TMI Blog2010 (9) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... butable This methodology/ formula will be more helpful in arriving at the reasonably correct amount of attributable income, being comparatively just, fair and equitable - law is very clear that Sec. 195(1) is applicable to a person who pays any amount by way of income to non-resident. In assessees’ case the revenue has been recognized in India by eFunds India International - how the balance income, which should have been recognized in India can become liable to TDS in India - the assessee is liable to interest u/s 234A & B, as the income being assessed now cannot be held to be income liable to TDS under Indian provisions Provisions of sections. 234A & B are mechanical in nature, as held by Hon’bleble Supreme Court in the case of Anjuman Ghaswala 252 ITR - In the result, assessees’ appeals are partly allowed for statistical purposes. Revenue’s appeals are allowed - IT APPEAL NOS. 3668 TO 3676 AND 3714 TO 3722 (DELHI) OF 2009 - - - Dated:- 30-9-2010 - ORDER PER R.P. TOLANI, J.M: This is a group of cross-appeals by above interconnected assessees and the department arising out of common order of the CIT(A)-XXXIX, New Delhi dated 25-05-2009. Assessment year wise appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of proceedings and framing the assessment same were without jurisdiction and hence deserve to be quashed as such. 3. That the learned Commissioner of Income Tax (Appeals) has further erred in upholding the addition of ₹ 2,22,93,920/- out of an aggregate addition of ₹ 2,81,70,560/- by holding that, appellant company had a business connection under section 9(1)(i) of the Act and, Permanent Establishment under Article 5(1), 5(2)(i) and 5(5) of the Double Taxation Avoidance Agreement between India and USA on complete misconception of facts of the appellant company and statutory provisions of law. 3.1. That the learned Commissioner of Income Tax (Appeals) while upholding the assessment, has failed to appreciate: (a) That the order of assessment computing income was based on in disregard of the fact that, the assessee had neither an LO nor a Permanent Establishment nor it was carrying on any business in India or that it had any business connection in India; (b) That even otherwise, the basis of computing income was arbitrary; (c) That even if such a basis is adopted, there was no income liable to be assessed; (d) That in any case and without prejudice, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the payments are made to Nortel India Ltd. by the appellant on a regular basis through the deduction from the payment to the appellant at 5% or lump sum payment in accordance with the contract, which has been entered into for a period of two years; (c) That it is not in dispute that the entire activities of the appellant in India are carried out by M/s eFunds International India (P) Ltd. (hereinafter referred to as EFI ) and as already mentioned that the agent has not remunerated on arm s length price as defined by the Hon bleble Supreme Court in the case of Morgan Stanley Co. In fact there was no dispute that the payments have been made to EFI at arm s length price. (d) That the learned Commissioner of Income Tax (Appeals) has further factually erred in concluding that even though business operations are being carried out by EFI, the risks of the appellant are not being transferred to EFI and EFI is only undertaking limited risk and therefore, arm s length remuneration as determined does not include the entire risk of the appellant with regard to the services being rendered by the appellant to their customers and therefore, the appellant had a business connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Commissioner of Income Tax (Appeals) has failed to appreciate that, in any case and without prejudice, assets used by EFI to provide services to its local clients ought to have been excluded while calculating the proportion of value of assets in India and value of global assets to determine percentage of global profits attributable to India. 9. That the learned Commissioner of Income Tax (Appeals) has also failed to appreciate that since in the option of the learned officer alone, total income to be allocated was 5.65% of income from global operations i.e. 1.07 million USD (being 5.65% of 18.99 million USD) and income declared by Indian subsidiary namely M/s EFI was 6.41 million USD, which was far higher than the figure of 1.07 Million USD, the income therefore determined was unjust, arbitrary and unsustainable. 9.1.That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts by failing to appreciate that the methodology adopted was not only arbitrary, misconceived but wholly untenable on facts and in law which can be illustrated from the chart enclosed. 9.2. That the learned Commissioner of Income Tax (Appeals) has failed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. eFunds International India Pvt. Ltd. became a wholly owned subsidiary of M/s. eFunds Corporation, USA. 5.1. In so far as M/s eFunds Solutions IT Solutions Group INC is concerned, it is a wholly owned subsidiary of M/s Idlx International BV and, thus is a wholly owned subsidiary of eFunds Corporation, USA. The pictorial representation of the above-stated business is as under: 5.2. M/s. eFunds International India (P) Ltd. is a company carrying on business in India and was established in the year 1997. It has been furnishing its return of income in India and, is being separately assessed to tax in India. M/s. eFunds International India (P) Ltd. is carrying on business in India, and is providing service to the appellant M/s. eFunds Corporation Ltd. by way of providing: (a) call center services; (b) financial shared services and data entry; and (c) software development services and, for such services, M/s eFunds International India (P) Ltd. is being compensated by way of remuneration, which is being assessed accordingly as Indian, resident assessee. In so far as the appellants M/s. eFunds Corporation and M/s. eFunds IT Group Solutions Inc are concerned, since they did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the reopening of assessments in the cases of appellants. It is pertinent to mention that ld counsel s initial grounds about non writing of reasons and non furnishing of reasons for A.Y. 2000-01 have been replied by ld DR Shri Ashwani Mahajan that reasons for proceedings were recorded. 6.1. Taking the arguments further it is pleaded that framing of assessments u/s 147/148 is bad in law and on facts on following arguments: 6.2 Ld counsel, at the outset, sought to refer to the reasons recorded for initiating proceedings u/s 147 of the Act, for demonstrative purposes referred to assessment year 2001-02. It was contended that the aforesaid reasons recorded by AO are based on no material as there was no new material on record to form a prima facie belief that the income of the appellant assessees for impugned financial years escaped assessment. The purported material referred by the learned Officer were annual reports for calender years. In absence of any material AO cannot have been any justification to have reason to believe that income of the appellant has escaped assessment for this year. For other years also annual reports cannot form any new material as they are printed g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89-90 to 1994-95, it was held by the Hon bleble Court that, this fact alone could not confer jurisdiction and, in absence of any material for the year under consideration, the proceedings initiated are without jurisdiction. It was held therein affirming the order of Tribunal, as under: The Tribunal while allowing the appeal filed by the assessee came to the conclusion that first of all the nature of the income that has escaped assessment ought to have been indicated and in any case there was no rational or intelligible nexus between the reasons given by the Assessing Officer and the action taken by him. Admittedly, no application was filed by the assessee before the Settlement Commission with regard to the assessment year 1995-96. Merely because an application was filed in respect of some other years cannot be a rational or intelligible ground for initiating reassessment proceedings for the assessment year 1995-96. The Tribunal relied upon Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1, wherein the Supreme Court observed as follows: ... If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional connection or relevant bearing to the formation of the belief that is claimed to have been held at the time when he issued the notice. 6.6. There was no basis with the learned Officer to assume that income of the appellant exceeding ₹ 1,00,000/- has escaped assessment as the reasons recorded are highly vague and do not indicate possible amount of escapement. It was thus contended that pre-conditions provided under section 149 of the Act for initiating proceedings under section 147 of the Act have not been satisfied and therefore, proceedings initiated is not in accordance with law. 6.7. It is further submitted that approval granted on such fact by the learned Additional Director of Income Tax, Range 2, International Taxation is also mechanical and without application of mind. Reliance in this context was placed on the following judgments: (a) 79 ITR 603 (SC) Chhugamal Rajpal vs. S. P. Chaliha and Others (b) 258 ITR 317 (Del.) United Electrical Co. P. Ltd. vs. CIT (c) 267 ITR 716 (P H) Mohinder Singh Malik vs. CCIT 6.8. The proceedings initiated for each of the assessment years are without jurisdiction since no notice under section 148 of the Act has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO can re-open the completed assessment; f) The expression reason to believe predicates that the Assessing Officer must hold a belief. In other words, it contemplates existence of reasons on which belief is founded and, not merely a belief in the existence of reasons, including the belief. Such a belief may not be based merely on reasons but it must be founded on information; g) The existence of tangible material for the formation of opinion is a pre-requisite for initiation of action u/s 147 of the Act, as has been held by the Apex Court in the case of Ganga Saran Sons (P) Ltd. 130 ITR 1; h) Explaining the scope of expression information , reliance was placed on the judgment of Delhi High Court in the case of L.R. Gupta vs. Union of India reported in 194 ITR 32; i) That when a challenge is made to the action under section 147 of the Act, what the court is required to examine is, whether some material exists on record for the AO to form the requisite belief and the reasons for the belief have a national nexus or a relevant bearing to the formation of belief. 6.11. Applying these facts to the facts of the instant case, it is evident from the reasons record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious cardholders for the purpose of verification and, revenues were shared from the ATM machine installers. Here also no activity was carried on by the appellants in India and, therefore no income accrued in India. c) Decision Support and Risk Management That appellants further provide decision support and, risk management services by providing 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 check. These products and services are based on or enhanced by appellant s proprietary databases such as Debit Bureau , ChexSystems (SM) and SCAN(SM) and other sources. Neither the customers to whom such services are provided are situated in India nor the services are provided from India and, therefore no income accrued to the appellants in India. d) Professional Services Professional Services include business process management and IT outsourcing services, EFT software sales and software applications development, maintenance and installation services. The appellant s business process management and outsourcing services focus on bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and 15 being income of M/s eFunds Corporation and, M/s eFunds IT Solutions Group Inc. respectively. (v) On similar basis assessments had also been made on M/s eFunds IT Solutions Group by holding that it had a PE in India and, income therefore is attributable to tax in India. (vi). Mutual Agreement Procedure (MAP) order which is provided under Article 27 of Double Taxation Avoidance Agreement (DTAA) (herein after referred to as MAP ) between India and USA, reads as under: We have concluded our consideration of eFunds Corporations (eFunds) request to competent authority assistance. The request resulted from a determination by India that, eFunds and, its US subsidiary eFunds IT Solutions Group Inc (IT Solutions) had permanent establishments in India. To date, assessments have been made by India against eFunds for the tax year ended March 31,.2003 and, IT Solutions for the tax years ended March 31,2003 and, 2004 Although we do not agree on the technical merits that eFunds and IT Solutions had a PE in India, we reached a mutual agreement with a view to avoid double taxation. .. 6.15.Assessing Officer ____ proceeding u/s 147/148 adopted the basis for Assessment Ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147/143(3) 147/143(3) 147/143(3) 147/143(3) 147/143(3) 7. Date of completion of assessment 28/12/2007 28/12/2007 28/12/2007 28/12/2007 28/12/2007 8. Income assessed (in Rs.) 4,36,200 2,81,70,560 11,77,54,400 17,22,38,220 18,98,31,250 9. Basis adopted by Assessing Officer That profits were attributed in the proportion of the written down value of global assets of the entire group of companies of the appellant vis- -vis the written down value of the assets held by eFunds India in the manner as per the Annexures enclosed for each of the assessment years under consideration 10. Date of order of CIT(A) 25.05.2009 25.05.2009 25.05.2009 25.05.2009 25.05.2009 11. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,07,88,800 3,35,12,500 9. Basis adopted by Assessing Officer That profits were attributed in the proportion of the written down value of global assets of the entire group of companies of the appellant vis- -vis the written down value of the assets held by eFunds India in the manner as per the Annexures enclosed for each of the assessment years under consideration. 10. Date of order of CIT(A) 25.5.2009 25.5.2009 25.5.2009 25.5.2009 11. Income after relief granted by CIT(A) (in Rs.) 65,430 39,17,760 1,55,67,200 2,82,18,750 12. Basis adopted by CIT(A) The global profits of the entire group of companies of the appellant were allocated to the PE in India. Profits were attributed in the proportion of the gross value of global assets of the entire group of companies of the appellant vis- -vis the gross value of the assets held by eFu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are carried out in India and, therefore in view of the judgment in the case of UAE Exchange Centre LLC, appellants have a business connection in India; -That claim of the appellant that remuneration are paid at arms length is not supported by facts and, moreover the fact that, the same are at arms length will not alter the legal position as remuneration may be relevant for PE but doesn t have any legal impact on existence of business connection; -That appellants have undertaken a number of projects which involve financial accounting, BPO, Software development and, maintaining a help desk for ATM. For all these activities, remuneration are being paid to the appellants by their customers and, all these activities result in earning of income and, thus there can be no doubt that business connection exists. - That M/s eFunds India is not bearing the entire risk of business and, it is only very limited risk which is with respect to BPO, Call Centre, accounting service and, software development and, accordingly the remuneration that, has been paid in accordance with the TP study does not include all the risks of appellant and, in view of the decision of Morgan Securities as ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e levy of interest u/s 234B of the Act by relying on the amendment made in Explanation to section 191 of the Act by Finance Act 2008 w.e.f 01.04.2003. E That he also upheld the assumption of jurisdiction u/s 147 of the Act by holding the action was based on the order of assessment for A.Y. 03-04 and, MAP proceedings for that year. Apart from above, annual report of the appellant s enable the learned Assessing Officer to have a reason to believe that, income of appellants have escaped assessment. 