TaxTMI 
TaxTMI 
2016 (3) TMI 370
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.... relation to contracts of the assesse with PowerGen Retial Ltd. and Last Minute Networks Ltd. The total revenue earned by Vertex India to the assessee was Pound 4735037. Over the above this sum of pound 60528/- was retained by the assessee as cost incurred by the assessee in United Kingdom and recovered from the customers. The balance amount is remitted to Vertex India. The assessee allowed Vertex India right to use certain equipment located outside India and claimed reimbursement of expenses incurred by the assessee on behalf of the Vertex India. 3. The assessee filed its return of income on 29.10.2004 and offered the sum received from Vertex India for right to use equipment outside India as royalty in accordance with Article 13.3 (b) of Indo UK DTAA. Regarding the reimbursement it was claimed that same is non-taxable as it was on cost to cost basis. The ld AO held that the assessee has PE in India and according to DTAA and business connection according to India Income Tax Act and hence computed the profit of Rs. 30626180/- attributable to such PE. Regarding reimbursement of Rs. 52452014/- as it has effect of reducing the service fee payable to the Indian Company was also consi....
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.... appreciating of the facts that attribution of profit is about determining income element of the assessee out of taxable transaction between the assessee (nonresident) and Indian Parties as well as Associated Enterprises in India. 5. The assesse is also in appeal raising three effective grounds:- 1. That on the facts and circumstance of the case and in law, the Commissioner of Income Tax (Appeals) - XXIX, New Delhi ['Ld. CIT(A)'] erred in upholding the order of the assessing officer ('Ld. AO') that the Appellant has a business connection in India under section 9(1) (i) of the Act. 2. That on the facts and circumstance of the case and in law, the CIT(A) erred in upholding the order of Id. AO that the Appellant has a fixed Permanent Establishment ('PE') in India under Article 5(1) of the Double Taxation Avoidance Agreement between India and United Kingdom ('DTAA' or 'treaty‟). 3. That on the facts and circumstance of the case and in law, the CIT(A) erred in holding that the payments in respect of access circuits, networks, bandwidth, call charges etc aggregating to Rs. 2,45,11,059 (GBP306,076) is taxable as Royalty under ....
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....of Morgan Stanley and honourable Delhi high court in case of E Funds. He referred to various para of these judgments extensively. He submitted that CIT (A) has wrongly decided that assessee has a fixed place PE in India. b) On profit attribution he submitted that when the transaction is at arm‟s length no further profit can be attributed to the PE. He also submitted that for AY 2006-07 the TPO in his order has accepted the transaction and has not given any adverse comments and therefore there cannot be any profit attribution. c) On ground no 3 of the appeal regarding he relied on the decision of 14 SOT 20 ( Del) and submitted that there is no element in reimbursement of expenses and hence it cannot be charged to tax. d) Regarding reimbursements he submitted that it is actual cost which has been reimbursed based on cost recovery charges mechanism and company has not added mark up to these and therefore this just like a pass through cost and therefore there is no income in that. Regarding call charges it was submitted that there are the call charges incurred by the assessee o for powergen and last minute which have been incurred by the assessee and sa....
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....ia, would be deemed to accrue or arise in India and hence would be taxable in India. However the term "Business Connection has not been defined in the Income tax Act.Thus rightly so, the Bombay High Court in Blue Star Engg. Co. (Bom) (P) Ltd v CIT [1969] 73 ITR 283 (Bom) following the principle laid down by honorable Supreme court in CIT v R D Aggarwal & Co. [1965] 56 ITR 20, 24 (SC) has stated that since the term Business Connection admits of no precise definition, the solution of the question must depend upon the particular facts of each case. Further, various honorable High Courts in Bangalore Woollen Cotton & Silk Mills Co. Ltd V CIT [1950] 18 ITR 423 (Mad); CIT v Evans Medical Supplies Ltd. [1959] 36 ITR 418 (Bom) and Jethabhai Javeribhai v CIT [1951] 20 ITR 331 (Nag) have also held that there is no definition of the words „business Connection‟ and the legislature has deliberately chosen words of wide import. Further, there is no determinative form, in which a business connection exists. As has been held by the honorable Supreme Court in a landmark case of CIT v R D Aggarwal & Co [1965] 56 ITR 20 that "a business connection may take several forms:- it may include c....
