ITOCHU Corporation v. ACIT (IT) (2024)

⚙️ ITOCHU Corporation v. ACIT (IT) – Delhi ITAT on Business Connection, Agency Relationship & Absence of Permanent Establishment under India–Japan DTAA (2024)

📌 Background

In cross-border trade arrangements, especially involving Japanese trading houses (sogo shosha), one recurring issue is whether the presence of an Indian subsidiary performing purchasing or selling support functions creates a Permanent Establishment (PE) for the foreign parent company under Article 5 of the applicable Double Taxation Avoidance Agreement (DTAA).

The decision in ITOCHU Corporation v. ACIT (IT) [(2024) 231 TTJ 744 / 242 DTR 57 / 38 NYPTTJ 995 (Delhi)(Trib)] addresses this issue comprehensively. The Delhi Income Tax Appellate Tribunal (ITAT) held that routine trading activities carried out by an Indian subsidiary as an independent selling and purchasing agent did not constitute a PE of the Japanese parent company in India under Article 5(6) of the India–Japan DTAA.

The ruling reaffirms that mere commercial collaboration or flow of transactions between a foreign enterprise and its Indian counterpart does not, by itself, create a “business connection” or “Dependent Agent PE” (DAPE) unless the Indian entity habitually concludes contracts or operates under complete control of the foreign principal.

📂 Facts of the Case

• Assessee: ITOCHU Corporation, a company incorporated in Japan, engaged in international trading of various goods and commodities.
• Indian Entity: ITOCHU India Pvt. Ltd. (ITPL) – a wholly owned subsidiary of the assessee.
• Assessment Year: 2017–18.

Nature of Arrangement:

• The assessee appointed ITPL as its selling and purchasing agent under an Agency Agreement.
• ITPL performed functions related to:
  • Export of goods from Japan to India, and
  • Import of goods from India to Japan.
• ITPL received service fees or commission for facilitating these transactions.
• The assessee retained full control over pricing, contracting, and commercial terms, as per Article 1 of the Memorandum of Agency Agreement.

Assessment Proceedings:

• The Assessing Officer (AO) held that ITPL acted as a Dependent Agent PE (DAPE) of the Japanese assessee under Article 5(6) of the India–Japan DTAA.
• Consequently, the AO attributed income to the alleged PE in India and taxed a portion of the global profits.
• The CIT(A) upheld the AO’s view.
• The assessee appealed before the Delhi ITAT.

❓ Core Issue

Whether the activities of ITOCHU India Pvt. Ltd. (ITPL) constituted a Permanent Establishment (PE) of ITOCHU Corporation (Japan) in India under Article 5(6) of the India–Japan DTAA, thereby making the assessee’s trading income taxable in India under Section 9(1)(i) of the Income-tax Act, 1961.

📑 Assessee’s Submissions

1. Independent Agent Relationship:
   • ITPL was an independent agent acting in the ordinary course of business and was remunerated at arm’s length.
   • It did not habitually conclude contracts on behalf of the assessee.
2. Control and Decision-Making:
   • The assessee retained full control over key decisions—pricing, contracting, and dealing with customers.
   • ITPL merely facilitated communications and market liaison but did not bind the assessee in any transaction.
3. Article 5(6) of DTAA – DAPE Conditions Not Met:
   • To constitute a DAPE, the Indian entity must habitually conclude contracts or play a principal role in their conclusion.
   • ITPL neither concluded contracts nor negotiated key terms—hence no PE was created.
4. Business Process Flow ≠ Agency PE:
   • The continuous flow of trade between Japan and India was due to business requirements, not control or dependency.
   • Trading operations inherently involve repetitive transactions; this does not imply subordination or control sufficient to establish a PE.
5. OECD Commentary Support:
   • Cited the OECD Model Tax Convention (2017), which clarifies that an agent acting independently and earning arm’s length remuneration does not create a PE.

