TaxTMI 
TaxTMI 
2014 (2) TMI 442
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....scribed as the "assessee" and the Director of Income Tax, International Taxation has been referred to as the "Revenue". The cross-appeals arise out of two common orders passed by the Income Tax Appellate Tribunal (tribunal, for short). The first order dated 30th September, 2010 relates to all assessment years, except assessment years 2006-07 and 2007-08, which are subject matter of the second order of the tribunal dated 15th March, 2011. 2. The assessee are primarily aggrieved by the finding of the tribunal that they have Permanent Establishment (PE, for short) in India. They are also aggrieved with the initiation of the assessment proceedings under Section 147 read with Section 148 of the Income Tax Act, 1961 (Act, for short), whereas the Revenue is aggrieved by the finding of the tribunal relating to computation or attribution of the income earned by the assessee through the PE in India. 3. By order dated 27th September, 2011, the following substantial common questions of law were framed in the appeals Nos. 912/2011, 913/2011, 914/2011, 915/2011, 916/2011, 917/2011, 918/2011, 919/2011 and 920/2011 relating to assessment years 2000-01, 2001-02, 2002-03, 2004-05 and 2005-06 f....
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....- "Whether the action of the Assessing officer in reopening the assessment under Section 147/148 of the IT Act is correct?‖ 5. The substantial questions of law framed on the appeals being ITA Nos. 735/2011, 736/2011, 737/2011, 738/2011, 739/2011, 740/2011, 802/2011, 845/2011 and 1002/2011 filed by the Revenue vide order dated 27th September, 2011 read as under:- "1. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal has erred in law I not appreciating that the method adopted by the AO for attributing the profit to the PE of the assessee is based on the lines of MAP proceedings based on A.Y. 2003- 04? 2. Whether on the facts and circumstances of the case, the order of the ITAT is not perverse?‖ 5A. In ITA Nos. 1217/2011, 1218/2011, 1219/2011 and 1221/2011 for Assessment Years 2006-07 and 2007-08 filed by the Revenue, the following substantial questions of law were framed vide order dated 21st November, 2011:- "(1) Whether the Income Tax Appellate Tribunal has correctly rejected the computation of profit attributed to the Permanent Establishment on the lines of the MAP proceedings?‖ (2) Whether the formula pres....
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.... Revenue that income of the two assessees were attributable to India because the two assessees had PE in India and should be taxed in India, irrespective of whether the said assessees had paid taxes in USA. Income earned and taxed in the hands of e-Fund India was different from the income attributable to the two assesses. Thus the balance or differential amount, i.e., income attributable to the two assesses, which was not included in income earned and taxed in the hands of e-Fund India, should be taxed in India. 8. As a principle what is stated and submitted by the Revenue cannot be contested and in fact not contested by the assessees as it is a principle applicable to international taxation. A foreign or a nonresident company can be taxed in the country where it has a subsidiary, which is also a PE on the income attributable to the said PE, even if the subsidiary (in the present case of e-Fund India) is being taxed in the said country. The principle being that subsidiary being an independent and a distinct entity is taxed for its income, whereas the foreign entity, i.e., holding company is taxed for the income earned by the said independent entity attributable to the PE in the ....
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....each other. However, this does not mean that a subsidiary can never be a PE of the holding company, though there is opinion that the holding company or the controlling company possibly may not be a PE of a subsidiary (the later question is not subject matter of the present decision and we express no opinion on the said question though it may be a relevant aspect, which the tax adjudicators, policy makers and the legal draftsmen in India and abroad may have to deal with). Indeed if this principle is not applicable it could be argued that the Indian subsidiary, i.e., eFund India"s income could be taxed in the country from where it is controlled or managed. A subsidiary can become a PE of the holding/controlling company or the related company, if it satisfies the postulates and requirements of other paragraphs of Article 5, notwithstanding and negating the protection provided under paragraph 6 of Article 5, which recognizes legal independence of the two entities for tax purposes. This legal principle that the holding or contracting company and the subsidiary or the controlled company are two separate and independent tax entities and must be so treated permeates and pervades but will g....
