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TMI Blog2024 (1) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and cross appeal of the Revenue and pertain to same assessee, they were heard together and are disposed of by this common order for the sake of convenience and brevity. 3. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. Relevant judicial decisions considered wherever necessary. 4. Facts of the case are that the assessee is a company incorporated under the laws of Delaware, USA and its primary business is to develop and deploy business process outsourcing solutions including transaction processing services and Internet/ voice-based customer care services for its clients. The assessee is stated to be providing such services to customers located in the United States of America and the United Kingdom. The parent company of the group as on 31.03.2002 was Conseco Inc., which held 100% of the paid-up capital of Exl, USA on 31.03.2002. Exl. Inc performs sales and marketing function, contract negotiations and conclusion of contracts and customer relationship management. 5. Exl India has entered into a service agreement with Exl Inc under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates of America u/s 9(1)(ii) of the Act, respectively holding that its income was taxable in India for the years under consideration. 10. We have given thoughtful consideration to the impugned assessment order. In our understanding, the Assessing Officer has based his finding on the following points, which have also been highlighted by the ld. DR during the course of his submissions: (i) The entire activity for performance of the contract was undertaken in India and even though the assessee did not have much role to play in securing the contract and no role in its performance, it retained substantial portion of revenue earned by the performance of contract from Indian set up. (ii) Marketing job was done by employees of Exl, India but still the major portion of profits was retained by the assessee. (iii) The assessee and Exl India were nothing but one and the same, as the primary activity of the assessee is carried out by the Indian company and facilities of Exl India was a fixed place of business for the assessee. (iv) The assessee was technically dependent on the Indian company for all practical purposes and it had neither the competence nor the facility to execute the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment and other enterprises controlling, controlled by or subject to the same common 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 the principles contained in this Article." 12. A perusal of the above shows that the business profits arising to a US enterprise shall be taxable in India, only if the US enterprise has a PE in India, meaning thereby, that if there is no PE in India, no part of the business profit arising to the US enterprise is taxable in India. 13. Article 5 of the treaty defines PE as under: "ARTICLE 5: Permanent establishment - 1. For the purposes of this Agreement, 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 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 the first-mentioned State an authority to conclude 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 the 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 Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, the "power of disposition" test to qualify as PE under Article 5(1). The 'core business' of the foreign enterprise should be conducted through the place of business which means that there should be a nexus between the place of business and carrying on of business. 17. The Supreme Court in the case of Formula One World Championship Ltd 394 ITR 80 after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, international tax jurisprudence observed that in terms of Article 5(1) of the India-UK Tax Treaty, a fixed place PE is constituted in India, if the following twin conditions are satisfied viz, (i) Existence of a fixed place of business at the disposal of the foreign enterprise in India; (ii) through which the business of the foreign enterprise is wholly or partly carried on. 18. On the issue of "fixed place of business", we find that the facts considered by the Hon'ble Supreme Court in the case of eFunds IT Solution and Ors 399 ITR 34 are pari materia same as that of the assessee. Therefore, it would be pertinent to refer to the decision of the Hon'ble Supreme Court {supra]. The relevant findings read as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary and the foreign company. 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 PE. On the issue of constitution of service PE, the Supreme Court held that the requirement of Article 5(2)(l) of the India US Tax Treaty is that an enterprise must furnish services 'within India' through employees or other personnel. Since none of the customers of the assessees are located in India or have received any services in India, therefore, the question of constitution of service PE does not arise since the foreign company is not rendering any services to any customer in India. On the issue of agency PE, the Supreme Court observed that since there is no factual finding as to whether and how e-Funds India was authorized to or exercised any authority to conclude contracts on behalf of the US company, the US company cannot be said to constitute agency PE in India in terms of Article 5(4) of the India US Tax Treaty. The Supreme Court further held that since the transactions between the US company and Indian subsidiary have been held to be at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' which have been developed and maintained by eFunds US. Services provided by eFunds US: eFunds US provided the processing for over 11,000 of the ATM machines in its network. Most of the ATMs were owned by the Appellant and its associate companies. All these ATMs were installed outside India and mainly in United States. Services provided by eFunds India: The only involvement of eFunds India was responding to queries raised by the customers, if they faced any difficulty in operation of their transaction which was part of activity (d) referred above. (b) Electronic Payment Management eFunds US's Electronic Payment Management segment provides products and services in two broad categories: Payment Processing Software and Electronic Payment Processing Services. The business involves processing transactions for regional automated teller machine or ATM networks in the United States and also transaction processing for retail point-of-sale terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions. Processing Services: eFunds US processes transactions for regional ATM networks in the United States. They also prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and conceptualization of ideas were done by eFunds US. All Networks and Infrastructure for this category of services is owned by eFunds US only. Connex was developed by a company