REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 6082 OF 2015 Assistant Director of Income Tax-I, New Delhi Appellant Versus M/s E-Funds IT Solution Inc. Respondent WITH CIVIL APPEAL NO. 2962 OF 2016 CIVIL APPEAL NO. 6087 OF 2015 CIVIL APPEAL NO.6102 OF 2015 CIVIL APPEAL NO. 6084 OF 2015 CIVIL APPEAL NO. 6100 OF 2015 CIVIL APPEAL NO. 6094 OF 2015 CIVIL APPEAL NO. 6083 OF 2015 CIVIL APPEAL NO. 6096 OF 2015 Signature Not Verified Digitally signed by R.NATARAJAN CIVIL APPEAL NO. 6089 OF 2015 Date: 2017.10.24 17:03:32 IST Reason: CIVIL APPEAL NO. 6104 OF 2015 1 CIVIL APPEAL NO. 6088 OF 2015 CIVIL APPEAL NO. 6091 OF 2015 CIVIL APPEAL NO. 6103 OF 2015 CIVIL APPEAL NO. 6093 OF 2015 CIVIL APPEAL NO. 6085 OF 2015 CIVIL APPEAL NO. 6090 OF 2015 CIVIL APPEAL NO. 6095 OF 2015 CIVIL APPEAL NO. 6099 OF 2015 CIVIL APPEAL NO. 6092 OF 2015 CIVIL APPEAL NO. 6101 OF 2015 CIVIL APPEAL NO. 6097 OF 2015 AND CIVIL APPEAL NO. 16958 OF 2017 (@S.L.P.(C) NO.27494 OF 2017 (CC NO.19128 OF 2014) JUDGMENT R.F. Nariman, J. Leave granted. 1. These appeals are from judgment of Delhi High Court disposing off several appeals and cross appeals. They 2 relate to two American Companies which are assessees in present case, namely, e-Funds Corporation, USA (relating to assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08) and e-Funds IT Solutions Group Inc., USA (relating to assessment years 2000-01 to 2002-03 and 2005-06 to 2007- 08). appeals from Income Tax Appellate Tribunal (ITAT) by assessees were allowed by High Court, whereas cross-appeals by department were rejected. After framing several substantial questions of law, High Court narrated undisputed facts as follows: 6. Undisputed facts in brief may be first noticed. assessees are companies incorporated in United States of America (USA, for short) and were residents of said country. They were assessed and have paid taxes on their global income in USA. e-Fund Corp. was holding company having almost 100% shares in IDLX Corporation, another company incorporated in USA. IDLX Corporation held almost 100% shares in IDLX International BV, incorporated in Netherlands and later in turn held almost 100% shares in IDLX Holding BV, which was subsidiary again incorporated in Netherlands. IDLX Holding BV was almost 100% shareholder of e-Funds International India Private Limited, company incorporated and resident of India (e-Fund International India Private Limited has been described as e-Fund India ). IDLX International BV was also parent/holding company having almost 3 100% shares in e-Fund Inc., which as noticed above, was company incorporated in USA. 7. Both e-Fund Inc. and e-Fund Corp. have entered into international transactions with e-Fund India. details of these transactions have to be examined in depth and have to be referred below. e-Fund India being domestic company and resident in India was taxed on income earned in India as well as its global income in accordance with provisions of Act. international transactions between assessees and e-Fund India and income of e-Fund India, it is accepted, were made subject matter of arms length pricing adjudication by Transfer Pricing Officer (TPO, for short) and Assessing Officer (AO, for short) in returns of income filed by e-Fund India. We are not primarily concerned with merits of computation of income declared and assessed in hands of e-Fund India in present appeals, though factum that e-Fund India was assessed to tax on its global income as per law or on arms length pricing in relation to associated transactions and basis of said computation of income earned by e-Fund India, as noticed below, is relevant and important fact. Revenue has not disputed said legal position. It is contention of Revenue that income of two assessees were attributable to India because two assessees had PE in India and should be taxed in India, irrespective of whether said assessees had paid taxes in USA. Income earned and taxed in hands of e-Fund India was different from income attributable to two assessees. Thus balance or differential amount, i.e., income attributable to two assessees, which was not included in income earned and taxed in hands of e-Fund India, should be taxed in India. 4 8. As principle what is stated and submitted by Revenue cannot be contested and in fact not contested by assessees as it is principle applicable to international taxation. foreign or non-resident company can be taxed in country where it has subsidiary, which is also PE on income attributable to said PE, even if subsidiary (in present case of e-Fund India) is being taxed in said country. principle being that subsidiary being independent and distinct entity is taxed for its income, whereas foreign entity, i.e., holding company is taxed for income earned by said independent entity attributable to PE in country where subsidiary is situated. income of subsidiary is not taxed in hands of non-resident principal and vice-versa. Thus, there is no double taxation in hands of holding company as income of subsidiary is not taxed as income of foreign holding assessee. principle is that subsidiary constitutes independent legal entity for purpose of taxation. 2. assessing authority decided that assessees had permanent establishment (hereinafter referred to as PE) as they had fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of India U.S. Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as DTAA) was attracted. Consequently, assessees were liable to pay tax in respect of what they earned from aforesaid fixed place PE in India. CIT (Appeals) 5 dismissed appeals of assessees holding that Article 5 was attracted, not only because there was fixed place where assessees carried on their business, but also because they were service PEs and agency PEs under Article 5. In appeal to ITAT, ITAT held that CIT (Appeals) was right in holding that fixed place PE and service PE had been made out under Article 5, but said nothing about agency PE as that was not argued by Revenue before ITAT. However, ITAT, on calculation formula different from that of CIT (Appeals), arrived at nil figure of income for all relevant assessment years. appeal of assessees to High Court proved successful and High Court, by elaborate judgment, has set aside findings of all authorities referred to above, and further dismissed cross-appeals of Revenue. Consequently, Revenue is before us in these appeals. 3. learned Attorney General, Shri K.K. Venugopal, has argued before us that, under Article 5(1) of DTAA, fixed place PE has been made out on facts of these cases, and 6 relied heavily upon United States Securities and Exchange Commission Form 10K of e-Funds Corp. dated 31st March, 2003. According to learned Attorney General: Most of employees are in India (In fact, High Court records that 40% of employees of entire group are in India). eFunds Corp has call centers and software development centers only in India. eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India. master services agreement between American and Indian entity gives complete control to American entity in regard to personnel employed by Indian entity. It is only through proprietary database and software of eFunds Corp, that eFunds India carries out its functions for eFunds Corp (The High Court records that software, intangible data etc is provided free of cost and then states that this is irrelevant). 7 Corporate office of eFunds India houses International Division comprising President s office and sales team servicing EFI and eFunds group entities in United Kingdom, South East Asia, Australia and Venezuela. President s office primarily oversees operations of eFunds India and eFunds group entities overseas. sales team undertakes marketing efforts for affiliate entities also. CIT(A) has referred to Transfer Pricing Report which says that eFunds India provides management support and marketing support services to eFunds Corp group companies outside India. Regarding supervision of personnel rendering services, TP Report states as follows: President s office manages operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to President. President s overall reporting is to EFC. Though personnel rendering marketing services are employees of EFI, they report to overseas group 8 entities to extent that they are engaged in rendering services to such entities. Applying above facts, it is submitted that assessees satisfy requirements of fixed place PE. Supreme Court in recent judgment in Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation-3, Delhi and others, (2017) SCC Online SC 474 has held that it universally accepted that for ascertaining whether there is fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of physical location which is at disposal of enterprise through which business is carried on. It was further held that physically located premises have to be at disposal of enterprise and that place will be treated as at disposal of enterprise when enterprise has right to use said place and has control thereupon. Consequently, he argued that physically located premises are at disposal of assessees with degree of permanence