AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (12) TMI 1528
X X X X Extracts X X X X
X X X X Extracts X X X X
....M APPL. 79333/2025 (delay in refiling) in ITA 752/2025 3. For the reasons stated in the applications, the delay of 519, 517 & 520 days in re-filing the appeals are condoned. 4. The applications are disposed of. ITA 748/2025 ITA 749/2025 ITA 752/2025 5. These three appeals lay a challenge to a common order passed by the Income Tax Appellate Tribunal (Tribunal) dated 20.12.2023 in ITA nos. 4183/DEL/2013 (A.R. 2003-04), 5627/DEL/2014 (A.R. 2004-05) and 3408/DEL/2014 (A.R. 2006-07). 6. At the outset, Mr. Puneet Rai, SSC for the appellant states that the appeal against ITA 5627/DEL/2014 relatable to the Assessment Year 2004-05 may not have been filed because of low tax effect. 7. The Tribunal had allowed the appeals filed by the assessee and dismissed the appeal filed by the Revenue. Mr. Rai states that these appeals are confined to the conclusion drawn by the Tribunal in the appeals filed by the respondent/assessee. 8. The challenge in the appeals was primarily to the orders of the CIT (Appeals)-XI, New Delhi dated 05.03.2013 for the Assessment Year 2003-04, CIT (Appeals)-XXIX order dated 26.05.2014 for the Assessment Years 2004-05 and 2005-06 and DRP-1 order....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om India. For undertaking the activities as noted in paragraph 6, the Assessee has established marketing offices in various cities in the USA. 13. The submission on behalf of the respondent/Assessee is that in the assessment order dated 30.03.2006 framed under Section 143(3) of the Income-tax Act, 1961 (the Act), the Assessing Officer held that the Assessee had established a Permanent Establishment (PE) in India under Article 5 of the India-USA DTAA and under Section 9(1)(ii) of the Act, respectively, holding that its income was taxable in India for the years under consideration. 14. The Tribunal in paragraphs 10 onwards has come to the following conclusion : "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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er State of the same or similar kind as those effected through 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." 12. A perusal of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the enterprise through this fixed place of business. This usually means that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. 15. In our understanding, nature of fixed place of business is very much that of a physical location, i.e., one must be able to point to a physical location at the disposal of the enterprise through which the business is carried on. Understandably, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ship Ltd. vs. CIT (supra) and held that in order to ascertain as to whether an establishment has a fixed place of business or not is that such physically located premises have to be 'at the disposal' of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as 'at the disposal' of the enterprise when the enterprise has right to use the said place and has control thereupon. The AO has adopted a fundamentally 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness activities which are: ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. He was at great pains to point out the report of Deloitte Haskins and Sells dated 13th 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ution of cash benefits to program participants through ATMs and POS networks. As mentioned earlier, these are mostly located in USA. In any case, none was located in India. Software Products: eFunds US develops and sells electronic funds transfer software, Connex and Architect, used in electronic payment services to in-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 Net....
X X X X Extracts X X X X
X X X X Extracts X X X X
....heque is presented as payment at the point-of sale, SCAN members run the cheque through a scanner. The information on the cheque is then compared to the SCAN database to determine whether there have been payment problems with the cheque writer or his or her 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-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&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncluding maintenance of hardware and networks, installation of eFunds US electronic payment products and the integration of these products within the customer's existing information technology infrastructure. All of these hardwares, networks and information technology infrastructure 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 profess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....actual foundation laid to attract any of the said clauses contained in Article 5(4) of the DTAA. This aspect of the case, therefore, need not detain us any further. 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Yes Yes Employees of the Foreign entity (eFunds Corp) are seconded to Indian Entity (eFunds India) Yes Yes Foreign entity (eFunds Corp) is doing marketing work only and its contracts with clients are assigned, or subcontracted to Indian Entity (eFunds India) Yes Yes. Infact the appellant is undertaking much more work in the US The master services agreement between the American and the Indian entity gives complete control to the American entity in regard to personnel employed by the Indian entity Yes No It is only 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 No 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 cli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding financial advisory services, corporate lending and securities underwriting. It entered into an agreement with Morgan Stanley Advantage Services Pvt Ltd ('MSAS'), a wholly owned Indian subsidiary for providing certain support services to MSC. MSAS was set-up to support the main office functions in equity and fixed income research, account reconciliation and IT enabled services such as back office operations which are preparatory and auxiliary in nature, data processing and support centre to MSC pursuant to the aforesaid agreement. The Supreme Court held that one has to undertake 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 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se services to be performed by the deputationists deployed by MSCo and not on account of stewardship activities. As regards income attributable to the PE(MSAS) we hold that the Transactional Net Margin Method was the appropriate method for determination of the arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark-lup worked out at29% on the operating costs of MSAS. This position is also accepted by the Assessing Officer in his order dated 29-12-06 (after the impugned ruling) and also by the transfer pricing officer 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vance tax and nonpayment or short payment of such tax, have to be satisfied, after which interest can be levied taking into account the assessed tax. Therefore, section 209 of the Act which relates to the computation of advance tax payable by the assessee cannot be ignored while construing the contents of section 234B. As we have already held that prior to the financial year 2012-13, the amount of income-tax which is deductible or collectible at source can be reduced by the assessee while calculating advance tax, the Respondent cannot be held to have defaulted in payment of its advance tax liability. We uphold the view adopted in the impugned judgement 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 amoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Exl US to Exl India." 16. The Tribunal concluded that, it is not the case of Revenue that the employees of foreign enterprises furnished services in India. At least nothing has been brought on record by the Revenue to show that there was secondment of employees by Assesssee to Exl India. The findings of fact include that the service agreement shows that the foreign en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(after the impugned ruling) and also by the transfer pricing officer 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 Dep....