+ Ita 1288/2006 Director Of Income Tax Intn'l v. Western Union Financial Services Inc

IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment reserved on: 19 September 2024 Judgment pronounced on: 18 December 2024 + ITA 1288/2006 DIRECTOR OF INCOME TAX INTN'L .....Appellant Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC. versus WESTERN UNION FINANCIAL SERVICES INC. .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 724/2016 PR.COMMISSIONER OF INCOME TAX .....Appellant Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC. Ms. Pratishtha, JSC. versus WESTERN UNION FINANCIAL SERVICES .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 192/2019 COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION)- 3 .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus Signature Not Verified WESTERN UNION FINANCIAL SERVICES INC. .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 126/2016 DIRECTOR OF INCOME TAX-II .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus WESTERN UNION FINANCIAL SERVICES INC. .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 141/2016 –DIRECTOR OF INCOME TAX II –II .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus WESTERN UNION FINANCIAL SERVICES INC .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 235/2019 THE COMMISSIONER OF INCOME TAX-–INTERNATIONAL TAXATION 3 – 3 .....Appellant Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC. versus WESTERN UNION FINANCIAL SERVICES INC. .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 237/2019 THE COMMISSIONER OF INCOME TAX-–INTERNATIONAL TAXATION 3 – 3 .....Appellant Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC. versus WESTERN UNION FINANCIAL SERVICES INC. .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 110/2024 THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -3 .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus WESTERN UNION FINANCIAL SERVICES INC .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 111/2024 THE COMMISSIONER OF INCOME TAX - Signature Not Verified INTERNATIONAL TAXATION -3 .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus WESTERN UNION FINANCIAL SERVICES INC .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 597/2019 THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -3 .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus WESTERN UNION FINANCIAL SERVICES INC .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. CORAM:HON'BLE MR. JUSTICE YASHWANT VARMA HON'BLE MR. JUSTICE RAVINDER DUDEJA J U D G M E N T YASHWANT VARMA, J. 1.These batch of appeals emanate from judgments handed down by the Income Tax Appellate Tribunal[1] negating the stand of the appellant and principally holding that the respondent-assessee did not 1Tribunal Signature Not Verified .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. + ITA 597/2019 THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -3 .....Appellant Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv. versus WESTERN UNION FINANCIAL SERVICES INC .....Respondent Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates. CORAM:HON'BLE MR. JUSTICE YASHWANT VARMA HON'BLE MR. JUSTICE RAVINDER DUDEJA J U D G M E N T YASHWANT VARMA, J. 1.These batch of appeals emanate from judgments handed down by the Income Tax Appellate Tribunal[1] negating the stand of the appellant and principally holding that the respondent-assessee did not 1Tribunal Signature Not Verified have a Permanent Establishment[2] in India in the relevant Assessment Years[3] as contemplated under Article 5 of the Double Taxation Avoidance Agreement[4] between India and the United States of America[5]. The appeals themselves pertain to AYs 2001-02 , 2002-03 , 2003-04 2004-05 , 2006-07 , 2007-08 , 2008-09 , 2011-12 , 2013-14 and 2015-16 . 2.The Tribunal had rendered its principal decision on 10 March 2006 while dealing with the appeal pertaining to AY 2001-02 and which decision has been followed in the subsequent years. We had in terms of our order dated 20 July 2009 admitted ITA 1288/2006 on the following question of law:- ―Whether on facts, income earned from customers outside India is liable to tax in India under AADT with USA‖ The remainder of the appeals subsequently came to be tagged with ITA 1288/2006 and were admitted on similar questions of law. 3.From the material placed before us as well as the submissions addressed by learned counsels appearing for respective sides, the following would appear to be the uncontested facts and which we for the sake of convenience glean from the material placed on the record by way of ITA 1288/2006. 4.The respondent-assessee is stated to be a non-resident company registered in USA and has been engaged in the business of rendering 2 PE 3 AYs 4 DTAA 5 USA Signature Not Verified Money Transfer Services[6] since 1890. The essential business model adopted by it has been recorded by the Tribunal to be as follows. A person residing in USA desirous of transferring money to an individual or an entity in India, approaches a branch or an outlet of the assessee and transfers the money in USDs, together with the charges prescribed by the respondent-assessee. Upon receipt of that money, the respondent-assessee generates a unique number which is referred to as the Money Transfer Control Number[7]. It is this MTCN which is communicated by the remitter to the person or entity situate in India. 