Supreme Court of India
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHIversusMIS. E-FUNDS IT SOLUTION INC.
- Citation
- 2017 INSC 1048
- Decided
- 24 October 2017
- Disposal
- Dismissed
Holding
The US companies did not have a permanent establishment in India; the Revenue failed to discharge the burden of proof, and the High Court’s findings are affirmed.
Summary
The Supreme Court examined whether two US‑incorporated companies, eFunds Corp. and eFunds IT Solutions Inc., had a permanent establishment (PE) in India under the India‑US Double Taxation Avoidance Agreement (DTAA). The Revenue argued that a fixed place of business, a service PE, and an agency PE existed through the Indian subsidiary eFunds India, while the assessees contended that only support services were rendered from India and no PE was created. The Court held that the burden of proving a PE lies on the Revenue and found no specific finding of a fixed place, service, or agency PE. It affirmed the Delhi High Court’s conclusion that the US companies did not have a PE in India, and that the MAP settlement was not binding for subsequent years. Consequently, the appeals of the Revenue were dismissed.
Issues considered
- The existence of a fixed place of business PE of the US companies in India under Article 5(1) of the DTAA.
- The existence of a service PE under Article 5(2)(1) of the DTAA.
- The existence of an agency PE under Article 5(4) of the DTAA.
- The allocation of burden of proof for establishing a PE.
- The effect of the Mutual Agreement Procedure (MAP) settlement on future assessment years.
- The relevance of adverse inference based on non‑disclosure of documents.
Legislation cited
- Income Tax Act, 1961s. 90, s. 92CA(3)
- Income Tax Rules, 1962s. 44H
- India‑US Double Taxation Avoidance Agreement, 1990s. Article 27, s. Article 5, s. Article 7
Subjects
Permanent establishmentDouble Taxation Avoidance AgreementArticle 5 DTAAFixed place of businessService PEAgency PEBurden of proofMutual Agreement ProcedureTransfer pricingArm's length principleInternational taxation
Judgment
[2017] 10 S.C.R. 157
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI A
v.
MIS. E-FUNDS IT SOLUTION INC.
(Civil Appeal No. 6082 of 2015)
OCTOBER 24, 2017 B
[R. F. NARIMAN AND SANJAY KISHAN KAUL, JJ.]
Income Tax Act, 1961:
Business _income of companies incorporated in US - Taxability
of - Permanent establishment (PE) - The Income Tax Act, in C
particular s.90 thereof, does not speak of the concept of a PE -
This is a creation only of the DTAA - By virtue of Art. 7( 1) of the
DTAA, the business income _of companies which are incorporated
in the US will be taxable only in the US, unless it is found that they
were PEs in India, in which event their business income, to the extent
D
to which it is attributable to such PEs, would be taxable in India -
There must exist a fixed place of business in India, which is at the
disposal of the US companies, through which they carry on "their
own business - ln the instant case, there is no specific finding in
the assessment order or the appellate orders that applying the said
tests, any fixed place of business was put at the disposal of these E
companies - No part of the main business and revenue earning
activity of the two American companies was carried on through a
fixed business place in India which has been put at their disposal -
The Indian company only renders support services which enable
the assessees in tum to render services to their clients abroad -
F
This outsourcing of work to India would not give rise to a fixed
place PE - Insofar as a service PE is concerned, the requirement of
Art.5(2)(1) of the DTAA is that an enterprise must furnish services
"within India" through employees or other personnel - None of the
customers of the assessees are located in India or have received
any services in India - Therefore, the assessing officer, CIT (Appeals) G
and the lTAT essentially adopted a fundamentally erroneous
approach in saying that they were contracting with a 100%
subsidiary and were outsourcing business to such subsidiary, which
resulted in the creation of a PE - Intelference wit!! the judgmellt of
H
157
158 SUPREME COURT REPORTS f2017] 10 S.C.R.
A High Court not called for - Double Taxation Avoidance Agreement
of 1990 - Arts.5, 7.
Foreign assessee - Burden to prove PE - Held: The burden
of proving the fact that a foreign assessee has a PE in India and
must, therefore, suffer tax from the business generated from such
B PE is initially on the Revenue.
Permanent establishment (PE) - Meaning of - Distinct types
of PEs - Discussed - Double Taxation Avoidance Agreement of
1990 - Art.5.
