AI Drafter 
TaxTMI 
TaxTMI 
2022 (10) TMI 762
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....rring to grounds of appeal in ITA No.4582/Del/2010 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....
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....s Global Market Operations Centres ('GMOC') located outside India. In India, the assessee provides such services to Ariba India 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 recei....
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....O). 8. Proceedings before the AO for AY 2007-08 Similar to AY 2004-05 to 2006-07, the AO passed an assessment order for A Y 2007-08 wherein 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. Procee....
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....ither under the control of the Assessee nor it receives any detailed instructions from the Assessee to conduct its business activities. Thus, it cannot be held to be a dependent 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 ....
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....rections in this regard by the ITAT. No transfer pricing adjustments were for AYs 2005- 06 to 2009-10. Further, for AYs 2010-11 to 2011-12, the matter was remanded back to the TPO by the ITAT with such directions which will result in deletion 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. Subm....
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....e royalty for use of transponders inside the satellite. 26. Subsequently, the AAR adopted the position laid down in Asia Satellite (supra) in the case of ISRO Satellite Centre (ISAC), in re (2008) 307 ITR 59, wherein, it was held that for equipment royalty to arise, 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 p....
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....rocess has been granted in favour of either Ariba India or its customers in India. Services provided by the Assessee are standardized/ common services which cannot he characterized as fee for technical/ included services 34. Further, the CIT (A) grossly erred in observing at Para 54 of the Impugned Order for AYs 2004-05 to 2006-07 that 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 Cou....
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....ssessed notional income equal to Rs.8,96,33,341 (i.e. 45% of the gross payments (Rs.19,91,85,203) received by Ariba India) in the hands of the Assessee. The AO also disregarded the Amended Agreement citing that in substance, the business model and terms of the Amended Agreement and Original Agreement remained the same. 42. It is submitted that the CIT (A) for the other AYs (i.e. AYs 2005-06, 2006-07, 2008-09, 2009-10, 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 a....
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....as it is an independent legally enforceable agreement. The parties involved (i.e. Ariba India and the Assessee) agreed to a new understanding which culminated into the Amended Agreement. Accordingly, the terms and conditions of the Amended Agreement would govern the rights and obligations of the parties. The Assessee can manage its affairs within the framework of the statute. It is a settled position of law that the revenue authorities cannot interfere in the business/ 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. Sulze....
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.... In such a situation, the decision 0.r Hon'ble Apex Court as above applies on all fours in these cases. 22. In the background of the aforesaid discussion and the precedents, we hold that it is undisputed that in the assessment of the AE, the transfer pricing adjustments do not survive. Hence, attribution of income to the alleged PE is not sustainable. Hence, we decide this ground in favour of the assessee. 23. Since we have allowed without prejudice ground, the issue whether AE is DAPE is only of academic interest 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....
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....r only avails a service and pays for it. The assessee has merely conducted online auction on its platform and at all times, the control on process and information etc. remains with the assessee. The other case laws referred by the ld. Counsel for the assessee hereinabove are also germane and support the case of the assessee. In this regard, we may also refer to the decision of Salesforce.com Singapore Pte vs The Dy DIT Circle 2(2) International Taxation, Delhi TS-222-ITAT-2022(DEL) wherein ITAT held that by granting access to the information forming 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 onl....
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....ame to tax in India in its income tax returns for each of these years, only a miniscule percentage of the revenues (around 3% to 12.50%) have been paid to Ariba Inc. This clearly shows that there has been no base erosion in terms of taxes to be paid in India by the relevant parties. Hence, we agree that there is no base erosion on account of non-taxability of the assessee. 32. Another point is the notional income confirmed by the ld. CIT (A) for AY 2007-08. For AY 2007-08, assessee has received Rs.2,61,04,811 as per the Amended Agreement. However, the AO assessed notional income equal to Rs.8,96,33,341 (i.e. 45% of the gross payments (Rs.19,91,85,203) received by Ariba India) in the hands of the assessee. The AO also disregarded the Amended Agreement citing that in substance, the business model and terms of the Amended Agreement and Original Agreement remained the same. In this regard, the submission of the assessee is that the above is in contradiction to the order of ld. CIT (A) for AYs 2005-06, 2006-07, 2008-09, 2009-10, 2010-11 and 2011-12) wherein it was held that the AO was not justified to tax notional income in the hands of the assessee in absence of an adverse observati....