2015 (1) TMI 1156 - AT - Income Tax

Transfer pricing adjustment - attribution of profits to the Permanent Establishment - India-USA DTAA - Held that - Ld.CIT(A) s order on the proposition of PE deserves to be upheld. 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 palce 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. 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. Assessee has a fixed base Permanent Establishment in India. Addition on account of IPCL/link charges - Held that - 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 under Section 234 B - 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. In this case we have no option but to hold. that the 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.

Summary

Issues Involved:
1. Permanent Establishment (PE) in India.
2. Attribution of profits to the PE.
3. Taxability of International Private Leased Circuit (IPLC) charges as 'Equipment Royalty'.
4. Levy of interest under Section 234B of the Income Tax Act.

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The Tribunal upheld the Assessing Officer's (AO) determination that the assessee has a PE in India. The AO established that the employees of the assessee frequently visited the premises of Convergys India Services Pvt. Ltd. (CIS) to provide supervision, direction, and control over operations, thereby having a fixed place of business at their disposal. The Tribunal reiterated that CIS was practically the projection of the assessee's business in India, operating under the control and guidance of the assessee without assuming significant risk. This was consistent with the Tribunal's earlier decision for AY 2006-07 and 2008-09.

2. Attribution of Profits to the PE:
The Tribunal rejected the methodology adopted by the AO and the CIT(A), which considered the global revenue of the assessee to determine profits attributable to the PE. Instead, the Tribunal endorsed a transfer pricing approach, as supported by CBDT Circular No. 5 of 2004 and the Supreme Court's judgment in Morgan Stanley (292 ITR 416). The Tribunal directed that profits attributable to the PE should be computed by applying the global operating income percentage to the end-customer revenue from Indian operations, then reducing this by the profit before tax of CIS. The residual profit should then be attributed between the US and India, with a specific percentage allocated to the PE in India.

3. Taxability of IPLC Charges as 'Equipment Royalty':
The Tribunal ruled that IPLC/link charges are not taxable as 'Equipment Royalty' under Article 12 of the DTAA. The Tribunal noted that CMG/CIS did not have control or possession over the equipment used by the service providers. The assessee merely procured a service, and no part of the equipment was leased to CIS. This was consistent with the Tribunal's previous decisions and supported by various judicial precedents, including the Delhi High Court's ruling in Asia Satellite Telecommunications Co. Ltd. (332 ITR 340). The Tribunal also accepted the assessee's contention that these payments were in the nature of reimbursement of expenses and thus not taxable.

4. Levy of Interest under Section 234B:
The Tribunal held that the assessee is liable for interest under Section 234B of the Income Tax Act. The Tribunal reasoned that the income of the assessee was not liable for withholding tax under Section 195, and thus, the assessee was required to pay advance tax. The Tribunal noted that the provisions of Section 234B are mechanical in nature, and the assessee's failure to pay advance tax warranted the levy of interest.

Conclusion:
The appeal was allowed in part. The Tribunal upheld the existence of a PE in India and the methodology for attributing profits to the PE. It ruled that IPLC charges are not taxable as 'Equipment Royalty' and confirmed the levy of interest under Section 234B. The decision was pronounced in the open court on 28th January 2015.