required, namely, entire year. In addition, he 9 argued that High Court was in error in holding that place of management PE under Article 5(2)(a) was prima facie made out, but since said provision had not been invoked and requires factual determination, Revenue s argument was dismissed on this score. Further, under Article 5(2)(l) of DTAA, he argued that service PE is clearly made out on facts because: As per consolidated Annual Report of eFunds Corp, most of employees are in India. eFunds Corp has call centers and software development centers only in India. eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India. Regarding supervision of personnel rendering services, TP Report states as follows: President s office manages operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to President. President s overall reporting is to EFC. 10 Though personnel rendering marketing services are employees of EFI, they report to overseas group entities to extent that they are engaged in rendering services to such entities. Master sub-contractor agreement between eFunds Corp and eFunds India discussed in CIT(A) s order provides in clause 1.1(a) as follows: Subcontractors personnel assigned to work with eFunds IT or Customers located in United States shall be directed by eFunds IT or by Subcontractors supervisor acting at direction of eFunds IT. In event Subcontractors personnel are assigned to perform such services in India, Subcontractor shall supervise such work, acting at direction of eFunds IT. eFunds IT shall be sole judge of performance and capability of each of subcontractors personnel and may request removal of one or more of Subcontractors personnel from project covered by any statement of work as follows. 11 It is submitted that personnel engaged in providing these services were ostensibly employees of eFunds India but were de facto working under control and supervision of eFunds Corp. In this regard, reference was made to Para 17 of judgment in DIT v. Morgan Stanley (2007) 7 SCC 1, where Court held: 17 It is important to note that where activities of multinational enterprise entails it being responsible for work of deputationists and employees continue to be on payroll of multinational enterprise or they continue to have their lien on their jobs with multinational enterprise, service PE can emerge. Furthermore, AO in Assessment Order has observed that eFunds Corp has seconded two employees to eFunds India and these employees worked as Sr. Director- Technical Services and Country Head-Business Development. activities of seconded employees go beyond mere stewardship activities in terms of Morgan Stanley. 12 term Other Personnel has to be seen in context of facts of this case which show that eFunds India was not independent subsidiary. Further, he also argued that dependent agent PE was made out under Articles 5(4) and 5(5), there being concurrent finding of facts of CIT (Appeals) and ITAT in this regard. Also, according to learned Attorney General, since assessees failed to furnish information when sought for, adverse inference was sought to be drawn against them and that, therefore, it is clear that once this inference is drawn, burden shifts on to assessees, which they will then have failed to discharge. 4. learned Attorney General also relied heavily upon admission made under mutual agreement procedure (MAP) under Article 27 of DTAA, in which, for assessment year 2003-04 qua e-Funds Corp., and assessment years 2003-04 and 2004-05 qua e-Funds IT Solution Inc., assessees have admitted that income tax will be attributable to Indian PEs 13 based on certain ratio and that, therefore, it is clear that this admission would continue to bind assessees in all subsequent years as there was no change in factual position. 5. As against this, Shri S. Ganesh, learned senior counsel for respondents, has argued that tests for whether there is fixed place PE have now been settled by judgment of this Court in Formula One (supra), and that it is clear that for fixed place PE, it must be necessary that said fixed place must be at disposal of assessees, which means that assessees must have right to use premises for purpose of their own business, which has not been made out in facts of this case. He further argued that, on facts of this case, both US companies as well as Indian company pay income tax, and Transfer Pricing Officer by his order dated 22nd February, 2006, has specifically held that whatever is paid under various agreements between US companies and Indian company are on arm s length pricing and that, this being case, even if fixed place PE is found, 14 once arm s length price is paid, US companies go out of dragnet of Indian taxation. He also adverted to Article 5(6) to state that mere fact that 100% subsidiary may be carrying on business in India does not by itself means that holding company would have PE in India. Further, according to learned counsel, so far as service PE is concerned, even assessing officer did not find that such PE existed. According to him, under Article 5(2)(l), it is necessary that foreign enterprises must provide services to customers who are in India, which is not Revenue s case as all their customers exist only outside India. Further, according to learned counsel, entire personnel engaged in Indian operations are employed only by Indian company and fact that US companies may indirectly control such employees is only for purposes of protecting their own interest. Ultimately, there are four businesses that assessees are engaged in, namely, ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. Since all these businesses are carried on outside India and property 15 through which these businesses are carried out, namely ATM networks, software solutions and other hardware networks and information technology infrastructure were all located outside India, activities of e-Funds India are independent business activities on which, as has been noticed by High Court, independent profits are made and income assessed to tax under Income Tax Act. According to learned counsel, agency PE was never argued before assessing officer and even before ITAT. Therefore, no factual foundation for same has been laid. Equally, according to learned counsel, settlement procedure availed for assessment years in question cannot be said to be binding for subsequent years as they were without prejudice to assessees contention that they have no PE in India. He also relied upon OECD Commentary, paragraph 3.6 in particular, to demonstrate that so-called admissions made and relied upon by three authorities below were correctly overturned by High Court. Learned counsel also stated that ground of adverse inference was never argued or put before any of authorities below, and only place that it could be found is in 16 assessment order for year 2003-04, which order became non est as it was substituted by agreement entered into between parties ending in withdrawal of appeals before CIT (Appeals). Thus, according to learned counsel, view of High Court is absolutely correct and should not be interfered with. Learned counsel also argued that cross- appeals of Revenue were correctly dismissed in that, even though ITAT decided case in law against assessees, yet it found on facts, differing from calculation formula by authorities below, that nil tax was payable. This is only part of ITAT judgment upheld by High Court, and should not, therefore, be disturbed in any case. 6. Before we deal with submissions made on both sides, it is necessary to first set out statutory background. This is contained in Section 90 of Income Tax Act, before it was amended in 2009. Section 90(1) and 90(2) of Income Tax Act, as it then stood, read as under: Section 90. Agreement with foreign countries. 17 1) Central Government may enter into agreement with Government of any country outside India (a) for granting of relief in respect of (i) income on which have been paid both income-tax under this Act and income-tax in that country; or (ii) income-tax chargeable under this Act and under corresponding law in force in that country to promote mutual economic relations, trade and investment, or (b) for avoidance of double taxation of income under this Act and under corresponding law in force in that country, or (c) for exchange of information for prevention of evasion or avoidance of income-tax chargeable under this Act or under corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under corresponding law in force in that country, and may, by notification in Official Gazette, make such provisions as may be necessary for implementing agreement. (2) Where Central Government has entered into agreement with Government of any country outside India under sub-section (1) for granting relief of tax, or as case may be, avoidance of double taxation, then, in relation to assessee to whom such agreement applies, provisions of this Act shall apply to extent they are more beneficial to that assessee. 