Dismissing the appeals, the Court
c
HELD: 1. Article 5 of the DTAA provides for three distinct
types of PEs. They are business PE under Articles 5(1) and 5(2)(a)
to 5(2)(k); service PE under Article 5(2)(1) aPd agency PE under
Article 5(4). Specific and detailed criteria arc set out in the said
provisions in order to fulfill the conditions of these PEs existing
D in India. The burden of proving the fact that a foreign assessee
has a PE in India and must, therefore, suffer tax from the business
generated from such PE is initially on the Revenue. Under Article
5(1), a PE means a fixed place of business through which the
business of an enterprise is wholly or partly carried on. [Paras
E 10, 11] [174-D-E, F]
2. Reiiance placed by the Rcvenu.e on the United States
Securities and Exehange Commission Form lOK Report, as
correctly pointed out by the High Court, is also misplaced. It is
clear that the report speaks of the e-Funds group of companies
F worldwide as a whole, which is evident not only from going
through the said report, but also from the consolidated financial
statements appended to the report, which show the assets of the
group worldwicJe. This report would ~how that no part of the
main business and ·revenue earning activity of the two American
companies is carried on through a· fixed business place in India
G which has been put at their disposal. It is clear that the Indian
company only renders support services which enable the
assessees in turn to render services to their clients abroad. This
outsourcing of work to India would not give rise to a fixed place
PE and the High Court judgment is, therefore, correct on this
H score. [Paras 14, 16] [181-D-E; 187-D-E]
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 159
MIS. E-FUNDS IT SOLUTION INC.
3. Insofar as a service PE is eoncerned, the requirement A
of Article 5(2)(1) of the DTAA is that an enterprise must furnish
services "within India" through employees or other personnel.
None of the customers of the assessees are located in India or
have received any services in India. All its customers receive
services only in locations outside India. Only auxiliary operations B
that facilitate such services are carried out in India. It is clear
that as the very first part of Article 5(2)(1) is not attracted, the
question of going to any other part of the said Article does not
arise. It is perhaps for this reason that the assessing officer did
not give any finding on this score. [Paras 17, 18, 20][187-F; 189-
D; 191-E-F] C
4. It was never the case of Revenue that e-Funds India
was authorized to or exercised any authority to conclude contracts
on behalf of the us company, nor was any factual foundation laid
to attract any of the said clauses contained in Article 5(4) of the
DTAA. As the arm's length principle has been satisfied in the D
present case, no further profits would be attributable even if there
exists a PE in India. [Paras 21, 22] [191-G; 193-B-C]
5. A perusal of Paragraph 1.3.1 of the OECD Manual and
Best Practice No.3 would show that a competent authority should
engage in discussion with the other competent authority in a E
principled, fair and objective manner, with each case being decided
on its own merits. It was also specifically observed that where
.an agreement is not otherwise achievable, then both parties
should look for appropriate opportunities for compromise in order
to eliminate double taxation on the facts of the case, even though
a principled approach is important. The Attorney General also F
relied upon Best Practice No.1 of the said OECD Manual, which
requires the publication of mutual agreements reached that may
apply to a general category of taxpayers which would then improve
guidance for the future. Best Practice No.1 has no application
on the facts of the present case, as the agreement reached applies G
only to the respondent companies, and not to any general category
of taxpayers. It is clear, therefore, that reliance placed upon
Article 3.6 of the OECD Manual was correct. It is very clear,
therefore, that such agreement cannot be considered as a
precedent for subsequent years, and the High Court's conclusion
H
160 SUPREME COURT REPORTS ['.W 17] I 0 S.C.R.
A on this aspect is also correct. [Para 27] [197-E-G]
Formula One World Championship Ltd. v. Commissioner
of Income Tax, lnternationai Taxation-], Delhi and
others 2017 (6) JT 276 : 2017 (5) SCALE 228; D!T
v. Morgan Stanley (2007) 7 SCC 1 : [2007] 8 SCR 52 -
B referred to.
Bollinger v. Commissioner, 108 S.Ct. 1173 - referred
to.
Case Law Reference
C 2017 (6) JT 276 referred to Para3
[2007] 8 SCR 52 referred to Para 3
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6082
of2015.
From the Judgment and Order dated 05 .02.2014 of the High Court
D of Delhi at New Delhi in I. T. A. No. 1201 of 2011
WITH
C.A.Nos.6087,6102,6084,6100,6094,6083,6096,6089,6104,
6088,6091,6103,6093,6085,6090,6095,6099,6092,6101,60970f
2015
E C. A. No. 2962 of2016
C. A. No. 16958 of 2017
K. K. Veuugcpal, AG, K. Radhakrishnan, Y. P. Adhyaru, Sr. Ad vs.,
D. L. Chidananda, Ms. Niranjana Singh, Rupesh Kumar, Arijit Prasad,
Parvesh Thakur, Rohit Bhat, Ms. Charanya L., Ms. Anil Katiyar, Ad vs.
