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TMI Blog2013 (11) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he three appeals are being disposed of by this common order. 2. Respective grounds raised by the assessee and the department are as under: Assessee's appeal for A.Y. 2006-07 (1443/Del/2012): "1. That the Ld. CIT (Appeals) on the facts and in the circumstances of the case and in law, erred in confirming the order of the Ld. AO that the Appellant has a Permanent Establishment ('PE') in India under Article 5 of the DTAA between India and U.S.A. 1.1 That the Ld. CIT (Appeals), erred on facts and in law, in upholding that the Appellant has a Fixed Place PE in India in terms of Article 5(1) of the DTAA. 1.2 That the Ld. CIT (Appeals), erred on facts and in law, in holding that the Appellant has a place of management in India under Article 5(2)(a) of the DTAA. 1.3 That the Ld. CIT (Appeals), erred on facts and in law, in not appreciating that the Appellant was only procuring services from India and thus, falls within the exclusionary clause under Article 5(3) of the DTAA. 2. That the Ld. CIT (Appeals) erred in facts and in law in ignoring that no profits can be attributed to the alleged PE both in terms of Article 7(4) of the DTAA and Explanation 1 to section 9(1) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue's appeal for A.Y. 2006-07 (1376/Del/2012): "1. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in reducing the additions figure made by the AO on account of selling cost pertaining to Indian operations, profits earned by the assessee from Indian operations and attribution of total profit to the PE in India, by adopting the amount of revenue earned globally shown by the assessee, without appreciating the reasons and ignoring the findings of the AO. 2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in holding that the assessee did not have a Dependent Agent Permanent Establishment in India through Convergys India Services Pvt. Ltd. (CIS), despite of having observed that the CIS did not have either economic independence or functional independence." Assessee's appeal for A.Y. 2008-09 (5243/Del/2011): 1. That on the facts and in the circumstances of the case in law, the order passed by the Ld. Assessing Officer under section 143(3) read with section 144(C) of the Act is bad in law and void ab-initio. 2. That on the facts and in circumstances of the case in law, the Ld. LD. AO erred in assessing the returned inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to appreciate that attribution of profits to the PE is a transfer pricing issue and grossly erred on facts and in law in disregarding established judicial pronouncements in India on the issue that once an arm's length price has been determined for the Indian associated enterprise [Convergys India Services Private Limited (CIS) in the present case] which subsumes the functions, assets and risk profile of the alleged PE, nothing further can be attributed to the PE. 5.5 Without prejudice to the ground that no PE exists, the profit attribution made by the Ld. LD. AO to the alleged PE is highly excessive and without any basis. 5.5.1 That for attributing profits to the alleged PE, the Ld. LD. AO ought to have considered only the revenue attributable to the alleged PE instead of considering the end-customer revenue of the appellant company. 5.5.2 That the Ld. LD. AO further, erred in facts in law by invoking the provisions of section 40(a)(i) and section 44C of the Act with regard to cost incurred outside India thereby restricting the allocation of expenses to USD 831,643 as against the claim of allocated actual expenses of USD 33,824,353 incurred outside India. 6. That th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated December 29, 2008 determined the taxable income at Rs. 294,46,73,964 against the declared income of Rs. 4,00,06,350. It was held by AO that the Appellant has various forms of Permanent Establishment('PE') in India as under: (i) Fixed Place PE : a. Fixed Place PE under paragraph 1 of Article 5 of the DTAA b. An Office under paragraph 2(c) of Article 5 of the DTAA c. A Factory under paragraph 2(d) of Article 5 of the DTAA (ii) Service PE under paragraph 2(l) of Article 5 of the DTAA . (iii) Dependent Agent PE (DAPE) under paragraph 4(a) and 4(c) read with paragraph 5 of Article 5 of the DTAA. 3.4 After coming to the conclusion that the Appellant has a PE in India, the Ld. AO has computed profits of Rs. 2,84,45,67,544 as attributable to the alleged PE in India by further estimating the revenue from Indian operations at Rs. 12,15,81,77,391 by allocating the global revenue in proportion of number of employees, as against the actual revenue of Rs. 6,19,73,70,750/-. Actual revenue figure has been accepted by the CIT(A) after giving a proper opportunity of