Authority For Advance Rulings
Speciality Magazines (P) Ltd., In Re
Sections 9(1)(i), 90, DTAA between India & U.K., art. 5, DTAA between India & U.K., art. 7
Syed Shah Mohammed Quadri, J., Chairman & K.D. Singh, Member
AAR No. 610 of 2003
7th February, 2005
Counsel Appeared
None, for the Applicant : Yashwant Y. Chavan, for the CIT concerned
Ruling
Syed Shah Mohammed Quadri, J., chairman :
In this application under s. 245Q(1) of the Income-tax Act, 1961 (for short the ‘Act’), M/s Speciality Magazines (P) Ltd. (SMPL), an Indian company, is the applicant. SMPL is an advertisement concessionaire of M/s The Economist Newspaper Limited (TENL), which is a company registered in the United Kingdom (U.K.) and is carrying on business of publishing magazines from London. TENL is a non-resident company and does not have a PE in India. As an advertisement concessionaire for TENL in India, SMPL gets 15 per cent commission on gross value of the invoices raised outside India directly on the Indian advertisers by TENL. The advertisement cost is payable in US dollars according to the invoices raised by TENL either by draft or by wire transfer. To enable the Indian advertisers including Government undertakings and to secure international market, TENL extended the facility of payment of advertisement charges in Indian currency. Under an agreement which is to be concluded between them, TENL proposes to authorize SMPL to collect the advertisement charges from Indian advertisers in Indian currency and remit the same in foreign currency (US dollars) to TENL. On these facts, SMPL seeks advance rulings of the Authority on the following questions : (1) Whether Speciality Magazines (P) Ltd. (resident) collecting advertisement charges from Indian advertisers towards cost of advertisements in overseas publications, such collections being in Indian currency, converting to foreign currency and remitting the same to The Economist Newspaper Ltd. (non-resident) tantamount to income deemed to accrue or arise in India under s. 9 of the IT Act, 1961, to the non-resident ? (2) If income is deemed to accrue or arise in India under s. 9 of the IT Act, 1961, to The Economist Newspapers Ltd. (non-resident), then what is the withholding rate of tax to be adopted by Speciality Magazines (P) Ltd. (resident) ? (3) Whether the Indian advertiser should deduct income-tax at source while making payment to Speciality Magazines Ltd., the advertising concessionaire for The Economist Newspaper Ltd. in India, such payment being in Indian rupees and against invoices raised by The Economist Newspaper Ltd. towards advertisement charges ? (4) Whether Speciality Magazines (P) Ltd., the advertising concessionaire for The Economist Newspaper Ltd., should deduct income-tax at source while making “remittance” of Indian rupee collections to The Economist Newspaper Ltd. ?
The CIT, Bangalore-III, offered his comments to the application of SMPL. It is stated that SMPL is not an independent agent of TENL, a non-resident, within the meaning of second proviso to Expln. 2 of s. 9 of the Act, therefore, TENL will be deemed to have business connection in India and its income is assessable to income-tax under s. 9(1)(i) r/w s. 5(2) of the Act. From the terms of the agreement between SMPL and TENL it is clear that there exists business connection between them. SMPL renders all services of the TENL and records disclose that it has earned Rs. 2,68,961 in the year ending 2000, Rs. 21,65,645 in 2001 and Rs. 36,44,137 in 2002. These figures establish that the agreement is exclusive. The CIT treated the transaction as one between a non-resident and the Indian advertiser through Indian company in the nature of advertising contract and stated that the tax has to be deducted under s. 194C on the gross amount of the bill.
In its rejoinder, SMPL stated that it cannot accept orders for advertisement but takes orders subject to confirmation and acceptance by TENL which has the right to accept or decline to publish the advertisement. It is added that SMPL is also holding advertisement concessionaire contract with Media Representation International, New Delhi, for territorial representation in Southern States of India for the following publications : (a) National Geographic group of publications (b) North Star Travel Media, U.S.A. (c) Euro Sports Television Network based in Europe (d) Fortune, Time Inc., U.S.A.
