Convergys Customer Management Group Inc. Vs ADIT (ITAT Delhi)
The assessee made payment for link charges to telecom service providers in the USA and cross-charged the portion of the cost incurred by it in connection with the India half link to CIS, which was accordingly reimbursed by CIS to assessee. The assessee 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, the said payments do not constitute royalty under the provisions of article 12 of the Tax Treaty.
FULL TEXT OF THE ITAT JUDGEMENT
These four cross appeals filed by the assessee and Revenue, arise out of a consolidated order dated 28.01.2014 passed by the Ld. CIT(A)XXIX, Delhi, whereby the appeals of the assessee challenging the assessment orders u/s. 143(3)/147 for A.Y. 2002-03 and 143(3)/144C for A.Y. 2009-10 were partly allowed.
2. The brief facts relating to appeals for A.Y. 2002-03 are that the assessee, Convergys Customer Management Group Inc (hereinafter referred to as “assessee” / “CMG”) is a company incorporated in the United State of America and claimed itself a tax resident of USA under Article 4 of the India – US Double Taxation Avoidance Agreement (‘DTAA’). It provides IT enabled customer management services by utilizing its advanced information system capabilities, human resource management skills and industry experience. The assessee has a subsidiary in India by the name of Convergys India Services Pvt. Ltd. (hereinafter referred to as “CIS”), which provides IT enabled call centre/back office support services to the assessee. The assessee claims that substantial risk of procurement of services by the assessee from CIS lies with the assessee like, market risks, price risks, R&D risk, service liability risk towards its customers for quality and efficiency in delivery of services. The assessee claims that its customers are outside India, aforesaid risk resides outside India.
3. The assessee did not file any return of income u/s. 139(1) for the year under consideration. Accordingly, notice u/s. 148 was issued to the assessee on 30.03.2007. The assessee filed writ petition against the re-assessment proceedings before the Hon’ble Delhi High Court, wherein the assessee was directed to file the return of income and file objections, if any, before the AO after obtaining the reasons recorded and the AO was directed to dispose of the objections of assessee by way of speaking order. The objections of the assessee were disposed of by the AO against which again the assessee filed second writ petition before the Hon’ble High Court, which finally stood dismissed. Accordingly, notice u/s. 143(2) was issued on 09.09.2009 and a notice u/s. 142(1) was also issued requiring the assessee to furnish information and details. The ARs of the assessee filed required information.
4. During the assessment proceedings the AO observed that the assessee is a call centre company and is having a subsidiary in India, i.e., CIS. In the assessment order for A.Y. 2006-07 passed u/s. 143(3) on 29.12.2008, it was held by the AO that the assessee has a fixed place Permanent Establishment (PE) in India under article5(1), 5(2)(a) and 5(2)(c), a Service PE under Article 5(2)(l) as well as a Dependent Agent PE under Articles 5(4)(a) and 5(4)(c) of the India-USA DTAA. The AO’s finding regarding existence of assessee’s Fixed Place PE in India under Articles 5(1) and 5(2)(a) has also been confirmed by the ld.CIT(A) vide his order dated 24.01.2012 in appeal No.12/11-12. Further in the draft assessment orders for A.Ys. 2007-08 & 2008-09 also, the finding regarding existence of assessee’s PE in India was made by the AO and the same was reviewed and confirmed by the Hon’ble DRP and accordingly, the final assessment orders for A.Ys. 2007-08 and 2008-09 were passed u/s. 144C(13). The assessee filed appeals before the ITAT and the matter for A.Y. 2007-08 only was restored to the DRP vide order dated 16.06.2011 in ITA No. 4679/Del/2010. The PE in India was also held to exist in the assessment order for A.Y. 2003-04, wherein appeal is pending before the Ld. CIT(A). Thus, the AO observed that the Assessing Officers have consistently held during the assessment proceedings in the assessee’s cases that the assessee has a PE in India.
5. The Assessing Officer while dealing with the facts of the present case, held that the assessee did have a fixed place PE in India as well as a Dependent Agent PE in India for the reason that (i) the assessee has borne the cost of setting up of various call sites; (ii) the assessee’s employees visiting CIS extensively and on regular basis; (iii) there was no practice of sending requisitions for procuring services, (iv) the hardware and software assets were also provided by the assessee to CIS free of cost; and (v) it is a case where the assessee has outsourced its core business activity to CIS who is wholly owned subsidiary in India. On the basis of these facts, the AO held that the two entities are having complete integration and CIS is practically the projection of assessee’s own business in India. It was seen that the CIS did not have either economic independence or functional independence in relation to the function carried out by it. The Assessing Officer thus held that the profits attributable to PE in India is taxable in the hands of the assessee. However, the AO held that since the assessee has paid service fee during the year to CIS amounting to Rs.16,01,57,880/- amounting to USD 4.09 million, the margin kept by the assessee over and above the payment to the CIS is a loss. Accordingly, the profits attributable to PE in India was assessed at nil. The assessee challenged the assessment order in appeal before the ld. CIT(A) who vide impugned order confirmed that the assessee has PE in India, but reversed the conclusion of the AO that CIS is a dependent Agent PE of assessee in India. He accordingly, partly allowed the appeal of the assessee for the A.Y. 2002-03. Aggrieved by the impugned order, both the parties have come up before us raising the following issues for adjudication:
The issues involved in appeal of the assessee :
(i) Whether the CIT(A) was justified in holding that the assessee has a PE in India. (Ground Nos. 1 to 1.4).
