M/S BALMER LAWRIES & CO. LTD.,KOLKATA vs. INCOME TAX OFFICER(IT) WD-1(1), KOLKATA, KOLKATA

आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by the assessee is arising out of order of Commissioner of Income Tax (Appeals)-VI, Kolkata in appeal No.34/13- 14/CIT(A)-VI/ITO(IT)-1(1)/Kol dated 04.09.2014. Assessment was framed by ITO I.T),Ward-1(1), Kolkata u/s 201(1)/1A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.01.2014 for assessment year 2012-13. Grounds raised by assessee are reproduced below:-

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 2 1. That the learned Commissioner of Income Tax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly confirming that the Appellant Company was liable to deduct tax at source under section 195 of the Income Tax Act, 1961 on account of remittance of profits made to the Non-Resident Companies / Organizations towards “Logistic Freight and Other Services” provided by such entities overseas and wholly outside India. 2. That the learned Commissioner of Income Tax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly holding and/or confirming that the overseas entities had appointed the Appellant Company as its ‘Exclusive Agent’ in respect of import from their respective Countries on a long term basis. 3. That the learned Commissioner of Income Tax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly holding and/or confirming that the Appellant Company acted as a “Dependent Agent”- “Permanent Establishment” in India of different Non-Resident Entities, in terms of the various Double Taxation Avoidance Agreements (DTAA). 4. That the learned Commissioner of Income Tax (Appeals)-VI, Kolkata erred in arbitrarily and wrongly holding and/or confirming that though income is received by the Overseas Entities outside India, it accrued or arose in India, and is, therefore, chargeable to tax in India, as per section 5(2)(b) of the said Act. 5. That the learned Commissioner of Income Tax (Appeals)VI, Kolkata erred in arbitrarily and wrongly upholding the application, in the instant case, of the principles laid down by the Hon'ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. CIT (1999) 239 ITR 587 (SC), notwithstanding his findings and observations in paragraph 11 of his impugned order dated 4th September, 2014, that the whole of the profits remitted to the overseas entities was not chargeable to tax in India. 6. That the findings and/or observations made by the learned Commissioner of Income Tax (Appeals)-VI, Kolkata, more particularly in paragraph 9 of his impugned Order dated 4th September, 2014, inter alia to the effect that the terminology of ‘Agency Agreement’ and/or ‘Reciprocal Agency’ used in different Agreements executed between the Appellant Company and the Overseas Entitles leads to a normal presumption that the same has been used consciously and for a valid reason: that the Appellant is dependent upon a single overseas entity relevant to that country for the purpose of meeting requirement of its

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 3 customers; that ht Appellant has no option of making the import through any other service provider; that the Appellant was, on a regular basis negotiating and concluding the contracts including the rates and other terms with the clients in India, for and on behalf of the Overseas Entitles, which rates are binding on the overseas entities; that the Appellant was regularly generating business for the Overseas Entities from India are erroneous and based on mere presumptions and also contrary to the facts on record. 7. That the leaned Commissioner of Income Tax (Appeals)-VI, Kolkata failed to note and appreciate that the contracts executed by the Appellant Company with its Indian Customers, who wanted to import goods from overseas countries, were annual rate contracts; and that the Appellant Company was free to choose the overseas entities for any movement of goods to or from overseas; and that Appellant Company neither negotiated nor concluded any contract for and on behalf of the foreign entities either regularly, as alleged, or otherwise or at all. 8. That the findings recorded and/or observations made by the learned CIT(A)-I, Kolkata, more particularly in paragraphs 9, 11 & 12 of his impugned Order dated 4th September, 2014, in so far as these relate to the alleged liability of the Appellant Company to deduct tax at source under section 195 of the said Act in respect of remittance of share of profits of the Overseas Entities, are against the facts and evidences on record, illegal, invalid, unreasonable and/or otherwise perverse.” There is a single and common issue in all the grounds of appeal, so all the grounds are clubbed together for the sake of convenience. The solitary issue raised by the assessee in all the grounds of appeal is that the assessee failed to deduct the TDS on the payment made to overseas entities for logistic services.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 4 all the world. As and when the assessee receives the contract from its client based in India for the logistic services for a country outside India then the assessee approaches to his overseas agent of that country for such services. The major role of the overseas agents is to coordinate with the shipping companies, arrange local transportation as required and book the shipment either by the Sea or the Air as per the instruction of the customers. The agent submits the actual bills of the expenses which are reimbursed by the assessee. The assessee accordingly raises the invoice for the services to its customer which comprises the actual cost of the services and profit margin. The assessee after deducting the actual expenses shares the 50% of the profit element with the overseas agent. The similar procedure is followed when the overseas agent needs the logistic services for any part of India. The assessee submits the actual bill of expenses to the overseas agent which are reimbursed by the overseas agent. Accordingly the overseas agent raises the invoice to its client which comprises the cost of the services and profit element. This profit is again shared between the overseas agent and the assessee in the ratio of 50 : 50.

2.1 The assessee has the overseas agent in various countries as mentioned above and with whom there is an agency agreement with each of them. The AO during the assessment proceedings observed that all the agreements similarly worded in terms of language, terms & conditions, accounting procedure mentioned in the agreement. For the sake of clarity the agency agreement with one client is reproduced as below. “AGENCY AGREEMENT WITH ABC EUROPEAN AIR & SEA CARGO DISTRIBUTION TRANSPROT GmbH, A-2401 Fischamend, Austria AGREEMENT made this 1st day of September 2010 between BALMER LAWRIE & CO.LTD with its Head Office at 21, Netaji Subhas Road, Kolkata-700 001, India hereinafter called BL and ABC EUROPEAN AIR & SEA CARGO DISTRBUTION TRANSPORT GmbH, A-2401 Fischamend, Austria for all of its branches in Europe hereinafter called ABC whereby it is agreed as follows:

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 5 1. RECIPROCAL APPOINTMENT BL agrees to appoint ABC and ABC agrees to appoint BL as its agent covering air and ocean import and export transportation between India and all the establishments of ABC in Europe, both ways. It is agreed by both parties that throughout the term of this agreement that neither party will establish an operating company doing the business of air and ocean import and export transportation in the others territory, without the express agreement of the other. SERVICES; (a) The parties shall ensure to breakbulk consolidation expeditiously in accordance with local regulations and notify promptly the individual consignee about the arrival of their consignments. (b) The parties shall undertake delivery of the individual shipment on the other party’s consolidations if so required by the individual consignee. All such clearance and delivery charges will be recoverable from the consignee. (c) If the consignor want the parties to perform customs clearance, the parties shall render all possible help to the consignor or consignor’s representative with reasonable service charges plus the normal charges required for the issue of delivery orders. (d) Upon effecting final delivery to the consignee or consignee’s representative, the parties shall obtain a signed delivery receipt for each shipment in token of having delivered the consignment in good order and condition. (e) Where the consignee of a consignment is at a place beyond the deconsolidation point and sector carriage by air or land is effected by either party, such sector charges (Actual Sector Freight + Transhipment Charges) will be invoiced at 50% by the receiving party to the other after the transactions, in respect of consolidations from Austria, Bosnia, Czech Republic, Slovenia, Slovakia, Ukraine to India and from India to the countries mentioned above. (f) Both the parties agree and shall ensure that their respective client do not suffer in any way because of short service (and not getting their consignments in time) due to any difference between the parties at any time. (g) In respect of Charges Collect Shipment it is the respective party’s responsibility to receive payment of all charges due from the consignee before making final delivery.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 6 (h) If the consignee does not want to take delivery of his shipment right away, or refuses to accept it, whether party shall communicate this to the other party immediately by e-mail communication and the first party shall send disposal instructions to the second party after obtaining the same from the shipper. (i) The parties shall reply promptly to all tracers and communications which one party may receive from the other party. (j) All expenses for telephone fax or other communication sent in connection with or pursuant to this agreement, as between parties hereto, shall be to the account of sender. II. ACCOUNTING (a) The parties shall account to each other in EURO for Air Shipments and US $ for Ocean shipments for the money collected or disbursed by one party on behalf of the other. Such accounts between the parties will be settled by the end of the second month following the transactions date, (i.e July invoices will be paid in full by 30th September, after allowing for contra items from the other party in the same period). Remittance to ABC from India will be arranged by BL on complying extant rules applicable for such found transfer. (b) Both the parties shall have the right to forward consolidations to the other party reflecting airfreight charges, valuation and related charges and Agent’s disbursements on a chargeable to consignee basis as the occasion demands. (c) Profit share will be on a 50/50 basis between BL and ABC and the profit is determined as the difference between the net freight (and airline and shipping fuel surcharge if applicable) paid to the carrier and the freight amount collected from the customer. No other costs will be permitted in the profit share calculation including breakbulk fees, trucking, supplementary FOB charges, airline handling or security fees, unless expressly agreed by both parties in writing. (d) Queries/Disallowances to be notified promptly, on arrival of shipments, to the origin agent and will be replied to within 7/15 days by both sides. The origin agent to raise a credit not if the query is accepted. (e) The origin agent will invoice the Agent with the total collect charges for all HAWB/HBL where origin agent prepays the MAWB/MBL. When the origin agent sends MAWB/MBL on a charges collect basis to the destination agent, a credit note will be given to the agent for the amount of the collect charges for freight, and any applicable airline disbursements.” At this juncture the AO has also highlighted the provision of Permanent Establishment (for short PE) in the light of Double Taxation Avoidance Agreement (for short DTAA) with various countries. Accordingly for the sake of

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 7 clarity the provisions of PE in relation to DTAA with UAE - United Arab Emirates is reproduced below:- “UAE: Article 5- Permanent establishment- 1. For the purposes of this Agreement, the term “permanent establishment” mans a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term “permanent establishment” includes especially: (a) A place of management; (b) A branch; (c) An office; (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 farm or plantation; (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months; (i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. 3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) The use of facilities solely for the purpose of storage, display or 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 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;

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 8 (e) The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 4. Notwithstanding the provisions of paragraphs (1) and (3), where a person – other than an agent of independent status to whom paragraph (5) applies- is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise 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 ns 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, he will not be considered an agent of independent status within the meaning of this paragraph.” 2.2 For the year under consideration the assessee has made the payment to its overseas agents towards the logistic services for an amount of Rs. 9785.36 lacs. The breakup of such services stands as under : i) Remittances towards Air Logistic Services from Kolkata 8724.53 ii) Remittance towards Sea Logistic Services from Kolkata 641.38 iii) Remittance towards Logistic Services from Mumbai 415.03 iv) Remittance towards Logistic Services from Bangalore 4.42