acquired by eFunds US. eFunds US's associate company in United Kingdom has developed and owns the Architect software which is middleware used primarily by financial institutions in Europe (there is one customer in Chicago). This software runs on IBM and Tandem computing platforms. All of them were located outside India. In accordance with the terms of the contract with Government Agencies, eFunds US is responsible for management, support and control of the electronic payment band distribution of cash benefits to program participants through its ATM and point of sale network. Services provided by eFunds India: eFunds India provided testing, bug fixing and other related software development support services to eFunds US for various software/software based solutions developed by eFunds US. Such services are required by eFunds US in the course of development of software/software based solutions and their use in providing services to customers. The process of development of software/solutions involves t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased person's records and suspect address lists. All such data base relates to the persons located in the US and the customers of this data base were banks and retailers located in the US. Services provided by eFunds US: eFunds US was responsible for Customer interface and agreement/contracts with the customers were entered into by eFunds US. All risks and responsibilities for performance of contracts at all times were of eFunds US only. All eFunds risk management services are based on, or enhanced by eFunds' proprietary DebitBureau database, which is located in data centres of the group situated in USA. DebitBureau contains over three billion records and includes data form eFunds ChexSystemsSM and SCANSM databases and other sources. The data in DebitBureau is used to screen for potentially incorrect, inconsistent, or fraudulent social security numbers, home addresses, telephone numbers, driver license information, and other indicators of possible identity manipulation. Using this data, eFunds US can perform various tests to validate a consumer's identity and assess and rank the risk of fraud associated with opening an account for or accepting a payment from that con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s customers to eFunds India which involve the following: Data Processing Services including making outbound calls to collate data; Making soft outbound calls to customers of eFunds US clients to follow up payment; and Responding to inbound calls from customers from dealers/customers of telecom services providers (who are customers of eFunds US), to check on the status of applications made for new connections, change in billing plans etc. Note: Logica Global, an independent company, had received an order from the Reserve Bank of India for development and implementation of certain software. A part of this work was subcontracted to eFunds India directly by Logica Global. The Appellant had nothing to do with this contract." 16. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the IT Act. All provisions of the IT 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 IT Act (for example Sections 44-BB, 44-BBA, etc.). 36. Under the impugned ruling delivered by 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 all the risk-taking functions of the enterprise. In such cases nothing further would be left to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution to be made to India Yes Yes 21. On understanding the facts mentioned hereinabove, we are of the considered view that it is not the case of the Revenue that the employees of foreign enterprises furnished services in India Nothing has been brought on record by the Revenue to show that there was secondment of employees by Exl US to Exl India. 22. A perusal of the Service Agreement shows that foreign enterprise i.e. Exl US is doing marketing work only and its contracts with clients are assigned or sub-contracted to Indian entity i.e. Exl India. 23. The expenses of the firm/enterprise Exl US can be understood from the following chart: 24. The ld. DR vehemently stated that Shri Rohit Kapoor as Chief Financial Officer has signed agreement both for Exl Serviuces.com [India] Private Limited and Exl Services India Private Limited to which the ld. counsel for the assessee vehemently stated that agreement which is referred to by the ld. DR is between Conseco Inc and Exl Service.com India Private Limited and made a categorical finding that Shri Rohit Kapoor is not employed with the Indian company but is under employment of Exl US and pointed out that the addresses for service of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made available to the assessee for its use. Even the Assessing Officer has not placed any material on record to show that the assessee had a right to use any part of the business premises of Exl India to carry on its own business activities. Moreover, Exl India is merely a work contract to it by the assessee and core activities such as key management functions, such as, development of strategy, identifying new business areas, guidance to the group, sales and marketing, contract negotiation and conclusion, and customer relationship management are managed by the assessee from outside India. 28. Merely because the assessee owns 100% of share capital of EXl India does not have effect or consequence of EXL India becoming the PE of the assessee in India. The assessee being the major shareholder of EXL India, it has the legal right to nominate a director on the Board of EXL India and merely because the assessee has nominated a director on the Board of EXL India would not mean that the assessee has a "Place of Management" in India. 29. Considering the facts in totality in light of the decision of the Hon'ble Supreme Court in the case of eFunds IT Solution and Ors [supra] and Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost? Therefore, the Department has to determine income, expense or cost allocations having regard to arm's length prices to decide the applicability of the transfer pricing regulations." 31. In light of the aforementioned discussion, Ground Nos. C, D and E, are allowed and Ground Nos. F to P become otiose. 32. Ground No. Q was not disposed of by the ld. CIT(A). We, therefore, direct the ld. CIT(A) to decide this grievance raised by the assessee before him. Accordingly, this ground is allowed for statistical purposes. 33. Ground No. R relates to the levy of interest u/s 234A, 234B and 234c of the Act. 34. Levy of interest is consequential and the Assessing Officer is directed to charge interest as per provisions of law. 35. In so far as interest u/s 234B is concerned, u/s 195 of the Act, tax is deductible at source from payments made to non-residents. The assessee being a non-resident, tax is deductible at source u/s 195 of the Act from the payments made to the assessee. Therefore, ..... 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