Article 5(4), 7(1), 13(4) of India-UK DTAA, Section 195(2) of Income-tax Act — Commission earned by UK company from its Indian WOS for providing support services taxable as business income — Accrual by virtue of parent company’s business connection/operations in India — Circular No. 23, dated 23-7-1969 cannot be relied on after its withdrawal.
Facts:
UKCO is engaged in international business of shipbroking services and has an extensive worldwide network with international ship-owners. ICO, a wholly-owned Indian subsidiary of UKCO, is engaged in the business of ship-broking and transportation of cargo from India.
ICO entered into a service agreement with UKCO, in terms whereof UKCO was required to provide the following services:
— Identifying potential international ship-owners outside India and referring them to ICO and facilitating their interaction with ICO
— Co-coordinating with ship-owners regarding availability of ships on requisite dates.
As per the agreement, ICO was to pay 50% of commission earned to UKCO.
ICO applied to the Assessing Officer (AO) for remitting payments to UKCO, without deducting tax at source. ICO contended that the commission payable to UKCO was not chargeable to tax in India. The AO rejected the contentions of ICO and held that it was an agent of UKCO as it was effectively procuring business for UKCO. The activities of ICO were carried out wholly and exclusively for UKCO and commission payment to UKCO was 50% of overall commission of ICO’s income. Hence ICO triggered agency PE of UKCO in India and its profits attributable to Indian operations would be taxable in India. The CIT(A) held that commission received by UKCO was not taxable in India as it pertained to remuneration for commercial services rendered outside India.
On an appeal by the Department to the Tribunal:
Held:
Contention of ICO that commission was paid to UKCO for services rendered outside India and the customers instead of paying the commission to UKCO, directly paid UKCO through ICO was selfserving and without any substantive proof.
Commission paid to UKCO by ICO in respect of services may ultimately result in business to ICO in India and commission paid by ICO to UKCO accrued to UKCO by virtue of its business connection in India and the same is liable to tax as business income in India. Reliance on Circular No. 23 was not permissible as the same had been withdrawn in 2009. Even otherwise applicability of the Circular was doubtful as the same had been issued in the context of sale of goods and may not apply in a case of rendering of services.
However the fact that ICO was a wholly-owned subsidiary of UKCO and that ICO worked only for UKCO would have a substantial bearing on the case. In the light of the same, the case was remanded to the Assessing Officer to reconsider the issue.