5.The beneficiary of that remittance residing in India then approaches the representative/agent of the respondent-assessee along with the MTCN details. Upon verification of the MTCN with the aid of a software owned by the respondent-assessee, the MTCN, once matched, leads to the transaction being honoured. This is, of course, subject to the Indian agent of the respondent-assessee satisfying itself with respect to the identity of the recipient. 6.It has further come to be noted by the Tribunal that for the purposes of the aforesaid business, the respondent-assessee had entered into agreements appointing agents in India and which included the Department of Posts, Commercial Banks, Non-Banking Financial Companies[8] and Tour Operators. In terms of the agency agreements which came to be executed between the respondent-assessee and the Indian agents, the agreement was initially to run for a period of five years and was extendable thereafter. In the shape of remuneration, the Department of Posts was entitled to charge 30% of the remittance made 6 MTS 7 MTCN 8 NBFCs Signature Not Verified 6.It has further come to be noted by the Tribunal that for the purposes of the aforesaid business, the respondent-assessee had entered into agreements appointing agents in India and which included the Department of Posts, Commercial Banks, Non-Banking Financial Companies[8] and Tour Operators. In terms of the agency agreements which came to be executed between the respondent-assessee and the Indian agents, the agreement was initially to run for a period of five years and was extendable thereafter. In the shape of remuneration, the Department of Posts was entitled to charge 30% of the remittance made 6 MTS 7 MTCN 8 NBFCs Signature Not Verified and in the case of all others, the remuneration was fixed at 25%. The aforesaid payment, which was in the nature of a commission, was described as the ―base compensation‖ in the agency agreements. 7.For the purposes of facilitating its business and undertaking promotional activities, the respondent-assessee is also stated to have applied to the Reserve Bank of India[9] for grant of requisite permissions as contemplated under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973[10]. Basis the permission granted, it also established an office in India and posted a representative therein. This office was described to be the Liaison Office[11], manned by one manager and supporting staff. 8.As per the disclosures made, the respondent-assessee had made a declaration before the RBI that the said LO would not represent any party other than Western Union Financial Services. The annexure to that application enumerated the following activities/services which would be undertaken by the LO:- ―The Liaison office shall undertake the following liaison activities/services: (a)Distribute brochures and literature describing the activities of Western Union Financial Services, Inc. ("Western Union"). Western Union Financial Services, Inc. ("Western Union"). (b)Maintain liaison contact with government authorities and officials of the government, its agencies and other organizations and associations. officials of the government, its agencies and other organizations and associations. (c)Maintain and develop the relationship of mutual understanding and co-operation between Western Union and India. and co-operation between Western Union and India. (d)Address seminars on Western Union‘s activities. (e)Put interested parties in direct contact with Wester Union‘s principal offices. principal offices. 9 RBI 10 1973 Act 11 LO Signature Not Verified (f)Explore legal, commercial and regulatory feasibility of setting up subsidiaries, affiliates, partnerships, joint ventures, licensing arrangements, etc. up subsidiaries, affiliates, partnerships, joint ventures, licensing arrangements, etc. (g)Keep in touch with the economic developments. (h)Gather commercial and marketing data and information, including its assessment of the requirements of the private sector and of the government. including its assessment of the requirements of the private sector and of the government. (i)Gather, receive and transmit message/information from customers and other interested parties to Western Union‘s offices. customers and other interested parties to Western Union‘s offices. (j)Assist personnel from Western Union during their visits to India, making travel arrangements and arranging appointments with customers and other concerned parties, agencies, government officials, etc. making travel arrangements and arranging appointments with customers and other concerned parties, agencies, government officials, etc. (k)Investigate business opportunities in the Western Union range of activities and develop business contacts. activities and develop business contacts. The Liaison Office will not: (a)Undertake any commercial, trading or industrial activity in India. India. (i)Gather, receive and transmit message/information from customers and other interested parties to Western Union‘s offices. customers and other interested parties to Western Union‘s offices. (j)Assist personnel from Western Union during their visits to India, making travel arrangements and arranging appointments with customers and other concerned