TaxTMI 
TaxTMI 
2017 (10) TMI 1011
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....ls are from a judgment of the Delhi High Court disposing off several appeals and cross appeals. They relate to two American Companies which are the assessees in the present case, namely, e-Funds Corporation, USA (relating to assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08) and e-Funds IT Solutions Group Inc., USA (relating to assessment years 2000-01 to 2002-03 and 2005-06 to 2007- 08). The appeals from the Income Tax Appellate Tribunal (ITAT) by the assessees were allowed by the High Court, whereas cross-appeals by the department were rejected. After framing several substantial questions of law, the High Court narrated the undisputed facts as follows: "6. Undisputed facts in brief may be first noticed. The assessees are companies incorporated in United States of America (USA, for short) and were residents of the said country. They were assessed and have paid taxes on their global income in USA. e-Fund Corp. was the holding company having almost 100% shares in IDLX Corporation, another company incorporated in USA. IDLX Corporation held almost 100% shares in IDLX International BV, incorporated in Netherlands and later in turn held almost 100% shares in ....
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....n-resident 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 country where subsidiary is situated. The income of the subsidiary is not taxed in the hands of the non-resident principal and vice-versa. Thus, there is no double taxation in the hands of the holding company as income of the subsidiary is not taxed as income of foreign holding assessee. The principle is that a subsidiary constitutes an independent legal entity for the purpose of taxation." 2. The assessing authority decided that the assessees had a permanent establishment (hereinafter referred to as PE) as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement of 1990 (hereinafter refe....
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....ivision' comprising the President's office and a sales team servicing EFI and eFunds group entities in the United Kingdom, South East Asia, Australia and Venezuela. • The President's office primarily oversees operations of eFunds India and eFunds group entities overseas. The sales team undertakes marketing efforts for affiliate entities also. • The CIT(A) has referred to the Transfer Pricing Report which says that eFunds India provides management support and marketing support services to eFunds Corp group companies outside India. Regarding supervision of personnel rendering the services, the TP Report states as follows: "The President's office manages the operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to the President. The President's overall reporting is to EFC. Though the personnel rendering marketing services are employees of EFI, they report to overseas group entities to the extent that they are engaged in rendering services to such entities." Applying the above facts, it is submitted that the assessees satisfy the requirements of a fixed place PE. The Su....
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....rk with eFunds IT or Customers located in the United States shall be directed by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds IT. In the event Subcontractors personnel are assigned to perform such services in India, the Subcontractor shall supervise such work, acting at the direction of eFunds IT. eFunds IT shall be the sole judge of performance and capability of each of subcontractors personnel and may request the removal of one or more of Subcontractors personnel from a project covered by any statement of work as follows." • It is submitted that the personnel engaged in providing these services were ostensibly the employees of eFunds India but were de facto working under the control and supervision of eFunds Corp. In this regard, reference was made to Para 17 of the judgment in DIT v. Morgan Stanley (2007) 7 SCC 1, where the Court held: "17......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 multin....
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....id under various agreements between the US companies and the Indian company are on arm's length pricing and that, this being the case, even if a fixed place PE is found, once arm's length price is paid, the US companies go out of the dragnet of Indian taxation. He also adverted to Article 5(6) to state that the mere fact that a 100% subsidiary may be carrying on business in India does not by itself means that the holding company would have a PE in India. Further, according to learned counsel, so far as the service PE is concerned, even the assessing officer did not find that such a PE existed. According to him, under Article 5(2)(l), it is necessary that the foreign enterprises must provide services to customers who are in India, which is not Revenue's case as all their customers exist only outside India. Further, according to the learned counsel, the entire personnel engaged in the Indian operations are employed only by the Indian company and the fact that the US companies may indirectly control such employees is only for purposes of protecting their own interest. Ultimately, there are four businesses that the assessees are engaged in, namely, ATM Management Services, Electroni....
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....under: "Section 90. Agreement with foreign countries.- 1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement wit....
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....this Article, the term "permanent establishment" shall be deemed not to include any one or more of the following: (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise 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; (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 a 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 en....
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....his Court stating that if the assessees were made to pay tax in India, there would be double taxation. Article 25 provides for relief from such double taxation, by which the United States shall allow to a resident or citizen of the United States as a credit against US tax on income tax that is paid to India by or on behalf of such citizen in India. Article 27 is also important and reads as under: "ARTICLE 27 - Mutual agreement procedure - 1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or national. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention. 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agr....