6.20. Learned counsel for assessee vehemently assails these findings and contends that the learned Commissioner of Income Tax (Appeals) has erred in holding that, appellant companies had business connection under Section 9(1)(i) of the Act and, Permanent Establishment under Article 5(1), 5(2)(i) and 5(5) of the Double Taxation Avoidance Agreement between India and USA on complete misconception of facts of the appellant and statutory provisions of law. He failed to appreciate that the order of assessment computing income was based on in disregard of the facts that, the appellants neither had Liaison Office or Permanent Establishment nor it was carrying on any business in India and had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds India and has orally mentioned that the agent has not remunerated on arm s length price as defined by the Hon bleble Supreme Court in the case of Morgan Stanley Co. The CIT(A) has failed to appreciate the fact that the department has not at all disputed the arm's length remuneration paid by the appellants to eFunds India. As a matter of fact, the arm's length remuneration received by eFunds India has been subjected to assessment by the department during the course of assessment proceedings of eFunds India. The department has accepted the arm's length remuneration for continuous three assessment years i.e. AY 2002-03, 2003-04 and 2004-05. The remuneration received by eFunds India has been subjected to some adjustment in the assessment year 2005-06. However, such adjustment is related to alleged inappropriate comparables chosen by eFunds India and, such adjustment is not all related to any additional risks/activities being undertaken by eFunds India 6.22. It is contended that the above findings given by the learned CIT (Appeals) are not correct both on facts and in law. CIT(A) heavily relied on in the cases of Lucent Technologi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse, in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, 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 Contracting State by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided 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... 6.26. Article 5(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a P.E. stood constituted one has to undertake what is called a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of the AAR that in the present case article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5(1) is not attracted. 6.28. On above finding, Supreme Court held that back office functions carried out by the Indian Subsidiary does not constitute to be a PE under Article 5 of the DTAA between India and USA. It is thus evident that, the learned CIT(A) has failed to appreciate the above judgment while holding that appellants have a PE in India under Article 5(1) of DTAA. 6.29. Article 5(2)(I) And Article 5(5) are inapplicable to assessees as they neither have any store nor premise which is used as a sales outlet in India and hence the application under Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 6.31. It is contended that, M/s. eFunds India neither has any authority nor habitually exercises any such purported authority to conclude contracts on behalf of the appellants, it does not maintains any stock of goods or merchandise on behalf of the appellants. Further, M/s. eFunds India also does not secure orders for the appellant., even assuming that it is not an agent of an independent status (though the same is seriously disputed), yet it cannot be held that, the appellants have a PE in India since the conditions mentioned in Article 5(4) of DTAA remain unsatisfied. 6.32. Since, neither Article 5(1) and nor Article 5(2)(i) and nor Article 5(5) of DTAA can be justifiably invoked to hold that the appellants have a PE in India and, therefore in view of the judgment of the Apex Court in the case of CIT v P.V.A.R. Kulandagan Chettiar 267 ITR 654 that, if an assessee does not have a PE in India, income derived from business outside India is not assessable in India. 6.33. Ld. Counsel further contends that Article 5(5) specifically provides that, if an enterprise of a contracting state ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n activity was carried out by the Indian entities under the terms of separate installation contracts with the Indian Telecom operators. It was alleged that the appellant had a PE in India, on account of the fact that the supply contracts were signed in India and title/risk in equipment supplied to Indian telecom operators was transferred in India. In the aforesaid case, it has been laid down by ITAT, while holding that the appellants do not constitute a PE in India and supply revenues are not taxable in India that, where the title and risk in the telecom equipment passes outside India, no income accrues to the appellant in India from sale of telecom equipment. In the instant case, even contracts have also been executed outside India. Therefore, relying on the above principles laid down by ITAT, no portion of income from supply of goods can be taxed in the hands of the appellant in India. In fact, Hon bleble Apex Court judgment in the case of Ishikawajima Harima Heavy Industries Co. Ltd. on an SLP filed by the assessee against the Ruling of Authority for Advance Rulings reported in 271 ITR 193 has held in the case reported in 288 ITR 408 that, (1) That only such part of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions in respect of risks assumed indicate that appellants retain major risk. Accordingly, it is clear that the remuneration which has been paid in accordance with the T.P. study, does not include all the risks of the Multinational Enterprise (i.e. the appellant) and therefore, in view of the decisions of Supreme Court in the case of Morgan Stanley as explained by the ITAT in case of Rolls Royce the payment of remuneration at the level indicated in the T.P. Report will not extinguish the assessment of both the appellants 6.38. It was not appreciated that appellants have not undertaken any risk in India. As a matter of fact, the appellants did not have any clients in India. Therefore, there could not arise any income which can be attributable in India other than those already paid to eFunds India. Learned CIT(A) has overlooked that, the department has not at all disputed the arm's length remuneration paid by the appellant to eFunds India. As a matter of fact, the arm's length remuneration received by eFunds India has been subjected to assessment by the department during the course of assessment proceedings of eFunds India. The department has accepted the arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutions), had permanent establishments in India. To date, assessments have been made by India against eFunds for the tax year ended March 31, 2003, and against IT Solutions for the tax years ended March 31, 2003 and 2004. Although we do not agree on the technical merits that eFunds and IT Solutions had a PE in India, we reached a mutual agreement with a view to avoid double taxation. Per the terms of the mutual agreement, income will be attributed to India by applying certain developed and acquired tangible and intangible attribution factors to operating income. Details o the calculations are provided in the attached Exhibit 1. In addition, payments by Indian subsidiary eFunds International India Private Ltd. to eFunds and IT Solutions will not be subject to withholding tax in India. The implementation of the determination reached by the U.S. Competent Authority will require eFunds acceptance of the following terms of disposition: 1. Correlative Adjustment: eFunds income will be decreased by $2.24 million and IT Solutions income will be decreased by %0.84 million as detailed in Exhibit 1. The earnings profits of each company will be decreased by the same amount. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by Apex Court in the case of CIT v. MR. P. Firm, MUAR reported in 56 ITR 67 that, conduct of parties cannot be operate against the statute and, conduct of parties has to be seen as a whole. There is no material on record to hold that, appellants have a PE in India. It is submitted that it has been held by the Apex Court in the case of ITO v Ch. Atchiah reported in 218 ITR 239 that correct income has to be computed irrespective of the fact that same has been taxed in incorrect hands. 6.42. Hon bleble Delhi High Court in the case of Bharat General Re-Insurance Co. Ltd reported in 81 ITR 303 and, Circular No. 14(XL-35) dated April, 11,1955, held as under : Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing relief s and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... September 1999, we changed the name of our Company to eFunds Corporation. In January 2000, we decided to combine Deluxe s professional services business, eFunds IT Solutions Group, Inc. and eFunds International India Private Limited, with our electronic payments and risk management business. In June 2000, we sold 5,5,00.00 shares of our common stock to the public at a price of $ 13.00 per share. After the IPO, Deluxe continued to own about 87.9% of the outstanding shares of our common stock. In December 2000, Deluxe distributed of the shares of our common stock owned by it to its shareholders through a tax-free spin-off (the Spin-Off) in which each of its shareholders received approximately 5514 of a share of our common stock of each Deluxe share owned by them. Following the Spin-Off. Deluxe ceased to own any shares of our common stock .has concluded that: The above dates of Mumbai Centre and eFunds Indian Internationals Operations since September 1999, indicate that both these appellants have been generating income through the Indian operations carried out by the entities for all the assessment years under appeal. It is clear from the above reproduction from the assessee s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that general rule. 6.47. It is well settled that, a judgment is an authority for what it actually decides and, not what can remotely deduced there from as held by various courts in : i. 188 ITR 402 (SC) Goodyear India Ltd. v. State of Haryana (SC) ii. 255 ITR 153 (SC) Padmasundara Rao v. State of Tamil Nadu Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Herrington v. British Railways Board [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Iii.198 ITR 297 CIT v. Sun Engineering Works P. Ltd. 6.48. Applying the above, a chart has been submitted to distinguish the cases relied on by learned Commissioner of Income Tax (Appeals) Sr. No. Name of the Judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a PE in India and no income is assessable to tax in India. 6.50. It is also pleaded by counsel that assessees have no business connection in India as, whether income is deemed to accrue or arise in India, section 9(1)(i) of the Act is a deeming section, which provides that, the following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any assets or source of income in India, or through the transfer of a capital asset situated in India .. Explanation -For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; 6.51.Section 9(1)(i) of the Act provides that all incomes accruing or arising, whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. It is submitted that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion unless the commercial connection was really and intimately connected with the business activity of the non residents in the taxable territories and, this contributing to the earning of profits in the said trading activity. 6.53. In the case of Carborundum Co. V CIT reported in 108 ITR 335, it was held that: The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in India; and (c) That real and intimate connection must exist within the operations carried on in India and, the business of the non-resident outside India; whereby profits of the business outside India can be held to be attributable to the operations carried on in India. 6.57. Mere fact that some of the work/activities were outsourced by the appellant viz. debtor management, call centre i.e. BPO, software development support etc. cannot be a basis in the given facts to hold that the appellants have business connection in India. Appellants do not have any business operations in India and, therefore no operations carried on in India can be held to be attributable, directly or indirectly, to the earning of income by the appellants. Burden was on the revenue to establish that appellants have business operations in India. It has merely been held that, services/facilities of eFunds India are operations of appellants in India. The operations of the eFunds India in India cannot by any stretch of imagination, be held to be operations of the appellants. It is reiterated that appellants and, M/s eFunds India have principle-to-principle relationship and, M/s eFunds India has an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantly and on real time basis available to eFunds India, constitute a fixed place PE of eFunds US in India: It is further submitted that, terminals were the property of eFunds India and not of the appellant. Moreover, the servers are not located in India and eFunds India only has a limited access to view the data located on servers and does not have any right to modify/edit the data. d) That most of the employees of the Appellant are operating from India: It is submitted that, the employees in India were the employees of eFunds India, which is a separate legal entity having its separate business activities, and not of the appellant. Without prejudice to the aforesaid, the allegation by Assessing Officer is in respect of the business segment professional services which is not the core business segment of the appellant. e) That the Appellants have a sales outlet in India: It is submitted that, appellant did not have any sales outlet in India. The sales outlets were those of eFunds India. The appellant even did not have any customer in India. f) That eFunds India has constant access to the database of the Appellant: It is submitted that, mere access to database located a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. 