parties, agencies, government officials, etc. making travel arrangements and arranging appointments with customers and other concerned parties, agencies, government officials, etc. (k)Investigate business opportunities in the Western Union range of activities and develop business contacts. activities and develop business contacts. The Liaison Office will not: (a)Undertake any commercial, trading or industrial activity in India. India. (b)Sign any commercial agreement (except those directly incidental to the conduct of operations of the liaison office such as office leases, employment of local personnel, car rental, etc.) incidental to the conduct of operations of the liaison office such as office leases, employment of local personnel, car rental, etc.) (c)Have any power of attorney to participate in any commercial, trading or industrial activity and/or negotiate any related contracts; trading or industrial activity and/or negotiate any related contracts; (d)Have any authority to bind Western Union companies in any manner in connection with commercial, trading or industrial matters; manner in connection with commercial, trading or industrial matters; Be allowed or entitled to receive any monies on account of commissions, fee or remuneration or otherwise in regard to any commercial, trading or industrial activity‖ 9.The aforesaid application came to be approved by the RBI with it being noted that the said permission would be for a period of three years ―for the purpose of undertaking liaison activities viz., to act as a communication channel between Head Office and parties in India‖.Apart from the aforesaid and as the Tribunal records in para 5 of its judgment, the following additional conditions came to be imposed by the RBI:- ―(i)Except the liaison work, the office in India will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without our prior permission. any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without our prior permission. (ii)No commission/fees will be charged or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India. remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India. (iii)The entire expenses of the office in India will be met exclusively out the funds received from abroad through normal banking channels. exclusively out the funds received from abroad through normal banking channels. (iv)The office in India shall not borrow or lend any money from/to any person in India without our prior permission. from/to any person in India without our prior permission. (v)The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. (vi)The office in India will furnish to our Mumbai Regional office (on a yearly basis): office (on a yearly basis): (v)The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. (vi)The office in India will furnish to our Mumbai Regional office (on a yearly basis): office (on a yearly basis): (a)a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; the year no income was earned by/or accrued to the office in India; (b)details of remittances received from abroad duly supported by Foreign Inward Remittance Certificate; supported by Foreign Inward Remittance Certificate; (c)certified copy of the audited final accounts of the office in India; and in India; and (d)annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during the period m respect of which the office had rendered liaison services. stating therein the details of actual export or import, if any, effected during the period m respect of which the office had rendered liaison services. (e)The number of staff engaged/appointed and duties assigned to each staff. assigned to each staff. (vii)The liaison office will not render any consultancy or any other services directly/indirectly with or without any consideration. other services directly/indirectly with or without any consideration. (viii)The liaison office will not have signing/commitment powers except than those which are required for normal functioning of liaisoning office on behalf of the Head Office.‖except than those which are required for normal functioning of liaisoning office on behalf of the Head Office.‖ 10.It has further come on record that the respondent-assessee in terms of the conditions imposed by the RBI had also submitted activity reports pertaining to its LO periodically. One such report which has been noticed in para 6 of the order of the Tribunal is extracted hereinbelow:- ―Activity Report of the Liaison Office Report for the period: 1 January 2000 to December 2000 The liaison office acted as a communication linkbetween the agents and the Head Office of Western Union International. The Liaison office trained and installed one new Agent - Bank of Madura Ltd. After they received final approval from the Reserve Bank of India. The Liaison office visited the Head Office locations of the Agents and offered training and refresher courses in the areas of Western Union Operations, Customer Service Standard, Security Standard, accounting and reconciliation procedures, telecommunications and systems configuration, merchandising standards and Reserve Bank of India guideline. The Liaison office communicated procedures to all Agents to ensure a smooth roll over Y2K. The Liaison office organized local production of posters and merchandising material for the Agents to display at