14th Nani Palkhivala Memorial National Taxation Moot Court Competition- 2018

IN THE HIGH COURT OF JUDICATURE AT MADRAS

(Ordinary Original Civil Jurisdiction)

IN APPEAL NO. _____ OF 2014

IN THE MATTER OF:

The Income-tax Act, 1961

And

IN THE MATTER OF:

Section 260A of the Income-tax Act, 1961

And

IN THE MATTER OF:

Order dated 24th October, 2014 by the
Income-tax Appellate Tribunal, Chennai,
for the assessment years 2006-07 to 2009-10.

M/s General Appliances India Limited… Appellant

Versus

Commissioner of Income Tax … Respondent

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MEMORANDUM OF APPEAL

The Appellant prefers this Appeal against the order dated 24th October, 2014 passed by
the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) for the
assessment year 2006-07 to 2009-10.

I. Statement of facts:

1. The Appellant, General Appliances India Limited (GAIL), is a company

incorporated in India and registered under Indian Companies Act 1956. During the
years under appeal, GAIL was engaged in the business of rendering business
development and marketing support services, dealing in home appliances and
textiles.

2. The Appellant renders business development and marketing services to Innovative

Appliances Canada (IAC) a manufacturer of industrial appliances and tax resident
of Canada. In providing these services, GAIL

a. finds customers for IAC,

b. sets up meetings with such customers

c. explains about products of IAC

d. negotiates all the terms of the contract with such customers

e. sends the documents to IAC for formal execution

f. follows up with customers for realisation of the sale proceeds

3. Indian tax authorities observed that GAIL is a Dependent Agent Permanent

Establishment of IAC and treated it to be a statutory agent under section 163 of the
Income tax Act, 1961 (‘the Act’). In the assessment proceedings for all the four
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years for IAC as represented by GAIL, the Assessing Officer held that IAC has a
permanent establishment (PE).

4. Being aggrieved by the said order, the Appellant filed appeal before CIT(A).

5. Before CIT(A) it was contended as under:

a. For AY 2006-07 GAIL only negotiated the terms of the sale contracts and the
same were concluded by IAC itself. It pleaded that it did neither have nor
exercise the authority to conclude contracts on behalf of IAC. It also argued
that it is only after the Action Plans of Base Erosion and Profit Shifting are
fully implemented through the Multilateral Instrument, the revised definition
of PE will apply. The revised definition can be said to have done away with
the requirement of conclusion of contracts by the agent and made it sufficient
to infer a PE if the agent plays a principal role in conclusion of the contract.
However, as per the text of the treaty applicable to the relevant years in appeal,
a PE is created only if the agent concludes contract. GAIL contended that it
did not have power to make any binding commitment on behalf of IAC and
all contracts were invariably sent to IAC for signatures.

b. For AY 2007-08 in addition to the above arguments, GAIL argued that it was
not a dependent agent. GAIL argued that its gross revenue from IAC in the
form of commission was INR 22 crore while its gross revenue from the
business of sale and purchase of home appliances was INR 40 crores. Out of
the commission income of INR 22 crore, the revenue from IAC was INR 20
crore. Thus, the business dealings with IAC constituted only one-third of the
total business.

Revenue authorities highlighted that though gross revenue gives an

impression of commercial independence, the profit from commission income
is INR 12 crore, while the profit from trading is merely INR 2 crore. Thus,
significant dependence is on commission business from IAC.
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c. For AY 2008-09 & 2009-10, in addition to the arguments for AY 2006-07, it

argued that its independence was strengthened by the fact that during this year
it had amalgamated with another company engaged in the business of textiles.
As a result, the total gross revenue of the taxpayer was INR 200 crore of which
only INR 20 crore from IAC. Profit from commission from IAC was 14 crores
while profit from other business was INR 36 crores.

6. Learned CIT(A) held that as far AY 2006-07 is concerned, a PE gets created even
by playing principal role in conclusion of the contracts. This part of the fact is not
disputed even by GAIL. For this Learned CIT(A) referred to the 2010 version of
the commentary of OECD on Article 5 para 33 extracted hereunder:

“33. …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 or if the first person has not formally been
given a power of representation. The mere fact, however, that a person has attended
or even participated in negotiations in a State between an enterprise and a client
will not be sufficient, by itself, to conclude that the person has exercised in that
State an authority to conclude contracts in the name of the enterprise…….”

