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TMI Blog2024 (1) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... t to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. This means that a fixed place of business should satisfy, amongst others, the power of disposition test to qualify as PE under Article 5(1). The core business of the foreign enterprise should be conducted through the place of business which means that there should be a nexus between the place of business and carrying on of business. Supreme Court in the case of Formula One World Championship Ltd [ 2017 (4) TMI 1109 - SUPREME COURT] after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, international tax jurisprudence observed that in terms of Article 5(1) of the India-UK Tax Treaty, a fixed place PE is constituted in India, if the following twin conditions are satisfied viz, (i) Existence of a fixed place of business at the disposal of the foreign enterprise in India; (ii) through which the business of the foreign enterprise is wholly or partly carried on. On the issue of fixed place of business , we find that the facts considered by the Hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable as no business connection has been established under Article 5 of the DTAA between India and the US. For the sake of completeness, in respect of attribution of income to the PE, the Hon'ble Supreme Court in the case of Morgan Stanley Co. Inc [ 2007 (7) TMI 201 - SUPREME COURT] has held that if the transactions between the PE and the foreign Associated Enterprise are found to have taken place at arms length prices, then there is no question of attributing any income to the PE. Levy of interest u/s 234A is consequential and the Assessing Officer is directed to charge interest as per provisions of law. Interest u/s 234B - The assessee being a non-resident, tax is deductible at source u/s 195 of the Act from the payments made to the assessee. Therefore, no advance tax was payable as per the provisions of section 208 r.w.s. 209 of the Act. Therefore, the assessee had no liability for payment of advance tax. Provisions of section 234B are not applicable.. Though the Finance Act, 2012 has amended the relevant provisions, but the said amendment is w.e.f. 01.04.2012 and not applicable for the years under consideration. - Shri N.K. Billaiya, Accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list is only indicative of list of activities: Preparing the corporate strategy for the EXL Group (including new service lines, prospective clients, etc.) Managing the flow of corporate funds for the EXL Group Preparing consolidated financial statements for the EXL Group Managing relationships with corporate investors Undertaking sales and marketing activities and negotiating and concluding client contracts Undertaking all risks in respect of the client contracts including but not limited to business risk, bad debt risk, service liability risk, rework risk, etc. Managing relationships with clients to broaden the spectrum of services being offered by EXL group Incurring numerous expenses including compensation of employees and corporate overheads and technology and telecommunications related expenses. 7. From the above, it can be seen that a significant part of the activities was provided by the assessee from the US during the FY 2002 03 and Exl s primary function was delivery of the agreed outsourced services from India. For undertaking the aforementioned activities, the assessee has established marketing offices in various cities in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning thereby, that the assessee had authority to conclude the contracts on behalf of the Indian entity and Indian entity is fully controlled, operated and managed by the assessee. (vii) Activities of the assessee was minimum, yet it was in receipt of substantial income by retaining considerable portion of receipts from the client for which the entire processes were carried out by the PE in India and profits for A.Y 2003 04 was attributed to such PE on the basis of ratio of assets held by the assessee and Exl India. 11. On the above facts, we are of the considered view that since the assessee is a company resident in USA, it is entitled to treaty benefits under India - US Tax Treaty. Article 7 of the India US Tax Treaty dealing with taxation of business profits is as under: ARTICLE 7: Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , plantation or related activities are carried on; (i) a store or premises used as a sales outlet ; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period ; (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period ; (l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period ; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)]. 3. Notwithstanding the preceding provisions of this Article, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. 14. To constitute a fixed place PE, we have to look into the OECD Commentary on Article 5 of the OECD Model Convention, which states the following conditions should exist in order to constitute fixed place of business: the existence of a place of business , i.e. a facility such as premises or, in certain instances, machinery or equipment. this place of business must be fixed , i.e., it must be established at a distinct place wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orp has call centers and software development centers only in India. eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India. The master services agreement between the American and the Indian entity gives complete control to the American entity in regard to personnel employed by the Indian entity. It is only through the proprietary database and software of eFunds Corp, that eFunds India carries out its functions for eFunds Corp. The Corporate office of eFunds India houses an 'International Division' comprising the President's office and a sales team servicing EFI and eFunds group entities in the United Kingdom, South East Asia, Australia and Venezuela. The President's office primarily oversees operations of eFunds India and eFunds group entities overseas. The sales team undertakes marketing efforts for affiliate entities also. eFunds India provides management support and marketing support services to eFunds Corp group companies outside India. On this issues of fixed place PE, the Supreme Court relied on the decision of Formula One World Championship Ltd. vs. CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed place of business PE, this will be tackled first. Under Article 5(1), a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. What is a fixed place of business is no longer res integra. In Formula One World Championship Ltd. (supra), this Court, after setting out Article 5 of the DTAA, held as follows: . 12. Thus, it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies . The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. 