9911796707
TMI Blog2010 (9) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... raised: i. Ld CIT(A) has erred in law and on facts in upholding the validity of proceedings u/s 147/148 of the I T Act. ii. Ld CIT(A) has erred in law and facts in holding that: a. Assessees had Permanent Establishment in India. b. The PE had attributable profits liable to tax in India. c. Alternatively method adopted for computation of attributable profits is incorrect and excessive. 3.1. Various argumentative grounds are raised to refer to observations and finding of lower authorities claiming them to be mistaken, misplaced or wrong. 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 Rs. 2,22,93,920/- as against income assessed at Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the US Competent Authority even in that year that, there was no Permanent Establishment of appellant company and in any case, since the same was accepted under a legal misconception, such acceptance could not then be legally, factually and validly applied to hold that appellant had a permanent establishment in India in the instant assessment year. 3.3. That the learned Commissioner of Income Tax (Appeals) has also erred both in law and, on facts in concluding that, "even if it is argued by the appellant that it did not 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 therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia, no liaison office in India and no business in India and, therefore, no permanent establishment in India and as such, no income could be said to have accrued to the appellant company in India. 4. That the learned Commissioner of Income Tax (Appeals) has further erred both in law and on facts in holding that office operation and software development being carried out by EFI also constitute permanent establishment under Article 5(1) of the Double Taxation Avoidance Agreement between India and USA. 5. That 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. It is therefore, prayed that it be held that assessment framed is without jurisdiction. It be further held that, income determined of the appellant company at Rs. 2,22,93,920/- by holding that the appellant has business connection under section 9(1)(i) of the Act and Permanent establishment under Article 5 of Double Taxation Avoidance Agreement between India and USA 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered for tax in India. 5.4. Transactions between M/s. eFunds International India (P) Ltd. and the appellants are claimed to be at arm's length other than for assessment year 2005-06. 5.5. Both i.e. M/s eFunds Corporation, USA and eFunds IT Solutions Group Inc, USA are non resident companies and, are tax residents of USA whereas M/s eFunds International India Pvt. Ltd is a resident company and, tax resident of India. 5.6. The main reason of these assessment proceedings is concerned with the assessment 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 bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched,. which would warrant the formation of the belief relating to escapement of the income of the assessee. from assessment. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and further there was no material for a reasons to believe that the assessee had a Permanent Establishment in India, which burden was to be discharged by Revenue. It was further contended that, the assessee had no LO/B.O/Place of business/ or any business in India. It is submitted that appellants had no assets and also no customers in India. MAP resolution relates to that year alone, the same could not in law or on fact be a ground to initiate action u/s 147 of the Act for any other assessment 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 initiatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 148 of the Act and therefore, proceedings initiated are otherwise too illegal and untenable. 6.9. It was thus submitted that, proceedings initiated may be quashed in view of the following judicial pronouncements: a) Jamna Lal Kabra Vs. ITO 69 ITR 461(All) b) Equitable Investment Co. P. Ltd. Vs. ITO 174 ITR 714 (Cal) c) Baldev Singh Giani Vs. CIT 248 ITR 266 (P & H) d) Sheo Narain Jaiswal & Others Vs. ITO 176 ITR 352 at page 369 (Pat) e) CIT Vs. Aggarwalla Brothers 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 belie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ashok Kumar Sen vs ITO Special Circle-V 132 ITR 707 (Del) * Chhugamal Rajpal vs S. P. Chaliha And Others 79 ITR 603 (SC) * Mohinder Singh Malik vs Chief CIT and Ors. 267 ITR 716 (P&H) * Sita World Travels (I) Ltd. vs CIT 274 ITR 186 (Del) * Haryana Acrylic Manufacturing Co. vs CIT 308 ITR 38 (Del) * Kamlesh Sharma vs. B.L. Meena ITO & others 287 ITR 337 (Del) * CIT vs Batra Bhatta Co. 174 Taxman 444 (Del) 6.14. Ld counsel for assessee then adverted to elaborate arguments on 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 Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son office in India and no business in India and therefore, no Permanent Establishment in India and as such, no income was either received in India or has accrued or arisen in India and as such. Consequently no return of income was filed by the appellants for the assessment years in question. (ii) In the first assessment for the assessment year 2003-04 dated 31.03.2006, it was held that, the facilities of eFunds International India Private Limited (for brevity alternatively referred to as "EFI" or "eFunds India") constitutes a fixed place permanent establishment of appellants in India primarily for the following reasons: a) That as per the Group Annual Report for the year 2002, facilities of eFunds India in the shape of software development centre and, call centre 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consolidated order gave partial relief by holding as under: (a) Proceedings under section 147 of the Act were validly initiated; (b) There exists business connection between the appellants and M/s eFunds India in India; (c) The appellants have a PE in India; (d) Consequently, assessments were validly made; (e) the appellants were liable to interest under section 234B of the Act. 6.17. Learned counsel for the assessee Shri C.S. Aggarwal then referred to summary of events leading to the filing of the instant appeals which are tabulated hereunder: A.M/s eFunds Corporation, USA S.N. Particulars 2000-01 2001-02 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed (in Rs.) 87,240 49,90,480 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-à-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-à-vis the gross value of the assets held by eFunds India i.e. instead of taking written down value, the gross value of assets have been taken. 