2010 (9) TMI 720 - AT - Income Tax

DTAA between India and USA - Income escaping assessment - Addition - Competent authorities have considered the fact that it is a case of e-commerce, where business may be transacted on global basis through various tax jurisdiction and income may be earned in various jurisdiction even though theoretically a case can be argued that conditions mentioned in article 5 of the DTAA are not be fulfilled as they relate only to conventional business and not e-commerce - MAP resolution is to be viewed as an application of the DTAA to an e-commerce environment, where the literal application of article 5 may not lead to a correct representation of the taxing rights of the two tax jurisdiction - Appellants have not been able to point out any change in the business model as compared to these MAP assessment years it is clear that the Appellants have a PE in India in accordance with the above analysis and MAP resolution - It shall be pertinent here to indicate that the whole exercise is to ascertain the effect of assessees business connections in India in terms of profits, which are attributable This methodology/ formula will be more helpful in arriving at the reasonably correct amount of attributable income, being comparatively just, fair and equitable - law is very clear that Sec. 195(1) is applicable to a person who pays any amount by way of income to non-resident. In assessees case the revenue has been recognized in India by eFunds India International - how the balance income, which should have been recognized in India can become liable to TDS in India - the assessee is liable to interest u/s 234A & B, as the income being assessed now cannot be held to be income liable to TDS under Indian provisions Provisions of sections. 234A & B are mechanical in nature, as held by Hon bleble Supreme Court in the case of Anjuman Ghaswala 252 ITR - In the result, assessees appeals are partly allowed for statistical purposes. Revenue s appeals are allowed

Issues Involved:

1. Validity of proceedings under Section 147/148 of the Income Tax Act.
2. Existence of Permanent Establishment (PE) in India.
3. Attribution of profits to the PE.
4. Levy of interest under Sections 234A and 234B of the Income Tax Act.
5. Method of computation of attributable profits (Revenue's appeal).

Detailed Analysis:

1. Validity of Proceedings under Section 147/148:

The Assessing Officer (AO) reopened the assessments for various years based on the belief that the appellant had a business connection in India and a Permanent Establishment (PE), leading to income escaping assessment. This belief was formed using information from annual reports and previous assessments. The court held that the AO had sufficient material to form a "reason to believe" that income had escaped assessment, fulfilling the requirements of Section 147. The court also noted that the reasons recorded were communicated to the assessee, and any procedural lapses were curable and not fatal to the reassessment proceedings.

2. Existence of Permanent Establishment (PE) in India:

The court analyzed the business model and operations of the appellant and its subsidiary, eFunds India. It was found that eFunds India provided various services to the appellant under different agreements, and the appellant had significant control over the operations in India. The court held that the appellant had a PE in India under Article 5(1) and 5(2)(i) of the India-USA Double Taxation Avoidance Agreement (DTAA). The court also relied on the Mutual Agreement Procedure (MAP) resolution, which, although not binding for other years, indicated the existence of a PE.

3. Attribution of Profits to the PE:

The court examined the methodology adopted by the AO and the MAP authorities for attributing profits to the PE. It was found that the MAP resolution provided a reasonable basis for computation. The court directed that the profits attributable to the PE should be calculated by determining the proportion of Indian assets to global assets, including the assets of eFunds India, and then applying this proportion to the global profits. The profits of eFunds India should be deducted from the total profits attributable to India to avoid double taxation.

4. Levy of Interest under Sections 234A and 234B:

The court held that the levy of interest under Sections 234A and 234B was justified as the income being assessed was not subject to tax deduction at source (TDS) under Indian provisions. The court noted that the provisions of Sections 234A and 234B are mandatory and mechanical in nature, as held by the Supreme Court in the case of Anjuman Ghaswala.

5. Method of Computation of Attributable Profits (Revenue's Appeal):

The court addressed the Revenue's appeal regarding the method of computation of attributable profits. The CIT(A) had directed the AO to adopt the original cost basis for determining the ratio of Indian assets to global assets instead of the depreciated cost. The court upheld the AO's method of using the depreciated cost of assets, as it provides a more practical and fair basis for determining the income-generating capacity of the assets.

Conclusion:

The appeals were partly allowed for statistical purposes, with directions to the AO to recompute the attributable profits using the revised methodology. The Revenue's appeals were allowed, and the AO's method of using the depreciated cost of assets was upheld. The court found that the appellant had a business connection and a PE in India, and the levy of interest under Sections 234A and 234B was justified.

← Previous Next →