TMI Blog2015 (1) TMI 1156X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has merely procured a service and provided the same to CIS, no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. Therefore, it is held. that the said payments do not constitute Royalty under the provisions of Article 12 of the tax treaty - Decided in favour of assessee. Interest under Section 234 B - Held that:- The charging of interest is automatic under the Act if the assessee has defaulted in payment of advance tax. The income of the assessee was not liable for withholding tax under section 195 of the Act. In this case we have no option but to hold. that the assessee is liable to interest u/s 234B, 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 section 234B are mechanical in nature. - Decided against assessee. - ITA No. 3605/De/2013 - - - Dated:- 28-1-2015 - SHRI J. SUDHAKAR REDDY AND SHRI GEORGE GEORGE K, JJ. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sales team of CIS assists CMG in the sales and marketing efforts. The assessee is providing services to CIS and these services are not in the nature of fees for included services (which are characterized by the assessee). The visiting employees as well as seconded employees are sent by the assessee and not requested by the CIS. The cost base of the Cenvergys India is highly understated. All the functions performed by Cenvergys India for CMG are not identified. The Cenvergys India has even stepped disclosing the various activities, which were identified in the transfer pricing study report for FY 2002-03. The activities of the assessee in India are not excluded from being PE referred in Paragraph 3 of Article 5. The activities of the cssessee in India are not of the preparatory or auxiliary in nature. The assessee is in India, not for doing any business with its customers in India, but for doing core business of customer management activity relating to its customers located outside India. As per provisions of Paragraph 5, CIS is also not an agent of independent status within the meaning of this paragraph, because the activities of CIS are devoted wholly on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (85 ITD 478), ruling of Hon'ble Authority for Advance Ruling (AAR) in P.No. 30 of 1999's case and ruling of Hon'ble ITAT in the case of New Skies Satellites N V. vs ADIT [2009] 121 ITD 1 (DELHI) (SB) . 4. Aggrieved the assessee is in appeal before us on the following grounds. 1. That on the facts and in the circumstances of the case in law, the order passed by the Ld. Assessing Officer under section 143(3) read with section 144(C) of the Act is bad in law and void ab-initio. 2. That on the facts and in circumstances of the case in law, the Ld. AO erred in assessing the returned income of appellant of ₹ 4,36,33,694 at ₹ 97,24,66,634. 3. That on the facts circumstances of the case in law, the Ld. DRP erred in confirming the draft order of the Ld. AO and conclusions contained therein. 4. That the Ld. AO erred on facts in law, in alleging that the appellant has a Permanent Establishment ('PE') in India in terms of the provisions of the Article 5 of the Double Taxation Avoidance Agreement between India and United States of America ('DTAA') without bringing any material on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s / information placed on record. 5.7 That the Ld. AO further, erred in facts law by invoking the provisions of section 40(a)(i) and section 44C of the Act with regard to cost incurred outside India thereby restricting the allocation of expenses to USD 1,438,077, 6. That the Ld. ORP erred in rejecting the Transfer Pricing Study filed as additional evidence on mere conjectures and surmises. 7. That the Ld. AO, erred on facts and in law, in making an addition of ₹ 54,389,123 (USD 1,204,440) paid on account of International Private Leased Circuit (IPLC) charges by stating that they are taxable as 'Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. 8. That the Ld. AO erred on facts and in law in withdrawing interest under section 244A of the Act and levying interest under sections 2348 and 2340 of the Act. That the above grounds of appeal are without prejudice to each other. That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 5. Shri Pawan Kumar, the Ld.Counsel for the assessee submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. On attribution of profits to the Permanent Establishment, he submitted the following calculation and argued that the directions of the Tribunal, if followed by the Assessing Officer, would result in the attribution to the P.E. an amount of $ 2,82,224/-. Particulars Amount (in US Dollars) Total revenue of CMG as per the Annual Report (A) (Refer page no.466 of paper book Vol.II) 1,838,100,000 Operating Income of CMG as per the Annual Report (B) (Refer page no.406 of the paper book Vol.II) 219,000,000 Operating income as a percentage of revenue earned (C=B/A) 11.91% End Customer revenue from Indian operations (D) (Refer page no.349 of paper book Vol.II) 166,000,000 Operating income of CIS (profit before tax of CIS)(F) (Refer page no.708 of paper book) Vol.III INR 777,067,680 converted at the exchange rate of USD 1=INR 43.42) 17,896,538 Profit/(loss) retained by CMG in the US (G=E-F) 1,881,494 Amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has a fixed base Permanent Establishment in India. 