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2013 (11) TMI 564
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.... the Appellant has a Permanent Establishment ('PE') in India under Article 5 of the DTAA between India and U.S.A. 1.1 That the Ld. CIT (Appeals), erred on facts and in law, in upholding that the Appellant has a Fixed Place PE in India in terms of Article 5(1) of the DTAA. 1.2 That the Ld. CIT (Appeals), erred on facts and in law, in holding that the Appellant has a place of management in India under Article 5(2)(a) of the DTAA. 1.3 That the Ld. CIT (Appeals), erred on facts and in law, in not appreciating that the Appellant was only procuring services from India and thus, falls within the exclusionary clause under Article 5(3) of the DTAA. 2. That the Ld. CIT (Appeals) erred in facts and in law in ignoring that no profits can be attributed to the alleged PE both in terms of Article 7(4) of the DTAA and Explanation 1 to section 9(1) of the Act as the Appellant was merely procuring services from India. 3. That the Ld. CIT (Appeals) having accepted the application of transfer pricing principles in determining the profits attributable to the alleged PE, and having regard to the functions, assets and risks already captured in the transfer pricing analysis of the Indian as....
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....to the PE in India, by adopting the amount of revenue earned globally shown by the assessee, without appreciating the reasons and ignoring the findings of the AO. 2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in holding that the assessee did not have a Dependent Agent Permanent Establishment in India through Convergys India Services Pvt. Ltd. (CIS), despite of having observed that the CIS did not have either economic independence or functional independence." Assessee's appeal for A.Y. 2008-09 (5243/Del/2011): 1. That on the facts and in the circumstances of the case & in law, the order passed by the Ld. Assessing Officer under section 143(3) read with section 144(C) of the Act is bad in law and void ab-initio. 2. That on the facts and in circumstances of the case & in law, the Ld. LD. AO erred in assessing the returned income of appellant of Rs. 37,94,300 at Rs. 50,71,14,396. 3. That on the facts & circumstances of the case & in law, the Ld. DRP erred in confirming the draft order of the Ld. LD. AO and conclusions contained therein. 4. That the Ld. LD. AO erred on facts & in law, in alleging that the appellant has a Permanent Esta....
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....ices Private Limited (CIS) in the present case] which subsumes the functions, assets and risk profile of the alleged PE, nothing further can be attributed to the PE. 5.5 Without prejudice to the ground that no PE exists, the profit attribution made by the Ld. LD. AO to the alleged PE is highly excessive and without any basis. 5.5.1 That for attributing profits to the alleged PE, the Ld. LD. AO ought to have considered only the revenue attributable to the alleged PE instead of considering the end-customer revenue of the appellant company. 5.5.2 That the Ld. LD. AO further, erred in facts & in law by invoking the provisions of section 40(a)(i) and section 44C of the Act with regard to cost incurred outside India thereby restricting the allocation of expenses to USD 831,643 as against the claim of allocated actual expenses of USD 33,824,353 incurred outside India. 6. That the Ld. LD. AO, erred on facts and in law, in making an addition of Rs. 4,81,48,179 paid on account of International Private Leased Circuit (IPLC) charges by stating that they are taxable as 'Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. 7. That the Ld. LD. AO err....
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....ticle 5 of the DTAA b. An Office under paragraph 2(c) of Article 5 of the DTAA c. A Factory under paragraph 2(d) of Article 5 of the DTAA (ii) Service PE under paragraph 2(l) of Article 5 of the DTAA . (iii) Dependent Agent PE (DAPE) under paragraph 4(a) and 4(c) read with paragraph 5 of Article 5 of the DTAA. 3.4 After coming to the conclusion that the Appellant has a PE in India, the Ld. AO has computed profits of Rs. 2,84,45,67,544 as attributable to the alleged PE in India by further estimating the revenue from Indian operations at Rs. 12,15,81,77,391 by allocating the global revenue in proportion of number of employees, as against the actual revenue of Rs. 6,19,73,70,750/-. Actual revenue figure has been accepted by the CIT(A) after giving a proper opportunity of hearing to the AO). Further, the AO also allocated expenses (excluding direct expenses) in proportion of number of employees. Assessee claims that if the methodology adopted by the AO is followed by taking the correct/ actual revenue as accepted by the Ld. CIT(A) i.e. of Rs. 6,19,73,70,750 as the starting point, it will result in a loss in the hands of the alleged PE. 3.5 Further the AO held the Peop....