hearing to the AO). Further, the AO also allocated expenses (excluding direct expenses) in proportion of number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the PE, the Ld. CIT (A) recomputed and reduced the amount of profits attribution from Rs. 2,84,45,67,544 to Rs. 43,10,86,460. (iii) People Soft charges - The Ld. CIT (A) affirmed the order of the Ld. AO and held that the PeopleSoft license cost and maintenance charges received by Appellant are in the nature of Royalty in terms of section 9(1)(vi) of the Act and Article 12 of the DTAA and hence taxable @15% on gross basis. CIT (A) relied on the judgement of Karnataka High Court in the case of CIT, International Taxation v. Samsung Electronics Co. Ltd. in his order. (iv) IPLC charges - The Ld. CIT (A) deleted the addition made by the Ld. AO and held that the payments for International Private Leased Circuits ('IPLC') charges do not constitute Royalty in terms of provisions of Article 12 of the DTAA as the third party service provider was merely using its own equipment itself while rendering the services to its customers including the Appellant and CIS and there is no transfer of right to use, either to the Appellant or CIS. (v) Interest under section 234B - The Ld. CIT (A) has held that except for the payment with regard to PeopleSoft charges made by CIS, the income of CMG was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s employees to India, secondment of Appellant's employees to the key position in CIS, d. CIS did not bear any substantial risk in relation to the functions carried out by in India and, e. Deployment of certain assets (hardware and software) without charging any cost. (ii) Management of risk related to delivery of services was carried out in India by CMG through its employees visiting India on frequent basis or secondment of its employees on key positions in CIS. (iii) The entrepreneurial services were performed in India by CMG through the frequent visits of its employees to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal. (iv) The Ld. CIT (A) has held that the appellant had a place of management in India under Article 5(2)(a) of the DTAA. Legal Submission: 4.3 Article 5.1 of the DTAA defines that the term 'permanent establishment' to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. Thus, the conditions so prescribed under Article 5(1) are as follows: - There must be a place of business; - The place of business must be f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.7 Reference is also made to the decision of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, in which it was held that the PE postulates the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. 4.8 Further, the OECD Model Convention provides that in order to constitute a fixed place PE, there should be a distinct situs "in India in instant case" and that the word "fixed" refers to a distinct place with a certain degree of permanence. It further provides that the foreign enterprise should be able to walk into the place of its own right and not by permission. 4.9 Further, DTAA also recognizes that mere fact that a company of one Contracting State controls or controlled by a company which is a resident of the Other Contracting State, the relationship per se shall not by itself result in a PE of either company. 4.10 Reference in this regard is made to Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deputed persons cannot be considered as constituting a PE of the assessee in India. Hence there is no PE of the assessee in India. The actual salary of the deputed personnel reimbursed by the Indian company is only reimbursement of salary payable by the Indian company advanced by the assessee to the employees. 4.14 The provision of assets and software free of cost by CMG to CIS cannot lead to the conclusion that CMG was carrying on business in India. The ITAT Delhi in the case of Western Union Financial Services Inc v. Asstt. DIT, International Taxation [2007] 104 ITD 34 has analysed whether the software provided by the US tax resident to its Indian representative/agent can create a PE in India under the India-USDTAA. In this case, the assessee (a non-resident company) registered in USA was engaged in the business of rendering money transfer services. The business included transfer of monies across international borders. In this regard, the Liaison Office of the assessee in India provided the management software (VOYAGER) to the agents free of cost and trained their staff on the usage and versatility thereof. In this background, the ITAT held as under: (c) Is the software "VOYA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph 3 of Article 5 of DTAA which excludes "the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the foreign enterprise" from being regarded as PE. 4.19 It is further submitted that procurement of services is akin to purchasing goods or merchandise. In this regard, we draw your attention to the decision of the Supreme Court in the case of CIT v. B. Suresh [2009] 313 ITR 149, wherein the Apex Court observed that today the difference between "goods" and "services" is getting blurred with the globalisation and cross-border transactions. Accordingly, with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. 