TaxTMI 
TaxTMI 
2022 (10) TMI 762
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....010 for AY 2004-05 :- "1. On the facts and in the circumstances of the case and in law, the order passed by the Ld. Commissioner of Income Tax (Appeals) [CIT (Appeals)], to the extent confirming Assessing Officer's action, is bad in law and void ab-initio. 2. On the facts and in law, the Ld. CIT(Appeals) grossly erred in upholding the order of the Assessing Officer that Ariba India constitutes a PE of the Appellant in India under Article 5 of the Indo-US Double Taxation Avoidance Agreement (hereinafter referred to as 'DTAA'). 2.1 On the facts and in law, the Ld. CIT (Appeals) grossly erred in concluding that Ariba India is an agent of the Appellant in India in terms of section 182 of the Indian Contract Act, 1872. 2.2 On the facts and in law, the Ld. CIT (Appeals) grossly erred in holding that Ariba India cannot be treated as an agent of independent status in view of Article 5(5) of DTAA. 2.3 Without prejudice to the above grounds, on the facts of the case and in law, even if Ariba India is construed to be agent of the Appellant then also the transaction between the Appellant and Ariba India is at arm's length and there cannot be any further attribution in....
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....ia Pvt. Ltd. (earlier known as Freemarkets Services Pvt. Ltd. hereinafter referred to as 'Ariba India') a wholly-owned subsidiary of the assessee. 5. For the A.Y. 2004-05, the assessee earned an amount of Rs.3,90,17,222/- from Ariba India. According to the assessee, the receipts from Ariba India were in the nature of business profits and it did not qualify as 'royalty or fees for technical services' in terms of Article 12 of the Indo-US Double Tax Avoidance Agreement ('DTAA'). Accordingly, in the absence or a permanent establishment, the assessee offered Nil income in its return of income. In the assessment order for this year, the AO held that Ariba India was a dependent agent PE of the assessee in India and that the income arising to the assessee is taxable as business income under Article 5 read with Article 7 of the DTAA. The AO estimated the expenses incurred by the assessee for maintaining requisite infrastructure for conduct of online auction at 50% of gross receipts and accordingly, the balance 50% of the gross receipts were deemed to be income of assessee. The assessment was completed at an income of Rs.1,95,08,611/- against the Nil income returned....
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.... Ariba India was held to be a DAPE of the Assessee. The AO assessed the income of the Assessee at Rs.8,96.33.340 (i.e. -15% of the gross payments of Rs.19,91,85,203) received by Ariba India and the same was held to be Assessee's notional income. Out or the notional income assessed in Assessee's case. 50% of the notional income was held to be royalty under paragraphs 3 and 4 of Article 12 of the India-US DTAA and accordingly taxed at the rate of 15%. Further. the balance 50% of the income was held to be taxable at 20% under section 44D (since the Amended Agreement was disregarded and section 44D was held to be applicable) read with section 115A of the Act as income attributable to assessee's DAPE (i.e. Ariba India). 9. Objections filed in the Dispute Resolution Panel (DRP) for A Y 2007-08 Aggrieved by the Assessment Order for AY 2007-08, the Assessee filed its objections before the DRP. The objections were disposed of by vide directions dated 29.09.2010 in which no relief was given by the DRP to the Assessee. 10. Proceedings before the AO for AYs 2008-09 to 2011-12: The AO, while finalizing the assessments for AYs 2008-09 to 2011-12, held that notional income (45% of....
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....pendent agent of the Assessee. 10. The CIT (A) erroneously observed that Ariba India has been holding itself out as an agent of the Assessee to the clients of the former (i.e. the Indian clients). In this regard, it is submitted that Section 237 of the Indian Contract Act provides that an agency by holding out is created only if the principal, by words or conduct, induced third persons to believe that acts done and obligations incurred by an agent were within the scope of the agent's authority. In the present case, no material/ evidence has been brought on record by the CIT(A) to show that the Assessee (i.e. the alleged principal) has induced third parties (i.e. the clients of Ariba India) to believe that Ariba India is its agent and it will be bound by the acts done and obligations incurred by Ariba India. 11. Further, the relationship between Ariba India and the Assessee has to be determined by relying on the express terms of the agreement between the parties. In this case, the relationship between the Assessee and Ariba India is on principal-to-principal basis which can be understood from bare reading of clause 8.1 of the Original Agreement. 12. A perusal of Limited Li....
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....eletion of the transfer pricing adjustment." 16. Accordingly, it is the submission of the assessee that when the transaction between the assessee and Ariba India is at arm's length there cannot be any further attribution in the hands of the assessee in India. In this regard, ld. Counsel of the assessee placed reliance on the ruling pronounced by the Authority of Advance Ruling (AAR) in the case of Morgan Stanley and Co. vs. DIT (International Taxation) (152 Taxman 1) which has been affirmed by the Hon'ble Apex Court in the case of DIT vs. Morgan Stanley and Co. Inc., 292 ITR 416. Similar findings have also been affirmed in the cases of Galileo International Inc. 224 CTR 251; B4U International Holdings Ltd. 137 ITD 346 (2012); and BBC Worldwide Ltd. 203 Taxman 554 (Delhi HC), SET Satellite (Singapore) vs. DDIT (International Taxation) 307 ITR 205 (Bom. HC). 17. Further, assessee's counsel submitted that there is no base erosion in this case. Submissions in this regard are as under :- "It is submitted that since Ariba India has retained majority of the revenues earned from the clients (around 88% to 97% from AY 2004-05 to AY 2011-12) and offered the same to tax in India in it inc....