their locations. The Liaison office facilitated the visit of the Director Operations of Western Union International to visit with Agents and review their quality operational standards. The Liaison Office provided the latest Western Union Agent Management Software - VOYAGER to the Agents and trained the staff on the usage and versatility. List of Employees: Harsh Lambah Business Development Manager Shekhar Nair Regional operations Manager‖ The Liaison office communicated procedures to all Agents to ensure a smooth roll over Y2K. The Liaison office organized local production of posters and merchandising material for the Agents to display at their locations. The Liaison office facilitated the visit of the Director Operations of Western Union International to visit with Agents and review their quality operational standards. The Liaison Office provided the latest Western Union Agent Management Software - VOYAGER to the Agents and trained the staff on the usage and versatility. List of Employees: Harsh Lambah Business Development Manager Shekhar Nair Regional operations Manager‖ 11.For AY 2001-02, the respondent-assessee is stated to have paid a total commission of INR 12,16,94,036/- to its agents situate in India being equivalent to USD 2,663,472/-. On 13 January 2003, the Income Tax Department is stated to have issued a notice to the respondent-assessee calling upon it to file its Income Tax Returns. The respondent-assessee initially questioned the assumption of jurisdiction, as would be evident from its letter of 03 October 2003. However, notwithstanding that objection being raised, it ultimately furnished a return of income on 08 December 2003 declaring its income as ‗nil‘. 12.The Assessing Officer[12], however, assessed the total income to be INR 4,90,22,316/-, as a consequence of which notices under Section 143(2) came to be issued on 04 March 2004. The AO, while framing the order of assessment essentially came to hold as under. It firstly opined that the income of the respondent-assessee had accrued and arisen in India and would consequently be exigible to tax. It further held that the respondent-assessee would be liable to tax under the provisions of the DTAA. 13.Tested on the anvil of the activities that occurred in India, the AO came to conclude that not only did the respondent have a fixed place of business and which constituted a ―Fixed Place‖Permanent Establishment[13], the activities undertaken by the LO were sufficient to treat it as a Dependent Agentbeing present in India and thus the test of existence of a Dependent Agent Permanent Establishment[14] were also met. 12 AO 13 PE 14 DAPE Signature Not Verified 14.Apart from what was construed by the AO and is noticed above, it was further observed and held that the software installed in the office of the Indian agents and the facility of connectivity so provided would also lend credence to the premises of those agents being viewed as a PE. The AO further observed that the test of business connection in India also stood satisfied. This, according to the AO, was in light of the Indian agents carrying out activities which constituted an integral part of the business of the assessee and the revenue so generated. 15.Aggrieved by the aforesaid, the respondent-assessee is stated to have moved the Commissioner of Income Tax (Appeal)[15]. The CIT(A), while taking note of the activities undertaken by the LO, held that the training activity undertaken by that establishment of employees of the agents such as regulation of service and security standards, accounting and reconciliation procedures as well as the providing of the software ‗Voyager‘, would be indicative of the LO not being a mere passive communication channel but one which had been actively involved in the business activity of the appellant. The CIT(A) further held that the said establishment would thus satisfy the tests of ‗place of management‘ as well as the existence of a substantial element of an enduring or permanent nature of the foreign enterprise in India. Basis the above, it came to affirm the view which had been taken by AO insofar as Fixed Place PE was concerned. The CIT(A) also concurred with the AO of the installation of the software ‗Voyager‘ in the fixed premises of the agents as being one more element which would be liable to be viewed as being of significance for the purposes of acknowledging the existence of a Fixed Place PE. 15 CIT(A) Signature Not Verified 15 CIT(A) Signature Not Verified 16.Before proceeding further, it would be relevant to note that undisputedly the LO which had been established in India operated only up to 31 July 2005 whereafter it was closed and the subsidiary, Western Union Services India Private Limited, came to be incorporated. 17.When the matter travelled to the Tribunal, it firstly held that the business connection test, as enumerated in Explanation 2 to Section 9(1) stood satisfied. However, it held against the appellants insofar as the question of Fixed Place PE was concerned. It further proceeded to hold that the LO would not satisfy the tests enumerated in Article 5 of the DTAA and the activities undertaken by it would be liable to be ‖―‖viewed as being merely ―preparatory or auxiliary in character. 18.From the record we find that a decision of the Authority for Advance Rulings[16] in UAE Exchange Centre LLC, In re.