18 7. Under this provision, India US Double Taxation Avoidance Agreement of 1990 was made. We are directly concerned with Article 5 of DTAA, which reads as under: ARTICLE 5 - Permanent establishment 1. For purposes of this Convention, term permanent establishment means fixed place of business through which business of enterprise is wholly or partly carried on. 2. term permanent establishment includes especially: (a) place of management; (b) branch; (c) office; (d) factory; (e) workshop; (f) mine, oil or gas well, quarry, or any other place of extraction of natural resources; (g) warehouse, in relation to person providing storage facilities for others; (h) farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) store or premises used as sales outlet; (j) installation or structure used for exploration or exploitation of natural resources, but only if so used for period of more than 120 days in any twelve-month period; (k) building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for period of more than 120 days in any twelve-month period; 19 (l) furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within Contracting State by enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for period or periods aggregating more than 90 days within any twelve-month period; or (ii) services are performed within that State for related enterprise [within meaning of paragraph 1 of Article 9 (Associated Enterprises)]. 3. Notwithstanding preceding provisions of this Article, term permanent establishment shall be deemed not to include any one or more of following: (a) use of facilities solely for purpose of storage, display, or occasional delivery of goods or merchandise belonging to enterprise; (b) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage, display, or occasional delivery; (c) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of processing by another enterprise; (d) maintenance of fixed place of business solely for purpose of purchasing goods or merchandise, or of collecting information, for enterprise; (e) maintenance of fixed place of business solely for purpose of advertising, for supply of information, for scientific research or for other activities which have preparatory or auxiliary character, for enterprise. 4. Notwithstanding provisions of paragraphs 1 and 2, where person other than agent of independent status to whom paragraph 5 applies - 20 is acting in Contracting State on behalf of enterprise of other Contracting State, that enterprise shall be deemed to have permanent establishment in first-mentioned State, if: (a) he has and habitually exercises in first- mentioned State authority to conclude on behalf of enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through fixed place of business, would not make that fixed place of business permanent establishment under provisions of that paragraph; (b) he has no such authority but habitually maintains in first-mentioned State stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of enterprise, and some additional activities conducted in State on behalf of enterprise have contributed to sale of goods or merchandise; or (c) he habitually secures orders in first- mentioned State, wholly or almost wholly for enterprise. 5. enterprise of Contracting State shall not be deemed to have permanent establishment in other Contracting State merely because it carries on business in that other State through broker, general commission agent, or any other agent of independent status, provided that such persons are acting in ordinary course of their business. However, when activities of such agent are devoted wholly or almost wholly on behalf of that enterprise and transactions between agent and enterprise are not made under arm s length conditions, he shall not be considered agent of independent status within meaning of this paragraph. 21 6. fact that company which is resident of Contracting State controls or is controlled by company which is resident of other Contracting State, or which carries on business in that other State (whether through permanent establishment or otherwise), shall not of itself constitute either company permanent establishment of other. 8. Article 7 has also been referred to, by which profits of enterprise of contracting State may be taxed in other State only to extent of so much of business as is attributable to permanent establishment in other State. Article 25 was referred to by learned Attorney General to counter argument made by Shri Ganesh based upon affidavits filed before this Court stating that if assessees were made to pay tax in India, there would be double taxation. Article 25 provides for relief from such double taxation, by which United States shall allow to resident or citizen of United States as credit against US tax on income tax that is paid to India by or on behalf of such citizen in India. Article 27 is also important and reads as under: ARTICLE 27 - Mutual agreement procedure 22 1. Where person considers that actions of one or both of Contracting States result or will result for him in taxation not in accordance with provisions of this Convention, he may, irrespective of remedies provided by domestic law of those States, present his case to competent authority of Contracting State of which he is resident or national. This case must be presented within three years of date of receipt of notice of action which gives rise to taxation not in accordance with Convention. 2. competent authority shall endeavour, if objection appears to it to be justified and if it is not itself able to arrive at satisfactory solution, to resolve case by mutual agreement with competent authority of other Contracting State, with view to avoidance of taxation which is not in accordance with Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in domestic law of Contracting States. 3. competent authorities of Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to interpretation or application of Convention. They may also consult together for elimination of double taxation in cases not provided for in Convention. 4. competent authorities of Contracting States may communicate with each other directly for purpose of reaching agreement in sense of preceding paragraphs. competent authorities, through consultations, shall develop appropriate bilateral procedures, conditions, methods and techniques for implementation of mutual agreement procedure provided for in this Article. In addition, competent authority may 23 devise appropriate unilateral procedures, conditions, methods and techniques to facilitate above-mentioned bilateral actions and implementation of mutual agreement procedure. 9. This Article must be read with Rule 44H of Income Tax Rules, 1962, which reads as under: Action by Competent Authority of India and procedure for giving effect to decision under agreement. 44H. (1) Where reference has been received from competent authority of country outside India under any agreement with that country with regard to any action taken by any income-tax authority in India, Competent Authority in India shall call for and examine relevant records with view to give his response to competent authority of country outside India. (2) Competent Authority in India shall endeavour to arrive at resolution of case in accordance with such agreement. (3) resolution arrived at under mutual agreement procedure, in consultation with competent authority of country outside India, shall be communicated, wherever necessary, to Chief Commissioner or Director-General of Income-tax, as case may be, in writing. (4) effect to resolution arrived at under mutual agreement procedure shall be given by Assessing Officer within ninety days of receipt of same by Chief Commissioner or Director- General of Income-tax, if assessee, 24 (i) gives his acceptance to resolution taken under mutual agreement procedure; and (ii) withdraws his appeal, if any, pending on issue which was subject matter for adjudication under mutual agreement procedure. (5) amount of tax, interest or penalty already determined shall be adjusted after incorporating decision taken under mutual agreement procedure in manner provided under Income-tax Act, 1961 (43 of 1961), or rules made thereunder to extent that they are not contrary to resolution arrived at. Explanation. For purposes of rules 44G and 44H, Competent Authority of India shall mean officer authorised by Central Government for purposes of discharging functions as such. 10. Income Tax Act, in particular Section 90 thereof, does not speak of concept of PE. This is creation only of DTAA. By virtue of Article 7(1) of DTAA, business income of companies which are incorporated in US will be taxable only in US, unless it is found that they were PEs in India, in which event their business income, to extent to which it is attributable to such PEs, would be taxable in India. Article 5 of DTAA set out hereinabove provides for 25 three distinct types of PEs with which we are concerned in present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in aforesaid provisions in order to fulfill conditions of these PEs existing in India. burden of proving fact that foreign assessee has PE in India and must, therefore, suffer tax from business generated from such PE is initially on Revenue. With these prefatory remarks, let us analyse whether respondents can be brought within any of sub-clauses of Article 5. 