IN THE HIGH COURT OF JUDICATURE AT MADRAS (Ordinary Original Civil Jurisdiction) IN APPEAL NO. OF IN THE MATTER OF: The Income-tax Act, 1961

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1 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 24 th October, 2014 by the Income-tax Appellate Tribunal, Chennai, for the assessment years to M/s General Appliances India Limited Appellant Versus Commissioner of Income Tax Respondent

2 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 to I. Statement of facts: 1. The Appellant, General Appliances India Limited (GAIL), is a company incorporated in India and registered under Indian Companies Act 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

3 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 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 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.

4 c. For AY & , in addition to the arguments for AY , 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 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 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 and , 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

5 A PE is constituted for AY 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 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 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 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) (ii) 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 when the Appellant did not itself conclude any contract? 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

6 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) (iv) 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? 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 ? 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.

7 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 which got approved in May 2008 shows that for FY , 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

8 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.