TMI Blog2016 (3) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act.On this score we confirm the order of CIT (A). In view of the decision of Honourable supreme court in case of DIT V Morgan Stanely inc CO (2007 (7) TMI 201 - SUPREME Court ) we do not have any difficulty in holding that there is no Fixed Place PE in India of the assessee. In view of this even if assumed that there is a PE in India of the assessee no profit can be attributed to it as FAR (Functions performed, Assets deployed and Risk Assumed) such PE has already been compensated at arm's length price and therefore nothing more should be attributed to it. Furthermore when in the case of Assessee for AY 2006-07 Ld AO has made no addition and assessment is made at returned income it is apparent that the contention the assessee is accepted by the AO in subsequent year. In view of this we confirm the order of CIT (A) on this count that if there is a PE in India of the assessee, when PE is remunerated at arm‟s length no further attribution of profit can be made. Reimbursement of Royalty as per Indo UK DTAA - whether chargeable to tax despite there being no income element? - Held that:- As on the basis of assets employed and salary and wages paid, the service fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remitted to Vertex India. The assessee allowed Vertex India right to use certain equipment located outside India and claimed reimbursement of expenses incurred by the assessee on behalf of the Vertex India. 3. The assessee filed its return of income on 29.10.2004 and offered the sum received from Vertex India for right to use equipment outside India as royalty in accordance with Article 13.3 (b) of Indo UK DTAA. Regarding the reimbursement it was claimed that same is non-taxable as it was on cost to cost basis. The ld AO held that the assessee has PE in India and according to DTAA and business connection according to India Income Tax Act and hence computed the profit of ₹ 30626180/- attributable to such PE. Regarding reimbursement of ₹ 52452014/- as it has effect of reducing the service fee payable to the Indian Company was also considered as business profits of PE in India. Further royalty was also taxed as business profit of the PE in India. The assessee being aggrieved with this carried the order before the ld CIT(A) who in turn held as under:- i. Appellant has fixed place PE in India in terms of article 5(1) of the INDO UK DTAA. ii. Appellant does not have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XXIX, New Delhi ['Ld. CIT(A)'] erred in upholding the order of the assessing officer ('Ld. AO') that the Appellant has a business connection in India under section 9(1) (i) of the Act. 2. That on the facts and circumstance of the case and in law, the CIT(A) erred in upholding the order of Id. AO that the Appellant has a fixed Permanent Establishment ('PE') in India under Article 5(1) of the Double Taxation Avoidance Agreement between India and United Kingdom ('DTAA' or 'treaty‟). 3. That on the facts and circumstance of the case and in law, the CIT(A) erred in holding that the payments in respect of access circuits, networks, bandwidth, call charges etc aggregating to ₹ 2,45,11,059 (GBP306,076) is taxable as Royalty under Article 13-3(b) of the India UK DTAA. 3.1 Without prejudice to the above, that on facts and circumstances of the case and in law, the CIT(A) erred in holding that the reimbursement of expenses aggregating to ₹ 2,45,11,059 (GBP 306,076) was taxable in India despite there was no income element. 6. Before us the LD AR of the appellant submitted as under :- a) It was submitted that vide service agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted the transaction and has not given any adverse comments and therefore there cannot be any profit attribution. c) On ground no 3 of the appeal regarding he relied on the decision of 14 SOT 20 ( Del) and submitted that there is no element in reimbursement of expenses and hence it cannot be charged to tax. d) Regarding reimbursements he submitted that it is actual cost which has been reimbursed based on cost recovery charges mechanism and company has not added mark up to these and therefore this just like a pass through cost and therefore there is no income in that. Regarding call charges it was submitted that there are the call charges incurred by the assessee o for powergen and last minute which have been incurred by the assessee and same are recharged to vertex India on actual basis. He also referred to a declaration furnished to the CIT for this. Therefore it was submitted that it is not Royalty as per article 13.3 (b) of Indo UK DTAA. 7. LD DR submitted that AO has rightly taxed the income of the assessee holding that assessee has Fixed place PE , services PE and DAPE and therefore income is attributed correctly. He vehemently supported the orders of AO and CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the question must depend upon the particular facts of each case. Further, various honorable High Courts in Bangalore Woollen Cotton Silk Mills Co. Ltd V CIT [1950] 18 ITR 423 (Mad); CIT v Evans Medical Supplies