11. Since Revenue originally relied on fixed place of business PE, this will be tackled first. Under Article 5(1), PE means fixed place of business through which business of enterprise is wholly or partly carried on. What is fixed place of business is no longer res integra. In Formula One (supra), this Court, after setting out Article 5 of DTAA, held as follows: 26 32. principal test, in order to ascertain as to whether establishment has fixed place of business or not, is that such physically located premises have to be at disposal of enterprise. For this purpose, it is not necessary that premises are owned or even rented by enterprise. It will be sufficient if premises are put at disposal of enterprise. However, merely giving access to such place to enterprise for purposes of project would not suffice. place would be treated as at disposal of enterprise when enterprise has right to use said place and has control thereupon. xxx xxx xxx 34. According to Philip Baker, aforesaid illustrations confirm that fixed place of business need not be owned or leased by foreign enterprise, provided that is at disposal of enterprise in sense of having some right to use premises for purposes of its business and not solely for purposes of project undertaken on behalf of owner of premises. 35. Interpreting OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as term business is concerned, it is broad, vague and of little relevance for PE definition. According to him, crucial element is term place . Importance of term place is explained by him in following manner: In conjunction with attribute fixed , requirement of place reflects strong link between land and taxing powers of State. This territorial link serves as basis not 27 only for distributive rules which are tied to existence of PE but also for considerable number of other distributive rules and, above all, for assignment of person to either Contracting State on basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC). 36. We would also like to extract below definition to expression place by Vogel, which is as under: place is certain amount of space within soil or on soil. This understanding of place as three- dimensional zone rather than single point on earth can be derived from French Version ( installation fixe ) as well as term establishment . As rule, this zone is based on certain area in, on, or above surface of earth. Rooms or technical equipment above soil may qualify as PE only if they are fixed on soil. This requirement, however, stems from term fixed rather than term place , given that place (or space) does not necessarily consist of piece of land. On contrary, term establishment makes clear that it is not soil as such which is PE but that PE is constituted by tangible facility as distinct from soil. This is particularly evident from French version of Article 5(1) OECD MC which uses term installation instead of place . term place is used to define term establishment . Therefore, place 28 includes all tangible assets used for carrying on business, but one such tangible asset can be sufficient. characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property (in civil law countries) is not authoritative. It is rather context (including, above all, terms fixed / fixe ), as well as object and purpose of Article 5 OECD and UN MC itself, in light of which term place needs to be interpreted. This approach, which follows from general rules on treaty interpretation, gives certain leeway for including movable property in understanding of place and, therefore, we assume PE once such property has been fixed to soil. For example, work bench in caravan, restaurants on permanently anchored river boats, steady oil rigs, or transformator or generator on board former railway wagon qualify as places (and may also be fixed ). In contrast, purely intangible property cannot qualify in any case. In particular, rights such as participations in corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks etc.) or intangible economic assets (a regular clientele or goodwill of enterprise) do not in themselves constitute PE. They can only form part of PE constituted 29 otherwise. Likewise, internet website (being combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute PE. Neither does mere incorporation of company in Contracting State in itself constitute PE of company in that State. Where company has its seat, according to its by-laws and/or registration, in State while POEM is situated in State B, this company will usually be liable to tax on basis of its worldwide income in both Contracting States under their respective domestic tax law. Under A-B treaty, however, company will be regarded as resident of State B only (Article 4(3) OECD and UN MC). In absence of both actual facilities and dependent agent in State A, income of this company will be taxable only in State B under 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of piece of land. Where qualifying business activities consist (in full or in part) of human activities by taxpayer, his employees or representatives, mere space needed for physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and notion of agent PEs were superfluous). This can be illustrated by example of salesman who regularly visits major customer to take orders, and conducts meetings in purchasing director's 30 office. OECD MC Comm. has convincingly denied existence of PE, based on implicit understanding that relevant geographical unit is not just chair where salesman sits, but entire office of customer, and office is not at disposal of enterprise for which salesman is working. 37. Taking cue from word through in Article, Vogel has also emphasised that place of business qualifies only if place is at disposal of enterprise. According to him, enterprise will not be able to use place of business as instrument for carrying on its business unless it controls place of business to considerable extent. He hastens to add that there are no absolute standards for modalities and intensity of control. Rather, standards depend on type of business activity at issue. According to him, disposal is power (or certain fraction thereof) to use place of business directly. Some of instances given by Vogel in this behalf, of relative standards of control, are as under: degree of control depends on type of business activity that taxpayer carries on. It is therefore not necessary that taxpayer is able to exclude others from entering or using POB. painter example in OECD MC Comm. (no. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to functional integration test) suggests that type and extent of control need not exceed level of what is required for 31 specific type of activity which is determined by concrete business. By contrast, in case of self- employed engineer who had free access to his customer's premises to perform services required by his contract, Canadian Federal Court of Appeal ruled that engineer had no control because he had access only during customer's regular office hours and was not entitled to carry on businesses of his own on premises. Similarly, Special Bench of Delhi's Income Tax Appellate Tribunal denied existence of PE in case of Ericsson. Tribunal held that it was not sufficient that Ericsson's employees had access to premises of Indian mobile phone providers to deliver hardware, software and know-how required for operating network. By contrast, in case of competing enterprise, Bench did assume Indian PE because employees of that enterprise (unlike Ericsson's) had exercised other businesses of their employer. OECD view can hardly be reconciled with two court cases. All three examples do indeed shed some light onto method how relative standards for control threshold should be designed. While OECD MC Comm. suggests that it is sufficient to require not more than type and extent of control necessary for specific business activity which taxpayer wants to exercise in source 32 State, Canadian and Indian decisions advocate for stricter standards for control threshold. OECD MC shows paramount tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of subsidiary would rarely been unusable outside office hours of one of its customers (i.e. third person), view of two courts is still more convincing. Along these lines, POB will usually exist only where taxpayer is free to use POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, taxpayer will usually be regarded as controlling POB only where he can employ it at his discretion. This does not imply that standards of control test should not be flexible and adaptive. Generally, less invasive activities are, and more they allow parallel use of same POB by other persons, lower are requirements under control test. There are, however, number of traditional PEs which by their nature require exclusive use of POB by only one taxpayer and/or his personnel. small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square 33 meters can hardly be used by more than one person. same holds true for room where taxpayer runs noisy machine. 