TMI Blog2014 (2) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the assessee. Therefore, the conditions and requirements of subclauses (a), (b) and (c) to Article 5(4) are not satisfied. - assessees did not have "permanent establishment" in India The transactions between the assessees and e-Fund India were at arm”s length and were taxed on arm”s length principle. There was no allegation or considered finding of the tribunal that the transactions were not in ordinary course of business. In these circumstances, even otherwise requirements of Article 5(5) are not satisfied in the present case. Real and intimate connection must exist between operations carried out in India and business by nonresident outside India, and profits of business outside India attributed to operations carried out in India, can be only subjected to tax. This is clear from the explanation to Section 9(1)(i) and only such income operations carried out in India have to be attributed and taxed. When DTAA and provisions of the Act apply to an assessee, then the Article of DTAA or the provision of the Act will apply depending upon, which one of the two is more beneficial or advantageous to the assessee. Reassessment u/s 147 - Held that:- non communication of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessment years 2000-01, 2001-02, 2002-03, 2004-05 and 2005-06 filed by the assessee:- 1. Whether, on the facts and circumstances of the case and in law, the Assessing Officer was justified in reopening the assessment under Section 147/148 of the Income-Tax Act? 2. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that Appellant has a business connection in India under Section 9(1) of the Act? 3. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the Appellant has a permanent establishment in India under Articles 5(1), 5(2) (1) and 5(4) of the India- US DTAA? 4. Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified in holding that appellant is liable to interest under Section 234A and 234B of the Act?‖ 4. By subsequent order dated 2nd March, 2012, two more questions of law being question Nos. 5 and 6 were framed and read as under:- 5. Whether any income of eFunds International India Pvt. Ltd. Can be attributed and assessed in the hands of the appellant? 6. In case question no. (5) is answered aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings?‖ (2) Whether the formula prescribed by Income Tax Appellate Tribunal for computation of profit attributable to a Permanent Establishment is correct and as per law? (3) Whether the order of the Income Tax Appellate Tribunal is perverse?‖ 6. Undisputed facts in brief may be first noticed. The assessees are companies incorporated in United States of America (USA, for short) and were residents of the said country. They were assessed and have paid taxes on their global income in USA. e-Fund Corp. was the holding company having almost 100% shares in IDLX Corporation, another company incorporated in USA. IDLX Corporation held almost 100% shares in IDLX International BV, incorporated in Netherlands and later in turn held almost 100% shares in IDLX Holding BV, which was a subsidiary again incorporated in Netherlands. IDLX Holding BV was almost a 100% shareholder of e-Funds International India Private Limited, a company incorporated and resident of India (e-Fund International India Private Limited has been described as e-Fund India ). IDLX International BV was also the parent/holding company having almost 100% shares in e-Fund Inc., which as noticed above, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent entity attributable to the PE in the country where subsidiary is situated. The income of the subsidiary is not taxed in the hands of the non-resident principal and vice-versa. Thus, there is no double taxation in the hands of the holding company as income of the subsidiary is not taxed as income of foreign holding assessee. The principle is that a subsidiary constitutes an independent legal entity for the purpose of taxation. 9. Before we examine whether e-Fund India and its activities constitute PE of the foreign assessees as under the applicable Double Taxation Avoidance Agreement between India and USA, (The agreement for the sake of convenience is being referred to as DTAA), it would be appropriate, at the outset, dispel any doubt or contention that establishing a subsidiary in the other treaty country would result in creating or establishing a PE of a foreign holding company in the said third country. Again to be fair to the Revenue, no such contention has been raised and the said legal position is clear and luminescent from paragraph 6 to Article 5 of the DTAA. The said paragraph reads:- 6. The fact that a company which is a resident of a Contracting State control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated permeates and pervades but will give way to the exceptions carved out and stated in the DTAA. The legal principle is simple, a subsidiary being a resident of the State in which it is incorporated and functioning is taxed for its income. Subsidiary s income is separately allocated and brought to tax in the country where it is situated or is a resident of. This clearly distinguishes a subsidiary form a foreign assessee, which is directly carrying on business and has residence in another country through their own branches/offices, personnel, etc. 11. Klaus Vogel on Double Taxation Conventions, Third Edition, states the following principle:- 40. [Principle] It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by the subsidiary company is managed by the parent company does not constitute the subsidiary company a permanent establishment of the parent company.