S. Ranganathan, J. (Chairman), R.L. Meena and Bhuvanendra Nigam, Members For Appellant/Petitioner/Plaintiff: O.P. Vaish and Tapas Misra, Advs.
and Ajay Vohra, Chartered Accountant 1. This is an application under Section 245Q(1) of the Income-tax Act, 1961 ("the Act"). The applicant is TVM Limited, a company incorporated in Mauritius on May 23, 1995. It is stated that the effective place of management of the company is in Mauritius and that, therefore, the applicant is a non-resident under Section 6 of the Act.
2. The applicant (TVM) has five share holders whose names and extent of shareholding are set out below : *What appear above are not the actual individual shareholders but of five groups to which the shareholders are said to belong.
3. It is stated that Hindustan Times Limited had experience in making presentations of programmes produced by it on the Indian National Television Network--the Doordarshan. Westpoint Media Holdings Limited is stated to be primarily a financing company, being a subsidiary of Schroedar Capital Investments Ltd. TVB (Mauritius) Ltd. is stated to be a subsidiary of U. K. T. V. B. Broadcast Ltd., running two T. V.Channels in Hong Kong and one of the largest purchasers of software.
CTV Mauritius Limited is said to belong to the Carlton Group having a large number of joint ventures in Singapore. Pearson Mauritius Limited is stated to be a subsidiary of Pearson Pic. of U. K. which owns TV channels in the United Kingdom and Latin American countries.
4. A company known as T. V. India Limited (TVI) had been incorporated a little earlier in India on March 6, 1995. It has the same shareholders or group of shareholders as TVM Limited, Mauritius, with identical proportions of shareholding. The directors of the two companies are, however, different. While TVM has only one Indian director, TVI has five of them. There are no common directors and it is said that the management of TVI is entirely independent of that of TVM.5. TVM is engaged, inter alia, in the business of development, operation, marketing, sale and distribution of television programmes and broadcasting of a television channel. To operate a channel, the operator requires TV programmes called software. TVI, mainly utilising the previous experience of Hindustan Times in this field, is engaged in the production of such software programmes. It has also developed a logo for its programmes called "Home TV". It was decided that TVI would license the software produced by it, in its own studios as well by commissioning other producers in this behalf, to TVM. It was also decided that TVI would permit TVM to use its logo of "Home TV" in the telecasts made by it. The other cardinal requirement for a TV operator is an earth station and a transponder. The software programmes acquired by TVM from TVI (as well as from other groups such as the Pearsons, Carltons, BBC, etc.) were broadcast by it through a transponder taken on lease by Carltons and subleased to TVM. The transponder receives electronic signals sent up by a huge dish antenna through the medium of an optic fibre linked to an earth station owned by another Hong Kong company. The transponder is attached to the satellite known as PanAmSat-4 with a broadcasting coverage (technically known as its "footprint") which covers 68 countries and, in turn, transmits its signals which are received by dish antennae located in these countries which are tuned into the particular satellite. These signals are then transformed into sound and picture and become available for viewing through the television sets in the countries concerned.
6. The revenues of the TV broadcaster are derived principally by way of advertisement revenues from persons who desire to advertise their wares on the channel. The wider the field of propagation of a particular channel, the more extensive will be its customers for advertisement.
The Hindi software programme and the other programmes broadcast by TVM are viewed by millions of viewers all over the world (a list of such countries has been placed before us). Naturally advertisers in these countries, and particularly from India, would like to advertise their goods and commodities on this channel. TVM was desirous of "selling air-time" on the channel to parties in India. It, therefore, proposed to enter into a solicitation agreement for such sale with TVI, whereunder the latter would solicit orders from purchasers of air-time and pass on those orders to TVM for acceptance. TVI would also be responsible for remitting the advertisement revenue so collected to TVM and be entitled to a commission for the services rendered by it in this regard. The relevant Clauses of the proposed agreement are as follows : (a) Canvassing and soliciting orders from purchasers (other than purchasers from whom TVM has previously notified TVI in writing it will not accept orders) for the purchase of advertisement time at the rates and on the terms and conditions which TVM shall have previously notified TVI in writing (provided that TVI shall be entitled where, in the reasonable opinion of TVI, appropriate, to offer purchasers discount of not more than 10 per cent, from the rate so notified as contained within the rate card enclosed under Schedule II), and passing on those orders to TVM for acceptance and confirmation in accordance with Clause 3. TVM reserves the right at all times to vary the terms of the rate card enclosed under Schedule II and the rate of discount offered to purchasers as stated above.