4.20 In view of the above, notwithstanding the provisions of Article 5(1) and 5(2) of DTAA, even maintaining a fixed place of business in India merely for the purposes of purchasing/procuring services will not create a PE of CMG in India. C: Appellant does not have any Dependent Agent PE in terms of Article 5(4) and 5(5) of the DTAA Legal Submission : 4.21 Article 5(4) of the DTAA specifically precludes an agent of independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. The only assistance that CIS may provide CMG in this regard is intermittent inputs from an India perspective like USP, skill sets, and comparative advantage of choosing India as a base for outsourcing services etc. Even the Ld. AO has not brought any material on record to demonstrate that CIS had any authority whatsoever to conclude contracts or secure orders on behalf of the assessee. It is merely an allegation without any basis. 4.26 In the light of above, even assuming, CIS is an agent of CMG, it does not have any authority to conclude contracts or secure orders on behalf of CMG and hence CMG does not have a Dependent Agent PE in India. 5. Attribution of profits for Indian operations: 5.1 During the course of assessment proceedings, the details of aggregate customer revenue from the work subcontracted to CIS and estimated operating income of the appellant with respect to such revenue were submitted before the AO. The estimated operating income was computed by assessee considering the global operating income percentage of the customer care business came to 10.55%, this was explained in following tabular format: Description Amount in USD million ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian Operations (H= E-(F+G)) 4,79,75,81,869 Ratio of costs of products services to total cost considered to be attributable to India 72.77% Profit attributable to Indian operations (I = H * 72.77%) 3,49,12,00,326 Profit before Tax of CIS (J) 64,66,32,792 Profit belonging to the PE (I - J) 2,84,45,67,534 5.3 The following table shows the computation of global expenses proportioned in the ratio of employees: Particulars 2006 2005 F.Y. 2005-06 Selling, general and administrative expenses 335.8 308.2 315.1 Research and development costs 8.6 8.6 8.6 Depreciation 65.4 68.7 67.875 Amortization 4 10.7 9.025 Restructuring charges 6.5 13.8 11.975 Total expenses (Million USD) 412.575 Allocation of other expenses in (USD) (412.575 *10000/61050) (Rounded off) 67.579 Allocation of other expenses in (Rs.) (USD 67,579,000* Rs.44.6175) 3,01,52,06,032 -Computation of Ratio of costs of produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41,73,89,015) 5.5 In first appeal CIT(A) incorrectly held that Profit Split Method (PSM) appears to be the most suitable method to determine the arm's length profit attributable to CMG's PE in India. Without appreciating that the FAR profile of alleged PE of CMG in India has to be limited to 'additional FAR/Cost' if any deemed to be incurred for the purpose of carrying out the India operations of service delivery and which are not already captured in the FAR/Cost of CIT. It is pleaded that CMG or its employees do not perform any entrepreneurial service to manage risk related to service delivery in India. Further, neither CIS nor the alleged PE develops/ owns any intangibles. It is contended that merely for attribution towards free of cost assets and software by CMG, PSM is not the appropriate method for computing the attribution in the instant case for the alleged PE. 5.6 CIT(A) though after hearing detailed arguments and verification, accepted the revenue from end-customer with regard to contracts/projects wherein services were procured from CIS of USD 138.9 million as submitted by the appellant relying on the following: (i) Customer-wise break-up of revenue earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed by the CIT(A). Hence, applying this percentage on revenue earned by the appellant with regard to contracts wherein services have been procured from CIS, one would arrive at the arm's length revenue of the alleged PE (i.e. USD 101.08 million = 72.77% of USD 139.9 million). The correction of this error would prove that no further attribution can be made as the amount of service fee paid by CMG to CIS (i.e. USD 112.5) is more than this amount. This can be explained as under: Description Amount (USD in million) Comments