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....d through the enterprise"s PE. This intention must also apply when the parent company"s business income is earned by the intermediation of a subsidiary. Thus, from a de lege ferenda point of view, PE taxation of the parent company is justified in cases where residence state taxation of the subsidiary does not adequately attribute taxing jurisdiction to the source state. The commentaries to the OECD model treaty do not de lege lata give conclusive reasons for the conventional wisdom with regard to this question.‖ A part of the above observations are in the nature of justification of right of taxation in source State and relate to the domain of PE principle and inter-state neutrality as a theory. Issue of source State in the present factual matrix has been touched below. 14. The aforesaid principle is no longer res integra and has been lucidly elucidated by the Supreme Court in DIT versus Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC) in the following words:- "32. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCO would be taxable in India but only those which hav....
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....pacity as an agent for the parent. This is consistent with the rule in paragraph 7 of Article 5. But, as paragraph 41 of the Commentary indicates, the subsidiary may be considered a dependent agent of its parent by application of the same tests which are applied to unrelated companies.‖ 16. It has been observed below, that subsidiary can constitute PE, other than dependent agent PE. A write up in Bulletin for International Taxation, February 2011 titled "The Subsidiary as a Permanent Establishment‖ has summarized the true and correct legal position in the following words;- "A PE is, however, not always easy to identify. This is particularly true where a PE is hidden behind a dependent operating company, i.e. if an operating company in addition to its own business also carries on another company"s business as a PE of the latter. In this regard, the 2010 OECD Model Tax Convention (the "OECD Model‖) states in Art. 5(7) that: [t]he fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other state (whether through a permanent....
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....iding storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or premises used as a sales outlet; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve month period; (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects- or activities, if any) continue for a period of more than 120 days in any twelve month period; (l) the furnishing of services other than included services as defined in Article 12 (Royalties and Fees for Included Services), within Contracting State by an enterprise through employees or other personnel, but only if; (i) activities of that nature continue within that State for a period or periods aggregating more than 90 within any twelve-month period; or (ii) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of Article 9 (Associated Ent....
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.... on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. Article7 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 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 St....
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....e 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. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 5. For the purposes of this Convention, the (sic) to be attributed to the permanent establishment as provided in paragraph 1 (a) of this Article shall include only the profits derived from the assets and activities of the permanent establishment and shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt ....
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....eign assessees outside India are not covered under sub-clause (c) to paragraph 1 of Article 7. We shall be referring to other paragraphs of Article 7 subsequently as at this stage we would first like to examine Article 5 paragraphs 1 to 5 of the DTAA. Location or fixed place PE under Article 5(1) and (2) of DTAA. 19. Paragraph 1 of Article 5 refers to what can be described as fixed place PE. Tiiu Albin commentary, Problems with PE; problems in determining permanent establishment on the basis of Article 5(1) has stated that the said Article encapsulates three requirements, namely, (i) the existence of place of business at the disposal of the enterprise; (ii) the place of business must be of a "fixed nature‖ (geographical and temporal permanence); and (iii) the enterprise being carried on is required to be "carried on through the place of business‖. 20. The word "permanent‖ in the expression PE is of significance and imperial importance. It refers to some degree of permanency and not a mere transitory nature of the business in the other State. Further, the enterprise must have a fixed place of business. The expression "fixed place of business‖ refers ....
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.... reproduce the interpretation in the amended commentary of UN Model to Article 5, the relevant portion of which reads: "B. COMMENTARY ON THE PARAGRAPHS OF ARTICLE 5 Paragraph 1 3. This paragraph, which reproduces Article 5(1) of the OECD Model, defines the term "permanent establishment‖, emphasizing its essential nature as a "fixed place of business‖ with a specific "situs‖. According to paragraph 2 of the OECD Commentary (the 2005 version of which is cited below), this definition contains the following conditions: - the existence of a "place of business‖, i.e., a facility such as premises or, in certain instances, machinery or equipment; - this place of business must be "fixed‖, i.e., it must be established at a distinct place with a certain degree of permanence; - the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.‖ The OECD Commentary goes on to observe:- "3. It could perhaps be argued that in ....
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....n is at the disposal of that enterprise. These principles are illustrated by the following examples where representatives of one enterprise are present on the premises of another enterprise. A first example is that of a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer"s premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a fixed place of business through which the business of that enterprise is carried on (depending on the circumstances, however, paragraph 5 could apply to deem a permanent establishment to exist). 4.3 A second example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g. a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company will constitute a pe....