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....he Act and Article 12 of the DTAA and hence taxable @15% on gross basis. CIT (A) relied on the judgement of Karnataka High Court in the case of CIT, International Taxation v. Samsung Electronics Co. Ltd. in his order. (iv) IPLC charges - The Ld. CIT (A) deleted the addition made by the Ld. AO and held that the payments for International Private Leased Circuits ('IPLC') charges do not constitute Royalty in terms of provisions of Article 12 of the DTAA as the third party service provider was merely using its own equipment itself while rendering the services to its customers including the Appellant and CIS and there is no transfer of right to use, either to the Appellant or CIS. (v) Interest under section 234B - The Ld. CIT (A) has held that except for the payment with regard to PeopleSoft charges made by CIS, the income of CMG was not liable for withholding under section 195 of the Act and therefore CMG was liable to pay advance tax on its business income (i.e. profits attributed to PE) and consequentially liable to pay interest under section 234B of the Act. 3.10 Aggrieved with the order of the CIT (A), both assessee and revenue have preferred appeals before the ITAT. The r....
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....arried out in India by CMG through its employees visiting India on frequent basis or secondment of its employees on key positions in CIS. (iii) The entrepreneurial services were performed in India by CMG through the frequent visits of its employees to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal. (iv) The Ld. CIT (A) has held that the appellant had a place of management in India under Article 5(2)(a) of the DTAA. Legal Submission: 4.3 Article 5.1 of the DTAA defines that the term 'permanent establishment' to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. Thus, the conditions so prescribed under Article 5(1) are as follows: - There must be a place of business; - The place of business must be fixed; and - The business of the enterprise must be carried on through that place of business. 4.4 In view of these propositions, one of the basic conditions to be satisfied before a PE can come into existence is that the foreign enterprise must have a place of business in the other country. The concept of a place of busin....
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....e attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. 4.8 Further, the OECD Model Convention provides that in order to constitute a fixed place PE, there should be a distinct situs "in India in instant case" and that the word "fixed" refers to a distinct place with a certain degree of permanence. It further provides that the foreign enterprise should be able to walk into the place of its own right and not by permission. 4.9 Further, DTAA also recognizes that mere fact that a company of one Contracting State controls or controlled by a company which is a resident of the Other Contracting State, the relationship per se shall not by itself result in a PE of either company. 4.10 Reference in this regard is made to Paragraph 40 of the OECD Commentary which provides that it is generally accepted that the existence of a subsidiary company does not by itself, constitute that subsidiary company a permanent establishment of its parent company. The relevant extract is given below: "40. It is generally accepted that the existence....
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....s. 4.14 The provision of assets and software free of cost by CMG to CIS cannot lead to the conclusion that CMG was carrying on business in India. The ITAT Delhi in the case of Western Union Financial Services Inc v. Asstt. DIT, International Taxation [2007] 104 ITD 34 has analysed whether the software provided by the US tax resident to its Indian representative/agent can create a PE in India under the India-USDTAA. In this case, the assessee (a non-resident company) registered in USA was engaged in the business of rendering money transfer services. The business included transfer of monies across international borders. In this regard, the Liaison Office of the assessee in India provided the management software (VOYAGER) to the agents free of cost and trained their staff on the usage and versatility thereof. In this background, the ITAT held as under: (c) Is the software "VOYAGER" the PE of the assessee? The department has made out a case that the software, which affords access to the agents to the assessee's mainframe computers in USA for the purpose of finding out the matching of the MTCN numbers, has been installed in the premises of the agents and hence taken together wi....