(b) Where authorised by TVM, collecting advertising revenues from purchasers pursuant to contracts between TVM and the purchasers and obtaining necessary regulatory approvals to remit such collections to TVM, subject hereto that no remittances shall be made unless the advertisement concerned has been telecast on the HOME TV channel prior to such remittance.
1.2. For the avoidance of doubt, TVI shall have no authority to accept orders from or conclude contracts with, or to issue invoices (other than for commissions as contemplated hereunder) to, a purchaser arising from the sale of advertisement time ("Advertisement Time Sales Proceeds").
2.2. For the avoidance of doubt, TVM may, in its discretion, refuse acceptance of an order from a purchaser including but not limited to cases where the advertisement does not, in the opinion of TVM, comply with applicable laws, rules, Government regulations or codes of practice for the broadcast of advertisement material in any part of the territory in which such advertisement is to be broadcast.
2.3. TVM shall broadcast a channel throughout the entire footprint of the PanAmSat-4 satellite, which consists of approximately all the countries set out in the list annexed hereto under Schedule-I. 3.1. In respect of any sale of advertisement time concluded by TVM through the solicitation activities of TVI under this agreement, TVI shall be entitled to charge and collect from the relevant purchaser a commission calculated at a rate to be mutually agreed upon but not exceeding 10 (ten) per cent, of the amount of the invoice issued to that purchaser by TVM in respect of that sale. TVM shall deliver to TVI all invoices that TVM intend to send to purchasers in order for TVI to forward the same to the purchaser.
5. Independent contractor : The parties agree that they are entering into this agreement as independent contractors and not as the agent of the other for any purpose whatsoever, and neither has any authority to enter into any agreements or assume any obligation for or on behalf of the other or to make any warranties or representations on behalf of the other, and nothing herein shall be construed to establish a relationship of copartner or joint-venture between TVI and TVM." 7. It has been mentioned that TVI claims to have been successful in preparing software programmes and is negotiating with various broadcast channels. In particular, it has prepared programmes for a channel labelled Home T. V. and that under separate agreements with TVM, the latter has been licensed to telecast these programmes and also use this label. It does not, however, appear that TVI has so far produced any programmes apart from those which are exclusively utilised by TVM for telecast on the Home TV channel. But these and other agreements between TVI and TVM are distinct and separate from the solicitation agreement earlier referred to. It is the only one in issue before us. The short questions raised by the TVM in its application before the authority are as follows : "1. Whether, the business profits earned by the applicant from sale of air-time on the television channel broadcast in, inter alia, India, would be liable to tax in India 2. Whether, the agent appointed by the applicant to solicit orders from the purchasers of air-time and to pass on those orders to the applicant for acceptance, could be construed as a permanent establishment of the applicant in India 3. If the answer to question No. 2 is in the negative, whether any part of the business profits earned by the applicant could still be deemed to accrue or arise in India and, therefore, liable to tax in India ?" 8. The questions raised by the appellant require consideration of the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. Article 7(1) of the DTAA reads thus (see [1984] 146 ITR (St.) 214, 219) : "7. Business profits.-(1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." 9. 'In other words, since TVM is a Mauritian enterprise, its profits are prima facie taxable in Mauritius and can be taxed in India only if it has a permanent establishment in India and then also only to the extent its profits are attributable to that establishment. The principal question that calls for decision is, therefore, whether TVM can be said to have a permanent establishment in India and the answer to this question turns on article 5 of the DTAA.10. For the purposes of the present case, it is sufficient to refer to paras. 1, 3, 4, 5 and 6 of Article 5 which read thus (see [1984] 146 ITR (St.) 214, 217): "5. Permanent establishment--(1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
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 or display of 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 or display ; (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 for collecting information for the enterprise ; (iv) for similar activities, which have a preparatory or auxiliary character for the enterprise.
4. Notwithstanding the provisions of paragraphs 1 and 2 of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph 5 apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if- (i) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise ; or (ii) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.
6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not, of itself, constitute either company a permanent establishment of the other." 11. TVM has no fixed place of business in India. Even if the presence of TVI is taken as one, the terms of para. 3(e) clearly exclude the possibility of its being considered as a permanent establishment. The next question is whether the common shareholding of TVM and TVI can be considered sufficient ground to hold that TVI is a permanent establishment of TVM. In this context, it has to be remembered that the two are separate legal entities. It is also denied that TVM exercises any control over the activities of TVI. But it would appear from para.