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 9

9785.36 The further breakup of the amount paid towards logistic services in the form of reimbursement and profit stands as under : S.No. Particulars Reimbursement exp. Profit Total 1. Air Logistic services 8250.00 474.00 8724.00 2. Sea Logistic Services 636.75 4.62 641.38 3. Logistic services (Mum) 408.62 6.38 415.03 4. Logistic services (Ban) Not available 4.42 The AO during assessment proceedings observed that no TDS has been deducted by the assessee on the above payments to overseas agent. Accordingly the AO sought the clarification from the assessee for the non- deduction of tax on the above stated payments. The assessee submitted that the above payments have two elements as described in the aforesaid table. Firstly the remittance on account of air freight, local transport etc. which is nothing but reimbursement of the actual cost incurred by the overseas agent on behalf of the assessee. Therefore the question of TDS on such payment does not arise. Secondly the element of profit to the overseas agent but again the same is not taxable in India due to following reasons : 1. The remittance to the overseas agents is nothing but the reimbursement of the expenses for the freight of transport etc. So there arises no liability of TDS on such payment. 2. None of overseas agent has any permanent establishment in India. Therefore the question of TDS on such payment does not arise. 3. All the activities are carried outside India so the income of the overseas agent does not accrue or arise in India. 4. As per the provisions of DTAA the income to the non resident entities is not taxable in India then the aforesaid transaction is out of the purview of TDS provisions.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 10 In view of the above the assessee submitted that the question of deducting TDS from the payment to the overseas agents does not arise as their income is not assessable to tax in India. However the AO disregarded the claim of the assessee and held that the payments made to the overseas agents are assessable in India by holding that the place of assessee in itself is permanent establishment for non- resident entities and the profit made by them from the transactions made with the assessee are assessable to tax in India. The AO further held that the assessee was to deduct the TDS on the whole amount of payment made to the overseas agents i.e. actual cost of reimbursement plus the amount of share of profit as the assessee or the overseas agent has not submitted any application under section 195(2), 195(3) or 197 of the Act. The AO has relied in the decision of Hon’ble Supreme Court in the case of Transmission Corporation of AP Vs CIT 105 Taxman 742 while holding the assessee in default.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 11 show that none of them are agents of each other and that each of them are operating in their respective countries on principal to principal basis. However the learned CIT(A) has disregarded the claim of the assessee and partly confirmed the order of AO by observing as under. “9. While it is true, that for income tax purpose, what is more important is the substance of the transactions and not the terminology per se, when in a legal document any term is used, normal presumption is that the same has been used consciously and for a valid reason. Nevertheless, going beyond the terminology, if one analyses the relationship between the appellant and the overseas entities, it can be seen that the overseas entities have appointed the appellant as exclusive agent in respect of import from their respective countries on a long term basis. As a result, wherever an import is to be made from a particular country, the appellant is dependent upon a single overseas entity relevant to that country for the purpose of meeting requirement of its customers. The appellant has no option of making the import through any other service provider the ape negotiates the terms and rates of the contract with the importing party (customer) in India. It has no say over the cost of logistic services provided by the overseas entity. It also passes on, in addition to the cost, pre-agreed share in profit to the overseas entity. Such profit obviously depended upon the price negotiated by the appellant with the clients. Thus, the appellant was, on a regular basis, negotiating the rates and other terms with the clients in India, which generated business for the overseas entity and determined, even if indirectly, the consideration being received by the overseas entity. The rate negotiated by the appellant with its clients in India is binding on the overseas entity and determined the profit received by the overseas entity. Viewed in this light, it can be said that the appellant was regularly generating business for the overseas entity from India, was acting exclusively on behalf of entity in India, was negotiating and concluding contracts including rates on behalf of the overseas entity and represented its interest in India on long term basis. It is well known that concept of permanent establishment includes agency PE. The UN model convention contains Article-5(5) dealing with agency PE. It has been mentioned therein that where an enterprise does not have its own establishment, it could have a PE though an agent. The agent should be authorized to conclude contracts on behalf of the principal in such a manner that agent’s action would bind the enterprise. Agents who are dependent upon the principal may constitute a PE and the authority to bind should be for the purposes which are essential

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 12 and significant to the principal’s business. Such provisions regarding agency PE are present in practically all the DTAAs signed by India with several counties. The ITO has, in his order extensively quoted such provisions in some of the DTAAs, such as those with UAE, Germany, Singapore, as well as UN model. If one analyses the relationship between the overseas entities and the appellant, it fulfils all of the tests mentioned therein. As discussed earlier, the appellant is acting s exclusive agent for overseas entity on a long term basis, negotiating contracts having a direct bearing on its business sand is acting in a manner which binds overseas entity in relation to profit of its business. Though the appellant is having agreements with a number of entities, for a single country there is only one overseas entity involved, on whom it was depending for providing logistical services. Moreover, profit from the contract entered into with the client is shared with the overseas entity. Though the appellant was having other independent business activities, so far as import form a particular country was concerned, it was dependent on a particular overseas entity. Thus, the appellant is, as a matter of fact, acting as a dependent agent PE of the overseas entity, so far as this activity is concerned. It therefore follows that any business generated from the overseas entity through such PE results in accrual of income in India. Though such income is received by the overseas entity outside India, it accrues or arises in India and is, therefore taxable as per section 5(2)(b) of the Income Tax Act, 1961. Moreover since the overseas entity has PE in form of its agent (appellant), such income would be taxable in India even after taking into account the beneficial provisions of various DTAAs signed by India with various countries. It may be mentioned that all the DTAAs have a provision that business since accrued in India is taxable if the non-resident has a PE in India. I, therefore, do not agree with the contention of the appellant that business income of the non-residence was not taxable in India. 10. However, it is noted that the amount remitted by the appellant to the overseas entity had two components. The first one was towards cost of logistic services provided by them and the second was share in profit. The first component was nothing but reimbursement of cost of logistic services provided by the overseas entities. The ITO is of the opinion that the entire remittance was liable to be TDS u/s. 195 of the Act. For this, he has drawn strength from the order of the Hon'ble Supreme Court in the case of Transmissions Corporation of AP, Ltd. vs. CIT 105 Taxman 742. According to the ITO, since the appellant / payees had not made any application u/s. 195(2), 195(3) or u/s. 197 of

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 13 the Act, tax was required to be deducted on the entire payment in view of the ratio given by the Hon'ble Supreme Court in the aforesaid case. On carefully going through the said decision, it is seen that the issue before the Hon'ble Supreme Court in that case was whether in a case where any sum is payable to the non- resident was a trading receipt, whether the assessee was liable to deduct tax on the entire payment or on the net income. In that context, it was held by the Hon'ble Supreme Court that where the sum paid was chargeable to tax, tax should be deducted on the entire sum at the prescribed rate. In other words, the payer was not supposed to go into as to what would be income imbedded in such a sum and that aspect could only be seen by the AO if an application u/s. 195(2), 195(3) or u/s. 197 of the Act was made to him. However, Hon'ble Supreme Court was, in that case, not concerned with a situation where the amount under consideration was not chargeable to tax at all and hence, in such a situation, ratio of the said decision shall not apply. Hon'ble Delhi High Court has also taken such view in its decision the case of Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del), after analysing the ratio given by Supreme Court in the case of Transmission Corporation of AP. Ltd (supra). The position is somewhat peculiar in the appellant’s case. Here, the appellant is making payments towards reimbursement of cost as well as share in profit. It is in fact paying two sums of entirely different nature – the first one being reimbursement of cost and the second one being share of profit. Though for the sake of convenience the two sums are sometimes being paid together, in reality, they are towards two different payments, the first being reimbursement to the overseas entity towards cost incurred by it and the second being its share in profit accrued in India. As pointed out over the appellant, it has been held in a number of decisions, that reimbursement of cost has no component of income and therefore, tax is not required to be deducted on the same. Some such decisions are by Hon'ble Calcutta High Court in the case of CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal), by the Bangalore Bench of the Tribunal in Bangalore International Airport Ltd. v. ITO (International Taxation) (2008) 307 ITR (AT) 295 (Bang), by Mumbai bench of Tribunal in Asst. Director of Income Tax (International Taxation) v. Wizcraft International Entertainment Pvt. Ltd. (2011) 135 TTJ 647 (Bom) and Nathpa Jhakri Joint Venture v. ACIT (2010) 5 ITR (Trib) 75 (Mum). Respectfully following the ratio given I the aforesaid decisions by several judicial authorities, including the Hon'ble jurisdictional High Court, it is held that the appellant was not liable to deduct tax at source in respect of reimbursement of cost.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 14 11. So far as remittance towards share in profit is concerned, as discussed earlier, the same was chargeable to tax in India. There may be some dispute as to quantum of income taxable in India. In the case of Galileo International Inc. vs. DCIT 19 SOT 257, Hon'ble ITAT, Delhi had examined the case where a resident of USA, engaged in provision services to hotels, airlines etc., appointed a distributor in India. It was held by the Hon'ble Tribunal that such appointment of distributor amounted to business connection in India and also the same, practically being a dependent agent, was to be treated as PE in India. Therefore, income earned by the non-resident through such distributor was held to be taxable in India. However, it was held by the Hon'ble ITAT that since the major part of operation took place outside India and only generation of request and receiving the results had occurred in India, only a small component of income shall be taxable in India. Therefore, in the appellant’s case also there could be a divergence of view as to what portion of the income was taxable in India. However, since some part of such income was taxable in India and the appellant/payees had not made any application u/s 195(2), 195(3) or u/s. 197 of the Act, the entire sum paid to the overseas entities towards share in profit was liable to be TDS in view of the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. (supra). 12. In the light of the above discussion it is held, that while the reimbursement of cost incurred by non-resident entity shall not be liable to TDS, remittance of their share in profit was liable to TDS u/s 195 of the Income tax Act, 1961. According to the appellant, the figures stated in his order by the ITO in this regard are not correct. The appellant is directed to produce break up of remittance between the reimbursements of cost and share in profit before the ITO. He shall verify the same and rework liability towards tax and interest u/s. 201(1)/1A of the Act accordingly.” Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 15 4.1 The major function of these Overseas Agents is to coordinate with shipper overseas, arrange local transportation overseas as and when required, and book the shipments by Air / Sea in accordance with the customers’ requirements. The independent Overseas Agents hire the services of Shipping Lines / Airlines Operators; the charges whereof are reimbursed by the Appellant Company herein on actual basis to such Overseas Agents. The Overseas Agents are also required to issue / arrange necessary documents for export such as Air Way Bills / Bills of Landing etc. Subsequently, on receipt of bills from the Overseas Agents, the freight charges and other expenses incurred by them overseas are reimbursed on actual basis. 1. The pre-agreed share in the net income derived by the Appellant Company from such logistic services is remitted to overseas independent agents on account / by way of their remuneration for rendering all services overseas. 2. The pre-requisite condition for the application of section 195 of the Income Tax Act, 1961 requiring deduction of tax at source by any person responsible for making any payment to a non-resident is that the amount paid to the non-resident is otherwise chargeable to income tax in India under the provisions of the said Act. If the amount paid or payable to the non-resident is not chargeable to tax in India under the regular provision of the said Act, or such amount is not taxable by virtue of the provisions of the Double Taxation Avoidance Agreement (DTAA) entered into by India with such other country of which the non-resident is a resident in accordance with Chapter – IX, then the provisions of Chapter – XVII of the said Act about the collection and recovery of tax are ruled out, and the person responsible for paying such sum cannot be fastened with any liability for deduction of tax at source, and cannot under any circumstance whatsoever be treated as an assessee in default. 4.2. In order to treat the payer as assessee in default, it is of the utmost importance that the amount so paid or credited to the account of the payee is capable of being brought within the purview of the tax net and such assessment can be lawfully made on the payee.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 16 4.3. In support of the aforesaid settled position in law, reliance is placed on the decision of the Hon’ble Supreme Court in Vijay Ship Breaking Corporation v. CIT (2009) 314 ITR 309, 313 (SC), which decision was followed and reiterated in GE India Technology Centre Pvt. Ltd. v. CIT (2010) 327 ITR 456, 463-465 (SC). In Vijay Ship Breaking’s case, the Hon’ble Supreme Court clearly held and observed at page 313 of the Reports that liability to deduct TDS arises ‘only if the tax is assessable in India’. Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. In GE India Technology’s case, the Hon’ble Supreme Court following its earlier decision in Vijay Ship Breaking, held and observed at pages 463-465 of the Reports inter alia as under : ‘If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See : Vijay Ship Breaking Corporation v. CIT [2009] 314 ITR 309). One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of "any sum paid to any resident". Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of "any amount" referred to in the specified