‖ 12. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of I.T. Act. All provisions of I.T. Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry-forward and set-off losses etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are also made under the I.T. Act (for example: Sections 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other (emphasis added) This follows from the principle that, for the purpose of taxation, such a subsidiary constitutes an independent legal entity.7 Accordingly, both companies are subject to unlimited tax liability in the state in which they are resident or where their place of management is located. However, by using the wording not of itself ‖, the provision clarifies that a parent company (parent) can have an (agent) PE in its subsidiary s state of residence if the general requirements for a PE set out inArt. 5(1) to (5) of the OECD Model are met. Accordingly, any space or premises belonging to the subsidiary that is at the disposal of the parent (the right-to-use test‖) and that constitutes a fixed place of business (the location test‖ and the duration test‖) through which the parent carries on its own business (the business activity test‖), gives rise to a PE of the parent under Art. 5(1), subject to Art. 5(3) and (4), of the OECD Model. In addition, under Art. 5(5) of the OECD Model, a subsidiary constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise). 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 base of business solely for the purpose of advertising, for the supply of information, for scientific research, or for other activities which have preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 5 applies is acting in a Contracting State on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as the 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 the principles contained in this Article. 3. In the determination of the profits of a permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other Articles of the Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 7. For the purposes of the Convention, the term "business profits" means income derived from any trade or business including income from the furnishing of services other than included services as defined in Article 12 (Royalties and Fees for Included Services) and including income from the rental of tangible personal properly other than property described in paragraph 3 (b) of Article 12 (Royalties and Fees for Included Services).‖ 18. Article 7 paragraph 1, states that profit of an enterprise of contracting State shall be taxed only in that State, i.e., in the State where it is a resident and not in the other State even if its activities have a business connection in the second State. This ensures that the same income is not taxed twice in the hands of the same person merely because there is a business connection between income earned by one assessee from activities‖ in two States. Income of the said assessee can be taxed in the second State only if and when the said enterprise carries on business in the said State through a PE. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation in the form of immovable property or premises but in certain instances can mean machinery and equipment. The word fixed‖ refers to a distinct place with some or certain degree of permanence. The relevant and important word used in the definition clause for the purpose of the present case is through‖ and i.e., the carrying on of business‖ should be through‖ the fixed place of business. In Morgan Stanley (supra), the Supreme Court has observed that back office operations by the Indian subsidiary to the parent to support the main office functions and equity and fixed income research, account reconciliation and providing IT enabled services such as data processing and support centre do not satisfy the second requirement of Article 5(1), i.e., carrying on of business in India through‖ such fixed place. The Indian subsidiary was in fact merely supporting the front operations of the principal company and on functional and factual analysis, Section 5(1) was not applicable. In Morgan Stanley (supra), the Supreme Court observed:- EXISTENCE OF P.E. IN INDIA 6. With globalization, many economic activities spread over to several tax jurisdiction. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n should also be made of the other characteristic of a permanent establishment to which some importance has sometimes been attached in the past, namely that the establishment must have a productive character i.e., contribute to the profits of the enterprise. In the present definition this course has not been taken. Within the framework of a well-run business organisation it is surely axiomatic to assume that each part contributes to the productivity of the whole. It does not, of course, follow in every case that because in the wider context of the whole organisation a particular establishment has a productive character‖ it is consequently a permanent stablishment to which profits can properly be attributed for the purpose of tax in a particular territory. 