Section 195 — Article 5 of US DTAA — Sales, support and marketing activities of independent nature by an Indian affiliate — Not to result in PE for USCO — Contracts entered on principal to principal basis and all operations carried out and concluded outside India.
Facts:
The taxpayer was a manufacturer of high performance chemicals, a company incorporated in and a tax resident of the US (USCO).
Indian Company (ICO) was a JV between IOC (Indian Oil Corporation) and USCO. ICO was primarily engaged in the business of manufacture of various products. In addition, ICO also agreed to render to USCO assistance pursuant to an Exclusive Sales Representation Agreement. In terms of the agreement, ICO solicited orders for the products. All orders received by ICO were forwarded to USCO for acceptance or rejection and ICO did not have any authority in that regard or in regard to prices to be charged.
ICO was required to inform USCO of business opportunities; tenders and competitive bids received from customers, make reasonable efforts to promote sale and distribution of the products of USCO. ICO assumed no responsibility for the quality of the products, creditworthiness of customers etc. Service fees constituted very small portion of overall turnover of the company and was calculated based on shipments of the products resulting from orders which were submitted by ICO.
USCO was of the view that no income was taxable in India since (a) USCO did not carry on business in India; (b) Transfer Pricing Officer had accepted the price to be arms length. (c) In absence of any form of PE no part of income could be taxed in India. To support that there was no PE in India, USCO also urged that ICO could not be considered as dependent agent as it did not ‘secure orders’ on behalf of USCO.
The Assessing Officer took a view that ICO was a virtual projection of USCO in India and it constituted a sole/exclusive agency of USCO in India. Consequently profits being 5% of sales made by USCO were attributed in the hands of USCO, in addition to commission which was paid to ICO.
USCO filed objections before the Dispute Resolution Panel which upheld the order of Assessing Officer. On appeal to the Tribunal.
Held:
ICO had an independent business of manufacture of various products in India. It had its own marketing network in India for sale of various products. Commission received by ICO in India accounts for only 0.18% of its sales. USCO did not have a PE in India as
(a) Sales were made on principal-to-principal basis to Indian customers.
(b) ICO did not have the authority to negotiate the terms of the contract and contracts were concluded only when the purchase order was accepted by USCO.
(c) USCO did nott have any right to use ICO’s premises in India.
Thus in absence of PE, no profits could be attributed to USCO and mere presence of someone acting on behalf of USCO was not sufficient to give rise to PE.
