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Director of Income Tax-II vs Western Union Financial Services… | Delhi High Court 2016 | BharatTax

DIRECTOR OF INCOME TAX-II vs. WESTERN UNION FINANCIAL SERVICES INC.

ITA/126/2016HC DelhiDLHC01670540201512 February 2016Bench: HON'BLE DR. JUSTICE S.MURALIDHAR,HON'BLE MR. JUSTICE VIBHU BAKHRU72 pages

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Cases cited in this judgment

Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.

DIT v. Morgan Stanley & Co.
292 ITR 416 · 2007 · SC
360 citing
(i) Formula One World Championship Ltd. v. CIT
13 SCC 294 · 2017 · SC
200 citing
Panditrao Khotkar v. Kailash Kushanrao Gorantyal
7 SCC 1 · 2020 · SC
183 citing
CIT v. Visakhapatnam Port Trust
1983 SCC OnLine AP 287 · 1983
124 citing
National Petroleum Construction Company v. DIT
383 ITR 648 · 2016 · HC
69 citing
DIT v. E-Funds IT Solution
364 ITR 256 · 2014 · HC
61 citing
CIT v. Vishakhapatnam Port Trust
15 Taxmann 72 · 1983 · HC
35 citing
CIT v. Ahmedbhai Umarbhai & Co.
18 ITR 472 · 1950 · SC
34 citing
(International Taxation) v. Samsung Heavy Industries Co. Ltd.
426 ITR 1 · 2020 · SC
29 citing
One World Championship Ltd. v. CIT (International Taxation)
15 SCC 602 · 2017 · SC
25 citing
Anglo French Textile Company Ltd. v. CIT
23 ITR 101 · 1953 · SC
21 citing
2024 SCC OnLine DEL 4065
2024 SCC OnLine DEL 4065 · 2024
16 citing
248 Taxmann 192
248 Taxmann 192 · 2017 · SC
16 citing
National Petroleum Construction Co. v. DIT (International Taxation)
2016 SCC OnLine DEL 571 · 2016
13 citing
268 ITR 9
268 ITR 9 · 2004
11 citing
Nawal Kishore Sharma v. Union of India
9 SCC 329 · 2020
3 citing

ITA 1288/2006 & Connected Matters Page 1 of 72

* 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.

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

WESTERN UNION FINANCIAL SERVICES INC.

.....Respondent Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

ITA 1288/2006 & Connected Matters Page 2 of 72

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.

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 Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 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 A while 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 directly. Some of the instances given by Vogel in this behalf, of relative standards of control, are as under: 'The degree of control depends on the type of business activity that the taxpayer carries on. It is Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

therefore not necessary that the taxpayer is able to exclude others from entering or using the POB. The painter example in the OECD MC Comm. (No. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional integration test) suggests that the type and extent of control need not exceed the level of what is required for the specific type of activity which is determined by the concrete business. By contrast, in the case of a self-employed engineer who had free access to his customer's premises to perform the services required by his contract, the Canadian Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer's regular office hours and was not entitled to carry on businesses of his own on the premises. Similarly, a Special Bench of Delhi's Income Tax Appellate Tribunal denied the existence of a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson's employees had access to the premises of Indian mobile phone providers to deliver the hardware, software and know-how required for operating a network. By contrast, in the case of a competing enterprise, the Bench did assume an Indian PE because the employees of that enterprise (unlike Ericsson's) had exercised other businesses of their employer. The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries [cf. Article 24(3) OECD and UN MC], and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: – at any time of his own choice; Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

(d) a factory (e) a workshop (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; (g) a warehouse, in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or premises used as a sales outlet; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period; (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period; (l) The furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)]. 3. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include any one or more of the following: (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if: (a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first- mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a 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, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.‖