Learned CIT(A) held that independence for AY 2007-08 cannot be accepted as the
profit from commission business is relevant and a decision about independence
cannot rest upon the materiality of gross receipts;

For AY 2008-09 and 2009-10, the taxpayer is independent as the independence has
to be seen at the entity level and not qua the relevant business.

7. In cross appeals before the Tribunal, it held that a PE existed for all the years for
following reasons
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 A PE is constituted for AY 2006-07 as it is enough if the agent negotiates

all the terms of the contract and it is only a formality of signatures that is
carried out by the non-resident;
 Independence for AY 2007-08 cannot be accepted as the profit from
commission business is material and a decision about independence
cannot rest upon the materiality of gross receipts;
 Even for AY 2008-09 the taxpayer is not independent as the
independence has to be seen not at the entity level but qua the relevant
business. Merely by acquiring another entity in the process of merger or
amalgamation.
 Even though the amalgamation is effective from 1 April 2007 being the
appointed date, the order of the company court was rendered only in May
2008 so during the relevant fiscal year, GAIL actually conducted only
appliance business.
 For AY 2009-10 the argument of independence was declined as the
independence was to be seen only qua relevant business.

II. Substantial questions of law:

The Appellant submits that the following substantial question of law arises from the
Order of the Tribunal:

(i) Whether, on the facts and in the circumstances of the case and in law, the
Tribunal was right in holding that a PE exists in India for AY 2006-07
when the Appellant did not itself conclude any contract?

(ii) Whether, on the facts and in the circumstances of the case and in law, the
Tribunal was right in holding that commercial independence of an agent is
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to be gauged from the profitability and not gross revenue especially when
two views are possible thereon in the absence of a statutory mandate?

(iii) Whether, on the facts and in the circumstances of the case and in law, the
Tribunal was right in holding that commercial independence of an agent is
to be gauged qua the business in which he is engaged as an agent and not
in relation to his all businesses?

(iv) Whether, on the facts and in the circumstances of the case and in law, the
Tribunal was right in holding that even though the amalgamation is
effective from 1 April 2007, the amalgamated business cannot be looked
into for ascertaining commercial independence for AY 2008-09?

III. Grounds of Appeal

That the Appellant seeks to challenge the impugned order passed by the Tribunal on
the following grounds, inter- alia:-

A. The phrase ‘conclude contracts on behalf of the enterprise’ has to be interpreted

to mean bringing into existence a legal relationship between principal and the
customer and cannot be so widely interpreted to mean mere negotiation of the
terms of the contract.
B. The commercial independence has to be examined from the perspective of
businessman and as a businessman, GAIL always believed it to be commercially
independent as the significant portion of its gross revenue has been from the
business of dealing in home appliances and textiles and not commission from
IAC.
C. The aspect of commercial independence is to be examined in relation to the agent.
Dependence of independence is the status of the agent and not of the business.
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There is no warrant to artificially dissect the activities of the legal entity and test
the dependence only qua a line of business wherein it is acting as an agent
D. The legal implication of amalgamation is that it retrospectively takes effect and
the amalgamation in the case of GAIL became effective from 1st April, 2007
which cannot be ignored. The fact that it had moved a petition for merger in FY
2007-08 which got approved in May 2008 shows that for FY 2007-08, GAIL
should be treated to have been engaged in textile business as well and therefore
independent.

IV. The Appellant reserves the right to alter, modify or amend the grounds of appeal
raised hereinabove.

V. The Appellant submits that the Appeal is filed within the time prescribed.

VI. The Appellant states that the Appellant is assessed to tax at Chennai. Thus, this
Hon’ble Court has jurisdiction to try, entertain and dispose off the present appeal.

VII. The Appellant states that the Appellant has paid the court fees of Rs.10,000.

VIII. The Appellant prays that:

a. This Hon’ble Court may be pleased to admit the present appeal and after
considering the aforesaid substantial questions of law to allow the appeal;

b. This Hon’ble Court may be pleased to set aside the impugned order and decide
the issues in favour of the Appellant;

c. For costs of and incidental to this appeal; and

 14th Nani Palkhivala Memorial National Taxation Moot Court Competition- 2018

d. This Hon’ble Court may be pleased to grant such further and other relief as it may
deem fit.

Note: The Appeal has been admitted on all the questions and has been fixed for final
hearing.