In June, 2003, it has procured advertisement for Fortune magazines from Infosys Technology Ltd., Bangalore. It is asserted that SMPL is not a dependent agent of TENL but has enjoyed an independent status and that it cannot be treated as a representative assessee of the non-resident. Number of opportunities were given to the applicant to represent its case by granting adjournments as prayed for from time to time. However, counsel for the applicant expressed his inability to represent the case of the applicant on the last day of hearing and requested that the application might be considered on the basis of written submissions filed by it. It is urged in the written submissions that SMPL is not the agent of the Economist group alone and that it is also the agent of Media Representation International, New Delhi, for ‘Travel Weekly’ published by REED group, Fortune published by the Time Inc. group New York, as well as territorial representative of Media Representation International, New Delhi, for south India. It receives commission in Indian currency from the principal agent and from the Economist group in foreign currency. SMPL also represents National Geographic group of publication, North Star Travel Media and European Television Network. Therefore, SMPL cannot be treated as an exclusive agent of Economic group. It is submitted that the mode of receipt of commission in Indian currency or foreign currency is not the decisive fact to consider the application of cl. 5 of the DTAA, therefore, it cannot be treated that it is working wholly or almost wholly for TENL. SMPL placed reliance on ruling of this Authority in Al Nisr Publishing, In re, ruling dt. 29th Oct., 1997 in AAR No. 358 of 1997 [(1999) 154 CTR (AAR) 268 : (1999) 105 Taxman 308 (AAR)].
Mr. Yashwant Y. Chavan who appears for the CIT has contended that from the records of the last 4 years, it is evident that foreign earnings of the applicant are only from TENL, therefore, the applicant is a dependent agent. It is further contended that about 78 per cent of the income of the SMPL is from TENL group and that SMPL secures orders wholly or almost wholly for the Economist group. Relying on the annexure, it is submitted that 100 per cent of the applicant’s foreign business is with TENL group only. Clause 4(d) of the agreement of the SMPL with TENL shows that it is obliged not to enter into an agreement with any competitor of the Economist group except with the approval of that group and this shows complete control of the group over SMPL. It is submitted that the ruling of the Authority in Al Nisr Publishing case (supra) is distinguishable on facts. He relied on the ruling of the Authority in HMS Investments Ltd., In re, ruling dt. 18th Dec., 1995 in AAR No. 222 of 1995 P. No. 19 of 1995 [(1999) 152 CTR (AAR) 358 : (1999) 238 ITR 610 (AAR)].
In the light of the above contentions, the short question that arises for consideration is whether there exists business connection between the SMPL and TENL within the meaning of Expln. 2 to s. 9(1)(i) of the Act. It would be useful to refer to the said provisions here. “9. (1) The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, (*) or through the transfer of a capital asset situate in India. Explanation : For the purposes of this clause— (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) in the case of a non-resident, being— (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph in India;” A perusal of provisions of s. 9(1)(i), extracted above, shows that all income accruing or arising whether directly or indirectly through or from any business connection in India or from any property in India or through any assets or source of income in India or through transfer of capital assets situated in India, shall be deemed to accrue or arise in India. The mandate contained in cl. (a) of the Explanation is that for the purpose of the aforementioned clause, where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. The other clauses of the Explanation are not relevant.
6. On the facts of this case, the said deeming provisions would apply as admittedly income accrues or arises to TENL (whether directly or indirectly) through or from SMPL in India [see HMS Investments Ltd., In re (supra)]. The important aspect which needs to be examined is, whether TENL has “business connection” in India. The expression “business connection” was not defined for the purpose of the aforementioned provisions, before 31st March, 2003. By the Finance Act, 2003, two Explanations were inserted after the then existing Explanation which are numbered as Explns. 1 and 2 to sub-s. (1) of s. 9 w.e.f. 1st April, 2004. Explanation 2 which is relevant for our purpose defines the expression thus : “Explanation 2 : For the removal of doubts, it is hereby declared that ‘business connection’ shall include any business activity carried out through a person who, acting on behalf of the nonresident,— (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non- resident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:” It may be seen that Expln. 2 contains an inclusive definition; it brings in the business activities specified in cls. (a) to (c), referred to above, within the fold of the expression “business connection” which has to be understood in its ordinary meaning. We shall presently advert to the decisions of the Hon’ble Supreme Court wherein the meaning of that expression has been elucidated. On the facts of this case it cannot but be concluded that the business activities in the aforementioned cls. (a) and (c) are carried out in India by SMPL for TENL. There is thus “business connection” within the meaning of Expln. 2 between SMPL and TENL in India.