6.63. Hon bleble Supreme Court in the case of DIT vs. Morgan Stanley (supra) have further held at page 442 of the report as under: The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with P.E. in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the P.E. in India. The quantum of taxable income is to be determined in accordance with the provisions of the Income-tax Act. All provisions of the Income-tax Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry-forward and set-off losses etc. However, deviations are made by the DTAA in cases of royalty, interest etc. Such deviations are also made under the Income-tax Act (for example: sections 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the P.E. (MSAS). In other words, the said ruling equates an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed on the current income of the assessee and by reducing the same by tax deductible at source. The tax need not actually be deducted at source and it is sufficient if the tax is deductible under the various provisions of the Act. In this case entire income has a character of being income on which tax was deductible at source. 6.66. The Uttaranchal High Court in the case of CIT vs. Sedco Forex International Drilling Co. Ltd. (264 ITR 320) has held that section 234B imposes interest, which is compensatory in nature and not as a penalty. The schemes of section 208 and 209 of the Act indicate that in order to compute the advance tax the assessee has to, inter alia, estimate his current income and calculate the tax on such income by applying the rates in force. It was held that under section 209(1)(d), the income tax to be calculated is to be reduced by the amount of tax which would be deductible at source or collectible at source, which in this case has not been done by the employer company according to the law prevailing for which assessee cannot be defaulted. Further reliance is placed on the judgment of the Hon bleble Delhi ITAT in the case of Motorola Inc. vs DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of India USA DTAA. 7.3. Having arrived at these conclusions, AO computed the income attributable to PE in India by taking 17.16% of global profits which corresponds to ratio of both tangible and intangible assets in India vis-a-vis global assets of the assessees. Thereafter, the profits attributable to Indian PE were divided amongst eFunds Corporation and eFunds IT Solution Inc. in ratio of 85:15 as suggested by the assessee itself. 7.4. Subsequently, the assessee invoked Mutual Agreement Procedure before USA/India Competent Authority, which passed an order dated 23.04.2007 which is referred to above. As per computation of income attributable to Indian PE as given in MAP order, the income of eFunds India was first reduced from global income of assessee and then balance was held as attributed Indian PE @ 10.48% for AY 2003-04 which represents percentage of assets in India vis-a-vis global assets of assessee. It is to be noted that only difference in computation of income made by AO and as made in MAP is regarding percentage of assets in India vis-a-vis global assets (17.16% adopted by AO and 10.48% as in MAP order) and rest of the method adopted by MAP just confirms the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as having the same business model and pursuing the same business activities. The AO has described various business lines of the assessee, in the reasons for reopening that under similar facts in AY 2003-04, the assessee was found to have business connection in India and a permanent establishment in India. On basis of these findings, the AO came to conclusion that income chargeable to tax has escaped assessment for the AYs involved. For the AYs 2000-01 and 2001-02, the AO has specifically mentioned that income which has escaped assessment for these AYs is likely to exceed Rs one lac. It is pertinent to note that the word written in section 149(1)(b) is likely , which cannot be read to mean as exact working of escaped income . Various case laws lay down that at the time of recording reasons, the AO is not required to work out exact calculation of escaped income. From various facts and figures as culled from annual reports of the assessee, AO formed a reasoned belief that income had escaped assessments for these years and is likely to exceed Rs one lac. Therefore, all necessary pre-conditions as mentioned in Explanation 2 (a) of section 147 are satisfied. Following case laws are rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings become invalid. The contention of the assessee that no reasons were recorded for AY 2000-01 is factually wrong as relevant assessment records have been produced before the Bench which reveals that reasons are duly recorded and placed on file. Copies of such reasons have been provided to the counsel for the assessee. 7.14. In this regard, it is submitted that issue has been discussed by CIT(A) on page 56 onwards of his order. The AO has reopened different AYs by writing similar reasons as the facts were exactly the same for all AYs concerned. The assessee says that reasons for all AYs except AY 2000-01 were communicated and objections thereto were filed, which were duly responded to by the AO. However, because of change in jurisdiction of these cases from one AO to another, the successor AO was not in knowledge of any request of the assessee asking for a copy of reasons for AY 2000-01 as such request, if any was never brought to his knowledge. The reasons for AY 2000-01 are similar to those for other assessment years, which were undisputedly communicated to the assessee. At the most, it may be called procedural lapse, which is curable and which is not fatal to the reassessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because as per section 148(2), notices should have been served on the appellant. This contention of the assessee is without any merit as notices were served upon the authorised representative is a service on the assessee who duly participated in proceedings. 7.20. In respect of Business Model of the assessee ld DR contends that the ownership structure of the companies of assessee group and its business model has been discussed by the CIT(A) in para 3 of his consolidated order. eFunds India is wholly owned subsidiary of a Netherlands company, which in turn is wholly owned by eFunds corporation. Similarly, eFunds IT Solution Inc. is wholly owned by eFunds Corporation through a Netherlands company. 7.21. CIT(A) has discussed different operations being conducted by different divisions of eFunds India like Shared Services centre, Gurgaon, Call Centre Mumbai. Software Development centre, Chennai and Corporate Office, Mumbai. CIT(A) has found that eFunds Corporation enters into contract with its clients for providing certain IT enabled services and then, the same contract is either assigned or sub-contracted to eFunds India for execution. Therefore, both eFunds Corporation and eFun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vs UOI (2009-TIOL-84-HC-DEL-IT) 7.24. These case laws have laid down general parameters that for a business connection to occur in India, non-resident should be engaged in some business outside India, it should be doing some business activities in India which lead directly or indirectly to income generation for the non-resident, the connection between two should be real and intimate one and activities which are of casual or isolated character would not fall with the ambit of aforementioned test. All these parameters are available in the case under consideration. The non-resident assessees (viz. Funds corporation and eFunds IT Solution Inc.) are engaged in providing IT enabled services, they are operating in India through eFunds India as discussed in business model, the activities being conducted in India are generating income and there is continuous, real and intimate connection between the two. Hence, there being business connection in India, the income of the assessee is taxable in India as per section 9(1)(i) of IT Act, 1961. 7.25. In respect of Permanent Establishment (PE), it is pleaded by ld DR that it is to be seen whether the income of assessee is taxable in India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a being its partners thereby making eFunds India as PE of the assessee company. These concepts have been recognised by Hon bleble Delhi ITAT in case of M/s Lucent Technologies, appeal No. 2224/Del/2001, which says that: 7. We have considered the rival submissions. At the outset, what is noticed from two agreements, being the one between the Escotel and the assessee and the other between Escotel and AT T(India) Pvt. Ltd., now known as LTIL shows that the contract is for two different purposes. The agreement between Escotel and the assessee herein is for the supply of the hardware and software. The agreement between Escotel and LTIL is for commissioning, installation and operations. However, both the agreements provided for turnkey functioning of the project of GSM network. In short, what is noticed is that by entering into contract by Escotel with both the assessee and LTIL, Escotel has made both the assessee and LTIL responsible for the turnkey completion of GSM project, individually and severally. Thus, if either one breaks its terms of conditions of contract with Escotel, the other would be responsible for its completion. In short, a consortium or partnership has been created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above wording competent authorities held that three is PE and income is attributable. Working of attribution of income:- : 7.33. Once it is demonstrated that there is PE of eFunds Corporation USA and eFunds Solutions in India, their income becomes taxable in India as per provisions of Article 7(1) of DTAA to the extent that the income is attributable to such PE. The AO has followed the method as prescribed in MAP order for AY 2003-04. The methods of computation of income attributable to PE in India as adopted by AO for AY 2003-04 and as adopted by MAP order are exactly the same but for minor difference of percentage of Indian assets to global assets taken for the purpose of attributing profits to Indian PE. 7.34. It is undisputed that the assessee is not maintaining India specific accounts. Under these circumstances, the AO is empowered to resort to provisions of Rule 10. The court will not interfere if AO has made a fair estimate of income on a reasonable basis, as has been held by Hon bleble courts in cases of 70 ITR 450 (Bom) and 60 ITR 423 (SC). Even if estimate is based on guess work, court might not interfere if the assessee has not placed proper material justifyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgan Stanley Co. 292 ITR 416 contending that no adverse inference can be drawn in case of assessment of eFunds India with respect to payments received from eFunds Corporation. 7.39. This contention of the assessee counsel is not correct. The relevant part of Hon bleble Supreme court decision is as under: The impugned ruling is correct in principle so far as an associated enterprise, that also constitutes a PE, has been remunerated on arm s length basis taking into account all risk taking functions of the enterprise. In such cases, nothing further would be left to be attributed to PE. The situation would be different if transfer 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. There, 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 upon the functional and factual analysis to be undertaken in each case . 7.40. From perusal of these observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies under the same or similar conditions and dealing wholly at arm length with enterprise of which it is a permanent establishment and other enterprise controlling, controlled by or subject to the same control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with principles contained in this article. 7.42. eFunds India is an Indian entity (resident status) and it is getting some payments from foreign enterprise as price for services it is rendering to foreign enterprise. These payments have to conform to transfer pricing regime and are taxable in hands of eFunds India in its status as resident as per provisions of Indian income Tax Act, 1961. Further, assessees viz. eFunds corporation and eFunds IT Solution Inc. are having economic presence in India as service PE (represented by establishment of eFunds India) and therefore these will be subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee that since eFunds India has been remunerated on arm length basis, therefore assessment of PE gets extinguished is not correct as risks/assets belong to foreign enterprise and not to eFunds India and therefore income attributable to PE as per Article 7(2) of DTAA is more than the payments received by eFunds India for the services provided by it to eFunds Corporation USA. Assessees liability for interest u/s 234A and 234B : 7.44. The assessee, relying on various case laws, contends that since tax is deductible on all the payments made to it u/s 195 of IT Act, 1961, it is not liable to pay advance tax as per provisions of section 209(1)(d) of IT Act and hence the interest u/s 234B is not leviable. 7.45. Provisions of section 195(1) of IT Act, 1961, read as under: Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this act (not being chargeable under the head Salaries) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessment proceedings the AO framed the assessment for A.Y. 2003-04. However, the AO came to a belief that the business connection was in existence on some business model even in earlier years as was evident from the annual report 2002 and 2003. In the cases returns are not filed by the assessees and AO came across global accounts, on which he relied on for one year and framed a proper assessment as a revenue officer, it will be call of his duty to go into the other years, looking to the continuity of business and operations. Assessee contended that subsidiary eFunds India represents all the Indian operations carried out by this group, however, accept that the business model and interconnection of operations is same as earlier. In these circumstances it will be AO s duty to look into the global accounts. The fact that AY 2003-04 assessment was in progress and many transactions came to AOs notice in respect of earlier years also, will constitute reasonable material and proper facts for consideration of invoking 147/148 proceedings. . 8.2 The AO has also mentioned to the fact that appellants have initiated provisions of article 27 of the DTAA wherein the US competent authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re so when returns of income are admittedly not filed. The issue of new information coming into the possession of the AO, will arises if assessee has filed the returns or AO has framed an assessment. In these cases the distinct feature exist that assessees did not file any return of income and above material will constitute relevant material. Therefore, it is clear that AO was within his jurisdiction to have proceeded u/s 147/148. 8.5. Hon bleble Delhi High Court in Sharda Trading Co. V. CIT (1984) 149 ITR 19 has observed that section 147 empowered the Income-tax Officer only to assess income which had escaped assessment in the relevant year and that reassessment is not confined to those items in respect of which there is initiation of proceedings and once an assessment is reopened, the Income-tax Officer is duty-bound to determine the tax liability of an assessee and, for the said purpose, he would necessarily have to take into account not only the escaped income in respect of which a notice under section 148 read with section 147 had been issued but also the entire income that had escaped assessment during that year. Further, a Division Bench of the Madras High Court in CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of notice. It was so held in the case of G.Sukh vs. DCIT 252 ITR 320. (iv) Hon bleble Supreme Court in case of CIT Vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 which are as under: Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayer. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. ITO (1991) 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether it had a positive impression that income must have escaped assessment. It is a well settled proposition that courts should see that the reasons recorded make out a prima facie case of a reasonable belief that income has escaped assessment, it does not mean that court should see that they should see demonstrative certainty. Initiation of proceedings are to be examined on the touchstone of prima facie relevancy of material and opinion of the AO in holding the belief about same. Respectfully relying on Hon bleble Supreme Court Judgments in the cases of Phoolchand Bajranglal, Raymond woolen Mills and other citations we have to uphold the initiation of proceedings u/s 147/148 by AO as conforming to the procedure. In our view AO had before the material in the form of- Assessment order for AY 2003-04, annual accounts, business model and business strategy were same, business arrangements and strategy among these entities being same thereby the transactions and resultant income had linkage to earlier years. These information s and material on record of prudent revenue officers are sufficient to hold a belief that income has escaped assessments in years under appeals and to initiate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursed on a cost plus 16% basis. The basis for margin fixation is not known. It is not out of place to mention that the assessee has not filed the Form no. 3CEB as required by Section 92E of the Act, for which separate penalty proceedings are being initiated. In the transfer pricing study report, the arm s length price of the international transactions relating to reimbursement of expenses to associated enterprises and reimbursement of expenses by associated enterprises is not determined. Even it is not identified that on what account telecommunication costs are incurred by PEs and what are the expenses incurred on employees training and entertainment? The important thing is regarding the salary of employees seconded to eFunds India. It is not mentioned, why such employees are seconded to eFunds India and what functions they performed for eFunds Corp./ associated enterprises? eFunds India functions almost exclusively for the associated enterprises, as the sales are first made to the associated enterprises, which in turn selling the services to customers. Considering the nature of services, the delivery has to be direct to the customers and the role of the associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. This indicates that, more than 40% of the employees of the group are based in India). - Indian operations continue to experience pressure on compensation cost as competition increases. - The total net revenue of $552,148(000) consists of : (a) Electronic payments - $203,609(000) (b) Risk management - $140,099(000) (c) Global outsourcing - $ 87,121(000) (d) ATM management - $121,319(000) -The description of principal facilities reads as below: Location Approximate Function Square ft . Scottsdale, Arizona 57,500 Corporate Headquarters Phoenix, Arizona 94,400 Data center New Berlin, Wisconsin 82,600 Data center Milwaukee, Wisconsin 82,500 Software development Center Woodbury, Minnesota 105,300 Customer contact center, Debit Bureau, IT consulting And ATM management Services. Austin, Texas 19,100 Retail solutions Chennai, India 18,600 Software development Center. Chennai India 48,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses are incurred by eFunds India with regard to traveling expenses, communication charges, courier charges, tape drives, Xerox etc. The purpose of incurring these expenses is not known and if these expenses are incurred in India, then, whether the same should form the cost base of eFunds India for the purpose of compensation or not, requires to be verified. The source the information regarding employee strength is the global accounts of eFunds Corp and the transfer pricing study report in case of eFunds India. The source of the information is Form no. 3CEB of eFunds India. The purpose of providing the software free of cost to eFunds India is not known. The cost of such software to eFunds Corp. is also not known. Had this software provided at charge, the payment could be liable for withholding tax and also such charge will form part of cost base of the eFunds India, which in turn will require more compensation by eFunds Corp. The effect of the same are required to be seen on the transfer prices between eFunds India and eFunds Corp. The President and sales team of eFunds India were working for eFunds Corp., then, whether they were also concluding the contracts on beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessees. Considering Function performed, Assets used and Risks assumed (FAR analysis) by the assessees and eFunds India, it is clear that eFunds India is not having requisite material assets as the relevant software and database needed for providing IT enabled services so as to perform the requisite functions independently, therefore, to that extent they are made available by eFunds corporation to eFunds India free of any charges. (iii) eFunds India does not bear any significant risk as the ultimate responsibility lies with the assessees. (iv) Corporate office of eFunds India at Mumbai has an International Division which consists of President s office and a Sales team. The president s office oversees operations of efunds group entities globally and the sales team undertakes marketing efforts for affiliates of efunds corporation. The overall reporting of President s office is to eFunds Corporation USA. (v) These activities are carried on continuously over a period which includes the years in question. In our view the gamut of activities and relationship clearly constitutes Business Connection in India. As per provisions of section 5(2) of IT Act, 1961, non-residents ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the contract is for two different purposes. The agreement between Escotel and the assessee herein is for commissioning, installation and operations However, both the agreements provided for the turnkey functioning of the project of the GSM network In short what is noticed is that by the entering into the contract by Escoral with both the assessee and its LTIL, Escotel has made both the assessee and LTIL responsible for the turnkey completion of the GSM project. individually and severely Thus, if either one breaks its terms of conditions of contract with Escotel, the other would be responsible for its completion. In short a consortium or partnership has been created between the assessee and its Indian subsidiary LTIL. With this situation, the next question that comes up is, can either the assessee or its subsidiary LTIL complete the contract with Escotel on a turnkey basis without the assistance of the other. Obviously, the assessee is to supply the hardware and the software and LTIL is to do the installation, testing, commissioning and bringing up to operation of the turnkey project. If the assessee herein does not provide the hardware and the software, It would be the duty o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the employees through whom if services are provided the FE is to set to come into existence. It also includes other personnel. Obviously, the term other personnel has to be read with reference to the earlier worth as provided in the said enterprise would be having a control in the present case undisputedly employees of the affiliates of the assessee had been employed through LTIL the services of Installing, commissioning, testing and bringing up to operation of the hardware and the software sold by the assessee to Escotel through is contract in regard to GSM project to be completed on a turnkey basis. These employees of the affiliates over whom the assessee has a control would fall within the term other personnel and consequently, it would have to be held that a FE did exist as per the inclusive term as provided in article 5(2)(l) of the DTAA between USA and India. A copy of the returns of the expatriates which have been placed in the paper book also clearly show that they have been in India for more than 90 days within the 12 months period from April. 1996 to March, 1997 Consequently, the term of Article 5(2)(1) of the DTAA between USA and India are fulfilled Consequently, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e OECD commentary. However, certain relevant portion of the commentary have not been mentioned which indicate that place of business need not be owned, rented or otherwise under possession or control of the enterprise in order to constitute PE. The only requirement is that the place should be fixed in the context of the nature of business being carried out and also no time period test is prescribed for permanence. The permanence of the establishment has to be determined in the context of nature of business being carried on. In this context it is important to refer to the decision of ITAT, Delhi Bench in the case of Fugro Engineers vs. ACIT 26 SOT 78 (Delhi): We have also considered the submissions of the Id. Counsel to the effect that if the appellants case falls under a particular clause, then, it cannot be considered under any other clause or under any other paragraph The argument of the Id DR in this respect was that paragraph contains the principal rule for deciding whether there is a PE or not. Paragraph 2 enlarges the ambit. Wherever fixed place is available, there is no requirement of time in this paragraph and such requirement exists only in respect of installation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace of business has to be a fixed one. Thus, in the normal way there has to be a link between the place of business and a specific geographical point. it is immaterial how long an enterprise of a Contracting State operates in the other Contracting State f it does not do so at a distinct place, but this does not mean that the equipment constituting the place of business has to be actually fixed to the soil on which it stands. It is enough that the equipment remains on a particular site, 2.1 Where the nature of the business activities carried on by an enterprise is such that these activities are often moved between neighboring locations, there may be difficulties in determining whether there is a single place of business (If two places of business are occupied and the other requirements of article 5 are met, the enterprise will, of course, have two PEs). As recognized in paragraphs 18 and 20 below a single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. The competent authorities, through consultations, shall develop appropriate bilateral procedures, conditions,, methods and techniques for the implementation of the mutual agreement procedure provided for in this Article. In addition, a competent authority may devise appropriate unilateral procedures, conditions, methods and techniques to facilitate the above-mentioned bilateral actions and the implementation of the mutual agreement procedure. 8.25. It cannot be assume that facts of the years under appeal are different from the MAP years or any of the facts were not considered by the competent auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han $0.5 million of revenue in 2000. Also contributing to the increase In this segment s revenue in 2001 were increased sales of products and services based on our Debit Bureau (R) database as well as increased usage of our debit account opening products. 8.28. Further, the description at page 210 of the paper book which is reproduced from form l0-K again indicates that the business of eFunds International India Pvt. Ltd. is inextricably linked to the business of the appellant. The relevant portion is reproduced as under: In April 1999, we began the process of combining four of Deluxe s other former operating units into an integrated electronic payments and risk management business. The operations combined were Debit Bureau, Chex System, Inc., Deposit Payment Protection Services, Inc. and an electronic check conversion company that Deluxe acquired in February 1999. In September 1999, we changed. the name of our Company to eFunds Corporation. In January 20Q0, we decided to combine Deluxe s professional services business, eFunds IT Solutions Group, Inc. and eFunds International India Private Limite4 wish our electronic payments and risk management business. In June 2000, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nrelated company, however, a subsidiary, of an independent agent, can very well alto constitute a permanent establishment of its parent company under the conditions laid down in Art. 5(6). A subsidiary may, for instance, act as an agent of its parent company and conclude such contracts for the latter on the b as is of a corresponding authority as go beyond the limits of the ordinary course of its business. The independence of the subsidiary under company law also remains authoritative for tax purposes if it subcontracts entirely or partially to associated enterprises or it acquires the means required for the contract s execution from associated enterprises. The latter is particularly true for the hiring out of employees as temporary workers. If the parent company makes personnel available to the subsidiary for remuneration, then the activity of this hired labour is to he attributed so the subsidiary and does not constitute a permanent establishment of the parent doing the hiring-out . This is different however, as well as in cases of subcontracts of the parent assumes the economic risk of the contract s fulfillment in relation to the main customer. In this situation the parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) above. (iv ) Aggregate India attributable profits of group X (v) Less : (-) eFunds India International assessed Profits Y (vi) Balance: Z (X-Y) i.e. Surplus profits attributable to Indian PEs of both assessees . Surplus profits i.e. Z is to be further distributed in both assessees: 85% attributable to PE of eFunds Corporation; and 15% attributable to eFunds I.T. Solutions. 8.37. In our view, this working is more scientific and equitable. It will take care of the apprehension raised by the learned counsel that though eFunds India income was reduced on first stage in MAP proceedings, corresponding assets are not reduced, while adopting the global assets. This methodology/ formula will be more helpful in arriving at the reasonably correct amount of attributable income, being comparatively just, fair and equitable. 8.38. Coming to the revenue s ground that CIT(A) erroneously directed the AO to adopt original cost of assets for determining the ratio between Indian assets vis a vis global assets instead of taking depreciated cost of the assets as adopted by the AO. It is pleaded that assessees had not raised this specific plea before CIT(A). It is mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lculation of attribution of profits are allowed for statistical purposes. Since the revenue s ground is only in respect of adoption of depreciable cost vis a vis original cost of assets, AO s basis of adopting depreciable assets is upheld. 9. In the result, assessees appeals are partly allowed for statistical purposes. Revenue s appeals are allowed. <!--[if !mso]> v\:* {behavior:url(#default#VML);} o\:* {behavior:url(#default#VML);} w\:* {behavior:url(#default#VML);} .shape {behavior:url(#default#VML);} <![endif]--><!--[if gte mso 9]> Normal 0 false false false false EN-US X-NONE MicrosoftInternetExplorer4 <![endif]--><!