4. The term place of business‖ covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided that the office is at his disposal for a sufficiently long period of time so as to constitute a fixed place of business‖ (see paragraphs 6 to 6.3) and that the activities that are performed there go beyond the activities referred to in paragraph 4 of the Article. 4.4 A third example is that of a road transportation enterprise which would use a delivery dock at a customer s warehouse every day for a number of years for the purpose of delivering goods purchased by that customer. In that case, the presence of the road transportation enterprise at the delivery dock would be so limited that that enterprise could not consider that place as being at its disposal so as to constitute a permanent establishment of that enterprise. 4.5 A fourth example is that of a painter who, for two years, spends three days a week in the large office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions of his business (i.e. painting) constitute a permanent establishment of that painter. XXXXX 4.6 The words through which‖ must be given a wide meaning so as to apply to any situation wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been interpreted and read in a manner that the foreign enterprise should have the right to use the location in the second State. The said right may or may not be formalized through legal documentation, but right to use should be established and shown. Then and then alone fixed place PE shall exist. 23. Fixed location test may be in form of a legal right or can be inferred from the facts when the foreign establishment and its employees are allowed right to use the place of business belonging to a subsidiary, a third party. Arvid A. Skaar in Permanent Establishment (supra) has observed:- (at page 155) 11.1 General The definition of the basic-rule PE of the modern tax treaties explicitly requires the enterprise s objective‖ presence in the other country through the existence of a fixed place of business.‖ It also requires a business‖ activity as a condition for PE. Furthermore it is a clear condition that there must be a connection between the place of business and the activity, i.e. that the activity has to be conducted through‖ the place of business. xxx xxx (at pages 157-8) 11.3 The problem: A factual‖ or a legal‖ approach? x x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and contention to the contrary is academic in view of the negative list given in paragraph 3, which is fairly comprehensive and the restrictive; and postulates of paragraph 1 to Article 7 and other paragraphs to Article 7. Even otherwise, a mine, oil or gas fuel etc. or plantation or a factory in most cases would satisfy requirements of paragraph 1 to Article 5. United Nations Handbook on Selected issues in Administration of Double Tax Treaties for Developing Countries states that Article 5(2) lists some examples of fixed place of business. However, we need not address this issue further for the purpose of the present decision as the two foreign assessees did not have any branch office or factory or workshop in India and merely because they had a subsidiary in India by itself did not create a fixed place of business/location PE within the meaning of Article 5, paragraph 2, sub-clauses (b) to (k) thereof. Service PE under Article 5(2)(l) of the DTAA. 26. Sub-clause (l) to Article 5(2) defines what can be called service PE. Sub-clause (k) is also a type of service PE, but this clause is not relevant for the purpose of the present decision. The sub-clause (l) requires furnishing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e former deputes its own employees to work in India in MSAS. Therefore, according to the AAR the service Agreement between MSCO and MSAS dated 14.4.3005 would fall under Article 5(2)(1) and consequently the transfer pricing regulation would apply for evaluating the charges payable by MSCO to MSAS in India for such service contract, This ruling has been challenged by the applicant. 14. Article 5(2)(1) of the DTAA applies in cases where the MNE furnishes services within India and those services are furnished through its employees. In the present case we are concerned with two activities namely stewardship activities and the work to be performed by deputationists in India as employees of MSAS. A customer like an MSCO who has world wide operations is entitled to insist on quality control and confidentiality from the service provider. For example in the case of software P.E. a server stores the data which may require confidentiality. A service provider may also be required to act according to the quality control specifications imposed by its customer. It may be required to maintain confidentiality. Stewardship activities involve briefing of the MSAS staff to ensure that the output mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCO as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(1). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCO is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed.‖ 27. In respect of stewardship activities by employees of the nonresident assessee, it was observed that the employees‖ were not involved in any day-to-day management or any specific services undertaken by the Indian subsidiary and it was basically to protect the interest of the customers, i.e., the third parties. It was also noticed, as in the present case, that the Indian subsidiary therein was a service provider. The aforesaid observations of the Supreme Court affirm our view that the services must be performed in respect of the activities withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and investigation. While clause 19 of the agreement disables MSAS from disclosing the information contained in the software products to any party except the Morgan group which has the liberty to share the infor-mation with any member of the Morgan group. All this would show that the applicant would be in a position to exercise close control and super-vision on the working of MSAS. Further these features in the agreement vividly bring out that the business of MSAS is inextricably linked with the business of the applicant and the other two entities of the Morgan Stanley group so as to make activities of MSAS projection of Morgan group.‖ 28. In Morgan Stanley Co. Inc., In re (supra) one of the findings recorded by the Authority for Advanced Ruling was that the salary payable to the deputed staff from associated enterprises aggregated to 50% of the total remuneration to be paid to the employees of the Indian subsidiary. Further performance appraisal, promotion and discipline etc. was to be carried out in consultation with the foreign assessee. 29. Thus, on the question of seconded employees by the foreign enterprise/assessee to the Indian enterprise/subsidiary, we have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy PE in the second contracting country. Agency replaces fixed place with personal connection. Arvid K. Skaar in his work Permanent Establishment has opined that primacy of location test of the basic rule is consistent with the conceptual structure of the PE clause itself. An agency will constitute a PE only when a PE cannot be found according to those conditions in the basic rule which are altered or replaced by the agency clause. OECD and UN Model Treaties recognize agency PE. The principle being, that a foreign enterprise may choose to perform business activities itself or through a third person in the other States. An agent is a representative who acts on behalf of another with third persons. International taxation laws recognize and accept two distinct types of agency PE, dependent and independent. Every agent by very nature of principle of agency is to follow principal s instructions. But this principle is not squarely applicable to DTAAs, as third parties may not be strictly an agent under the domestic law. Further, the aforesaid dependency cannot be the distinguishing factor which determines whether the agency is dependent or an independent agency for the purpose of Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the three conditions specified in sub-clause (a) to (c) are satisfied. Under sub-clause (a), a dependent agent should have authority and should habitually exercise the said authority to conclude contracts on behalf of the foreign enterprise. What is meant by the term authority to conclude contract has been subject matter of controversy on whether participation in negotiations by the agent is sufficient or not. However, this is not relevant for the decision of the present appeals in view of the factual matrix of the present case. Subclause (b) refers to an agent who habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the principal enterprise. In such cases, the agent should also perform some additional activities in its country on behalf of the foreign enterprise which has contributed to the sale of goods or merchandise. Sub-clause (c) applies when the agent habitually secures orders in the said country i.e. where he is located, almost wholly or wholly for the foreign enterprise. 35. Transactions between a foreign enterprise and an independent agent, do not result in establishment of a permanent establishment un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of conduct on the part of the agent. If, despite the specific provision of the soliciting agreement, it is found, as a matter of fact, that TVI is habitually concluding contracts on behalf of TVM without any protest or dissent, perhaps it could be presumed either that the rele- vant provisions of the agency contract are a dead letter ignored by the parties or that the principal has agreed implicitly to TVI exercising such powers notwithstanding the terms of the contract. If such a situation is found to exist, then perhaps it could be said that TVI constitutes a permanent establishment for TVM despite the clauses of the contract relied upon.