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.... occupied and the other requirements of Article 5 are met, the enterprise will, of course, have two permanent establishments). As recognised in paragraphs 18 and 20 below a single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business.‖ 22. The UN Commentary observes that place of business to constitute PE, the enterprise using it must carry on its business wholly or partly "through‖ it, though the activity need not be productive in character and need not be permanent in the sense that there is no disruption, but the operations must be carried out on regular basis. Branch, offices and factory mentioned in paragraph 2 are examples of fixed place of business. In paragraph 4.6 of the OECD Commentary, the words "through which‖ have been interpreted to have a wide meaning but postulate that the particular location should be at the disposal of the enterprise for that purpose and only then the business is carried through the location where the activit....
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....hrough which the business of enterprise is carried on‖. It is not extraneous and the interpretation does not imply adding or substracting words to Article 5(1). The OECD and UN Model Commentaries quoted above adopts a reasonable and a rational approach in the commentaries for interpretation of Article 5(1) to not only include places which are legally at the disposal of an enterprise but also places where the non-resident assessee can as a matter of right claim is right to use. The said right to use can be inferred from the conduct etc‖. 25. There is some controversy whether the examples given in paragraph 2 to Article 5 are per se and ex facie permanent establishments or the requirements of paragraph 1 should also be satisfied. This controversy is in respect of building and construction sites etc. We need not give an affirmative opinion on the said question in relation building/construction sites etc. Overwhelming international commentaries, write ups and decisions support the position that for applying the location test, requirements of paragraph 1 to Article 5 must be independently satisfied. Therefore, to create a location PE, requirements of paragraph 1 to Articl....
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....thin India. Thus the employees and other personnel must be of the non-resident assessee to create a service PE. Any other interpretation or treating employees of the Indian entity, i.e., e-Fund India as "other personnel‖ of the foreign assessee would lead to incongruities and irrational result, for every subsidiary which engages an employee, would always become a PE of the controlling foreign company. The said submission of the Revenue is misconceived and has to be rejected. This would be contrary to the overriding mandate of Article 5 paragraph 6. Decision in the case of Morgan Stanley (supra) as suggested and submitted by the Revenue does not hold or propound to the contrary. In the said case, the Supreme Court has held as under:- "13. However, the question which arises for determination in the present case is the nature of activities performed by stewards and deputationists deployed by MSCO to work in India as employees of MSAS. Under Article 5(a)(1) furnishing of services through the fixed place in India can constitute a P.E. The AAR In the impugned ruling has held that the stewards and deputationists are proposed to be sent by the MSCO from U.S. According to the AAR t....
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....deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCO. As long as the lien remains with the MSCO the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of "the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCO. In such circumstances, generally, MSAS makes a request to MSCO. A deputationist u....
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....as:- "The staff deputed to MSAS would be on the payroll of the applicant and the remuneration paid by it will be reimbursed by MSAS. Out of a total remuneration of Rs.49,402,704 paid to employees, reimbursement to associate company for deputed staff aggregates to Rs.24,220,631 ; performance appraisal, pro-motion and discipline, etc., would be carried out in consultation with the applicant. Clause (4) of the agreement expressly stipulates that MSAS shall comply with all performance standards as specified by the Morgan group and that it shall comply with all reasonable directions or instructions of the group. Operation manual would be prepared and updated in conformity with the policy, procedures and practices of the Morgan group. Clause 7 enjoins upon MSAS to submit reports or other information concerning the services that the group may require. It further enjoins MSAS to attend all meetings convened for reviewing the services at the appointed time, place and agenda fixed by the group. By virtue of clause 8, MSAS is required to maintain a complete record which would be subject to audit and investi-gation by the applicant. The persons authorized by the Morgan group are provided un....