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....s akin to purchasing goods or merchandise. In this regard, we draw your attention to the decision of the Supreme Court in the case of CIT v. B. Suresh [2009] 313 ITR 149, wherein the Apex Court observed that today the difference between "goods" and "services" is getting blurred with the globalisation and cross-border transactions. Accordingly, with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. 4.20 In view of the above, notwithstanding the provisions of Article 5(1) and 5(2) of DTAA, even maintaining a fixed place of business in India merely for the purposes of purchasing/procuring services will not create a PE of CMG in India. C: Appellant does not have any Dependent Agent PE in terms of Article 5(4) and 5(5) of the DTAA Legal Submission : 4.21 Article 5(4) of the DTAA specifically precludes an agent of independent status from being considered as a PE. Article 5(5) provides that a person is considered to be an agent of independent agent when: - He is an agent of independent status; - He acts in the ordinary course of its business However, such an agent would not be considered an agent of indep....
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....onstrate that CIS had any authority whatsoever to conclude contracts or secure orders on behalf of the assessee. It is merely an allegation without any basis. 4.26 In the light of above, even assuming, CIS is an agent of CMG, it does not have any authority to conclude contracts or secure orders on behalf of CMG and hence CMG does not have a Dependent Agent PE in India. 5. Attribution of profits for Indian operations: 5.1 During the course of assessment proceedings, the details of aggregate customer revenue from the work subcontracted to CIS and estimated operating income of the appellant with respect to such revenue were submitted before the AO. The estimated operating income was computed by assessee considering the global operating income percentage of the customer care business came to 10.55%, this was explained in following tabular format: Description Amount in USD million End-customer revenue with regard to contracts/ projects where services are procured from CIS (A) 138.9 Service fee paid to CIS (inclusive of mark-up of USD 13.8 million) (B) 112.5 Balance retained by CMG (C = A - B ) 26.4 Expenses incurred in U.S. by CMG (D) 25.6 Profi....
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....-06 Selling, general and administrative expenses 335.8 308.2 315.1 Research and development costs 8.6 8.6 8.6 Depreciation 65.4 68.7 67.875 Amortization 4 10.7 9.025 Restructuring charges 6.5 13.8 11.975 Total expenses (Million USD) 412.575 Allocation of other expenses in (USD) (412.575 *10000/61050) (Rounded off) 67.579 Allocation of other expenses in (Rs.) (USD 67,579,000* Rs.44.6175) 3,01,52,06,032 -Computation of Ratio of costs of product and services to total cost (Amount in USD million) Particulars 2006 2005 F.Y. 2005-06 Costs of products and services 1,180.4 1,077.2 1,103 Selling, general and administrative expenses 335.8 308.2 315.1 Research and development costs 8.6 8.6 8.6 Depreciation 65.4 68.7 67.875 Amortization 4 10.7 9.025 Restructuring charges 6.5 13.8 11.975 Total Costs and expenses (Million USD) 1,515.575 Ratio of Costs of products and services to total cost (1,103/1515.575*100) 72.77% ....
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....n in the instant case for the alleged PE. 5.6 CIT(A) though after hearing detailed arguments and verification, accepted the revenue from end-customer with regard to contracts/projects wherein services were procured from CIS of USD 138.9 million as submitted by the appellant relying on the following: (i) Customer-wise break-up of revenue earned from India operations along with a management certificate and also an affidavit from Director of the appellant. (ii) Jurisdiction wise break-up of the global revenue. (iii) Ledger extracts of top six customers. (iv) Sample copy of contracts between appellant and its clients. (v) Sample copy of invoices raised by the appellant on its clients. (vi) Assessment order of assessment year 2008-09 wherein the revenue of USD 184.6 million was accepted by the assessing officer. 5.7 Shri Pawan Kumar ld. counsel for assessee pleads that once the revenue was accepted by the CIT(A) at USD 138.9 million the methodology adopted by the assessing officer about expenses, ought to have been followed. If this correct and reasonable method is adopted, it results in a loss in the hands of the alleged PE. However, the CIT(A) computed profits ....