7. We may, with advantage, note here the following decisions of the Hon’ble Supreme Court to comprehend the full import of the expression “business connection” : In CIT vs. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC), the essence of the expression is brought out in the following observation of the Supreme Court :
“The expression ‘business connection’ postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity”. Hon’ble Mr. Justice Shah (as he then was), for the purpose of s. 42 of the IT Act, 1922, laid down, “‘business connection’ contemplated by s. 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection.”
The requirement of continuity of transactions to form ‘business connection’ between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Co. Ltd. vs. CIT (1953) 23 ITR 101 (SC). Hon’ble Mr. Justice Mahajan (as he then was), speaking for the Court, observed, “an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of s. 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection”.
8. In the light of above discussion, the essential features of “business connection” may be summed up as follows : (a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India; (b) such relation shall contribute, directly or indirectly, to the earning of income by the nonresident in his business; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of ‘business connection’ in India. Apart from the fact that requirements of Expln. 2, referred to above, are satisfied, the facts of the instant case would also fulfil the aforementioned essential features of business connection.
The above discussion would suffice to pronounce rulings on the questions proposed by the applicant. However, in Annex. III as well as in the written submissions, reference is made to the Double Taxation Avoidance Agreement entered into between the Government of the Republic of India and the Government of the United Kingdom of Great Britain and Northern Ireland which came into force on 26th Oct., 1993, vide Notification dt. 11th Feb., 1994, (hereinafter referred to as the “Treaty”). It is, therefore, necessary to advert to the relevant provisions of the Treaty.
It is a common ground that by virtue of arts. 1 and 2, both SMPL and TENL are covered by the Treaty. The contention based on art. 7 of the Treaty is that the profit of TENL shall be taxable in India only if it has permanent establishment (PE) situated in India and only so much of them as is directly or indirectly attributed to that PE. The controversy now centres around the point as to whether SMPL can be treated as the PE of TENL in India.
The expression “PE” is defined in art. 5 of the Treaty. Inasmuch as the focus of the arguments is on para 5 of art. 5, we shall quote it here. Article 5 : Permanent Establishment : 1 to 4. xx xx An enterprise of a Contracting State shall not be deemed to have permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control), he shall not be considered to be an agent of an independent status for the purpose of this paragraph. to 7 xx xx To have a clear comprehension of para 5 quoted above, it would be useful to note the substance of other paras of art. 5. A combined reading of paras 1 to 7 of art. 5 brings out the gist of the expression ‘permanent establishment’. Whereas para 1 defines the expression to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on, para 2 enumerates ten places specified in cls. (a) to (j) and services specified in cl. (k) to include them within the scope of the expression and para 3 contains a deemed exclusionary clause to exclude the use of facilities noted in cl. (a); maintenance of stock of goods mentioned in cls. (b) and (c); maintenance of fixed place of business for the purposes indicated in cls. (d) and (e) and maintenance of fixed place of a preparatory or auxiliary character from the scope of the expression. However, para 4 contains a deemed inclusion clause. It says that a person (not covered under cl. 5) acting in a Contracting State for or on behalf of an enterprise of the other Contracting State shall be deemed to have a PE of that enterprise in the first mentioned State, if any one of clauses—(a) to (c) thereof—applies. Clause (a) speaks of a case when he has and habitually exercises in that State an authority to negotiate and enter into for or on behalf of the enterprise, unless the activities are limited to the purchase of goods or merchandise for the enterprise; cl. (b) speaks of a case when he habitually maintains a stock of goods or merchandise in the first mentioned State from which he regularly delivers them on behalf of the enterprise, and cl. (c) speaks of a case when he habitually secures orders in the first mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control, as that enterprise. Para 5, quoted above, is in two parts. The first part incorporates a deemed exclusion clause and says that an enterprise of a Contracting State shall not be deemed to have a PE in the other Contracting State merely because it carries on business in the other State through a broker, general commission agent or any other agent of an independent status provided that such persons are acting in the ordinary course of business. Nonetheless, the second part provides that when the activities of such an agent are carried out wholly or almost wholly for the enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same control as that enterprise, he shall not be considered as an agent of an independent status within the meaning of the paragraph. In effect, the test embodied in the second part is that the enterprise should be the sole client of such an agent and not that he/it should be the sole agent of the enterprise to treat such an agent as not an agent of an independent status.