Revenue [A] 101.08 [72.77% of USD 138.90 million i.e. total end-customer revenue] Less: Amount of service fee paid to CIS (including markup) [B] 112.50 Already offered to tax in India by CIS Balance [C = A - B ] (11.42) Profit attributable to India No further attribution required 5.10 CIT(A) for arriving at the revenue of the alleged PE of the appellant has taken CMG revenue as the starting point. Hence, the Ld. CIT (A) should also have considered the expenses incurred outside India for arriving at the profit of the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject. Where the dealings are between two related corporate entities, one overseas and one domestic, then the transactions between them are subjected to the examination of "transfer pricing" in which it is ascertained by the department that appropriate income is attributed to the Indian entity for the Indian leg of operations and therefore the appropriate amount of tax is collected in India. 5.13.2 If the approach of the Ld. AO and Ld. CIT (A) is followed, then it would bring the following to tax in India: (a) part of the value of the transaction in the hands of the foreign company on the principle of attribution; and (b) the same income in the hands of the subsidiary company (CIS) by increasing the arms length value vis-a-vis the Indian company. Thus the same income attributable to India may be taxed twice, once in the hands of the parent company on the principle of attribution and then in the hands of the subsidiary company on the arms length principle. 5.13.3 It is submitted that conceptually the department cannot apply transfer pricing principle which are designed to ensure that the entire income attributable to Indian operations is taxed in the hands of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was reimbursed by CIS to CMG. 6.2 The Ld. AO in his order has held that the consideration received for licensing of software was taxable as 'Royalty' in terms of section 9(1)(vi) of the Act and Article 12 of the DTAA and accordingly taxed it @ 15% on gross basis as per Article 12(2) of the DTAA without even bothering to mention as to which particular clause in the definition would get attracted in this case. 6.3 The Ld. CIT (A) relied on the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd.(supra) and CIT, International Taxation v. Sunray Computers (P.) Ltd. wherein it has been held that there was a transfer of copyright and payment made for the import of software was in the nature of royalty in terms of the definition of royalty provided in the Act as well as the DTAA. The Ld. CIT (A) accordingly held that the amount received by the Appellant for providing the 'PeopleSoft' software was in the nature of Royalty and hence taxable. 6.4 Hon'ble Delhi High Court in the case of CIT v. Industrial Engg. Projects (P.) Ltd. [1993] 202 ITR 1014 has held that reimbursement of expenses can under no circumstances be regarded as revenue receipt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Hon'ble Delhi High Court in Ericsson A.B's case (supra). instead of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) stating that when two views are available on an issue one favourable to the assessee and the one against the assessee, the view which is favourable to the assessee and does not support levy of tax on the assessee should be preferred. 6.8 It is pointed out that even though the Finance Act, 2012 has made an amendment in section 9(1)(vi) of the Act and widened its scope, however, the same does not impact the provisions of DTAA in any manner. 6.9 In this regard, reliance is placed on the recent judgment of ITAT Mumbai, in the case of B4U International Holdings Ltd. v. Dy. CIT [2012] 52 SOT 545 , wherein the Hon'ble Tribunal has observed that: "Coming to the argument of the Ld Departmental Representative that the amendment to Finance Act 2012 changes the position, we find that there is no change in the DTAA between India and USA. Thus the amendment has no affect on our decision". 6.10 Ld. Counsel contends that from above, it follows that: (a) the payment made by CIS to CMG cannot be characterized as Royalty eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to use, either to the Appellant or CIS. The Appellant has merely procured services and provided the same to CIS and no part of the equipment was leased out to CIS. The Ld CIT (A) held that the payment for link charges do not constitute Royalty under the provisions of Article 12 of the DTAA. 6.14 The provisions of Equipment Royalty are also contained in Explanation 2(iva) of section 9(1)(vi) of the Income Tax Act, 1961 ('Act') which is similar to the provisions of Article 12(3)(b) of DTAA. Recently, there has been an amendment in section 9(1)(vi) of the Act which though dilutes the concept of control or possession in respect of any right, property or information and has widened its scope, however, the same does not impact the provisions of DTAA in any manner and has no effect on assessee's case. 6.15 It is further submitted that though Asia Satellite Telecommunications Co. Ltd.'s case (supra) is a decision on the domestic law but also makes an observation regarding DTAA. In para 74 of the judgment, it is specifically mentioned that" Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets a boost". Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such cases is already covered by the following decisions: (a) DIT v. Jacabs Civil Incorporated/ Mitsubishi Corpn. [2011] 330 ITR 578 (Delhi) (b) Motorola Inc's case (supra); (c) DIT (International) Taxation v. NGC Network Asia LLC [2009] 313 ITR 187 [Bom.]; (d) CIT v Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal) In view of the above position of law, the levy of interest under section 234B deserves to be quashed. 7.6 In the present case, no interest has been granted to the Appellant under section 244A of the Act as the Appellant has till date not received either the intimation under section 143(1) of the Act or the refund claimed by it in its tax return. Accordingly there is no question of withdrawing interest under section 244A or levying interest under section 234D of the Act. 8. Ld. CIT(DR) Shri D.K. Gupta supported the order of ld. AO /TPO as under: 8.1 On the issue of P.E. it is contended that assessee has a PE in India looking at interlinking and interlacing of CIS and CMG. This is further supported by the decision of the Hon'ble Delhi High Court in the assessee's case for A.Ys. 2002-03 2004-05 in Convergys Customer Management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of B4U International Holding Ltd. (supra) is distinguishable as in this case the main issue involved was whether disallowance can be made u/s 40(a)(i) on the payments made by the assessee to the Satellite owner. One of the grounds on which the issue was decided in favour of the assessee was that in view of the Delhi High Court's decision in the case of Asia Satellite Telecommunications Co. Ltd. (supra) such payment was not royalty. When the attention was drawn towards the above mentioned retrospective amendments in section 9 the ITAT in para 17 of the order merely stated that there was no change in the DTAA between India and the USA and hence amendments had no effect. It is submitted that there is no necessity for any change in the DTAA as the payments even before the amendments were royalty under article 12 of the DTAA. The Hon'ble Delhi High Court had decided the issue against the department under the domestic law. In fact, in the case before the High Court there as no DTAA with the concerned country (Hongkong) at the relevant time and the issue was being examined under the domestic law. Now since the payment is taxable under the domestic law after the amendment, the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CMG to CIS were working on key positions such as Country Head and Managing Director of CIS. (iii) CMG has borne revenue expenses incurred for setting up of various call sites (pre-operative expenses), capital costs were borne by CIS itself. (iv) CMG has provided free of cost assets in India for use of CIS. (v) CMG has provided free of cost access to gateways, communication lines etc outside India to CIS. (vi) CMG has provided free of cost software to CIS for its use. 9.2 AO was of the opinion that CIS was not an agent of Independent status within the meaning of Article 5(5) of the DTAA because the activities of CIS are wholly on behalf of the assessee and the transactions between CIS and the assessee are not made under arm's length conditions. The Ld. AO also alleged that the assessee has a PE under paragraph 4(a) and 4(c) of Article 5 of the DTAA as the sales team of CIS assists CMG in the sales and marketing efforts. 9.3 The Ld. CIT (A) in his order has upheld. that the assessee has a Fixed Place PE in India in terms of Article 5(1) of the DTAA by stating that the premises of CIS were at the disposal of CMG and the business of CMG was carried on from such place. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusionary clause of Article 5(3) of the DTAA which excludes "the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the foreign enterprise" from being regarded as PE. It was further submitted that even if it is presumed that a business connection or a PE exists, even then procurement of services from the Indian subsidiary which is a 10A unit is akin to purchasing goods or merchandise. Therefore, Assessee is covered under clause (b) of Explanation 1 of sub-section (1) of section 9 of the Act read with article 7(4) of the DTAA. In this regard, the ld. AR of the assessee relied on the decision of the Hon'ble Supreme Court in the case of CIT v. B. Suresh [2009] 313 ITR 149 wherein the Apex Court observed that today the difference between "goods" and "services" is getting blurred with the globalization and cross-border transactions. Accordingly, with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. 