F for the Appellant.
S. Ganesh, Arvind P. Datar, Sr. Advs., S. Kumaran, Anand
Sukumar, Bhupesh Kumar Pathak, Ms. Mecra Mathur, Ajay Vohra,
Bhargav? V. Desai, Akshat Malpani. Advs. for the Respondents .
..
The Judgment of the Court was delivered by
G
R. F. NARIMAN, J. Leave granted.
1. These appeals are from a judgment of the Delhi High Court
· disposing off several appeals and cross appeals. They relate to two
American Companies· which are the assessees in the present case,
H namely, e-Funds Corporation, USA (relating to assessment years 2000-
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 161
· MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
01 to 2002-03 and 2004-05 to 2007-08) and e-Funds IT Solutions Group A
Inc., USA (relating to assessment years 2b00-01 to 2002-03 and 2005-
06 to 2007-08). The appeals from the Income Tax Appellate Tribunal
(!TAT) by the assessees were allowed by the High Court, whereas cross-
appeals by the department were rejected. After framing several
substantial questions of law, the High Court narrated the undisputed facts
B
as follows:
"6. Undisputed facts in brief may be first noticed. The assessees
are companies incorporated in United States of America (USA,
for short) and were residents of the said country. They were
assessed and have paid taxes on their global income in USA. e-
Fund Corp. was the holding company having almost I OO'Yo shares C
in IDLX Corporation, another company incorporated in USA.
IDLX Corporation held almost l 00% shares in IDLX International
BV, incorporated in Netherlands and later in turn held almost
100% shares in IDLX Holding BV, which was a subsidiary again
incorporated in Netherlands. IDLX Holding BV was almost a D
I 00% shareholder of e-Funds International India Private Limited,
a company incorporated and resident of India (e-Fund.
International India Private Limited has been described as 'e-
Fund India'). IDLX International BV was also the parent/holding
company having almost 100% shares in e-Fund Inc., which as
noticed above, was a company incorporated in USA. E
7. Both e-Fund Inc. and e-Fund Corp. have entered into
international transactions withe-Fund India. The details of these
transactions have to be examined in depth and have to be referred
below. e-Fund India being a domestic company and resident in
India was taxed on the income earned in India as well as its F
global income in accordance with the provisions of the Act. The
international transactions between the asses.sees and e-Fund India
and the income of e-Fund India, it is accepted, were made subject
matter of arms length pricing adjudication by the Transfer Pricing
Officer (TPO, for short) and the Assessing Officer (AO, for G
short) in the returns of income filed bye-Fund India. We are not
primarily concerned with the merits of the computation of income
declared and assessed in the hands of e-Fund India in the present
appeals, though the factum that e-Fund India was assessed to
tax on its global income as per law or on arms length pricing in
H
162 SUPREME COURT REPORTS . [2017] 10 S.C.R.
A relation to associated transactions and the basis of the said
computation of income earned bye-Fund India, as noticed below,
is a relevant and an important. fact. Revenue has not disputed
the said legal position. It is the contention of the Revenue that
income of the two assessees were attributable to India because
the two assessees had PE in India and should be taxed in India,
B
irrespective of whether the said assessees had paid taxes in
USA. Income earned and taxed in the hands of e-Fund India
was different from the income attributable to the two assessees.
Thus the balance or differential amount, i.e., income attributable
to the two assessees, which was not included in income earned
c and taxed in the hands of e-Fund India, should be taxed in India.
8. As a principle what is stated and submitted by the Revenue
cannot be contested and in fact not contested by the assessees
as it is a principle applicable to international taxation. A foreign
or a non-resident company can be taxed in the country where it
D has a subsidiary, which is also a PE on the income attributable to
the said PE, even ifthe subsidiary (in the present case of e-Fund
India) is being taxed in the said.country. The principle being that
subsidiary being an independent and a distinct entity is taxed for
its income, whereas the foreign entity, i.e., holding company is
taxed for the income earned by the said independent entity
E attributable to the PE in the country where subsidiary is situated.
The income of the subsidiary is not taxed in the hands of the
non-resident principal and vice-versa. Thus, there is no double
taxation in the hands of the holding company as income of the
subsidiary is not taxed as income of foreign holding assessee.
F The principle is that a subsidiary constitutes an independent legal
entity for the purpose of taxation."
2. The assessing authority decided that the assessees had a
permanent establishment (hereinafter referred to as PE) as they had a
fixed place where they carried on their own business in Delhi, and that,
G consequently, Article 5 of the India U.S. Double Taxation Avoidance
Agreement of 1990 (hereinafter referred to as DTAA) was attracted.