38. OECD commentary on Model Tax Convention mentions that general definition of term PE brings out its essential characteristics, i.e. distinct situs , fixed place of business . This definition, therefore, contains following conditions: - existence of place of business , i.e. facility such as premises or, in certain instances, machinery or equipment; - this place of business must be fixed , i.e. it must be established at distinct place with certain degree of permanence; - carrying on of business of enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on enterprise (personnel) conduct business of enterprise in State in which fixed place is situated. 12. Thus, it is clear that there must exist fixed place of business in India, which is at disposal of US companies, through which they carry on their own business. There is, in fact, no specific finding in assessment order or appellate orders that applying aforesaid tests, any fixed place of business has been put at disposal of these companies. assessing officer, CIT (Appeals) and ITAT have essentially 34 adopted fundamentally erroneous approach in saying that they were contracting with 100% subsidiary and were outsourcing business to such subsidiary, which resulted in creation of PE. High Court has dealt with this aspect in some detail in which it held: 49. Assessing Officer, Commissioner (Appeals) and tribunal have primarily relied upon close association between e-Fund India and two assessees and applied functions performed, assets used and risk assumed, criteria to determine whether or not assessee has fixed place of business. This is not proper and appropriate test to determine location PE. fixed place of business PE test is different. Therefore, fact that e-Fund India provides various services to assessee and was dependent for its earning upon two assessees is not relevant test to determine and decide location PE. allegation that e-Fund India did not bear sufficient risk is irrelevant when deciding whether location PE exists. fact that e-Fund India was reimbursed cost of call centre operations plus 16% basis or basis of margin fixation was not known, is not relevant for determining location or fixed place PE. Similarly what were direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE. Assignment or sub-contract to e-Fund India is not factor or rule which is to be applied to determine applicability of Article 5(1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not relevant criteria/test. e-Fund India was/is 35 separate entity and was/is entitled to provide services to assessees who were/are independent separate taxpayers. Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between Indian subsidiary and foreign Principal under Article 5(1). Even if foreign entities have saved and reduced their expenditure by transferring business or back office operations to Indian subsidiary, it would not by itself create fixed place or location PE. manner and mode of payment of royalty or associated transactions is not test which can be applied to determine, whether fixed place PE exists. 13. It further went on to hold that ITAT s finding that assessees were joint venture or sort of partnership with Indian subsidiary was wholly incorrect. Also, none of these arguments have been invoked by Revenue and such finding would, therefore, be perverse. After citing Klaus Vogel on Double Taxation Conventions, Arvid A. Skaar in Permanent Establishment: Erosion of Tax Treaty Principle and Bollinger vs. Commissioner, 108 S.Ct. 1173, High Court found against Revenue, holding that there is no fixed place PE on facts of present case. We agree with findings of High Court in this regard. 36 14. Reliance placed by Revenue on United States Securities and Exchange Commission Form 10K Report, as has been correctly pointed out by High Court, is also misplaced. It is clear that report speaks of e-Funds group of companies worldwide as whole, which is evident not only from going through said report, but also from consolidated financial statements appended to report, which show assets of group worldwide. 15. Also, Shri Ganesh has pointed out that two American companies have four main business activities which are: ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. He was at great pains to point out report of Deloitte Haskins and Sells dated 13th March, 2009, produced before CIT (Appeals), in which, on behalf of their American clients, said firm of Chartered Accountants stated: 2. nature of business under each of above verticals is detailed below: a) ATM Management Services 37 eFunds US s ATM Management Services ( ATM Services ) segment covers business of ATM deployment, management and branding services. eFunds US is independent provider of ATMs and it places ATMs in convenience, grocery, general merchandise, and drug stores as well as gas stations located throughout United States and Canada. ATMs run on operating software which is generally owned by original ATM manufacturer whereas datacentre, to which such ATMs are connected, operate on software platforms such as Connex which have been developed and maintained by eFunds US. Services provided by eFunds US: eFunds US provided processing for over 11,000 of ATM machines in its network. Most of ATMs were owned by Appellant and its associate companies. All these ATMs were installed outside India and mainly in United States. Services provided by eFunds India: only involvement of eFunds India was responding to queries raised by 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. business involves processing transactions for regional automated teller machine or ATM networks in 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. 38 Processing Services: eFunds US processes transactions for regional ATM networks in United States. They also provide transaction processing for retail point of sale ( POS ) terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions. Transaction processing involves electronically transferring money from person s checking or savings account according to his or her instructions. To carry out tasks required, each ATM or POS device is typically connected to several computer networks. None of these networks is installed in India. These networks include private networks that connect devices of single owner, shared networks that serve several device owners in region, and national shared networks that provide access to devices across regions. Each shared network has numerous financial institution members. eFunds US provides its Customers with access across multiple networks. eFunds US s Government services EBT (Electronic Benefits Transfer) business was started in response to federal mandates that require state and local Governmental agencies to convert to electronic payment methods for distribution of benefits under entitlement programs, primarily food stamps and Transitional Aid to Needy Families. EBT processing system manages, supports, and controls electronic payment and distribution of cash benefits to program participants through ATMs and POS networks. As mentioned earlier, these are mostly located in USA. In any case, none was located in India. Software Products: eFunds US develops and sells electronic funds transfer software, Connex and Architect, used in electronic payment services to in- 39 house processors and regional networks in 23 foreign countries and in United States. None of software products of eFunds US was licensed or installed in India. This software runs on IBM and Tandem computing platforms. eFunds US also provides software maintenance and support services as part of its Global Outsourcing business. eFunds US has developed various other software/solutions. Services provided by eFunds US: eFunds US was responsible for Customer Interface and customization of products and services as per dictates of Customer. Agreement/contracts with Customer were entered into by eFunds US. All risks and responsibilities for performance of Contract at all times were of eFunds US only. All Software s/solutions are developed by eFunds US. Software writing 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 company acquired by eFunds US. eFunds US s associate company in United Kingdom has developed and owns 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 terms of contract with Government Agencies, eFunds US is responsible for management, support and control of 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 40 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 course of development of software/software based solutions and their use in providing services to customers. process of development of software/solutions involves testing same with sample data to determine workability of software. Further, certain errors or bugs may be found in software/solutions at such eFunds US avails services of eFunds India for bug fixing. work performed by eFunds India for eFunds Government Services Business (EBT Processing) was limited to responding to inbound calls made to its call