--[if gte mso 9]> ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In order to avoid any confusion detailed grounds of AY 2001-02 are reproduced as example: (only amounts in respective years are different) 1. That the learned Commissioner of Income Tax (Appeals),XXIX, New Delhi has erred both in law and on facts in confirming the order of assessment and, further went wrong in sustaining the determination of income of the appellant company at ₹ 2,22,93,920/- as against income assessed at ₹ 2,81,70,560/- in an order of assessment under section 147/143(3) of the Act dated 28-12-2007, despite the fact that the assessee company had no income liable for assessment as none had accrued or arisen in India. 2. That the learned Commissioner of Income Tax (Appeals) has further erred both in law and on facts in upholding the initiation of proceedings under section 147 of the Act and, framing of assessment under section 147/143(3) of the Act by failing to appreciate that, there was no material much less any valid material to have reason to believe that income of the appellant company had escaped assessment for the year under consideration and therefore, the initiation of proceedings and framing the assessment same were without jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have any Permanent Establishment, it has to indicate specific facts of the case which are different in MAP years to bring out a case that resolution is not applicable and since nothing is brought on record to show that facts of the year under appeal were different from MAP years, therefore, MAP resolution made for assessment years 2003-04 shall also apply to the facts of the case of the appellant for the instant year. In doing so, he has failed to appreciate that, assessee did not apply its mind as is evident when it had agreed to pay and paid the tax on an income which could not have been assessed to tax on the formula agreed under the MAP and therefore, principles decided in MAP order could not be applied for other assessment years. In any case and without prejudice, the findings of competent Authority were not of binding effect for the relevant assessment year. 3.4. That the learned Commissioner of Income Tax (Appeals) has recorded the following findings of fact, which are factually incorrect and are based on no material: (a) That activities of Liaison office were more than merely preparatory and auxiliary; (b) That the payments are made to Nortel India Ltd. b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in placing reliance on Form no. 10K to hold that activities of the appellant company in India are not preparatory and auxiliary activity but core income generating activities. 6. Without prejudiced to the aforesaid and, assuming that appellant had a Permanent Establishment in India under Article 5 of the Double Taxation Avoidance Agreement between India and USA, the learned Commissioner of Income Tax (Appeals) has erred in upholding the theoretical and, mathematical calculations adopted by the learned officer to determine the income of the appellant company which are not in accordance with law and are highly arbitrary and untenable. 7. That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that mere assumption that there is a permanent establishment in India could not be a valid basis to adopted the mechanically the methodology of computation of income as adopted by the Competent Authorities under the MAP for Assessment years 2003-04 and 2004-05 more particularly when it resulted into absurd and arbitrary results. 8. That the learned Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A is incorrect and be therefore, along with interest levied be directed to be deleted and, appeal of the appellant company be allowed. 4. Revenue has raised following common grounds: 1. On the facts and in the circumstances of the case, the CIT(A) erred in holding that actual cost of asset should be taken as basis for attribution of profit to Indian Operation in place of depreciated cost of asset as taken by the AO. 2. On the facts of the case, the CIT(A) erred in holding that rates of attribution for various years should not vary because of the effect of depreciation of fixed assets ignoring the fact that depreciation does have an effect on income generating capacity of an asset. 3. On the facts of the case, the CIT(A) erred in giving relief to the assessee by directing the AO to adopt actual cost of assets instead of w.d.v. of the asset without the assessee having raised a specific ground for seeking such relief. 5. M/s. eFunds Corporation USA, one of the appellants is the holding company of M/s. Idlx International BV and, M/s. eFunds International India Pvt. Ltd. is a wholly owned subsidiary of M/s. Idlx International BV. In view thereof, M/s. eFunds I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment for Assessment year 2003-04 in the case of M/s eFunds Corporation, USA (one of the two appellants). Consequent to AO s notice u/s 142(1) of the Act, assessee filed the return of income and assessment was framed holding that this assessee had PE and profits earned were attributable to India. 5.7. On the basis thereof AO recorded the reasons about income having escaped from taxation in the case of both the assessees, notices u/s 148 were issued for all the years under appeal, after obtaining approval before competent USA and Indian Tax authorities. 5.8. In the meanwhile assessee invoked MAP proceedings in respect of AY 2003-04 which are dealt with herein below. Assessment in all these years, under appeal were completed by AO adopting earlier line of action, and MAP order was also considered while working out the taxable income. 5.9. Aggrieved assessees preferred 1st appeals, CIT(A), upheld AO s line of action in holding that assessees have PE in India and profits were attributable to tax, however gave part relief in respect of computation of attribution of profits. 6. In this factual backdrop ld counsel for the assessee Shri C. S. Agrawal, Sr. Advocate, fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The fact that the words definite information which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. 6.3. The appellant further submitted that reliance placed by the learned Officer in the reasons recorded on the MAP proceedings for assessment year 2003-04 in the case of eFunds Corporation for assessment year 2003-04 and in the case of eFunds International IT Solutions Group Inc for the assessment years 2003-04 and 2005-06 is also misplaced as MAP proceedings being year specific, cannot form any basis to assume that income of the appellant has escaped assessment. Further reliance is placed on the judgment of the Hon bleble Delhi High Court in the case of CIT vs. Mesco Laboratories reported in 288 ITR 219, in this case, proceedings were initiated for A.Y. 1995-96 on the ground that, assessee approached the Settlement Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year. It was a concession availed by assessee for that year alone based thereon jurisdiction u/s 147/148 for other years was not in invoked in accordance with law. 6.5. Annual accounts and MAP proceeding may create mere suspicion which alone cannot confer jurisdiction under section 147 of the Act. Reliance is placed upon the judgment of the Delhi High Court in the case of CIT vs. United Electrical Pvt. Ltd. reported in 258 ITR 317 wherein it has been observed that in absence of material, no proceedings can be initiated under section 147 of the Act and held therein as under: Thus, the existence of tangible material, for the formation of opinion is a pre-requisite for initiation of action under section 147 of the Act. Therefore, what section 147 of the Act postulates is that the Assessing Officer must have reason to believe that income has escaped assessment. There should be facts before him that reasonably give rise to the belief, but the facts on the basis of which he entertains the belief need not at this stage be rebuttably conclusive to support his tentative conclusion. In case of challenge, it is open to the court to examine whether there was material before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rothers 189 ITR 786 (Patna) f) Girdhar Gopal Gulati vs UOI 182 Taxation 616 (All) g) Banswara Syntex Ltd. vs ACIT 182 Taxation 584 (Raj) h) Chuggamal Rajpal V CIT 79 ITR 603 (SC) i) CIT v Chandball Rice Mills P. Ltd. 203 ITR 368,372 (Cal) j) N.D Bhatt Vs. IBM Trade Corporation 216 ITR 811, 823-824 (Bom) 6.10. It is pleaded that Hon bleble Delhi High Court in the case of United Electrical Co. (P) Ltd. reported in 258 ITR 317, laid down following parameters: a) The power conferred under section 147, particularly after 1.4.1989, is no doubt very wide but it can not be said to be plenary; b) The amended section provides that where the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for an assessment year, he may apply the provisions of section 148 to 153 and assess or reassess the income, which has escaped assessment; c) That for the present purpose, only section 148 to 151 are relevant; d) Section 148(2) of the Act mandates before issuing notice to the assessee, under sub-section (1), for filing the return, the Assessing Officer shall record his reasons for doing so; e) Therefore, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merits which are summarized below: i) Nature Of Appellants Business: That in each of the years under consideration, the appellants have not provided any services either from India, or outside India to any of the customers in India, be it financial institutions, retailers, electronic funds transfer networks, government agencies. No services have been provided by the appellants from India to any of its clients outside India. Thus, as no services have been provided by the appellants, from India, no receipt accrued to it and, there was no accrual of any income in India. The activities of assessees are as under: a) ATM Management Services Those appellants had installed ATM machines and point of sale machines in USA and Canada and, not in India. On the transactions carried out through the ATMs, revenues were generated by the appellants outside India and, therefore no income accrued in India. All the servers processing the transactions were not installed in India and were located wholly outside India. b) Electronic Payments That ATM machines installed by other companies not belonging to the appellants outside India were also managed i.e. the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tre were at the disposal of appellants; b) That whole of the contract in respect of professional services are carried out in India and, all revenues relatable to segment professional services are derived from the activities undertaken in India; and c) That terminals, on which database of appellants is constantly and on real time basis available to eFunds India, constitute a fixed place PE of appellants in India. (iii) Assessing Officer further held that appellants have a business connection in India since core activities of the appellant are carried out in India subsidiary company i.e. M/s eFunds India. (iv) On this basis, the Assessing Officer framed these assessments by adopting the Group Annual global balance sheet prepared by the appellant in USA and, estimated the income by adopting following format: -Firstly, allocated the global revenues of appellants in the proportion of alleged assets in India to the global assets to determine the income attributable to Indian operations; -Thereafter, reduced the said figure by payments made to M/s eFunds International India (P) Ltd to determine the income attributed to Indian operations; -He furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002-03 2004-05 2005-06 1. Date of issue of notice u/s 148 26/03/2007 26/03/2007 26/03/2007 26/03/2007 26/03/2007 2. Date of filing of return 27/04/2007 27/04/2007 27/04/2007 27/04/2007 27/04/2007 3. Income declared in the return NIL NIL NIL NIL NIL 4. Date on which request was made to provide reasons to believe for initiation of proceedings u/s 148 27/04/2007 27/04/2007 27/04/2007 27/04/2007 27/04/2007 5. When supplied i.e. date No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002-03 2005-06 1. Date of issue of notice u/s 148 26/03/2007 26/03/2007 26/03/2007 26/03/2007 2. Date of filing of return 27/04/2007 27/04/2007 27/04/2007 27/04/2007 3. Income declared in the return NIL NIL NIL NIL 4. Date on which request was made to provide reasons to believe for initiation of proceedings u/s 148 27/04/2007 27/04/2007 27/04/2007 27/04/2007 5. When supplied i.e. date Assessee says no reasons have been supplied as they were not recorded 28/11/2008 28/11/2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. - That the Appellants have a sales outlet in India -That the business activities carried on by eFunds India is in fact the business activities of appellants. It has been held that, the outsourcing and call center operations carried on by eFunds India were the business operations of appellants and thus, appellants were carrying on business activities in India; -That appellants were undertaking overall performance responsibility towards the clients and, therefore appellant is also undertaking the responsibility in respect of the services performed by eFunds India; -That appellants were having business operations and were assuming risk in India for which an appropriate amount of profits should be liable to tax in India. B. Permanent Establishment in India as: -That terminals, on which database of eFunds US is constantly and on real time basis is available to eFunds India, constitute a fixed place PE of eFunds US in India. -That eFunds India has constant access to the database of the appellant. 6.19. Ld. CIT(A) broadly held that appellants have business connection in India and, also have a Permanent Establishment in India for the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That appellants have Permanent Establishment in India in terms of Article 5(1), 5(2)(i) and, 5(5) of DTAA between India and USA. -That business of development and global deal is carried out through its PE, it cannot be considered to preparatory and, auxiliary and, therefore decision of Motorola is inapplicable; - That activity of supervision or control of the proper performance of a contract can hardly be considered to be of an auxiliary nature, as it is strictly functional to the production of income, as has been held by Supreme Court of Germany in the case of Tax Office v Phillip Morris 4 ITLR 903; -That there exists a PE under Article 5(1) in respect of back office operations and, software development services carried out by the subsidiary following the decision in the case of Lucent Technologies, Fugro Engineers v ACIT reported in 26 SOT 78 (Del); -That in view of the MAP order for A.Y. 2003-2004 and, in absence of specific facts of the case which are different from MAP to bring out a case that MAP resolution is not applicable to the years under appeal as has provided in Article 27(3), appellants have a PE in India; - That from the perusal of the glob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellants have no liaison office in India. 