IN THE ITAT MUMBAI BENCH ‘L’
eBay International AG
versus
Assistant Director of Income-tax, Range – 3(2)
IT APPEAL NOs. 6784 & 7046 (MUM.) OF 2010
[ASSESSMENT YEAR 2006-07]
SEPTEMBER 21, 2012
ORDER
R.S. Syal, Accountant Member
These two cross appeals – one by the assessee and other by the Revenue emanate from the order passed by the CIT (A) on 12.7.2010 in relation to assessment year 2006-07.
2. Briefly stated the facts of the case are that the assessee is a company incorporated under the law of Switzerland and is a tax resident of Switzerland. The return of income was filed declaring Rs. NIL as total income. Such return was accompanied by a note, inter alia, stating that during the previous year relevant to assessment year under consideration eBay AG operated India specific websites providing an online platform for facilitating the purchase and sale of goods and services to users based in India. eBay AG entered into a Marketing Support Agreement with eBay India Private Limited (hereinafter referred to as ‘eBay India’) and eBay Motors India Private Limited (hereinafter referred to as ‘eBay Motors’) which are eBay group companies, for availing certain support services in connection with its Indian specific websites. The assessee, eBay AG earned revenue amounting to Rs. 4,94,27,530/- from the operations of its websites in India. It was claimed that such revenue is taxable as business profits in India as per the provisions of Article 7 of the Double Taxation Avoidance Agreement between India and Switzerland (hereinafter referred to as ‘the DTA’) only if it has a Permanent Establishment (hereinafter also referred to as ‘the PE’) in India as per the provision of Article 5 of the DTA. It was claimed that eBay AG did not have any PE in India and as such no amount was taxable. During the course of assessment proceedings, the Assessing Officer (hereinafter also referred to as ‘the AO’) observed that the assessee signed agreements with eBay India and eBay Motors for providing certain services to it in respect of its Indian specific operations, which have been reproduced from the clause 3.1 of the Agreements, as under :-
“Service Provider shall at all times during the Term of this agreement:
a. Suggest to eBay International, all pertinent legal requirements relating to the business for the Service Provider Territory.
b. Provide market data relating to industry
c. Provide marketing and promotional services within the Service Provider territory as directed by eBay International.
d. Perform payment processing and collection activities related to eBay International’s business in the Service Provider Territory, including look box service;
e. On directions from eBay International, prepare and discuss budgets or other similar matters relation to the Service Provider Territory and provide market data, as may from time to time be requested by eBay International.
f. Perform local customer support activities as specified by eBay International from time to time.
g. Furnish such reports and information relating to its activities as may be requested from time to time by eBay International during the Term of this Agreement; and
h. Such other administrative and support activities as eBay International shall request.”
3. On appreciation of the relevant details furnished by the assessee, the AO came to hold that the assessee during the relevant period had connection in India as eBay India and eBay Motors were group companies rendering services to it in India. It was also found that the entire income of eBay Indian and eBay Motors was derived from such services rendered to the assessee, eBay AG. Further, eBay India and eBay Motors were found to be responsible for collecting the revenue of the assessee from its operations in India. Considering Explanation 2 to section 9(1)(vii) defining the term “Fee for technical services”, the Assessing Officer held that the amount received by the assessee from its operations in India was income in the form of ‘Fee for technical services’. Applying the provisions of section 115A, the Assessing Officer taxed the assessee’s gross revenue amounting to Rs. 4.94 crore @ 20%. When the matter came up before the learned CIT(A), the assessee contended that the Assessing Officer simply considered the provisions of the Income-tax Act, 1961 (hereinafter called ‘the Act’) without deliberating on the provisions of the DTAA. It was also submitted that the revenue earned by it from its users in India was not in the nature of Fee for technical services in terms of section 9(1)(vii) of the Act. As the Assessing Officer had not considered the provisions of the DTA, the learned CIT(A) required the Assessing Officer to submit a remand report in this regard. The Assessing Officer, vide remand report dated 4.2.2010, held that the assessee was eligible to claim the benefit of the DTAA. In the second remand report dated 28.4.2010, the Assessing Officer held that the assessee had dependent agent PE in India in the form of eBay India and eBay Motors. After considering the submissions advanced on behalf of the assessee, the assessment order and the remand reports, the learned CIT(A) came to hold that the Assessing Officer was not justified in considering the amount of Rs. 4.94 crore as ‘Fee for technical services’. He, however, upheld the stand of the AO in remand proceedings that the assessee had permanent establishment in India within the meaning of Articles 5(5) and 5(6) of the DTA and accordingly the revenue earned by it was taxable in India under Article 7 of the DTAA. Thereafter, the ld. CIT(A) proceeded to compute the income. In this regard, the assessee filed Annexure-I giving details of revenue earned at Rs. 4.94 crore and expenses incurred under Service agreements to eBay India at Rs. 24.97 crore and eBay Motors at Rs. 2.94 crore. The assessee contended that since the revenue of the assessee was a small fraction of the expenses, leading to a huge loss of Rs. 22.97 crore, there was no income which could be subjected to tax. In the absence of the assessee furnishing any supporting evidence to prove the genuineness of the claim of expenses, the ld. CIT(A) invoked Rule-10 of Income-tax Rules, 1962 and held that 10% of the revenue of Rs. 4.94 crore be taxed as business profits at Rs. 49.23 lakhs, being income of Indian specific operations.