centre for enquiry on non-acceptance of cheques and opening of accounts. c) Decision Support & Risk Management eFunds US Decision Support & Risk Management ( Risk Management ) segment provides risk management-based data and other products to financial institutions, retailers and other businesses that assist in detecting fraud and assessing risk of opening new account or accepting cheque. This segment offers products and services that help determine likelihood of account fraud and identity manipulation and assess overall risks involved in opening new accounts or accepting payment transactions. SCAN: SCAN or Shared Cheque Authorization Network, helps retailers reduce risk of write-offs for dishonoured cheques due to insufficient funds and other forms of account fraud or identity manipulation. When cheque is presented as payment at point-of-sale, SCAN members run 41 cheque through scanner. information on cheque is then compared to SCAN database to determine whether there have been payment problems with cheque writer or his or her account. SCAN then reports any issues to retailer and merchant decides whether or not to accept cheque. ChexSystems: ChexSystems business is provider of new account applicant verification services for financial institutions. ChexSystems provides access to more than 17 million closed-for- cause account histories and has recorded 124 million new account enquiries. account is considered closed-for-cause when, for example, consumer refuses to pay account fee and bank closes account. ChexSystems helps financial institutions immediately assess risks involved in opening account for new customer by supporting real-time enquiries to its database of consumer debit account performance. ChexSystems database includes account history data provided by or purchased from financial institutions and other data purchased from third parties including driver s license data, deceased person s records and suspect address lists. All such data base relates to persons located in US and customers of this data base were banks and retailers located in US. Services provided by eFunds US: eFunds US was responsible for Customer interface and agreement/contracts with 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 group 42 situated in USA. DebitBureau contains over three billion records and includes data form eFunds ChexSystemsSM and SCANSM databases and other sources. 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 consumer s identity and assess and rank risk of fraud associated with opening account for or accepting payment from that consumer. eFunds US software development centers in United States, as well as in U.S. data centers and remotely at customers sites develop and maintain software for these service offerings. Services provided by eFunds India: work performed by eFunds India involved responding to inbound calls made by customers located outside India to customer support center of eFunds US. These calls were routed to eFunds India for enquiry on non-acceptance of cheques and opening of accounts. eFunds India also provided software support services for SCAN and Chex process. eFunds India was only involved in bug fixing and software maintenance. d) Global Outsourcing Services & Professional Services eFunds US provide its clients with information technology and business process outsourcing services to complement and support its electronic payments business. Its business process management and outsourcing services focus on both back-office and customer support business 43 processes, such as accounting operations, help desk, account management, transaction processing and call center operations. It consists of providing information technology services including maintenance of hardware and networks, installation of eFunds US electronic payment products and integration of these products within customer s existing information technology infrastructure. All of these hardwares, networks and information technology infrastructure were located outside India. Professional services include customizing standard eFunds US products and developing new applications for clients who want additional features and functionality and help clients test and refine eFunds US products in their information technology environments. In addition, it also covers providing on-site user training on eFunds US products and solutions for information technology, operations and management staff of clients. Services provided by eFunds US: eFunds US was responsible for Customer Interface and customization of products and services as per dictates of Customer. Agreement/ contracts with customers were entered into by eFunds US. All risks and responsibilities for performance of contracts at all times were of eFunds US only. Services provided by eFunds India: eFunds US subcontracted part of its responsibilities under professional services contract with some of its customers to eFunds India which involve 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 44 providers (who are customers of eFunds US), to check on status of applications made for new connections, change in billing plans etc. Note: Logica Global, independent company, had received order from Reserve Bank of India for development and implementation of certain software. part of this work was subcontracted to eFunds India directly by Logica Global. Appellant had nothing to do with this contract. 16. This report would show that no part of main business and revenue earning activity of two American companies is carried on through fixed business place in India which has been put at their disposal. It is clear from above that Indian company only renders support services which enable assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to fixed place PE and High Court judgment is, therefore, correct on this score. 17. Insofar as service PE is concerned, requirement of Article 5(2)(l) of DTAA is that enterprise must furnish services within India through employees or other personnel. In this regard, this Court has held, in Morgan Stanley (supra), as follows: 45 16. Article 5(2)(l) of DTAA applies in cases where MNE furnishes services within India and those services are furnished through its employees. In present case we are concerned with two activities, namely, stewardship activities and work to be performed by deputationists in India as employees of MSAS. customer like MSCo who has worldwide operations is entitled to insist on quality control and confidentiality from service provider. For example in case of software PE server stores data which may require confidentiality. service provider may also be required to act according to quality control specifications imposed by its customer. It may be required to maintain confidentiality. Stewardship activities involve briefing of MSAS staff to ensure that output meets requirements of MSCo. These activities include monitoring of outsourcing operations at MSAS. object is to protect interest of MSCo. These stewards are not involved in day-to- day management or in any specific services to be undertaken by MSAS. stewardship activity is basically to protect interest of customer. In present case as held hereinabove MSAS is service PE. It is in sense service provider. customer is entitled to protect its interest both in terms of confidentiality and in terms of quality control. In such case it cannot be said that MSCo has been rendering services to MSAS. In our view MSCo is merely protecting its own interests in competitive world by ensuring quality and confidentiality of MSAS services. We do not agree with ruling of AAR that stewardship activity would fall under Article 5(2)(l). To this extent we find 46 merit in civil appeal filed by appellant (MSCo) and accordingly its appeal to that extent stands partly allowed. 17. As regards question of deputation, we are of view that employee of MSCo when deputed to MSAS does not become employee of MSAS. deputationist has lien on his employment with MSCo. As long as lien remains with MSCo said company retains control over deputationist s terms and employment. concept of service PE finds place in UN Convention. It is constituted if multinational enterprise renders services through its employees in India provided services are rendered for specified period. In this case, it extends to two years on request of MSAS. It is important to note that where activities of multinational enterprise entails it being responsible for work of deputationists and employees continue to be on payroll of multinational enterprise or they continue to have their lien on their jobs with multinational enterprise, service PE can emerge. 