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2016 (3) TMI 370 - AT - Income TaxBusiness connection in India - Existence of Fixed PE In India and service PE In India - Whether assessee has a dependent agent PE is India? - Held that - In this case assessee company secures orders on behalf of the Indian company and outsources the job to Indian company. There is a continuous relationship between the assessee company and its affiliates and subsidiary company in India. The contract entered by the assessee company and its affiliates outside India are carried out in India. The responsibility of the assessee company vis a vis its customer is concluded in India. The responsibility of the assessee company cannot be segregated and will not complete unless the Indian company provides services to the customers. Based on these facts Ld CIT (A) has held that appellant has continuous revenue generating business activities with Vertex India and there is real and intimate relationship between activities of non-resident outside India and those inside India. In view of this we are of the view that the assesse has a business connection in India u/s 9 (1) (i) of the Act.On this score we confirm the order of CIT (A). In view of the decision of Honourable supreme court in case of DIT V Morgan Stanely inc CO (2007 (7) TMI 201 - SUPREME Court ) we do not have any difficulty in holding that there is no Fixed Place PE in India of the assessee. In view of this even if assumed that there is a PE in India of the assessee no profit can be attributed to it as FAR (Functions performed, Assets deployed and Risk Assumed) such PE has already been compensated at arm s length price and therefore nothing more should be attributed to it. Furthermore when in the case of Assessee for AY 2006-07 Ld AO has made no addition and assessment is made at returned income it is apparent that the contention the assessee is accepted by the AO in subsequent year. In view of this we confirm the order of CIT (A) on this count that if there is a PE in India of the assessee, when PE is remunerated at arm‟s length no further attribution of profit can be made. Reimbursement of Royalty as per Indo UK DTAA - whether chargeable to tax despite there being no income element? - Held that - As on the basis of assets employed and salary and wages paid, the service fee payable to the Indian company comes out to be 78151587- and service fee actually paid was 7170443/-. Therefore if the reimbursement of expenses is reduced from the services fee actually received by the Indian company, then profit from Indian operation will enhance from the same value i.e. the reimbursement of expenses paid by Indian company to other. In the same logic the royalty and fee for technical services received by the assessee company and its affiliates will have effect of reducing the fee actually paid to Indian company. Therefore without prejudice to the assessee s disclosure, the receipt as royalty and fee for technical services, the same is taxable as business profit. Therefore the profit margin of assessee company and its affiliate for Indian operations will further enhance by reimbursement of expenses and royalty and FTS paid by Indian co. The payment in respect of access circuit , networks, bandwidth and call charges amounting to ₹ 24511059/- is taxable as royalty as per Article 13.3(b) of the Indo UK DTAA.
Issues Involved:
1. Business Connection in India 2. Fixed Place Permanent Establishment (PE) in India 3. Service PE in India 4. Dependent Agent PE (DAPE) in India 5. Attribution of Further Profit to PE 6. Taxability of Reimbursement as Royalty Detailed Analysis: 1. Business Connection in India: The Tribunal upheld the CIT(A)'s decision that the assessee has a business connection in India under section 9(1)(i) of the Income Tax Act. The assessee's continuous relationship with Vertex India, where the Indian entity performs services for contracts secured by the assessee, constitutes a real and intimate connection. The Tribunal noted that the assessee's business activities in India are closely linked with its overseas operations, fulfilling the criteria of business connection as per various judicial precedents. 2. Fixed Place Permanent Establishment (PE) in India: The Tribunal reversed the CIT(A)'s finding that the assessee has a fixed place PE in India. The Tribunal concluded that the premises of Vertex India were not at the disposal of the assessee. The Tribunal relied on the Supreme Court's decision in DIT v. Morgan Stanley & Co. Inc., which held that back-office operations do not constitute a fixed place PE under Article 5(1) of the DTAA. The Tribunal found that the disposal test was not satisfied as the premises were not made available to the foreign enterprise for carrying out its business. 3. Service PE in India: The Tribunal confirmed the CIT(A)'s finding that the assessee does not have a Service PE in India under Article 5(2)(k) of the DTAA. The AO had not provided any material evidence to prove that the assessee's employees were providing services in India. The Tribunal noted that the AO, in his remand report, admitted that in the absence of employees visiting India, there cannot be a Service PE. 4. Dependent Agent PE (DAPE) in India: The Tribunal upheld the CIT(A)'s decision that Vertex India does not constitute a Dependent Agent PE of the assessee under Article 5(4) of the DTAA. The AO failed to provide evidence that Vertex India habitually exercises authority to negotiate and enter into contracts on behalf of the assessee. The Tribunal noted that merely because an agent is not independent does not automatically create an agency PE unless the agent has authority to conclude contracts. 5. Attribution of Further Profit to PE: The Tribunal agreed with the CIT(A) that no further profits can be attributed to the PE if the transactions are determined at arm's length. The Tribunal noted that the Transfer Pricing study submitted by the assessee demonstrated that the Indian entity was already compensated at arm's length price. The Tribunal also observed that in the subsequent assessment year, the AO accepted the assessee's contention and made no further attribution of profit. 6. Taxability of Reimbursement as Royalty: The Tribunal upheld the CIT(A)'s decision that the reimbursement of Rs. 24,511,059 (GBP 306,076) for access circuits, network bandwidth, etc., is taxable as royalty under Article 13.3(b) of the Indo-UK DTAA. The Tribunal agreed with the CIT(A) that it could not be said with certainty that the amount allocated by the assessee was on a cost-to-cost basis. The Tribunal noted that the reimbursement related to the use of equipment outside India and constituted royalty as defined under the DTAA. Conclusion: - The revenue's appeal was dismissed, confirming that there is no Service PE or Dependent Agent PE, and no further profit can be attributed to a PE if transactions are at arm's length. - The assessee's appeal was partly allowed, confirming the business connection in India, denying the fixed place PE, and holding the reimbursement taxable as royalty. Order Pronounced: The order was pronounced in the open court on 04.03.2016.
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