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....ibutable to India No further attribution required 5.10 CIT(A) for arriving at the revenue of the alleged PE of the appellant has taken CMG revenue as the starting point. Hence, the Ld. CIT (A) should also have considered the expenses incurred outside India for arriving at the profit of the assessee with regard to the contracts wherein services have been procured from CIS. While computing the profit of CMG, there is no question of applying the provisions of the Act. The expenses incurred outside India have been incurred by CMG for its business outside India and not by the alleged PE. Hence, the Ld. CIT (A) erred in invoking the provisions of section 44C of the Act with regard to cost incurred outside India and restricting the selling expenses to Rs. 58,69,62,170 and executive and general administrative expenses to Rs. 2,26,88,761 for attributing the profits to the alleged PE in India. 5.11 Ld CIT (A) should have allowed all the expenses incurred outside India such as Research and development expenditure, depreciation, amortization etc. while computing he profits of CMG. The Ld CIT (A) erred in allowing only 50% of the selling, general and administrative expenses a....
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....e principle of attribution and then in the hands of the subsidiary company on the arms length principle. 5.13.3 It is submitted that conceptually the department cannot apply transfer pricing principle which are designed to ensure that the entire income attributable to Indian operations is taxed in the hands of the Indian entity on the one hand and at the same time seek to tax a part of subsidiary's income in the hands of the parent company on principles of attribution. This runs contrary to established and recognized T.P. norms. 5.14 In this case, the Ld. TPO in the case of CIS (Indian subsidiary) has scrutinized and examined all the international transactions undertaken between CIS and Appellant and thereafter after confirmation by the DRP, an adjustment of Rs. 31,21,61,763 has been made under section 92CA in the assessment order by considering an arm's length mark-up of 22.61%. The matter is presently pending before the Hon'ble ITAT. For affecting the said transfer pricing adjustment, the Ld. TPO has determined this margin with reference to entrepreneurial companies in India assuming all normal business risks and has not allowed any adjustment/relief to CIS on account of th....
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.... the amount received by the Appellant for providing the 'PeopleSoft' software was in the nature of Royalty and hence taxable. 6.4 Hon'ble Delhi High Court in the case of CIT v. Industrial Engg. Projects (P.) Ltd. [1993] 202 ITR 1014 has held that reimbursement of expenses can under no circumstances be regarded as revenue receipt. 6.5 Under the DTAA, a perusal of the definition under Article 12(3) of the DT AA shows that for a consideration to be treated as "Royalties", it should be towards use of or the right to use of any of the aforementioned rights. Payments for transaction where the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program should be dealt with as commercial income in accordance with Article 7 (Business Profits). 6.6 The Indian Courts (including the jurisdictional High Court have been consistent in their approach in holding that purchase of software would fall within the category of copyrighted article and not towards acquisition of any copyright in the software and hence the consideration should not qualify as Royalty. Reliance is placed on the decision rendered by the Delhi High Court in the ....
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....of the Ld Departmental Representative that the amendment to Finance Act 2012 changes the position, we find that there is no change in the DTAA between India and USA. Thus the amendment has no affect on our decision". 6.10 Ld. Counsel contends that from above, it follows that: (a) the payment made by CIS to CMG cannot be characterized as Royalty either under the Act or under the DTAA. (b) Link charges amounting to Rs. 5,32,82,192 as 'Royalty' under Article 12(2) of the DTAA (c) The link charges pertain to leased lines (under sea cables) that allow a dedicated capacity for a private, secure communication link from India to the US which enables CIS to communicate with the customer. The Appellant makes payment for such link charges to telecom service providers in the USA and cross charges the portion of the cost incurred by it in connection with the India half link to CIS, which is accordingly reimbursed by CIS to CMG. 6.11 The Ld AO in his order made an addition on account of link charges by stating that they were taxable as 'Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA and accordingly taxed it @ 10% on gross basis. 6.12 CMG/CIS....
