attribution may indeed seem incompatible with the above legal position. It may sound incongruous from an academic point of view but then that’s what the law is.
- Once an agent has been paid arm’s length remuneration, and the income embedded in such remuneration has been taxed in India, no further profits can be taxed in the hands of the Dependent Agency Permanent Establishment. Accordingly, the action of the authorities, in bringing income of the Dependent Agency Permanent Establishment – independent of the agency remuneration received by the agent of the Assessee, was unsustainable in law.