9. Ground no.5 is on attribution of profits. The Tribunal at pages 55 to 58 at para 11.17 held as follows. 11.17. In view of the above facts, circumstances, case law, CBDT circulars and various articles of India-USA DTAA, following conclusions are arrived at: A. The Ld. CIT (A) accepted the revenue from end-customer with regard to contracts/projects wherein services were procured from CIS of USD 138.9 million submitted by the assessee for assessment year 2006-07. The end customer revenue has been accepted by the AO is the assessment of all the other years on the same basis. B. The methodology adopted by the AO and the ld. CIT(A) cannot be accepted as they have considered revenue of the assessee company (CMG as a multi-national enterprise) as the starting point for arriving at the profits attributable to the PE of assessee in India. The revenue of the assessee company cannot be considered as the revenue of the PE by any stretch of imagination. Furthermore the expenses incurred outside India are linked with the business activities of the assessee undertaken outside India for the functions perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software s provided by the assessee to CIS. E. The assessee has submitted that it does not prepare India specific accounts, therefore the attribution of profits on the basis as disclosed in the transfer pricing study for assets and software cannot be accepted. Further, in the facts and circumstances of the case Profit Split method is not the correct method for attribution of profits to the PE of the assessee in India. F. In our considered opinion, the correct approach to arrive at the profits attributable to the PE should. be as under: Step 1: Compute Global operating Income percentage of the customer care business as per annual report/10K of the company. Step 2: This percentage should. be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at is the Operating Income from Indian operations. Step 3: The operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above. The attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Delhi High Court in the case of Expeditors International India (P) Ltd. (209 Taxman 18) on reimbursement of common expenses incurred by the parent company. 13.1. AO made an addition on account of link charges by stating that they were taxable as Equipment Royalty in terms of Article 12(2) read with Article 12(3)(b) of the DTAA and accordingly taxed it @ 10% on gross basis. CMG/CIS, who availed the services from the service providers, have neither intended to nor have obtained any right to use the underlying infrastructure maintained and used by the service providers for providing the services. It is important to see whether there was any intention to transfer the right to use or not. In the present set of facts, CMG/CIS do not have any control or possession over the equipment i.e. the network facilities are under the control of and maintained and operated by the service providers. CMG/CIS merely avail a service. Accordingly, we hold that the link charges do not qualify as Equipment Royalty in terms of Article 12 of the DTAA and hence are not taxable in India. Useful can be drawn from the following judgments: Bharat Sanchar Nigam Ltd. vs. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee further contends that even otherwise the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. 11. Ground no.8 is against the levy of interest under Section 234 B of the Act. The Tribunal at para 14, pages 67 and 68 has held as follows. 14. Coming to the assessee s ground about levy of interest under section 234B, it is pleaded that the taxable income of the assessee was liable to TDS, as the assessees are non-residents, therefore there was no liability to pay advance tax as per the provisions of sec. 209(1) of the I.T. Act and interest u/s 234B should not be levied. 14.1. We have considered rival submissions and record. The charging of interest is automatic under the Act if the assessee has defaulted in payment of advance tax. The income of the assessee was not liable for withholding tax under section 195 of the Act. In this case we have no option but to hold. that the assessee is liable to interest u/s 234B, 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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