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....e a real and intimate connection between the activity carried on by the non-resident outside India and the activity carried out in India. Further, such activity must be one, which contributes to the earnings of profits by the non-resident in his business. It is also a settled principle that to conform with the requirements of the expression "Business Connection" it is necessary that a common thread of mutual interest must run through the fabric of the trading activity carried on outside and inside India and the same can be described as real and intimate connection. The commonness of interest may be by way of management control or financial control or by way of sharing of profits. It may come into existence in some other manner but there must be something more than mere transaction of purchase and sale between „principal to principal‟ in orders to bring the transaction within the purview of business connection. Further Where the Indian entity and the non-resident entity are both held by the same person, or have common control, then the non-resident would be regarded as having a business connection in India. In this case assessee company secures orders on behalf of the In....
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....It will be suffice if the fixed place is at disposal of the non-resident for carrying out its business wholly or partly through it. In present case, the appellant had entered into service contract with Powergen and Lastminute, its overseas customers. As per clause 20.2 of contract dated 10.05.2002 with Powergen, the appellant could sub-contract whole or part of the services only to its subsidiary in India. Accordingly, these contracts were sub-contracted to a subsidiary namely Vertex India. It is important to note that Vertex India started providing services in accordance with contract of the appellant with its overseas customers much before when services were sub-contracted to it retrospectively. It can be inferred that appellant and its overseas customers were in agreement that services shall be provided to overseas customers from subsidiary company based in India. Now, Vertex India is not doing anything else other than providing services to overseas customers of the appellant. The appellant is practically not doing anything with reference to its contracts with its overseas customers except that according to clause 20.2(ii) of the agreement dated 10.05.2002, it shall be responsib....
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....ley & co Inc. 292 ITR 416 (SC) in case of whether back office services constitute permanent Establishment or not under article 5(1) of The DTAA has held as under "Existence of P.E. in India 6. With globalization, many economic activities spread over to several tax jurisdiction. This is where the concept of P.E. becomes important under article 5(1). There exists a P.E. if there is a fixed place through which the business of an enterprise, which is a multi-national enterprise (MNE), is wholly or partly carried on. In the present case MSCo is a multi-national entity. As stated above it has outsourced some of its activities to MSAS in India. A general definition of the P.E. in the first part of article 5(1) postulates the existence of a fixed place of business whereas the second part of article 5(1) postulates that the business of the MNE is carried out in India through such fixed place. One of the questions which we are called upon to decide is whether the activities to be undertaken by MSAS consist of back office operations of the MSCo and if so whether such operations would fall within the ambit of the expression " the place through which the business of an enterprise is....
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....se belonging to the enterprise solely for the purpose of storage, display, or occasional delivery ; (c) the maintenance of a stock of goods, or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; Page No : 0423 (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first- mentioned State if : (a) he has and habitually exercises in that first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to tho....
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....ough 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 where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. 3. In the determination of the profits of a permanent establishment, there shall be all....
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....n, then the provisions of those articles shall not be affected by the provisions of this article. 7. For the purposes of the Convention, the term ' business profits' means income derived from any trade or business including income from the furnishing of services other than included services as defined in article 12 (royalties and fees for included services) and including income from the rental of tangible personal property other than property described in paragraph 3 (b) of article 12 (royalties and fees for included services)." 8. In our view, the second requirement of article 5(1) of the DTAA is not satisfied as regards back office functions. We have examined the terms of the agreement along with the advance ruling application made by MSCo inviting the AAR to give its ruling. It is clear from a reading of the above agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a P.E. stood constituted one has to undertake ....