[17]was also cited. The applicant in that case also was engaged in money transfer business and had adopted a similar model of remitting money to India through its LOs. The LOs were stated to have engaged in downloading of data pertaining to the beneficiaries in India, printing of cheques and dispatching the same to the beneficiaries. It was on the basis of these facts that the AAR had proceeded to hold that the LOs constituted a PE in India. 19.However and was noticed by the Tribunal, the AAR had observed that the role of the LO must involve performing the contract of remittance of amounts at least in part before it could be said to be a PE of the foreign enterprise. The Tribunal while contrasting the facts of the AAR ruling to the present case, noted that the LO performed no part 16 AAR 17 (2004) 268 ITR 9 (AAR) Signature Not Verified of the contract of remittance of monies to India because of which it could not be considered to be a PE of the respondent-assessee in India. 20.It is pertinent to note that the decision of the AAR thereafter came to be overturned by the Delhi High Court in UAE Exchange Centre Ltd. v. Union of India and Another[18] and which decision was affirmed by the Supreme Court in Union of India and Another v. U.A.E. Exchange Centre[19]. 21.Insofar as the issue of software constituting a PE is concerned, the Tribunal held that it merely accorded access to the agents to communicate with the mainframe computers and servers situate outside India. According to the Tribunal, the software was the property of the respondent-assessee and mere use thereof would not lead to a PE coming into existence. It also negated the conclusions which were rendered by the AO as well as the CIT(A) insofar as the question of DAPE was concerned. It is aggrieved by the aforesaid decision of the Tribunal that these appeals have come to be preferred before this Court 22.Leading submissions on behalf of the appellants, Mr. Chawla, learned counsel submitted that bearing in mind the nature of activities which the LO had undertaken and which extended to training of agents in India as well as interacting with local agents, conducting refresher courses in accounting, reconciliation, aiding them in successfully transitioning Y2K and the provision of the ‗Voyager‘ software, when cumulatively considered, would lead one to the irresistible conclusion that a Fixed Place PE came into existence. 18 2009 SCC OnLine Del 337 19 (2020) 9 SCC 329 Signature Not Verified 23.It was Mr. Chawla‘s submission that it would be wholly incorrect to view the activities undertaken and functions discharged by the LO as being preparatory or auxiliary. It was submitted by learned counsel that the LO was engaged in the core activities of the respondent and would thus be liable to be viewed as a projection of the foreign enterprise itself. 18 2009 SCC OnLine Del 337 19 (2020) 9 SCC 329 Signature Not Verified 23.It was Mr. Chawla‘s submission that it would be wholly incorrect to view the activities undertaken and functions discharged by the LO as being preparatory or auxiliary. It was submitted by learned counsel that the LO was engaged in the core activities of the respondent and would thus be liable to be viewed as a projection of the foreign enterprise itself. 24.Mr. Chawla further argued that the installation of software in the premises of the Indian agents would satisfy the provisions made in Article 5(2) of the India-USA DTAA and which speaks of letting or leasing of intangible property. Mr. Chawla argued that the software plays a central role in the completion of transactions and thus the placement of that dedicated software would result in the establishments of the Indian agents being liable to be viewed as a Fixed Placed PE. It was then argued that the Indian agents were in turn entitled to appoint sub-agents to carry on the business of the respondent and this too would be a factor which would render the conclusions of the Tribunal unsustainable. 25.Refuting those submissions, Mr. Vohra, learned senior counsel appearing for the respondents, firstly urged us to dismiss the appeals outrightly since according to learned senior counsel, the determination of whether a PE exists or not is essentially a question of fact. According to Mr. Vohra, the Tribunal being the final fact finding authority having come to the conclusion that no PE existed, the same would clearly not give rise to any substantial question of law. 26.Mr. Vohra then cited for our consideration the decision of the Supreme Court in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi and Signature Not Verified Another[20] and which, according to learned senior counsel, had identified the principal elements for a Fixed Place PE being assumed to have come into existence to be: (a) an identified fixed place, (b) that fixed place being made available and placed at the disposal of the foreign enterprise and (c) business of that foreign enterprise being carried on through such fixed place. Mr. Vohra in order to buttress his submissions adverted to the following paragraphs from the Formula One decision of the Supreme Court:- ―33.The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be ―at the disposal‖ of the enterprise. For this purpose, it is not necessary that