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2024 (1) TMI 308 - AT - Income TaxPE in India - Income taxable in India or not? - scope of Article 5 of the DTAA between India and the United States of America and u/s 9(1)(ii) of IT Act - scope of fixed place of business - HELD THAT - The business profits arising to a US enterprise shall be taxable in India, only if the US enterprise has a PE in India, meaning thereby, that if there is no PE in India, no part of the business profit arising to the US enterprise is taxable in India. Nature of fixed place of business is very much that of a physical location, i.e., one must be able to point to a physical location at the disposal of the enterprise through which the business is carried on. Understandably, the fixed place of business need not be owned or leased by the foreign enterprise, provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. This means that a fixed place of business should satisfy, amongst others, the power of disposition test to qualify as PE under Article 5(1). The core business of the foreign enterprise should be conducted through the place of business which means that there should be a nexus between the place of business and carrying on of business. Supreme Court in the case of Formula One World Championship Ltd 2017 (4) TMI 1109 - SUPREME COURT after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, international tax jurisprudence observed that in terms of Article 5(1) of the India-UK Tax Treaty, a fixed place PE is constituted in India, if the following twin conditions are satisfied viz, (i) Existence of a fixed place of business at the disposal of the foreign enterprise in India; (ii) through which the business of the foreign enterprise is wholly or partly carried on. On the issue of fixed place of business , we find that the facts considered by the Hon'ble Supreme Court in the case of eFunds IT Solution and Ors 2017 (10) TMI 1011 - SUPREME COURT are pari materia same as that of the assessee. We are of the considered view that it is not the case of the Revenue that the employees of foreign enterprises furnished services in India - Nothing has been brought on record by the Revenue to show that there was secondment of employees by Exl US to Exl India. A perusal of the Service Agreement shows that foreign enterprise i.e. Exl US is doing marketing work only and its contracts with clients are assigned or sub-contracted to Indian entity i.e. Exl India. PE being Agency PE - In our understanding, an Agency PE is constituted where a person, other than an agent of an independent status, is acting on behalf of a US enterprise in India and such person has authority to conclude contracts on behalf of the US enterprise and such authority habitually secures orders in India wholly or almost wholly for the foreign enterprise. On the facts of the case in hand, such conditions are absent, as Exl India has no authority to conclude any contract on behalf the US enterprise and all customers are based out of US and none of it is present in India. Exl India is merely a work contract to it by the assessee and core activities such as key management functions, such as, development of strategy, identifying new business areas, guidance to the group, sales and marketing, contract negotiation and conclusion, and customer relationship management are managed by the assessee from outside India. Merely because the assessee owns 100% of share capital of EXl India does not have effect or consequence of EXL India becoming the PE of the assessee in India. The assessee being the major shareholder of EXL India, it has the legal right to nominate a director on the Board of EXL India and merely because the assessee has nominated a director on the Board of EXL India would not mean that the assessee has a Place of Management in India. Considering the facts in totality in light of the decision of the Hon'ble Supreme Court in the case of eFunds IT Solution and Ors 2017 (10) TMI 1011 - SUPREME COURT and Morgan Stanley Co. Inc 2007 (7) TMI 201 - SUPREME COURT , we are of the considered view that the assessee does not have a fixed place PE in India, Service PE in India and dependent Agent PE in India. Therefore, no profit is attributable as no business connection has been established under Article 5 of the DTAA between India and the US. For the sake of completeness, in respect of attribution of income to the PE, the Hon'ble Supreme Court in the case of Morgan Stanley Co. Inc 2007 (7) TMI 201 - SUPREME COURT has held that if the transactions between the PE and the foreign Associated Enterprise are found to have taken place at arms length prices, then there is no question of attributing any income to the PE. Levy of interest u/s 234A is consequential and the Assessing Officer is directed to charge interest as per provisions of law. Interest u/s 234B - The assessee being a non-resident, tax is deductible at source u/s 195 of the Act from the payments made to the assessee. Therefore, no advance tax was payable as per the provisions of section 208 r.w.s. 209 of the Act. Therefore, the assessee had no liability for payment of advance tax. Provisions of section 234B are not applicable.. Though the Finance Act, 2012 has amended the relevant provisions, but the said amendment is w.e.f. 01.04.2012 and not applicable for the years under consideration.
Issues Involved:
1. Permanent Establishment (PE) in India 2. Attribution of Income to PE 3. Levy of Interest under Sections 234A, 234B, and 234C Summary: 1. Permanent Establishment (PE) in India: The core issue was whether the assessee, a company incorporated in Delaware, USA, had a Permanent Establishment (PE) in India under Article 5 of the DTAA between India and the USA. The Assessing Officer (AO) argued that the assessee had established a PE in India because: - The entire activity for performance of the contract was undertaken in India. - Marketing jobs were done by employees of Exl India, yet the major portion of profits was retained by the assessee. - The assessee and Exl India were essentially one and the same, with Exl India being a fixed place of business for the assessee. - The facilities in India were at the disposal of the assessee. - The CEO signed contracts on behalf of both entities, indicating control and management by the assessee. The Tribunal, referring to the Supreme Court's decisions in Formula One World Championship Ltd. and eFunds IT Solution and Ors, concluded that the assessee did not have a fixed place PE, Service PE, or dependent Agent PE in India. The Tribunal emphasized that: - The Indian entity only rendered support services, which did not constitute a fixed place PE. - There was no secondment of employees by the US entity to the Indian entity. - The Indian entity had no authority to conclude contracts on behalf of the US entity. - All clients were located outside India, and the Indian entity was remunerated on an arm's length basis, accepted by the TPO. 2. Attribution of Income to PE: The Tribunal held that if transactions between the PE and the foreign Associated Enterprise are at arm's length prices, no further profits would be attributable to the PE. This principle was upheld by the Supreme Court in Morgan Stanley & Co. Inc. The Tribunal concluded that since the Indian entity was remunerated on an arm's length basis, no further income was attributable to the PE. 3. Levy of Interest under Sections 234A, 234B, and 234C: The Tribunal directed the AO to charge interest as per the provisions of law. However, it held that the assessee, being a non-resident, was not liable for advance tax under Section 195 of the Act. Therefore, the provisions of Section 234B were not applicable. This position was supported by the Supreme Court's decision in Mitsubishi Corporation. Conclusion: The appeals of the assessee were partly allowed for statistical purposes, and the Revenue's cross-appeal was dismissed. The Tribunal directed the CIT(A) to decide on the grievance related to Ground No. Q and confirmed that the TP adjustments made by the TPO were deleted in the hands of Exl India.
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