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TMI Blog2020 (11) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... ssees has a fixed place PE in India. Methodology of profit attribution - As in assessee s own case for Assessment Years 2006-07 and 2008-09 has laid down the methodology and respectfully following the same, the TPO is directed to adopt the same methodology as enumerated by the Co-ordinate Bench. Thus, the issue to attribution of profits is restored to the file of TPO for computing the attribution of profits with respect to the fixed place PE after giving due opportunities to the assessee to submit its computation and calculations. Assessee did not have a dependent Agent PE or a service PE in India and reduction in profit attribution done by the AO - CIT (A) has returned a finding based on the order of the ITAT and has also noted that even in assessment year 2006-07 [ 2018 (2) TMI 1742 - ITAT NEW DELHI ] the Ld. CIT (A) had held that there was no service PE in India and that the AO had not challenged this before the ITAT. Payment link charges/IPLC charges being taxable under royalty has been decided in assessee s favour by the Tribunal in assessment year 2006-07 [ 2018 (2) TMI 1742 - ITAT NEW DELHI ] - It is also seen that the Ld. CIT (A) has taken due cognizance of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformed outside India and only the delivery part has been outsourced under sub-contract to the Indian subsidiary. 2.3 For the year under consideration, the assessee had entered into following transactions with Convergys India Services Pvt. Ltd.: Particulars Amounts received / receivable Amounts received / receivable (in USD) (in INR) Fee for Included Services 44,300 24,,11,959 Fee for Technical Services 47,869 26,34,547 UPLC/ link charges 684,072 3,72,79,929 Salary reimbursement 100,908 54,68,168 Receipt towards Employee stock purchase plan ('ESPP') 45,946 25,07,722 Reimbursement of third party expenses 432 23,582 Total (A) 923,527 5,03,25,907 Particulars Amounts pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08/-. 2.8 The Ld. CIT (A), following the order of the ITAT in assessee s own case for assessment year 2006-07 and 2008-09, held that the Assessee has a Fixed Place PE in India in terms of Article 5(1) of the DTAA; the Assessee does not have a Dependent Agent PE in India in terms of Article 5(4) of the DTAA; the Assessee does not have a Service PE in India in terms of Article 5(2)(1) of the DTAA; Further profits could be attributed on account of assets provided by the assessee to CIS and followed the methodology provided in the order of the Hon'ble ITAT in AY 2006-07 for arriving at the profits attributable to PE in India. The Ld. CIT (A) also held that the payments for link charges do not qualify as Equipment Royalty and Process Royalty in terms of Article 12 of the DTAA and hence not taxable in India. 2.9 Aggrieved with the order of the Ld. CIT (A), now both the department as well as the assessee is in appeal before this Tribunal. The assessee has raised the following grounds of appeal:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place permanent establishment in India, Ld. AR submitted that the AO in his order has alleged that CIS is practically a projection of CVG s own business in India. The visiting employees of CVG had a fixed place of business at their disposal in the form of the facilities and premises of CIS. It has been further alleged that the assessee has provided free of cost hardware and software assets in India for use of CIS. The Ld. AR argued that that the business in India is that of the Indian company, CIS, and not that of the Assessee. CIS is a separate legal entity having business operations in India carried on by its own employees from its units registered with the Software Technology Parks of India (STPI). CIS is working as an independent contractor for CVG on a principal to principal basis and by no stretch of imagination can it be said that the business in India is that of CVG. It was submitted that while determining the existence of the Permanent Establishment what needs to be looked at is whether the work carried on by the employees that visited India/ seconded to CIS was carrying out the work of the Assessee or its subsidiary. In this regard, reliance was placed on the decision ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in India. Further, it was submitted, the visiting employees came to India for short durations for rendering training and technical services as required under the Technical Service Agreement. The premises of CIS used for providing training and technical services could not be said to be at the disposal of the Assessee. 3.3 The Ld. AR submitted that the fact that CIS has entered into a Technical Service Agreement with the Assessee for availing its services and was paying to the Assessee on an hourly rate basis for the services rendered by it means that such services were being utilised by CIS for its own business. Reliance was placed on clause 7.4 of the Service Agreement in this regard and it was submitted that the AO has disregarded the above clause without bringing any material on record to the contrary. The premises of CIS used for providing services could not be said to be at the disposal of the Assessee as they did not have any permission to enter the premises in their own right and had to undergo the same drill as any other visitor. In such a case, it cannot be said that the Assessee had at its disposal, as a matter of right, certain space which could be categorized as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided to CIS by CVG in its capacity as the main contractor to enable CIS to work on a particular project. Providing such project-specific assets on a free of cost basis is a standard industry practice in the IT/ITES- BPO sectors. It was submitted that CVG has also provided certain software to CIS such as Convergys Customer Management