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....r submitted that though Asia Satellite Telecommunications Co. Ltd.'s case (supra) is a decision on the domestic law but also makes an observation regarding DTAA. In para 74 of the judgment, it is specifically mentioned that" Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets a boost". This observation supports assessee's case. 6.16 In the case of B4U International Holding (supra), the Mumbai ITAT has held that transponder hire charges are mere payment for rendering a service. In this regard, the Mumbai ITAT has relied on the judgment of Madras High Court in the case of Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 6.17 In the facts and circumstances of the instant case, it is pleaded by ld. counsel that assessee's case is to be decided on the basis of the provisions of the DTAA and accordingly the link charges are not taxable as Equipment Royalty in view of Article 12 of DTAA. In addition, as already mentioned above, reimbursement of expenses can under no circumstances be regarded as revenue receipt. Accordingly, as payment for link charges pertains to reimbursement of expenses, it wou....
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....on 234D of the Act. 8. Ld. CIT(DR) Shri D.K. Gupta supported the order of ld. AO /TPO as under: 8.1 On the issue of P.E. it is contended that assessee has a PE in India looking at interlinking and interlacing of CIS and CMG. This is further supported by the decision of the Hon'ble Delhi High Court in the assessee's case for A.Ys. 2002-03 & 2004-05 in Convergys Customer Management v. Asstt. DIT 2012-TII-73-HC-DEL-INTL. The Hon'ble Court while upholding the validity of the notices issued u/s 148 of the Act has held that the facts of the case prima facie indicated that apart from the prima facie existence of a business connection there was also material to entertain the belief that Convergys India was a permanent establishment of the assessee. Orders of AO, CIT(A) and DRP are relied on. 8.2 Apropos attribution of profits to PE, assessing officer has given adequate, tenable and reasonable basis. The assessee was neither able to produce full details of revenue nor the expense could be fully verified by AO. 8.3 Apropos people soft license charges order of TPO is relied on. 8.4 Apropos IPLC/ Link charges it is pleaded that the decision of the Hon'ble Delhi High court relied....
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....yalty under article 12 of the DTAA. The Hon'ble Delhi High Court had decided the issue against the department under the domestic law. In fact, in the case before the High Court there as no DTAA with the concerned country (Hongkong) at the relevant time and the issue was being examined under the domestic law. Now since the payment is taxable under the domestic law after the amendment, the same is liable to be taxed both under the domestic law as well as under the DTAA. 8.4.3 The term 'process' has not been defined in the DTAA. Thus in view of article 3(2) of the Treaty its meaning has to be seen under the domestic law. Sine after the retrospective amendment the term 'process' has now been defined in Explanation 6 to section 9(1)(iv) the same has to be considered while examining the payment as royalty under article 12 of the DTAA. 8.4.4 The assessee's reliance on the Hon'ble Delhi High Court's decision in the case of DIT v. Nokia Networks OY is misplaced as in the aforesaid case the issue involved was about the payment made for the use of software. The Hon'ble High Court decided the issue mainly on the ground that the software was embedded in hardware. It was also held that ....
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....hat the assessee has a PE under paragraph 4(a) and 4(c) of Article 5 of the DTAA as the sales team of CIS assists CMG in the sales and marketing efforts. 9.3 The Ld. CIT (A) in his order has upheld. that the assessee has a Fixed Place PE in India in terms of Article 5(1) of the DTAA by stating that the premises of CIS were at the disposal of CMG and the business of CMG was carried on from such place. The Ld. CIT (A) made the following assertions in this regard: (v) CIS did not have either economic independence or functional independence in relation to functions carried on by it due to the following: a. entire pre-operative expenses for setting up the call centre sites for CIS were borne by the Appellant, b. entire capital was provided to CIS in the form of share capital/loan by the assessee to start its operation in India, c. CMG exercised substantial control and influence in the functional matters as is evident from the frequent and extensive visits of assessee's employees to India, secondment of assessee's employees to the key position in CIS, d. CIS did not bear any substantial risk in relation to the functions carried out by in India and, e. Deployment of c....
