(i) Income from carrying on a Business or Industry through
(54. The term “carrying on a business” applies, not only to producing or selling in N.E.I., but also to purchasing through a permanent establishment.)
55. (1) A Local Commission Agent or Broker. — Where a local commission agent or broker is carrying on business independently as such, and does not belong to the staff of the foreign enterprise, the income derived by the latter from selling or purchasing through such an intermediary cannot be taxed. The most frequent example of this class of business is where a foreign enterprise sends a consignment of cotton goods to a local commission agent who sells them, for the account of the consignor, to merchants throughout the islands. The fact that the local commission agent receives a del credere commission would, as a rule, be taken as an indication of his independence. Still, there is reason to study each case, as an enterprise not settling down in this country ought not to be in a more favourable position than an enterprise having an establishment in N.E.I. The question may be of great importance when the country is the special buying market for some product, as N.E.I. is for sugar. Though it is not very probable that a foreign enterprise will abstain from founding an establishment only on account of tax liability, the circumstances of each case ought to be studied in order to ascertain if the relations between the commission agent and the foreign enterprise are of such a nature that the latter may be regarded as carrying on business itself.
56. (2) A Local Dealer or Distributor. — As long as this dealer is buying and reselling for his own account, whether he has or not the exclusive right to sell the goods in a particular district, the foreign enterprise itself is not taxable on profits made on the goods sent to this dealer. This is true even though the foreign enterprise has in N.E.I. an engineer to supervise the installation of machines sold by the dealer, or to inspect the goods from time to time. If the dealer or distributor is not, in fact, independent — for example, if he has not sufficient capital of his own — but is selling goods belonging to the foreign enterprise, which carries the risk of bad debts, the latter can be considered as carrying on business, and the tax will be levied on its profits.
57. (3) A Travelling Salesman, whether or not having Power to conclude a Contract. — Under the Income-Tax Ordinance, if the foreign enterprise sends to N.E.I. an employee who travels from place to place taking orders or closing contracts for the sale of goods, the enterprise is taxable on its profits if the salesman remains in N.E.I. for more than three months, and the salesman is likewise taxable on his remuneration. Although the Company-Tax Ordinance does not contain a similar provision, by analogy the company would be taxable on profits derived from carrying on the business in N.E.I. for more than three months. Thus, in practice, liability would arise if the foreign company maintains a salesman in N.E.I. for more than three months, and, consequently, might be regarded as having become established. Liability does not depend upon where the contract of sale is actually closed, but rather upon the fact that the profits resulted from the activities of the employee in N.E.I. for the indicated period.
58. If the travelling salesman does not belong to the staff of the foreign enterprise, but is a local person receiving a commission only when sales are made, the enterprise is generally not taxable.
59. (4) A Local Agent with a Power of Attorney. — The question of liability under this head depends upon the extent of the powers given the agent. If the local agent has an independent position (e.g., a local individual operating from his own home or office), and is merely authorised to collect orders for the foreign enterprise, for which he receives a commission, whereas the transaction is closed directly between the foreign company and the buyers, and the goods are sent directly to the latter, the foreign enterprise cannot be considered as itself carrying on business in N.E.I. The situation is not altered even if the agent acts as intermediary for the payments and eventually for claims, and even if the goods are shipped to the agent for distribution to the purchasers. If the powers of the agent are broad enough to close contracts for the sale of goods or services which bind the non-resident enterprise, the latter is taxable on its profits.
60. (5) An Agent selling out of a Stock belonging to the Foreign Enterprise. — This is a case that seldom arises in practice. In the light of general principles of liability, however, if the stock is maintained in a godown or warehouse belonging to, or leased by, the foreign enterprise, and if the agent makes sales in the name of the foreign enterprise, the latter would be regarded as having an establishment and would be taxable on its profits. On the other hand, if the foreign enterprise consigns goods to an independent merchant who disposes of them in his own name, the foreign enterprise is not taxable.
61. (6) A Permanent Establishment of Any Kind. — As has been mentioned before, in such a case the foreign enterprise is considered to carry on business itself through an “organ”, and it is taxable on all income derived from this source. In the N.E.I. fiscal law no definition is given of the term “permanent establishment”, because such term is not used. For the purposes of this study, the term “permanent establishment” includes the centre of direction, the real centre of management, branches and agencies, factories, offices and premises, and the representation by a member of the staff of the foreign enterprise. In the past, a subsidiary company has not generally been considered as a permanent establishment, even when it is independent only in legal form.