The Delhi High Court reiterated that if transactions between an associated enterprise (that also constitutes a PE) and the foreign enterprise are remunerated on an arm’s length basis, no further profits would be left to be attributed to the PE. The Court also reiterated that since the appellant is a non-resident and tax is deductible at source under Section 195 of the Income Tax Act from payments made to it, there was no liability for payment of advance tax.
Relying on the Supreme Court’s decision in Mitsubishi Corporation [438 ITR 174] and DIT v. Morgan Stanley & Co. [292 ITR 416], the High Court upheld the findings of the ITAT that the provisions of Section 234B for levying interest for default in payment of advance tax are not applicable.
As the Transfer Pricing Officer (TPO) had already deleted the transfer pricing adjustments, the Court asserted that this deletion implied that the transactions were considered to be at arm’s length, and therefore, no further income could be attributed to a PE in India, even if one were deemed to exist.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that a fixed place Permanent Establishment (PE) requires a fixed place of business to be “at the disposal” of the foreign enterprise. It found the facts of the case to be pari materia with the Supreme Court’s ruling in eFunds IT Solution [399 ITR 34], where it was held that an Indian subsidiary does not become a PE merely because of cross-transactions or outsourcing of back-office operations.
The Bench noted that no part of India’s business premises was made available to the respondent for its use, and the core activities were managed from outside India. Citing Article 5(2)(l) of the DTAA, the Court confirmed the findings of the ITAT that a service PE requires an enterprise to furnish services “within India”. Since all of the respondents’ clients were located outside India and received services outside India, this condition was not met.
Further, the Bench found that the Revenue Department had failed to show any secondment of employees from the US entity to the Indian entity. The Bench also explained that an Agency PE is constituted if a person in India has and habitually exercises an authority to conclude contracts on behalf of the foreign enterprise.
Briefly, the respondent company, incorporated in Delaware, USA, is in the business of developing and deploying business process outsourcing solutions, including transaction processing and customer care services for clients in the USA and the UK. It entered into a service agreement with an Indian entity, which shall provide internet and voice-based customer care and backroom operation services to the respondent’s customers. The Indian entity invoices the respondent at pre-determined hourly rates for these services, and the respondent, in turn, raises invoices on the end customers.
The AO held that the respondent had established a Permanent Establishment (PE) in India under Article 5 of the India-USA Double Taxation Avoidance Agreement (DTAA), opining that the entire contract performance was undertaken in India, yet the respondent retained a substantial portion of the revenue. Further, marketing was allegedly done by employees of the Indian entity, but the major portion of profits was retained by the respondent.
The AO’s opinion was based on the fact that the facilities in India were deemed to be at the disposal of the respondent, and the respondent had authority to conclude contracts on behalf of the Indian entity. On appeal, the ITAT overturned the AO’s decision, observing that the respondent did not have a PE in India.
Appearances:
Senior Advocate Puneet Rai, along with Advocates Ashvini Kumar, Gibran, and Rishabh Nangia, for the Appellant/ Taxpayer
Senior Advocates Ajay Vohra and Vipul Agrawal, along with Advocates Neeraj Jain, Tavish Verma, Sakshi Shairwal, Akshat Singh, and Harshita Kotru, for the Respondent