Ltd. [1959] 36 ITR 418 (Bom) and Jethabhai Javeribhai v CIT [1951] 20 ITR 331 (Nag) have also held that there is no definition of the words business Connection‟ and the legislature has deliberately chosen words of wide import. Further, there is no determinative form, in which a business connection exists. As has been held by the honorable Supreme Court in a landmark case of CIT v R D Aggarwal Co [1965] 56 ITR 20 that a 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 India, which facilitates or assists the carrying on of that business. Honorable Bombay High Court in CIT v National Mutual Life Association of Australia [1933] I ITR 350 held that all that is necessary for a Business Connection to exist is that there should be: (i) a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed as real and intimate connection. The commonness of interest may be by way of management control or financial control or by way of sharing of profits. It may come into existence in some other manner but there must be something more than mere transaction of purchase and sale between principal to principal‟ in orders to bring the transaction within the purview of business connection. Further Where the Indian entity and the non-resident entity are both held by the same person, or have common control, then the non-resident would be regarded as having a business connection in India. In this case assessee company secures orders on behalf of the Indian company and outsources the job to Indian company. There is a continuous relationship between the assessee company and its affiliates and subsidiary company in India. The contract entered by the assessee company and its affiliates outside India are carried out in India. The responsibility of the assessee company vis a vis its customer is concluded in India. The responsibility of the assessee company cannot be segregated and will not complete unless the Indian company provides services to the customers. Based on these facts Ld CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with contract of the appellant with its overseas customers much before when services were sub-contracted to it retrospectively. It can be inferred that appellant and its overseas customers were in agreement that services shall be provided to overseas customers from subsidiary company based in India. Now, Vertex India is not doing anything else other than providing services to overseas customers of the appellant. The appellant is practically not doing anything with reference to its contracts with its overseas customers except that according to clause 20.2(ii) of the agreement dated 10.05.2002, it shall be responsible for acts, omissions, defaults or negligence of its sub-contractor. It means that the appellant assumes all the major risks whereas Vertex India is virtually a risk free enterprise. Therefore, in substance, the subsidiary Vertex India is operating as if it were a branch of the nonresident appellant. Vertex India is virtual projection of the appellant in India inspite of its having an independent legal status. In view of the above, it can be said that the premises of Vertex India were at the disposal of VCM. The business of the appellant is being carried on almost wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sourced some of its activities to MSAS in India. 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 MNE is carried out in India through such fixed place. One of the questions which we are called upon to decide is whether the activities to be undertaken by MSAS consist of back office operations of the MSCo and if so whether such operations would fall within the ambit of the expression the place through which the business of an enterprise is wholly or partly carried out in article 5(1). 7. We quote herein below articles 5 and 7 of the DTAA* : Article 5 Permanent establishment 1. For the purposes of this Convention, the term ' permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term ' permanent establishment' includes especially : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-other than an agent of an independent status to whom paragraph 5 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first- mentioned State if : (a) he has and habitually exercises in that first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph ; (b) he has no such authority but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of the goods or merchandise ; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its ruling. It is clear from a reading of the above agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a P.E. stood constituted one has to undertake what is called a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of the AAR that in the present case article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5(1) is not attracted. Hence in view of the above and relying on the decision of Honourable supreme court in case of DIT V Morgan Stanely inc CO (Supra) we do not have any difficulty in holding that there is no Fixed Place PE in India of the assessee. To this extent we reverse the order of CIT (A). 