Paras 6 and 7 need not detain us here. The former says that a resident company of a Contracting State which controls or is controlled by a resident company of the other Contracting State shall not of itself constitute other company a PE of the other and the latter defines the term ‘contract’ in relation to a company. To apply the second part of para 5, it has to be shown : (1) the applicant is claiming to carry on business through an agent of an independent status; (2) the activities of such an agent are carried out wholly or almost wholly on behalf of the applicant. So far as the first requirement is concerned, it is not in issue that TENL is carrying on its business in India through SMPL which is claiming to be an agent of independent status. The second requirement takes us to the question as to whether the activities of SMPL are carried out wholly or almost wholly on behalf of TENL.
13. Mr. Chavan has argued that SMPL is a dependent agent of TENL as the entire work of TENL in India is looked after by SMPL and that the entire foreign income of SMPL is from TENL alone. His further contention is that the returns of income filed by the SMPL disclose that 75 per cent to 78 per cent of its income is from TENL and, therefore, SMPL would be working wholly or almost wholly for the TENL. There is considerable force in the written submissions of the applicant that the mode of receipt of the commission either in foreign currency or Indian currency is not a criteria to determine as to whether the SMPL is a dependent agent of TENL or independent agent. Nor do we think that the fact that the entire work of TENL in India is done through SMPL could make it a dependent agent. The clause in the agreement between SMPL and TENL that the former would not accept any agency of a competitor without first obtaining its consent, would not, in our view, make it a dependent agent.
In Fidelity Advisor Series VIII, In re, ruling dt. 27th Sept., 2004 (Application No. AAR/566/2002) [reported at (2004) 192 CTR (AAR) 201—Ed.], the Authority held thus : “What is contended by Mr. Gupta is that the SCB is not an agent of independent status within the meaning of cl. 5 of art. 5 of the Treaty and that the activities of the domestic custodian are almost exclusively to the applicant. We are unable to accept this submission. It would be necessary to note here that the SCB—the domestic custodian of the applicant in India—provides custodial services to a number of other local and international companies on a routine basis and, therefore, it cannot but be an independent agent of the applicant both legally and economically.”
In Morgan Stanley & Co. International Ltd., In re, ruling dt. 29th Nov., 2004 (Application No. AAR/611/2003) [reported at (2005) 193 CTR (AAR) 161—Ed.], this Authority ruled thus : “There is no merit in the plea of the CIT that the difference between ‘dependent’ and ‘independent’ agents has to be seen from the perspective of the ‘principal’ and not from that of ‘agent’. In our view, for a proper understanding of the deeming provisions contained in paras 4 and 5 of art. 5, they have to be read together. Para 4 deals with a person other than an agent of independent status to whom para 5 of the article applies. We shall, therefore, refer to the basic features of para 5, as mentioned above. It contains a deemed non-inclusion clause and provides that an enterprise of the Contracting State shall not be deemed to have a PE in the other Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status provided such persons are acting in the ordinary course of the business. This is clear enough. However, this exclusion clause is subjected to an exception, namely, where activities of such an agent are wholly or almost wholly devoted for the enterprise or controlling enterprise, in such a situation such a person shall not be considered as agent of independent status. The test is objective and has two limbs. The first limb requires that such persons shall be agents of an independent status acting in the ordinary course of their business and the second requires that the activities of such persons shall not be devoted wholly or almost wholly for the enterprise. The activities referred to therein are that of the broker, general commission agent or any other agent and not of the enterprise. The purpose is to exclude agents who though acting in the ordinary course of their business, are devoted entirely or almost entirely to the work of the enterprise. This implies that they have little work of other enterprises. If properly understood there is no scope to exclude from para 5 ‘agents’ whose activities in the ordinary course of their business not only cover wholly or almost wholly the work of the enterprise but also include work of many other enterprises who are also their clients. In other words, only such agents will be out of purview of para 5, whose ordinary course of business comprises exclusively the work of the enterprise with little work of any other client; like the standing counsel or law officers of Central/State Government.” SMPL is no doubt the sole agent of