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....r when sub-clauses (d) and (e) apply and "fixed place‖ or "base‖ is created. Nature of the activities of the employees and other personnel of the non-resident assessee is important and relevant. This formed the foundation and basis of the distinction made by the Supreme Court in Morgan Stanley (supra) between stewardship activities and primary or core activities. Therefore, first and foremost, Article 5(1)/(2) should be applicable but then if the activities fall within parameters of paragraph 3, PE is not created for imposing tax in the second state. It does not follow that if activities are not covered in the negative or exclusions set out in paragraph 3, a PE is established or deemed to be established under paragraphs 1 or 2 of Article 5. This principle is relevant. As noticed below, the tribunal has erred and has referred and applied paragraph 3 of Article 5 as if all activities performed and undertaken by the Indian subsidiary and their employees would still create a PE in India of the assessees, because the activities of e-funds India were not preparatory or auxiliary in character. This is not the correct legal position. Agency PE under Article 5(4) and (5) of DTAA....
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.... 5 of Article 5 will, therefore, normally not include agents who have power to conclude contracts. Paragraph 38.1 of the OECD Commentary has been quoted above (see paragraph 15). The commentary elucidates and gives illustrations and tests. 33. Earlier U.N. commentary had deviated in some respect from the OECD commentary and had observed that an agent who was wholly or almost wholly engaged by one principal shall be considered to be a dependent agent. This initial position stated in UN commentary has, however, not been accept in subsequent commentaries. The essential criteria being arms length relationship though engagement with one or a group might serve as an indicator of absence of independence of an agent. 34. Subsidiary by itself cannot be considered to be a dependent agent PE of the Principal, otherwise it would negate the overriding effect of paragraph 6 to Article 5, a provision which precedes and seeks to give recognition to separate legal entity principle associated with juristic incorporated enterprises. However, a subsidiary may become dependent or an independent PE agent provided the tests as specified in paragraphs 4 and 5 are satisfied. A dependent agent is deem....
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.... or conclude contracts on behalf of the foreign establishment/agency. The contracts were entered into in America and were concluded there. Only implementation of those contracts to the extent of back office operations were carried out in India. This legal position is relevant in the present case. 37. In TVM Ltd. vs. Commissioner of Income Tax (1999) 237 ITR 230, Authority of Advance Ruling has interpreted the two expression "has" and "habitually exercises" in the case of dependent agent. It has been observed that the expression "has" may have reference to the legal existence of such authority on terms of the contract between the Principal and the Agent, the expression "habitually exercises" has certainly reference to systematic course of conduct on the part of the agent. Reference to OECD Commentary and Klaus Vogel was made and it has been observed :- ".....Para. 4 uses two expressions : "has‖ and "habitually exercises‖ an authority to conclude contracts on behalf of the enterprise in question. While the expression "has‖ may have reference to the legal exist- ence of such authority on the terms of the contract between the principal and agent, the expression ....
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....ous year ending 31.3.2003 with the Competent Authority of India under the Double Taxation Avoidance Agreement vide their letter No. SE LM IM: T: ? : IN dated 8.5.2006. Subsequently vide letter dated 16.2.2007 Competent Authority of USA initiated Mutual Agreement Procedure for the previous year ending 31.3.2004 in the case of the Solutions Group Inc. The Competent Authorities of both the countries after examined the facts of the case and issues involved have arrived at a resolution in terms of Section 90 of Income Tax Act, 1961 read with Article 27 of Indo -USA Double Taxation Avoidance Agreement and Rule 44 I-I of Income Tax Rules, 1962. The Competent Authorities of USA and India have reached an agreement as follows with respect to the Tax assessment on M/s e Funds Corporation and e Funds IT Solution Group Inc: Income will be attributed to the Indian PEs based on the ratio of certain developed and acquired tangible and intangible assets in India and outside India. Out of the total assets for the AY 2003-04 , 10.48% of the assets were located in India and accordingly 10.48% of the Income would be attributable to India. The percentage attributable to India for the AY ending 2005 w....
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....e are good and sufficient reasons to take a contrary or divergent view. However, a concession on point of law, is not binding for other assessment years or a different assessee. It is always open to the competent authorities of the two countries to enter into an agreement for avoidance of double taxation and bring a litigation/dispute to an end. Double taxation means taxation of the same subject matter or income in the hands of one assessee or one person in the two different countries. Double taxation can be avoided by either granting exemption or giving tax credit paid in the third country. As per the MAP procedure, there was decrease in the American taxable income and the tax paid on income in India was credited under the American laws. FACTS AND APPLICATION OF AFORESAID PRINCIPLES TO THE FACTS 43. Tribunal in the impugned order has held that the assessee had fixed place PE under Article 5(1) and also service PE under Article 5(2)(l) of the DTAA. The assessment order on the said aspect is rather ambiguous and unclear. In paragraph 7 of the assessment order, it is observed that the assessee had permanent establishment in India in various forms without elucidating any specifi....
