2023 (3) TMI 711 - AT - Income Tax

Indian Tribunal: Convergys not PE, IPLC not royalty. Dependent Agent & Service PE dismissed. Revenue's appeal dismissed.

The Tribunal upheld that M/s. Convergys India Services Pvt. Ltd. (CIS) constituted a Permanent Establishment (PE) of the assessee in India. Profit ... Fixed place Permanent Establishment - Dependent agent Permanent Establishment - Service Permanent Establishment - Attribution of profits to Permanent Establishment - Business connection under section 9 - Taxability of IPLC/link charges as royalty - Precedential effect of coordinate-bench Tribunal orders in assessee's own caseFixed place Permanent Establishment - Precedential effect of coordinate-bench Tribunal orders in assessee's own case - Whether the assessee had a fixed place Permanent Establishment in India for the relevant year and whether earlier coordinate-bench findings in the assessee's own case are binding. - HELD THAT: - The Tribunal followed earlier coordinate-bench decisions in the assessee's own case (concluding a fixed place PE existed for earlier assessment years) and applied judicial discipline to hold that those findings bind the Bench in the present proceeding. On that basis the Tribunal affirmed the finding of a fixed place PE in India and decided the related grounds against the assessee. [Paras 9]Finding of fixed place PE in India affirmed; grounds challenging fixed place PE dismissed against the assessee.Attribution of profits to Permanent Establishment - Methodology and quantum of profits attributable to the PE arising from assets/use of project-specific assets. - HELD THAT: - While the existence of a fixed place PE was affirmed by following earlier coordinate-bench methodology, the Tribunal did not decide the final quantification on the merits. Instead, it restored the issue to the file of the Assessing Officer/TPO with directions to adopt the methodology laid down by the coordinate Bench for earlier assessment years, and to recompute attribution after giving the assessee opportunity to submit calculations. [Paras 10]Issue remanded to AO/TPO for recomputation of profits attributable to the PE following the Tribunal's earlier prescribed methodology.Service Permanent Establishment - Dependent agent Permanent Establishment - Whether the assessee had a Service PE or a Dependent Agent PE in India for the year under consideration. - HELD THAT: - The Tribunal noted that earlier orders in the assessee's own case had held there was no service PE and no dependent agent PE, and that the Revenue had failed to point out distinguishing facts for the year under appeal. The Tribunal therefore accepted the earlier findings and sustained the conclusion that neither a Service PE nor a Dependent Agent PE existed in India in the year under consideration. [Paras 11]Findings that there is no Service PE and no Dependent Agent PE upheld; related grounds raised by the Revenue dismissed.Taxability of IPLC/link charges as royalty - Whether amounts received by the assessee towards IPLC/link charges are taxable in India as royalty. - HELD THAT: - Following the Tribunal's earlier reasoning in the assessee's own case, the Bench held that the IPLC/link charges did not amount to transfer of right to use nor constituted royalty under Article 12 of the India-US DTAA. The payments were treated as procurement/reimbursement for services and not as equipment or process royalty; accordingly the CIT(A)'s allowance of the ground in favour of the assessee was sustained. [Paras 5, 12]Receipt of IPLC/link charges held not taxable as royalty in India; ground allowed for the assessee.Final Conclusion: The revenue appeal is dismissed. The assessee's appeal is partly allowed: the Tribunal upheld that a fixed place PE exists (following coordinate-bench precedent), sustained findings that there is no Service PE or Dependent Agent PE, held IPLC/link charges are not taxable as royalty, and remanded the profit-attribution computation to the Assessing Officer/TPO to be carried out in accordance with the Tribunal's established methodology. Issues Involved:1. Whether M/s. Convergys India Services Pvt. Ltd. (CIS) constitutes a Permanent Establishment (PE) of the assessee in India.2. Profit attribution to the said PE.3. Taxability of IPLC charges received by the assessee in India.4. Existence of Dependent Agent PE in India.5. Existence of Service PE in India.Issue-Wise Detailed Analysis:1. Permanent Establishment (PE) of the Assessee in India:The primary issue was whether CIS constitutes a PE of the assessee in India. The Tribunal upheld the findings of the CIT(A) and previous Tribunal orders, concluding that the assessee has a fixed place PE in India. The Tribunal noted, 'The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal.' Therefore, CIS was considered a projection of the assessee's business in India, carrying out business under the control and guidance of the assessee without assuming significant risk. Consequently, the Tribunal upheld the CIT(A)'s decision that the assessee has a fixed place PE in India under Article 5(1) of the DTAA.2. Profit Attribution to the PE:The Tribunal directed the AO to follow the methodology laid down in previous years for profit attribution. The CIT(A) had provided a detailed step-by-step methodology for computing the profits attributable to the PE, which included computing the global operating income percentage, applying it to the end-customer revenue, and reducing the profit before tax of CIS. The Tribunal restored the issue to the file of the AO for computing the attribution of profits with respect to the fixed place PE, following the methodology from previous years.3. Taxability of IPLC Charges:The Tribunal ruled in favor of the assessee, holding that IPLC charges are not taxable as royalty in India. The CIT(A) had followed the Hon'ble IT Jurisdictional High Court's decision in New Skies Satellite BV, stating, 'the amendment in section 9 will not affect DTAA.' Therefore, the payment of link charges received by the appellant from CIS would not qualify as 'process' royalty under Article 12 of the India-US DTAA.4. Existence of Dependent Agent PE in India:The Tribunal dismissed the department's appeal on the issue of Dependent Agent PE, following the decision in the assessee's own case for earlier assessment years. The CIT(A) had concluded that CIS did not constitute a dependent agent PE of the appellant in India, as there was no material on record to show that the conditions mentioned in Article 5(4) of the DTAA were satisfied, such as habitually exercising authority to conclude contracts or securing orders.5. Existence of Service PE in India:The Tribunal also dismissed the department's appeal regarding the existence of a Service PE in India. The CIT(A) had noted that the AO had accepted the returned position and taxed the amount as Fee for Included Services under Article 12 of the DTAA. The CIT(A) observed that there was no Service PE in India, as the personnel of the company visited India for rendering services that qualified as Fee for Included Services, which were already taxed accordingly.Conclusion:The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal with consequential effects as per the directions provided. The Tribunal's decision was consistent with previous rulings in the assessee's own case, emphasizing judicial discipline and the principle of consistency. The order was pronounced in the open court on 6th March 2023.