TaxTMI 
TaxTMI 
2013 (11) TMI 564
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....E') 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 associated enterprise, erred in not appreciating that no fur....
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.... 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 Establishment ('PE') in India in terms of the provisions of the Article 5 of the Double Taxati....
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.... 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 erred on facts and in law in withdrawing interest under section 244A of the Act and levying interest under sections 234B ....
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.... 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 PeopleSoft license cost/maintenance charges are taxable as "Royalty" under the provisions section 9(1)(vi) of the Act and Article 12 of the DTAA. ....
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....td. 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 revenue has not challenged the order of the CIT (A) holding that assessee has no Service PE. Thus, the revenue has accepted that CMG does not have a Service PE in India. 4. In this factual backdrop, ld. Cou....
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....ployees 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 business envisages the following: - A facility such as a premise which is used for carrying on the business of the enterprise; and - Such facility must be at the constant disposal of the enterprise. In other words, the place of business (facility) must be at th....
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.... 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 of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that....
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.... 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 with the premises constitutes the PE. The premises of the agents are either owned or hired by them. There is no evidence to show that the assessee can as a matter of right enter and make use of the premises for the purpose of its business. The software is the property of the assessee and it has no....
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....rder 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 independent status: - Where activities of the agent are devoted wholly or almost wholly on behalf of the principal; and - The transaction between the agent and the principal are not made under arm's length price. 4.22 Thus, if an agent is of independent status, recourse to Para 4 is not available to the department as that para w....
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....ndent 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 Profit retained by CMG for functions performed, assets utilised and risks borne in the US (E = C - D) 0.8 (Amount in USD million) Description India US Consolidated Revenue (A) 112.5 26.4 138.9 Expenses (B) 98.7 25.6 124.3 Profit (C = A - B) 13.8 0.8 14.6 5.1.1 These details are submitted to AO/ TPO and are not adversely commented upon. TPO has ....
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....rvices 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% 5.4 The fundamental difference between the appellant and the AO's calculation lies at the starting point of the computation itself i.e. the revenue which was considered on the basis of head count instead of the amount submitted by the appellant i.e. USD 138.9 million representing the revenue from end customers with regard to contracts/projects wherein services were procured from CIS for AY 2006-07. If the methodology adopted by the AO is followed by taking the revenue of USD 138.9 million as the starting point, it will result in a loss in the hands of the alleged PE as explained through computati....
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....t 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 attributable to the alleged PE of the appellant in India by an unreasonable method, as under: Particulars Amount (Rs.) End - customer revenue from Indian operations (A) 6,19,73,70,750 Less: Amount paid to CIS (B) 4,98,68,34,000 Less: Selling cost allocated to Indian Operations (USD 13.155 million * Rs. 44.6175) (C) (estimated @ 50% of selling, general and administrative expenses) 58,69,62,170 Profits earned from India operations (D = A-B-C) 62,35,74,580 Profits attributable to CMG's PE in India (E = D*72.77%) 45,37,75,221 Less: 5% of above for Head Office expenses under section 44C of the Income Tax Act, 1961 (Act) (F = E*5%) 2,26,88,761 Profits taxable in India (E-F) 4....
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....ses 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 and ignoring the other expenses incurred by CMG outside India for earning the revenue from end-customers. 5.12 The details and nature of expenses incurred by CMG outside India which are allocable to the contracts wherein services have been procured from CIS are submitted before the Ld. AO /Ld. DRP in the subsequent years i.e AY 2007-08 and AY 2008-09. Following the same methodology for the financial Year 2005-06, the detail of expenses aggregating to USD 25.69 million is enclosed as Annexure A with submissions. These expenses relate to the activities undertaken by CMG outside India such as sales and marketing, contract negotiation, customer relationship management, provision of necessary networking/telecom infrastructure, technology, project management, et....