6.18. Learned counsel for the assessee thereafter contends, the AO's findings broadly hold that: A. Assessees have Business Connection in India as: -&nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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 explained in M/s Rolls Royce Plc. case will not extinguish the assessment of both the appellants; - That appellants has even though placed reliance on the decision of R.D. Aggarwal (supra), Ishikawajima Harima Heavy Industries, Morgan Stanley and, Set Satellite Singapore (Pte) Ltd Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no business connection in India. 6.21. It is submitted that, in arriving at the above conclusion, the learned Commissioner of Income Tax (Appeals) has recorded various findings which are factually incorrect and are based on no material for the following reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;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 Technologies vs. DCIT, Fugro Engineers vs. CIT reported in 26 SOT 78 (Delhi) and Rolls Royce PLC (Delhi) which have no parity of the facts with the instant cases. It has not been appreciated that the revenue has not at all disputed the arm's length remuneration paid by the appellants to eFunds India, which 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, which are not related to any additional risks/activities b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 an enterprise through employees or other personnel, but only if; (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of article 9 (associated enterprise)). 3. Notwithstanding the preceding provisions of this article, the term 'permanent establishment' shall 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 delive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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) is not applicable to assessees facts as office operations and software development carried out by M/s eFunds India do not in any manner constitute Permanent Establishment under Article 5(1) of the Double Taxation Avoidance Agreement between India and USA. The appellants relied on the judgment of the Hon'bleble Apex Court in the case of DIT vs. Morgan Stanley and Co. Inc. reported in 292 ITR 416. In that case, M/s. Morgan Stanley and Co. Inc. (MS Co.) 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 subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 Article 5 of DTAA to suggest that, appellants have a PE is also misplaced. 6.30. The finding that, appellants have a PE in terms of Article 5(5), is also not correct as it will be seen that, Article 5(5) provides that, 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 on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 carries on business in any other state; through a broker; through a general commission agent; or any other agent of an independent status who carries on such business in their ordinary course of business, then such enterprise of a contracting state shall not be deemed to have a Permanent Establishment in the other contracting state. However, this rule is subject to the exception that, when the activities of such an agent are devoted wholly 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 independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant 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 income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 remuneration for continuous three assessment years i.e. AY 2002-03, 2003-04 and 2004-05. 6.39. It is further pleaded that the MAP order of A.Y. 2003-2004 cannot be relied upon as Commissioner of Income Tax (Appeals) failed to appreciate that, determination of income of the appellant for the year under consideration could not mechanically be made on the basis of resolution passed under section 90 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. Foreign Tax Credit: The changes to income and earnings & profits will be taken into account in determining eFunds' deemed paid credits under Section 902. 3. Effect on Future Years: The competent authority determination made herein is not binding on subsequent years. We have instructed the Natural Resources and Construction Industry Director on the implementation of the foregoing 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 fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and relief's rests with assessee on whom it is imposed by law, officers should- a. draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other. b. freely advise them 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 preced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pin-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 own statement as given in for 10-K 405, that the operation carried out in India by the Indian entity are integral part of the appellants income generating activity. It is prove that the Indian entity is an independent legal entity to which work has been allocated. But at the same time Indian entity is not a contractor of the appellants but a partner in business 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 issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Page/Para of CIT(A) Order Contention of the appellant 1. G. V. K. Industries vs. ITO 228 ITR 564 (AP) 21 (5) In the case of GVK Industries, the non-resident was rendering services to GVK Industries and thus was earning 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides 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, the term 'business connection' has not been defined in the Act but is an important concept while determining whether the business income of a non-resident is subject to tax in India. The Supreme Court in R. D. Agarwal & Co., reported in 56 ITR 20 was considering a case, wherein 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn 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 company, yet no part of the activity or operation could be said to have been carried on by the American company in India." 6.54. Further, the Central Board of Direct Taxes (CBDT) has issued a Circular No 7 of 2003 reported in 263 ITR 62 (St), explaining the amendments 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 brok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 independent status in the ordinary course of their business (First Proviso to Explanation 2 to section 9(1)(i) of the Act). In view thereof, it is submitted that no business connection exists, which has resulted into earning of income outside India and, therefore 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 at the servers outside India cannot be deemed to be a fixed place PE of the Appellant in India. The database belongs to the appellant and is based on servers which are located outside India. eFunds India does not have any rights in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a P.E. The impugned ruling is correct in principle in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reported in 95 ITD 269 SB), wherein the Special Bench of ITAT has held that in case the payments made to the assessee are liable to tax deduction at source, the assessee cannot be held to have committed a default in paying 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 action of AO. 7.5.With this background ld DR proceeded with further arguments the issues taken by assessee regarding reopening. 