‖ 38. Judgment of the Delhi High Court in the case of Rolls Royce PLC versus Director of Income Tax (International Taxation) (2011) 339 ITR (Del) is a good authority for the proposition that subsidiary can constitute and become a PE of the controlling company. The said decision proceeds on its own peculiar facts and we do not find that any legal principle and the elucidation in the present decision is contrary to the legal ratio propounded in the case of Rolls Royce (supra). Mutual Agreement Procedure 39. Before we go on the factual m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross income as reduced by the income of subsidiary e Funds India Pvt. Ltd. Already reported in India. Thereafter the total income so attributed will be apportioned between e Funds and IT solutions in the ratio of 85% (to e Funds) and 15% (to IT Solutions) for the AY 2003-04 and 87% (to e Funds) and 13% (to IT solutions) for the AY 2004-05. In view of the above, the income attribution , as agreed upon is given below:- AY 2003-04 AY 2004-05 Figures in US $ million Figures in US $ million Apportionable base income 25.12 30.71 Percentage attributed to India 10.48% 11.11% Income attributed to India 2.63 3.14 Allocation between IT Solutions and e Funds IT Solutions E Funds 0.39 (15%), 2.24 (85%) 0.45 (13%), 2.96 (87%) 41. The assessee has placed on record communication dated 7th May, 2005 written by Department of Treasury, Internal Revenue Services, Washington in which they have stated that they did not agree on technical merits that e-Fund Corp or e-Fund Inc. had a PE in India but they had agreed to mutual agreement to divide income to avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of Article 5 which was invoked and held to be applicable. However, in paragraph 8 reference is made to the assessment order for assessment year 2003- 04 in the case of e-Fund Corp and it was observed that assessee had fixed place PE as well as dependent agent PE i.e. PE under Article 5(1) and Article 5(4) of the DTAA. 44. Commissioner of Income Tax (Appeals) has held that the assessees had PE in India under paragraph 5(1), 5(2)(l) and both dependent PE and independent PE under Article 5(4) and 5(5) of the DTAA. 45. Tribunal in the impugned order has primarily referred to and quoted findings of the Assessing Officer. The assessee have placed on record copies of the written submissions filed before the appellate authorities i.e. Commissioner (Appeals) and tribunal wherein they have specifically questioned and challenged the facts recorded by the Assessing Officer/Commissioner (Appeals). Unfortunately, these have not been dealt with specifically in the appellate orders and to this extent we as an appellate court under Section 260A, are handicapped and faced with rather a difficult task. Further the assessment orders are confusing and the expression it is not known , reflective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al institutions, retailers and other businesses that assist in detecting fraud and assessing the risk of opening a new account or accepting a check. These products and services are based on or enhanced by appellant's proprietary databases such as Debit Bureau , ChexSystems (SM) and SCAN(SM) and other sources. Neither the customers to whom such services are provided are situated in India nor the services are provided from India and, therefore no income accrued to the appellants in India. d) Professional Services Professional Services include business process management and IT outsourcing services, EFT software sales and software applications development, maintenance and installation services. The appellant's business process management and outsourcing services focus on both back-office and customer support business processes, such as accounting operations, help desk services, account management, and call center operations to customers outside India.‖ 47. As per the assessment/appellate orders e-Fund India had performed back office operations in respect of the first three. This included data entry operations etc. in respect of Decision Support and Risk Management‖. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act to e-Fund India is not a factor or rule which is to be applied to determine applicability of Article 5(1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not the relevant criteria/test. e-Fund India was/is a separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayer. Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between the Indian subsidiary and the foreign Principal under Article 5(1). Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place PE exists. 50. Reference to core of auxiliary or preliminary activity is relevant when we apply paragraph 3 of Article 5 or when sub-clause (a) to paragraph 4 to Article 5 is under consideration. The fact that the subsidiary company was car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ,fir the hiring out of employees as temporary workers. If the parent company makes personnel available to the subsidiary.* remuneration, then the activity of this 'hired labour' is to be attributed to 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 if 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 f the general preconditions are fulfilled." 