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.... below. These details have not been questioned in the orders of the Assessing Officer, Commissioner (Appeals) or the tribunal. These are:- "a) ATM Management Services Those appellants had installed ATM machines and point of sale machines in USA and Canada and, not in India. On the transactions carried out through the ATMs, revenues were generated by the appellants outside India and, therefore no income accrued in India. All the servers processing the transactions were not installed in India and were located wholly outside India. Electronic Payments That ATM machines installed by other companies not belonging to the appellants outside India were also managed i.e. the transactions for these ATM machines were routed through servers installed by the appellant. These servers contained database of various cardholders for the purpose of verification and, revenues were shared from the ATM machine installers. Here also no activity was carried on by the appellants in India and, therefore no income accrued in India. Decision Support and Risk Management That appellants further provide decision support and, risk management services providing risk management based data and other p....
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....ed above, Article 5(1) has to be read with paragraph 6 of Article 5 which relates to subsidiary companies. 49. The Assessing Officer, Commissioner (Appeals) and the tribunal have primarily relied upon the close association between e-Fund India and the two assessee and applied functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business. This is not a proper and appropriate test to determine location PE. The fixed place of business PE test is different. Therefore, the fact that e-Fund India provides various services to the assessee and was dependent for its earning upon the two assessees is not the relevant test to determine and decide location PE. The allegation that e-Fund India did not bear sufficient risk is irrelevant when deciding whether location PE exists. The fact that e- Fund India was reimbursed the cost of the call centre operations plus 16% basis or the basis of margin fixation was not known, is not relevant for determining location or fixed place PE. Similarly what were the direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE....
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....Subsidiary as an agent: On the basis of a special parent/subsidiary relationship - other than one of control under company law a subsidiary may; however, in individual cases be an agent, and consequently, for that reason a permanent establishment, of its parent company. The Mfg: make this clear by using the words 'of itself". Also the transformation of a permanent establishment into a subsidiary does not yet lead, therefore, to the characterization of the subsidiary as a permanent establishment. In such cases, the subsidiary continues to be a separately taxable entity. his its parent company's permanent establishment only to the extent that it satisfies the agency requirement set out in Art. 5(5). and (6) MC. Paragraph 41 MC Comm.Art. 5 makes express mention of this only in regard to the independent agent within the meaning of Art. 5(5). Like any other unrelated company, however, a subsidiary, if an independent agent, can very well also constitute a permanent establishment of its parent company under, the conditions laid down in Art. 5(6). A subsidiary may, for instance, act as an agent of its parent nd conclude such contracts for the latter on the b as is of a corresponding author....
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....cannot be and is not established by mere transactions between two associated enterprises or the principal subcontracting or assigning the contract to the subsidiary. An agency PE will be established and created if the requirements of paragraphs 4 and 5 of Article 5 are fulfilled and not otherwise. It is not uncommon for an enterprise to enter into contracts assign or sub-contract works, or service to their subsidiary. The subsidiary may also render services to a third party on behalf of the principal. This by itself would not lead to a subsidiary becoming a PE unless requirements of paragraphs 1, 2, 4 or 5 are satisfied. The observations of the Klaus Vogel in fact support the assessee as it postulates that partnership PE would be created only when the principal of the foreign enterprise retains the economic risk of contract and other general conditions i.e. Articles 5(1), 5(2), 5(4) and 5(5) of the DTAA are fulfilled. Tax authorities have to be cautious and aware of consequences when they apply joint venture or partnership principle in a case like the present one as it could be argued that substantial or significant part of the income of the joint venture entity should be taxed in ....