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....,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 the fact that majority of risks are borne by CMG. Thus as per the assessment order in the case of CIS, CIS should have earned a revenue of approx Rs. 5,29,89,96,030 instead of Rs.4,98,68,34,267. 5.15 Therefore, on one hand the profits of Rs. 43,10,86,460 have been attributed to the alleged PE of the Appellant in India and on the other hand transfer pricing adjustment of Rs. 31,21,61,763 has been made in the hands of CIS. Thus the same income attributable to India would be taxed twice, once in the hands of the parent company on the principle of attribution and then in the hands of the subsidiary company on the arms length principle. 5.16 The above pleadings make it is absolutely clear that even if any adjustment has to be made, it can be made only to the assessable income of....
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....fits). 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 case of DIT v. Ericsson A.B. Reliance is also placed on the following judgments wherein it has been held that supply of computer software is sale of copyrighted article and not copyright: - Special Bench of Delhi Tribunal in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Mag.) - Infrasoft Ltd. v. Asstt. CIT [IT Appeal No. 847/Delhi of 2008] - Lucent Technologies International Inc. v Dy. CIT [2009] 28 SOT 98 (Delhi) - LotUS Development Asia Pacific Ltd. Corpn. (ITA Nos. 564 to 566/Delhi of 2005) (Delhi) - Sonata Information Technology Ltd. v. Dy. CIT [2006] 7 SOT 465 (Mum.) - Sonata Software Ltd. v. ITO (International Taxation) [2006] 6 SOT 700 (Bang) - Samsung Electronics Co. Ltd. v. ITO [2005] 94 ITD 91 (Bang.) - Hewlett - Packard (India) (P.) Ltd. v. ITO (International Taxat....
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....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, who availed the services from the service providers, have neither intended to nor have obtained any right to use the underlying infrastructure maintained and used by the service providers for providing the services. The Indian judiciary has made it clear that it is important to see whether there was any intention to transfer the right to use or not. In the present set of facts, CMG/CIS do not have any control or possession over the equipment i.e. the network facilities are under the control of and maintained and operated by the service providers. CMG/CIS merely avail a service. Accordingly, the link charges do not qualify as 'Equipment Royalty' in terms of Article 12 of the DTAA and hence are not taxable in India. Reliance is placed on the following judgments: * Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 (SC) * Dell In....
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.... 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 would also not be taxable under section 9(i)(vi) of the Act. D. Levy of Interest under sections 234B and 234D and withdrawal of interest under section 244A 7. The Ground no. 6 of the ITA No. 1443/DEL-2012 is as under: "That the Ld. CI'T (Appeals) erred on facts and in law in upholding levy of interest under sections 234B and 234D of the Act and withdrawal of interest under section 244A of the Act". 7.1 The Ld CIT (A) in his order 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 as 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. 7.2 The Ld. CIT (A)erred in upholding the levy of interest under section 234B of the Act without app....
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....asis. 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 by the ld. AR in the case of Asia Satellite Telecommunications Co. Ltd. (supra) is no longer applicable as subsequent to this decision section 9 of the I.,T Act ('Act') has been amended by the Finance Act, 2012 whereby Explanations 5 and 6 have been inserted with retrospective effect from 1-6-1976. The Hon'ble High Court had decided the issue against the department mainly on the ground:- (a) The payments were made by non-resident to non-residents. (b) The control of transponder/ equipment was in possession of the payee i.e. the satellite owner and not with the payer (telecasting company); (c) No 'process' was involved. 8.4.1 After the insertion of Explanation 5 & 6 for the purposes of treating a payment as royalty within the meaning of section 9(1)(vi) of the Act it is not necessary that the 'control' should be with the payer. It has also been clarified that 'process' includes transmission by c....