6 of Article 5 that the close relationship between the two companies and even the possibility of TVM being able to exercise control over TVI may not be enough to constitute the latter a permanent establishment of the former. For, para 6 goes to the extent of saying that even if TVI had been a subsidiary of TVM or fully controlled by it, it cannot be described as a permanent establishment of TVM. This paragraph is based on the principle that for the DTAA purposes, a corporation cannot be treated as a permanent establishment of another company simply because the latter owns, controls or is associated with it, It is, therefore, difficult to characterise TVI as the permanent establishment of TVM, merely on the ground that the shareholding groups of the two companies are identical.
12. What, then, is the relationship between TVM and TVI The simple answer seems to be that TVI is just an agent for the collection of advertisements for TVM to broadcast on its channels. This is exactly the situation dealt with by para. 5 of Article 5. It negates the existence of a permanent establishment where the enterprise of one Contracting State carries on business in the other Contracting State through a broker, general commission agent or any other agent of an independent status. Thus, a broker or commission agent of such an enterprise cannot be termed as a permanent establishment where such person is carrying on his own business and is dealing with the enterprise only as one of his many clients and the dealings between the two are on a commercial basis. This is further clarified by the language of the paragraph. Changing the syntax somewhat, it stipulates two conditions as necessary before an agent can be treated as having an independent status : (1) Such agent must be acting in the ordinary course of his business ; (2) The activities of such agent should not be devoted exclusively or almost exclusively on behalf of that enterprise.
14. Shri Vaish, appearing for the applicant, asks us to answer these questions in the affirmative. He says that, in considering the applicant's position qua these requirements, one should look at the business of the "agent" in its entirety and not confine oneself only to the activities of the agent on behalf of the enterprise in question. He says that the business of TVI is the production of software which belongs to it and the licensing of it for payment to various channels.
It is no doubt licensing its programmes at present to TVM and permitting the latter to use the logo "Home TV" developed by it.
However, it is also negotiating with others such as Raj TV, Star Plus and Mauritius Broadcasting Corporation. He also points out that TVI is tied up with TVM in several respects by various types of mutual agreements which make TVI's prosperity dependant on the success of its programmes, particularly those beamed on the "Home TV". The success of the programmes and the advertisement revenues earned by them are mutually interdependent and, therefore, the securing of advertisements for being beamed on the programmes is an integral part of the business of TVI which is much wider in scope and comprehends within itself the preparation of software, the licensing of it to various broadcasting channels and taking all steps inducting necessary advertisements to ensure that they are successful. It is, therefore, urged that canvassing for advertisements is done by TVI in the ordinary course of its business. The business of TVI is also not confined or devoted exclusively or almost exclusively to TVM. TVI should, therefore, be considered to be, counsel argues, an agent of independent status within the meaning of para. 5 of Article 5 of the DTAA.15. The authority finds it difficult to accept this contention. Paras.
4 and 5 deal with the activities carried on by an enterprise of one Contracting State in another State through the medium of an agent. That agent, the Clauses say, will be considered to be of independent status if it carries on the activities on behalf of the non-resident in the ordinary course of its business and if those agency activities are not, substantially speaking, confined to a single principal, viz., the foreign enterprise. One has, therefore, to see first whether in carrying on the profit-earning activities here in question--viz. the sale of advertisements and collection of advertisement revenue--TVI is acting in the ordinary course of its business. There is no material placed by the applicant to enable the authority to answer this question in the affirmative. The object Clauses in the memorandum of association of TVI to which the attention of the authority has been drawn are not specific in this regard though, no doubt, quite broad in their canvass as is usual with objects Clauses in the memoranda of companies. The relevant Clauses are, among the main objects : "III. A.--1. To engage in the business of import, export, syndication, bartering, research, development, production, editing, marketing, distributing, buying, selling and all other activities related to programmes, footage and software for motion picture, films, television (including cable, terrestrial and satellite), video and audio industry including but not limited to sub-titling, dubbing, mixing, commissioning, licensing, franchising, acquiring any or all intellectual property rights of the same.
2. To engage in the business of import, export, syndication, bartering, research, development, production, exchange, alteration, marketing, distribution and sale of computer software for motion picture, films, television (including cable, terrestrial and satellite), video and audio industry.