remitters in the United Arab Emirates25 and thereafter transmitted to beneficiaries in India either through normal banking channels or with the involvement of the LOs. The LOs of UAE Exchange Centre were enabled to download requisite information particulars by using computers installed in India and which were in turn connected to servers in the UAE. It was the LOs which after due verification were drawing cheques on banks in India and transmitting them to the concerned beneficiaries. The AAR had held against the assessee by observing that those LOs would constitute a PE. 41. Our Court in UAE Exchange while examining the challenge had held that the AAR had clearly erred in taking that position and ignoring that the services rendered by LOs clearly fell within the scope of Article 5(3). This becomes apparent from a reading of para 32 of that decision and which is extracted hereinbelow:- ―32. In our opinion, this view is clearly erroneous. We are living in an era where the world is described euphemistically as ―flat‖ or even a global village. Organisations and companies operate transnationally. There is an eagerness to bring to tax by States income, by employing deeming fictions so that incomes which ordinarily do not accrue or arise within the taxing State are brought within the State's tax net. It is in this context that the expression ―permanent establishment‖ appearing in the DTAA has to be viewed. In the case of the DTAA under consideration in the present case under article 5 read with article 7, profits of an enterprise are liable to tax in India if an enterprise were to carry on business through a permanent establishment, meaning thereby fixed place of business through which business of an enterprise is wholly or partly carried on. Under article 5(2)(c), amongst others, permanent establishment includes an office. However, article 5(3) which opens with a non obstante clause, is illustrative of instances where under the DTAA various activities have been deemed as ones which would not fall within the ambit of the expression ―permanent establishment‖. One such exclusionary clause is found in article 5(3)(e) which is : maintenance of fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a

preparatory or auxiliary character. The plain meaning of the word ―auxiliary‖ is found in the Black's Law Dictionary 7th Edition at page 130 which reads as ―aiding or supporting, subsidiary‖. The only activity of the liaison offices in India is simply to download information which is contained in the main servers located in the UAE based on which cheques are drawn on banks in India whereupon the said cheques are couriered or despatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. Can such an activity be anything but auxiliary in character. Plainly to our minds, the instant activity is in ―aid‖ or ―support‖ of the main activity. The error into which, according to us, the Authority has fallen is in reading article 5(3)(e) as a clause which permits making a value judgment as to whether the transaction would or would not have been complete till the role played by liaison offices in India was fulfilled as represented by the petitioner to their NRI remitter. According to us, what has been lost sight of is that by invoking the clause with regard to permanent establishment, we would, by a deeming fiction tax an income which otherwise neither arose nor accrued in India—when looked at from this point of view, the exclusionary clause contained in article 5(3) and in this case in particular, sub-clause (e) have to be given a wider and liberal play. Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-a-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an ―auxiliary‖ character. On this aspect of the matter, the Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 ; [2007] 7 SCC 1 amongst other issues was called upon to decide as to whether back office operations carried on by Morgan Stanley Company for one of its Morgan Stanley Advantages Services Pvt. Ltd. would qualify as having a permanent establishment in India. The Supreme Court, while holding that back office operations fall within the exclusionary clause article 5(3)(e) of the Indo-US DTAA, which is, identical to the DTAA under consideration in the present case, came to the conclusion that back office operations came within the purview of article 5(3)(e). It is laid down by the Supreme Court in the case of Morgan Stanley [2007] 292 ITR 416 ; [2007] 7 SCC 1 that in ascertaining what would constitute a ―permanent establishment‖ within the meaning of article 5(1) of the Indo-US DTAA, one had to undertake what is called a functional and factual analysis of each of the activities undertaken by an establishment. In that case, the Supreme Court came to the conclusion that the entity located in India which was engaged in only supporting the front Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted, one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore, to the extent of the above back office functions the second part of Article 5(1) is not attracted. 11. Lastly, as rightly held by AAR there is no agency PE as the PE in India had no authority to enter into or conclude the contracts. The contracts would be entered into in the United States. They would be concluded in US. The implementation of those contracts only to the extent of back office functions would be carried out in India, and therefore, MSAS would not constitute an agency PE as contended on behalf of the Department. 12. In DTAA, the term PE [Ed.: The matter between two asterisks has been emphasised in original.] means [Ed.: The matter between two asterisks has been emphasised in original.] a fixed place of business through which the business of an MNE is wholly or partly carried out. The definition of the word PE in Section 92-F(iii) is inclusive, however, it is not under Article 5(1) of the Treaty. It is for this reason that Article 5(2) of DTAA herein refers to places included as PE of the MNE. One such place is mentioned in Article 5(2)(l) which deals with furnishing of services. 13. The concept of PE was introduced in the 1961 Act as part of the statutory provisions of transfer pricing by the Finance Act of 2001. In Section 92-F(iii) the word ―enterprise‖ is defined to mean ‗92-F. (iii) … a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, …‘ Under CBDT Circular No. 14 of 2001 it has been clarified that the term PE has not been defined in the Act but its meaning may be understood with reference to DTAA entered into by India. Thus, the intention was to rely on the concept and definition of PE in DTAA. However, vide the Finance Act, 2002 the definition of PE was inserted in the Income Tax Act, 1961 (for short ―the IT Act‖) vide Section 92-F(iii- a) which states that the PE shall [Ed.: The matter between Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

135.