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.... Court observed that today the difference between "goods" and "services" is getting blurred with the globalization and cross-border transactions. Accordingly, with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. 9.7 The ld. CIT DR in reply submitted that the judgment of the Hon'ble Supreme Court in the case of B. Suresh (supra) was in connection with claiming of deduction under section 80HHC and the same cannot be applied in the present case. We are in agreement with the ld. CIT DR and reject the above contention of the assessee. 9.8 Looking at the entirety of facts and circumstances, we are of the view that the Ld. CIT (A)'s order on the proposition of PE deserves to be upheld. 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. CIS was practically the projection of assessee's business in India and carried out its business under the control and guidance of the assessee and without assuming any significant risk in relation to such functions. Besides assess....
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.... tabular format in the foregoing paragraphs. 11.4 The CIT (A) accepted the revenue from end-customer with regard to contracts/projects wherein services were procured from CIS of USD 138.9 million submitted by the assessee and reduced the attribution of profits to Rs. 43,10,86,460 to the PE of the assessee. In determining the profits, the ld. CIT (A) allowed deduction only for a part of the expenses. The computation of profits made by the CIT(A) is tabulated in para 5.7 above. 11.5 In the assessment order for the assessment year 2008-09, the AO accepted the end customer revenue submitted by the assessee and computed the profits attributable to the PE as under: Description Amount (USD) Amount (Rs.) Revenue from the Indian operations[A] 1 8,46,00,000 Less: Amount of service fee paid to CIS (including mark-up) [B] 16,79,67,139 Balance [C] = A - B 1,66,32,861 Less: 5% of C in terms of section 44C of the Act [D] 8,31,643 Balance [E = C - D] 1,58,01,218 Profits attributable to India [72.89% of E] 1,15,17,508 45,51,71,917 11.6 The above attribution of profits to the PE of th....
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....roper opportunity of hearing to AO. 11.12 Ld. CIT(A) has accepted that to the extent of functions, assets and risks are already captured in the transfer pricing analysis of CIS, no further profits can be attributed to such functions, assets and risks in the hands of assessee's PE, but held that further profit was required to be attributed on account of the following: (i) Certain assets were deployed by the Assessee in India; (ii) entrepreneurial services to manage risk related to the service delivery were performed in India by the Assessee. 11.13 In our considered view the observations of the CIT(A) that further attribution is required to be made on account of the entrepreneurial services to manage risk related to the service delivery performed in India by CMG is completely without any basis and no attribution on these facts is required to be made on these issues. The risk is outside India with CMG since the Indian Company (CIS) is remunerated at Cost+14% irrespective of failure of service delivery. Even otherwise, no attributions can be made on account of risks in terms of paragraph 5 of Article 7 of the DTAA. The assessee submitted that the contention of the Ld. CIT (....
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....s and states that the assessee is entitled to claim deduction both in India as well as administrative and general expenses whether they are incurred in India in which PE is alleged or outside India. In nutshell for the purpose of computing the taxable profits attributable to the alleged PE, even the executive and general expenses are allowable. The action of the lower authority order in invoking section 40(a)(i) in respect of all expenses incurred by CMG as a multi-national enterprise is not in accordance with Para 3 of Article 7 of the DTAA. 11.15 The submissions of both parties for assessment year 2008- 09 are broadly same as the facts of assessment year 2008-09 are similar to assessment year 2006-07. 11.16 It will be desirable to reproduce Article 7 of the DTAA for arriving at the methodology for attributing profits to the PE of the assessee in India. "ARTICLE 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterp....
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....ther similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than toward reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." 11.17 In view of the above facts, circumstances, case law, CBDT circulars and various articles of India-USA DTAA, following conclusions are arrived at: A. The Ld. CIT (A) accepted the revenue from end-customer with regard to contracts/projects wherein services were procured....
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....p; The application of transfer pricing principles is also supported by the decisions of the Bombay High Court in Set Satellite (Singapore) (P.) Ltd.'s case (supra), jurisdictional High Court in Rolls Royce Singapore(P.) Ltd.'s case (supra), Director of Income Tax v. BBC Worldwide Ltd.'s case (supra) D. The ld. CIT (A) has held. that further profit was required to be attributed on account of Assets provided by the assessee to CIS and management of risk by the assessee in India. In our view no attribution of profits can be made on account of management of risk as risk resides outside India. Even otherwise the charge for the employees seconded to CIS and employees visiting India to provide the technical services is subsumed in the transfer pricing analysis of CIS. Therefore, attribution can only be made on account of free of cost assets and software's provided by the assessee to CIS. E. The assessee has submitted that it does not prepare India specific accounts, therefore the attribution of profits on the basis as disclosed in the transfer pricing study for assets and software cannot be accepted....