3. To manufacture, assemble, purchase, import, export, alter, remodel, hire, exchange, repair, service, stock, or otherwise deal in, distribute rent, sell and lease television, movie, camera, and video camera tapes, cassettes, equipment and ancillary products.
4. To provide consultancy, advisory, marketing, training and educational services relating to the motion picture, films, television (including cable, terrestrial and satellite), video and audio industry and to establish, operate, license training centres for the aforegoing," "III. B.--21. To act for itself or others in the development, promotion, exploitation, and marketing of new devices and ideas with respect to any merchantable product and for that purpose to adopt such means of making known the products and activities of the company as may seem expedient and in particular by advertising in the press, by circulars, pamphlets, handbills, posters and cinema slides, by purchase and/or exhibition of works of art, publication of books and periodicals and by granting prizes, rewards, donations and organising and participating in exhibitions," "III. C--3. To engage in the business of advertising, including but not limited to designing, writing, developing, producing, preparing, placing, publishing and displaying, in any manner, advertisements and publicity devices and innovations of all kinds in all kinds of publications for itself or for others." 16. But what paras. 4 and 5 of Article 5 of the DTAA refer to are not theoretical powers or the legal amplitude of the activities that can be carried on by the company but the factual position as to what it is, in fact, doing at present. If one were to confine oneself to this aspect, there is nothing to show that securing advertisements for the programmes developed by it is an ordinary incident of TVI's business comprising of the preparation and licensing of software. There is also some difficulty in the present case arising out of the fact that TVI has started business only recently and thus far its activities are confined to dealings with TVM though it is said that it proposes to launch out on a large scale. When such expansion will take place and what the scope of activities thereafter would be, remain to be seen.
But, even assuming that, on a pragmatic consideration of the nature and type of business carried on, the procurement of advertisements is also regarded as an integral part of the business of TVI, the answer to the second part of the question posed, viz., whether its activities in this regard are confined to one principal viz., TVM, has to be answered in the affirmative. Admittedly, TVI is at present canvassing for advertisements only on behalf of TVM. Whatever the position may be at a future date, in the event of TVI expanding the list of the broadcasters for its software and extending the scope of its advertisement canvassing there is no real doubt that the advertisement activities of TVI are to be confined, as on date, only to TVM under the proposed solicitation agreement. Shri Vaish mentioned that though the solicitation agreement between TVI and TVM is pending approval with the Government of India, another agreement entered into with a firm known as CM Airtime Promotion Ltd., on similar lines, has been accorded approval by the Government though its application was later in point of time. But this has no relevance to the question at issue. That TVM has also appointed another advertisement agent, in addition to TVI, for its wares do not change the fact that, so far as TVI is concerned, its activities are proposed to relate to a single principal and no more.
The authority is, therefore, of opinion that TVI cannot be considered to be an agent of TVM with independent status within the meaning of para. 5 of Article 5 of the DTAA.17. Repelled in his attempt to bring the present case under para. 5, Shri Vaish turns to seek recourse to para. 4 of Article 5. This Clause refers to a person in one State acting for and on behalf of an enterprise in another State--i.e., an agent of such enterprise--and says that he shall be deemed to be a permanent establishment for the enterprise if "he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise". According to Shri Vaish this Clause is attracted when there is an agent of the foreign enterprise and he is seen to have no independent status, as in the present case. In such an event, Shri Vaish says, the existence of a permanent establishment can be read in "if and only if" the agent exercises independent power to conclude contracts on behalf of the enterprise. This means that, if it has no such power, it cannot be treated as a permanent establishment. In this context, he places emphasis on the terms of paras, 1.1(a) and (b), 1.2, 2.2 and 5 of the proposed solicitation agreement and contends that since TVI can claim or exercise no power, independent of TVM, to accept advertisement contracts, it cannot be treated as a permanent establishment for TVM in India.