The first function of the term ‗through‘ is to make it clear that the taxpayer has to control the permanent establishment (see supra m. No. 106 et seq. for details). 136. Secondly, functional integration presupposes that the taxpayer ‗wholly or partly carrie(s) on‘ his business (article 5(1) OECD MC; the OECD MC Comm. uses the verb ‗carried out‘ synonymously (No. 35 OECD MC Comm. on article 5)). However, like ‗business' and ‗enterprise‘ (cf. supra m. No. 27 et seq.), these words do not function as a substantive filter either. While early draft Model Conventions contained the condition that the fixed POR should have a productive character, this requirement was never adopted by the OECD Model (see No. 35 OECD MC Comm. on article 5). None of the current MCs provide a specific productivity test. It follows that place of business may constitute a permanent establishment even if they perform activities which mainly or exclusively expenditures to show for. 137. Likewise, the ‗carrying-on‘ requirement does not imply an activity in the sense of an active and visible work. It includes even stand-by services and omissions. This gains significant relevance where the omission is profitable (e.g., in the case of a place of business earning money in the source State simply by fulfilling, for whichever period of time, a non-competition agreement relating to the territory of that State). 138. However, a diffuse passivity which equals a (temporal or lasting) suspension of the activities which the place of business has been designed for may indicate that the place of business is not ‗permanent‘. For details, see supra m. No. 87 et seq. 139. Thirdly, the phrase ‗through which‘ indicates that the taxpayer makes use of the place of business in that he employs it an instrument (equalling or resembling an operating asset) for his entrepreneurial activities. This third aspect of the functional integration is by far the most disputed one. 140. Historically, the instrumental character of the place of business for the carrying-on of the enterprise could not be taken for granted. Between 1963 and 1977, the OEEC/Organization for Economic Co-operation and Development did not employ this term. Rather, it was sufficient that the taxpayer carried on his business ‗in‘ the place of business (see supra m. No. 45). Based on the old Model, some older DTCs use the words ‗in which‘ still today. While some authors have denied any divergence in substance, Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

the 1977 amendment is a strong reason to assume a semantic shift indeed. 141. In a different context (viz., in article 5(4.1) of the Organization for Economic Co-operation and Development and UN MC, (as amended in 2017), the Organization for Economic Co-operation and Development and UN have returned, in one specific regard, to this old line by stating that an enterprise should carry on business ‗at the same place‘. However, the simultaneous use of this language on the one hand and the terms ‗used or maintained by an enterprise‘ on the other, in one and the same sentence in the initial phrase of article 5(4.1) of Organization for Economic Co-operation and Development and UN MC, proves how careful and attentive the 2017 Models have been drafted. This dualism is another good reason to stipulate a different meaning of ‗through‘, as opposed to ‗in‘ or ‗at‘. For all of these reasons, we do see a substantial difference between both terms. 142. It follows that on the one hand, the activities mentioned in article 5(1) of the Organization for Economic Co-operation and Development and UN MC need no longer be carried on ‗in‘ or ‗at‘ the place of business. In this respect, the 1977 change of article 5(1) of OECD MC has enlarged the scope of the permanent establishment definition. Especially if one thinks of an activity as a human behaviour, one can now (unlike before 1977) easily subsume unmanned facilities under the permanent establishment definition (see supra m. No. 45 and see, e.g., No. 127 OECD MC Comm. on article 5). 143. On the other hand, the requirement of an instrumental character of the place of business has become irrefutable. Even stronger than the English amendment (‗through which‘ instead of ‗in which‘), the corresponding modification of the French text (‗par l'intermediaire de laquelle‘ instead of ‗ou‘) has stressed the functional integration of the place of business in the business. 144. The OECD MC Comm. has weakened the meaning of ‗through‘ since 2003. The Commentary holds the view that the requirement of a functional integration is met as soon as the taxpayer exercises the business in a fixed place of business which is at his disposal (No. 20 OECD MC Comm. on article 5 (added on January 28, 2003)). This is the reason for the characterisation of the famous painter example (i.e., the fictitious case of a painter who, for two years, spends three days a week in the large office building of its main client) as a service permanent establishment. In substance, the view of the OECD MC Comm. limits the meaning of ‗through‘ to the first two instead of all three semantic aspects Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

69.

