Under India-France DTAA as long as it is shown that the transactions between the agent and the principal are made under arm’s-length conditions, the agent would be treated as that of independent status even if he deals exclusively for one principal.
The ‘profit neutrality’ theory on account of arm’s-length remuneration to a dependent agent PE (DAPE) may not always hold good as the dependent agent (DA) may not be compensated for entrepreneurial risks that may arise to the principal.
Facts:
Taxpayer, a French company (FCO), is engaged in the business of operation of ships in international traffic.
FCO carried on operations in India through agents who handled the work at most of the Indian ports. The agents were responsible for all clearances from Government departments.
The Tax Department held that as business of FCO was carried out through a fixed place by an agent in India, wherein the agent was to maintain the office for the principal duly equipped, it could be said that FCO had PE in India. The Tax Department attributed 10% of the gross receipts from India to agency PE.
FCO contended that it did not have a PE in India under the DTAA, hence its business profits could not be taxed in India. In any case, due to arm’slength principal, there was no attribution of profit.
Held:
As the Dispute Resolution Panel (DRP) upheld the AO’s contention, appeal was preferred to ITAT. ITAT accepted contentions of FCO and held that FCO did neither have basic rule PE, nor agency PE. On Basic PE rule
The Agency PE rule specifically overrides the Basic PE rule.
The very business model of business of FCO being carried out through an agent is such that it does not ordinarily admit the possibility of a PE under the Basic PE rule.
In case of Airlines Rotables Ltd.2, UK it was observed that the following three criteria are embedded in the definition of the Basic PE rule:
- Physical criterion i.e., existence of a physical location.
- Subjective criterion i.e., right to use that place.
- Functionality criterion i.e., carrying out of business through that place.
In the agency business model, the above three parameters are not satisfied. Under such a model, the business of the foreign enterprise is carried out by the agent, and the principal does not have the powers, as a matter of right to use the agent’s place for carrying out its business, nor does it have the right of disposal of that place.
On DAPE
The France DTAA in Article 5(5) and Article 5(6) contains the scope of the DAPE. Article 5(5) provides the situations in which business being carried on through a DA creates a PE.
Under Article 5(6) of India-France DTAA even when an agent is wholly or almost wholly dependent on the foreign enterprise, it would still be treated as an independent agent, if the transactions are at arm’s length.
The sine qua non for constituting a DAPE under the France DTAA is the finding that the transaction is not carried out at arm’s length. No such finding was given by the Tax Department.
In absence of findings by the Tax Department or the DRP, FCO does not have a PE in India.
On profit attribution
One of the issues raised was about tax neutrality for the taxpayer even assuming there is emergence of PE. The ITAT ruled that the issue is academic in the facts of the case as DAPE did not exist. ITAT did however caution that the tax neutrality theory (i.e., once the agent is paid at arm’s length no further attribution can be made to PE) on account of existence of DAPE may not always hold good, as the DA may not be compensated for the risks that may arise to the principal.
