TaxTMI 
TaxTMI 
2024 (1) TMI 308
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....g facts are common in the appeals of the assessee and cross appeal of the Revenue and pertain to same assessee, they were heard together and are disposed of by this common order for the sake of convenience and brevity. 3. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. Relevant judicial decisions considered wherever necessary. 4. Facts of the case are that the assessee is a company incorporated under the laws of Delaware, USA and its primary business is to develop and deploy business process outsourcing solutions including transaction processing services and Internet/ voice-based customer care services for its clients. The assessee is stated to be providing such services to customers located in the United States of America and the United Kingdom. The parent company of the group as on 31.03.2002 was Conseco Inc., which held 100% of the paid-up capital of Exl, USA on 31.03.2002. Exl. Inc performs sales and marketing function, contract negotiations and conclusion of contracts and customer relationship management. 5. Exl India has en....
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....ad established a Permanent Establishment [PE] in India under Article 5 of the DTAA between India and the United States of America u/s 9(1)(ii) of the Act, respectively holding that its income was taxable in India for the years under consideration. 10. We have given thoughtful consideration to the impugned assessment order. In our understanding, the Assessing Officer has based his finding on the following points, which have also been highlighted by the ld. DR during the course of his submissions: (i) The entire activity for performance of the contract was undertaken in India and even though the assessee did not have much role to play in securing the contract and no role in its performance, it retained substantial portion of revenue earned by the performance of contract from Indian set up. (ii) Marketing job was done by employees of Exl, India but still the major portion of profits was retained by the assessee. (iii) The assessee and Exl India were nothing but one and the same, as the primary activity of the assessee is carried out by the Indian company and facilities of Exl India was a fixed place of business for the assessee. (iv) The assessee....
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....terprise 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." 12. A perusal of the above shows that the business profits arising to a US enterprise shall be taxable in India, only if the US enterprise has a PE in India, meaning thereby, that if there is no PE in India, no part of the business profit arising to the US enterprise is taxable in India. 13. Article 5 of the treaty defines PE as under: "ARTICLE 5: Permanent establishment - 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of busin....
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....ss 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 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 the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph ; (b) he has no such authority but habitually maintains in the first mentioned State a stock of goods or merchandise from wh....
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....erstandably, the fixed place of business need not be owned or leased by the foreign enterprise, provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. 16. This means that a "fixed place of business" should satisfy, amongst others, the "power of disposition" test to qualify as PE under Article 5(1). The 'core business' of the foreign enterprise should be conducted through the place of business which means that there should be a nexus between the place of business and carrying on of business. 17. The Supreme Court in the case of Formula One World Championship Ltd 394 ITR 80 after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, international tax jurisprudence observed that in terms of Article 5(1) of the India-UK Tax Treaty, a fixed place PE is constituted in India, if the following twin conditions are satisfied viz, (i) Existence of a fixed place of business at the disposal of the foreign enterprise in India; (ii) through which the business ....
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....damentally erroneous approach in saying that the US companies were contracting with a 100 per cent subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. e-Funds India was a separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayers. Indian entity i.e. subsidiary company will not become location PE merely because there is interaction or cross transactions between the Indian subsidiary and the foreign company. Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place PE. On the issue of constitution of service PE, the Supreme Court held that the requirement of Article 5(2)(l) of the India US Tax Treaty is that an enterprise must furnish services 'within India' through employees or other personnel. Since none of the customers of the assessees are located in India or have received any services in India, therefore, the question of constitution of service PE does not arise since the foreign company is not rendering any services to any cu....
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.... 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: The only involvement of eFunds India was responding to queries raised by the customers, if they faced any difficulty in operation of their transaction which was part of activity (d) referred above. (b) Electronic Payment Management eFunds US's Ele....
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....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 primarily by financial institutions in Europe (there is one customer in Chicago). This software runs on IBM and Tandem computing platforms. All of them were located outside India. In accordance with the terms of the contract with Government Agencies, eFund....
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.... to more than 17 million closed-for cause 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 Customer interface and agreement/contracts with the customers were entered into by eFunds US. All risks and responsibilities for performance of contracts at all times were of eFunds US only. All eFunds risk management services are based on, or enhanced by eFunds' proprietary Debit....
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....formation 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 follow up payment; and Responding to inbound calls from customers from dealers/customers of telecom services providers (who are customers of eFunds US), to check on the status of applications made for new connections, change in billing plans etc. Note: Logica Global, an....
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....s 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 also issued by CBDT. This is the key question which arises for determination in these civil appeals. (at page 25) ** ** ** 35. 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 have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of the IT Act. All provisions of the IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set-off losses, etc. However, deviations are made by DTAA in cases of royalt....
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....ly through the proprietary database and software of Foreign entity (eFunds Corp), that Indian Entity (eFunds India) carries out its functions for Foreign entity (eFunds Corp Yes Yes Indian Entity (eFunds India) provides management support and marketing support services to Foreign entity (eFunds Corp) group companies outside India. Yes No. The Indian entity only provide back office and BPO related services. Place of business of the Indian entity is not at the disposal of the US company Yes Yes Indian entity is not negotiating and concluding contracts on behalf of the foreign parent company Yes Yes All the clients to whom services are rendered are located outside India Yes Yes The Indian entity has been remunerated on an arm's length basis which has also been accepted by the TPO. Accordingly, no further attribution to be made to India Yes Yes 21. On understanding the facts mentioned hereinabove, we are of the considered view that it is not the case of the Revenue that the employees of foreign enterprises furnished services in India Nothing has been brought on record by the Revenue to show that there was secondment of employees by ....
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....ake a factual and functional analysis of each of the activities performed by an enterprise to determine whether a PE has been constituted. On the basis of such an analysis, it was concluded that the activities performed by its subsidiary in India were only back office operations. Consequently, the second part of Article 5(1) (i.e. business activities of an enterprise are carried out wholly or in part through the fixed place) of the treaty was not satisfied and there was no fixed place PE in India. The Court further held that MSAS does not constitute an agency PE since MSAS does not have any authority to enter into or conclude the contracts on behalf of MSC in India. However, since MSC is rendering services through its employees to MSAS, therefore, service PE of MSC is constituted in India. 27. There is no dispute that no part of the business premises of Exl India has been made available to the assessee for its use. Even the Assessing Officer has not placed any material on record to show that the assessee had a right to use any part of the business premises of Exl India to carry on its own business activities. Moreover, Exl India is merely a work contract to it ....
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....er vide order dated 22- 09-06. As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represents the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost? Therefore, the Department has to determine income, expense or cost allocations havi....
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....dgement of the Delhi High Court in Civil Appeal No. 1262 of 2016 as well as by the Madras High Court in the Madras Fertilizers Ltd. case (supra), that the Revenue is not remediless and there are provisions in the Act enabling the Revenue to proceed against the payer who has defaulted in deducting tax at source. There is no doubt that the position has changed since the financial year 2012-13, in view of the proviso to section 209(1)(d), pursuant to which if the assessee receives any amount, including the tax deductible at source on such amount, the assessee cannot reduce such tax while computing its advance tax liability." 37. Though the Finance Act, 2012 has amended the relevant provisions, but the said amendment is w.e.f. 01.04.2012 and not applicable for the years under consideration. 38. As a result, the appeals of the assessee are allowed in part for statistical purposes. 39. Before closing, wherever the TPO has made adjustments while determining the ALP, the said TP adjustment has been deleted by this Tribunal in the case of Exl Service India Pvt ltd. Copies of the decision of the co-ordinate bench are placed at pages 357 to 480 of the Paper Book. Since the TP adjustm....