Profits-based attribution under the functions-assets-risks test limits Indian taxation where only limited CRS activity is performed in India.

Cross-border CRS operations were analysed on the basis of business connection and permanent establishment, with attribution determined by where core processing and database functions were performed. The limited role of equipment and connectivity in India, together with the functions-assets-risks test, showed that only a small part of the activity was carried on in India while the main operations and risks remained offshore. Income attribution was therefore required on a profits basis rather than by mechanically allocating gross receipts. On those facts, no income was chargeable to tax in India for the years considered.

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Issues: Whether the assessee had a business connection or permanent establishment in India, and if so, what portion of the profits from the CRS business was attributable to India.

Analysis: The appeals were disposed of by following the earlier decision on identical facts for prior assessment years. The determining factors were the place where the core processing and database functions were performed, the limited role of the equipment and connectivity in India, and the principle that attribution must be to profits rather than gross revenue. On that basis, the earlier view that a small part of the activity was carried on in India and that the bulk of the operations and risks remained outside India was applied to the present years as well.

Conclusion: No income was chargeable to tax in India on the facts of these years, and the assessee's appeals succeeded while the revenue's appeals failed.

Ratio Decidendi: Where only a limited operational role is performed in India in a cross-border business, taxable income must be apportioned on a profits basis by applying the functions-assets-risks test, and not by attributing gross receipts mechanically.

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