18. The argument of counsel has to be accepted. One may be tempted to say that an enterprise carrying on business in a country through an agent who has no independent status should be held to have a permanent establishment in that country and no doubt that would have been the result if para. 5 had stood alone. But para. 4 is, unambiguously and definitely, attracted to cases where there is a person in one State acting on behalf of the other State--that is, an agent--who is "other than an agent of independent status to whom the provisions of para. 5 apply". The consequence is that when an "agent" fails to come up to the standard of independence referred to in para. 5, the issue regarding permanent establishment is not closed but has to be resolved in terms of para. 4. The wording of para. 4 is somewhat ambiguous. The presence of the words "unless his activities are limited to the purchase of goods or merchandise for the enterprise" in Clause (i) and the terms of Clause (ii) may suggest a narrower interpretation for this paragraph restricting its application to agents involved in the purchase and sale of goods and no others and as saying that mere purchase or sporadic sale of goods through an agent will not be sufficient to merit such an agent being considered a permanent establishment. But the Authority is of the view that it will not be a proper canon of construction to ignore the generality of the preceding words of the paragraph merely because exceptions are carved out in the latter part of Clause (i) or Clause (ii) only in respect of a certain specific category of agents, viz., those buying or selling goods. The paragraph is applicable in all cases where the enterprise in a Contracting State has an agent in the other who does not have an independent status. Such a person will be deemed to be a permanent establishment only if he has, and exercises, the authority to conclude contracts in the name of the enterprise. But even the existence of such authority will not make him a permanent establishment (i) if he is a mere agent for purchase of goods or merchandise ; or (ii) being an agent for sale of goods or merchandise is allowed to habitually maintain a stock of the goods of the enterprise and effect sales therefrom. The conclusion seems inevitable that oven a non-independent agent can be deemed to be a permanent establishment only if he can act independently in the matter of concluding contracts on behalf of the principal, on his own, freely and without control from the latter. The Clauses in the solicitation agreement to which reference has been made earlier, no doubt, negate this situation in the present case inasmuch as TVI is not the final arbiter in the matter of telecast of the advertisements procured by it.
19. An objection is taken that the Clauses of the agreement relied upon merely embody a legal formula, repetitive of the words of the DTAA employed solely to bring the case under Clause (i) of para. 4 of Article 5 and that the determination of such an important question as the existence of a permanent establishment cannot be allowed to depend on the use of self-serving phraseology in the relevant document. On the other hand, it is said that the use in para. 4 of the words "has and exercises authority" shows that the emphasis is on the specific conferment of authority on the agent in this regard and the exercise thereof in terms of such authorisation. The use of words to that effect in the agreement is, therefore, it is said, imperative and should not be looked at with suspicion merely because the two companies are similarly constituted. It is pointed out that there is also a practical necessity on the part of TVM to retain the final word on the acceptance of advertisements. Its channels are broadcast not only in India but over a large number of countries in the East and the Far East and these have different types of regulations and controls on the matter that is to be broadcast. It is only TVM that can fully appreciate and regulate the beaming of advertisements and control it from Mauritius in such a way as not to offend the susceptibilities and regulations of the several countries concerned. TVI, though composed of the same controlling shareholders, operates primarily in production of software in India and may not be fully cognisant of the limitations of TVM in this regard. That is why, it is said, final acceptance of the advertisement is made to rest with TVM and payment therefor is made only after the broadcast takes place. It is submitted, therefore, that the agreement gives expression to a practical necessity and does not merely voice an empty or non-genuine declaration.
20. There is force in these contentions which have to be accepted but with a note of reservation. Para. 4 uses two expressions : "has" and "habitually exercises" an authority to conclude contracts on behalf of the enterprise in question. While the expression "has" may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression "habitually exercises" has certainly reference to a systematic course of conduct on the part of the agent. If, despite the specific provision of the soliciting agreement, it is found, as a matter of fact, that TVI is habitually concluding contracts on behalf of TVM without any protest or dissent, perhaps it could be presumed either that the relevant provisions of the agency contract are a dead letter ignored by the parties or that the principal has agreed implicitly to TVI exercising such powers notwithstanding the terms of the contract. If such a situation is found to exist, then perhaps it could be said that TVI constitutes a permanent establishment for TVM despite the Clauses of the contract relied upon. It is, however, too premature to express an opinion on this. The solicitation agreement has not been approved or acted upon and, having regard to the identity of the groups of shareholding in both companies, it is difficult to speculate on the way in which the transactions of TVM through TVI will be eventually put through. Subject to a liberty to the Department to investigate the actual state of affairs and draw appropriate conclusions, the contention that TVI, notwithstanding its identity of shareholders and close business connections with TVM and its representing TVM in its Indian transactions for collection of advertisements and revenue therefor, cannot be held to be a permanent establishment of TVM.21. The above conclusions are reinforced by the Commentary on the OECD Model of Double Tax Conventions as well as the views of text book writers like Klaus Vogel and Baker. The provisions of the paragraphs relied upon in this case are based upon the Model Conventions evolved by the OECD, UN and USA. There are of course some variations but a comparative reading will leave no doubt that several observations in the commentary on the UN Model will be equally apposite even for the interpretation of the India-Mauritius treaty. The following commentary in respect of paras. 4 and 5 of the other models (which correspond to paras. 5 and 6 of the Indian treaty under consideration here) clearly elucidates the principles behind these provisions : "Para. 31. [principle] It is a generally accepted principle that an enterprise should be treated as having a permanent establishment in a State if there is under certain conditions a person acting for it, even though the enterprise may not have a fixed place of business in that State within the meaning of paragraphs 1 and 2. This provision intends to give that State the right to tax in such cases. Thus, paragraph 5 stipulates the conditions under which an enterprise is deemed to have a permanent establishment in respect of any activity of a person acting for it. The paragraph was redrafted in the 1977 Model Convention to clarify the intention of the corresponding provision of the 1963 Draft Convention without altering its substance apart from an extension of the excepted activities of the person.