Proceeding further to deal with the concepts of ―preparatory‖ and ―auxiliary‖ services and which are intended to remove a place of business which may otherwise fall within the meaning of a permanent establishment and which phraseology is mirrored in article 5(3)(e) of the India-USA Double Taxation Avoidance Agreement, Klaus Vogel's work has the following instructive passages: ―59. (Determination of the activity's character) It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Each individual case will have to be examined on its own merits. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity. 60. (Preparatory character) As a general rule, an activity that has a preparatory character is one that is carried on in contemplation of the carrying on of what constitutes the essential and significant part of the activity of the enterprise as a whole. Since a preparatory activity precedes another activity, it will often be carried on during a relatively short period, the duration of that period being determined by the nature of the core activities of the enterprise. This, however, will not always be the case as it is possible to carry on an activity at a given place for a substantial period of time in preparation for activities that take place somewhere else. Where, for example, a construction enterprise trains its employees at one place before these employees are sent to work at remote work sites located in other countries, the training that takes place at the first location constitutes a preparatory activity for that enterprise. An activity that has an auxiliary character, on the other hand, generally corresponds to an activity that is carried on to support, without being part of, the essential and significant part of the activity of the enterprise as a whole. It is unlikely that an activity that requires a significant proportion of the assets or employees of the enterprise could be considered as having an auxiliary character.… 69. (Collect information) The second part of sub-paragraph

marketing, sale and delivery of the goods to final consumers) and (2) a specialised enterprise which focuses on one of these steps only (e.g., on the delivery of goods). Suppose that each enterprise maintains a place of business in a foreign State just for the sake of the delivery of goods. The same activity (the delivery of goods) is ancillary and subordinate for enterprise (1) while it constitutes the core business of enterprise (2). 305. The amount of value added by either enterprise is the same, and so is the potential tax revenue in the source State. An absolute standard suggests equal treatment of cases (1) and (2). 306. However, the ordinary meaning of both ‗preparatory‘ and ‗auxiliary‘ requires the identification of a point of reference. One may say that the absolute standards are based on an analysis of the function of the core activity in relation to the entire chain of economic value added. It is more convincing, however, to apply relative standards in the sense that the value added is considered on a micro rather than a macro level, that is, that the core activity should be compared to the entirety of all activities exercised by the enterprise. This relative view would deny a permanent establishment in case (1), and assume a permanent establishment in case (2). This view is shared by No. 60 of OECD MC Comm. on article 5 as well as by most authors. 307. It seems to your author, however, that the strict and exclusive application of relative standards would not do justice to cases where an enterprise of type (1) above (supra m. No. 283) is so large that place of businesses which, from an absolute perspective, are respectable entities with valuable assets, a considerable number of employees and full-fledged bureaucratic and administrative facilities of their own, just seem to be small, preparatory or auxiliary from the perspective of the company's headquarters. If they are still the biggest employer in a given municipality, it is hardly justified from the viewpoint of fiscal equivalence to exempt such place of businesses under article 5(4) of OECD and UN MC. 308. It follows that a combined approach is most appropriate. While relative standards apply at the outset (supra m. No. 304), absolute standards require a second filter: The activities of a place of business qualify as being ‗of a preparatory or auxiliary character‘, as compared to the overall activities of the enterprise if they have not more than a marginal relevance within the enterprise's overall business plan. It should be noted that it is not the share in actual profits or losses on which the comparison should be based. Rather, the characterisation of an activity as preparatory and/or Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

World Championship Ltd. [Formula One World Championship Ltd. v. CIT (International Taxation), (2017) 394 ITR 80 (SC); (2017) 15 SCC 602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).] in the following terms (page 100 of 394 ITR): ―Emphasising that as a creature of international tax law, the concept of permanent establishment has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of permanent establishments contemplated under article 5 of Organization for Economic Co-operation and Development Model. First, an establishment which is part of the same enterprise under common ownership and control—an office, branch, etc., to which he gives his own description as an ‗associated permanent establishment‘. The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a permanent establishment. Such permanent establishment is given the nomenclature of ‗unassociated permanent establishment‘ by Baker. He, however, pointed out that there is a possibility of a third type of permanent establishment, i.e., a construction or installation site may be regarded as permanent establishment under certain circumstances. In the first type of permanent establishment, i.e., associated permanent establishments, primary requirement is that there must be a fixed place of business through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled : (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) permanent establishment must be a fixed place of business, i.e., a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, permanent establishment must have three characteristics : stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on… 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 the disposal‘ of the enterprise when the enterprise has right to use the said place and has control thereupon.… Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

