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TMI Blog2017 (10) TMI 1011X X X X Extracts X X X X X X X X Extracts X X X X ..... s and cross appeals. They relate to two American Companies which are the assessees in the present case, namely, e-Funds Corporation, USA (relating to assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08) and e-Funds IT Solutions Group Inc., USA (relating to assessment years 2000-01 to 2002-03 and 2005-06 to 2007- 08). The appeals from the Income Tax Appellate Tribunal (ITAT) by the assessees were allowed by the High Court, whereas cross-appeals by the department were rejected. After framing several substantial questions of law, the High Court narrated the undisputed facts as follows: "6. Undisputed facts in brief may be first noticed. The assessees are companies incorporated in United States of America (USA, for short) and were residents of the said country. They were assessed and have paid taxes on their global income in USA. e-Fund Corp. was the holding company having almost 100% shares in IDLX Corporation, another company incorporated in USA. IDLX Corporation held almost 100% shares in IDLX International BV, incorporated in Netherlands and later in turn held almost 100% shares in IDLX Holding BV, which was a subsidiary again incorporated in Netherlands. IDLX Holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable to the said PE, even if the subsidiary (in the present case of e-Fund India) is being taxed in the said country. The principle being that subsidiary being an independent and a distinct entity is taxed for its income, whereas the foreign entity, i.e., holding company is taxed for the income earned by the said independent entity attributable to the PE in the country where subsidiary is situated. The income of the subsidiary is not taxed in the hands of the non-resident principal and vice-versa. Thus, there is no double taxation in the hands of the holding company as income of the subsidiary is not taxed as income of foreign holding assessee. The principle is that a subsidiary constitutes an independent legal entity for the purpose of taxation." 2. The assessing authority decided that the assessees had a permanent establishment (hereinafter referred to as PE) as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as DTAA) was attracted. Consequently, the assessees were liable to pay tax in respect of what they earned from the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marily oversees operations of eFunds India and eFunds group entities overseas. The sales team undertakes marketing efforts for affiliate entities also. * The CIT(A) has referred to the Transfer Pricing Report which says that eFunds India provides management support and marketing support services to eFunds Corp group companies outside India. Regarding supervision of personnel rendering the services, the TP Report states as follows: "The President's office manages the operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to the President. The President's overall reporting is to EFC. Though the personnel rendering marketing services are employees of EFI, they report to overseas group entities to the extent that they are engaged in rendering services to such entities." Applying the above facts, it is submitted that the assessees satisfy the requirements of a fixed place PE. The Supreme Court in the recent judgment in Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation-3, Delhi and others, (2017) SCC Online SC 474 has held that "it universally accepted that for ascertainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the direction of eFunds IT. eFunds IT shall be the sole judge of performance and capability of each of subcontractors personnel and may request the removal of one or more of Subcontractors personnel from a project covered by any statement of work as follows." * It is submitted that the personnel engaged in providing these services were ostensibly the employees of eFunds India but were de facto working under the control and supervision of eFunds Corp. In this regard, reference was made to Para 17 of the judgment in DIT v. Morgan Stanley (2007) 7 SCC 1, where the Court held: "17......It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge." * Furthermore, the AO in the Assessment Order has observed that eFunds Corp has seconded two employees to eFunds India and these employees worked as Sr. Director- Technical Services and Country Head-Business Development. The activities of the seconded employees go bey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness in India does not by itself means that the holding company would have a PE in India. Further, according to learned counsel, so far as the service PE is concerned, even the assessing officer did not find that such a PE existed. According to him, under Article 5(2)(l), it is necessary that the foreign enterprises must provide services to customers who are in India, which is not Revenue's case as all their customers exist only outside India. Further, according to the learned counsel, the entire personnel engaged in the Indian operations are employed only by the Indian company and the fact that the US companies may indirectly control such employees is only for purposes of protecting their own interest. Ultimately, there are four businesses that the assessees are engaged in, namely, ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. Since all these businesses are carried on outside India and the property through which these businesses are carried out, namely ATM networks, software solutions and other hardware networks and information technology infrastructure were all located outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding law in force in that country to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee." 7. Under this provision, the India US Double Taxation Avoidance Agreement of 1990 was made. We are directly concerned with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if: (a) he has and habitually exercises in the firstmentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or mercha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or national. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention. 