Para 32. [Dependency test] Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents, i.e., persons, whether employees or not, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies. It would not have been in the interest of international economic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. Therefore, paragraph 5 proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them. In such a case the person has sufficient authority to bind the enterprise's participation in the business activity in the State concerned. The use of the term "permanent establishment" in this context presupposes, of course, that that person makes use of this authority repeatedly and not merely in isolated cases. Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise ; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise.
Para. 33. [Authority to conclude contracts] The authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. It would be irrelevant, for instance, if the person had authority to engage employees for the enterprise to assist that person's activity "or the enterprise or if the person were authorised to conclude, in the name of the enterprise, similar contracts relating to internal operations only. Moreover the authority has to be habitually exercised in the other State ; whether or not this is the case should be determined on the basis of the commercial realities of the situation. A person who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise this authority "in that State", even if the contract is signed by another person in the State in which the enterprise is situated. Since, by virtue of paragraph 4, the maintenance of a fixed place of business solely for purposes listed in that paragraph is deemed not to constitute a permanent establishment, a person whose activities are restricted to such purposes does not create a permanent establishment either.
Para 35. [Principle] Where an enterprise of a Contracting State carries on business dealings through a broker, general commission agent or any other agent of an independent status, it cannot be taxed in the other Contracting State in respect of those dealings if the agent is acting in the ordinary course of his business (of paragraph 31 above). Although it stands to reason that such an agent, representing a separate enterprise, cannot constitute a permanent establishment of the foreign enterprise, paragraph 6 has been inserted in the Article for the sake of clarity and emphasis." "The question whether such a person has an authority to conclude contracts within the meaning of treaty law must be decided not only with reference to private law but must also take into consideration the actual behaviour of the contracting parties, An approach relying solely on aspects of private law (the law of contracts) would make it easily possible to prevent an agent being deemed a permanent establishment (and, therefore, to prevent the enterprise from being taxed by the State in question) even where he is engaged most intensively in the enterprise's business ; he would be allowed only to negotiate contracts up to the point when they were finalised and ready to be signed, but the final signature, to satisfy the proprieties, would be reserved to someone from the enterprise's headquarters in the other contracting State. Such a formal split-up of business responsibilities on the one hand and legal authority on the other, is considered by Strobl/Kellmann to constitute a case of 'tax circumvention' (see supra Introduction at m. No. 114) where substance should prevail over form ; a permanent establishment should, therefore, be deemed to exist irrespective of what the formal arrangements were (Strobl, J./Kellmann, c. 15 AWD 405, 408 (1969). It is submitted that the solution is even simpler, since the agent in question had in fact an authority to conclude contracts, even if not under private law (the law of contracts), but at all events within the meaning underlying Article 5. Corresponding clarification is already to be found in some DTCs (cf., e.g., Germany's DTC with Malaysia, para. 3(b) Prot. re Article 6), 141. The question as to whether the behaviour of the contracting parties is such as to support the opinion that an authority to conclude contracts exists, should be decided against the background of the economic situation. If there are sound reasons for the enterprise represented to reserve its right to conclude the contract itself--say, where major contracts are involved--the agent may not be considered to have an authority to conclude contracts. If, on the other hand, mass contracts made out on standard forms are merely signed by someone at headquarters without showing signs of having been scrutinized by the signatory himself, the agent can be assumed to have taken the ultimate decision and, in other words, to have had an authority to conclude such contracts." 23. The result of the above conclusion is that, since TVM has no permanent establishment in India, none of its business profits arising as a result of its activities in India through TVI can be brought to tax here. On behalf of the Department, however, the authority's attention has been drawn to Circular No. 742 (see [1990] 219 ITR (St.) 49), dated May 2, 1996, which is in the following terms : "Subject : Taxation of foreign telecasting companies--Guidelines for computation of income-tax, etc.