(ii) Whether the procurement of IT enabled services from assessee’s Indian Subsidiary for the purpose of export, would accrue income in the hands of the assessee in India or whether the profits are attributable to alleged PE in India. (Ground No. 2).
(iii) Whether levy of Interest u/s. 234B of the Act is justified. (Ground No. 3).
The issues involved in appeal of the Revenue :
(i) Whether the ld. CIT(A) was correct in holding that the assessee is not having dependent agent PE through CIS in India (Ground No. 1).
6. During the course of hearing, the ld. AR of the assessee submitted at the outset that the facts of the present case are identical to the facts of the earlier assessment year 2006-07 and in that year, the Tribunal had held that the assessee had PE in India by rejecting the claim of the assessee. However, he pleaded that the order of the Tribunal has been challenged in appeal before the Hon’ble High Court which is pending disposal. On the other hand, the ld. DR submitted that the issue is squarely covered in favour of the Revenue and the against the Revenue by the order of Tribunal dated 10th May, 2013 in ITA Nos. 1443/Del/13 and 1376/Del./12 in assessee’s own case for A.Y. 2006-07.
7. We have heard the rival submissions, perused the material available on record and the orders of the authorities below including the order of ITAT dated 10.05.2013, wherein the identical issues have been decided by the Tribunal in appeals for the assessment year 2006-07 and 2008-09. We find that the issue of Permanent Establishment in India has been decided against the assessee as under :
“9.8. Looking at the entirety of facts and circumstances, we are of the view that the Ld.CIT(A)’s order on the proposition of PE deserves to be upheld. The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed palce of business at their disposal. CIS was practically the projection of assessee’s business in India and carried out its business under the control and guidance of the assessee and without assuming any significant risk in relation to such functions. Besides assessee has also provided certain hardware and software assets on free of cost basis to CIS. Thus, the findings of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the DTAA is upheld.”
8. As regards the issue raised by the Revenue regarding dependent agent PE in terms of various articles of DTAA, we find that this issue has been decided by the Tribunal in favour of the assessee in para 10 of the order dated 10.05.2013, which reads as under :
“10. Apropos the dependent agent PE in terms of Article 5(4) and 5(5) of the DTAA, after hearing the rival contentions, we do not find any infirmity in the order of the ld. CIT(A) and hold that CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the DTAA are not satisfied. The grounds of appeal taken by the assessee and the department in connection with the PE are accordingly disposed off.”
9. Taking a consistent view, we hold that the assessee has a fixed place PE in India, but has no dependent agent PE in India. Accordingly, ground No. 1 to 1.4 raised by the assessee and the only ground No.1 raised by Revenue in their respective appeals are dismissed.
10. Adverting to issue of attribution of profits to PE, the Tribunal at pages 55 to 58 of the order in para 11.17 has 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 performed outside India and are not linked to the PE of the assessee in India.
C. The attribution of profits to the PE should be made by the transfer pricing principles supported by the CBDT Circular No. 5 of 2004 as ITA nos. 1443/D/12, 5243/D/11 & 1376/D/12 Convergys Customer Management Group Inc. as well as the judgment of the Supreme Court in Morgan Stanley (292 ITR 416). As per the Supreme Court in the case of Morgan Stanley, it has been held. as under:
“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 be attributed to the PE. The situation would. be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would. be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would. depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to the PE).”
The application of transfer pricing principles is also supported by the decisions of the Bombay High Court in Set Satellite (Singapore) Pte Ltd. (307 ITR 205), jurisdictional High Court in Rolls Royce Singapore Pvt. Ltd. (202 Taxman 45) (Del.), Director of Income Tax vs. BBC Worldwide Ltd. (203 Taxman 554) (Del.)
D. The ld. CIT (A) has held that further profit was required to be attributed on account of Assets provided by the assessee to CIS and management of risk by the assessee in India. In our view no attribution of profits can be made on account of management of risk as risk resides outside India. Even otherwise the charge for the employees seconded to CIS and employees visiting India to provide the technical services is subsumed in the transfer pricing analysis of CIS. Therefore, attribution can only be made on account of free of cost assets and 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 attribution of India profit shall be worked out as under, mentioned after the table:
11.18. In the computation based on the above approach for the AY 2006-07, the profits attributable to India comes as under :