4. The Revenue is in appeal against the direction of the learned CIT(A) to treat the assessee’s gross revenue as ‘Business profits’ as against ‘Fee for technical services’. The assessee is aggrieved against the impugned order on two scores, viz., firstly, the assessee did not have any dependent agent PE in India in the form of eBay India and eBay Motors and, secondly, without prejudice to its claim of not having a permanent establishment in India, against the attribution of income to its operations in India at the rate of 10% of the gross revenue.
5. Firstly, we will take up Revenue’s appeal in which the challenge has been made to the treatment of the assessee’s revenue as ‘Business profits’ instead of ‘Fee for technical services’. Before we proceed to vet the Revenue’s claim in this regard, it is pertinent to note that eBay India was earlier called Bazee.com India Private Limited. The said Bazee.com was acquired by eBay AG in the financial Year 2004-2005. eBay Motors came into existence for the first time in the previous year relevant to assessment year under consideration. Prior to acquisition of Bazee.com, the assessee did not have any presence in India. It was only thereafter that it operated its Indian specific websites www.ebay.in and www.b2bmotors.ebay.in for providing an online platform to facilitate the purchase and sale of goods and services to users based in India. It would be relevant to consider the modus operandi of the transactions undertaken through the aforenoted websites operated by the assessee. Any seller is entitled to list its products for sale on the website. At the time of listing, the seller is required to provide various details regarding the product that is wished to be sold through the website, such as, photograph, description and price of the product. Any buyer can also register himself for buying of the goods through the assessee’s website. While registering, the buyers are required to provide information, such as, their name, age and address. When the buyer accesses the website, he goes through various products listed by the sellers. Depending on his requirements, he chooses the product which he wants to purchase online, out of the variety of products available on website with all the necessary details available. The buyer is required to choose any of the payment methods for making payment of the product directly to the seller. Once the buyer clicks ‘Buy It Now’ button after registering itself with the website and agreeing to the terms and conditions of sale as displayed by the seller on the website, an email is sent by the assessee to the seller confirming the sale of his product listed on the website. The seller then delivers the product to the buyer and settles the payment in respect of sale. The sellers registered on the assessee’s website are its source of income who are required to pay ‘User fee’ on every successful sale of their products on the website. If any seller intends his products to be listed more prominently on the assessee’s website, then some amount of fee is charged for that purpose as well. Such later payment is charged only once at the time of registration of the seller with its products on the assessee’s website. On the successful completion of the sale, the assessee raises periodic invoice on the seller for the “user fee”. The sellers are required to make payment of the user fee to eBay India/eBay Motors for the transactions undertaken on the websites of the assessee. After making collection from the sellers, eBay India/eBay Motors remit the user fee, so collected, to the assessee. These two companies, namely, eBay India and eBay Motors have entered into an agreement with the assessee for rendering market support services reproduced above. The assessee, in turn, reimburses the costs incurred by them with 8% mark-up.
6. The initial case of Assessing Officer was that the assessee’s revenue sourced solely from the sellers in India, constituted ‘Fee for technical services’, in terms of section 9(1)(vii) of the Act, which has been negatived by the learned CIT(A). From the discussion made about the factual scenario prevailing in this case, it is manifest that the assessee earns revenue from sellers registered on its websites at the time of the successful completion of the sale. A small portion of the assessee’s revenue also comes from the sellers at the time of initial registration, if they intend to list their products more prominently on the website of the assessee. Now, let us see as to whether the assessee’s revenue is Fee for technical services, which has been defined in Explanation 2 to section 9(1)(vii) of the Act, as follows:
“Explanation 2.–For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
7. From the above definition of ‘fee for technical services’, it can be seen that the same has certain positives, making the consideration as fees for technical services and certain negatives, not making the consideration as fees for technical services. The positives, talk of any consideration for rendering of any managerial, technical or consultancy services and also the provision of services of technical or other personnel. The negatives exclude any consideration for construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”, from the scope of ‘fees for technical services. It is nobody’s case that the assessee’s revenue is akin to any of the negatives in the definition.
8. We will focus on the positive list to ascertain whether the revenue received by the assessee is consideration for rendering managerial or technical or consultancy services. The term ‘managerial services’ refers to managing certain affairs, a quid pro quo for which will be described as fees for technical services. We have noticed above that the assessee becomes entitled to the user fee when there is a successful completion of sale between the buyer and seller through its website. The assessee has no role, much less the provision of any managerial services, in the process of completion of successful sales, which entitles it to user fee. The products of the sellers are displayed on the assessee’s website. When some purchaser intends to purchase a particular product, he accesses the assessee’s website and on finding a suitable product, clicks ‘Buy It Now’ button. It concludes the transaction of sale between the buyer and seller, entitling the assessee to its fee. The assessee is in no way responsible either to the buyer or the seller if there arises any dispute between them as regards the quality or suitability of product. The assessee’s websites are analogous to a market place where the buyers and sellers assemble to transact. By providing a platform for doing business, the assessee can, by no standard, be considered as having rendered any managerial services either to the buyer or to the seller, for which it received fee from the seller.