24. A number of representations have been received from foreign telecasting companies regarding their taxability and the extent of income that could be said to accrue or arise to them from their operations in India. A consequent issue raised is the method of computation of profits from their Indian operations, especially in the cases of those companies which do not have any branch office in India or are not maintaining country-wise accounts of their operations.
2. The matter has been examined by the Board and the assessment records of some of these companies have also been looked into. Since this is a new area of commercial activity, no uniform basis is being adopted by the Assessing Officers at different stations for computing the income in the absence of country-wise accounts of the foreign telecasting companies. It has, therefore, been decided by the Board to prescribe guidelines for the purpose of proper and efficient management work of the assessment of foreign telecasting companies.
3. It is seen that out of the gross amount of bills raised by a foreign telecasting company, the advertising agent retains commission at 15 per cent, or so. Similarly, the Indian agent of the foreign telecasting company retains his service charges at 15 per cent, or so of the gross amount. The balance amount of approximately 70 per cent, is remitted abroad to the foreign company. So far as the income of India, advertising agent and the agent of the non-resident telecasting company are concerned, the same is liable to tax as per the accounts maintained by them. As regards the foreign telecasting companies which are not having any branch office or permanent establishment in India, tax has to be deducted and paid at source in accordance with the provisions of Section 195 of the Income-tax Act, 1961, by the persons responsible for paying or remitting the amount to them.
4. In the absence of country-wise accounts and keeping in view the substantial capital cost, installation charges and running expenses, etc., in the initial years of operation, it would be fair and reasonable if the taxable income is computed at 10 per cent, of the gross receipts (excluding the amount retained by the advertising agent and the Indian agent of the nonresident foreign telecasting company as their commission/charges) meant for remittance abroad.
The Assessing Officers shall accordingly compute the income in the cases of the foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining country-wise accounts by adopting a presumptive profit rate of 10 per cent, of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, i.e., 55 per cent, at present.
5. It has also been decided that while assessing the income in the aforesaid manner, penalty proceedings may not be initiated in the cases in which taxes due along with the interest are paid voluntarily within 30 days of the date of issue of this circular.
6. It is clarified that these guidelines would be applicable to all pending cases irrespective of the assessment year involved until 31st March, 199B, after which the position with regard to the reasonableness of the rate of profits of such companies will be reviewed." 25. These guidelines are only general in character and it is open to asses-sees to accept them if they are beneficial to them. It is difficult to agree, however, on a proper interpretation of the DTAA in the light of the facts here that any portion at all of the profits of TVM are assessable in India. To the extent these guidelines purport to extend the applicability of the presumptive rate of profits even to cases where the foreign telecasting company has no permanent establishment in India, it cannot be treated as laying down the correct position in law.
26. A point was also made on behalf of the Department that there was no ostensible need for establishing a company at Mauritius with the same group shareholding as TVI except perhaps as a design to avoid tax. Shri Vaish pointed out that this objection was not valid. Though TVI was preparing a software and had enough material for feeding a channel, the Indian law does not permit uplinking of TV programmes from India and that many TV organisations in India have proceeded to obtain such facilities from Mauritius. The business of TVI could not have been carried on without the creation of an organisation which can obtain such facilities elsewhere. As already pointed out all the other shareholder groups were running several channels and transmitting programmes all over the world. It was with a view to obtain the benefit of their technical expertise, financial capabilities and well-established reputation in this field of entertainment and education that Hindustan Times entered into collaboration with them to form TVI (to prepare software programmes for TV, particularly in Hindi) and TVM (to avail of the transponder on PanAmSat-4 available to it through the good offices of the Carlton group and to broadcast the programmes it acquires from various sources including the Pear-son, the Carltons and TVI). The solicitation agreement is but one of a number of agreements entered into between TVI and TVM to realise the above objectives. TVM had been incorporated with a view to operate a TV channel. Since it was considered expedient that such a company should be incorporated in a country neutral to all the parties concerned and from where broadcasting was permitted, it is said, Mauritius emerged as the best choice as it had the facility and also a number of other advantages.
