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 :
|Particulars||Amount (in US Dollars)|
|Total revenue of CMG as per the Annual Report (A)||1,663,600,000|
|Operating Income of CMG as per the Annual Report (B)||175,500,000|
|Operating income as a percentage of revenue earned (C=B/A)||10.55%|
|End Customer revenue from Indian operations (D)||138,900,000|
|Operating Income from Indian operations (E=C*D)||14,653,950|
|Operating income of CIS (profit before tax of CIS)(F)||13,800,000|
|Profit retained by CMG in the US (G=E-F) Placitum ‘X’||853,950|
11. Having based our conclusion on these directions, we hold that since in the A.Y. 2002-03, the margin kept by assessee after payments to CIS is in loss, no profit attribution is available to PE in India. Ground No. 2 of assessee’s appeal is accordingly disposed of.
12. As regards the issue involved in ground No. 3 regarding levy of interest under section 234, the Tribunal at para 14, pages 67 and 68 has held as follows:
“14. Coming to the assessee’s ground about levy of interest under section 234B, it is pleaded that the taxable income of the assessee was liable to TDS, as the assessees are non-residents, therefore there was no liability to pay advance tax as per the provisions of sec. 209(1) of the I.T. Act and interest u/s 234B should not be levied.
14.1. We have considered rival submissions and record. The charging of interest is automatic under the Act if the assessee has defaulted in payment of advance tax. The income of the assessee was not liable for withholding tax under section 195 of the Act. In this case we have no option but to hold. that the assessee is liable to interest u/s 234B, as the income being assessed now cannot be held. to be income liable to TDS under Indian provisions. The same is being assessed in the hands of PEs who had not filed their return on the ground that this income was not attributed to Indian Business Connection. Provisions of section 234B are mechanical in nature. In view of the above this ground of appeal of the assessee is dismissed.”
13. Following the findings of the Tribunal, this ground of assessee’s appeal is, accordingly, dismissed. As a result, the appeals of the assessee and the revenue for A.Y. 2002-03 are dismissed.
14. Adverting to the cross appeals for the A.Y. 2009-10, we find that the facts of the case are identical to that of A.Y. 2002-03 barring that in A.Y. 2002-03, the assessee did not procure services in connection with his business from PE and that the margin kept by the assessee over & above payments to the CIS was a loss and also that in A.Y. 2002-03, the assessment was made u/s. 143(3)/147 whereas in A.Y. 2009-10, the assessment was made u/s. 143(3) read with section 144C. In the instant case, the revenue earned by customer care segment of the assessee for the subject period has been intimated by the assessee at USD 1995.79 million. Out of this, the revenue from end customers with regard to contracts/wherein services were procured from CIS during the year is stated to be USD 166.99 million and the assessee has paid USD 140,697,002 to CIS for these services (including markup) The net margin of the assessee after considering payment to CIS is USD 26,292,998. The assessee also filed a certificate for expenses incurred outside India aggregating to USD 23.3 million. The deduction of expenses was held not allowable for the reasons mention at para 5.16.2 of the assessment order. However, after allowing 5% of adjusted income on account of head office expenses u/s. 44C, the net figure came to USD 24,978,348, out of which the profit attributable to PE in India was worked out to USD 17,454,870, representing 69.88%, which works out to Rs.881,994,581/-, which was added to the income of the assessee taxable @ 40%. The AO also observed that the assessee had received an amount of Rs.53,549,851/- on account of IPLC cost, which was also added to the income of assessee taxable @ 10% as equipment royalty. The ld. CIT(A) after following the decision of ITAT dated 10.05.2013 for A.Y. 2006-07 and 2008-09, directed the AO to work out profit attributable to PE in India following the steps given in the said order. Similarly, after following the order of the Tribunal, the ld. CIT(A) held that the payments for link charges do not quality as equipment royalty in terms of Article 12 of DTAA and hence, are not taxable in India. The levy of interest u/s. 234B was decided against the assessee.