18. Applying above tests to facts of this case we find that on request/requisition from MSAS applicant deputes its staff. request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs expertise of staff of MSCo. In such circumstances, generally, MSAS makes request to MSCo. deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to 47 India. He lends his experience to MSAS in India as employee of MSCo as he retains his lien and in that sense there is service PE (MSAS) under Article 5(2)(l). We find no infirmity in ruling of ARR on this aspect. In above situation, MSCo is rendering services through its employees to MSAS. Therefore, Department is right in its contention that under above situation there exists service PE in India (MSAS). Accordingly, civil appeal filed by Department stands partly allowed. (at pages 15-16) 18. It has already been seen that none of customers of assessees are located in India or have received any services in India. This being case, it is clear that very first ingredient contained in Article 5(2)(l) is not satisfied. However, learned Attorney General, relying upon paragraph 42.31 of OECD Commentary, has argued that services have to be furnished within India, which does not mean that they have to be furnished to customers in India. Para 42.31 of OECD Commentary reads as under: Whether or not relevant services are furnished to resident of state does not matter: what matters is that services are performed in State through individual present in that State. 48 19. Based upon said paragraph, Shri Venugopal has argued that in assessment year 2005-06, two employees of American firm were seconded in India and that, therefore, it is clear that management of American company through these employees has obviously taken place. High Court, in dealing with this contention, has found as follows: 62. appellants had pleaded before authorities and tribunal that prior to assessment year 2005-06 not even single employee of assessee ever visited India even for short period and in 2005-06, two employees of e-Fund were transferred to e-Fund India and that entire expenditure for these two employees were borne by e-Fund India. No employees were present in India after 2005-06. Presence of employees in India is relevant under Article 5(2)(l) but said employees should furnish services within contracting State. These services should not be mere stewardship services. Assessing Officer has recorded that employees were seconded to e-Fund India but functions they performed and whether they performed functions and reported to e-Fund Corp/associated enterprise was not known or ascertained. This was not correct way of determining and deciding whether service PE existed. Whether seconded employees were performing stewardship services or were directly involved with working operations was relevant. It is also not known whether services were performed related to services provided to associated enterprise in which case clause 5(2)(l)(ii) would be applicable. In said situation, 49 question of attribution of income etc. would also arise. 63. Two employees of e-Fund Corp were deputed to e-Fund India in assessment years 2005-06. case of assessee and e-Fund India is that they were deputed to look towards development of domestic work in India. Payment of these employees as per Revenue to extent of 25% was borne by e-Fund India and balance 75% was borne by e-Fund Corp. Assessing Officer on this basis has observed that this reduced cost base of e-Fund India as remuneration was paid by e- Fund Corp and said employees were at liberty to perform functions of e-Fund Corp even while working for e-Fund India. response of assessee as quoted in assessment order was that e-Fund India, apart from export activities had also domestic business in India. This was evident from return of income filed by e-Fund India where domestic income was computed separately as it was not eligible for deduction under Section 10A of Act. Copy of return was furnished. It was further stated that cost of personnel seconded in India was fully borne by e-Fund India i.e. 100% of salary paid to said employees seconded to India were debited to profit and loss accounts. 75% of salary component was paid abroad by e-Fund Corp but same was reimbursed by e-Fund India. This was in accordance with and permitted under Indian Exchange Control Regulations. It was further stated that Assessing Officer was wrong in assuming that two seconded employees were at liberty to function for e-Fund Corp while they were working for e-Fund India. seconded employees were working under control and supervision of e-Fund India. Assessing Officer thereupon has not commented on reply of assessee, though he has recorded comments in 50 respect of replies to other issues raised by him (see paragraph 7 of assessment order). aforesaid factual assertion made by assessee, therefore, was not negated or questioned by Assessing Officer. 20. We entirely agree with approach of High Court in this regard. Article 42.31 of OECD Commentary does not mean that services need not be rendered by foreign assessees in India. If any customer is rendered service in India, whether resident in India or outside India, service PE would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to other ground namely, that other personnel would cover personnel employed by Indian company as well, and that US companies through such personnel are furnishing services in India. This being case, it is clear that as very first part of Article 5(2)(l) is not attracted, question of going to any other part of 51 said Article does not arise. It is perhaps for this reason that assessing officer did not give any finding on this score. 21. Shri Ganesh has argued before us that agency PE aspect of case need not be gone into as it was given up before ITAT. He is right in this submission as no argument on this score is found before ITAT. However, for sake of completeness, it is only necessary to agree with High Court, that it has never been case of Revenue that e-Funds India was authorized to or exercised any authority to conclude contracts on behalf of US company, nor was any factual foundation laid to attract any of said clauses contained in Article 5(4) of DTAA. This aspect of case, therefore, need not detain us any further. 22. Shri Ganesh has referred to and relied upon order of Additional Taxation Commissioner, who is Transfer Pricing Officer. said order is dated 22nd February, 2006 and states as under: taxpayer company filed its return of income with ACIT Circle 11(1), New Delhi. reference was received from Assessing Officer to determine 52 arm s length price u/s 92CA(3) in respect of international transactions entered into by assessee during F.Y. 2002-03. In response to notice u/s 92CA, Shri Vijay Iyer, CA of S.R. Batliboi & Co. Chartered Accountants, authorized representative of assessee appeared form time to time. documentation prescribed under Rule 10D of Income Tax Rules was submitted and placed on record. taxpayer company is engaged in providing IT enabled services which include Back office services and Call centre services. It also has software design center for development of software for call centres. eFunds International (India) Pvt. Ltd. is wholly owned subsidiary of IDLX Holdings BV, Netherlands. IDLX is wholly owned subsidiary of eFunds Corp. major international transactions undertaken by assessee during year is given below: S.No Description of transaction Method Value (In Rs.) 1. Financial Shared Services TNMM 33.9 (Back Office) Cr. 2. Call Center Services (Shared TNMM 88.03 Service Centre) Cr. 3. Software Development TNMM 57.58 Cr. (Off-shore for call centres) 53 In addition to above assessee has also provided software development services to overseas eFunds group entities. international transactions undertaken by assessee were examined vis-a-vis method applied by assessee for arriving at arm s length price. assessee has relied on Transactional Net Margin Method (TNMM) in respect of all major international transactions. After examination of documentation and discussion with authorized representative of assessee, no adverse inference is drawn in respect of Arm s Length Price (ALP) of international transactions, as declared by assessee in Form 3CEB, annexed to return of Income. Shri Ganesh is correct in stating that as arm s length principle has been satisfied in present case, no further profits would be attributable even if there exists PE in India. This was specifically held in Morgan Stanley (supra) as follows: 32. As regards determination of profits attributable to PE in India (MSAS) is concerned on basis of arm s length principle we have quoted Article 7(2) of DTAA. According to AAR where there is international transaction under which non-resident compensates PE at arm s length price, no further profits would be attributable in India. In this connection, AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 54 2004 also issued by CBDT. This is key question which arises for determination in these civil appeals. (at page 25) xxx xxx xxx 35. object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to PE in India. quantum of taxable income is to be determined in accordance with provisions of IT Act. All provisions of 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 IT Act (for example Sections 44-BB, 44-BBA, etc.). 