27. Having considered the contention of both sides, the Authority is of the view that there were satisfactory considerations for the constitution of TVM as a company in Mauritius. It is not possible to accept the contention that the question raised in this application relates to a transaction that is designed to avoid income-tax.
28. Before proceeding to record the Authority's ruling on the questions posed, reference has to be made to a very important objection raised by the Department regarding the applicant's eligibility to any benefit at all under Article 7 of the treaty. The objection is that the provisions of the DTAA will be applicable only if the recipient is resident in Mauritius in terms of the DTAA and is liable to pay tax in that country. It may be pointed out that though Article l of the DTAA permits the benefits of the DTAA to flow to persons who are residents of one or both of the Contracting States and Article 7 talks merely of an enterprise of a Contracting State, the requirement above-mentioned is a must before the applicant can claim the benefit of Article 7 because of the definition of the words "person" and "enterprise of a Contracting State" in Article 3. These definitions read (see [1984] 146 ITR (St.) 214, 215) : "Article 3-General definitions : (1) For the purposes of this Convention, unless the context otherwise requires :. . .
(e) the term 'person' includes an individual, a company and any other entity, corporate or non-corporate, which is treated as a taxable unit under the taxation laws in force in the respective Contracting States ; . . . . (g) the terms, 'enterprise of a Contracting State' and 'enterprise of the other Contracting State' mean, respectively, an industrial, mining, commercial, plantation or agricultural enterprise or similar undertaking carried on by a resident of a Contracting State and an industrial, mining, commercial, plantation or agricultural enterprise or similar undertaking carried on by a resident of the other Contracting State ; . . ." the reference to "tax" being to the income-tax in Mauritius : vide Article 2(1) read with Article 3(d). It is, therefore, important for the applicant to establish that it is liable to pay income-tax in Mauritius.
29. The applicant was called upon, in the course of the hearing, to produce before the Authority the particulars of the income-tax law in Mauritius but this has not been done. Apart from an averment in a letter by counsel "confirming" that TVM "is liable to tax in Mauritius in respect of its global income", no relevant statutes or regulations of Mauritius in this regard have been placed on record. The Authority has been able to gather some information, the strict and full accuracy of which, however, is subject to verification. It appears that Mauritius is one of those countries which permit the formation of off-shore companies. There are two types of companies in Mauritius : "international business companies" and "ordinary status companies". The former of these pays no taxes at all in Mauritius and is free from all exchange control. The other can be incorporated in Mauritius or register a branch there. It is accorded a resident status under the law of Mauritius if it has two local directors, provides for board meeting's in Mauritius and maintains a local off-shore account. As to the income-tax rates, it seems they are at present negotiable and are on a sliding scale varying between 0 per cent, and 35 per cent, though it is said that from July, 1998, it is proposed to levy a minimum tax of 15 per cent. This somewhat unusual provision is indeed specially so couched to enable such companies to avail themselves of the benefits of the DTAAs some of which (like the one with India) require the company in Mauritius to show that it is subject to a minimum rate of tax in order to qualify for relief thereunder. Hence, liability to income-tax of the Mauritius off-shore company is optional, If TVM is an IBC or off-shore company which opts for the zero rate of tax, it will become ineligible for relief under the DTAA between India and Mauritius. On the other hand, if it is an off-shore company which has opted for being subjected to tax and proof of this is produced, relief under Article 7 will have to be granted. The claim of the applicant for relief is, therefore, conditional on the factual situation actually prevalent. For the reasons set out above, the Authority proceeds to pronounce its ruling on the questions raised. Though three separate questions have been framed, questions Nos. 1 and 3 are virtually the same and the answer to them is dependent on that to question No. 2. The authority, therefore, pronounces the following as the common ruling on all the three questions raised : 1. Whether, the business profits earned by the applicant from sale of air time on the television channel broadcast in, inter alia, India, would be liable to tax in India The business profitsearned by TVM through TVI are profits deemed to accrue or arise in India under section 9 of the Act. However, they are not taxable in India 2. Whether, the agent appointed by the applicant to solicit orders from the purchasers of air-time and to pass on those orders to the applicant for acceptance, could be construed as a permanent establishment of the applicant in India by virtue of article 7 of the DTAA, (a) if TVM's liability to pay tax in Mauritius is established ; and (b) only TVM and not TVI is shown to exercise generally the power to conclude the advertisement contracts for the sale of air time.
3. If the answer to question No. 2 is the negative, whether any part of the business profits earned by the applicant could still be deemed to accrue or arise in India and, therefore, liable to tax in India ?