15. Having considered the submissions made by both the parties, we find that the issue regarding the assessee having PE in India has already been decided in favour of the Revenue and against the assessee and the issue of dependent agent PE in India has been decided in favour of assessee and against the Revenue after following the decision of Tribunal dated 10.05.2013 for A.Y. 2006-07 and 2008-09. The relevant findings of Tribunal have been reproduced above while deciding the appeals for A.Y. 2002-03. Therefore, grounds No. 1 and its sub-grounds raised by the assessee and ground No. 1 raised by the revenue are dismissed.
16. Similarly, the issue regarding attribution of profits to the PE has been decided by the Tribunal in terms of findings given in para No. 11.17 and 11.18 of the order dated 10.05.2013 reproduced above. Following the same, we do not find any infirmity in the directions of the ld. CIT(A) on this count to determine the profits as per steps given by the ITAT. Accordingly, grounds Nos. 2 to 5 of the assessee’s appeal and 2 to 3 of the Revenue’s appeal are dismissed.
17. Regarding the taxability on IPLC/link charges, the Hon’ble ITAT held in para 13 to 13.5 that the payment is not taxable in the hands of the assessee as Royalty. The findings of the Tribunal are reproduced as under :
“13. Adverting to the issue of taxability of link charges as ‘Equipment Royalty’ in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. This issue is common to both assessment year 2006-07 and 2008-09. In this regard, the ld. AR of the assessee submitted that the link charges pertain to leased lines (under sea cables) that allow a dedicated capacity for a private, secure communication link from India to the US which enables CIS to communicate with the customers. The assessee makes payment for such link charges to telecom service providers in the USA and cross charges the portion of the cost incurred by it in connection with the India half link to CIS, which is accordingly reimbursed by CIS to CMG. Ld. counsel also referred to the invoice of raised by the assessee on CIS on Page 349 of paper book volume I and the basis of cross charged at page 828 of paper book volume III and placed reliance on the decision of the Hon’ble Delhi High Court in the case of Expeditors International India (P) Ltd. (209 Taxman 18) on reimbursement of common expenses incurred by the parent company.
13.1. AO made an addition on account of link charges by stating that they were taxable as ‘Equipment Royalty’ in terms of Article 12(2) read with Article 12(3)(b) of the DTAA and accordingly taxed it @ 10% on gross basis. CMG/CIS, who availed the services from the service providers, have neither intended to nor have obtained any right to use the underlying infrastructure maintained and used by the service providers for providing the services. It is important to see whether there was any intention to transfer the right to use or not. In the present set of facts, CMG/CIS do not have any control or possession over the equipment i.e. the network facilities are under the control of and maintained and operated by the service providers. CMG/CIS merely avail a service. Accordingly, we hold that the link charges do not qualify as ‘Equipment Royalty’ in terms of Article 12 of the DTAA and hence are not taxable in India. Useful can be drawn from the following judgments:
13.3. The provisions of Equipment Royalty are also contained in Explanation 2(iva) of section 9(1)(vi) of the Income Tax Act, 1961 (‘Act’) which is similar to the provisions of Article 12(3)(b) of DTAA.
13.4. Besides, though Asia Satellite case is a decision on the domestic law but also makes an observation regarding DTAA. In para 74 of the judgment, it is specifically mentioned that “ Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the assessee gets a boost”. This observation supports the case of assessee.
13.5. In view of the foregoing observations we hold that there is no transfer of the right to use, either to the assessee or to CIS. 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, it is held. that the said payments do not constitute Royalty under the provisions of Article 12 of the tax treaty and the ground is allowed in favour of assessee.”
18. Respectfully following these findings of the Tribunal, we decide this issue in favour of the assessee and against the Revenue. Accordingly, ground No. 4 of the Revenue’s appeal is dismissed.
19. The issue regarding levy of interest u/s. 234B also stood decided against the assessee vide para No. 14 of the Tribunal Order dated 10.05.2013 reproduced above. Therefore, taking a consistent view, ground No. 6 of assessee’s appeal is dismissed.
20. In view of the above discussions, all the four cross appeals, filed by the assessee and the Revenue are found to have no merits and are, thus, liable to be dismissed.
21. In the result, all the four cross appeals of the assessee and Revenue are dismissed.
Order pronounced in the open court on 26.10.2015