2014 (2) TMI 442 - HC - Income Tax

Business Connectioin - India-US DTAA - dependency test - Held that - The assessees have business connection in India, but the tribunal has given a wide and broad meaning to the term business connection‖ and what is attributable and taxable as business connection‖ has not been adjudicated and decided. This is because both the Assessing Officer and the assessees have proceeded that in terms of Section 90(2) of the Act, provisions of the DTAA were more beneficial to the assessee. Existence of PE in India - Mutual Agreement Procedure (MAP) - Held that - The MAP procedure and agreement, is no doubt relevant but cannot be determinative or the primary basis to decide whether the assessee had PE in India. - Conditions of Articles 5(4) are not satisfied in the present case. It is not the case of the Revenue that e-Fund India was authorized and habitually exercised authority to conclude contract or was maintaining stock or merchandise from which it delivered goods or merchandise on behalf of the assessee or secured orders on behalf of the assessee. Therefore, the conditions and requirements of subclauses (a), (b) and (c) to Article 5(4) are not satisfied. - assessees did not have permanent establishment in India The transactions between the assessees and e-Fund India were at arm s length and were taxed on arm s length principle. There was no allegation or considered finding of the tribunal that the transactions were not in ordinary course of business. In these circumstances, even otherwise requirements of Article 5(5) are not satisfied in the present case. Real and intimate connection must exist between operations carried out in India and business by nonresident outside India, and profits of business outside India attributed to operations carried out in India, can be only subjected to tax. This is clear from the explanation to Section 9(1)(i) and only such income operations carried out in India have to be attributed and taxed. When DTAA and provisions of the Act apply to an assessee, then the Article of DTAA or the provision of the Act will apply depending upon, which one of the two is more beneficial or advantageous to the assessee. Reassessment u/s 147 - Held that - non communication of reasons to believe was inconsequential and did not prejudice the assessee. Tribunal has on examining the original records came to a factual finding giving cogent reasons, why reasons to believe were in fact recorded before issue of notice. Challenge to the proceedings under Section 147/148 of the Act is therefore, rejected.

Issues Involved:
1. Justification of reopening the assessment under Section 147/148 of the Income-Tax Act.
2. Determination of business connection in India under Section 9(1) of the Act.
3. Existence of a permanent establishment (PE) in India under Articles 5(1), 5(2)(l), and 5(4) of the India-US DTAA.
4. Attribution and assessment of income of eFunds International India Pvt. Ltd. in the hands of the appellant.
5. Correctness of the formula adopted by the Tribunal for computation of profit attributable to a PE.
6. Liability of the appellant to interest under Section 234A and 234B of the Act.

Detailed Analysis:

1. Justification of Reopening the Assessment under Section 147/148 of the Income-Tax Act:
The court held that the notices under Section 147/148 were valid and as per law. The assessees had not filed returns of income and were not subjected to regular assessment under Section 143(3). The initiation of proceedings was justified as the reasons recorded were not based on gossip, rumor, or mere suspicion. The reassessment proceedings were initiated after the assessment orders for the assessment year 2003-04 were passed, and the MAP procedure was adopted, partially taxing the income of the assessees in India.

2. Determination of Business Connection in India under Section 9(1) of the Act:
The court affirmed that the assessees had a business connection in India. The term "business connection" was interpreted broadly, but what is attributable and taxable as "business connection" was not adjudicated. The e-Funds India provided information and details to the assessees in the USA for entering into contracts with third parties, which were performed fully or partly by e-Funds India. The court emphasized that only income reasonably attributed to operations carried out in India can be taxed under the Act.

3. Existence of a Permanent Establishment (PE) in India under Articles 5(1), 5(2)(l), and 5(4) of the India-US DTAA:
The court concluded that the assessees did not have a permanent establishment in India under Articles 5(1), 5(2)(l), and 5(4) of the DTAA. The tribunal and authorities erred in treating employees of e-Fund India as employees of the assessees for determining whether a service PE under Article 5(2)(l) was created. The court found no material or relevant discussion to hold that the two assessees had a fixed place of business in India through which the business of the enterprise was wholly or partly carried on.

4. Attribution and Assessment of Income of eFunds International India Pvt. Ltd. in the Hands of the Appellant:
The court held that no income of e-Funds India could be attributed and assessed in the hands of the assessees. The transactions between the assessees and e-Fund India were at arm's length and were taxed on an arm's length principle. There was no allegation or considered finding that the transactions were not in the ordinary course of business.

5. Correctness of the Formula Adopted by the Tribunal for Computation of Profit Attributable to a PE:
The court found that the tribunal's method for estimating the profits attributable to the PE was more scientific and equitable. The tribunal's approach corrected an apparent error in the method adopted by the Assessing Officer, which was based on the MAP proceedings. The tribunal's method included determining the proportion of Indian assets to global assets, working out total profits attributable to India, and then deducting the e-Funds India International assessed profits to arrive at the surplus profits attributable to the Indian PEs of both assessees.

6. Liability of the Appellant to Interest under Section 234A and 234B of the Act:
This question was not addressed as the court found that the assessees did not have taxable income in India.

Conclusion:
The court disposed of the appeals, holding that the assessees did not have a permanent establishment in India and no income of e-Funds India could be attributed to the assessees. The tribunal's method for computing the profits attributable to the PE was upheld as fair and equitable. The reopening of assessments under Sections 147/148 was valid. The court emphasized that only income reasonably attributed to operations carried out in India can be taxed, affirming the broader interpretation of "business connection" under Section 9(1) of the Act.

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