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 17 provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in section 195(1). Therefore, this court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the Income-tax Officer (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non- resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e., sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income-tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly and Co. (India) (P.) Ltd. [2009] 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 18 collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are "chargeable to tax" under the Income-tax Act. It is true that the judgment in Eli Lilly [2009] 312 ITR 225 was confined to section 192 of the Income-tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income "chargeable under the head salaries". Similarly, section 195 imposes a statutory obligation on any person responsible for paying to a non- resident any sum "chargeable under the provisions of the Act", which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income-tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income-tax Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments, the payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 19 the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax………... As stated hereinabove, section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, section 195 uses the word "payer" and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill- founded………….” 5. The aforesaid view was also taken by the Hon’ble Delhi High Court in Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del).

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 20 7. The aforesaid view was followed and reiterated by the Hon’ble Karnataka High Court in Jindal Thermal Power Co. Ltd. v. DCIT (2010) 321 ITR 31 (Kar), by the Hon’ble Rajasthan High Court in CIT v. Modern Insulators Ltd. (2014) 369 ITR 138 (Raj), by the Hon’ble Madras High Court in CIT v. Fluidtherm Technology Pvt. Ltd. (2015) 231 Taxman 259 (Mad) and by the Bangalore Bench of the learned Tribunal in Zanav Home Collection v. JCIT (2015) 68 SOT 184 (Bang). 8. Therefore, the law is by now well settled that there is no requirement to deduct any tax at source if the amount paid to non-resident is not chargeable to tax in India. Reliance in this connection is placed inter alia on the decision of the Hon’ble Delhi High Court in Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del) and of the Hon’ble Gauhati Bench of the learned Tribunal in JCIT v. George Williamson (Assam) Ltd. (2008) 305 ITR(AT) 422 (ITAT-Gau). 9. The concepts of ‘business connection’ and ‘Permanent Establishment (PE)’ in the context of deeming provisions contained in section 42 of the 1922 Act read with the charging section 4 of the 1922 Act and section 9 of the 1961 Act read with charging section 5 thereof have been dealt with by the Hon’ble Supreme Court as well as by the different High Courts in various cases. 1. In Carborandum’s case (supra), the Hon’ble Supreme Court inter alia held and observed at pages 341-345 of 108 ITR, inter alia as under : “The income assessable to income-tax, therefore, is of two kinds, viz., (i) accruing or arising in the taxable territories; and (ii) deemed to accrue or arise to the non-resident in the taxable territory. The concept of actual accrual or arising of income in the taxable territories, although not dependent upon the receipt of the income in the taxable territories, is quite distinct and apart from the notion of deemed accrual or arising of the income, The High Court does not appear to have kept this distinction in view and mixed the one with the other while deciding the reference in question.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 21 Section 42 of the Act concerns itself with a deemed accrual or arising of the income within the taxable territiories. Under subsection (1): " All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories... shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. " If the whole of the deemed income can be roped in for the levy of tax under sub-section (1) of section 42, no question of any apportionment arises. If not, sub-section (3) is attracted. It says : " In the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories." xxxx xxxx xxxx “On a plain reading of sub-sections (1) and (3) of section 42 it would appear that income accruing or arising from any business connection in the taxable territories-even though the income may accrue or arise outside the taxable territories-will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub- section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 22 territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under subsection (3) of section 42. In Commissioner of Income-tax v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC), Shah J., as he then was, speaking for this court, said at page 24: " A business connection in section 42 involves a relation between a business carried on by a nonresident which yields profits or 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 the non- resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non- resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case." The learned judge says further: " A relation to be a 'business connection' must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income- tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 23 deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non- resident, and if through or from that connection income directly or indirectly arises." The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and Solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all. The judgment of the High Court under appeal in Commissioner of Income- tax v. Carborandum Company [1973] 92 1TR 411 (Mad) is not correct. It has rightly been pointed out by the Bombay High Court in Commissioner of Income-tax v. Tata Chemicals Ltd. [1974] 94 ITR

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 24 85 (Bom) with reference to the similar or almost identical provisions in section 9(1) of the Income- tax Act, 1961, that in order to rope in the income of a nonresident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed……….” 10. In Toshoku Ltd.’s case (supra), the Hon’ble Supreme Court clearly held and observed at page 531 of 125 ITR inter alia as under : “In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.” 11. In Ishikawajima-harima’s case (supra), their Lordships of the Hon’ble Supreme Court inter alia held and observed at page 437 of the Repots “…Mere existence of business connection may not result in income of the non-resident assessee from transaction with such a business connection accruing or arising in India.” “The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment’s non-involvement in this transaction excludes it from being a part of the cause of the income itself, and thus there is no business connection.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 25 xxx xxx xxx For attracting the taxing statute there has to be some activities through the permanent establishment. If income arises without any activity of the permanent establishment, even under the DTAA the taxation liability in respect of overseas services would not arise in India. Section 9 spells out the extent to which the income of non-resident would be liable to tax in India. Section 9 has a direct territorial nexus. Relief under a Double Taxation Treaty having regard to the provisions contained in section 90(2) of the Income-tax Act would arise only in the event a taxable income of the assessee arises in one Contracting State on the basis of accrual of income in another Contracting State on the basis of residence. Thus, if the appellant had income that accrued in India and is liable to tax because in its State all residents it was entitled to relief from such double taxation payable in terms of the Double Taxation Treaty (sic). However, so far as accrual of income in India is concerned, taxability must be read in terms of section 4(2) read with section 9, whereupon the question of seeking assessment of such income in India on the basis of the Double Taxation Treaty would arise. In cases such as this, where different severable parts of the composite contract are performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction. This principle helps determine, where the territorial jurisdiction of a particular State lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. Therefore, in our opinion, the concepts profits of business connection and permanent establishment should not be mixed up. Whereas business connection is relevant for the purpose of application of section 9; the concept of permanent

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 26 establishment is relevant for assessing the income of a non-resident under the DTAA. There, however, may be a case where there can be overlapping of income; but we are not concerned with such a situation. The entire transaction having been completed on the high seas, the profits on sale did not arise in India, as has been contended by the appellant. Thus, having been excluded from the scope of taxation under the Act, the application of the double taxation treaty would not arise. The Double Tax Treaty, however, was taken recourse to by the appellant only by way of an alternate submission on income from services and not in relation to the tax of offshore supply of goods. xxx xxx xxx “Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. The petitioners in the present case have provided services to persons resident in India, and though the same have been used here, they have not been rendered in India.” xxx xxx xxx 12. It is an undisputed fact that none of the overseas independent Entities with whom the Appellant Company has been dealing with is having any permanent establishment in India. It is by now well settled that even when Section 9 of the Income Tax Act, 1961 applies to a given case, considering the provisions of the Double Taxation Avoidance Agreement, if beneficial, than the provisions of the Income Tax Act, the provisions of the Double Taxation Avoidance Agreement would prevail. In the absence of a permanent establishment, the industrial or commercial profits derived by a non-resident are not assessable to tax in India, particularly when all activities are carried by the independent Overseas Agents only outside India. Reliance in this connection is placed on the decision of the Hon’ble Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC). The said view

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 27 was also stated by the Central Board of Direct Taxes in its Circular No.333 dated 2nd April, 1982 reported in (1982) 137 ITR(St.) 1 as well as by the Hon’ble Calcutta High Court in CIT v. Davi Ashmore India Ltd. (1991) 190 ITR 626 (Cal). The Hon’ble Bombay High Court in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom), and the Hon’ble Delhi High Court in Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del), the Authority for Advance Rulings in HMS Real Estate Pvt. Ltd., In re (2010) 325 ITR 71 (AAR) and Ernst & Young Pvt. Ltd., In re (2010) 323 ITR 184 (AAR), as well as the Special Bench of the Income Tax Tribunal, Mumbai in Mahindra and Mahindra Ltd. v. DCIT (2009) 313 ITR(AT) 263 (Mum)(SB).

