9911796707
TMI Blog2019 (8) TMI 1468X X X X Extracts X X X X X X X X Extracts X X X X ..... cture internal combustion diesel engines. The assessee filed its return declaring total income of Rs. 52,63,02,900/-. In Notes to the return of income, the assessee stated that it received a sum of Rs. 20,18,50,000/- (equivalent to US$ 50.00 lakh) during the year from KPIT Cummins Global Business Solutions (hereinafter called 'KPIT-GBS') pursuant to an agreement dated 17-07-2007 as consideration for grant of right to render Business Process Outsourcing (BPO) services to Cummins group entities globally. It was also claimed that the said receipt is in the nature of business income in its hands, but is not chargeable to tax because the assessee does not have any Permanent Establishment (PE) in India. During the course of assessment proceedings, the AO required the assessee to furnish necessary details in this regard. On their perusal, the AO held that business connection was established in relation to such income in India. Applying Explanation 2(a) and (c) to section 9(1)(i) of the Act, the AO held that KPIT-GBS has been bound by the assessee to provide BPO services to Cummins group entities worldwide out of its facility in Pune. This, in his opinion, had the effect of securing orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto existence of a service PE under Article 5(2)(l) of the DTAA. The action of the AO in the draft order treating the amount of Rs. 20.18 crore as chargeable to tax as business income was upheld albeit by treating KPIT-GBS as constituting a service PE of the assessee in India rather than an agency PE as was held by the AO in the draft order. The AO finalized the assessment order accordingly on 25-10-2012, inter alia, making an addition of Rs. 20.18 crore and odd. The assessee is aggrieved by the impugned order on this score. 3. We have heard both the sides and gone through the relevant material on record. It is found as an undisputed position that prior to execution of the Grant of Right to render BPO Services Agreement (hereinafter `the Grant Agreement') dated 17.7.2007 between the assessee, KPIT Cummins Infosystems Ltd and KPITGBS, India, Cummins Business Services, an internal division of the assessee company, was rendering BPO services to worldwide Cummins entities including some other divisions of the assessee itself. On 17.7.2007, the assessee entered into the Grant Agreement with KPIT-GBS in India, a wholly owned subsidiary of KPITCummins: `to undertake outsourcing of the Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Street, Columbus, Indiana USA 47202-3005 and its divisions and affiliates including without limitation joint ventures, partnerships, limited partnerships, distributors and subsidiaries (`CUMMINS', which expression shall unless repugnant to the context thereof be deemed to include its successors and permitted assigns)'and KPIT- GBS. The term `Affiliate' has been defined in the definition clause of the Agreement to mean: `with respect to any person or entity, an entity that now or hereafter directly or indirectly controls, is controlled by, or is under common control with such person or entity.. '. Clause II of the Agreement with caption "General" provides that KPITGBS agrees to provide the services to various local CUMMINS entities worldwide out of this facility in Pune, India and other locations at the price set forth in this Agreement and various Services Addendum, as amended from time to time'. A Service Addendum (No. 1) - Finance and Accounting BPO Services (hereinafter called `the Addendum') was executed on the same date, namely, 17-07-2007, whose copy is available on page 196 onwards of the paper book. This is again between `Cummins Inc., an Indiana corporation with its princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mins China paid Rs. 5.01 lakh (constituting 0.72%). Thus, it follows that there were two transactions between the assessee and KPIT-GBS. The first transaction is of receipt by the assessee of Rs. 20.18 crore and odd from KPIT-GBS towards Grant of Right to render BPO Services and the second transaction is of payment by the assessee of Rs. 3.65 crore to KPIT-GBS for receipt of BPO services. The dispute in the extant appeal is only qua the first transaction of receipt of Rs. 20.18 crore for grant of right to render BPO services to worldwide Cummins group entities including itself. 6. The assessee is a tax resident of the USA. Section 5(2) of the Act dealing with the scope of total income provides that the total income of a person who is non-resident includes all income from whatever source which is received or is deemed to be received in India or accrues or arises or is deemed to accrue to arise in India during the year. Section 9 deals with incomes deemed to accrue or arise in India. Section 9(1)(i) states that all income accruing or arising, whether directly or indirectly through or from any business connection in India or source of income in India etc. shall be deemed to accrue or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned. Whatever is received from the supplier of service, cannot be considered as anything unrelated with the transaction of receipt of service. It is, in fact, a part of the same transaction of the receipt of service. One can consider it as a revenue receipt to be compensated later with the higher outgo as a consideration for receipt of service. In so far as compensation for granting the right to render BPO services in relation to other Cummins group entities is concerned, the same is also chargeable to tax u/s 28(va) which provides that any sum, whether received or receivable, in cash or kind, under an agreement for (a) not carrying out any activity in relation to any business or profession' shall be considered as business income. Thus the revenue character of the sum of Rs. 20.18 crore is not in dispute. Pertinently, the assessee also treated it as a business receipt as is coming out from the Notes to the return, reproduced in para 13 of the assessment order, wherein the assessee admitted that : `The payment is in the nature of business income in the hands of Cummins Inc.' and then claimed as not taxable due to absence of any Permanent establishment in India. To the same effect, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the taxability of the amount. 11. Article 5 of the DTAA gives meaning to the Permanent Establishment. Para 1 provides that the term 'Permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Para 2(l) deals with service PE and states that the term 'permanent establishment' includes: `the furnishing of services, other than included services as defined in Article 12 (Royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if : (i) activities of that nature continue within that State for a period or periods aggregating more 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 Enterprises).' 12. The DRP in reaching its conclusion of the service PE of the assessee in India noted in para 2.1.2.6 of its direction that : `The assessee company received annual payment towards consideration for granting right to render business process outsourcing services'. The position stated by the DRP is not corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the MSA BPO, for arriving at the conclusion of existence of service PE of the assessee in India. We have noted supra in para 4 of this order that the assessee received Rs. 20.18 crore pursuant to the Transaction no. 1 in lieu of granting the right to render BPO services. Then we have noted Transaction no. 2 under which the assessee paid to KPITGBS a certain sum for receipt of BPO services. Whereas the BPO MSA and the Addendum are concerned with the Transaction no. 2, the Grant Agreement is concerned with the Transaction no. 1. What is under consideration is the Transaction no. 1, being the receipt by the assessee of Rs. 20.18 crore from KPIT-GBS and not the payment of Rs. 3.65 crore to KPIT-GBS for availing the BPO Services. The DRP inadvertently considered BPO MSA and the Addendum under which the assessee paid for availing BPO services, for inferring the existence of service PE of the assessee in India qua the transaction of receipt for granting Right to render BPO Services. 14. A service PE is ordinarily constituted when the foreign enterprise renders services in India to its customers and such services are rendered through its own employees or other personnel. In the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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