7.6. The AO recorded reasons for reopening which are on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar 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 relied for the preposition that assessment proceedings can be reopened on the basis of information obtained during assessment made for subsequent AY :- Raymond Wooollen Mills Ltd. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 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 reassessment proceedings. Hon'bleble Delhi Tribunal in case of ITO Vs Smt. Gurinder Kaur 102 ITD 189 has held that "In the light of judgment of Supreme Court in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved 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 eFunds India come under legal obligation to provide services to clients of eFunds Corporation. Further, there are contracts between the assessees (viz. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as per provisions of India-USA DTAA. Article 7(1) of the DTAA says that income of resident of USA shall be taxable in India only if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'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 between the assessee and its Indian Subsidiary.... . .......A perusal of Article 5(2)(l) clearly shows that it is not on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome:- : 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 justifying a more definite and certain apportionment as has been held in case of 73 ITR 283 (Bom). In these cases AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 of Hon'bleble Supreme court, it is clear that the assessment of PE gets extinguished only if followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to tax in India as per provisions of Article 7 of DTAA in status of 'Non-resident' and on the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E 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 earlier, deduct income tax thereon at rates in force" 7.46. The basic requirement for application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 authority also agreed to the negotiations of the issue of taxation of the appellant with Indian compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto 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. Standard Motor Products of India Ltd. (1983) 142 ITR 877 also considered the scope of "r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conditions in that regard is essential. At that stage, the final outcome of the proceeding i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the proceedings u/s 147/148. Consequently we are unable to hold that AO initiating proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 enterprises is limited to marketing of the products only. It is not known, why the associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp;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 - $121,319(000) -The description of principal facilities reads as below: Location Approximate Function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... global outsourcing and the entire services are rendered from India. -The total net revenue of US$ 552,148(000) is shown to have earned from company's operations by geographic areas as follows: 2004 2003 2002 United States $486,307 $482,251 $495,786 United Kingdom and other 26,980 18,352 14,853 India 22,369 18,817 23,169 Canada 16,492 12,634 9,317 Total consolidated $552,148 $532,054 $543,107 8.11. On the basis of Assessees replies AO arrived at following conclusions for holding PE in India. If the expenses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and then, the same contract is either assigned or sub-contracted to eFunds India for execution. Therefore, both eFunds Corporation and eFunds India come under legal obligation to provide services to clients of eFunds Corporation. (ii) There are contracts 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 provides various services to the 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions given by the special bench in the case of Motorola, there was a PE in Lucent Technologies India Ltd. (LTIL) case under article 5(2XIXI) of the DTAA. The relevant portion of the Lucent decision are reproduced here which indicate that a subsidiary of an American appellant company could be a PE as indicated therein: "7. We have considered the rival submissions. At the outset what is noticed from the two agreements, being the one between the Escotel and the assessee and the other between Escotel & AT&T (India) Pvt Ltd., now knows as LTIL shows 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LTIL. Though, I I'll has certified that does not keep any 3 pares on behalf of the assessee for the equipments supplied by the assessee under the contract with Escotel still the fact that LTIL has also assumed the responsibilities of the warrantee in regard to the hardware supplied by the assessee as also the responsibility to replace the same within the period specified in the support contract between Escotel and LTIL clearly shows that the subsidiary LTIL is also acting on behalf Of the assessee. A perusal of article 5(2)(L) clearly shows that it is not 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, or the services are performed for a person related to the enterprise providing the services. In the latter case, no time threshold test must be met for a PE to exist. The determination of whether persons are related for purposes of this test is made in accordance with the rules of article 9 (Associated Enterprises). 8.21. The basic intent of paragraph I of article 5 is that there should be a fixed place of business through which the business of an enterprise is wholly or partly carried out. In this context, the appellant has referred to certain extracts from the 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 F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether there is a single place of business, in this connection, we may reproduce paragraphs 4.6, Sand 5.1 from the Commentary, which read as under: "4.6 The words "through which" must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location that is at the disposal of the enterprise for that purpose. Thus, for instance, an enterprise engaged in paving a road will be considered to be carrying on its business "though" the location where this activity takes place. 2. According to the definition, the place 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notional This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention. 