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 directly.… Organization for Economic Co-operation and Development commentary on Model Tax Convention mentions that a general definition of the term ‗permanent establishment‘ 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. The term ‗place of business' is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a permanent establishment. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute permanent establishment are : a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise.… As per article 5 of the Double Taxation Avoidance Agreement, the permanent establishment has to be a fixed place of business ‗through‘ which business 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 permanent establishment, i.e., what is mentioned in clauses (a) to (f) as the ‗negative list‘. A combined reading of sub-articles (1), (2) and (3) of article 5 would clearly show that only certain forms of establishment are excluded as mentioned in article 5(3), which would not be permanent establishments. Otherwise, sub-article (2) uses the word ‗include‘ which means that not only the places specified therein are to be treated as permanent establishments, the list of such permanent establishments is not exhaustive. In order to bring any other establishment which is not specifically 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.… We are of the opinion that the test laid down by the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP); 1983 SCC OnLine AP 287; (1984) 38 CTR 1 (AP); (1983) 15 Taxman 72 (AP).] fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e., FOWC) on the soil of this country. It is already noted above that as per Philip Baker (A Manual on the Organization for Economic Co-operation and Development Model Tax Convention on Income and on Capital), a permanent establishment must have three characteristics : stability, productivity and dependence. All characteristics are present in this case. Fixed place of business in the form of physical location, i.e., Buddh International Circuit, was at the disposal of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

98.

That takes us then to further test the stand as struck by the respondents and to examine the correctness of their conclusion that the activities undertaken by the Indian subsidiary could not be said to be of a ―preparatory‖ or ―auxiliary‖ character. The decision of the Supreme Court in Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7 SCC 1.] , while explaining the meaning to be ascribed to support services and activities of a ―preparatory‖ or an ―auxiliary‖ nature enunciates the legal position in the following terms (page 425 of 292 ITR): ―In our view, the second requirement of article 5(1) of the Double Taxation Avoidance Agreement is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from a reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing Information Technology enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a permanent establishment stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5(1) is not attracted.… There is one more aspect which needs to be discussed, namely, exclusion of permanent establishment under article 5(3). Under article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a permanent establishment. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in article 5(1) or under article 5(2) the term permanent establishment shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

101.

The aspect of whether an Indian establishment was performing functions of a ―preparatory‖ or an ―auxiliary‖ character was considered by this court in National Petroleum Construction Co. v. DIT (International Taxation) [(2016) 383 ITR 648 (Delhi); 2016 SCC OnLine Del 571.] , and where it was pertinently observed (page 672 of 383 ITR): ―The language of sub-paragraph (e) of paragraph (3) of article 5 of the Double Taxation Avoidance Agreement is similar to the language of sub-paragraph (e) of paragraph (4) of article 5 of the Model Conventions framed by Organization for Economic Co-operation and Development, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on ‗Double Taxation Conventions, Third Edition‘, he states that ‗It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character‘…. The Black's Law Dictionary defines the word ‗auxiliary‘ to mean as ‗aiding or supporting, subsidiary‘. The word ‗auxiliary‘ owes its origin to the Latin word ‗auxiliarius' (from auxilium meaning ‗help‘). The Oxford Dictionary defines the word ‗auxiliary‘ to mean ‗providing supplementary or additional help and support‘. In the context of article 5(3)(e) of the Double Taxation Avoidance Agreement, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the assessee. In the context of the contracts in question, where the main business is fabrication and Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

60.

At this juncture, we deem it apposite to notice some of the salient principles emanating from Klaus Vogel‘s work on Double Taxation Conventions27. The Klaus Vogel Commentary, albeit in the context of electronic commerce, renders the following illuminating observations with respect to whether software and computer equipment could constitute a PE:- ―122. [E-commerce operations as PE] There has been some discussion as to whether the mere use in electronic commerce operations of computer equipment in a country could constitute a permanent establishment. That question raises a number of issues in relation to the provisions of the Article. 123. [Distinction] Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a 'place of business' as there is no 'facility such as premises or, in certain instances, machinery or equipment' (see paragraph 6 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a 'fixed place of business' of the enterprise that operates that server. 124. [Internet Service Providers (ISPs)] The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise (see paragraph 10 to 19 above), even if the enterprise has been able to determine that its web site should be

hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met. 125. [Requirement of fixation] Computer equipment at a given location may only constitute a permanent establishment if it meets the requirement of being fixed. In the case of a server, what is relevant is not the possibility of the server being moved, but whether it is in fact moved. In order to constitute a fixed place of business, a server will need to be located at a certain place for a sufficient period of time so as to become fixed within the meaning of paragraph 1. 126. [Facilities at disposal] Another issue is whether the business of an enterprise may be said be wholly or partly carried on at a location where the enterprise such as equipment such as a server at its disposal. The question of whether the business of an enterprise is wholly or partly carried on through such equipment needs to be examined on a case-by-case basis, having regard to whether it can be said that, because of such equipment, the enterprise has facilities at its disposal where business functions of the enterprise are performed. 127. [Presence of personnel] Where an enterprise operates computer equipment at a particular location, a permanent establishment may exist even though no personnel of that enterprise is required at that location for the operation of the equipment. The presence of personnel is not necessary to consider that an enterprise wholly or partly carries on its business at a location when no personnel are in fact required to carry on business activities at that location. This conclusion applies to electronic commerce to the same extent that it applies with respect to other activities in which equipment operates automatically, e.g. automatic pumping equipment used in the exploitation of natural resources. 128. [Preparatory or auxiliary activities] Another issue relates to the fact that no permanent establishment may be considered to exist where the electronic commerce operations carried on through computer equipment at a given location in a country are restricted to the preparatory or auxiliary activities covered by paragraph 4. The question of whether particular activities performed at such a location fall within paragraph 4 needs to be examined on a case-by-case basis having regard to the various functions performed by the enterprise through that equipment. Examples of activities which would generally be regarded as preparatory or auxiliary include: Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

- providing a communications link - much like a telephone line - between suppliers and customers; - advertising of goods or services; - relaying information through a mirror server for security and efficiency purposes; - gathering market data for the enterprise; - supplying information. 129. [Essential and significant functions] Where, however, such functions form in themselves an essential and significant part of the business activity of the enterprise as a whole, or where other core functions of the enterprise are carried on through the computer equipment, these would go beyond the activities covered by paragraph 4 and if the equipment constituted a fixed place of business of the enterprise (as discussed in paragraphs 123 to 127 above), there would be a permanent establishment. 130. [Constitution of core functions] What constitutes core functions for a particular enterprise clearly depends on the nature of the business carried on by that enterprise. For instance, some ISPs are in the business of operating their own servers for the purpose of hosting web sites or other applications for other enterprises. For these ISPs, the operation of their servers in order to provide services to customers is an essential part of their commercial activity and cannot be considered preparatory or auxiliary. A different example is that of an enterprise (sometimes referred to as an 'e-tailer') that carries on the business of selling products through the Internet, In that case, the enterprise is not in the business of operating servers and the mere fact that it may do so at a given location is not enough to conclude that activities performed at that location are more than preparatory and auxiliary. What needs to be done in such a case is to examine the nature of the activities performed at that location in light of the business carried on by the enterprise. If these activities are merely preparatory or auxiliary to the business of selling products on the Internet (for example, the location is used to operate a server that hosts a web site which, as is often the case, is used exclusively for advertising, displaying a catalogue of products of providing information to potential customers, paragraph 4 will apply and the location will not constitute a permanent establishment. If, however, the typical functions related to a sale are performed at that location (for example, the conclusion of the contract with the customer, the processing of the payment and the delivery of the products are performed automatically through the equipment located there), these activities cannot be considered to be merely preparatory or auxiliary. 131. [ISPs as PE] A last issue is whether paragraph 5 may apply to deem an ISP to constitute a permanent establishment. As already Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

noted, it is common for ISPs to provide the service of hosting the web sites of other enterprises on their own servers. The issue may then arise as to whether paragraph 5 may apply to deem such ISPs to constitute permanent establishments of the enterprises that carry on electronic commerce through web sites operated through the servers owned and operated by these ISPs. Whilst this could be the case in very unusual circumstances, paragraph 5 will generally not be applicable because the ISPs will not constitute an agent of the enterprises to which the web sites belong, because they will not conclude contracts or play the principal role leading to the conclusion of contracts in the name of these enterprises, or for the transfer of property belonging to these enterprises or the provision of services by these enterprises, or because they will act in the ordinary course of a business as independent agent, as evidenced by the fact that they host the web sites of many different enterprises. It is also clear that since the web site through which an enterprise carries on its business is not itself a 'person' as defined in Article 3, paragraph 5 cannot apply to deem a permanent establishment to exist by virtue of the web site being an agent of the enterprise for purposes of that paragraph.‖ 61. As is manifest from a reading of the aforenoted passages, the Vogel Commentary commends a view that while software itself may not constitute tangible property and therefore a location that can constitute a ‗fixed place of business‘, the computer equipment within which such software is stored can meet that threshold, with or without the presence of personnel. However, this is subject to the computer equipment itself meeting the requirement of being ‗fixed‘ and of the equipment and place being at the disposal of the enterprise and of the activities themselves not being of a ‗preparatory‘ or ‗auxiliary‘ nature. 62. The Vogel Commentary, while examining the concept of a ‗place‘ under Article 5 takes the categorical position that purely intangible property, such as software, cannot constitute a PE:- ―A place is a certain amount of space (no. 11 OECD MC Comm. on Article 5) within the 20 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 Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