System (CCMS) which is an application for Agents' desktop which allows development of scripts for clients of Convergys who are setup in the call centres. The CCMS is hosted on a server outside India. These operating tools are essential in order to minimize errors, ensure consistent delivery and maintain the quality of services provided by all the worldwide call centres of CMG, including CIS in India. The provision of software by the Assessee to CIS cannot lead to the conclusion that the Assessee was carrying on business in India. It was argued that mere provision of assets on loan basis can neither lead to fixed place at the disposal of the Assessee nor be construed as carrying on of business by the Assessee in India. In fact, substantial assets have been returned to the Assessee. Even otherwise the economic value of the balance remaining assets wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o determine, whether fixed place PE exists. 50. Reference to core of auxiliary or preliminary activity is relevant when we apply paragraph 3 of Article 5 or when sub-clause (a) to paragraph 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place PE. Paragraph 3 of Article 5 lists negative activities which when performed from a fixed place in the other contracting State would not create a PE. The activities specified in Article 5, paragraph 3 would not create a PE, even when the conditions specified in paragraphs (1) and (2) of Article 5 are satisfied. Paragraph 3 is not a positive provision but a negative list. The said paragraph does not create a PE but has a negative connotation and activities specified when carried on do not create a PE. 3.8 It was submitted that the aforesaid judgment by the Hon ble Delhi High Court has been upheld by the Hon ble Supreme Court in the case of E-Funds IT Solutions Ors [(2017) 399 ITR 34 (SC)] which squarely covers the present case of the Assessee that the Assessee does not have a fixed place PE in India. 4.0 Argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly states that it shall in no respect create the relationship of agency between CIS and CVG. Thus, CIS is not an agent of the company. It was submitted by the Ld. AR that identical issue has been decided in favour of the assessee by the Tribunal in its order for AY 2006- 07 and that the Ld. CIT (A) has taken note of the aforesaid order of the Tribunal in assessee s own case for AY 2006-07 and AY 2008-09 and has that the assessee does not have a Dependent Agent PE in India. 4.2 Further, arguing against profit attribution, a ground common in both the appeals, the Ld. AR submitted that Attribution of Profits to the Permanent Establishment is a transfer pricing issue and no further profits can be attributed to a PE once an arm's length price has been determined for the Indian associated enterprise (which subsumes the functions, assets and risk profile of the alleged PE). It was submitted that in view of the provisions of the Act read with CBDT Circular No. 14 of 2001 and Circular No. 5 of 2004 as well as the judgment of the Hon ble Supreme Court in Morgan Stanley (292 ITR 416), it is settled that attribution to a PE is a transfer pricing issue and the same needs to be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost incurred by it in connection with the India half link to CIS, which is accordingly reimbursed by CIS to CVG. The Ld. AR submitted that the AO has made an addition on account of such link charges by stating that they are taxable as 'Equipment Royalty' in terms of Article 12(2) read with Article i2(3)(b) of the DTAA and accordingly taxed it @ 10% on gross basis. In addition to the finding of the AO that link charges are taxable as 'Equipment Royalty', the AO also held that the payments pertaining to link charges are taxable as 'Process Royalty' both under the Act as well as DTAA. It was submitted that the link charges do not qualify as Equipment Royalty. The Indian judiciary has made it clear that it is important to see whether there was any intention to transfer the right to use or not. It was submitted that it cannot be controverted that CVG/CIS have any control or possession over the equipment i.e. the network facilities are under the control of and maintained and operated by the service providers. CVG/CIS merely avail a service. With regard to Equipment Royalty, it was submitted that the Tribunal for AY 2006-07 held the issue in favour of CVG and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm interruptions, the leasing out of an enterprise or a PE by the taxpayer will usually bring the PE of the lessor taxpayer to an end. Likewise, a PE ceases to exist as soon as one of the negative elements contained in Art- 5(4) or (6) OECD and UN MC occurs. It is important to note, however, that the determination of the beginning and end of a PE is relevant; for capital taxation only. By contrast, it need not be considered for income tax purposes. This is particularly true with regard to Art 7(1) (2).... As the rules on attribution of profits to a PE allow an attribution of earnings and expenses to the PE even if they have accrued at a time when the PE had not subsisted yet - or vice versa, after the PE ceased to exist. (pp.348-349) Philip Baker, in his book Double Taxation C nventions also echoed a similar view where he observed as under- 5C.1111 The permanent establishment ceases to exist with the disposal of the fixed place of business or with the cessation of any activity through it, that is when all acts and measures connected with the former activities of the permanent establishment are terminated (winding up current business transactions, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant is primarily a finding of fact based on the appreciation of evidence. No change in the factual matrix is pointed out by (he appellant, and the finding returned does not raise a substantia auestier of law. Accordingly and in view of the above, grounds of appeal challenging the existence of PE deserve to be dismissed. 