the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as ―at the disposal‖ of the enterprise when the enterprise has right to use the said place and has control thereupon. xxxx xxxx xxxx 39. OECD commentary on Model Tax Convention mentions that a general definition of the term ―PE‖ brings out its essential characteristics i.e. a distinct ―situs‖, a ―fixed place of business‖. This definition, therefore, contains the following conditions: (i) the existence of a ―place of business‖ i.e. a facility such as premises or, in certain instances, machinery or equipment. (ii) this place of business must be ―fixed‖ i.e. it must be established at a distinct place with a certain degree of permanence; (iii) the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. xxxx xxxx xxxx (i) the existence of a ―place of business‖ i.e. a facility such as premises or, in certain instances, machinery or equipment. (ii) this place of business must be ―fixed‖ i.e. it must be established at a distinct place with a certain degree of permanence; (iii) the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. xxxx xxxx xxxx 74. As per Article 5 of the DTAA, the PE has to be a fixed place of business ―through‖ which businesses of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5(2), by way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE i.e. What is Signature Not Verified mentioned in clauses (a) to (f) as the ―negative list‖. A combined -reading of subarticles (1), (2) and (3) of Article 5 would clearly show that not only certain forms of establishment are excluded as -mentioned in Article 5(3), which would not be PEs. Otherwise, subarticle (2) uses the word ―include‖ which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specially mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (a) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out.‖ 27. 27. Learned senior counsel then took us through the decision rendered by this Court in Director of Income Tax v. E-Funds IT Solution[21] and which had underscored the requirement of the core business of the foreign enterprise being carried out through an identified fixed place in order to constitute a Fixed Place PE. Our attention was drawn to the following paragraphs of that decision:- ―53. Reference to core of auxiliary or preliminary activity is relevant -when we apply para 3 of Article 5 or when subclause (a) to para 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place PE. Paragraph 3 of Article 5 lists negative activities which when performed from a fixed placed in the other contracting State would not create a PE. The activities specified in Article 5, para 3 would not create a PE, even when the conditions specified in paras (1) and (2) of Article 5 are satisfied. Paragraph 3 is not a positive provision but a negative list. The said paragraph does not create a PE but has a negative connotation and activities specified when carried on do not create a PE. xxxx xxxx xxxx 59. 10K report referred to in the orders was filed by the assessee with the S.E.C. USA. The details submitted in this document not only pertain to the two assessee incorporated and paying tax in USA but the entire group companies including e-Fund India. The assets, revenues, income earned, employees of e-Fund India, etc. have to be disclosed and elucidated in the said report. The report, no doubt, is relevant and material but has to be examined with due care and caution to determine and decide whether the two assessees have PE in India. The fact that business has been transferred or sub- 21 2014 SCC OnLine Del 555 Signature Not Verified xxxx xxxx xxxx 59. 10K report referred to in the orders was filed by the assessee with the S.E.C. USA. The details submitted in this document not only pertain to the two assessee incorporated and paying tax in USA but the entire group companies including e-Fund India. The assets, revenues, income earned, employees of e-Fund India, etc. have to be disclosed and elucidated in the said report. The report, no doubt, is relevant and material but has to be examined with due care and caution to determine and decide whether the two assessees have PE in India. The fact that business has been transferred or sub- 21 2014 SCC OnLine Del 555 Signature Not Verified contracted or assigned to e-Fund India is not relevant and material, unless we are determining applicability of para 3 to para 5 and the question is whether the Indian company is performing core or auxiliary and preliminary activities. The fact, the report refers to and give details of or number of employees of e-Fund India which are part of the e-Fund group is not relevant. Neither income earned by e-Fund India nor activities in India by the Indian subsidiary by itself, relevant in determining whether or not PE exists under paras 1, 2, 4 and 5 of Article 5. Thus and therefore, the fact that 40% of the employees of the entire group were in India i.e. were employees of e-Fund India, will not make the said company agency subsidiary PE or fixed place PE of the assessee. Neither provision of any software, intangible data etc. whether free of cost or otherwise, make e-Fund India an agency or fixed place PE of the two foreign assessees. Whether or not and on what basis e-Fund India was reimbursed expenses of xerox, courier charges etc. will not make e-Fund India as PE of the assessee under Articles 5(1), 5(4) or 5(5). Conditions and stipulates under Articles 5(1), 5(4) or 5(5) will create a PE and not the said facts as highlighted in the impugned orders. Therefore, we will now examine the facts found and refer to Articles 5 (4) and 5(5) of DTAA.