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 28 of carrying on its activities in India….kindly see para 5, at page 7 of the said Written Submissions; c. Under each of such Agreements, the Appellant Company was to ensure to break bulk consolidation of consignments in India expeditiously and then undertake the job of delivery to the consignees concern….kindly see para 5, at page 7 of the said Written Submissions; d. It is common knowledge that such a process involve several orders being consolidated at a warehouse / central warehouse and sent to a break bulk warehouse where they are broken down into individual orders and distributed. Since these warehousing facilities were used for consolidating the consignments received from the overseas entities and therefrom ensuring delivery of the parcels in India, the warehouse(s) itself / themselves constituted a place of business for the operations of the business activity of the overseas entities in India….kindly see para 5, at page 7 of the said Written Submissions; e. It thus becomes absolutely clear that the overseas entities had substantial interest of enduring nature in India attributable to the Appellant Company. There was, thus, a virtual projection of each such overseas entity into the territory of India through the Appellant Company….kindly see para 5, at page 7 of the said Written Submissions; f. As per paragraph 1 of Article 5 of the DTAAs, ‘permanent establishment’ means a fixed place of business through which the business of the foreign enterprise is wholly or partly carried on. Since, in the instant case, each of the overseas entities was established to have carried on a part of its business through a fixed place of business, viz. through the Appellant Company, each overseas entity fell within the definition of PE under paragraph 1 of Article 5….kindly see para 5, at page 7 of the said Written Submissions; g. In essence, in the instant case, there existed both a fixed place PE in India within the meaning of paragraph 1 of Article 5, and that such PE was in the form of warehouse within the meaning of paragraph 2 of Article 5….kindly see para 5.1, at pages 7-8 of the said Written Submissions; h. Paragraph 5 of Article 5 provides that where a person other than an independent agent to whom paragraph 6 applies, is acting in one State on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first State. Paragraph 6 excludes such agents from the

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 29 operation of paragraph 5 who are of independent status acting in ordinary course of their business….kindly see para 5.2, at page 8 of the said Written Submissions; i. However, paragraph 6 is not applicable in such cases where the activities of the agent of an independent status are devoted wholly or almost wholly on behalf of the foreign enterprise….kindly see para 5.2, at page 8 of the said Written Submissions; j. The learned CIT(A) has held that the Appellant Company acted as a ‘dependent’ agent on behalf of each of the overseas entities. The natural corollary of this finding was that paragraph 6 of Article 5 was not applicable in the instant case….kindly see para 5.2, at page 8 of the said Written Submissions; k. Moreover, in each Agreement, it is specifically mentioned that the overseas entity will not establish an operating company doing the business of Air and Ocean, import and export transportation, without the express consent of the Appellant Company, during the continuance of the said Agreement between them. This clearly establishes that the Appellant Company had carried on the activities of each of the non- resident overseas entities wholly in India….kindly see para 5.2, at page 8 of the said Written Submissions; l. Therefore, even if it is assumed that the Appellant Company was an agent of independent status, still it had carried on the activities of the overseas entities wholly in India and in the result, paragraph 6 would have no application in the instant case….kindly see para 5.2, at page 8 of the said Written Submissions; m. Once, the applicability of paragraph 6 is excluded, the existence of an agency PE in India vis-a-vis each non- resident entity is inevitable in so far as the Appellant Company was acting as an agent on behalf of each of the overseas entities on a fairly long term basis, negotiating contract on their behalf having direct dealing on their business activity in India and was also acting in a manner which bound the overseas entities in relation to profits derived from their Indian operations….kindly see para 5.2, at page 8 of the said Written Submissions; n. The existence of such an agency PE in India under paragraph 5 of Article 5 will get further support from the fact that the Appellant Company maintained the stock of inbound parcels / consignments in ‘warehouse(s)’ from

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 30 which the delivery was made on regular basis….kindly see para 5.2, at page 9 of the said Written Submissions; o. Therefore, considering the provisions under paragraph 5 of Article 5 of DTAAs between India and the foreign Countries, it is now amply clear that the Appellant Company constituted an agency PE in India for each of the non- resident overseas entities, in the instant case….kindly see para 5.2, at page 9 of the said Written Submissions; p. In view of the above analysis, it followed that each of the non-resident overseas entity had carried on a part of its business activities in India through its PE, namely, the Appellant Company within the meaning of paragraph 1, paragraph 2 as well as paragraph 5 of Article 5 of the relevant DTAA. Therefore, each of the non-resident overseas entity was liable to tax in India, by virtue of Article 5(1) or 5(2) or 5(5) or all of them….kindly see para 5.3, at page 9 of the said Written Submissions. 15. Further, the learned Joint Commissioner of Income Tax (JCIT) and Senior DR (ITAT), Kolkata in his Written Submissions dated 1st / 14th September, 2015 has made following allegations in paragraph 4.1 at pages 5 & 6 thereof, in relation to Countries like Hong Kong, Taiwan, Lithuania & Slovakia, with whom undisputedly India has no Double Taxation Avoidance Agreement : i. In the absence of any DTAAs, the issue of taxability of business profits in India earned by overseas entities in those countries has to be considered only in terms of section 9(1)(i) of the Income Tax Act, 1961….kindly see para 4.1, at page 5 of the said Written Submissions; ii. The non-resident overseas entities carried on their business operation in India through the Appellant Company….kindly see para 4.1, at pages 5-6 of the said Written Submissions; iii. The entire parcels / consignments for delivery in India were handled by the Appellant Company on behalf of the overseas entities….kindly see para 4.1, at page 6 of the said Written Submissions; iv. The said activity of business was carried on continuously with regularity….kindly see para 4.1, at page 6 of the said Written Submissions;

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v. There was, thus, a business connection of the overseas entities in India through the Appellant Company….kindly see para 4.1, at page 6 of the said Written Submissions; vi. The overseas entities carried on their activity of business in India and there was an intimate and real relationship of a business character of the overseas entities with the Appellant Company in India, which contributed to the earning of profit by the overseas entities in their business. The connection between the overseas entities and the Appellant Company in India was undoubtedly a commercial connection intimately connected with the business activity of those entities and such a connection was contributed to the earning of the profit by the overseas entities….kindly see para 4.1, at page 6 of the said Written Submissions; vii. There being a business connection of the overseas entities in India within the meaning of section 9(1)(i), they are liable to tax in India under section 9(1)(i), subject to Explanation (a) to section 9(1)(i), which stipulates that in the case of a business of which all operations are not carried out in India, the income of the business deemed under the clause to accrue or arise in India is only such part of income as is reasonably attributable to the operations carried out in India….kindly see para 4.1, at page 6 of the said Written Submissions; viii. As per the terms and conditions of the Agreement between the respective overseas entities and the Appellant Company, the later was responsible to perform various services as stipulated in the Agreements and deliver the parcels of the overseas entities in India for which the charges to be collected and shared were distinctly stipulated in those Agreements….kindly see para 4.1, at page 6 of the said Written Submissions; ix. Normally, it was the obligation of the overseas entities to deliver the parcels / consignments in India. The activity of such delivery in India through the Appellant Company amounted to their operations carried out in India in respect of which a reasonable estimate of income attributable to such operations was assessable to tax in India under section 9(1)(i) ….kindly see para 4.1, at page 6 of the said Written Submissions; x. Therefore, the profit earned by the abovementioned non- resident entities from the business operations carried out in India through the Appellant Company was assessable to tax in India, even without bothering to look for a PE coming into

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 32 existence in India….kindly see para 4.1, at page 6 of the said Written Submissions. 16. The Appellant Company denies each and every allegations, as aforesaid made by the learned JCIT / Sr. DR (ITAT), Kolkata in his said Written Submissions dated 1st / 14th September, 2015. The Appellant states and respectfully submits that the learned Sr. DR has not properly appreciated the facts of the instant case, which are all on the records of both the Assessing Officer, as well as of the learned CIT(A). The observations and/or allegations made by the learned Sr. DR, in his said Written Submissions, as extracted in paragraphs 17 & 18 hereinabove, more particularly those highlighted, as aforesaid, are wholly contrary to the facts on record; and therefore the observations and/or allegations made by the learned Sr. DR, are wholly arbitrary, baseless, contrary to the facts and evidences on record, unreasonable and/or otherwise perverse.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 33 its Indian Customers, who wish to import goods from overseas; t. There is no contract at any time whatsoever in between the said Indian customers and the overseas entities, who are engaged by the Appellant Company, only for rendering logistic services overseas; u. The Appellant Company, through its concerned branch office in India, communicates with the entities overseas, who are independently engaged for rendering such logistic services overseas. It may be appreciated that the materials ordered by the Indian customers are to be imported from overseas to India; v. As such, the logistic services viz. engaging Carrier overseas, arranging, if required, stuffing / lashing / packing and transportation of materials from the overseas manufacturers / suppliers / consignors to the Carrier overseas, arranging customs clearance in the overseas Ports, and thereafter, handing over all relevant documents to the Carrier Overseas, with an additional copy thereof to the Appellant Company in confirmation of their having completed the execution of the concerned assignment, are all required to be rendered only outside India; and these services are rendered by the overseas entities directly on behalf of the Appellant Company, in pursuant to the logistic services contracts entered into between the Appellant Company and the overseas entities, and not on behalf of the Indian importers; w. The job assigned by the Appellant Company to the overseas entity is completed, as soon as the relevant consignment to be imported from overseas country to India is handed over by such overseas entity to the carrier outside India; x. In terms of the Agreements executed in between the Appellant Company herein and the entities overseas, who are engaged by the Appellant Company for rendering logistic services overseas, in the concerned overseas Country, the logistic provider intimates to the Appellant Company the freight charges and other expenses to be incurred, all on actual basis, which they are able to arrange / negotiate with the overseas carrier etc.; y. It is clearly understood between the Appellant Company and the overseas entity providing logistic services overseas that the actual profit made by the Appellant Company, after deducting the logistic expenses, incurred by and reimbursable to the overseas entity, on actual basis, from the amount actually

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 34 receivable by the Appellant Company from the Indian Importer / customer for arranging such import, would be shared in between the Appellant Company and the overseas logistic services provider entity, as per the agreed terms; z. The freight charges and other incidental expenses incurred overseas, on actual basis, in between the Appellant Company and the overseas logistic services provider, is reimbursed and remitted by the Appellant Company to the overseas entity; and the amount representing the prefixed share of the overseas entity in the net profits for each such consignment, is also remitted by the Appellant Company to the overseas entity; aa. The Appellant Company, while making remittances to the overseas entity, does not deduct any tax at source, since all services by the overseas entity are rendered by it outside India; and no income in relation thereto accrues or arises in India; bb. At no stage of operations, the overseas entities act as “Agents” of the Appellant Company. The overseas entities engage the Airlines company and/or the Shipping Lines and/or the local transporters etc. on Principal to Principal basis, and not as agent of the Appellant Company herein; cc. The overseas entity does not have any permanent establishment in India. In relation to export activity (cases falling under this category are not more than 5%): i. The Indian Exporter(s), who are all customers of the Appellant Company, engage(s) the Appellant Company about the cargo to be exported from India together with the relevant details of the Overseas Importer(s), all in pursuant to specific agreements entered into between the Indian Exporter(s) and the Appellant Company. The privity of contract in all such cases is in between the Indian Exporter(s) and the Appellant Company herein; ii. The Appellant Company, based upon tenders floated by the Indian customers / exporters, and/or on specific nomination basis, enters into contracts for a fixed rate for logistic services, with reference to the weight / volume / unit of the consignment (either on CIF / FOB / Ex-works basis etc.) to be exported from India to overseas countries;