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....e 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 the payment was for a copyrighted article and hence was not covered in the definition of royalty under Article 12 of the DTAA. It was in this context it was observed that retrospective amendment in the Act by inserting Explanation 4 in sec. 9(1)(vi) would not change the position as there was no change in the Treaty. In the present case, as discussed above, there is no need for any change in the Treaty. Hence, in my humble view, the relied decision is of no help to the assessee. 8.4.5 Reliance is also placed on the AAR's decision in the case of Dishnet Wireless Ltd.,In re (AAR-New Delhi). In the aforesaid decision not only the AAR has considered the aspect of reimbursement of expenses but has also held that after the above amendments payments for such leased lines are in the nature of royalty both under the Income Tax Act and under Article 12 of the DTAA. 8.4.6 It is submitted that the IPLC changes are taxable as ....
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.... 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 certain assets (hardware and software) without charging any cost. (vi) Management of risk related to delivery of services was carried out in India by CMG through its employees visiting India on frequent basis or secondment of its employees on key positions in CIS. (vii) 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. 9.4 The Ld. CIT (A) has also held. that the assessee had a place of management in India under Article 5(2)(a) of the DTAA. With regard to the dependant agent PE, the Ld. CIT (A) has however held. that the assessee does not have a Dependent Agent PE in India as none on the conditions mention in Article 5(4) are met. 9.5 It was contended before us that the above finding given by the CIT(A) are not sustainable both on facts and in law. In this r....
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....actically 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 assessee has also provided certain hardware and software assets on free of cost basis to CIS. Thus, the findings of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the DTAA is upheld. 10. Apropos the dependent agent PE in terms of Article 5(4) and 5(5) of the DTAA, after hearing the rival contentions, we do not find any infirmity in the order of the ld. CIT(A) and hold that CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the DTAA are not satisfied. The grounds of appeal taken by the assessee and the department in connection with the PE are accordingly disposed off. 11. Attribution of profits to the PE 11.1 We now come to the issue of attribution of profits to the PE in India. In the assessment order for the assessment year 2006-07 the Ld. AO adopted a head count basis for attributing profits of Rs. 2,84,45,67,544 by allocating revenue and expenses (excluding dire....
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....- 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 the assessee in India in the assessment year 2008-09 was confirmed by the DRP. 11.7 The fundamental difference between the computation submitted by the assessee for assessment year 2006-07 and as adopted by AO lies at the starting point of the computation itself i.e. the revenue which was considered on the basis of head count instead of the amount submitted by the Assessee i.e. USD 138.9 million representing the revenue from end customers with regard to contracts/projects wherein services were procured from CIS for FY 2005-06. If the methodology adopted by the AO is followed by taking the revenue of USD 138.9 million as the starting point, it will result in a loss in the hands of the alleged PE as explained in para 5.4. 11.8 The revenue as accepted by the CIT (A) at USD 138.9 million and if the methodology as adopted by the AO is followed it would result in a loss in the hands of the alleged PE. 11.9 In view of the CBDT Circular No. 5 of 2004 as well as the judgment of the Supreme Court in DIT (International Taxation) v. Mo....
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.... 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 (A) that the entrepreneurial services to manage risk related to service delivery were performed in India by the assessee through the employees of CMG visiting India on frequent basis or secondment of employees of CMG on key positions in CIS is factually incorrect. The Ld. CIT (A) himself in his order at para 8.7 has held. that the technical and consultancy services rendered by employees of CMG were in the nature of included/technical services. The employees/representatives of CMG visited India for short duration and for providing training under the Technical services Agreement. Further, the seconded personnel were employees of CIS working under its control and supervision and not the employees of CMG. It cannot be said that they were performing any entrepreneurial services to manage risk in India. 11.14 The AO/ CIT (A) for arriving at the revenue of the alleged PE of the assessee has taken the revenue of the assessee company (CMG as a multinational enterprise) as the starting point. Hence, the LD. AO/ld. CIT(A) ought to have considered the ex....
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....te through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold. through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. In any case wh....