📑 Revenue’s Submissions

1. Continuity of Relationship:
   • The Revenue argued that ITPL’s exclusive dealings with ITOCHU Japan indicated economic dependency.
   • The nature of the relationship showed ITPL was not independent but functioned as an extended arm of the Japanese parent.
2. Commercial Unity:
   • ITPL’s operations were integrated with ITOCHU’s global trading functions; therefore, it represented a fixed business presence in India.
3. Article 5(6) Triggered:
   • ITPL habitually secured orders for ITOCHU and facilitated all local transactions, satisfying the conditions of Dependent Agent PE.

⚖️ Tribunal’s Findings & Legal Reasoning

1. Memorandum of Agency Agreement

The Tribunal carefully examined Article 1 of the Agency Agreement, which expressly stated that:

• ITPL was appointed as an agent for selling and purchasing goods on behalf of ITOCHU.
• The assessee (principal) reserved the right to:
  • Quote prices,
  • Place orders, and
  • Directly deal with buyers or sellers in India, whenever necessary.

🧾 “Article 1 itself mentions that the assessee-company, as a principal, reserves the right to quote prices, place orders and deal directly with buyers/sellers… thus retaining full commercial control.”

2. Continuous Business Flow ≠ Principal–Agent PE

• The Tribunal observed that trading activity, by nature, involves a continuous flow of transactions between buyer and seller.
• Such continuity does not automatically establish a principal–agent relationship under Article 5(6).
• The business connection under Section 9(1)(i) was purely commercial and did not imply any fixed place or dependent agency PE.

💬 “Because the nature of business of trading is a continuous flow of business process, that cannot be a foundation to conclude a principal-agent relationship for Article 5 of the DTAA.”

3. Independent Agent Status of ITPL

• ITPL was engaged in independent commercial operations and earned separate remuneration for its services.
• The Revenue did not produce evidence that ITPL:
  • Concluded contracts on behalf of the assessee, or
  • Had authority to bind the Japanese entity.
• Thus, ITPL satisfied the independent agent exception under Article 5(6) of the DTAA.

4. No Permanent Establishment in India

• Since ITPL’s activities were limited to routine sales facilitation and communication support, and no contracts were finalized in India, the assessee did not have a PE in India.
• The Tribunal also noted that all key commercial decisions were made in Japan and that the profits attributable to India were already taxed in ITPL’s hands at arm’s length prices.

⚖️ “There was no PE of assessee in the form of ITPL.”

🏁 Held

The Delhi ITAT held that:
✅ The activities of ITPL did not create a Permanent Establishment (PE) of ITOCHU Corporation in India.
✅ The continuous trading transactions between India and Japan could not be the basis for assuming a principal–agent relationship under Article 5.
✅ Accordingly, ITOCHU Corporation was not liable to tax in India on its offshore trading income under Section 9(1)(i).

✅ Practical Impact for Multinational Businesses

• Independent agents protected: As long as Indian subsidiaries operate as independent agents and are remunerated at arm’s length, they will not constitute a PE.
• Documentation critical: Agency agreements should clearly state that the foreign principal retains commercial control and that the Indian entity has no authority to conclude contracts.
• OECD-aligned clarity: The ruling reinforces the global consensus that dependent agency requires actual control or authority, not mere business coordination.
• Reduced litigation risk: Well-structured intercompany arrangements can prevent PE attribution disputes in future assessments.

🔑 Key Takeaways

1. Trading continuity ≠ PE: Continuous import-export transactions do not by themselves establish a business connection or PE.
2. Arm’s length remuneration: If the Indian agent is remunerated fairly, no further profit can be attributed to the foreign principal.
3. Control is the key: Absence of authority to negotiate or conclude contracts negates PE status.
4. Article 5(6) independence: Indian subsidiaries functioning as independent agents remain outside the PE ambit.

📢 Why This Case Matters

The ITOCHU Corporation (2024) ruling provides critical guidance on Dependent Agent PE (DAPE) risk under the India–Japan DTAA and similar treaties. It underscores that commercial independence, contractual clarity, and arm’s length remuneration are sufficient safeguards against PE attribution for foreign trading entities.

For global trading houses, engineering exporters, and procurement agents, this decision strengthens the jurisprudence that routine trading functions executed through Indian subsidiaries do not trigger Indian tax exposure if structured properly.

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