2017 (10) TMI 1011 - SC - Income Tax

US companies avoid permanent establishment in India despite subsidiary support services under Article 5 DTAA

Assistant Director of Income Tax-I, New Delhi Versus M/s E-Funds IT Solution Inc.

Assistant Director of Income Tax-I, New Delhi Versus M/s E-Funds IT Solution Inc. - [2017] 399 ITR 34, (2018) 13 SCC 294 Issues Involved:1. Determination of Permanent Establishment (PE) in India.2. Attribution of income to the PE in India.3. Application of the Mutual Agreement Procedure (MAP) and its binding effect.4. Adverse inference due to non-disclosure of documents.Issue-wise Detailed Analysis:1. Determination of Permanent Establishment (PE) in India:The primary issue was whether the assessees had a PE in India under Article 5 of the India-US DTAA. The Revenue argued that the assessees had a 'fixed place PE,' 'service PE,' and 'agency PE' in India. The High Court, however, found no specific finding in the assessment order or appellate orders that any fixed place of business was at the disposal of these companies. The High Court emphasized that the mere outsourcing of business to an Indian subsidiary does not create a PE. The Supreme Court agreed, stating that the Indian company only rendered support services, which did not give rise to a fixed place PE. Additionally, the Court found that the service PE requirement under Article 5(2)(l) was not satisfied, as the services were not furnished within India. The 'agency PE' aspect was not argued before the ITAT and lacked a factual foundation.2. Attribution of Income to the PE in India:The Revenue contended that income attributable to the assessees' PE in India should be taxed in India. However, the High Court and the Supreme Court noted that the Transfer Pricing Officer had determined that the transactions between the US companies and the Indian subsidiary were at arm's length. The Supreme Court referenced the Morgan Stanley case, which held that if a PE is remunerated on an arm's length basis, no further profits would be attributable to the PE. Therefore, the Court concluded that no additional income was attributable to the assessees' PE in India.3. Application of the Mutual Agreement Procedure (MAP) and its Binding Effect:The Revenue relied on a MAP resolution for the assessment years 2003-04 and 2004-05, where the assessees had agreed to attribute a certain percentage of income to the Indian PEs. However, the Supreme Court noted that the MAP resolution explicitly stated that it was not binding for subsequent years. The Court also referred to the OECD Manual on MAP Procedure, which supports that such agreements are case-specific and not precedents for subsequent years. Thus, the MAP resolution did not bind the assessees for later years.4. Adverse Inference Due to Non-Disclosure of Documents:The Revenue argued for an adverse inference due to the assessees' failure to disclose certain documents. However, the Supreme Court dismissed this argument, noting that it was not raised before any of the authorities below or the High Court. Consequently, the Court did not consider it necessary to address this issue.Conclusion:The Supreme Court upheld the High Court's judgment, concluding that the assessees did not have a PE in India, and no additional income was attributable to them for taxation in India. The MAP resolution was not binding for subsequent years, and the argument for an adverse inference due to non-disclosure of documents was dismissed. The appeals were accordingly dismissed with no order as to costs.