36. Under impugned ruling delivered by AAR, remuneration to MSAS was justified by transfer pricing analysis and, therefore, no further income could be attributed to PE (MSAS). In other words, said ruling equates arm s length analysis (ALA) with attribution of profits. It holds that once transfer pricing analysis is undertaken, there is no further need to attribute profits to PE. impugned ruling is correct in principle insofar as associated enterprise, that also constitutes PE, has been remunerated on arm s length basis taking into account all risk-taking functions 55 of enterprise. In such cases nothing further would be left to be attributed to PE. situation would be different if transfer pricing analysis does not adequately reflect functions performed and risks assumed by enterprise. In such situation, there would be need to attribute profits to PE for those functions/risks that have not been considered. Therefore, in each case data placed by taxpayer has to be examined as to whether transfer pricing analysis placed by taxpayer is exhaustive of attribution of profits and that would depend on functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on basis of concept of economic nexus is important feature of attributable profits (profits attributable to PE). (at pages 27-28) 23. As large portion of Shri Venugopal s argument was in relation to MAP settlement in present case, it would be necessary to refer, in some detail, to documents produced on this account. 24. Resolution dated 23rd April, 2007 passed by competent authority of India, which was strongly relied upon by Shri Venugopal, is set out hereinbelow: 56 Resolution under Section 90 of Income Tax Act, 1961 read with Article 27 of Indo-USA Double Taxation Avoidance Agreement 1. Acting Director (International), Competent Authority of USA initiated Mutual Agreement Procedure in case of M/s eFunds Corporation and eFunds I.T. Solutions Inc. for previous year ending 31.03.2003 with Competent Authority of India under Double Taxation Avoidance Agreement vide their letter No.SE:LM:IN:T:2:JN dated 8.05.2006. Subsequently, vide letter dated 16.02.2007 Competent Authority of USA initiated Mutual Agreement Procedure for previous year ending 31.03.2004 in eFunds I.T. Solution Group Inc. Competent Authorities of both countries after having examined facts of case and issues involved have arrived at resolution in terms of Section 90 of Income Tax Act, 1961 read with Article 27 of Indo-USA Double Taxation Avoidance Agreement and Rule 44H of Income Tax Rules, 1962. 2. Competent Authorities of USA and India have reached agreement as follows with respect to tax assessment on M/s eFunds Corporation and eFunds IT Solutions Group Inc.:- Income will be attributed to Indian PEs based on ratio of certain developed and acquired tangible and intangible assets in India and outside India. Out of total assets for AY 2003-04, 10.48% of assets were located in India and accordingly 10.48% of income would be attributable to India. percentage attributable to India for AY ending 2005 was arrived at 11.11%. These percentages will be applied to base of consolidated gross income as reduced by income of subsidiary eFunds India Pvt. Ltd. already 57 reported in India. Thereafter, total income so attributed will be apportioned between eFunds and IT solutions in ratio of 85% (to eFunds) and 15% (to IT Solutions) for AY 2003-04 and 87% (to eFunds and 13% (to IT Solutions) for AY 2004-05. In view of above, income attributor, as agreed upon is given below:- A.Y. 2003-04A.Y. 2004-05 Figures in US Figures in $ million US $ million Apportionable base 25.12 30.71 income Percentage attributed 10.48% 11.11% to India Income attributed to 2.63 3.41 India Allocation between IT Solutions and eFunds IT Solutions eFunds 0.39 (15%) 0.45(13%) 2.24 (85%) 2.96(87%) Interest will be chargeable as per provisions of Income Tax Act, 1961. 3. Assessing Officer will give effect to this resolution in terms of clause 4 of Rule 44H of Income Tax Rules, 1962. 58 4. Appeals, if any, filed by both parties will be withdrawn. 25. However, Shri Ganesh stated that this was not end of matter as Department of Treasury in Washington, by letter dated 7th May, 2007, specifically stated, although we do not agree on technical merits that e-Funds and IT Solutions had PE in India, we reached mutual agreement with view to avoid double taxation . Equally same document states: Effect on Future Years: competent authority determination made herein is not binding on subsequent years. 26. To same effect are letters dated May 14, 2007 written by e-Funds Corp. to Deputy Director of International Tax Circle in India. Shri Ganesh has also referred to and relied upon paragraph 3.6 of OECD Manual on MAP Procedure, which reads as follows: 3.6. Competent Authority Agreements Competent authority agreements or resolutions are often case and time specific. They are not considered precedents for either taxpayer or tax administrations in regard to adjustments or issues relating to subsequent years or for 59 competent authority discussions on same issues for other taxpayers. In fact, letters exchanged between competent authorities to resolve case often state as much. This is because competent authorities have reached agreement that often takes into account facts of particular taxpayer, differences in provisions of tax law in each country, as well as effects of economic indicators on particular transactions at relevant time. Any review or adjustments of subsequent years by taxpayer or tax administration is best based upon particular circumstances, facts and documentary evidence existing for those years. 27. However, learned Attorney General relied upon paragraph 1.3.1 of OECD Manual and Best Practice No.3, in particular, which reads as under: Best Practice N 3: Principled approach to resolution of cases In resolution of MAP cases, competent authority should engage in discussions with other competent authorities in principled, fair, and objective manner, with each case being decided on its own merits and not by reference to any balance of results in other cases. To extent applicable, Commentary to OECD Model Tax Convention and OECD Transfer Pricing Guidelines are appropriate basis for development of principled approach. As part of principled approach to MAP cases, competent authorities should be consistent and reciprocal in positions they take and not change position on 60 issue from case to case, depending on which side of issue produces most revenue. Although principled approach is paramount, where agreement is not otherwise achievable, both competent authorities should look for appropriate opportunities for compromise in order to eliminate double taxation. To extent possible, competent authorities who face significant recurring issues in their bilateral relationship may wish to reach agreement on consistent treatment of such issues. perusal of above would show that competent authority should engage in discussion with other competent authority in principled, fair and objective manner, with each case being decided on its own merits. It is also specifically observed that where agreement is not otherwise achievable, then both parties should look for appropriate opportunities for compromise in order to eliminate double taxation on facts of case, even though principled approach is important. learned Attorney General also relied upon Best Practice No.1 of said OECD Manual, which requires publication of mutual agreements reached that may apply to general category of taxpayers which would then improve guidance for future. Best Practice No.1 has no application on facts 61 of present case, as agreement reached applies only to respondent companies, and not to any general category of taxpayers. It is clear, therefore, that Shri Ganesh is right in relying upon Article 3.6 of OECD Manual. It is very clear, therefore, that such agreement cannot be considered as precedent for subsequent years, and High Court s conclusion on this aspect is also correct. 28. learned Attorney General has also laid great emphasis on non-disclosure of documents and has relied upon long list of documents that assessees were asked to disclose and which they did not. From this, according to learned Attorney General, adverse inference should be drawn, and from this alone it should be inferred that PE of assessees, therefore, exists in India. We are afraid that this argument cannot be countenanced at this stage as it has never been raised before any of authorities below and has not been raised before High Court also. This being case, we do not think it necessary to get into this aspect of matter. 62 29. Having held in favour of assessees that no permanent establishment in India can possibly be said to exist on facts of present case, we do not deem it necessary to go into cross-appeals that were filed before High Court, which were dismissed by High Court agreeing with ITAT that calculation of ITAT would lead to nil taxation. This point would not arise in view of our decision on facts of present case. It is, therefore, unnecessary to go into this aspect of matter. 30. appeals are accordingly dismissed with no order as to costs. ......J. (R.F. Nariman) .. ...........J. (Sanjay Kishan Kaul) New Delhi; October 24, 2017. 63 Assistant Director of Income-tax-I, New Delhi v. E-Funds IT Solution Inc