technical equipment above the soil may qualify as a PE only if they are fixed on the soil (for details, see infra m.no. 50 et seq.). 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 (for this connection, see infra m.no. 45 et seq.), 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'; see infra no. 50 et seq.), as well as the object and purpose of Article 5 OECD and UN MC itself (supra m.no. 2 et seq.), in the light of which the term 'place' needs to be interpreted. This approach, which follows from the general rules on treaty interpretation (supra Introduction m.no. 87 et seq.), gives a certain leeway for including movable property in the understanding of 'place' and, therefore, to assume a PE once such property has been 'fixed' (infra m.no. 50 et seq.) to the soil. For example, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformator or generator on board a former railway wagon qualify as places (and may also be 'fixed'; see infra m.no. 50 et seg.). 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 a PE constituted otherwise (see Article 7 at m.no 60 et seq.). Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE (no. 123 OECD MC Comm. on Article 5)……‖

―23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as PE, so long such dependent agent has no authority to negotiate and enter into contracts, under Article 5(4), there is no PE in India. It is to be noted that Article 5(4) has three clauses, namely, a, b & c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per clause (c) of sub-Article (4), it is found that RRIL habitually secures orders in India for the appellant. It is a set practice that no customers in India are directly to send orders to the appellant in UK. Such orders are required to be routed only through RRIL. This fact is evident from the letter of Mr. L.M. Morgan to Mr. Prateek Dabral and Ms. Usha. In the said letter, it is made clear that even request for quotation/extension could not be communicated directly to the appellant but are to be routed through the office of RRIL. This is applicable even to the orders. The fact is not denied that the orders are firstly received by RRIL from the customers in India and only then communicated to the appellant. Thus, as per Para 4(c) of Article 5, the dependent agent habitually secures orders wholly for the enterprise itself and hence, is deemed to be a permanent establishment of the appellant. The contention of appellant that the role of RRIL is merely of a post office is, therefore, unacceptable in view of the facts of the case as evidenced by various documents and correspondence found during the course of survey. It can, therefore be summarized that in the light of the facts as well as documents mentioned above, RRIL's presence n India is a permanent establishment of appellant because: (a) It is a fixed place of business at the disposal of the Rolls Royce Pic and its group companies in India through which their business are carried on. (b) The activity of this fixed place is not a preparatory or auxiliary, but is a core activity of marketing, negotiating, selling of the product. This is a virtual extension/projection of its customer facing business unit, who has the responsibility to sell the products belonging to the group. (c) RRIL acts almost like a sales office of RR Pic and its group companies. (d) RRIL and its employees work wholly and exclusively for the Rolls Royce Pic and the Group. Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified

(e) RRIL and its employees are soliciting and receiving orders wholly and exclusively on behalf of the Rolls Royce Group. (f) Employees of Rolls Royce Group are also present in various locations in India and they report to the Director of RRIL in India. (g) The personnel functioning from the premises of RRIL are in fact employees of Rolls Royce Pic. This has been admitted by the MD Mr. Tim Jones, GM, and can be discerned from statement of Mr. Ajit Thosar and documents like terms of employment of GMS. Thus, the appellant can be said to have a PE in India within the meaning of Article 5(1), 5(2) and 5(4) of the Indo UK DTAA. Since we have found that the appellant has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India.‖ 17. We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRIL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered.‖ 65. Jebon Corporation v. Commissioner of Income-tax and another29, a judgment rendered by the Karnataka High Court was again concerned with a LO of a South Korean enterprise which had come to be established at Bangalore. On facts, that High Court in Jebon Corporation had found as follows:- ―19. It is on the basis of the aforesaid material, the Tribunal held that the activities carried on by the liaison office are not confined only to the liaison work. They are actually carrying on the commercial activities of procuring purchase orders, identifying the buyers, negotiating with the buyers, agreeing to the price, thereafter, requesting them to place a purchase order and then the said purchase order is forwarded to the head office and then the material is dispatched to the customers and they follow up regarding the payments from the customers and also offer after-sales support. Therefore, it is clear that merely because the buyers place orders directly with the head office and make payment directly to the head

