2012 (9) TMI 807 - AT - Income Tax

Indo-Swiss DTAA - assessee a Swiss company operated India specific websites providing an online platform for facilitating the purchase and sale of goods/services to users in India - entered into a Marketing Support Agreement with eBay India and eBay Motors which are eBay group companies in connection with its India specific websites - assessee contended that such revenue from the operations of its websites was not taxable as business profits as per Article 7 of the Indo-Swiss DTAA since it did not have a PE in India as per Article 5 AO contended that assessee had connection in India as eBay India and eBay Motors were group companies rendering services to it and the entire income of Indian companies was derived from such services and accordingly held income to be taxable as Fee for Technical Services CIT(A) however in the absence of the assessee furnishing any supporting evidence to prove the genuineness of the claim of expenses invoked Rule-10 and held that 10% of the revenue to be taxed as business profits. The term managerial services refers to managing certain affairs a quid pro quo for which will be described as fees for technical services. Assessee becomes entitled to the user fee when there is a successful completion of sale between the buyer and seller through its website. The assessee s websites are analogous to a market place where the buyers and sellers assemble to transact. By providing a platform for doing business the assessee can by no standard be considered as having rendered any managerial services either to the buyer or to the seller for which it received fee from the seller hence it is in nature of Business profits . There is no dispute about the fact that eBay India and eBay Motors are providing their exclusive services to the assessee. It has been fairly admitted that these two entities have no other source of income except that from the assessee in lieu of the provision of service as set out above. In view of the fact that eBay India and eBay Motors are exclusively assisting the assessee in carrying on business in India they definitely become dependent agents of the assessee. The next question however is whether or not these dependent agents constitute permanent establishments of the assessee as per conditions of Article 5(5). Clause (ii) of Article 5(5) has no application in this case because there is no requirement on the part of eBay India or assessee to maintain any stock of goods or merchandize on behalf of the sellers. Clause (iii) is also not applicable since eBay Motors is not required to manufacture or process the goods or merchandise on behalf of the assessee. As per Clause (i) it is to be seen whether eBay India and eBay Motors do or habitually exercise an authority to negotiate and enter into contracts for or on behalf of the assessee. Simply by providing marketing services to the assessee or making collection from the customers and forwarding the same to the assessee it cannot be said that eBay India entered into contracts on behalf of the assessee. Neither there is any mention in the assessment order nor the Revenue has specifically pointed out towards any contract entered into by eBay India or eBay Motors during the discharge of their functions or otherwise for or on behalf of the assessee. Thus the test laid down as per clause (i) of Article 5 (5) also fails in the present case. Therefore though eBay India and eBay Motors are dependent agents of the assessee but do not constitute Dependent agent PEs of the assessee in terms of Article 5. Further these concerns cannot be treated as the PEs of the assessee in terms of Article 5(2)(a) of the DTAA. Since the assessee has no PE as per Article 5 there can be no question of computing business profits of the assessee as per Article 7 in relation to the revenue generated from India Decided in favor of assessee

Summary

Issues Involved:
1. Classification of revenue as 'Fee for technical services' or 'Business profits'.
2. Existence of a Permanent Establishment (PE) in India.
3. Attribution of income to the Indian operations.

Detailed Analysis:

1. Classification of Revenue as 'Fee for Technical Services' or 'Business Profits':
The primary issue was whether the revenue earned by the Swiss company (assessee) from its Indian operations should be classified as 'Fee for technical services' under section 9(1)(vii) of the Income-tax Act, 1961, or as 'Business profits' under Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland.

The Assessing Officer (AO) initially classified the revenue as 'Fee for technical services' based on Explanation 2 to section 9(1)(vii) of the Act. However, the CIT(A) and the Tribunal held that the revenue earned by the assessee from its Indian operations was in the nature of 'Business profits' and not 'Fee for technical services'. The Tribunal noted that the assessee's revenue was derived from user fees charged to sellers upon successful sales through its website, which did not involve rendering any managerial, technical, or consultancy services. The Tribunal concluded that the revenue could not be classified as 'Fee for technical services' but as 'Business profits'.

2. Existence of a Permanent Establishment (PE) in India:
The next issue was whether the assessee had a Permanent Establishment (PE) in India through its group companies, eBay India and eBay Motors.

The AO, in the remand report, and the CIT(A) held that the assessee had a dependent agent PE in India under Articles 5(5) and 5(6) of the DTAA. However, the Tribunal analyzed the functions performed by eBay India and eBay Motors, which were mainly marketing support services, payment processing, and customer support. The Tribunal found that these entities did not have and habitually exercise authority to negotiate and enter into contracts on behalf of the assessee, nor did they maintain a stock of goods or merchandise for the assessee. Consequently, the Tribunal concluded that eBay India and eBay Motors, although dependent agents, did not constitute a dependent agent PE under Article 5 of the DTAA.

The Tribunal also rejected the argument that eBay India and eBay Motors could be considered as the assessee's 'Place of management' under Article 5(2)(a) of the DTAA, as they were only providing market support services and were not involved in the overall management of the assessee's business.

3. Attribution of Income to Indian Operations:
Since the Tribunal held that the assessee did not have a PE in India, the provisions of Article 7 of the DTAA, which deals with the taxation of business profits attributable to a PE, were not applicable. As a result, the Tribunal overturned the CIT(A)'s decision to attribute 10% of the gross revenue as taxable business profits in India.

Conclusion:
The Tribunal allowed the assessee's appeal by holding that the revenue earned from its Indian operations was 'Business profits' and not 'Fee for technical services'. It further concluded that the assessee did not have a PE in India, and therefore, no part of the revenue could be taxed in India under Article 7 of the DTAA. Consequently, the Tribunal ordered the deletion of the addition sustained by the CIT(A). The appeal of the Revenue was dismissed.