TENL but what is required to be shown is that TENL is the sole client of SMPL to bring it within the mischief of the second part of para 5. In this context, the aspect which remains to be considered is, when SMPL earns 75 per cent to 78 per cent of its income from TENL and 22 per cent to 25 per cent of its income from other clients, could it be said that its activities are carried out wholly or almost wholly for TENL. The terms ‘wholly’ and ‘almost wholly’ are not technical terms or terms of art. They must receive their ordinary meaning as understood by English speaking people. The word ‘wholly’ means entirely, completely, fully, totally; ‘almost wholly’ would mean very near to wholly, a little less than whole. In terms of percentage ‘almost wholly’ would mean anything less than 90 per cent. It is shown that though SMPL has other clients, the fact remains that the activities of SMPL for TENL yield 75 per cent to 80 per cent of its income and income from other clients is between 22 per cent to 25 per cent, so it cannot be said that the activities of the SMPL are carried out wholly or almost wholly for TENL. It follows that SMPL does not fall in the second part of para 5 of art. 5 of the Treaty. In Al Nisr Publishing, In re (supra), applicant was a partnership registered under the United Arab Emirates (UAE) laws, having its head office in Dubai. It was engaged in the business of publishing, printing and distributing newspapers, magazines and other publications. It entered into agency agreement with advertisement representative in various countries including India. Bennett Coleman & Co. Ltd. (BCL) was its sole advertisement representative of the applicant in India. BCL was to endeavour to obtain advertisements, collect the advertisement charges and remit the same to the applicant after deducting its commission. The applicant had posed the following questions for seeking advance ruling of the Authority :
(1) Whether, on the facts and circumstances of the case, any business profit or income accrues or arises in India in the hands of the applicant out of advertising revenue received/receivable from its agent(s) in India ?
(2) Whether such advertising revenues remitted out of India by the agent(s) of the applicant is subject to deduction of tax at source under s. 195 or any other provision of the IT Act, 1961, and if so, what would be the amount on which the tax would be deducted at source ?
On question No. (2), the Authority held that the advertisement revenue received by the applicant in India were not taxable in the hands of the applicant in view of art. 7 r/w art. 5 of DTAA. There was, therefore, no obligation to deduct tax at source from the remittances made to applicant by BCL. In view of the ruling on question No. (2), the Authority declined to give ruling on question No. (1).
14. From the above discussion the following conclusions emerge : (1) TENL has business connection in India within the meaning of Expln. 2 to s. 9(1)(i) of the Act; (2) SMPL is not covered by the definition of PE contained in art. 5 of the Treaty, so the business profits of TENL received through SMPL are not liable to tax under art. 7 of the Treaty. Having regard to the law laid down by the Hon’ble Supreme Court in Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) and in CIT vs. P.V.A.L. Kulandagan Chettiar (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC) and the ruling of the Authority in Sutron Corporation, In re, ruling dt. 1st June, 2004 (Application No. AAR/603/2002) [reported at (2004) 189 CTR (AAR) 366—Ed.] and in Emirates Fertilizer Trading Co. WLL, In re, ruling dt. 27th Oct., 2004 (Application No. AAR/628/2004) [reported at (2004) 192 CTR (AAR) 590—Ed.], the provisions of the Treaty entered into by the Government of Republic of India with the Government of U.K. under s. 90 of the Act will override the provisions of the Act.
It will not be out of place to observe that the questions set forth by the applicant are not properly framed. Though the thrust of the case of the applicant is on the Treaty, the questions do not refer to it. However, having regard to r. 12 of the Authority for Advance Rulings (Procedure) Rules, 1996, we have considered all aspects of the questions necessary to pronounce ruling on the substance of the questions posed in the application.
In the light of the above discussions, we rule on :
Question No. 1, that Speciality Magazines (P) Ltd. collecting advertisement charges from the Indian advertisers towards cost of advertisements in overseas publications, such collections being in Indian currency, converting them to foreign currency and remitting the same to TENL (non- resident) would tantamount to accruing or arising of deemed income in India under s. 9 of the IT Act to the non- resident. However, having regard to the provisions of art. 7 of the Treaty read with art. 5 thereof, TENL is not liable to tax under the Treaty.
In view of the above ruling on question No. (1), no ruling on question Nos. (2) to (4), which are consequential to the ruling on the question No. (1), need be pronounced.
[Citation : 274 ITR 310]