9. Coming to the second component of the definition, being ‘technical services’, we are again at loss to appreciate as to how the assessee can be said to have rendered any technical services. The products along with necessary details are displayed on its websites. Neither the buyer nor the seller is required to avail any technical service from the assessee so as to enter into transaction. Simply because the transactions of purchase and sale of products are routed though the assessee’s website, which, in turn, came into existence through necessary technical input, will not make the users of the website as availing any technical service. It is a case of use of the standard facility. Services are said to be technical when special skill or knowledge relating to a technical field is required for the provisions of such service. Where, however, technology is used in developing or bringing out any standard facility, and the provider of such standard service receives some consideration in lieu of allowing its use, the users cannot be said to have availed any technical service from the provider by the mere act of using such standard facility.
10. In the like manner, there is no question of considering the fees received by the assessee as a consideration for rendering any ‘consultancy services’. There is no point at which the assessee renders any consultancy, either to the buyer or to the seller, as regards the goods to be purchased or sold. It is neither open nor possible for the buyers to consult the assessee before making any decision as regards the product to be purchased by them. The whole varieties of goods are displayed on the website. Any buyer, finding a particular product displayed on the website as fulfilling his requirement, clicks the ‘Buy It Now’ button. With the pressing of this button, the transaction between the buyer and seller is concluded and the assessee becomes entitled to its user fee. There is no consultancy whatsoever, which is provided by the assessee at any stage, either to the buyer or the seller.
11. The last of the positives of the definition of ‘fees for technical services’, is consideration for the provision of services of technical or other personnel. It is axiomatic that there is nothing of the sort of provision of technical or other personnel in the entire process, for which the sellers pay user fees to the assessee. This fees accrues to the assessee on successful completion of transaction between buyer and seller.
12. Thus, it can be seen that apart from making its websites available in India on which various products of the sellers are displayed, the assessee has no role to play in effecting the sales. The fee received by the assessee from the sellers, in our considered opinion, cannot be designated as a consideration for rendering managerial, technical or consultancy service within the meaning of Explanation 2 to section 9(1)(vii).
13. The ld. CIT(A) has also referred to High Powered Committee (HPC) on “Electronic Commerce Taxation” constituted by the Central Board of Direct Taxes, which has stated in its report that such amount would be in the nature of payment for business activities. He also referred to The Technical Advisory Group (TAG) formed by OECD, which, vide its report on Tax Treaty Characterized Issues Arising From E-Commerce issued in February, 2001, has also opined that revenue earned by operating online facility are in the nature of business profits falling under Article 7 of the Treaty. These findings recorded by the ld. CIT(A) have remained uncontroverted by the ld. DR.
14. In view of the above discussion, there remains no doubt whatsoever that the fee received by the assessee can’t be described as ‘Fee for technical services’, but is in the nature of ‘Business profits’. In our considered opinion the ld. CIT(A) was fully justified in holding accordingly. The grounds raised by the Revenue in support of this solitary issue in its appeal, are thus not allowed.
15. Now we take up the appeal of the assessee. The learned CIT(A) has held that the assessee’s gross revenue is taxable as ‘Business profits’ as per Article 7 of the DTA, which was earned through its dependent agent Permanent Establishments in India in the form of eBay India and eBay Motors as per Article 5(5) and 5(6) of the DTA.
16. In an earlier para we have held that the revenue of the assessee amounting to Rs. 4.94 crore does not constitute ‘Fee for technical services’ but is in the nature of ‘Business profits’. Now we will examine as to whether such ‘Business profits’ are chargeable to tax in India.
17. Article 7 of the DTA deals with the chargeability of business profits. At this juncture, it will be relevant to note the prescription of para 1 of Article 7, which reads as under :-
“1: The business profits of an enterprise of a Contracting State, other than the profits from the operation of ships in international traffic, shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment.”
18. From the above business profit Article, it is palpable that the business profits of an enterprise of a Contracting State shall be taxable in the other Contracting State only if the enterprise carries on its business in such other State through a permanent establishment. When the business is carried on by the enterprise in the other state through a permanent establishment, then only so much of the profits can be taxed which are directly or indirectly attributable to that permanent establishment. This shows that in order to tax the business profits of an enterprise of one state in the other, it is sine qua non that such an enterprise must have its permanent establishment in the other state. If there is no permanent establishment of the enterprise of the one Contracting State in the other state and there are certain business profits arising to the enterprise from such other state, those profits will escape taxation. So the existence of permanent establishment as per Article 5 of the DTAA is must for bringing to charge any business profits as per Article 7. Let us have a look at the directive of the relevant parts of Article 5 of the DTA, as under :-
“1. For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
2. The term “permanent establishment” shall include especially:
(a) a place of management;
(b) a branch;
(c) an office; …………………………….