52. The aforesaid observations are in the context of dependent agency and not in the context of Article 5(1) or fixed place PE. The observations of Klaus Vogel have been misre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also the view and opinion of Arvind K. Skaar, wherein he has referred to the principle of altered ego companies and decision of American courts in National Carbide Corporation vs. Commissioner 336 US 422; Moline Properties Inc. vs. Commissioner 319 US 436 and Bollinger vs. Commissioner 108 S.Ct. 1173 and has referred to six point as the National Carbide criteria. These are: (1) The corporation must operate in the name and for the account of the principal, (2) it must bind the principal by its actions, (3) it must transmit money received to the principal, (4) it must be considered whether the receipt of income is attributable to the services of the employees of the principal or to assets belonging to the principal, (5) the relations between the principal and the agent must not depend upon the fact that it is owned by the principal, and (6) the business purpose must be carrying on the normal duties of an agent.‖ 54. With reference to criteria 5 and 6 in Bollinger (supra), observations and clarifications were made relying upon separate entity doctrine. Thereafter the text refers to problem of empty and slander companies which are used to avoid PE taxation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t basis e-Fund India was reimbursed expenses of xerox, courier charges etc. will not make e-Fund India as PE of the assessee under Articles 5(1), 5(4) or 5(5). Conditions and stipulates under Articles 5(1), 5(4) or 5(5) will create a PE and not the said facts as highlighted in the impugned orders. Therefore, we will now examine the facts found and refer to Articles 5(4) and 5(5) of DTAA. 57. Conditions of Articles 5(4) are not satisfied in the present case. It is not the case of the Revenue that e-Fund India was authorized and habitually exercised authority to conclude contract or was maintaining stock or merchandise from which it delivered goods or merchandise on behalf of the assessee or secured orders on behalf of the assessee. Therefore, the conditions and requirements of subclauses (a), (b) and (c) to Article 5(4) are not satisfied. 58. The assessment order does not state or mention how and why the transactions between the assessee and e-Fund India were not at arm s length and consequently Article 5(5) was applicable. The assessment order does mention that software was provided to e-Fund India free of cost. However, it was not stated that this showed that the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending 31st March, 2002, but stopped thereafter. This no doubt is a relevant aspect with reference to Article 5(2)(a) but the said provision has not been invoked in the assessment order and in the appellate orders including order of the tribunal. We do not have details with regard to the exact nature and character of the management services provided to the overseas group entities. 60. Before the Commissioner (Appeals), the assessee in their submission had stated that the President of e-Fund Indian provided management support services in U.K. and Australia, while certain personnel of South-east Asia region provided marketing support services to e-Fund India as well as e-Fund group entities overseas. The e-Fund India had an international division which consisted of President s office and South-east Asia Region office. Thus services rendered by e-Fund India personnel comprised of marketing support provided by President and Sales Team to U.K. and Australia and e- Fund Group overseas. It was further mentioned by the assessee that the President s office managed operations of e-Fund Group entities in U.K. and Australia and accordingly employees of said entities reported to the Presiden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short period and in 2005-06, two employees of e-Fund were transferred to e-Fund India and that the entire expenditure for these two employees were borne by e-Fund India. No employees were present in India after 2005-06. Presence of employees in India is relevant under Article 5(2)(l) but the said employees should furnish services within the contracting State. These services should not be mere stewardship services. The Assessing Officer has recorded that employees were seconded to e- Fund India but the functions they performed and whether they performed functions and reported to e-Fund Corp/associated enterprise was not known or ascertained. This was not the correct way of determining and deciding whether service PE existed. Whether the seconded employees were performing stewardship services or were directly involved with the working operations was relevant. It is also not known whether the services were performed related to services provided to an associated enterprise in which case clause 5(2)(l)(ii) would be applicable. In the said situation, the question of attribution of income etc. would also arise. 63. Two employees of e-Fund Corp were deputed to e-Fund India in the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m is defined in article 12 (Royalties and Fees for included Services). Under the subparagraph, the furnishing of services gives rise to a PE if either the activity continues for an aggregate of more than 90 days in a twelve month period, or the services are performed fir 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).