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....nt aspects. The finer and material aspects about the status, capacity of the employees are over looked and result become very vague and distorted. Therefore, the method adopted by assessing officer cannot be relied on as most appropriate method. 11.21 Apropos CIT(A)'s estimate about attribution, though he accepted the proposition that there cannot be notional addition to India revenue, however, CIT(A)'s method also does not become a rational inasmuch as the various expenditures incurred by CMG i.e. research & development, depreciation, amortization etc. have not been considered and 50% of selling, general and administrative expenses have been ignored along with other expenses incurred by CMG outside India for earning the revenue from end customers. In our considered view, this approach is also not viable and appropriate. 11.22 As the methods for calculating the attribution profit as adopted by TPO and CIT(A) are not reliable. Ld. Counsel has further demonstrated that if both the methods are harmoniously applied, this leads to a situation where no further attribution to the assessee's income can be made. Thus a harmonious intermixed rationalization of TPO and CIT(A) method res....
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....nt year 2006-07 held that the consideration received for licensing of software was taxable as 'Royalty' in terms of section 9(1)(vi) of the Act and Article 12 of the DTAA and accordingly taxed it @15% on gross basis as per Article 12(2) of the DTAA. 12.1 The Ld. CIT (A) relied on the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) and Sunray Computers (P.) Ltd. case (supra) wherein it has been held. that there was a transfer of copyright and payment made for the import of software was in the nature of royalty in terms of the definition of royalty provided in the Act as well as the DTAA and accordingly held. that the amount received by the assessee for providing the 'PeopleSoft' software was in the nature of Royalty and hence taxable. 12.2 Assessee contended that the nature of payment for PeopleSoft charges pertains to reimbursement of expenses, it would. not be taxable under section 9(i)(vi) of the Act. Reliance is placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Expeditors International India (P.) Ltd. on reimbursement of common expenses incurred by the parent company. 12.3 A perusal of the defin....
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....e recent judgment of ITAT Mumbai, in the case of B4U International Holding Ltd. (supra) and the Delhi High Court in the case of Nokia Networks OY (supra) is well placed. The Delhi High Court has held as under: "......... However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held. in CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held. in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law No. 1 & 2 in favour of the assessee and against the Revenue." 12.7 After hearing both the parties and perusing the record and in view of the judgment of jurisdiction High Court, we hold that the purchase of software would fall within the category of copyrighted article and not towards acquisition of any copyright in the software and hence the consideration should. not qualify as Royalty. Even otherwise, the payment is in the nature of reimbursement of expenses ....
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....s been dismissed by the Supreme Court) * Asia Satellite Telecommunications Co. Ltd. 's case (supra) * Yahoo India (P.) Ltd. 's case (supra) * Standard Chartered Bank case (supra) 13.2 CIT (A) in his order has accepted the contention of the assessee that the third party service provider was merely using its own equipment itself while rendering the services to its customers including the assessee and CIS and there is no transfer of the right to use, either to the assessee or CIS. The assessee has merely procured services and provided the same to CIS and no part of the equipment was leased out to CIS. The Ld. CIT (A) held that the payment for link charges do not constitute Royalty under the provisions of Article 12 of the DTAA. 13.3 The provisions of Equipment Royalty are also contained in Explanation 2(iva) of section 9(1)(vi) of the Income Tax Act, 1961 ('Act') which is similar to the provisions of Article 12(3)(b) of DTAA. 13.4 Besides, though Asia Satellite Telecommunications Co. Ltd.'s case (supra) is a decision on the domestic law but also makes an observation regarding DTAA. In para 74 of the judgment, it is specifically mentioned that " Even when we look into....