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.... A. The Ld. 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 for assessment year 2006-07. The end customer revenue has been accepted by the AO is the assessment of all the other years on the same basis. B. The methodology adopted by the AO and the ld. CIT(A) cannot be accepted as they have considered revenue of the assessee company (CMG as a multi-national enterprise) as the starting point for arriving at the profits attributable to the PE of assessee in India. The revenue of the assessee company cannot be considered as the revenue of the PE by any stretch of imagination. Furthermore the expenses incurred outside India are linked with the business activities of the assessee undertaken outside India for the functions performed outside India and are not linked to the PE of the assessee in India. C. The attribution of profits to the PE should be made by the transfer pricing principles supported by the CBDT Circular No. 5 of 2004 as well as the judgment of the Supreme Court in Morgan Stanley (292 ITR 416). As per the Supreme Court in the case of Morgan Stanley, it h....
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....on of profits on the basis as disclosed in the transfer pricing study for assets and software cannot be accepted. Further, in the facts and circumstances of the case Profit Split method is not the correct method for attribution of profits to the PE of the assessee in India. F. In our considered opinion, the correct approach to arrive at the profits attributable to the PE should. be as under: Step 1: Compute Global operating Income percentage of the customer care business as per annual report/10K of the company. Step 2: This percentage should. be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at is the Operating Income from Indian operations. Step 3: The operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above. The attribution of India profit shall be worked out as under, mentioned after the table: 11.18 In the computation based on the above approach for the assessment year 2006-07, the profits attr....
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....us intermixed rationalization of TPO and CIT(A) method results into no further attribution of profits to Indian PE. 11.23 In this backdrop we are reminded of two case laws decided by Hon'ble Supreme Court which have dealt with attribution of the profits to the Indian PEs: (i) Anglo French Textile Company Ltd. v CIT [1933] 23 ITR 101 (SC), in which 10% attribution ha been held to be reasonable. (ii) Hukum Chand Mills Ltd. v. CIT [1976] 103 ITR 548 (SC), in which 15% attribution has been held to be reasonable. 11.24 These cases decided by the Apex Court though are old, but they still hold the field as they have not been tinkered with. In our considered view, the adoption of higher figure of 15% as held by Hon'ble Supreme Court in the Hukum Chand Mills Ltd.'s case (supra), for attribution of assessee's Indian PE operations will meet the ends of justice. Thus, the attribution of Indian PE income should be made at 15% of profit retained by CMG in the US. 11.25 In other words 15% of the placitum 'X' (result of G=E-F) in the chart at para 11.18, as mentioned above as a reasonable attribution of profit of India PE, will meet the ends of justice. Thus, assessing officer will work out t....
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.... company. 12.3 A perusal of the definition under Article 12(3) of the DTAA shows that any payment in order to be treated as "Royalties", 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 are to be dealt with as commercial income in accordance with Article 7 i.e. Business Profits. 12.4 Assessee placed reliance on the decision of Hon'ble Delhi High Court in the case of Ericsson A.B. (supra) to contend that the jurisdictional High Court has held 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. Further reliance is placed on the following judgments, holding that supply of computer software is sale of copyrighted article and not copyright: * Special Bench of Delhi Tribunal in the case of Motorola Inc. (supra) * Infrasoft Ltd. 's case (supra) * Lucent Technologies International Inc's case (supra) * Lotus Development Asia Pacific Ltd. Corpn. case (sup....
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....and accordingly not taxable in the hands of the assessee. This ground is allowed to the assessee. 13. Adverting to the issue of taxability of link charges as 'Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. This issue is common to both assessment year 2006-07 and 2008-09. In this regard, the ld. AR of the assessee submitted that 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 customers. The assessee 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. Ld. counsel also referred to the invoice of raised by the assessee on CIS on Page 349 of paper book volume I and the basis of cross charged at page 828 of paper book volume III and placed reliance on the decision of the Hon'ble Delhi High Court in the case of Expeditors International India (P.) Ltd. (supra) on reimbursement of common expenses incurred by the parent company. 13.1 A....