‖ 65. The aforesaid explanation has been misunderstood by Commissioner (Appeals). Sub-clause (l) to Article 5(2) creates service PE when the overseas assessee is involved in the activity of furnishing services within the other contracting State through employees or other personnel but only if conditions stipulated in clauses (i) or (ii) are satisfied. Clause (i) stipulates a threshold period or aggregation of the threshold period which should be satisfied. Clause (ii), however, does not stipulate any time threshold. Clause (ii), therefore, is much wider but is applicable when the foreign enterprise through employees or other pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Fund India and this would have required deduction of tax at source. The argument is farfetched. We are not dealing with assessment or failure of e fund India to deduct tax at source. The argument cannot be accepted as it would interfere with the working or business model adopted by the assessee and e-Fund India. The said working model is not a sham or a camouflage having no business character. 69. Similarly, the contention and finding recorded that e-Fund India had provided necessary input or information to e-Fund Corp or e-Fund Inc. to enable them to enter into contracts which were sub-contracted or assigned to e-Fund India, will not make e-Fund India a permanent establishment of the assessee. This is not covered under any of the clauses or stipulations of Article 5. It is not the case that employees of e-Fund India had participated and/or were present in the negotiations of the assessee with the third parties, in respect of contracts to be paid/sourced from India or even executed/performed abroad. 70. The Assessing Officer has recorded and in our opinion incorrectly that majority of the employees of the two assessees operate from India. The said finding is legally untenable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing study of proposed amendments to the OECD Model Treaty. Section 9(1)(i) of the Act 72. No arguments have been addressed before us on the aspect of legal connection which justifies taxation of a non-resident under Section 9(1)(i) of the Act on income which is deemed to be accrue or arise in India. The tribunal in the impugned order has held that the assessees had business connection in India for the points noted in paragraph 18.3. Though the reasons stated in paragraph 18.3 do appear to be widely and broadly stated, but keeping in view the mandate and the ratio of the decisions of the Supreme Court in Commissioner of Income Tax, Punjab Vs. R.D. Aggarwal and Company [1965] 56 ITR 20, Commissioner of Income Tax, Andhra Pradesh Vs. Toshoku Ltd., Guntur and Ors. (1980) 125 ITR 525, Ishikawajma-Harima Heavy Industries Ltd. Vs. Director of Income Tax, Mumbai [2007] 288 ITR 408 and the amendments incorporated and made to Section 9 (1)(i), it has to be held that business connection did exist, not because the assessees were associated enterprise or had a subsidiary in India, but because the e-Funds India was providing information and details to the assessees in USA for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion etc. is not available. The only ground on which proceedings can be challenged is that the reasons recorded do not disclose any rational or relevant nexus with the formation of belief that income of the two assessees had escaped assessment. At the stage of issue of notice only a tentative or prima facie view, justifies initiation of proceedings under Section 147/148 of the Act, though the reasons or grounds recorded must not be based on gossip, rumour or mere suspicion. In the present case, reassessment proceedings were initiated after assessment orders in respect of assessment year 2003-04 were passed by the Assessing Officer. In respect of the said year, MAP procedure was adopted and income of the two assessees has been partly taxed in India. We, therefore, do not accept the contention of the assessee that there was no justification or valid reason to initiate proceedings under Section 147/148 of the Act. 75. Learned counsel for the assessees has submitted that reasons to believe for the assessment year 2000-01 were not communicated and this was in violation of law. Failure to communicate reasons to believe, may result in setting aside of the assessment order as an assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85% towards as income of Indian PE of e-Fund Inc. and e-Fund Corp. In view of the said computation, the total income of the two assessees determined for the relevant assessment years is as under:- For e-Funds Corporation e-funds IT Solutions Group Inc. 77. Commissioner (Appeals) did not interfere with the aforesaid computation except that for the purpose of attribution, he held that the value of assets should be taken at actual cost and not on written down value. The value of the assets was taken by the Assessing Officer at written down value. The Commissioner (Appeals) observed that taking written down value could result in different rates of attribution for various years as depreciation rates might vary for various assets and without change in business model or assets, business attribution would also vary. This probably had resulted in reduction of income attributable to the two assessees and, therefore, Revenue preferred appeals. Assessee also preferred appeals before the tribunal. 