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....osed and elucidated in the said report. The report, no doubt, is relevant and material but has to be examined with due care and caution to determine and decide whether the two assessees have PE in India. The fact that business has been transferred or sub contracted or assigned to e-Fund India is not relevant and material, unless we are determining applicability of paragraph 3 to paragraph 5 and the question is whether the Indian company is performing core or auxiliary and preliminary activities. The fact, the report refers to and give details of or number of employees of e-Fund India which are part of the e-Fund group is not relevant. Neither income earned by eFund India nor activities in India by the Indian subsidiary by itself, relevant in determining whether or not PE exists under paragraphs 1, 2, 4 and 5 of Article 5. Thus and therefore, the fact that 40% of the employees of the entire group were in India i.e. were employees of e-Fund India, will not make the said company agency subsidiary PE or fixed place PE of the assessee. Neither provision of any software, intangible data etc. whether free of cost or otherwise, make e-Fund India an agency or fixed place PE of the two forei....
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....ut cogent and good reasons. The transactions between the assessees and e-Fund India were at arm"s length and were taxed on arm"s length principle. There was no allegation or considered finding of the tribunal that the transactions were not in ordinary course of business. In these circumstances, even otherwise requirements of Article 5(5) are not satisfied in the present case. 59. This brings us to Article 5(2)(l) i.e. service PE. As already recorded above, employees of e-Fund India are not to be counted and treated as employees of the assessees; e-Fund India being a separate entity and taxable assessee. The tribunal and the authorities have erred in treating employees of e-Fund India as employees of the assessees for determining whether service PE under Article 5(2)(l) was created. There are no other factual findings recorded by the tribunal in respect of service PE under Article 5(2)(l). The assessment order also does not record any other relevant finding for creation of service PE under Article 5(2)(l), other than payment received by e-Fund India for providing management and support service by the President and Sales Team to overseas group entities. Payment by e-Fund Corp on t....
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....e as the associated enterprise were located in UK and Australia and computation of income attributable to the PE are highly debatable and contentious questions which require findings of facts at the first instance and cannot be made matters to be decided for the first time in an appeal under section 260A of the Act. 61. The President and international sales division or regional office may have also constituted service PE in India for the year ending 31st March, 2002, if we treat the President and employees whose salary was reimbursed as "other personnel‖ who had performed services within that State for a related enterprise as defined in paragraph 1 of Article 9. Thus, at best service PE for the year ending 31st March, 2002 would have been created under Article 5(2)(l) but again there has not been thorough and detailed discussion on the nature and type of services rendered and determination on question of salary and whether the President and employees of Regional Office could be treated as "employees or other personnel" of the assessee. 62. The appellants had pleaded before the authorities and the tribunal that prior to assessment year 2005-06 not even a single employee ....
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.... but the same was reimbursed by e-Fund India. This was in accordance with and permitted under the Indian Exchange Control Regulations. It was further stated that the Assessing Officer was wrong in assuming that the two seconded employees were at liberty to function for e-Fund Corp while they were working for e- Fund India. The seconded employees were working under the control and supervision of e-Fund India. The Assessing Officer thereupon has not commented on the reply of the assessee, though he has recorded comments in respect of replies to other issues raised by him (see paragraph 7 of the assessment order). The aforesaid factual assertion made by the assessee, therefore, was not negated or questioned by the Assessing Officer. 64. Commissioner (Appeals) has referred to technical explanation to DTAA issued by the US Department of Treasury. The said explanation refers to the definition of term "PE" including service PE and states as under:- "Subparagraph (1) provides the rule for determining the conditions under which the activity of furnishing services, through employees or other personnel, constitutes a PE. These rules apply only to the provision of services which are not ....
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....yees of the foreign company and were paid by the foreign company. Thus, the applicant company was rendering services through its employees to the Indian company, therefore this created a PE. 67. The assessment order refers to the net income or loss of e-Fund Corp and has come to the conclusion that once operations of e-Fund India started and grew, the profits of e-Fund Corp also increased. This is a very simplistic method and manner of analyzing data. Profits or losses depend upon several factors like, business environment, quality of business operations etc. including transfer of back office operations or other operations to a more efficient and cost effective locations. The said finding can be given after minute and meticulous examination of the data, reasons and not by a straight forward and simplistic inference. Further existence of PE does not depend upon transfer of assignment or sub-contracting work/services to India, with an intent and purpose to save costs and to increase profitability of the assessee resident abroad. This is not the stipulation or requirement in Article 5. 68. The contention of the Revenue is that if rights in the software had been transferred to e-....
