Case: Director of Income-Tax (It) ??Ii Vs. B4U International Holdings Limited

a complete reading of the agreement. Thereafter Indo-Mauritius DTAA has been referred to and particularly paragraphs 5.4 and 5.5. and the Tribunal concludes that the requirement that the first enterprise in the first mentioned State has and habitually exercised in that State an authority to conclude contracts in the name of the enterprise unless his activities are limited to the purchase of goods or merchandise for the enterprise is a condition which is not satisfied. Therefore, this is not a case of B4U India being an agent with an independent status. This finding is rendered in paragraph 29 and 30 of the order under challenge. We do not find that the Tribunals order and which also refers to the Honble Supreme Court decision in Morgan Stanley & Co. (supra) can raise any substantial questions of law.11. We are not agreement with Mr. Tejveer Singh when he submits that the Supreme Court judgment in the case of Morgan Stanley & Co. will not apply. In that regard he relies upon the conclusion rendered by the Honble Supreme Court. That conclusion is that there being no need for attribution of further profits to the permanent establishment of the foreign company where the transaction between the two was held to be at arms length but this was only provided that the associate enterprise was remunerated at arms length basis taking into account all the risk taking functions of the multinational enterprise. Thus, Mr. Tejveer Singhs reliance on these observations in the Supreme Court judgment are strictly on the alternate argument canvassed by the assessee. That alternate argument was that assuming that B4U India is a dependent agent of the assessee in India it has been remunerated at arms length price and, therefore, no profits can be attributed to the assessee. Mr. Tejveer Singh would submit that the Tribunal failed to note that the situation would be different if the transfer price analysis did not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the permanent establishment for those functions / risks that had not been considered. Mr. Tejveer Singhs argument is that the assessee had not subjected itself to the transfer price regime. Therefore, no assistance can be derived by it from this judgment.12. In this regard, Mr. Mistri has rightly pointed out that the requirement and in relation to computation of income from international transactions having regard to arms length price has been put in place in Chapter-X listing special provisions relating to avoidance of tax by substituting section 92 to 92F by the Finance Act of 2001 with effect from 1st April, 2002. Therefore, such compliance has to be made with effect from assessment years 2002-03 relevant to which is the previous year commencing from 1st April, 2002. In any event, we find that the Tribunal has rightly dealt with the alternate argument by referring to the Revenue Circular 742. There, 15% is taken to be the basis for the arms length price. Nothing contrary to the same having been brought on record by the Revenue before the Commissioner as also the Tribunal, it rightly concluded that the judgment of the Honble Supreme Court in Morgan Stanley & Co. and the principle therein would apply. Similarly, the Division Bench judgment of this Court in the case of Set Satellite (Singapore) Pte. Ltd. v. Deputy Director of Income Tax (IT) & Anr. [2008] 307 ITR 265would conclude this aspect. Therefore, we are of the opinion that the Tribunals conclusions and which are consistent with the factual materials and the principles of law laid down above are neither perverse nor vitiated by any error of law apparent on the face of the record.13. Strictly speaking the answers on questions (1) and (2) and which are common for all the appeals disposes of all the appeals against the Revenue and in favour of the assessee. However, the argument of Mr. Tejveer Singh is that the Tribunal and equally the Commissioner has dealt with other two questions. They are being projected before us and in relation to the assessment years 2004-05. It is submitted that the assessee was obliged to deduct tax at source under section 195 and having not deducted the same, there has to be a disallowance under section 40(a)(i) of the IT Act. That is because the transponder charges being a consideration and process as clarified in terms of Explanation (6) to section 9 of the IT Act. We have found from the detailed reasoning in the Tribunals order and assuming that such questions were indeed raised that in the light of the findings on the main issue, namely, on permanent establishment / dependent agent these grounds or questions were not required to be answered. They are not required to be answered separately but consistent with findings on Question Nos. (1) and (2). It is precisely applying that the Tribunal has concluded that even this ground would have to be answered against the Revenue. It was also doubtful and in the given facts and circumstances as to whether any payment which is stated to be made to a US based company by the assessee which is a Mauritius based company, can be brought to tax in terms of Indian tax laws. We are of the opinion that any wider question or controversy need not be addressed. Once consistent with the findings on the main issue even these questions have to be answered in the peculiar factual backdrop against the Revenue then, we can dispose of these appeals on these questions. We also clarify that the arguments of Mr. Tejveer Singh and based on whether the payments made could be brought within the meaning of the word "process" and within the explanation can be raised and are kept open for being considered in an appropriate case. Keeping them open and in such manner, we hold that none of the questions projected and proposed are substantial questions of law.