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention. 4. The competent authorities of the Contractin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of rules 44G and 44H, "Competent Authority of India" shall mean an officer authorised by the Central Government for the purposes of discharging the functions as such." 10. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfill the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. We would also like to extract below the definition to the expression 'place' by Vogel, which is as under: "A place is a certain amount of space within the soil or on the soil. This understanding of place as a threedimensional zone rather than a single point on the earth can be derived from the French Version ('installation fixe') as well as the term 'establishment'. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term 'fixed' rather than the term 'place', given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term 'establishment' makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term 'installation' instead of 'place'. The term 'place' is used to define the term 'establishment'. Therefore, 'place' includes all tangible assets used for carrying on the business, but o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous). This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, and conducts meetings in the purchasing director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working." 37. Taking cue from the word 'through' in the Article, Vogel has also emphasised that the place of business qualifies only if the place is 'at the disposal' of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square meters can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine." 38. OECD commentary on Model Tax Conven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d place PE. Similarly what were the direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE. Assignment or sub-contract to e-Fund India is not a factor or rule which is to be applied to determine applicability of Article 5(1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not the relevant criteria/test. e-Fund India was/is a separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayers. Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between the Indian subsidiary and the foreign Principal under Article 5(1). Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place PE exists." 13. It further went on to hold that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant and its associate companies. All these ATMs were installed outside India and mainly in United States. Services provided by eFunds India: The only involvement of eFunds India was responding to queries raised by the customers, if they faced any difficulty in operation of their transaction which was part of activity (d) referred above. b) Electronic Payment Management eFunds US's Electronic Payment Management segment provides products and services in two broad categories: Payment Processing Software and Electronic Payment Processing Services. The business involves processing transactions for regional automated teller machine or ATM networks in the United States and also transaction processing for retail point-of-sale terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions. Processing Services: eFunds US processes transactions for regional ATM networks in the United States. They also provide transaction processing for retail point of sale ("POS") terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions. Transaction processing involves e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate company in United Kingdom has developed and owns the Architect software which is middleware used primarily by financial institutions in Europe (there is one customer in Chicago). This software runs on IBM and Tandem computing platforms. All of them were located outside India. In accordance with the terms of the contract with Government Agencies, eFunds US is responsible for management, support and control of the electronic payment band distribution of cash benefits to program participants through its ATM and point of sale network. Services provided by eFunds India: eFunds India provided testing, bug fixing and other related software development support services to eFunds US for various software/software based solutions developed by eFunds US. Such services are required by eFunds US in the course of development of software/software based solutions and their use in providing services to customers. The process of development of software/solutions involves testing the same with sample data to determine the workability of the software. Further, certain errors or bugs may be found in the software/solutions at such eFunds US avails the services of eFunds India for bug fixing. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S was responsible for Customer interface and agreement/contracts with the customers were entered into by eFunds US. All risks and responsibilities for performance of contracts at all times were of eFunds US only. All eFunds risk management services are based on, or enhanced by eFunds' proprietary DebitBureau database, which is located in data centres of the group situated in USA. DebitBureau contains over three billion records and includes data form eFunds ChexSystemsSM and SCANSM databases and other sources. The data in DebitBureau is used to screen for potentially incorrect, inconsistent, or fraudulent social security numbers, home addresses, telephone numbers, driver license information, and other indicators of possible identity manipulation. Using this data, eFunds US can perform various tests to validate a consumer's identity and assess and rank the risk of fraud associated with opening an account for or accepting a payment from that consumer. eFunds US software development centers in the United States, as well as in the U.S. data centers and remotely at the customers' sites develop and maintain software for these service offerings. Services provided by eFunds India: The wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d calls from customers from dealers/customers of telecom services providers (who are customers of eFunds US), to check on the status of applications made for new connections, change in billing plans etc. Note: Logica Global, an independent company, had received an order from the Reserve Bank of India for development and implementation of certain software. A part of this work was subcontracted to eFunds India directly by Logica Global. The Appellant had nothing to do with this contract." 16. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score. 17. Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of the DTAA is that an enterprise must furnish services "within India" through employees or other personnel. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. 18. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(l). We find no infirmity in the ruling of ARR on this aspect. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e working operations was relevant. It is also not known whether the services were performed related to services provided to an associated enterprise in which case clause 5(2)(l)(ii) would be applicable. In the said situation, the question of attribution of income etc. would also arise. 63. Two employees of e-Fund Corp were deputed to e-Fund India in the assessment years 2005-06. The case of the assessee and e-Fund India is that they were deputed to look towards development of domestic work in India. Payment of these employees as per the Revenue to the extent of 25% was borne by e-Fund India and balance 75% was borne by e-Fund Corp. The Assessing Officer on this basis has observed that this reduced cost base of e-Fund India as remuneration was paid by e- Fund Corp and the said employees were at liberty to perform functions of e-Fund Corp even while working for e-Fund India. The response of the assessee as quoted in the assessment order was that e-Fund India, apart from export activities had also domestic business in India. This was evident from the return of income filed by e-Fund India where domestic income was computed separately as it was not eligible for deduction under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, for the sake of completeness, it is only necessary to agree with the High Court, that it has never been the case of Revenue that e-Funds India was authorized to or exercised any authority to conclude contracts on behalf of the US company, nor was any factual foundation laid to attract any of the said clauses contained in Article 5(4) of the DTAA. This aspect of the case, therefore, need not detain us any further. 22. Shri Ganesh has referred to and relied upon an order of the Additional Taxation Commissioner, who is the Transfer Pricing Officer. The said order is dated 22nd February, 2006 and states as under: "The taxpayer company filed its return of income with ACIT Circle 11(1), New Delhi. A reference was received from the Assessing Officer to determine the 'arm's length price' u/s 92CA(3) in respect of 'international transactions' entered into by the assessee during the F.Y. 2002-03. In response to notice u/s 92CA, Shri Vijay Iyer, CA of S.R. Batliboi & Co. Chartered Accountants, authorized representative of the assessee appeared form time to time. The documentation prescribed under Rule 10D of the Income Tax Rules was submitted and placed on record. The taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of the IT Act. All provisions of the IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carryforward and set-off losses, etc. However, deviations are made by DTAA in cases of royalty, interest, etc. Such deviations are also made under the IT Act (for example Sections 44-BB, 44-BBA, etc.). 36. Under the impugned ruling delivered by AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken, there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Solutions Group Inc.:- Income will be attributed to the Indian PEs based on the ratio of certain developed and acquired tangible and intangible assets in India and outside India. Out of the total assets for the AY 2003-04, 10.48% of the assets were located in India and accordingly 10.48% of the income would be attributable to India. The percentage attributable to India for the AY ending 2005 was arrived at 11.11%. These percentages will be applied to the base of consolidated gross income as reduced by the income of subsidiary eFunds India Pvt. Ltd. already reported in India. Thereafter, the total income so attributed will be apportioned between eFunds and IT solutions in the ratio of 85% (to eFunds) and 15% (to IT Solutions) for the AY 2003-04 and 87% (to eFunds and 13% (to IT Solutions) for the AY 2004-05. In view of the above, the income attributor, as agreed upon is given below:- A.Y. 2003-04 A.Y. 2004-05 Figures in US $ million Figures in US $ million Apportionable base income 25.12 30.71 Percentage attributed to India 10.48% 11.11% Income attributed to India 2.63 3.41 Allocation between IT Solutions and eFunds IT Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manner, with each case being decided on its own merits and not by reference to any balance of results in other cases. To the extent applicable, the Commentary to the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines are an appropriate basis for the development of a principled approach. As part of a principled approach to MAP cases, competent authorities should be consistent and reciprocal in the positions they take and not change position on an issue from case to case, depending on which side of the issue produces the most revenue. Although a principled approach is paramount, where an agreement is not otherwise achievable, both competent authorities should look for appropriate opportunities for compromise in order to eliminate double taxation. To the extent possible, competent authorities who face significant recurring issues in their bilateral relationship may wish to reach agreement on the consistent treatment of such issues." A perusal of the above would show that a competent authority should engage in discussion with the other competent authority in a principled, fair and objective manner, with each case being decided on its own merits. It is also specific ..... X X X X Extracts X X X X X X X X Extracts X X X X
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