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.... payment. The stand of the Indian tax authorities is that the services need not be rendered physically in India but when the payment is sourced from India and the services are to be utilized in India, income of the foreign resident is taxable in the source State i.e. India. We need not examine the said stand of the tax authorities in the present case as this is not in dispute or issue in question. The source State in the present case was USA. It was the State where the contract of service was performed and utilized, though certain operations took place in India. The beneficiaries of the services and the payment of the services were sourced in USA. Casual examination of India"s balance for payments in US Dollars available on Reserve Bank of India"s website from the year 2000-01 to 2010-11, would indicate that India has substantial inflow under the head "invisible‖ i.e. payments for services and products which do not result in transfer of physical objects. A significant portion of India"s services, which contributes almost 55% to the Indian Gross Domestic Product, are for outbound and cross borders services. A greater and in-depth study is required to understand the full tax or....
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....assessee and E fund India. In the present case, attributions of profit to business connection has not been undertaken/applied keeping in mind the aforesaid stipulation, but by applying Article 7 of the DTAA. It appears and is apparent that the assessee and Revenue felt that application of DTAA was more beneficial to the assessee. 73. In Director of Income Tax Vs. Rio Tinto Technical Services [2012] 340 ITR 507 (Delhi) it has been observed that Section 90 (2) mandates that where the Central Government has entered into DTAA and the said agreement applies, the provisions of that Act will apply to the extent they are more beneficial to the assessee. In other words, when DTAA and provisions of the Act apply to an assessee, then the Article of DTAA or the provision of the Act will apply depending upon, which one of the two is more beneficial or advantageous to the assessee. Challenge to the initiation of proceedings under Section 147/148 of the Act. 74. Challenge to the initiation of proceedings under Sections 147/148 of the Act by the two assessees is devoid of merits. In the present case, the assessee had not filed returns of income and were not subjected to regular assessment....
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....scious and considered decision not to challenge the proceedings at the initiation stage. Thus non communication of reasons to believe was inconsequential and did not prejudice the assessee. Tribunal has on examining the original records came to a factual finding giving cogent reasons, why reasons to believe were in fact recorded before issue of notice. Challenge to the proceedings under Section 147/148 of the Act is therefore, rejected. Computation, apportionment or accumulation of income/profit 76. The assessment order drawing authority from Article 7(2) of the DTAA and Rule 10 of the Income Tax Rules, holds that profit of the two assessees attributable to Indian PE should be computed on reasonable basis. The Assessing Officer took into account the assets of the two assessees located outside India and located in India, i.e., the assets of e-Fund India. In proportion to the assets located in and outside India, income from operations was attributed to the Indian PE. However, in computing the income from operations, the net profit of e- Fund India was reduced from the total income and then 2.51% of the net profit was attributed to India, 2.51% being the percentage of assets in ....
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....assets. This methodology/formula will be more helpful in arriving at the reasonably correct amount of attributable income, being comparatively just, fair and equitable.‖ 79. It was further observed that it was desirable to adopt depreciated cost of assets as the base as held by the Assessing Officer. The tribunal observed that the reasoning of the Commissioner (Appeals) required interference because computation on the basis of actual cost would require reference to earlier records and reverse calculations, which was undesirable. Besides income generating capacity of the assets would diminish with the lapse of time and depreciation, as provided in the respective statutes, should be given due regard. In such circumstances, it was desirable and expedient to base attribution on depreciated cost of assets for purpose of apportionment as it would be fairer, practical and hassle free method. As a result of the direction given by the tribunal, income of the two assessees has been computed as under:- For e-funds Corporation & e-funds IT Solutions Group Inc. Thus, no tax is payable by the two assessees in any year because e- Fund India had declared and stands taxed on a higher....
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....214; can be taken into consideration for attribution of profits to the two assessee, if it is assumed that e-Fund India was PE of the assessee. The activities, which were not undertaken by e-Fund India and the assets of the two assesses outside India, cannot be taken into account or attributed for earning/income of the two assessees. This is subject to the limited force of attraction principle mentioned above, which in the present case is not applicable. 83. We have already quoted passages from decision in Morgan Stanley (supra) on the question of attribution when the Indian company, i.e., e-Fund India itself was assessed and subjected to tax on "arms length" basis. The Supreme Court has observed that in such cases when transfer pricing analysis includes and takes into account risk taking functions of the PE enterprise, nothing further would be attributable to the foreign or non-resident enterprise. However, if the transfer pricing order or computation does not adequately reflect the functions performed and risk assumed by the Indian enterprise, there is need to attribute profits for those functions or risks which have not been considered. Data placed by the taxpayer, which is e....