15. Also, Shri Ganesh has pointed out that the two American companies have four main business activities which are: ATM Management Services, Electronic Payment Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. Transaction processing involves electronically transferring money from a person's checking or savings account according to his or her instructions. To carry out the tasks required, each ATM or POS device is typically connected to several computer networks. None of these networks is installed in India. These networks include private networks that connect the devices of a single owner, shared networks that serve several device owners in a region, and national shared networks that provide access to devices across regions. Each shared network has numerous financial institution members. eFunds US provides its Customers with access across multiple networks. eFunds US's Government services EBT (Electronic Benefits Transfer) business was started in response to federal mandates that require state and local Governmental agencies to convert to electronic payment methods for the distribution of benefits under entitlement programs, primarily food stamps and Transitional Aid to Needy Families. The EBT processing system manages, supports, and controls the electronic payment and distribution of cash benefits to program participants through ATMs and POS networks. As mentioned earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch eFunds US avails the services of eFunds India for bug fixing. The work performed by eFunds India for eFunds Government Services Business (EBT Processing) was limited to responding to the inbound calls made to its call centre for enquiry on non-acceptance of cheques and opening of accounts. (c) Decision Support Risk Management eFunds' US Decision Support Risk Management ( Risk Management ) segment provides risk management-based data and other products to financial institutions, retailers and other businesses that assist in detecting fraud and assessing the risk of opening a new account or accepting a cheque. This segment offers products and services that help determine the likelihood of account fraud and identity manipulation and assess the overall risks involved in opening new accounts or accepting payment transactions. SCAN: SCAN or Shared Cheque Authorization Network, helps retailers reduce the risk of write-offs for dishonoured cheques due to insufficient funds and other forms of account fraud or identity manipulation. When a cheque is presented as payment at the point-of-sale, SCAN members run the cheque through a scanner. The information on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customers' sites develop and maintain software for these service offerings. Services provided by eFunds India: The work performed by eFunds India involved responding to the inbound calls made by the customers located outside India to customer support center of eFunds US. These calls were routed to eFunds India for enquiry on nonacceptance of cheques and opening of accounts. eFunds India also provided software support services for SCAN and Chex process. eFunds India was only involved in bug fixing and software maintenance. (d) Global Outsourcing Services Professional Services eFunds US provide its clients with information technology and business process outsourcing services to complement and support its electronic payments business. Its business process management and outsourcing services focus on both back-office and customer support business processes, such as accounting operations, help desk, account management, transaction processing and call center operations. It consists of providing information technology services including maintenance of hardware and networks, installation of eFunds US electronic payment products and the integration of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this regard, this Court has held, in Morgan Stanley (supra), as follows: 18. It has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) is not satisfied . 21. Shri Ganesh has argued before us that the agency PE aspect of the case need not be gone into as it was given up before the ITAT. He is right in this submission as no argument on this score is found before the ITAT. 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. Shri Ganesh is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to 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 PE). 20. A comparative chart of the facts of the case in hand and those considered by the Hon'ble Supreme Court in the case of eFunds IT Solutions and Ors [supra] is as under Particulars E-Funds case Appellant s case Foreign entity (eFunds Corp) has BPO service provider only in India Yes Yes Employees of the Foreign entity (eFunds Corp) are seconded to Indian Entity (eFunds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated that Shri Rohit Kapoor as Chief Financial Officer has signed agreement both for Exl Serviuces.com [India] Private Limited and Exl Services India Private Limited to which the ld. counsel for the assessee vehemently stated that agreement which is referred to by the ld. DR is between Conseco Inc and Exl Service.com India Private Limited and made a categorical finding that Shri Rohit Kapoor is not employed with the Indian company but is under employment of Exl US and pointed out that the addresses for service of notices are different for Conesco Inc and Exl Delaware or Exl India. 25. Coming to the next allegation PE being Agency PE, in our understanding, an Agency PE is constituted where a person, other than an agent of an independent status, is acting on behalf of a US enterprise in India and such person has authority to conclude contracts on behalf of the US enterprise and such authority habitually secures orders in India wholly or almost wholly for the foreign enterprise. 26. On the facts of the case in hand, such conditions are absent, as Exl India has no authority to conclude any contract on behalf the US enterprise and all customers are based out of US and none of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India does not have effect or consequence of EXL India becoming the PE of the assessee in India. The assessee being the major shareholder of EXL India, it has the legal right to nominate a director on the Board of EXL India and merely because the assessee has nominated a director on the Board of EXL India would not mean that the assessee has a Place of Management in India. 29. Considering the facts in totality in light of the decision of the Hon'ble Supreme Court in the case of eFunds IT Solution and Ors [supra] and Morgan Stanley Co. Inc [supra], we are of the considered view that the assessee does not have a fixed place PE in India, Service PE in India and dependent Agent PE in India. Therefore, no profit is attributable as no business connection has been established under Article 5 of the DTAA between India and the US. 30. For the sake of completeness, in respect of attribution of income to the PE, the Hon'ble Supreme Court in the case of Morgan Stanley Co. Inc [supra] has held that if the transactions between the PE and the foreign Associated Enterprise are found to have taken place at arms length prices, then there is no question of attributing any income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im. Accordingly, this ground is allowed for statistical purposes. 33. Ground No. R relates to the levy of interest u/s 234A, 234B and 234c of the Act. 34. Levy of interest is consequential and the Assessing Officer is directed to charge interest as per provisions of law. 35. In so far as interest u/s 234B is concerned, u/s 195 of the Act, tax is deductible at source from payments made to non-residents. The assessee being a non-resident, tax is deductible at source u/s 195 of the Act from the payments made to the assessee. Therefore, no advance tax was payable as per the provisions of section 208 r.w.s. 209 of the Act. Therefore, the assessee had no liability for payment of advance tax. Provisions of section 234B are not applicable. 36. For this proposition, we draw support from the decision of the Hon'ble Supreme Court in the case of M itsubishi Corporation 438 ITR 174 wherein the Court held as under: 20. We do not find force in the contention of the Revenue that section234B should be read in isolation without reference to the other provisions of Chapter XVII. The liability for payment of interest as provided in section234B is for default in payment of advance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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