Profits attributable to Dependent Agent Permanent Establishment Taxable in India
September, 28th 2011
The assessee, a Singapore company, rendered repair and maintenance services and supplied spares to customers in India. While the income from repairs was offered to tax as fees for technical services, the income from supply of spares was claimed to be not taxable on the ground that it had accrued outside India. The AO, CIT (A) and Tribunal took the view that the assessee had a permanent establishment on the basis that it had a dependent agent in India under Article 5(9) of the India-Singapore DTAA and that the income earned from supplying spare parts was taxable in India. The AO held that 25% of the profits on sales of spare parts were chargeable to tax which was reduced to 10% by the CIT (A) & the Tribunal. On appeal to the High Court, HELD:
(i) To constitute a Dependent Agent Permanent Establishment under Article 5(9) of the DTAA it has to be seen whether the activities of the agent are devoted wholly or almost wholly on behalf of the assessee. While the issues as to (a) whether the agent is was prohibited from taking competitive products and (b) whether the assessee exercised extensive control over the agent were relevant, they are not conclusive. It is not correct to say that merely because the agent is prohibited from taking a competitive product means that it is not an agent of independent status. What has to be seen is whether the activities of the agent are devoted wholly or almost wholly on behalf of the assessee. If the assessee can show that it was not the sole client of the agent and that activities of the agent were not devoted wholly or almost wholly on behalf of the assessee, there may be no DAPE. The income earned by the agent from other clients and the extent of such income is very relevant to decide whether the criteria stipulated in Article 5(9) is satisfied or not. (Matter remanded for fresh consideration);
(ii) While in principle it is correct that if a fair price is paid by the assessee to the agent for the activities of the assessee in India through the DAPE and the said price is taxed in India at the hands of the agent, then no question of taxing the assessee again would arise, this is subject to a Transfer Pricing Analysis being undertaken u/s 92. The facts showed that the manner in which the commission/ remuneration had been fixed was usually not done between independent parties in an uncontrolled transaction. The assessee was in a position to dictate terms to the agent and so it could not be said that the commission was at arms length within the meaning of Article 7 (2) of the DTAA. The Transfer Pricing analysis to determine the arms length price has to be done by taking the Functions, Assets used and Risk involved (FAR). As this has not been done, the assessees argument on arms length price is not acceptable (Morgan Stanley 292 ITR 416 (SC) & Set Satellite (Singapore) 307 ITR 205 (Bom) distinguished);
(c) As the commission paid by the agent to the DAPE is not at arms length, the estimation that 10% of the profits on sales of spare parts were attributable to the activities carried out by the agent in India and taxable is reasonable. The test is profits expected to make and has to be determined bearing in mind the fact that the agent was merely rendering support services and had no authority to negotiate and accept contracts and also assumed limited risk.