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....o the assets, including Indian assets, though Indian assets had also contributed in earning of the net income. This inconsistency was highlighted by the assessee before the Commissioner (Appeals) and the tribunal. Commissioner (Appeals) referred to the written submissions; that the formula adopted was iniquitous and irrational. The said contention was elucidated by giving a specific example noticed in paragraph 7.7 of the order of the Commissioner (Appeals). The contention was rejected stating that the example was a theoretical. Method of apportionment has to be fair, rational and logical. Assets and net income criteria applied must collate and refer to the assets which have contributed to the earning of the net income. The tribunal, therefore, rightly interfered and corrected the error, which was apparent. In the MAP proceedings a formula was adopted and should be consistently followed but if the said formula was irrational and inappropriate, it could be corrected in other and subsequent years. The approach of the tribunal, therefore, cannot be faulted. 87. On the question whether depreciated/written down value or the original cost of assets should be taken as the basis, the tr....
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....other round of litigation with an order of remit, if it was not necessary. We did not seek details with an intention to get on record new or fresh facts, which were not elucidated or relied upon by the parties before the tribunal but in case we found merit in the contention raised by the learned counsel for the Revenue whether an order of remand would be justified. For reasons stated above we have not deemed it appropriate to interfere with the findings of the tribunal on apportionment. 91. In view of the aforesaid discussion, we answer questions of law in the following manner:- "Whether, on the facts and circumstances of the case and in law, the Assessing Officer was justified in reopening the assessment under Section 147/148 of the Income-Tax Act?‖ Notices under Section 147/148 are valid and as per law. "Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that Appellant has a business connection in India under Section 9(1) [or 9(1)(i)] of the Act ?‖ The assessees have business connection in India, but the tribunal has given a wide and broad meaning to the term "business connection‖ and what i....
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.... the computation of profit attributed to the Permanent Establishment on the lines of the MAP proceedings?‖ Whether the formula prescribed by Income Tax Appellate Tribunal for computation of profit attributable to a Permanent Establishment is correct and as per law? Whether the order of the Income Tax Appellate Tribunal is perverse?‖ These questions have to be answered against the Revenue and in favour of the assessees. The findings of the tribunal are not perverse and the tribunal is justified in not accepting the formula/method adopted/applied by the Assessing Officer or in the MAP proceedings to compute purported income attributable to the two assessee. 93. The appeals are disposed of. In the facts, there will be no order as to costs. ============= Document 1 S.No. Assessment Year 1. 2000-01 Particulars Post AO's Decision Amount (In Million Income from operations (10 K) Less; Net profits (eFunds USD) 1.28 0.82 Document 2 India) Attributable Income (In 0.46 Million of USD) (A) Percentage allocated to India 2.51% (B) Income attributed to the India 0.012 PE (A*B) Allocation of revenue be....
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....illion of USD)(A) 56.57 Percentage allocated to 9.02% India (B) Income attributed to the 5.105 India PE (A*B) Allocation of revenue between company eFunds IT Solution Group Inc. and eFunds Corporation eFunds IT Solution 0.766 Group Inc. (15%) eFunds Corporation 4.339 (85%) Exchange Rate 43.75 eFunds IT Solution 33,512,500 Group Inc. (in Rs.) eFunds Corporation (In 189,831,250 Rs.) Document 5 6. 2006-07 Particulars Amount (In Million USD) Income from operations 77.20 (10K) Less; Net profits (eFunds India) 6.76 Attributable Income (In 70.44 Million of USD) (A) Percentage allocated to 5.74% India (B) Income attributed to the 4.042 India PE (A*B) Allocation of revenue between company eFunds IT Solution Group Inc. and eFunds Corporation eFunds IT Solution 0.606 Group Inc. (15%) eFunds Corporation 3.436 (85%) Exchange Rate 44.61 eFunds IT Solution 2,70,46,039 Group Inc. (in Rs.) eFunds Corporation (In 15,32,60,890 2007-08 Rs.) Particulars Amount (In Million USD) Income from operations 79.....