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....by the Assessing Officer within ninety days of receipt of the same by the Chief Commissioner or the Director- General of Income-tax, if the assessee,- (i) gives his acceptance to the resolution taken under mutual agreement procedure; and (ii) withdraws his appeal, if any, pending on the issue which was the subject matter for adjudication under mutual agreement procedure. (5) The amount of tax, interest or penalty already determined shall be adjusted after incorporating the decision taken under mutual agreement procedure in the manner provided under the Income-tax Act, 1961 (43 of 1961), or the rules made thereunder to the extent that they are not contrary to the resolution arrived at. Explanation.-For the purposes of rules 44G and 44H, "Competent Authority of India" shall mean an officer authorised by the Central Government for the purposes of discharging the functions as such." 10. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US....
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....ing to PE, Klaus Vogel has remarked that insofar as the term 'business' is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term 'place'. Importance of the term 'place' is explained by him in the following manner: "In conjunction with the attribute 'fixed', the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either Contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC)." 36. We would also like to extract below the definition to the expression 'place' by Vogel, which is as under: "A place is a certain amount of space within the soil or on the soil. This understanding of place as a threedimensional zone rather than a single point on the earth can be derived from the French Version ('installation fixe') as well as the term 'establishment'. As a rule, this zon....
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....ration of a company in a Contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its by-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both Contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only (Article 4(3) OECD and UN MC). In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1^st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the piece of land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous). This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, an....
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....r operating a network. By contrast, in the case of a competing enterprise, the Bench did assume an Indian PE because the employees of that enterprise (unlike Ericsson's) had exercised other businesses of their employer. The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of hi....
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....with this aspect in some detail in which it held: "49. The Assessing Officer, Commissioner (Appeals) and the tribunal have primarily relied upon the close association between e-Fund India and the two assessees 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. Assignment or sub-contract to ....
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....s dated 13^th March, 2009, produced before the CIT (Appeals), in which, on behalf of their American clients, the said firm of Chartered Accountants stated: "2. The nature of business under each of the above verticals is detailed below: a) ATM Management Services eFunds US's ATM Management Services ("ATM Services") segment covers the business of ATM deployment, management and branding services. eFunds US is an independent provider of ATMs and it places ATMs in convenience, grocery, general merchandise, and drug stores as well as gas stations located throughout the United States and Canada. The ATMs run on an operating software which is generally owned by the original ATM manufacturer whereas the datacentre, to which such ATMs are connected, operate on the software platforms such as 'Connex' which have been developed and maintained by eFunds US. Services provided by eFunds US: eFunds US provided the processing for over 11,000 of the ATM machines in its network. Most of the ATMs were owned by the Appellant and its associate companies. All these ATMs were installed outside India and mainly in United States. Services provided by eFunds India:....
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....x and Architect, used in electronic payment services to in40 house processors and regional networks in 23 foreign countries and in the United States. None of the software products of eFunds US was licensed or installed in India. This software runs on IBM and Tandem computing platforms. eFunds US also provides software maintenance and support services as part of its Global Outsourcing business. eFunds US has developed various other software/solutions. Services provided by eFunds US: eFunds US was responsible for Customer Interface and customization of products and services as per the dictates of the Customer. Agreement/contracts with the Customer were entered into by eFunds US. All risks and responsibilities for performance of the Contract at all times were of eFunds US only. All Software's/solutions are developed by eFunds US. Software writing and conceptualization of ideas were done by eFunds US. All Networks and Infrastructure for this category of services is owned by eFunds US only. Connex was developed by a company acquired by eFunds US. eFunds US's associate company in United Kingdom has developed and owns the Architect software which is middleware used prima....
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....er account. SCAN then reports any issues to the retailer and the merchant decides whether or not to accept the cheque. ChexSystems: The ChexSystems business is a provider of new account applicant verification services for financial institutions. ChexSystems provides access to more than 17 million closed-forcause account histories and has recorded 124 million new account enquiries. An account is considered closed-for-cause when, for example, a consumer refuses to pay the account fee and the bank closes the account. ChexSystems helps financial institutions immediately assess the risks involved in opening an account for a new customer by supporting real-time enquiries to its database of consumer debit account performance. ChexSystems' database includes account history data provided by or purchased from financial institutions and other data purchased from third parties including driver's license data, deceased person's records and suspect address lists. All such data base relates to the persons located in the US and the customers of this data base were banks and retailers located in the US. Services provided by eFunds US: eFunds US was responsible for Custome....
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....structure were located outside India. Professional services include customizing standard eFunds US products and developing new applications for clients who want additional features and functionality and help clients test and refine eFunds US products in their information technology environments. In addition, it also covers providing on-site user training on eFunds US products and solutions for the information technology, operations and management staff of clients. Services provided by eFunds US: eFunds US was responsible for Customer Interface and customization of products and services as per the dictates of the Customer. Agreement/ contracts with the customers were entered into by eFunds US. All risks and responsibilities for performance of the contracts at all times were of eFunds US only. Services provided by eFunds India: eFunds US subcontracted part of its responsibilities under professional services contract with some of its customers to eFunds India which involve the following: • Data Processing Services including making outbound calls to collate data; • Making soft outbound calls to customers of eFunds US clients to follo....
