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2013 (11) TMI 564 - AT - Income TaxPermanent Establishment under Article 5 of the DTAA between India and U.S.A - Whether Appellant has a Permanent Establishment ('PE') in India under Article 5 of the DTAA between India and U.S.A - CIT(A) held that assessee has a fixed place PE in India - Held that - The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal. CIS was practically the projection of assessee's business in India and carried out its business under the control and guidance of the assessee and without assuming any significant risk in relation to such functions. Besides assessee has also provided certain hardware and software assets on free of cost basis to CIS - CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the DTAA are not satisfied - Thus, the findings of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the DTAA is upheld - Decided against assessee. Attribution of profits to the PE - Held that - The revenue of the assessee company cannot be considered as the revenue of the PE by any stretch of imagination. Furthermore the expenses incurred outside India are linked with the business activities of the assessee undertaken outside India for the functions performed outside India and are not linked to the PE of the assessee in India. - The attribution of profits to the PE should be made by the transfer pricing principles supported by the CBDT Circular No. 5 of 2004 as well as the judgment of the Supreme Court in Morgan Stanley 2007 (7) TMI 201 - SUPREME Court . - the charge for the employees seconded to CIS and employees visiting India to provide the technical services is subsumed in the transfer pricing analysis of CIS. Therefore, attribution can only be made on account of free of cost assets and software's provided by the assessee to CIS. - The assessee has submitted that it does not prepare India specific accounts, therefore the attribution of profits on the basis as disclosed in the transfer pricing study for assets and software cannot be accepted. Further, in the facts and circumstances of the case Profit Split method is not the correct method for attribution of profits to the PE of the assessee in India. Taxability of PeopleSoft license cost and maintenance charges - Held that - purchase of software would fall within the category of copyrighted article and not towards acquisition of any copyright in the software and hence the consideration should. not qualify as Royalty. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee - Decided in favour of assessee. Taxability of link charges as 'Equipment Royalty' - Held that - there is no transfer of the right to use, either to the assessee or to CIS. The assessee has merely procured a service and provided the same to CIS, no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. Therefore, it is held. that the said payments do not constitute Royalty under the provisions of Article 12 of the tax treaty - Decided in favour of assessee. Interest u/s 234B - Held that - The charging of interest is automatic under the Act if the assessee has defaulted in payment of advance tax. The income of the assessee was not liable for withholding tax under section 195 of the Act - assessee is liable to interest u/s 234B, as the income being assessed now cannot be held. to be income liable to TDS under Indian provisions. The same is being assessed in the hands of PEs who had not filed their return on the ground that this income was not attributed to Indian Business Connection. Provisions of section 234B are mechanical in nature - Decided against Assessee.
Issues Involved:
1. Permanent Establishment (PE) in India. 2. Attribution of profits to PE. 3. Taxability of PeopleSoft license cost and maintenance charges as "Royalty". 4. Taxability of link charges as "Equipment Royalty". 5. Levy of interest under sections 234B and 234D, and withdrawal of interest under section 244A. Detailed Analysis: 1. Permanent Establishment (PE) in India: Assessee's Appeal for A.Y. 2006-07: - The CIT(A) confirmed that the Appellant has a PE in India under Article 5 of the DTAA between India and the USA. - The CIT(A) upheld that the Appellant has a Fixed Place PE in India in terms of Article 5(1) and a place of management in India under Article 5(2)(a) of the DTAA. - The Appellant argued that it was only procuring services from India, thus falling within the exclusionary clause under Article 5(3) of the DTAA. Revenue's Appeal for A.Y. 2006-07: - The CIT(A) erred in holding that the assessee did not have a Dependent Agent PE in India through Convergys India Services Pvt. Ltd. (CIS). Tribunal's Decision: - The Tribunal upheld the CIT(A)'s finding that the Appellant has a Fixed Place PE in India under Article 5(1) and a place of management under Article 5(2)(a) of the DTAA. - The Tribunal rejected the Appellant's contention that it was merely procuring services from India and thus covered under the exclusionary clause of Article 5(3) of the DTAA. - The Tribunal agreed with the CIT(A) that the Appellant does not have a Dependent Agent PE in India as none of the conditions mentioned in Article 5(4) are satisfied. 2. Attribution of Profits to PE: Assessee's Appeal for A.Y. 2006-07: - The CIT(A) accepted the application of transfer pricing principles in determining the profits attributable to the alleged PE. - The CIT(A) recomputed and reduced the amount of profits attributable to the PE from Rs. 2,84,45,67,544 to Rs. 43,10,86,460. Revenue's Appeal for A.Y. 2006-07: - The CIT(A) erred in reducing the additions made by the AO on account of selling costs, profits earned, and attribution of total profit to the PE in India. Tribunal's Decision: - The Tribunal found the CIT(A)'s methodology more reasonable than the AO's, which was based on headcount. - The Tribunal concluded that no further profits can be attributed to the PE once an arm's length price has been determined for the Indian associated enterprise, which subsumes the functions, assets, and risk profile of the alleged PE. - The Tribunal adopted a 15% attribution of the profit retained by CMG in the US as reasonable for the Indian PE. 3. Taxability of PeopleSoft License Cost and Maintenance Charges as "Royalty": Assessee's Appeal for A.Y. 2006-07: - The CIT(A) upheld the AO's decision that PeopleSoft license cost and maintenance charges are taxable as "Royalty" under section 9(1)(vi) of the Act and Article 12 of the DTAA. Tribunal's Decision: - The Tribunal relied on the Delhi High Court's decision in Ericsson A.B., holding that the purchase of software falls within the category of copyrighted articles and not towards the acquisition of any copyright in the software. - The Tribunal concluded that the payment is in the nature of reimbursement of expenses and accordingly not taxable as "Royalty." 4. Taxability of Link Charges as "Equipment Royalty": Assessee's Appeal for A.Y. 2006-07 and A.Y. 2008-09: - The AO made an addition on account of link charges by stating they were taxable as "Equipment Royalty" in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. Tribunal's Decision: - The Tribunal held that the link charges do not qualify as "Equipment Royalty" in terms of Article 12 of the DTAA as there was no transfer of the right to use the equipment. - The Tribunal concluded that the payment is in the nature of reimbursement of expenses and accordingly not taxable. 5. Levy of Interest under Sections 234B and 234D, and Withdrawal of Interest under Section 244A: Assessee's Appeal for A.Y. 2006-07: - The CIT(A) upheld the levy of interest under sections 234B and 234D and the withdrawal of interest under section 244A. Tribunal's Decision: - The Tribunal held that the assessee is liable to interest under section 234B as the income being assessed now cannot be held to be income liable to TDS under Indian provisions. - The Tribunal dismissed the ground of appeal regarding the levy of interest under sections 234B and 234D and the withdrawal of interest under section 244A. Conclusion: - The Tribunal partly allowed the assessee's appeals for A.Y. 2006-07 and 2008-09 and dismissed the revenue's appeal for A.Y. 2006-07.
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