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 35 iii. The logistic charges for arranging exports from India to overseas countries are receivable only by the Appellant Company, in India, from the Indian exporter(s), in pursuant to specific agreements entered into in between the Appellant Company and the Indian exporter(s); iv. There is no contract or arrangement in between the overseas associate, on the one hand, and the overseas importer(s) and/or the Indian exporter(s); on the other hand, at any time whatsoever. The overseas entities are engaged by the Appellant Company only for rendering logistic services overseas; v. The appellant company receives the cargo and documents from the Indian Exporter(s), book(s) it through the Carrier(s) in India, pays the freight and other handling charges in India and hands over the cargo to the Carrier(s) after complying with all Customs procedures and formalities; vi. The Appellant Company, through its concerned branch office in India, communicates with the entities overseas, who are independently engaged by the Appellant Company only for rendering such logistic services overseas; vii. These logistic services are rendered by the overseas entities directly on behalf of the Appellant Company, in pursuant to the logistic services contracts entered into between the Appellant Company and the overseas entities, and not on behalf of the Indian exporters and/or the overseas importers; viii. It is clearly understood between the Appellant Company and the overseas entity providing logistic services overseas that the actual profit made by the Appellant Company, after deducting the logistic expenses, incurred overseas by and reimbursable to the overseas entity, on actual basis, from the amount actually receivable from the Indian exporter for arranging such export, would be shared in between the Appellant Company and the overseas logistic services provider / entity, as per the agreed terms; ix. Under instructions from the Appellant Company, the overseas entity receives the cargo from the carrier(s) and delivers the same to the consignee (overseas importer); x. The job assigned by the Appellant Company to the overseas entity is completed as soon as the relevant consignment exported from India is handed over by such overseas entity to the overseas importers outside India;

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 36 xi. The overseas entity invoices to the Appellant Company for local overseas transportation and other actual expenses incurred by it overseas in connection with the delivery of the exported consignment from India, which is required to be delivered to the overseas importer(s), after collecting the consignment from the carrier(s); xii. The transportation charges and other incidental expenses incurred overseas, on actual basis, by the overseas entity for providing logistic services overseas, is reimbursed and remitted by the Appellant Company to the overseas entity; and the amount representing the prefixed share of the overseas entity in the net profits for each such consignment, is also remitted by the Appellant Company to the overseas entity; xiii. The overseas entity in such cases does not render any service in India; xiv. The Appellant Company, while making remittances to the overseas entity, does not deduct any tax at source, since all services by the overseas entity are rendered by it wholly outside India; and no income in relation thereto accrues or arises in India; xv. At no stage of operations, the Appellant Company act as “Agents” of the overseas entities. The Appellant Company engages the Airlines companies and/or the Shipping Lines and/or the local transporters etc., in India, on Principal to Principal basis, and not as agent of the overseas entities; xvi. None of the overseas entities have any permanent establishment in India.

In reply to the Written Submissions dated 1st / 14th September, 2015 18. filed on behalf of the Department by the learned JCIT(IT), Range – 2, Kolkata / Sr. DR (ITAT), Kolkata, the Appellant Company respectfully submits as under :In respect of Countries with which India has DTAA dd. It is wholly incorrect on the part of the learned Sr. DR to arbitrarily and wrongly allege that the consignment sent by the overseas exporters, in respect of which overseas logistic services were rendered by the overseas entities, were required to be delivered by the Appellant Company, for and on behalf of the overseas entities. It has been repeatedly stated before the learned AO as well as before the learned CIT(A) that in respect

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 37 of each of the import consignments, there was privity of contract in between the Appellant Company and the Indian Importers. There was no contract in between the overseas entities and the Indian Importers. Therefore, the responsibility of delivering the imported consignments was all along, in every case, wholly and exclusively upon the Appellant Company herein; and in doing so, the Appellant Company was acting independently on its own in pursuant to the contracts entered into by it with the Indian Importers; and it was not doing any job in this respect for and on behalf of the overseas entities, as wrongly alleged by the learned Sr. DR and/or otherwise or at all; ee. In that view of the matter, it is wholly incorrect on the part of the learned Sr. DR that the place of business of the Appellant Company in India, where the services were provided, in regard to the imported consignments received from abroad for delivery in India, was to be treated as the office of the overseas entities in India, as wrongly alleged by the learned Sr. DR and/or otherwise or at all; ff. It is wholly incorrect on the part of the learned Sr. DR to allege that there was any question of break bulk consolidation of consignments in India in regard to the imported consignments; gg. Therefore, there is no question of the warehouse or central warehouse of the Appellant Company in India to be treated as place of business for the operations of the business activities of the overseas entities, as arbitrarily and wrongly alleged by the learned Sr. DR and/or otherwise or at all; hh. In the circumstances, it is wholly incorrect on the part of the learned Sr. DR to wrongly allege that overseas entities had substantial interest of enduring nature in India attributable to the Appellant Company and/or that there was any virtual projection of any such overseas entity into the territory of India through the Appellant Company, as arbitrarily and wrongly alleged by the learned Sr. DR and/or otherwise or at all; ii. In the circumstances, it is also wholly incorrect on the part of the learned Sr. DR to allege that they are existed a fixed place of PE in India within the meaning of paragraph 1 of Article 5 of the DTAA and/or that such PE was in the form of warehouse within the meaning of paragraph 2 of Article 5, as arbitrarily and wrongly alleged by the learned Sr. DR and/or otherwise or at all; jj. It was wholly incorrect on the part of the learned CIT(A) that the Appellant Company acted as a dependent agent on behalf of each of the overseas entities. This finding is wholly baseless,

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 38 against the facts and evidences on record, unreasonable and/or otherwise perverse; kk. It is also wholly incorrect on the part of the learned Sr. DR to allege that the Appellant Company had carried on the activities of each of the non-resident entities either wholly or partly in India. The Appellant Company repeats and reiterates that in respect of import consignments, the non-resident entities had no role to play in India; ll. It is therefore, incorrect to say the applicability of paragraph 6 of Article 5 of DTAA is excluded and/or that the agency PE in India vis-a-vis each of the non-resident entities is inevitable, as alleged or otherwise or at all; mm. The Appellant Company also states and submits that it did not negotiate any contract for and on behalf of the overseas entities at any time whatsoever; nn. It is wholly incorrect on the part of the learned Sr. DR to arbitrarily and wrongly allege that the Appellant Company maintained any stock of inbound parcels / consignments in its warehouses at any time whatsoever. The question of maintaining any stock could never arise inasmuch as the Appellant Company was required to immediately deliver the imported consignments on case to case basis to the Indian importer; oo. Therefore, no portion of paragraph 5 of Article 5 of DTAA is at all applicable in the instant case; and that the Appellant Company did not constitute an agency PE in India in respect of any of the non-resident overseas entities, as wrongly and arbitrarily alleged by the learned Sr. DR and/or otherwise or at all; pp. There is no basis for the learned Sr. DR to allege that any of the non-resident overseas entities had carried on any part of its business activities in India through the alleged PE of Appellant Company within the meaning of any part of Article 5 of DTAA; qq. Therefore, it is respectfully submitted that the non-resident entities are not liable to tax in India in any manner whatsoever, in the undisputed facts and circumstances of the instant case. In respect of Countries with which India has no DTAA rr. It is an undisputed fact and law that the taxability of business profits earned by overseas countries in India would wholly depend upon the fact whether such non-resident overseas entities rendered any services in India or not. Only if the

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 39 services are rendered in India, the deeming provisions contained in section 9(1) of the Act would apply so as to tax the income deemed to accrue or arise in India; ss. Since the non-resident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no portion of their business profits earned by them exclusively for services rendered outside India can be brought to tax in India, either under section 9(1) or otherwise or at all; tt. As already stated earlier the delivery of parcels / consignments were handled by the Appellant Company in India wholly on its own behalf and not on behalf of the overseas entities, as arbitrarily and wrongly alleged by the learned Sr. DR or otherwise or at all; uu. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of section 9(1)(i) of the Income Tax Act, 1961; vv. It is wholly incorrect on the part of the learned Sr. DR to allege that the overseas entities, in the facts and circumstances of the instant case carried on any activity of business in India, as wrongly and arbitrarily alleged by the Revenue or otherwise or at all; ww. Since there is no business connection within the meaning of section 9(1)(i) of the said Act between the Appellant Company and the overseas entities, the overseas entities are not chargeable to tax in India on their profits, which wholly accrued and arose outside India and through rendering of services by them wholly outside India. 19. The Appellant Company states and submits that it filed detailed submissions before the Income Tax Officer (International Taxation), Ward – 1(1), Kolkata through its two letters dated 11th September, 2013 and 20th December, 2013 in response to the show cause notice dated 18th July, 2013 issued by him; and through those two replies, the Appellant Company explained in particular as to why no portion of the remittances made to the non-resident entities were taxable in India. It was clearly explained and submitted before the Income Tax Officer that –

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 40 xx. none of the non-resident Entities had any permanent establishments in India; yy. the Appellant Company as well as each of the non-resident entities were acting on Principal to Principal basis; and that none of them were agents of each other; zz. even when section 9 of the said Act applied to a given case, the provisions of DTAA would prevail, particularly when such provisions are beneficial as compared to the regular provisions of the Income Tax Law in the light of the principles discussed and set out in paragraph 15 hereinabove; aaa. remittances made to the non-resident entities by way of reimbursement of freight and other charges / expenses incurred by them were not taxable in India in the light of the principles laid down in various decisions, which have been accepted by the learned CIT(A), and the Revenue is not in appeal before the learned Tribunal there against; bbb. in the absence of a permanent establishment, the industrial or commercial profits derived by non-resident were not assessable to tax in India, particularly when all activities were carried by the overseas non-resident entities independently on Principal to Principal basis in the light of the principles discussed hereinabove; ccc. the mere fact that the Agreements executed in between the Appellant Company and each of the different non-resident entities used the nomenclature “Reciprocal Appointment as Agents”, both ways, for Air / Ocean import and export transportation between India and the respective establishments in the overseas countries, it cannot and does not make the Appellant Company as the agent of the non-resident entities in any manner whatsoever, as is by now well settled by several decisions of the Hon’ble Supreme Court – kindly see Super Poly Fabriks Ltd. v. Commissioner of Central Excise (2008) 11 SCC 398 (SC) = (2008) 10 STR 545 (SC); ddd. the nature of operations and activities carried out by the Appellant Company as well as each of the non-resident entities clearly show that none of them are agents of each other; and that each of them are operating in their respective countries on Principal to Principal basis. As such, the Appellant Company can by no stretch of imagination be treated as the Permanent Establishment of any of the non-resident entities;

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 41 eee. in the circumstances mentioned hereinabove, the Appellant Company was not required to deduct any tax at source either under section 195 and/or section 195A of the said Act; fff. the decision of the Hon’ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. CIT (1999) 239 ITR 587 (SC) = (1999) 105 Taxman 742 (SC) referred to by the learned Income Tax Officer (International Taxation) at pages 21 & 22 of the said impugned Order dated 28th January, 2014 has no application in the facts and circumstances of the instant case. 20. The Appellant Company states and respectfully submits that it was not liable to deduct any tax at source in respect of any payments made and/or remitted to the non-resident entities at any time whatsoever. Discussions with reference to the eight (8) Case Decisions filed on 28th May, 2015 by the learned DR appearing for the Revenue in the form of Spiral Bound Paper Book containing 67 pages:

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 42 as per the existing agreement between Ennore Port and Tamil Nadu Electricity Board, two berths in Ennore Port were kept under lease exclusively for ships chartered by that assessee. The facility, that is placed for berthing is guaranteed for the foreign ships in coastal water chartered by the assessee tantamount to a permanent establishment for the foreign shipping companies. It was in these circumstances that the learned Chennai Bench of the Tribunal held that amount payable by the assessee to the non-resident was chargeable to tax in India; and therefore the Indian Assessee was required to deduct tax at source. This decision has no application in the facts and circumstances in the instant case. 23. The third decision of the Mumbai Bench of the learned Tribunal in Hapag-Lloyod Container Line GMBH v. Addl. Director of Income Tax (International Taxation), Mumbai (2012) 20 taxmann.com 719 (Mum), cited by the Revenue is again distinguishable in facts. In that case, it was clearly recorded by the learned Tribunal as a finding of facts in paragraph 21 of its said Decision that the assessee in that case was carrying out the business of operation of ships in India through its agent Hapag-Lloyod India Pvt. Ltd. The agent in India was concluding the contract of cargo transportation by issuing bill of lading which are legally binding on the assessee; therefore, the assessee was held to be carrying on the business of operation of ships in India and was thus held to be having a PE in India as per Article 5 of DTAA. This decision has no application to the instant case. 24. The fourth decision of the Hon’ble Supreme Court in GVK Industries Ltd. v. ITO (2015) 54 taxmann.com 347 (SC), cited by the Revenue is also distinguishable in facts. In paragraph 37 of the said Judgment, it was clearly recorded by the Hon’ble Apex Court that NRC had acted as a consultant and the services rendered by NRC came within the purview of consultancy service. In these circumstances it was held that fee for technical services being rendered and used in India were rightly liable to be taxed in India and

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 43 therefore there was need to deduct tax at source. This decision has no application in the facts and circumstances of the instant case. 25. The fifth decision of Delhi Bench of the learned Tribunal in Van Oord ACZ India Pvt. Ltd. v. ACIT (2008) 112 ITD 79 (Del), cited by the Revenue is again distinguishable on facts. There, the assessee an Indian Company was a wholly owned subsidiary of VOAMC, a foreign company. The Indian Company was to execute a dredging contract at certain port in Gujarat. As it did not have the technical competence and infrastructure to execute the aforesaid contract, the VOAMC execute the said contract on behalf of the Indian assessee through non-resident service providers. Mobilization and demobilization expense was over `.8 crores incurred by VOAMC were reimbursed to it by the Indian assessee. The Indian assessee had moved an Application under section 195 of the Act for issuing NIL tax withholding Certificate. This application was rejected by the Assessing Officer as well as by the learned CIT(A). It was in these circumstances that the learned Delhi Bench of the Tribunal upheld the claim of the Revenue that it was for the Assessing Officer to determine what portion of the payments made by the Indian assessee was liable to tax in India. This decision has no application in the instant case.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 44 27. The seventh decision of the Hon’ble Delhi High Court in Centrica India Offshore Pvt. Ltd. v. CIT (2014) 364 ITR 336 (Del), cited by the Revenue, is again distinguishable on facts. There the Hon’ble High Court held that payments made by the Indian assessee by way of fee for technical services rendered to it in connection with assisting it in conducting its business of quality control and management was liable to tax in India; and therefore there was requirement to deduct tax at source. This decision has no application in the instant case. 28. The eighth and last decision of the Bangalore Bench of the learned Tribunal in Syed Aslam Hashmi v. ITO (International Taxation), Ward 2(1), Bangalore (2013) 55 SOT 441 (Bang), cited by the Revenue, is again distinguishable on facts. The learned Tribunal held that where seller of an immovable property in India was non-resident Indian, according to the address given in the Sale Deed itself, the Indian purchaser ought to have deducted tax at source under section 195 while making payment of the sale consideration payable by him to the NRI Vendor. This decision again has no application in the facts and circumstances of the instant case.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 45 the terms & conditions of various agreements, the following salient features can be culled out :- (a) There is reciprocal appointment of agents by the appellant company and the overseas entities. (b) In those agreements, it has been specifically mentioned that the appellant company shall be exclusive agent of overseas entity in India insofar as import/export relating to particular territory is concerned. (c) It has been specified that throughout the term of the agreement, neither party shall establish an operating company doing the business of air and ocean, import and export transportation in the other’s territory without the express agreement of the other. (d) All the agreements are for fairly long period (generally of three years). (e) Each party shall have the right to recover contractual money from the other even after termination of the agreement for work done during the continuance of the agreement. 1.1 Services agreed to be performed under these agreements can be broadly described as under : (a) The parties shall ensure to breakbulk consolidation expeditiously in accordance with local regulations and promptly notify the individual consignee about the arrival of their consignments. (b) The parties shall undertake delivery of the individual shipment on the other party’s consolidations if so required by the individual consignee. All such clearance and delivery charges will be recoverable from the consignee. (c) If the consignors want the parties to perform customs clearance, the 1parties shall render all possible help to the consignor or consignor’s representative with reasonable service charges plus the normal charges required for the issue of delivery orders. (d) Upon effective final delivery to the consignee or consignee’s representative, the parties shall obtain a signed delivery receipt for each such shipment in token of having delivered the consignment in good order and condition. (e) Where the consignee is at a place beyond the deconsolidation point and sector carriage by air or land is effected by either party, such

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 46 sector chares will be invoiced at 50% by the receiving party to the other party after the transaction. (f) Both parties shall ensure that their respective clients do not suffer in any way because of short service (and not getting their consignments in time) due to any difference between the parties at any time. (g) It is the respective party’s responsibility to receive payment of all charges due from the consignee before making the final delivery. (h) If the consignee does not want to take delivery of his shipment right away, or refuses to accept it, either party shall communicate this to the other party immediately by e-mail and the first party shall send disposal instructions to the second party after obtaining same from the shipper. (i) The parties shall reply promptly to all tracers and communications which one party may receive from the other. (j) All expenses for telephone, fax or other communication sent in connection with or pursuant to the agreement shall be to the account of the sender. 29.1. As per accounting arrangement, it has been specifically agreed between the parties (the appellant company and the non-resident overseas party) that profit sharing shall be on a 50:50 basis.

29.2. In terms of the above arrangement, during the financial year 2011-12, the appellant company paid to the overseas entities under the agreement of various sums as under : Remittance towards Air Logistic Services from Kolkata Rs.8724.53 lakh Remittance towards Air Logistic Services from Kolkata Rs. 641.38 lakh Remittance towards Logistic Services from Mumbai Rs.415.03 lakh Remittance towards Logistic Services from Bangalore Rs. 4.42 lakh 29.3 In course of section 201-proceedings, the ITO found that the above remittances were inclusive of profit element of Rs.4,89,20,587/- which was paid in terms of the 50:50 profit sharing ratio between the appellant company and the non-resident overseas entities. The ITO examined the issue in terms of the provisions of section 5(2) read with section 9(1)(i) of the Income-tax Act, 1961 and also under the DTAAs, wherever applicable. In the end, the ITO came to the conclusion that the entire remittances including the profit element

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 47 embedded therein was income in the hands of the respective non-resident overseas entities and hence, the appellant company was liable to deduct tax under section 195(1) of the Act.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 48 establishment, it could have a PE through an agent. The agent should be authorized to conclude contracts on behalf of the principal in such a manner that agent’s action would bind the enterprise. Agents who are dependent upon the principal may constitute a PE and the authority to bind should be for the purposes which are essential and significant to the principal’s business. Such provisions regarding agency PE are present in practically all the DTAAs signed by India with several countries. The ITO has, in his order, extensively quoted such provisions in some of the DTAAs, such as those with UAE, Germany, Singapore, as well as UN model. If one analyses the relationship between the overseas entities and the appellant, it fulfils all of the tests mentioned therein. As discussed earlier, the appellant is acting as exclusive agent for overseas entity on a long term basis, negotiating contracts having a direct bearing on its business and is acting in a manner which binds overseas entity in relation to profit of its business. Though the appellant is having agreements with a number of entities, for a single country there is only one overseas entity involved, on whom it was depending for providing logistical services. Moreover, profit from the contract entered into with the client is shared with the overseas entity. Though the appellant is having other independent business activities, so far as import from a particular country was concerned, it was dependent on a particular overseas entity. Thus, the appellant is, as a matter of fact, acting as a dependent agent PE of the overseas entity, so far as this activity is concerned. It, therefore, follows that any business generated for the overseas entity through such PE results in accrual of income in India. Though such income is received by the overseas entity outside India, it accrues or arises in India and is, therefore, taxable as per section 5(2) of the Income-tax Act, 1961. Moreover since the overseas entity has PE in India in the form of its agent (appellant), such income would be taxable in India even after taking into account the beneficial provisions of various DTAAs signed by India with various countries. It may be mentioned that all the DTAAs have a provision that business income accrued in India is taxable if the non-resident has a PE in India. 30.1 Having held so, the Ld. CIT(A) further noted that the amount remitted by the appellant to the overseas entities had two components- cost of logistics services without any profit element embedded therein and the actual profit element in the form of share in profit arising from the activities carried out in India. The Ld. CIT(A) held that the cost of logistic services without profit element constituted mere reimbursement of cost of services provided by the overseas entities and was hence, not taxable in India. On the other hand, it was also held that the amount remitted in the form of profit arising out of activities in India (though PE in India as discussed above) constituted 'income' in the hands of the respective overseas entities in India and was, hence, taxable in India.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 49 30.2 In view of the above discussion, it is humbly submitted that the decision rendered by the Ld. CIT (A) is most reasonable, based on correct delineation and appreciation of facts of the case and the provisions of law has been correctly applied thereto.