2 That the payments are made to Nortal India Ltd. by the appellant on a regular basis through the deduction from the payment to the appellant at 5% or lump sum payment in accordance with the contract, which has been entered into for a period of two years. The appellant have made no payments to M/s Nortal India Ltd. 3 That when applied to the facts of the present case it will be seen that the appellant has undertaken a number of projects which involve financial accounting, BPO, Software development and maintaining a help desk for ATM. For all these activities remuneration are being paid to the appellants by their customers and thus all these activities result in earning of income The appellants have not carried out any such activities in India. There is neither any basis and, nor any material to support such an arbitrary conclusion 4 That a perusal of the risk indicated in the order above as well as those included in the Transfer Pricing Report indicate that even though the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 2005-06, which are not related to any additional risks/activities being undertaken by eFunds India. 6.23. It is matter of record that, appellants have neither any fixed place of business of their own nor any activities are carried out in India much less activities which can be termed as preparatory and auxiliary. Learned CIT(A) has proceeded to assume that, appellants have a liaison office, which is contrary to record as appellants neither have liaison office nor activities in India. 6.24. This finding that appellants have a PE in India is apparently contradictory, as the learned CIT(A) has himself admitted at page 41 of the order observed that appellants do not have a PE in India: Moreover, competent authorities have considered the fact that it is a case of e-commerce, where business may be transacted on global basis through various tax jurisdiction and income may be earned in various jurisdiction even though theoretically a case can be argued that conditions mentioned in article 5 of the DTAA are not be fulfilled as they relate only to conventional business and not e-commerce. In view of the paragraph 3 of article, this MAP resolution is to be viewed as an appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deemed not to include any one or more of the following: (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery; (c) the maintenance of a stock of goods, or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a tax resident of the USA and was an investment bank engaged in the business of providing financial advisory services, corporate lending and securities underwriting. It had set up a subsidiary company namely M/s. Morgan Stanley Advantages Services Pvt. Ltd. (MSAS) to support the main office functions of the USA company in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operation, data processing and support centre. It was submitted that, for the above purpose, data was available on real payment basis continual of MSAS. On the said facts, Hon bleble Apex Court held that: there was no PE of M/s. Morgan Stanley and Co. Inc. and in this regard, it was observed at page 421 of the report that, a general definition of the P.E. in the first part of article 5(1) postulates the existence of a fixed place of business whereas the second part of article 5(1) postulates that the business of the multi national enterprise is carried out in India through such fixed place. It was further observed that, one of the questions which we are called upon to decide is whether the activities to be undertaken by MSAS consist of back off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted 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. It is submitted that, Article 5(5) has no application to the facts of the instant case. It is submitted that firstly, as a matter of record that, transactions between the appellant and M/s. eFunds India are at arm s length and therefore, there can be no justification much less any valid justification to hold that, M/s. eFunds India is not an agent of independent status. In any case, M/s. eFunds India is not an agent of independent status then too, nothing turns on it as would be evident from the reading of Article 5(4) of DTAA which clearly provides that where a person other than an agent of an independent status 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly or almost wholly on behalf of that enterprise and, transactions between agent and the enterprise are not made at arms length then such an agent shall not be considered to be an agent of independent status. 6.34. Learned CIT(A) has grossly erred in concluding that, M/s. eFunds International India Pvt. Ltd. is an agent of M/s eFunds Corporation, for the following reasons: a) That there is no basis to allege that activities of M/s. eFunds International India Pvt. Ltd. are devoted wholly or almost wholly on behalf of the appellant company and; b) That the transactions between M/s. eFunds International India Pvt. Ltd. and, the appellant are at arm s length. 6.35. Provisions of Article 5(4) of Double Taxation Avoidance Agreement could not be applied to an agent unless such activities of an agent satisfy the aforesaid twin conditions cumulatively. In other words, it had to be established that, activities of the appellant and M/s. eFunds International India Pvt. Ltd. are not at arm s length particularly when evidence is to the contrary. It is well settled position of law that, burden is on the AO to establish that, appellant has a Permanent Establishment in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act. (6) Clause (a) of Explanation 1 to S. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient 'business connection', and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act read with Article 27 of the Double Taxation Avoidance Agreement between India and USA for the Assessment Year 2003-04.While doing so, he has failed to appreciate that, resolution passed under Mutual Agreement Procedure was only for assessment years 2003-04 (in the case of eFunds Corporation and eFunds IT Solutions Group Inc.) and 2004-05 (in the case of eFunds IT Solutions Group Inc.) and, therefore, could not be applied to any other assessment years more particularly when even it was clearly stated by the U.S. Competent Authority even in that year that, there was no Permanent Establishment of appellant. The learned Commissioner of Income Tax (Appeals) at pages 40 to 41 of the order has held that, since MAP authorities had deliberated on this case in number of meetings and after having discussed each and every fact of the case, arrived at a resolution, the appellants cannot plead that, the impact of the resolution passed should not be either enforced or given effect for the assessment years under appeal, particularly when assessee has failed to indicate specific facts, which are different from MAP years. It is submitted that, there is no basis for such a finding since s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going determination. We now consider this case closed at the competent authority level. Thank you for your cooperation in this matter. 6.40. The reading of the aforesaid terms and conditions would show that, as the assessments had already been framed for assessment year 2003-04 (in the case of M/s eFunds Corporation) and, of M/s eFunds I. T. Solutions Group Inc. for the Assessment Year 2003-04 and 2004-05) and, the assessee was agreeable in having its matter settled by Mutual Agreement Procedure to avoid double taxation. It has been specifically stated that, U.S. Competent Authority does not agree on the technical merits that, the appellants have a Permanent Establishment in India but had reached to a mutual agreement to avoid double taxation. US authorities had given up the right to tax this income in U.S. only for the Assessment Year 2003-04 in the case of M/s eFunds Corporation and, for the Assessment Years 2003-04 and 2004-05 in the case of M/s eFunds I. T. Solutions Group Inc. on an observation that technically there is no Permanent Establishment of the assessee s in India. Revenue has been heavily swayed by resolution passed by US authorities by which they had given u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs. 6.43. Nature of the assessment for AY 2003-04 being of agreed assessment, the same is not of binding as a precedent. The Hon bleble Apex Court held in the case of CIT vs. Banwari Lal reported in 238 ITR 461 that, any agreed assessment cannot be said to be validly made. It is settled law that, when an appeal is disposed of on concessions, that, such a judgment is not a precedent. It has been also held that, a finding recorded on concession, is not a precedent. The order of assessment for A.Y. 03-04 is neither a precedent nor authority as binding on the parties and, therefore cannot be used as a tool to sustain an action, which is otherwise invalid in law. 6.44. Group Annual report in Form No. 10-K was no basis in law to hold that activities of the appellant in India are not preparatory and auxiliary activity but core income generating activities. The learned CIT(A) has referred to form 10-K405 dated 01.04.2002 in the case of M/s eFunds Corporation which reads as under: Our call center in Mumbai, India completed its first full year of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where very limited or almost nil risks of the business of the appellant are borne by the Indian entity. 6.46. It is submitted that the learned officer in holding so has failed to appreciate that, statement of Financial Accounting Standards No. 94 issued by Financial Accounting Standards Board of USA requires consolidation of all majority owned subsidiaries. The relevant portion thereof is as under : Consolidated Financial Statements, to require consolidation of all majority-owned subsidiaries unless control is temporary or does not rest with the majority owner. This Statement requires consolidation of a majority-owned subsidiary even if it has no homogeneous operations, a large no controlling interest, or a foreign location. 1. Accounting Research Bulletin No. 51. Consolidated Financial Statements adopted by the Committee on Accounting Procedure of the AICPA in 1959, concisely describes the purpose of consolidated financial statements in its first paragraph. The purpose of consolidated statements is to present, primarily for the benefit of the shareholders and creditors of the parent company, the results of operations and the financial position of a parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g revenue from India. Whereas, in the present case, the appellant does not have any customers in India and it does not earn any revenue from India. 2. Rolls Royce Plc. vs. DDIT In the case of Rolls Royce, it was found that some risks and functions were undertaken by the Indian Liaison Office but were not considered while computing the arm s length price. However, in the present case, the department has not found out any risk or function which have been undertaken in India and have not been considered while computing the arm s length price for Indian subsidiary company. 3. Finance (Tax Office) vs. Philip Morris GmbH 4 ITLR 903 (decided in respect of USA-Germany DTAA) The case has been pronounced by Italian Court and it is not known as to in which context the comments have been made. Moreover, as accepted by the CIT(A), the comments have been made in reference to [k1] [k1] . 4. Lucent Technologies Appeal No. 2224/Del/2001 (Delhi Tribunal) In the case of Luce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts were that the assessee was canvassing orders for non-resident principals for the supply of goods and communicated them to certain non-resident exporters. The assessee had no authority to accept the orders on behalf of the non-resident. The orders were accepted by the non-resident, price was received by them and the delivery was also given, outside the taxable territories. No operation such as procuring raw materials or manufacture of finished goods took place within the taxable territories. The assessee was entitled to certain commission on sales. On the facts of this case, the court held that: there was no business connection of the assessee with the non-residents. A business connection involves a relation between a business carried on by a non-resident, which yields profits and gains and some activity in India, which contributes directly or indirectly to the earning of these profits and gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territory and a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms; it may include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made by Finance Act 2003, where in it has been stated that, in order to remove doubts regarding the expression 'business connection', and to align the provisions of the Act with those of the DTAAs, the Finance Act, 2003 has inserted two new Explanations to clause (i) of the said subsection. It has been further clarified that, 7.3 The business connection , however, will not include cases where the business activity is carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business. 7.4 It has been further clarified that where a broker, general commission agent or any other agent works mainly or wholly on behalf of the non-resident or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. 6.55. Previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore no income of appellants can be deemed to accrue or arise in India, even u/s 9(1)(i) of the Act. 6.58. Learned CIT (Appeals) has further erred in holding that, judgment of the Apex Court in the case of Morgan Stanley Co. reported in 292 ITR 416 and, judgment of Bombay High Court in the case of Singapore Set Satellite are not applicable to the facts of the instant case when as a matter of fact, they are fully applicable. 6.59. Judgment of the Hon bleble Delhi High Court in the case of U.A.E. Exchange Centre Ltd. vs. UOI reported in 313 ITR 94 has no application as facts of the appellant are totally distinguishable in as much as is a case where M/s. U.A.E. Exchange Centre Ltd. had a liaison office in India whereas the appellants have no liaison office in India and therefore, the application of this judgment is entirely misconceived and, misplaced. 6.60. It is contended that following adverse findings of lower authorities are contrary to material on record: a) That facilities of eFunds India were at the disposal of appellants: It is submitted that, facilities in India are those of eFunds India, which is a separate legal entity, and not of the appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... database. eFunds India merely has the rights to view the database in the regular course of responding to the inbound calls. 6.61. It is alternatively submitted that, even assuming that, there was an income based upon global balance-sheet wherein under the Laws of USA, a balance sheet has to reflect the transaction of all its subsidiaries, then also income which has been assessed is apparently erroneous and excessive. The process/method adopted by the Assessing Officer to compute/estimate the income is unscientific and irrational. a) That while estimating the income to be attributed to the alleged Indian PE, the learned Assessing Officer reduced the profits earned by eFunds India from the profits of eFunds Group. However, at the same time, the Assessing Officer did not reduce the assets of eFunds India while computing the assets located in India. In fact, the Assessing Officer did not reduce the assets of eFunds India while computing the assets located in India. Infact, the Assessing Officer has treated the assets of eFunds India to be the assets located in India; b) That the learned Assessing Officer should have considered the profits of eFunds Group as attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n so far as an associated enterprise, that also constitutes a P.E., has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the P.E. The situation would be different if transfer 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 the P.E. 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 P.E.). 