12. Whether assesse has a service PE in India? Ld CIT (A) has given its findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph. 8.4.2 Paragraph 5 of Article 5 of the treaty is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wholly or mostly wholly on behalf of foreign enterprise and the transactions between the two are not made under arm's length conditions. The twin conditions have to be satisfied to deny an agent character of an independent agent. In case the transactions between an agent and the foreign principal are under arm's length conditions the second stipulation in paragraph 5 of Article 5 would not be satisfied, even if the said agent is devoted wholly or almost wholly to the foreign enterprise. Further in absence of any evidence brought on record to establish DAPE in the case of the assessee we confirm the finding of CIT (A) holding that assessee does not have Dependent Agent permanent Establishment in India. 14. Whether any further profit can be attributed to PE after transaction is determined at Arms‟ length. Though we have already held that there is no permanent establishments of the assessee in India and therefore the business income is not chargeable to tax in India. Despite the above we concur with the views of Ld CIT (A) who has decided this issue as under :- 11.1 After having held that the appellant has PE in India, the AO has computed profit attributable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat constitute PE of appellant in India. Hence, no further profits can be attributed in the hands of Appellant's PE in India otherwise it will lead to double taxation of income pertaining to same functions, assets and risks once in the hands of the Indian associated enterprise and again in the hands of the Appellant's PE. This is also in line with the judgment of Supreme Court in the case of Morgan Stanley. It is pertinent to mention that in the Appellant's own case in AY 2006-07, on the basis of TP study of PE, the TPO has held that no further attribution is required in Appellant's hands. 11.3 It is also pertinent to mention that in connection with the work outsourced to Vertex India by the Appellant, the entire amount of revenue was passed on to Vertex India by the Appellant, other than 60,5 1 8 which was towards pass through telephony costs incurred by the Appellant in UK and recovered from the end-customer. It means that the appellant has retained only a portion of the contract revenue which pertains to functions performed by it outside India. 1 1.4 The Appellant has pointed 2 errors in the computation made by the AO out of which one of them has been rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian operation as the reimbursement of expenses has an effect of reducing the service fee payable to the Indian company. As on the basis of assets employed and salary and wages paid, the service fee payable to the Indian company comes out to be 78151587- and service fee actually paid was 7170443/-. Therefore if the reimbursement of expenses is reduced from the services fee actually received by the Indian company, then profit from Indian operation will enhance from the same value i.e. the reimbursement of expenses paid by Indian company to other. In the same logic the royalty and fee for technical services received by the assessee company and its affiliates will have effect of reducing the fee actually paid to Indian company. Therefore without prejudice to the assessee's disclosure, the receipt as royalty and fee for technical services, the same is taxable as business profit. Therefore the profit margin of assessee company and its affiliate for Indian operations will further enhance by reimbursement of expenses and royalty and FTS paid by Indian co.. On appeal before CIT (A) he held that:- 17.1 I have considered the observations of the Ld. AO contained in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... private limited cannot be accepted in view of the finding of facts by CIT (A) that there was no element of income in the entire amount of reimbursements cannot be accepted as it cannot be said with certainty that whether the amount of 306,076 allocated by the Appellant was on cost to cost basis or not. We have carefully considered above issues and we do not find any infirmity in the order of Ld CIT (A). 16. Based on above a. we dismiss all the grounds of the appeal of the revenue holding that there is no permanent establishment of the assessee which can be classified as service PE or dependent Agent PE and in any case no further profit can be attributed to a PE , if any, if the transaction is determined at Arm‟s length. We confirm the order of CIT (A). Therefore Appeal no 3759/Del/2013 is dismissed. b. In ITA NO 3368/Del/2013 i. We dismiss ground no 1 of the appeal of the assessee holding that three is business connection of the assessee in India u/s 9 (1) (i) of the Income Tax Act. ii. We allow ground no 2 of the appeal of the assessee holding that there is fixed place PE of the assessee in India under Article 5 (1) of the Indo U K DTAA. iii. We dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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