30.3 Now adverting to the list of non-resident overseas entities on whose behalf the appellant had carried out activities in India under the respective agency agreements (vide page-140, Volume-II of the appellant's Paper Book), it is easily discernible that during the relevant period of time, India did not have a DTAA with the following countries: Countries with whom India had to no DTAA at the relevant time: Sl. No. Country Overseas Entity 1 Hongkong Comprehensive International Ltd. 2 Do Go-Trans (Hongkong) Ltd. 3 Taiwan Top Exp. 4 Do Scanwell Logistics (Taiwan) Ltd. 5 Lithuania UAB "AD SERVICES" 6 Slovakia ABC European Air & Sea Cargo Distribution SR spol s.r.o. 30.4 In the absence of any DTAAs with the above mentioned countries, the issue of taxability of business profits in India earned by these entities has to be considered under the basis law only, that is in terms of section 9(1)(i) of the Income-tax Act, 1961. As discussed in the foregoing paragraphs, the non- resident overseas entities carried on their business operation in India though the appellant company. The entire parcels/ consignments for delivery in India were handled by the appellant company on behalf of the overseas entities. The said activity of business was carried on continuously with regularity. There was, thus, a 'business connection' of the overseas entities in India through the appellant company. The overseas entities carried on their activity of business in India and there was an intimate and real relationship of a business character of the overseas entities with the appellant company in India, which contributed to the earning of profit by the overseas entities in their business. The connection between the overseas entities with the appellant company in India was

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 50 undoubtedly a commercial connection intimately connected with the business activity of those entities and such a connection was contributory to the earning of the profit by the overseas entities. There being a business connection of the overseas entities in India within the meaning of section 9(1)(i), they are liable to tax in India under section 9(1)(i), subject to Explanation (a) to section 9(1)(i) which stipulates that in case of a business, of which all operations are not carried out in India, the income of the business deemed under the clause to accrue or arise in India is only such part of income as is reasonably attributable to the operations carried out in India. As per the terms and conditions of the agreements between the respective overseas entities and the appellant company, the latter was responsible to perform various services as stipulated in the agreements and deliver the parcels of the overseas entities in India for which the charges to be collected and shared were distinctly stipulated in those agreements. Normally it was the obligation of the overseas entities to deliver the parcels/ consignments in India. The activity of such delivery in India through the appellant company amounted to their operations carried out in India in respect of which a reasonable estimate of income attributable to such operations was assessable to tax in India under section 9(1)(i) of the Act. Therefore, besides the order of the Ld. CIT(A) being unassailable, the profits earned by the above mentioned non-resident overseas entities from the business operations carried out in India through the appellant company was assessable to tax in India, even without bothering to look for a PE coming into existence in India.

30.5 But for the above mentioned entities, all other overseas entities under consideration belonged to and were resident of countries with whom India had, at the relevant time, DTAAs in operation. The appellant company has rightly contended that in order to tax the business profits in India of such entities, there must be in existence of a PE in India through which there business operations were carried on in India. This aspect was duly considered and elaborately discussed in para 9 of the order of the Ld.CIT(A). The findings of fact recorded by the Ld.CIT(A) are unassailable and therefore, the existence of PE in India stands

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 51 proved beyond doubt. In the instant case, the appellant company was associated with the non-resident overseas entities by virtue of written agreements and the consignments sent by the overseas entities were delivered to the consignees in India by the appellant company on behalf of the overseas entities. Therefore, the place of business of the appellant company where the services were provided in regard to the consignments received from abroad for delivery in India was to be included as the office of the overseas entities in India for the purpose of carrying on its activities in India. Under each of such agreements, the appellant was to ensure to breakbulk consolidation of consignments in India expeditiously and then undertake the job of delivery to the consignees concerned. It is commonplace knowledge that such a process involves several orders being consolidated at a warehouse/ central warehouse and sent to a breakbulk warehouse where they are broken down into individual orders and distributed. Since these warehousing facilities were used for consolidating the consignments received from the overseas entities and therefrom ensuring delivery of the parcels in India, the warehouse(s) itself/themselves constituted a place of business for the operations of the business activity of the overseas entities in India. This arrangement is for fairly long period under the agreement between the appellant company and each overseas entity. It, thus, becomes absolutely clear that the overseas entities had substantial interest of enduring nature in India attributable to the appellant company. There was, thus, a virtual projection of each such overseas entity into the territory of India through the appellant company. As per paragraph 1 of Article of the DTAAAs, 'permanent establishment' means a fixed place of business through which the business of the foreign enterprise is wholly or partly carried on. Since, in the instant case, each of the overseas entities was established to have carried on a part of its business through a fixed place of business, viz. through the appellant company, each overseas entity fell within the definition of PE under paragraph 1 of Article 5.

30.6 Paragraph 2 of Article 5 provides certain places to be included in the definition of 'eminent establishment; and one such place is 'warehouse'.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 52 Paragraph 2 of Article 5 gives inclusive definition of 'permanent establishment' and it does not, by necessary implication, follow that what is not included in paragraph 2 is automatically excluded. Therefore, the finding that a part of the activities of the business of the foreign enterprise in India was carried on through a fixed place fell within the meaning of paragraph 1 of Article 5 and was not affected. In essence, in the instant case, there existed both a fixed place PE in India within the meaning of paragraph 1 of Article 5 and a PE in the form of 'warehouse' within the meaning of paragraph 2.

30.7 Paragraph 5 of Article 5 provides that where are person other than an independent agent to whom paragraph 6 applies is acting in one State on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first State. Paragraph 6 excludes such agents from the operation of paragraph 5 who are of independent status acting in ordinary course of their business. However, paragraph 6 is not applicable in such cases where the activities of agent of an independent status are devoted wholly or almost wholly on behalf of the foreign enterprise. It is well settled principle of law that the words in a statute or document take their colour from the context. When is kept in mind that the enquiry to be made is relating to the activities of the non-resident vis-a-vis the activities of the agent of independent status, it is not difficult to appreciate that the enquiry to be made as per paragraph 6 is not as to whether the agent is carrying on various other activities other than the activity of being an agent of the non-resident, but as to whether the entire activities relating to non-resident are carried on wholly or almost wholly by the agent on behalf of the non-resident enterprise. In the instant case, the Ld. CIT(A), after examining the agreements clause by clause between the appellant company acted as a "dependent" agent on behalf of each of the overseas entities. The natural corollary of this finding was that paragraph 6 was not applicable in the instant case. Moreover, in each agreement it is specifically mentioned that the overseas entity will not establish an operating company doing the business of air and ocean, import and export transportation in the

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 53 Indian territory, without the express consent of the appellant company, during the continuance of the said agreement between them. This clearly establishes that the appellant company had carried on the activities of each of the non- resident overseas entities wholly in India. Therefore, even if it is assumed that the appellant company was an agent of independent status, still it had carried on the activities of the overseas entity wholly in India and in the result, paragraph 6 would have no application in the instant case. Once the applicability of paragraph 6 is excluded, the existence of an agency PE in India vis-a-vis each non-resident entity is inevitable insofar as the appellant company was acting as a agent on behalf of each of the overseas entities on a fairly long term basis, negotiating contracts on their behalf having direct bearing on their business activity in India and was also acting in a manner which bound the overseas entities to relation to profit derived from their Indian operations. The existence of such an agency PE in India under paragraph 5 will get further support from the fact that the appellant company maintained the stock of inbound parcels/consignments in 'warehouse(s)' from which the delivery was made on regular basis. Therefore, considering the provisions under paragraph 5 of Article 5 of the DTAAs between India and the foreign countries, it is now amply clear that the appellant company constituted an agency PE in India for each of the non-resident overseas entities in the instant case.

30.8 In view of the above analysis, it follows that each of the non-resident overseas entity had carried on a part of its business activities in India through its PE, namely, the appellant company within the meaning of paragraph 1, paragraph 2 as well as paragraph 5 of Article 5 of the relevant DTAA. Therefore, each of non-resident overseas entities was liable to tax in India, by virtue of Article 5(1) or 5(2) or 5(5) or all of them.

30.9 Since the existence or non-existence of a PE is to be examined on the basis of given set of facts available in a case and in the instant case it has been proved that the PE was in existence on the strength of facts of the case,

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 54 the various case laws relied upon by the appellant company, which had turned on their peculiar facts, will have no direct application to the facts of the instant case.

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 55 profits made to the Non-Resident Companies / Organizations towards “Logistic Freight and Other Services” provided by such entities overseas and wholly outside India. 2. Whether the income received by the Overseas Entities outside India, it accrued or arose in India, and is, therefore, chargeable to tax in India, as per section 5(2)(b) of the said Act.

At this juncture we find important to highlight the provisions of section 195 of the Act and the relevant extract is reproduced as under:- “195. [(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC)] [or section 194LD] [***] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”[***] shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.“ 32.1 From the plain reading of the section it is clear for the applicability of section 195 of the Income Tax Act, 1961 with regard to the deduction of tax at source by any person responsible for making any payment to a non-resident is that the amount paid to the non-resident is otherwise chargeable to income tax in India under the provisions of the said Act. If the amount paid or payable to the non-resident is not chargeable to tax in India under the regular provision of the said Act, or such amount is not taxable by virtue of the provisions of the

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 56 Double Taxation Avoidance Agreement (DTAA) entered into by India with such other country of which the non-resident is a resident in accordance with Chapter – IX, then the provisions of Chapter – XVII of the said Act about the collection and recovery of tax are ruled out, and the person responsible for paying such sum cannot be fastened with any liability for deduction of tax at source, and cannot under any circumstance whatsoever be treated as an assessee in default. In this connection we rely on the decision of the Hon’ble Supreme Court in Vijay Ship Breaking Corporation v. CIT (2009) 314 ITR 309, 313 (SC), which decision was followed and reiterated in GE India Technology Centre Pvt. Ltd. v. CIT (2010) 327 ITR 456, 463-465 (SC). In Vijay Ship Breaking’s case, the Hon’ble Supreme Court clearly held and observed at page 313 of the Reports that liability to deduct TDS arises ‘only if the tax is assessable in India’. Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. In GE India Technology’s case, the Hon’ble Supreme Court following its earlier decision in Vijay Ship Breaking, held and observed at pages 463-465 of the Reports inter alia as under : “If the contention of the Department that the moment there is - remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See : Vijay Ship Breaking Corporation v. CIT [2009] 314 ITR 309).” Now whether the payment made to overseas entities is the income accrued or arose in India. It is also well settled that in order to tax the income of a non- resident under the deeming provisions of law as per section 9 of the 1961, it must be justified by Revenue that the non-resident carried out some operations or rendered some services in India, in respect of which the income is sought to be assessed to tax in India on deemed accrual basis. The relevant provisions of Section 9 of the Act are as under:-

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 57 “9. (1) The following incomes shall be deemed to accrue or arise in India:- (j) 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 I].- 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 film in India.] [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 non- resident,- (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 non-resident; or (b) Has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly0 delivers goods on merchandise on behalf of the non-resident; or

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 58 (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: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non- residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Explanation 3.- Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India.] [Explanation 4.- For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”. Explanation 5.- For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India;] 32.2 We are placing our reliance in this connection on the decisions of the Hon’ble Supreme Court in Carborandum Co. v. CIT (1977) 108 ITR 335 (SC), CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC) and in Ishikawajima-harima Heavy Industries Ltd. v. Director of Income Tax (2007) 288 ITR 408 (SC).

The concepts of ‘business connection’ and ‘Permanent Establishment (PE)’ in the context of deeming provisions contained in Section 9 of the 1961

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 59 Act read with charging section 5 thereof have been dealt with by the Hon’ble Supreme Court as well as by the different High Courts in various cases.