6.64. From the above finding, it is clear that it has been held that where transactions are at arm s length price taking into account all the risks, taking functions of the enterprise, no further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aying the advance tax. The assessee is entitled to take into account the tax, which is deductible by the payer, though not actually deducted. It was held that having regard to the provisions of section 201(1) 201(1A), the assessee has not committed any default in paying the advance tax. Consequently, there is no liability to pay interest under section 234B of the Act. 6.67. Applying the ratio of the above decisions in case of the appellant, it becomes evident that where the payments to the appellant were payments to a non-resident u/s 195 of the Act, tax thereon should have been withheld by the customers making the payment and consequently, there would be no liability on the appellant to pay advance tax and consequently of the above judgments, no liability to interest under section 234B. 6.69. Alternative, it is contended that the levy of interest is solely on the basis that the revenues accruing to the appellant are taxable in India under Article 7 read with Article 5 of DTAA between India and USA. The impugned revenues are not taxable in India, the consequential levy of interest under section 234B should be deleted. 7. LD DR Shri Ashwani Mahajan in reply contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on record. Perusal of reasons reveal that the case for reopening falls under Explanation 2 to section 147 which says that For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :- (a) Where no return of income has been furnished by the assessee although his total income or total income of any other person in respect of which he is assessable under this act during the previous year exceeded the maximum amount which is not chargeable to income tax. (b) ................. 7.7. Thus, the sub-clause (a) describes a situation which is deemed to be a case of escapement of income. The meaning of the word deemed has been explained by Hon bleble Gujrat High Court in case of CIT Vs Bai Vina 58 ITR 100 as under: The word deemed is used a great deal in modern legislation. Sometimes, it is used to impose for the purposes of the statute an artificial construction of the word or phrase that would not otherwise prevail. Sometimes, it is used to put beyond doubt a particular construction that might otherwise be uncertain. Sometimes, it is used to give a comprehensive description ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls Ltd. Vs ITO 236 ITR 34 (SC) Kalyanji Madvi Co. Vs CIT 102 ITR 287 (SC) Claggett Brachi Co. Ltd. s CIT 177 IT 409 (SC) K.R. Venkatesan Vs WTO 237 ITR 293 (Mad) Revathy C. P. Eqipments Ld. Vs DCIT 241 ITR 856 (Mad) Virudhnagar Co-operative Milk Supply Society Ltd. Vs CIT 183 ITR 454 (Mad) 7.9. The learned DR further submitted that, subsequent orders/ events can be made a basis to invoke section 147 of the Act and relied on the following judgments: a) 177 ITR 409 (SC) Clagett Brachi Co. Ltd. v CIT b) 241 ITR 856 (Mad) Revathy CP Equipment Ltd. v DCIT c) 183 ITR 545 (Mad) Virudhunagar Co-operative Milk Supply Society Ltd. v CIT d) 236 ITR 34 (SC) Raymond Woolen and Mills Ltd v ITO e) 237 ITR 293 (Mad) K. R. Venkatesalu vs. WTO 7.10. Further, notice issued u/s 148 based on assessment proceedings of a subsequent year is valid even if appeal is pending against such assessment as has been held by Hon bleble Bombay High Court in case of Anusandhan Investment Ltd. Vs M.R. Singh 287 ITR 482. 7.11. Following decisions relied for the preposition that while examining the aspect of belief for issuing notice u/s 147/148 the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Supreme Court in the case of S. Narayanappa Vs CIT 63 ITR 219, there is no requirement in the Act that the assessing officer has to communicate the reasons for re-opening the assessment to the assessee. Non-communication of reasons, even according to judgment of the Supreme Court in G.K.N. Driveshaft (India) Ltd. Vs ITO 259 ITR 19 is not considered to be fatal to the validity of the reassessment proceedings..... 7.15. Assessees reliance on the case of Haryana Acrylic Manufacturing Co. Ltd. v CIT 308 ITR 38 is misplaced as the facts in that case are absolutely different. In that case, wrong reasons were communicated to the assessee whereas actual reasons were communicated only during the course of writ petition before the Hon bleble High Court. The court on basis of these peculiar facts has held that such a long delay cannot be regarded as reasonable period. In present case under consideration, the successor AO was not at all requested by the assessee to supply reasons and no such request was made even before CIT(A). In response to letter dated 22.11.08 made by the assessee before successor AO, the concerned AO supplied copy of reason of AYs as requested on 28.11.08. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts between the assessees (viz. eFunds Corporation and eFunds IT Solution Inc.) and eFunds India namely - Master Sub-Contractor Agreement, Financial Shared Services Agreement and Call Centre Agreement. Under these agreements, eFunds India provide various services to the assessees. CIT(A) after considering Function performed, Assets used and Risks assumed (FAR analysis) by the assessees and eFunds India. found that eFunds India is not having requisite material assets as the relevant software and database needed for providing IT enabled services to clients of assessee are made available by eFunds corporation to eFunds India free of any charges. Further, eFunds India does not bear any significant risk as the ultimate responsibility lies with the assessee, eFunds Corporation. CIT(A) has given another important finding on page 6 of his order that Corporate office of eFunds India at Mumbai has an International Division which consists of President s office and a Sales team. The president s office oversees operations of efunds group entities globally and the sales team undertakes marketing efforts for affiliates of efunds corporation. The overall reporting of President s office is to eFunds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be taxable in India only if it has permanent establishment in India. Article 5 of the DTAA provided various situations when existence of PE in India can be envisaged. 7.26. From the business model and interlinked operations, it becomes clear that the assessee is doing its business through establishment of eFunds India; therefore business place of eFunds India constitutes a fixed place PE of the assessee under Article 5(1). It is a settled principle that fixed place may not be owned by the assessee so as to constitute its PE. 7.27. As per Article 5(2)(l), in the following condition also can be treated as PE: the furnishing of services, other than included services as defined in Article 12(Royalties and Fee 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 that 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)] 7.28. In the present case, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(l) clearly shows that it is not only the employees through whom if services are provided the PE is set to come into existence. It also includes other personnel . Obviously, the term other personnel has to be read with reference to the earlier words as provided in the said Article 5(2)(l). The other personnel specified here would be persons over whom the enterprise would be having a control. In the present case undisputedly, employees of the affiliates of the assessee had been employed through LTIL, the services of installation, commissioning, testing and bringing up to operation of the hardware and the software sold by the assessee to Escotel through its contact in regard to GSM project to be completed on a turnkey basis. These employees of the affiliates over whom the assessee has a control would fall within the term other personnel and consequently, it would have to be held that a PE did exist as per the inclusive term as provided in Article 5(2)(l) of DTAA between USA and India. A copy of returns of the expatriates which have been placed in the paper book also clearly show that they have been in India for more that 90 days within the 12 months period from April 1996 to mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 73 ITR 283 (Bom). In these cases AO has relied on a basis which is recognized by DTAA provisions, USA and Indian revenue authorities acting under the treaty and accepted by assessee. It can not be held to be unreasonable, arbitrary or guess work. 7.35. Since all the facts of AYs under appeal are the same as those in AY 2003-04 and the assessees have not demonstrated any facts which are different, the AO is bound by rule of consistency and judicial discipline to follow the same method of computation as per the well recognized rule of consistency as enunciated in following judicial pronouncements: Radhasoami Satsang Vs CIT 193 ITR 321 (SC) CIT Vs ARJ Security printers 264 ITR 276 (Del) 7.36. The assessee s counsels argument that since the income of eFunds India which has been disclosed and subjected to tax in India is more that the income which can be attributed to PE, such an attribution of income is meaningless. Here, it can be appreciated from MAP order that income of eFunds India is to be first reduced from global income of eFunds Corporation and then balance income is to be apportioned in ratio of percentage of Indian assets vis-a-vis global assets. Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment of PE gets extinguished only if following two conditions are cumulatively met- 1. The associate enterprise has been remunerated on arm s length basis and 2. By FAR (functions performed, assets used and risks assumed) analysis, nothing more can be attributed to PE. 3. Ld. Counsel for the assessee has tried to equate assessment of Indian entity i.e. eFunds India with assessment of Indian PE of the assessee (efunds Corporation and eFunds IT Solution Inc.). This contention is not incorrect. Indian entity and Indian PE are two separately assessable entities. Indian entity i.e. eFunds India is assessable with reference to incomes it received from foreign enterprises i.e. efunds Corporation and eFunds IT Solution Inc. and any other income it might have earned. This assessment will be in status of resident and as per domestic tax law . The foreign enterprise is taxable in India as PE with reference to profits, which are attributable to Indian PE. This assessment will be in status of non-resident and as per Article 7 of Indo-USA DTAA where the assessable income will be determined after FAR analysis as per provisions of Article 7(2). 7.41. In these cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 7 of DTAA in status of Non-resident and on the profits which PE in India might be expected to earn if it were a distinct and independent enterprise engaged in same or similar activities under the same or similar conditions and dealing wholly at arm s length with enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same control as that enterprise. 7.43. This principle has been upheld by Delhi ITAT in case of Rolls Roycee Plc. Vs DDIT (2009-TIOL-103-ITAT-Del), wherein after considering decision of Hon bleble Supreme court in case of Morgan Stanley Co., it has been held in para 5 in conclusion that- ............From the above conclusion, it can be held that the assessment of non-resident will extinguish only where profit attributable to the PE is equal to the remuneration payable to the agent in India. However, the agent in India is remunerated only on basis of cost plus 6% for the services that were to be rendered in terms of the agreement. But in the present case the remuneration to the agent does not take into account all the risk taking functions of the non-resident enterprise. For the functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax thereon at rates in force 7.46. The basic requirement for application of this section is that payment should be made to a non-resident. In case under consideration, payments are made by various clients to eFunds India, a resident entity because it is eFunds India which is providing IT enabled services to clients of eFunds Corporation as the contracts have been either assigned or sub-contracted by eFunds Corporation USA to eFunds India as discussed in business model. Therefore, from the angle of payers, eFunds India is receiving the payments and hence it is not subject to TDS as per provisions of section 195 because payment is not being made to a non-resident. 7.47. The assessees have not been filing its income tax return in India with the plea that its income is not taxable in India, in these circumstances the assessee cannot take the plea that all the payments were subject to TDS as per provisions of section 195. 7.48 Moreover, Hon bleble Supreme Court has held that interest u/s 234 A and B are mandatory in nature. In addition to these arguments, learned DR rely on order of AO/ CIT(A) in this regard. Departmental Appeal : 7.49. The ground of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to the negotiations of the issue of taxation of the appellant with Indian competent authority which was pending at that point of time for the AY 2003-04 and 2004-05 in the case of eFunds IT Solutions Inc. Once AO found out that the appellant had a PE for A.Y. 2003-04 and 2004-05, the reopening of assessment proceedings u/s 147 became a logical consequence. 8.3. In our considered view AO having obtained above information, had proper reasons to believe that in the similar circumstances i.e. same business with same model was being carried out by the appellants in the preceding years, there was clear situation of assessees having business presence, PE and income attributable for the earlier years. AO while recording reasons has referred to various specific information items from annual report 2002 and 2003 to indicate how appellant had been earning income for these earlier years also from the business connection in India. He has considered information given in the annual report mentioning as under:- The assessee is also having sales outlet in India, which also constitutes permanent establishment. As per it annual report our International sales officers are located i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Standard Motor Products of India Ltd. (1983) 142 ITR 877 also considered the scope of reassessment under section 147 of the Act. The Bench opined that once the assessment is reopened, the Income Tax Officer will not only have the jurisdiction but it would be his duty to determine the tax liability of an assessee and for that purpose, he will necessarily have to take into account not only the escaped income in respect of which a notice under section 147 had been issued but also the entire income that had escaped assessment during the year. 8.6. AO is not supposed to reach a final conclusion regarding the taxability of such income under the Act at the time of recording the reasons, only a prima facie belief regarding escapement of income would be sufficient for invoking the provisions of section 147 of the Act. A reference can be made to the two decisions of Supreme Court, which make it clear that merely a prima facie belief with respect to escapement of income has to be found (i) It has been laid down by SC in case of Raymond Woollen Mills (1999) 236 ITR 34 that where there is a prima facie material, the sufficiency and correctness of the belief cannot be questioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is reason to believe , but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd. (1996) 217 ITR 597 (SC); Raymond Woollen Mills Ltd. Vs. ITO (1999) 236 ITR 34 (SC). The scope and effect of section 147 as substituted with effect from April 1,1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clause (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment could be assessed or reassessed. To confer jurisdiction under section 147(a) tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to initiate the proceedings u/s 147/148. Consequently we are unable to hold that AO initiating proceedings improperly and approval was accorded thereon mechanically by Addl. CIT. In view of the foregoing we have no hesitation in coming to the conclusion that AO had proper reasons to believe in terms of secs 147/148 and case laws to initiate proceedings u/s 147/148 and frame these assessments and approval accorded thereon is in order. 