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....the payer needs to have control over the equipment. If the payer merely receives a service without control or possession of the equipment, no royalty can arise. 27. To the same effect are the following decisions: * Director of Income-tax v. New Skies Satellite BY (2016) 382 ITR 114 (Del HC) * Yahoo India (P.) Ltd. v. DCIT 140 TTJ 195 (Mumbai) 28. It is submitted that at no point of time the control of equipment is exclusively granted to Ariba India or its clients. The observations of the CIT(A) @ para 49 of the Impugned Order for AYs 2004-05 to 2006-07) regarding control of the equipment by grant of access through userid and password is wholly erroneous. 29. Right to use would mean that the payee himself can put the equipment into service or can himself employ the equipment for the desired purpose. The payee must have control over the equipment and shall be able to put the equipment to use for any desired purpose. Reliance in this regard is placed on the decision of Mumbai ITAT in the case of Standard Chartered Bank v. DDIT [11 ITR (Trib.) 721]. 30. As it can be perused from the agreement and the factual position, there is no parting of any exclusive right by the assess....
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....at the appellant provided certain technical/ helpdesk services for smooth conduct of online auction market through technical and other personnel. The CIT (A) concluded that such service fall within the category of technical services/ included services (FTS) under section 9(1)(vii) of the Act and under Article 12 (4) (a) of the India-US DTAA. 35. It is submitted that the services provided by the Assessee are standardized/ common services which cannot be regarded as FTS under the Act. [Refer CIT v. Kotak Securities Ltd. [20I6] 383 ITR 1 (SC) (para 9] 36. Further, for FTS to arise under Article 12(4)(a) of the India-US DTAA, the Assessee has to make available technical know-how, skills or experience etc. to Ariba India. In order to satisfy the requirement of the "make available clause", the Hon'ble Karnataka High Court in the case of CIT v. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467 observed that technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service c....
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....9-10, 2010-11 and 2011- 12) held that the AO was not justified to tax notional income in the hands of the Assessee in absence of an adverse observations being made by the jurisdictional transfer pricing officer of Ariba India in this regard. The relevant part of the order of CIT (A) for AY s 2005-06 to 2006-07 wherein relief was granted to the Assessee is reproduced below for ready reference: "56. In the absence of adverse determination by the TPO, the AO was not justified in bringing to tax income over and-above what was actually paid. What can he taxed is the real income and not the notional income. Copy of the invoice and the copy of the ledger account of the assessee in the books of Ariba India was duly filed before the AO which reflected the payment actually made by Ariba India to the assessee. Therefore, it cannot be said that any amount over and above the actual payment accrued to the assessee. Therefore, only the actual payment was required to be taxed otherwise taxing the assessee on an amount over and above the actual payment would amount to double taxation of the same income i.e. once in the hands of Ariba India as already offered by it for taxation and secondly in the....
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....commercial decisions of a taxpayer. 47. Reliance in this regard is placed on the decision of the Hon'ble Pune ITAT in the case of GKN Holdings Plc v, DDIT [2015] 167 TTJ 408 (Pune - Trib.) wherein it was held that. unless an agreement is proved beyond doubt to be a colourable device. the Revenue cannot disregard such an agreement. Further, in the following decisions, it has been consistently held that a new agreement which differently governs the rights and obligations of the parties vis-a-vis the preceding agreement cannot be held to be a mere extension of the previous agreement: (a) Inspecting Assistant Commissioner vs General Electric Co. (32 ITO 538) (Mumbai ITAT): (b) DCIT v. Sulzer Bros (46 ITD 546) (Madras ITAT): (c) Leonhard Andra Und Partner. GmbH vs CIT (249 ITR 418) (Calcutta HC); (d) Income Tax Officer vs Chloride India Ltd. (75 ITD 69) (ITAT Calcutta - Special Bench) affirmed by Chloride Group PLC vs CIT (253 ITR 514) (Calcutta HC) 48. Ground No.8 for AY 2007-08: The Assessee humbly submits that the credit of taxes withheld and deposited on behalf of the assessee should be granted to it while determining its tax liability during AY 2007-08." 20. Per co....
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....est now, hence we are not engaging into the same. 24. Now, we refer to the issue whether receipt should be taxed as royalty within the meaning of Article 12(3)(b) of the India USA DTAA and also under Explanation 2(iva) to section 9(1)(vi). 25. The assessee's submission in this regard is that this payment was not received by the assessee for any use of commercial or scientific equipment, hence it cannot be in the nature of royalty under Article (12)(3)(b) of the DTAA and Explanation 2 (iva) of section 9(1)(vi) of the Act. Assessee's submission is that it is merely providing services to Ariba India and in the course of providing these online auction services, it provides access to the online auction platform. Hence, it is the plea of the assessee that such access does not entail providing a right to use the equipment owned by the assessee on which the online auction platform is maintained. It is further amply made clear that Hon'ble Courts have consistently held that if the contract is primarily for rendering services, the consideration thereof cannot constitute royalty merely for the reason that the services are being provided through use of equipment. In this regard, assessee has....
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....rming part of the database, the Assessee neither shares its own experience, technique or methodology employed in evolving databases with the users, nor imparts any information relating to them, thus the income earned by the Assessee cannot be taxed as royalty as per section 9(1)(vi) as well as Article 12C of the DTAA. 28. In the background of the aforesaid and following the precedents, we sustain the assessee's plea that it cannot be said that the receipts of the assessee from Ariba India can come within the purview of "royalty" as defined under Article 12(3) of the DTAA and the assessee has been merely providing services of conducting online auctions to Ariba India and no exclusive right to use the equipment / process has been granted in favour of either Ariba India or its customers in India to qualify as "royalty". 29. Further assessee has disputed the CIT (A)'s observation in the common order for AYs 2004-05 to 2006-07 that the assessee provided certain technical/ helpdesk services for smooth conduct of online auction market through technical and other personnel. In this regard, assessee's submission is that the services provided by the assessee are standardized/ common servic....