2. The competent authority shall endeavour, if the objection appears to it to be justified and it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which Is not in accordance with the Convention Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention They may also consult together for the elimination of double taxation in cases not provided for in the Convention. 4. The competent authorities of the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Coming to nature of activities of the appellant in India, they cannot be considered to be preparatory and auxiliary as they are the core income generating activities, this is supported from the content of the form 10-1(405 dated 01,04.2002 in the case of eFunds Corporation, available at page 85 of the paper book. The relevant portion of the form is reproduced below: "Our call center in Mumbai, India completed is first fall year of operations in 2001 and generated revenue of approximately $I million. This call center commenced operations in mid-December 2000 and generated less than $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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make this clear by using the words 'of itself. Also the transformation of a permanent establishment into a subsidiary does not yet lead. therefore. to the characterization of the subsidiary as a permanent establishment. In such cases, the subsidiary continues, to be a separately taxable entity. It is its parent company's permanent establishment only to the extent that it satisfies the agency requirement set out in Art. 5(5) and (6) MC. Paragraph 41 MC Comm. Art. 5 makes express mention of this only in regard to the independent agent within the meaning of Art. 5(5). Like any other unrelated 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its fold some steps in an improper order, which need to be corrected to properly estimate such attributable profits. 8.36. In our view, the proper method for estimating the profits attributable to PE shall be worked out in the following manner/ order, which, according to us, gives a fair and is reasonable basis:- (i) Determination of Proportion of Indian assets to Global assets i.e. including eFunds India assets. (ii) Aggregate of global profits of group (inclusive of eFunds India profits). (iii) Working of total profits attributable to India out of global profits in same proportion as (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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. The same is being assessed in the hands of PEs who had not filed their return on the ground that this income was not attributed to Indian Business Connection. Provisions of sections. 234A & B are mechanical in nature, as held by Hon'bleble Supreme Court in the case of Anjuman Ghaswala 252 ITR, which we respectfully follow as a binding judicial precedent. 8.41. In view of the foregoings, the assessees all grounds, except computation of attributable profits, are dismissed. The ground about calculation 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. v\:* {behavior:url(#default#VML);} o\:* {behavior:url(#default#VML);} w\:* {behavior:url(#default#VML);} .shape {behavior:url(#default#VML);} Normal 0 false false false false EN-US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of assessment and, further went wrong in sustaining the determination of income of the appellant company at Rs. 2,22,93,920/- as against income assessed at Rs. 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 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 Rs. 2,22,93,920/- out of an aggregate addition of Rs. 2,81,70,560/- by holding that, appellant company had a business con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttribution 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 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 representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, first assailed 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 argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Commission for the A.Y. 1989-90 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Assessing Officer, having rational 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 Rs. 1,00,000/- has escaped assessment as the reasons recorded are highl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, formation of reason to believe and recording of reasons are inseparable before 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 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 transactions for these ATM machines were routed through servers ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 further allowed deduction of 5% towards Head office Expenses and, computed net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee says no reasons have been supplied as they were not recorded 28/11/2008 28/11/2008 28/11/2008 28/11/2008 6. Assessment completed u/s 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-à-vis the written down value of the assets held by eFunds India in the manner as per the Annexures enclosed for each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obal assets of the entire group of companies of the appellant vis-à-vis the gross value of the assets held by eFunds India i.e. instead of taking written down value, the gross value of assets have been taken. 6.18. Learned counsel for the assessee thereafter contends, the AO's findings broadly hold that: A. Assessees have Business Connection in India as: - That facilities of eFunds India were at the disposal of eFunds US; -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; -That most of the employees of the Appellant are operating from 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclude all the risks of appellant and, in view of the decision of Morgan Securities as explained in M/s Rolls Royce Plc. case will not extinguish the assessment of both the appellants; - That appellants has even though placed reliance on the decision of R.D. Aggarwal (supra), Ishikawajima Harima Heavy Industries, Morgan Stanley and, Set Satellite Singapore (Pte) Ltd Limited but has not properly been able to indicate how these case laws are directly related to the facts of present case. In fact, since remuneration is not at arms length, therefore judgment of Morgan Stanley and, Set Satellite Singapore (Pte) Ltd Limited support the case of Assessing Officer. B. 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts neither had Liaison Office or Permanent Establishment nor it was carrying on any business in India and had no business connection in India. 6.21. It is submitted that, in arriving at the above conclusion, the learned Commissioner of Income Tax (Appeals) has recorded various findings which are factually incorrect and are based on no material for the following reasons: No. Finding Recorded by the learned CIT(A) contention of the Appellants thereon 1 That activities of Liaison Office were more than merely preparatory and auxiliary The appellants 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the arm's length remuneration paid by the appellants to eFunds India, which 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, 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin that State for a related enterprise (within the meaning of paragraph 1 of article 9 (associated enterprise)). 