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....gent of PE (DAPE) of the Appellant in India, I am unable to agree with in the findings of the AO in this regard. In this case, none of three conditions in paragraph 4 of article 5 of India-UK DTAA is satisfied. Paragraph 4 and paragraph 5 of Article 5 of the treaty are reproduced below: "4. A person acting in a Contracting State for or on behalf of an enterprise of the other contracting State - other than an agent of an independent status to whom paragraph (5) of this Article applies, shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if: (a) he has, and habitually exercises in that Stale, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the e....
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....ex India did not constitute a dependent agent PE of the Appellant in India. We have carefully considered the issue of DAPE in case of the assessee. Paragraphs 4 and 5 of Article 5 of DTAA relate to creation of agency PE in the second contracting country. Agency replaces fixed place with personal connection. Transactions between a foreign enterprise and an independent agent do not result in establishment of a Permanent establishment under Article 5 if the independent agent is acting in ordinary course of their business. The expression „ordinary course of their businesses has reference to activity of the agent tested by reference to normal customs in the case in issue. It has reference to normal practice in the line of business in question. However as per paragraph 5 of Article 5, an agent is not considered to be an independent agent if his activities are wholly or mostly wholly on behalf of foreign enterprise and the transactions between the two are not made under arm's length conditions. The twin conditions have to be satisfied to deny an agent character of an independent agent. In case the transactions between an agent and the foreign principal are under arm'....
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....e. 11.2 I have considered the observations of the Ld. AO contained in the assessment order, the submissions of the appellant and also the remand report of the Ld. AO. I am in agreement with the Appellant that to the extent of functions, assets and risks already captured in the transfer pricing analysis of the Indian associated enterprise, i.e. Vertex India, no further profit can be attributed to such functions, assets and risks in the hands of the Appellant's PE. The Appellant's PE can be taxed only in respect of functions, assets and risks which have not already been captured in the hands of Vertex India. In the facts of Appellant's case, the AO has alleged Vertex India or activities undertaken by Vertex India to be the PE of Appellant in India. The AO has not established that there were any functions, assets or risks other than activities of Vertex India that constitute PE of appellant in India. Hence, no further profits can be attributed in the hands of Appellant's PE in India otherwise it will lead to double taxation of income pertaining to same functions, assets and risks once in the hands of the Indian associated enterprise and again in the hands of t....
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....ny of Rs. 5,24,52,0147- in the return of income the same was claimed as exempt from taxation on the ground that the reimbursement of expenses is not subject to tax in India in accordance with the provision of DTAA. Ld AO asked to explain the details of reimbursement of expenses and the nature of services provided for against these reimbursement. In reply the AR of the assessee submitted that the reimbursement of GBP 654982 represents the amount spent by company to facilitate Vertex India in delivering its services to the customer in UK including support in treasury, taxation, finance, etc. AO was of the view that it is responsibility of the Indian company to render services to the customer on the behalf of the assessee company therefore the disbursement of above expenses on behalf of Indian Co. does not arise. According to him even otherwise this is taxable as business income pertaining to Indian operation as the reimbursement of expenses has an effect of reducing the service fee payable to the Indian company. As on the basis of assets employed and salary and wages paid, the service fee payable to the Indian company comes out to be 78151587- and service fee actually paid was 717044....
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....has already been concluded above that no further profits can be attributed to the PE in the facts of present case. Hence, the only question remains whether the said amount is Royalty or FTS in nature. 17.4 The amount off 306,076 (Rs. 24,511,059) pertains to access circuits, network bandwidth etc. I am of the view that these are similar to the amount shown as Royalty in the return by the appellant himself. These amounts also pertain to use of equipment outside India and constitute Royalty as defined under Article 13.3(b) of India- UK DTAA. The appellant has not put forward any cogent objections to this proposition. Accordingly, AO is directed to treat Rs, 24,511,059 as royalty subject to taxation on gross basis under provisions of DTAA. The appellant shall get relief in respect of remaining amount of Rs. 27,940,955." Further reliance by assessee on the decision of 14 SOT 204 (Del) in case of ACIT V Modicon network private limited cannot be accepted in view of the finding of facts by CIT (A) that there was no element of income in the entire amount of reimbursements cannot be accepted as it cannot be said with certainty that whether the amount of GBP 306,076 allocated by the ....