‖ 28.Mr. Vohra also laid emphasis on the fact that the legal position as enunciated by this Court ultimately came to be affirmed by the Supreme Court in Assistant Director of Income Tax-I, New Delhi v. E-Funds IT Solution Inc.[22] and where the law was explained in the following terms:- ―16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a Signature Not Verified Signature Not Verified foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents are brought within any of the sub-clauses of Article 5. 17. Since the Revenue originally relied on fixed place of business PE, this will be tackled first. Under Article 5(1), a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. What is a ―fixed place of business‖ is no longer res integra. In Formula One, this Court, after setting out Article 5 of the DTAA, held as follows: (SCC pp. 625-29, paras 33-39) Signature Not Verified Signature Not Verified foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents are brought within any of the sub-clauses of Article 5. 17. Since the Revenue originally relied on fixed place of business PE, this will be tackled first. Under Article 5(1), a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. What is a ―fixed place of business‖ is no longer res integra. In Formula One, this Court, after setting out Article 5 of the DTAA, held as follows: (SCC pp. 625-29, paras 33-39) ―33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be “at the disposal” of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as “at thedisposal” of the enterprise when the enterprise has the right to use the said place and has control thereupon. * * * 35. According to Philip Baker, the aforesaid illustrations confirm that the fixed place of business need not be owned or leased by the foreign enterprise, provided that it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. 36. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as the term “business” is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term “place”. Importance of the term “place” is explained by him in the following manner: ‗In conjunction with the attribute ―fixed‖, the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC).‘ Signature Not Verified 37. We would also like to extract below the definition to the expression “place” by Vogel, which is as under: ‗A place is a certain amount of space within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term ―establishment‖. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term ―fixed‖ rather than the term ―place‖, given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term ―establishment‖ makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term ―installation‖ instead of ―place‖.‘ The term “place” is used to define the term “establishment”. Therefore, “place”includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property (in civil law countries) is not authoritative. It is rather the context (including, above all, the terms “fixed”/―fixe‖*), as well as the object and purpose of Article 5 OECD and UN MC itself, in the light of which the term “place”needs to be interpreted. This approach, which follows from the general rules on treaty interpretation, gives a certain leeway for including movable property in the understanding of “place” and, therefore, we assume a PE once such property has been “fixed” to the soil. For example, a workbench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformer or generator on board a former railway wagon qualify as places (and may also be “fixed”). In contrast, purely intangible property cannot qualify in any case. In particular, rights such as participations in a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks, etc.) or intangible economic assets (a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE. They can only form part of PE constituted otherwise. Likewise, an internet Signature Not Verified website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE. Neither does the mere incorporation of a company in a contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its bye-laws and/or registration, in State Awhile the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only [Article 4(3) OECD and UN MC]. In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxed only in State B under the 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the place of work. If the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals will be sufficient if it were available. Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous! This can be illustrated by the example of a salesman who regularly visits a major customer to take orders and conduct negotiations in the purchasing Director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.' 38. Taking cue from the word ‗through‘ in the Article, Vogel has also emphasised that the place of business qualifies only if the place is ―at the disposal‖ of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, ―disposal‖ is the power (or a certain fraction thereof) to use the place of business direct