8.8. Ld DR has demonstrated from the record that proper reasons were recorded in respect of all the assessment years and they were duly supplied to assessee except for AY 2001-02, which have been supplied at the beginning of this lengthy hearing. No prejudice is caused to the assessee as same objections are raised as in earlier years, contents of reasons are same as in other years. In our view the assessee having been served with proper notice, consideration of reasons and assessees objections, similarity of contents the proceedings for all these year, these proceedings for all these years including 2001-02 cannot be held to be invalid. 8.9. Objection about notices being served on S R Batliboi and Co. also does not carry any weight in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... role of the associated enterprises is limited to marketing of the products only. It is not known, why the associated enterprises were charging marketing fees to eFunds India, when the sales are shown to have been made to the associated enterprises only? It is also not known, why the eFunds India is incurring expenses on Xerox copies, tape drives and courier charges, which are reimbursed by associated enterprises? What the eFunds India does with tape drives is also not known? If the tape drives are used for the business of eFunds Corp./associated enterprises, then eFunds India is not being compensated for such business. 5.2 Considering these facts, assessees contentions that: (a) The services of testing, bug fixing services and other related software development services are insignificant and miniscule and at the most said to be preparatory or auxiliary to the main business activity of eFunds. (b) eFunds US does not have any sales offices in India and sales outlet referred to in the annual report in India is part of eFunds India s own business operations which are independent and separate of the operations of eFunds US.are not supported by facts, as in the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Chennai, India 18,600 Software development Center. Chennai India 48,600 Software Development Centre Mumbai, India 52,500 Outsourcing services. Mumbai, India 32,600 Outsourcing services. Mumbai, India 49,300 Outsourcing services. Gurgaon, India 62,200 Outsourcing and ATM Management services. Toronto, Canada 27,200 Software development Center. Bothell, Washington 24,700 Vacant -The segment wise contributions to the total operating income of US$ 58.5 million is as below: (Dollars in millions) 2004 2003 2002 Operating income (loss) Electronic payment $32.7 $40.5 $50.6 Risk management 50.0 29.5 11.8 Global outsourcing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l require more compensation by eFunds Corp. The effect of the same are required to be seen on the transfer prices between eFunds India and eFunds Corp. The President and sales team of eFunds India were working for eFunds Corp., then, whether they were also concluding the contracts on behalf of the enterprise is requires to be seen and this will also create the permanent establishment of the eFunds Corp. in India. 8.12. Assessees main contentions for not having PE and attributable profits in India is to the effect that: - The facts used by the learned Assessing Officer by use of the Form 10K report and annual report for year ending December 2003 are not relevant for the assessment year under consideration. -Even while using the information of the year 2003 not relevant to the year under appeal, the Assessing Officer ahs used only part information in annual report and Form 10K report to suit her preconceived notions and has drawn conclusion without taking in consideration the context in which it was stated in the reports. The Assessing Officer has also conveniently ignored the other facts and information in the annual report and Form 10K which contradicted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f President s office is to eFunds Corporation USA. (v) These activities are carried on continuously over a period which includes the years in question. In our view the gamut of activities and relationship clearly constitutes Business Connection in India. As per provisions of section 5(2) of IT Act, 1961, non-residents can be taxed on incomes which are received or deemed to be received in India And which accrue or arise or deemed to accrue or arise in India. The case under consideration falls in category of income deemed to accrue or arise in India. As per provisions of section 9(1), the following incomes shall be deemed to accrue or arise in India:- All income accruing or arising, whether directly or indirectly, through or from any business connection in India, ...... 8.14. In view of these observations, we have no hesitation to hold that assessees had business connection in India. 8.15. Having come to conclusion that the appellants have business connection in India, the next issue to be examined is whether the appellants have a PE in India. It is important to notice that the existence of PE or otherwise has to be determined on the basis of the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Escotel on a turnkey basis without the assistance of the other. Obviously, the assessee is to supply the hardware and the software and LTIL is to do the installation, testing, commissioning and bringing up to operation of the turnkey project. If the assessee herein does not provide the hardware and the software, It would be the duty of the LTIL to provide the requisite hardware and the software in the completion of the turnkey project Similarly, if LTIL does not comply with its duties of commissioning, installation, testing and bringing up to operation, the turnkey project, such responsibility would rest on the shoulder of the assessee. Here, what is noticed is that there is no dispute that the assessee herein has completed its part of its contract i.e. the supply of the hardware and the software. It is also specifically noted here that the installation, commissioning, testing and bringing up to operational status of the hardware and the software supplied by the assessee herein has been undertaken by the Indian subsidiary, LTIL. For this purpose; LTIL has also undisputedly taken the assistance of the expatriates, here the employees of the affiliates of the assessee herein Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween USA and India. A copy of the returns of the expatriates which have been placed in the paper book also clearly show that they have been in India for more than 90 days within the 12 months period from April. 1996 to March, 1997 Consequently, the term of Article 5(2)(1) of the DTAA between USA and India are fulfilled Consequently, it would have to be held that LTIL in fact, as a service PE of the assessee Consequently, the findings of the CIT(A) on this issue stand reversed. 8.17. In the present case it can be seen that that there exist a PE even under article 5(1) in respect of the back office operation and software development services being carried out by the subsidiary. Before any analysis of existence of PE can be undertaken, it is to be kept in mind that the articles of indo-USA DTAA is worded differently than the OECD model and prescribes .a lower threshold with respect to existence of the PE. The relevant technical explanation of the provision of made USA DTAA issued by US Department of treasury makes this point clear in the following terms: 8.18. This article differs in several significant respects from the US and OECD Model provision, principally by requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause or under any other paragraph The argument of the Id DR in this respect was that paragraph contains the principal rule for deciding whether there is a PE or not. Paragraph 2 enlarges the ambit. Wherever fixed place is available, there is no requirement of time in this paragraph and such requirement exists only in respect of installation and structure. Paragraph 3 is not applicable at all as it is not a case of building site or construction, installation or assembly project, etc., wherein there is a requirement of a particular length of time, Paragraph 4 contains a non obstante clause which overrides the provisions contained in paragraphs 1, 2 and 3. Looking to the wording of paragraph 4, a cannot be said that paragraph 3 or clause (V of paragraph 2 can override paragraph 1. We find that the cases cited by the Id Counsel in this behalf relate to classification of an income under one or the other head and it was held that If an income falls under one head, it cannot be brought to tax under any other head We do not have the question regarding the head of income before us. ft is equally true that strict rules of interpretation of statutes are not applicable to take interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll, of course, have two PEs). As recognized in paragraphs 18 and 20 below a single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business. On consideration of various case laws and the commentary above, it is clear that no length of time is prescribed in respect of paragraph I. To our mind in such a situation f the place of business is available to the assessee for the period in which its dependent work can be completed it shall constitute a PE and it is accordingly held 8.22. In view of the above it is seen that the eFunds India Ltd. in view of the activities being carried out represents a PE of the appellants under paragraph 5(1), 5(2)(i) of the DTAA between India and US. AO has also referred to a number of other issues like patent registered by appellant in India and agreements entered into by the appellants with Indian entity in para 7 of the assessment order. 8.23. In view of the above, it is held that the appellant had a PE in India under pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a competent authority may devise appropriate unilateral procedures, conditions, methods and techniques to facilitate the above-mentioned bilateral actions and the implementation of the mutual agreement procedure. 8.25. It cannot be assume that facts of the years under appeal are different from the MAP years or any of the facts were not considered by the competent authorities. Competent authorities have considered the fact that it is a case of e-commerce, where business may be transacted on global basis through various tax jurisdiction and income may be earned in various jurisdiction even though theoretically a case can be argued that conditions mentioned in article 5 of the DTAA are not be fulfilled as they relate only to conventional business and not c-commerce. In view of the paragraph 3 of the article; this MAP resolution is to be viewed as an application of the DTAA to an e-commerce environment, where the literal application of article 5 may not lead to a correct representation of the taxing rights of the two tax jurisdiction. The competent authorities have not only provided for computation of income under article 7, but also for the tax credit to be provided to the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectronic check conversion company that Deluxe acquired in February 1999. In September 1999, we changed. the name of our Company to eFunds Corporation. In January 20Q0, we decided to combine Deluxe s professional services business, eFunds IT Solutions Group, Inc. and eFunds International India Private Limite4 wish our electronic payments and risk management business. In June 2000, we sold 5,500,000 shares of our stock to the public at a price of $ 13.00 per share. After the IPO, Deluxe continued to own about 87.9% of the outstanding shares of our common stock In December 2000, De1 xt distributed all of the shares of our common stock owned by it to its shareholders through a tax-free win-off (the Spin-Off) in which each of its shareholders received approximately 5514 of a share of our common stock of each Deluxe share owned by them. Following the Spin-Off Deluxe ceased to own any shares of our common stock The above dates of Mumbai Centre and eFunds Indian Internationals Operations since September 1999, indicate that both these appellants have been generating income through the Indian operations carried out by the entities for all the assessment years under appeal. It is cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsidiary for remuneration, then the activity of this hired labour is to he attributed so the subsidiary and does not constitute a permanent establishment of the parent doing the hiring-out . This is different however, as well as in cases of subcontracts of the parent assumes the economic risk of the contract s fulfillment in relation to the main customer. In this situation the parent company and the subsidiary have in fact established a company of which they are partners. This will lead to a permanent establishment for the partners if the general preconditions are fulfilled. 8.29. Consequently, MAP proceedings order and article 27 of Indo-US DTAA have important bearing on the issue and has to be given effect on priority wherever required. 8.30. In view of the foregoings, it is held that assessees have:- (i) Business connection in India. (ii) They have PE in India under paragraphs 5(1) 5(2)(i). 8.31. Coming to the calculation of attributable profits, methodology adopted by AO, CIT(A) and MAP authorities have been mentioned above. 8.32. It shall be pertinent here to indicate that the whole exercise is to ascertain the effect of assessees busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amount of attributable income, being comparatively just, fair and equitable. 8.38. Coming to the revenue s ground that CIT(A) erroneously directed the AO to adopt original cost of assets for determining the ratio between Indian assets vis a vis global assets instead of taking depreciated cost of the assets as adopted by the AO. It is pleaded that assessees had not raised this specific plea before CIT(A). It is mentioned here that we have revised the working for arriving at attributable profits, as mentioned above. In our view, it will be desirable to adopt the basis of depreciated cost of assets, as done by AO is more appropriate. In order to arrive at the original cost of the assets, authorities have to refer to earlier records and make reverse calculations. Besides, the income generating capacity of any asset gets diminished with the elapse of time and generally the depreciation laws are provided by statutes considering all these factors. As the assets of eFunds India and various entities of the assessees in different tax jurisdictions are to be compiled, it will be desirable and expedient to adopt the basis of depreciated cost of assets as it will give a more practical, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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