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]8. After hearing both sides and perusing with their assistance all the appealwe are inclined to agree with Mr.in the light of the Central Board of Direct Taxes Circular No.23 of 1969, the income of the assessee is not taxable in India. The conditions of Circular 23 are fulfilled. Therefore, Explanation (a) to section 9(1)(i) of the IT Act will have noonly activity which is carried out in India is incidental or auxiliary / preparatory in nature which is carried out in a routine manner as per the direction of the principal without application of mind and hence B4U is not an dependent agent. Nearly 4.69% of the total income of B4U India is commission / service income received from the assessee company and, therefore, also it cannot be termed as an dependent agent. As far as the alternate contentions are concerned, the First Appellate Authority held that the assessee and B4U India were dealing with each other on arms length basis. 15% fee is supported by Circular No.742. Thus it was held that no further profits should be taxed in the hands of thedo not find that the Tribunals order and which also refers to the Honble Supreme Court decision in Morgan Stanley & Co. (supra) can raise any substantial questions of law.11. We are not agreement with Mr. Tejveer Singh when he submits that the Supreme Court judgment in the case of Morgan Stanley & Co. will not apply. In that regard he relies upon the conclusion rendered by the Honble Supreme Court. That conclusion is that there being no need for attribution of further profits to the permanent establishment of the foreign company where the transaction between the two was held to be at arms length but this was only provided that the associate enterprise was remunerated at arms length basis taking into account all the risk taking functions of the multinational enterprise. Thus, Mr. Tejveer Singhs reliance on these observations in the Supreme Court judgment are strictly on the alternate argument canvassed by the assessee. That alternate argument was that assuming that B4U India is a dependent agent of the assessee in India it has been remunerated at arms length price and, therefore, no profits can be attributed to the assessee. Mr. Tejveer Singh would submit that the Tribunal failed to note that the situation would be different if the transfer price analysis did not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the permanent establishment for those functions / risks that had not been considered. Mr. Tejveer Singhs argument is that the assessee had not subjected itself to the transfer price regime. Therefore, no assistance can be derived by it from this judgment.12. In this regard, Mr. Mistri has rightly pointed out that the requirement and in relation to computation of income from international transactions having regard to arms length price has been put in place inlisting special provisions relating to avoidance of tax by substituting section 92 to 92F by the Finance Act of 2001 with effect from 1st April, 2002. Therefore, such compliance has to be made with effect from assessment yearsrelevant to which is the previous year commencing from 1st April,we are of the opinion that the Tribunals conclusions and which are consistent with the factual materials and the principles of law laid down above are neither perverse nor vitiated by any error of law apparent on the face of the record.13. Strictly speaking the answers on questions (1) and (2) and which are common for all the appeals disposes of all the appeals against the Revenue and in favour of the assessee. However, the argument of Mr. Tejveer Singh is that the Tribunal and equally the Commissioner has dealt with other two questions. They are being projected before us and in relation to the assessment yearsIt is submitted that the assessee was obliged to deduct tax at source under section 195 and having not deducted the same, there has to be a disallowance under section 40(a)(i) of the IT Act. That is because the transponder charges being a consideration and process as clarified in terms of Explanation (6) to section 9 of the IT Act. We have found from the detailed reasoning in the Tribunals order and assuming that such questions were indeed raised that in the light of the findings on the main issue, namely, on permanent establishment / dependent agent these grounds or questions were not required to be answered. They are not required to be answered separately but consistent with findings on Question Nos. (1) and (2). It is precisely applying that the Tribunal has concluded that even this ground would have to be answered against the Revenue. It was also doubtful and in the given facts and circumstances as to whether any payment which is stated to be made to a US based company by the assessee which is a Mauritius based company, can be brought to tax in terms of Indian tax laws. We are of the opinion that any wider question or controversy need not be addressed. Once consistent with the findings on the main issue even these questions have to be answered in the peculiar factual backdrop against the Revenue then, we can dispose of these appeals on these questions. We also clarify that the arguments of Mr. Tejveer Singh and based on whether the payments made could be brought within the meaning of the word "process" and within the explanation can be raised and are kept open for being considered in an appropriate case. Keeping them open and in such manner, we hold that none of the questions projected and proposed are substantial questions of law.