3. Notwithstanding the preceding provisions of this article, the term 'permanent establishment' shall 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-oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the judgment of the Hon'bleble Apex Court in the case of DIT vs. Morgan Stanley and Co. Inc. reported in 292 ITR 416. In that case, M/s. Morgan Stanley and Co. Inc. (MS Co.) 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 thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have a Permanent Establishment in the other contracting state. However, this rule is subject to the exception that, when the activities of such an agent are devoted wholly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to 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 conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of income of the appellant for the year under consideration could not mechanically be made on the basis of resolution passed under section 90 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent years. We have instructed the Natural Resources and Construction Industry Director on the implementation of the foregoing 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they appear to be clearly entitled but which they have omitted to claim for some reason or other. b. freely advise them 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been allocated. But at the same time Indian entity is not a contractor of the appellants but a partner in business 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant 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 Lucent Technologies, the Indian subsidiary was executing a turnkey project in India through seconded employees. However, in the present case, only some services have been rendered by Indian Subsidiary and that too through its own employees in India. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven, 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 carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territory, which facilitates or assists the carrying on of that business. The expression 'business connection' postulates a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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. Previously, CBDT in a circular stated that, "Section 9 of the Domestic Tax Law does not seek to bring into the tax net the profits of a non-resident, which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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. Nothing has been brought on record which suggests that the facilities of eFunds India were at the disposal of the appellant for carrying out its business activities. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 profits and applied the percent in Step 1 to these profits (without reducing the profits of eFunds India) to arrive at the estimated income of the alleged Indian PE. If the estimated income so computed is more than what has already been declared by eFunds India, the excess would have been the taxable income of the alleged Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income could be attributed to the alleged PE. In view thereof, it is submitted that, in the instant case, since transactions are at arm's length price after considering all the risks, functions of the multi national enterprise, there is no justification to hold that there is any further income attributable to the alleged PE. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 contends as under: Re-opening of assessments : 7.1. The AO reopened following assessments u/s 147 after recording proper reasons to belief dated 17-11-2006 : In case of eFunds Corporation In case of eFunds IT Solution Inc. AY 2000-01 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 action of AO. 7.5.With this background ld DR proceeded with further arguments the issues taken by assessee regarding reopening. 7.6. The AO recorded reasons for reopening which are 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: "T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relied for the preposition that assessment proceedings can be reopened on the basis of information obtained during assessment made for subsequent AY :- Raymond Wooollen Mills 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 reassessment proceedings. Hon'bleble Delhi Tribunal in case of ITO Vs Smt. Gurinder Kaur 102 ITD 189 has held that "In the light of judgment 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 regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation 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 eFunds India come under legal obligation to provide services to clients of eFunds Corporation. Further, there are contracts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, 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 as per provisions of India-USA DTAA. Article 7(1) of the DTAA says that income of resident of USA shall 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)& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 between the assessee and its Indian Subsidiary.... . .......A perusal of Article 5(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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 justifying a more definite and certain apportionment as has been held in case 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Hon'bleble Supreme court, it is clear that the assessment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 to tax in India as per provisions of Article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable 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 earlier, deduct income 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 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authority also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchequer 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 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 stoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 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 105,300Customer contact center, Debit Bureau, IT consulting And ATM management Services. Austin, Texas 19,100 Retail solutions Chennai, India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 responsibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 theoretic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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, De1üxt distributed all of the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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