office and it is the head office which directly sends goods to the buyers, would not be sufficient to hold that the work done by the liaison office is only liaison and it does not constitute a permanent establishment as defined in article 5 of the Double Taxation Avoidance Agreement. In fact, the Assessing Officer has clearly set out what was discovered during the investigation and the same has been properly appreciated by the Tribunal and it came to the conclusion that though the liaison office was set up in Bangalore with the permission of the Reserve Bank of India and in spite of the conditions being stipulated in the said permission preventing the liaison office from carrying on commercial activities, they have been carrying on commercial activities. 20. It was further contended that the Reserve Bank of India has not taken any action and, therefore, such interference is not justified. Once the material on record clearly establishes that the liaison office is undertaking an activity of trading and, therefore, entering into business contracts, fixing price for sale of goods and merely because the officials of the liaison office are not signing any written contract would not absolve them from liability. Now, that the investigation has revealed the facts, we are sure that the same will be forwarded to the Reserve Bank of India for appropriate action in the matter in accordance with law. But merely because no action is initiated by the Reserve Bank of India till today would not render the findings recorded by the authorities under the Income-tax Act as erroneous or illegal.‖ 66. As is apparent from the aforesaid passages, the said decision is clearly distinguishable and has no application to the facts which obtain in these appeals. Contrary to what the Karnataka High Court found in Jebon Corporation, there is no material which may have even remotely tended to indicate that the LO was engaged in commercial or trading activities. 67. Columbia Sportswear Co. v. Director of Income Tax (International Taxation)30 was yet another decision which came to be cited by Mr. Chawla for our consideration. This too was a matter which pertained to a LO established by Columbia Sportswear in India. The activities which were being undertaken by that office in India and as

were identified by the AAR and which is also noticed in the judgment of this Court would become evident from a reading of paras 12 and 32 of the report and which are extracted hereinbelow:- ―12. The question, therefore, is whether the activities undertaken by the liaison office on behalf of the applicant are activities limited to or confined to the purchase of goods in India by the applicant. We have referred in detail to the various activities undertaken by the liaison office on behalf of the applicant. We have also noticed that it has about 35 employees divided into 5 teams dealing with material management, merchandising, production management, quality control and administration support constituting teams from finance, human resources and information systems. In addition to assisting the applicant in the actual purchase of the goods direct from the manufacturers in India, various activities are carried on by the liaison office which relate to ensuring the choosing of quality material, occasionally testing them for quality, conveying of requisite design, picking out of competitive sellers, the ensuring of quality, the ensuring of adherence to the policy of the applicant in the matter of procurement and employment, in the matter of compliance with environmental and other local regulations by the manufacturers - suppliers and in ensuring that the payments made by the applicant reach the suppliers. The applicant is obviously in the business of designing, manufacturing and selling branded products, brands over which it has exclusive rights. In the matter of manufacturing of products as per design, quality and in implementing policy, the liaison office is actually doing the work of the applicant. The activities of the liaison office are not confined to India. It also facilitates the doing of business by the applicant with entities in Egypt and Bangladesh. A person in the business of designing manufacturing and selling cannot be taken to earn a profit only by a sale of goods. The goods as designed and styled by the applicant cannot be sold without it being got manufactured and procured in the manner designed and contemplated by the applicant. It will be unrealistic to take the view that all the activities other than the actual sale of the goods are not integral part of the business of the applicant and have no role in the profit being made by the applicant by the sale of its branded products. It is difficult to accept the argument that what is done in India by the liaison office of the applicant is only to expend money and all its income accrues outside India by the sale of the products. The position we have adopted is clearly supported by the decision of the Supreme Court in Anglo- French Textile Co. Ltd. v. CIT [1953] 23 ITR 101 affirming the decision of the Madras High Court in Anglo-French Textile Co. Ltd. v. CIT [1950] 18 ITR 888. The Supreme Court answered the question, "can any profit arise out of mere purchase of raw- material," thus 'In our judgment, the contention of the Learned Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40 Signature Not Verified