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.... by MSAS. The stewardship activity is basically to protect the interest of the customer. In the present case as held hereinabove MSAS is a service PE. It is in a sense a service provider. A customer is entitled to protect its interest both in terms of confidentiality and in terms of quality control. In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services. We do not agree with the ruling of AAR that the stewardship activity would fall under Article 5(2)(l). To this extent we find merit in the civil appeal filed by the appellant (MSCo) and accordingly its appeal to that extent stands partly allowed. 17. As regards the question of deputation, we are of the view that an employee of MSCo when 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 MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the m....
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....ued that in assessment year 2005-06, two employees of the American firm were seconded in India and that, therefore, it is clear that management of the American company through these employees has obviously taken place. The High Court, in dealing with this contention, has found as follows: "62. The appellants had pleaded before the authorities and the tribunal that prior to assessment year 2005-06 not even a single employee of the assessee ever visited India even for a short period and in 2005-06, two employees of e-Fund were transferred to e-Fund India and that the entire expenditure for these two employees were borne by e-Fund India. No employees were present in India after 2005-06. Presence of employees in India is relevant under Article 5(2)(l) but the said employees should furnish services within the contracting State. These services should not be mere stewardship services. The Assessing Officer has recorded that employees were seconded to e-Fund India but the functions they performed and whether they performed functions and reported to e-Fund Corp/associated enterprise was not known or ascertained. This was not the correct way of determining and deciding whet....
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....20. We entirely agree with the approach of the High Court in this regard. Article 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a "service PE" would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground namely, that "other personnel" would cover personnel employed by the Indian company as well, and that the US companies through such personnel are furnishing services in India. This being the case, it is clear that as the very first part of Article 5(2)(l) is not attracted, the question of going to any other part of the said Article does not arise. It is perhaps for this reason that the assessing officer did not give any finding on this score. 21. Shri Ganesh has argued before us that the "agency PE" aspect of the ca....
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.... assessee for arriving at the arm's length price. The assessee has relied on the Transactional Net Margin Method (TNMM) in respect of all the major international transactions. After examination of the documentation and discussion with the authorized representative of the assessee, no adverse inference is drawn in respect of the Arm's Length Price (ALP) of the international transactions, as declared by the assessee in Form 3CEB, annexed to the return of the Income." Shri Ganesh is correct in stating that as the arm's length principle has been satisfied in the present case, no further profits would be attributable even if there exists a PE in India. This was specifically held in Morgan Stanley (supra) as follows: "32. As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm's length principle we have quoted Article 7(2) of DTAA. According to AAR where there is an international transaction under which a non-resident compensates a PE at arm's length price, no further profits would be attributable in India. In this connection, AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 al....
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.... 23. As a large portion of Shri Venugopal's argument was in relation to the MAP settlement in the present case, it would be necessary to refer, in some detail, to the documents produced on this account. 24. Resolution dated 23^rd April, 2007 passed by the competent authority of India, which was strongly relied upon by Shri Venugopal, is set out hereinbelow: "Resolution under Section 90 of Income Tax Act, 1961 read with Article 27 of Indo-USA Double Taxation Avoidance Agreement 1. The Acting Director (International), Competent Authority of USA initiated Mutual Agreement Procedure in the case of M/s eFunds Corporation and eFunds I.T. Solutions Inc. for the previous year ending 31.03.2003 with the Competent Authority of India under the Double Taxation Avoidance Agreement vide their letter No.SE:LM:IN:T:2:JN dated 8.05.2006. Subsequently, vide letter dated 16.02.2007 Competent Authority of USA initiated Mutual Agreement Procedure for the previous year ending 31.03.2004 in the eFunds I.T. Solution Group Inc. The Competent Authorities of both the countries after having examined the facts of the case and issues involved have arrived at a resolution in terms of Sectio....
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....t binding on subsequent years." 26. To the same effect are the letters dated May 14, 2007 written by e-Funds Corp. to the Deputy Director of International Tax Circle in India. Shri Ganesh has also referred to and relied upon paragraph 3.6 of the OECD Manual on MAP Procedure, which reads as follows: "3.6. Competent Authority Agreements Competent authority agreements or resolutions are often case and time specific. They are not considered precedents for either the taxpayer or the tax administrations in regard to adjustments or issues relating to subsequent years or for competent authority discussions on the same issues for other taxpayers. In fact, the letters exchanged between competent authorities to resolve a case often state as much. This is because the competent authorities have reached an agreement that often takes into account the facts of the particular taxpayer, the differences in the provisions of the tax law in each country, as well as the effects of the economic indicators on the particular transactions at the relevant time. Any review or adjustments of subsequent years by a taxpayer or tax administration is best based upon the particular circumstance....