9.7 The ld. CIT DR in reply submitted that the judgment of the Hon'ble Supreme Court in the case of B. Suresh (supra) was in connection with cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment of preceding and the subsequent years, the Ld. AO has accepted the end customer revenue based upon the methodology accepted by the ld. CIT(A) in assessment year 2006-07. Thus, AO himself accepted the actual revenue method in preceding and subsequent assessments. 11.3 It is not disputed that the details of aggregate customer revenue from the work subcontracted to CIS and estimated operating income of the assessee with respect to such revenue were submitted before the AO. The operating income was computed considering the global operating income percentage of the customer care business i.e. 10.55%. This percentage has been derived from the filings made by the assessee company with the Securities and Exchange Commission of USA. This has been explained in tabular format in the foregoing paragraphs. 11.4 The CIT (A) accepted the revenue from end-customer with regard to contracts/projects wherein services were procured from CIS of USD 138.9 million submitted by the assessee and reduced the attribution of profits to Rs. 43,10,86,460 to the PE of the assessee. In determining the profits, the ld. CIT (A) allowed deduction only for a part of the expenses. The computation of profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en determined for the Indian associated enterprise, which subsumes the functions, assets and risk profile of the alleged PE. In this case 81% revenue has been transferred to the India Subsidiary in the assessment year 2006-07. For the assessment year 2008-09 this percentage comes to 90%. 11.10 AO in his order for assessment year 2006-07 has attributed a weight age of 72.77% to the delivery part which is the work done in India. Even if the attribution to the alleged PE is made by applying said weight age on end-customer revenue, no further attribution will be required in the hands of the alleged PE. 11.11 Assessee in compliance with the CBDT Circular No. 5 of 2004, placed on record submitted the Transfer Pricing Analysis report for Profit Attribution before the CIT(A), who forwarded the copy of the report and also proper opportunity of hearing to AO. 11.12 Ld. CIT(A) has accepted that to the extent of functions, assets and risks are already captured in the transfer pricing analysis of CIS, no further profits can be attributed to such functions, assets and risks in the hands of assessee's PE, but held that further profit was required to be attributed on account of the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness outside India and not by the alleged PE. Hence, the AO/ CIT(A) erred in invoking the provisions of section 44C of the Act in attributing the income of the assessee company without allowing the cost incurred to earn the revenue outside India thereby attributing the entire receipts. The AO erred in not allowing the deduction of the cost allocated to earn the Indian revenues by interalia, invoking the provisions of section 40(a)(i) and 44C of the Act without appreciating the provisions of Article 7(3) of the DTAA. What is stipulated and stated in paragraph 3 of Article 7 is that the expenses incurred by the assessee for the purposes of the business of the PE can be claimed as a deduction but only in accordance with and subject to limitation prescribed in the Act. Second part of paragraph 3 to Article 7 protects and states that the assessee is entitled to claim deduction both in India as well as administrative and general expenses whether they are incurred in India in which PE is alleged or outside India. In nutshell for the purpose of computing the taxable profits attributable to the alleged PE, even the executive and general expenses are allowable. The action of the lower auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise. In such a situation, there would. be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would. depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to the PE). " The application of transfer pricing principles is also supported by the decisions of the Bombay High Court in Set Satellite (Singapore) (P.) Ltd.'s case (supra), jurisdictional High Court in Rolls Royce Singapore(P.) Ltd.'s case (supra), Director of Income Tax v. BBC Worldwide Ltd.'s case (supra) D. The ld. CIT (A) has held. that further profit was required to be attributed on account of Assets provided by the assessee to CIS and management of risk by the assessee in