78. Tribunal in the impugned order has modified the method of computation or attribution of profits to Indian PE. The method adopted by the tribunal is as under:- 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue has raised three contentions. Firstly, the method adopted by the Assessing Officer was in terms of the method adopted and accepted in the MAP proceedings and, therefore, the most reasonable method. Order of the tribunal does not set out or give reasons why the method adopted in the MAP proceedings was unreasonable and inappropriate. Secondly, as per Article 7, method once adopted should be followed from year to year and can be only altered under paragraph 5 of Article 7 for good and sufficient reasons. Lastly and in alternative, the bifurcation or appropriation should be based on Rule 10 by applying turnover criteria and not on the basis of assets criteria. 81. Article 7 has been quoted above. Paragraph 2 of the said Article stipulates that business income attributed to permanent establishment will be calculated as if the permanent establishment in a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arms length with other associated enterprises. In case profits attributable to permanent establishment are incapable of determination or determination presents exceptional difficulties, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing analysis is, therefore, of importance and has to be examined in each case. 84. Apportionment criteria or method is beset with difficulties and complications. Recent OECD attempt for application of people functions tests etc. has been subject matter of unfavourable comments. The criteria or apportionment principles can be grouped as:- (i) Receipt of enterprise based on turnover or commission. (ii) Expenses i.e. based upon wages paid. (iii) The capital structure i.e. based upon apportionment of total working capital of the enterprise allocated to each enterprise or part. Asset can form the basis of apportionment. (iv) Amalgamation of one two or more of the above criteria can be also adopted in different proportions. 85. As noticed above, Article 7 of the DTAA refers to the asset and functions method. Normally, turnover or commission method is applied in case of enterprise providing service as net profits significantly depends upon turnover. In Morgan Stanley (supra), the Supreme Court has also observed that Transactional Net Margin Method (TNMM, for short) is most appropriate method in case of service PE. The assessment order itself indicates and states that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets adopted by the Assessing Officer. Revenue has not specifically questioned the said finding and had contested original cost basis adopted by Commissioner (Appeals). Moreover, the tribunal has given valid and cogent reasons for the same, though in a given case, adjustments may have to be made when there is material to show that written down value may lead to irrational or illogical results due to difference in rate of depreciation or 100% depreciation was/is allowed under applicable tax laws of one of the countries. No such contention or issue has been raised by the Revenue before us. 88. Noticing the position that turnover method or TNMM is considered appropriate in case of service industry, while reserving judgment, the assessee was directed to file a computation of attribution of income on the basis of turnover method. Thereafter, the assessee filed a chart working out attribution on turnover basis. The calculation read:- Year Assessment Year (AY) eFunds US eFunds India % of eFunds India Vs eFunds US Turnover 1 2 3 4 5=4/3*100 31-Mar-00 2000-01 14,448,252,600 435,344,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection in India, but the tribunal has given a wide and broad meaning to the term business connection‖ and what is attributable and taxable as business connection‖ has not been adjudicated and decided. This is because both the Assessing Officer and the assessees have proceeded that in terms of Section 90(2) of the Act, provisions of the DTAA were more beneficial to the assessee. Question No. 2 is accordingly answered. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the Appellant has a permanent establishment in India under Articles 5(1), 5(2) (1) and 5(4) of the India-US DTAA?‖ The assessees did not have permanent establishment‖ in India under Articles 5(1), 5(2)(l) and 5(4) of the DTAA. Whether any income of eFunds International India Pvt. Ltd. Can be attributed and assessed in the hands of the appellant? No income of the e-Funds India could be attributed and assessed in the hands of the assessee/appellants. In case question no. (5) or question No.(3) (i.e. immediately preceding question) is answered against the appellant, whether the Tribunal was justified and correct in a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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