The Hon’ble Supreme Court inter alia held and observed at pages 341-345 of 108 ITR, in the case of Carborandum Co. Vs CIT(1977) 108 ITR 335 as under: “The income assessable to income-tax, therefore, is of two kinds, viz., (i) accruing or arising in the taxable territories; and (ii) deemed to accrue or arise to the non-resident in the taxable territory. The concept of actual accrual or arising of income in the taxable territories, although not dependent upon the receipt of the income in the taxable territories, is quite distinct and apart from the notion of deemed accrual or arising of the income, The High Court does not appear to have kept this distinction in view and mixed the one with the other while deciding the reference in question. Section 42 of the Act concerns itself with a deemed accrual or arising of the income within the taxable territories. Under subsection (1): " All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories... shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax. " If the whole of the deemed income can be roped in for the levy of tax under sub-section (1) of section 42, no question of any apportionment arises. If not, sub-section (3) is attracted. It says : " In the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories." “On a plain reading of sub-sections (1) and (3) of section 42 it would appear that income accruing or arising from any business connection in the taxable territories-even though the income may accrue or arise outside the taxable territories-will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 60 to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under subsection (3) of section 42. In Commissioner of Income-tax v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC), Shah J., as he then was, speaking for this court, said at page 24: " A business connection in section 42 involves a relation between a business carried on by a nonresident which yields profits or 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 the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case." The learned judge says further: " A relation to be a ' business connection' must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act of a non- resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises." The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 61 business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and Solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all. The judgment of the High Court under appeal in Commissioner of Income-tax v. Carborandum Company [1973] 92 1TR 411 (Mad) is not correct. It has rightly been pointed out by the Bombay High Court in Commissioner of Income-tax v. Tata Chemicals Ltd. [1974] 94 ITR 85 (Bom) with reference to the similar or almost identical provisions in section 9(1) of the Income-tax Act, 1961, that in order to rope in the income of a nonresident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed……….” 32.3 The Hon’ble Supreme Court clearly held and observed in the case CIT vs. Toshoku Ltd. (1980) 125 ITR 525 at page 531 of 125 ITR has held as under : “In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.” 32.4 In Ishikawajima-harima’s vs DIT (2007) 288 ITR 408, their Lordships of the Hon’ble Supreme Court inter alia held and observed at page 437 of the Repots

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 62 “…Mere existence of business connection may not result in income of the non-resident assessee from transaction with such a business connection accruing or arising in India.”

“The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment’s non-involvement in this transaction excludes it from being a part of the cause of the income itself, and thus there is no business connection. For attracting the taxing statute there has to be some activities through the permanent establishment. If income arises without any activity of the permanent establishment, even under the DTAA the taxation liability in respect of overseas services would not arise in India. Section 9 spells out the extent to which the income of non- resident would be liable to tax in India. Section 9 has a direct territorial nexus. Relief under a Double Taxation Treaty having regard to the provisions contained in section 90(2) of the Income- tax Act would arise only in the event a taxable income of the assessee arises in one Contracting State on the basis of accrual of income in another Contracting State on the basis of residence. Thus, if the appellant had income that accrued in India and is liable to tax because in its State all residents it was entitled to relief from such double taxation payable in terms of the Double Taxation Treaty (sic). However, so far as accrual of income in India is concerned, taxability must be read in terms of section 4(2) read with section 9, whereupon the question of seeking assessment of such income in India on the basis of the Double Taxation Treaty would arise. In cases such as this, where different severable parts of the composite contract are performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction. This principle helps determine, where the territorial jurisdiction of a particular State lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. Therefore, in our opinion, the concepts profits of business connection and permanent establishment should not be mixed up. Whereas business connection is relevant for the purpose of application of section 9; the concept of permanent establishment is relevant for assessing the income of a non-resident under the DTAA. There, however, may be a case where there can be overlapping of income; but we are not concerned with such a situation. The entire transaction having been completed on the high

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 63 seas, the profits on sale did not arise in India, as has been contended by the appellant. Thus, having been excluded from the scope of taxation under the Act, the application of the double taxation treaty would not arise. The Double Tax Treaty, however, was taken recourse to by the appellant only by way of an alternate submission on income from services and not in relation to the tax of offshore supply of goods. “Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. The petitioners in the present case have provided services to persons resident in India, and though the same have been used here, they have not been rendered in India.” 32.5 From the analysis of above judgments it is beyond doubt that none of the overseas independent Entities with whom the assessee has been dealing with is having any permanent establishment in India. It is by now well settled that even when section 9 of the Income Tax Act, 1961 applies to a given case, considering the provisions of the Double Taxation Avoidance Agreement, if beneficial, than the provisions of the Income Tax Act, the provisions of the Double Taxation Avoidance Agreement would prevail. In the absence of a permanent establishment, the industrial or commercial profits derived by a non-resident are not assessable to tax in India, particularly when all activities are carried by the independent Overseas Agents only outside India. Reliance in this connection is placed on the decision of the Hon’ble Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC). The said view was also stated by the Central Board of Direct Taxes in its Circular No.333 dated 2nd April, 1982 reported in (1982) 137 ITR(St.) 1 as well as by the Hon’ble Calcutta High Court in CIT v. Davi Ashmore India Ltd. (1991) 190 ITR 626 (Cal). The Hon’ble Bombay High Court in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom), and the Hon’ble Delhi High Court in Van Oord ACZ India Pvt. Ltd. v. CIT (2010) 323 ITR 130 (Del), the Authority for Advance Rulings in HMS Real Estate Pvt. Ltd., In re (2010) 325 ITR 71 (AAR) and Ernst & Young Pvt. Ltd., In re (2010) 323 ITR 184 (AAR), as well as the Special Bench of the Income Tax Tribunal, Mumbai in Mahindra and Mahindra Ltd. v. DCIT (2009) 313 ITR(AT) 263 (Mum)(SB).

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 64 With regard to the issue of agency relationship we find that both the parties are acting on principal to principal basis. In case of exports the Indian companies engage the assessee with the necessary information of the overseas importers for the delivery of the goods to outside India. This agreement is limited to Indian exporter and the assessee in relation to the logistic services and at no point of time the overseas entity or the Indian exporter has any dealing of whatsoever. The assessee for the services raises the bill to the Indian exporter. After completing the custom formalities, the assessee communicates with overseas entities who are independently engaged for rendering required logistic services and delivers the same to the overseas importer. For such services the assessee and overseas agent share the profit after the expenses incurred in India. Accordingly the assessee does not deduct the TDS as no service in India and no income accrued or arose in India. The assessee engages the airlines, shipping lines and local transport in India and not as overseas agent. Similar procedure is followed when some overseas agents require import of the goods from India. In our considered view we find from the facts that there is no agent and principal relationship between the assessee and overseas entities and vice versa. Merely the word used in the ‘agency’ in the agreement does not amount that there exist the relationship of agency. In this connection we are relying in the decision of Apex Court in the case of Super Poly Fabriks Ltd. Vs. Commissioner of Central Excise Punjab (2008) 11 SCC 398 (SC) civil appeal No. 1713 of 2007, decided on April 24, 2008 wherein it was held as under : “the expressions ‘principal’ and ‘agent’ is rules to our not this is it the nature of transaction is required to be to come mind on the basis of such expense the and not by the Norman later used documents are to be construed having regard to the context thereof 04 labours and may not be of much relevance” 32.6 We also rely in the Article 5 of the DTAA with UAE which speaks as under :

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 65 “An enterprise of all 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 person acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on the behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph.” The ld. DR has also not brought anything on record with regard to his allegation that the assessee carries out the activity of break bulk consolidation of the consignment and makes the delivery of the goods to the consignee in accordance with the instruction of the consignor. Therefore the place of the business of the assessee should be treated as the PE of the overseas entities in terms of the provisions contained in paragraph 1 of article 5 of DTAA. However the ld. AR denied to accept the above allegation and submitted that no such services are rendered. With regard to countries in respect of which India has no DTAA, we find that It is an undisputed fact and law that the taxability of business profits earned by overseas countries in India would wholly depend upon the fact whether such non-resident overseas entities rendered any services in India or not. Only if the services are rendered in India, the deeming provisions contained in Section 9(1) of the Act would apply so as to tax the income deemed to accrue or arise in India. Since the non- resident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no portion of their business profits earned by them exclusively for services rendered outside India can be brought to tax in India, either under Section 9(1) or otherwise or at all. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of Section 9(1)(i) of the Income Tax Act, 1961. Since there is no business connection within the meaning of section 9(1)(i) of the said Act between the Appellant Company and the overseas entities, the overseas entities are not chargeable to tax in India on their profits, which wholly accrued

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 66 and arose outside India and through rendering of services by them wholly outside India. None of the non-resident Entities had any permanent establishments in India. The Appellant Company as well as each of the non- resident entities were acting on Principal to Principal basis; and that none of them were agents of each other. The mere fact that the Agreements executed in between the Appellant Company and each of the different non-resident entities used the nomenclature “Reciprocal Appointment as Agents”, both ways, for Air / Ocean import and export transportation between India and the respective establishments in the overseas countries, it cannot and does not make the Appellant Company as the agent of the non-resident entities in any manner whatsoever, as is by now well settled by several decisions of the Hon’ble Supreme Court – kindly see Super Poly Fabriks Ltd. v. Commissioner of Central Excise (2008) 11 SCC 398 (SC) = (2008) 10 STR 545 (SC); the nature of operations and activities carried out by the Appellant Company as well as each of the non-resident entities clearly show that none of them are agents of each other; and that each of them are operating in their respective countries on Principal to Principal basis. As such, the Appellant Company can by no stretch of imagination be treated as the Permanent Establishment of any of the non-resident entities. in the circumstances mentioned hereinabove, the Appellant Company was not required to deduct any tax at source either under section 195 and/or section 195A of the said Act; the decision of the Hon’ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. CIT (1999) 239 ITR 587 (SC) = (1999) 105 Taxman 742 (SC) referred to by the Income Tax Officer (International Taxation) at pages 21 & 22 of the said impugned Order dated 28th January, 2014 has no application in the facts and circumstances of the instant case.

32.7 In view of the above discussions and considering the facts and circumstances, we find that the payment made by the assessee to the overseas entities is not chargeable to tax in India therefore the question of TDS deduction does not arise. The assessee is neither acting as an agent of

ITA No.ITA No.2079/Kol/2014 A.Y. 2012-13 M/s Blmer Lawrie & Co. Ltd. v. ITO(IT) Wd-1(1), Kol. Page 67 the overseas entities nor its place of business can be regarded as PE of the overseas entities. Accordingly we reverse the order of the authorities below. Hence this ground of appeal of the assessee is allowed.