India. In our view no attribution of profits can be made on account of management of risk as risk resides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allies with the submission of the assessee dated 26-12-2010 to the assessing officer in which it has been submitted that the approximate operating profits of CMG in USD come to 0.8 million. Now the important question that arises is as to how much of the profits shall be attributable to CMG's Indian PE over and above the profits declared by its subsidiary CIS. 11.20 Apropos TPO's estimation, we are of the view that the same is not justified as it involves a very unrealistic method of counting the worldwide number of employees and dividing it with CMG's global revenue without considering the relevant aspects. The finer and material aspects about the status, capacity of the employees are over looked and result become very vague and distorted. Therefore, the method adopted by assessing officer cannot be relied on as most appropriate method. 11.21 Apropos CIT(A)'s estimate about attribution, though he accepted the proposition that there cannot be notional addition to India revenue, however, CIT(A)'s method also does not become a rational inasmuch as the various expenditures incurred by CMG i.e. research development, depreciation, amortization etc. have not been considered and 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessment year 2006-07 only. Assessee demonstrated that these charges pertain to PeopleSoft financial reporting package (PeopleSoft) costs which help in improving the visibility, tracking, and control with a single source of information that provides complete, real-time reporting and reconciliation of operational and financial data. PeopleSoft is a packaged enterprise application. Out of the total amount incurred by the assessee, a proportion of the license cost and maintenance cost for PeopleSoft was allocated by CMG to CIS which was reimbursed by CIS to CMG. AO in order for assessment year 2006-07 held that the consideration received for licensing of software was taxable as 'Royalty' in terms of section 9(1)(vi) of the Act and Article 12 of the DTAA and accordingly taxed it @15% on gross basis as per Article 12(2) of the DTAA. 12.1 The Ld. CIT (A) relied on the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) and Sunray Computers (P.) Ltd. case (supra) wherein it has been held. that there was a transfer of copyright and payment made for the import of software was in the nature of royalty in terms of the definition of royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi High Court in Ericsson A.B case (supra) instead of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) stating that when two views are available on an issue one which is favourable to the assessee should be preferred. 12.6 Adverting to the issue of amendments brought in by Finance Act, 2012, we are of the view that even though the Finance Act, 2012 has made an amendment in section 9(1)(vi) of the Act and widened its scope, however, the same does not impact the provisions of DTAA in any manner. In this regard, reliance placed on the recent judgment of ITAT Mumbai, in the case of B4U International Holding Ltd. (supra) and the Delhi High Court in the case of Nokia Networks OY (supra) is well placed. The Delhi High Court has held as under: " However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held. in CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held. in Ericsson (supra) that a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the network facilities are under the control of and maintained and operated by the service providers. CMG/CIS merely avail a service. Accordingly, we hold that the link charges do not qualify as 'Equipment Royalty' in terms of Article 12 of the DTAA and hence are not taxable in India. Useful can be drawn from the following judgments: * Bharat Sanchar Nigam Ltd.'s case (supra) * Dell International Services India (P.) Ltd. 's case (supra) *Cable Wireless Networks India (P.) Ltd. 's case (supra) (The special leave petition filed against this ruling has been dismissed by the Supreme Court) * Asia Satellite Telecommunications Co. Ltd. 's case (supra) * Yahoo India (P.) Ltd. 's case (supra) * Standard Chartered Bank case (supra) 13.2 CIT (A) in his order has accepted the contention of the assessee that the third party service provider was merely using its own equipment itself while rendering the services to its customers including the assessee and CIS and there is no transfer of the right to use, either to the assessee or CIS. The assessee has merely procured services and provided the same to CIS and no part of the equipment was leased out to CIS. The Ld. CIT (A) held th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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