5.1 In respect of other grounds in assessee s appeal, the Ld. CIT (DR) placed reliance on the observations and findings recorded by the AO and the Ld. CIT (A) and in respect of the grounds in the Department s appeal, reliance was placed on the AO. 6.0 We have heard the rival submissions and have also perused the material on record. The essential question arising for determination by us in assessee s appeal is whether the assessee has a fixed place PE in India or not during the year under consideration. The Tribunal in assessee s own case for assessment years 2006-07 and 2008-09 has held that the assessee has a fixed place PE in India but the assessee does not have a dependent agent PE in India nor does have a service in India. It has also been held by the ITAT in assessee s own case for assessment year 2006-07 and 2008-09 as aforesaid that profits coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hand, the Ld. CIT (DR) has vehemently placed reliance on the order of the ITAT in earlier assessment years 2006-07 and 2008-09 wherein the Tribunal had held that the assessee had a fixed place PE in terms of Article 5 (1) of the DTAA. It has also been argued by the Ld. CIT (DR) that a PE begins to exist as soon as an enterprise commences to carry on its business through a fixed place of business and the PE ceases to exist with the disposal of the fixed place of business or cessation of any activity through it that is all the acts and measures connected with the activities of the PE are terminated for this proposition, Ld. CIT (DR) has placed reliance on the OECD guidelines as well as on the commentary by Klaus Vogel. It is the Ld. CIT (DR) s contention that if in one year it has been established that the assessee had a fixed PE in India, the onus is upon the assesee to prove that during subsequent years the fixed place ceased to exist/has been disposed of or is no longer at its disposal. 6.2 After duly considering the submissions of both the sides as well as the impugned order, we are of the considered opinion that the Tribunal in assessee s own case for Assessment Years 2006- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its is restored to the file of TPO for computing the attribution of profits with respect to the fixed place PE after giving due opportunities to the assessee to submit its computation and calculations. Thus, Ground Nos.3 4 in assessee s appeal and Ground No.3 in Department s appeal stand allowed for statistical purposes. 7.0 As far as the department s appeal is concerned, it is challenging the act of the Ld. CIT (A) in holding that the assessee did not have a dependent Agent PE or a service PE in India and it also challenges the reduction in profit attribution done by the AO. The Department s appeal also challenges the action of the Ld. CIT (A) in holding that the receipts towards IPLC / link charges were not taxable in India as royalty. The issues raised by the department are squarely covered in favour of the assessee by the order of the Tribunal in assessee s own case for assessment year 2006-07 and 2008-09. The relevant observations of the ITAT with respect to the assessee not having a service PE in India are contained in paragraph 3.10 of the order of the Tribunal and it has been followed by the Ld. CIT (A) in the year under consideration. Observations of the Tribunal are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT (A) has duly taken note of this order of the Tribunal as has made the following observations: Regarding the constitution of dependent agent of PE (DAPE) of the Appellant in India, I am in agreement with the submission of the Appellant and the order of the ITAT in Appellant s own case for AY 2006-07 and AY 2008-09. In view of the business model of the Appellant and in absence of any material on record that the conditions mentioned in Article 5(4) of the DTAA is satisfied viz. habitually exercising authority to conclude contracts or maintaining stock of goods or habitually securing orders. I am of the view that CIS did not constitute a dependent agent PE of the Appellant in India. In view of this, Grounds 5.9 to 5.11 are allowed. 7.1.2 In this case also, the department has not been able to bring out any distinguishing facts in this year under consideration and, therefore, following the order of the ITAT in earlier assessment years, we dismiss the related grounds in department s appeal in this year also. 7.2 Similarly, the issue of payment link charges/IPLC charges being taxable under royalty has been decided in assessee s favour by the Tribunal in assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant and jurisdiction High Court s decision of New Skies Satellite BV (Supra) wherein it is held that the amendment in section 9 will not affect the DTAA, I find that the payment of link charges received by the Appellant from Conuergys India Services Rut. Ltd. would not qualify as process royalty in terms ofArticle 12 of lndia-US DTAA. Hence, the ground of appeal, including additional ground of appeal is allowed. 7.2.2 Therefore, in absence of any contrary facts having been pointed out by the department, in view of the order of the coordinate bench in assessee s own case as aforementioned, we dismiss the related grounds raised by the department in this regard. 7.3 After this the only issue remaining to be adjudicated in the department s appeal is the action of the Ld. CIT (A) in reducing the profit attribution done by the AO with respect to fixed place PE in India. As we have already restored the ground in assessee s appeal challenging the finding regarding fixed place PE, the grounds relating to profit attribution in both the appeals also need to be restored to the AO/TPO with similar directions as contained in Para 6.0 above. It is so directed. 8.0 In the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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