Consequently, the assessees were liable to pay tax in respect of what
they earned from the aforesaid fixed place PE in India. The CIT
(Appeals) dismissed the appeals of the assessees holding that Article 5
was attracted, not only because there was a fixed place where the
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 163
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
assessees carried on their business, but also because they were "service A
PEs" and "agency PEs" under Article 5. In an appeal to the ITAT, the
ITAT held that the CIT (Appeals) was right in holding that a "fixed place
PE" and "service PE" had been made out under Article 5, but said
nothing about the "agency PE" as that was not argued by the Revenue
before the ITAT. However, the ITAT, on a calculation formula different B
from that of the CIT (Appeals), arrived at a nil figure of income for all
the relevant assessment years. The appeal of the assessees to the High
Court proved successful and the High Court, by an elaborate judgment,
has set aside the findings of all the authorities referred to above, and
further dismissed the cross-appeals of the Revenue. Consequently, the
Revenue is before us in these appeals. C
3. ·The learned Attorney General, Shri K.K. Venugopal, has argued
before us that, under Article 5(1) of the DTAA, a fixed place PE-has
been made out on the facts of these cases, ana relie~ heavily upon the
United States Securities and Exchange Commission Form 1OK of e-
Funds Corp. dated 31" March, 2003. According to the learned Attorney D
General:
• Most of the employees are in India (In fact, the High Court
records that 40% of the employees of the entire group are in India).
• eFunds Corp has call centers and software development centers
only in India. E
• eFunds Corp is essentially doing marketing work only and its
contracts with clients ·are assigned, or sub-contracted to eFunds
India.
• The master services agreement between the American and the F
Indian entity gives complete control to the American entity in regard
to personnel employed by the Indian entity.
• It is only through the proprietary database and software of eFunds
Corp, that eFunds India carries out its functions for eFunds Corp
(The High Court records that the software, intangible data etc is G
provided free of cost and then states that this is irrelevant).
• The Corporate office of eFunds India houses an 'International
Division' comprising the President's office and a sales team servicing
EFI and eFumb group entities in the·United Kingdom, South East
Asia, Australia and Venezuela. The President's office primarily
H
164 SUPREME COURT REPORTS [2017] IO S.C.R.
A oversees operations of eFunds India and eFunds group entities
overseas. The sales team undertakes marketing efforts for affiliate
entities also.
• The CIT(A) has referred to the Transfer Pricing Report which
says that eFunds India provides management support and marketing
B support services to eFunds Corp group companies outside India.
Regarding supervision of personnel rendering the services, the TP
Report states as follows:
"The President's office manages the operations of eFunds
India and eFunds group entities in UK and Australia and
c accordingly, employees of these entities report to the
President. The President's overall reporting is to EFC.
Though the personnel rendering marketing services are
employees of EFT, they report to overseas gmup entities to
the extent that they are engaged in rendering services to
D such entities."
Applying the above facts, it is submitted that the assessees satisfy the
requirements of a fixed place PE. The Supreme Court in the recent
judgment in Formula One World Championship Ltd. v.
Commissioner of Income Tax, International Taxation-3, Delhi and
E others, (2017) SCC Online SC 474 has held that "it universally accepted
that for ascertaining whether there is a fixed place or not, PE must have
three characteristics: stability, productivity and dependence. Further,
fixed place of business connotes existence of a physical location which
is at the disposal of the enterprise through which the business is carried
on." It was further held that "the physically located premises have to be
F 'at the disposal' of the enterprise" and that "the place will be treated as
'at the disposal' of the enterprise when the enterprise has right to use
the said place and has control thereupon. Consequently, he argued that
physically located premises are "at the disposal" of the assessees with
the degree of permanence required, namely, the entire year. In addition,
G he argued that the High Court was in error in holding that the place of
management PE under Article 5(2)(a) was prima facie made out, but
since the said provision had not been invoked and requires factual
determination, Revenue's argument was dismissed on this score. Further,
under Article 5(2)(1) of the DTAA, he argued that a service PE is clearly
made out on facts because:
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 165
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
• As per the consolidated Annual Report of eFunds Corp, most of A
the employees an~ in India. eFunds Corp has call centers and
software development centers only ih India.
• eFunds Corp is essentially doing marketing work only and its
contracts with clients are assigned, or sub-contracted to eFunds
India. B
•Regarding supervision of personnel rendering the services, the
TP Report states as follows:
"The President's office manages the operations of eFunds
India and eFunds group entities in UK and Australia and
accordingly, employees of these entities report to the C
President. The President's overall reporting is to EFC.
Though the personnel rendering marketing services are
employees of EFT, they report to overseas group entities to
the extent that they are engaged in rendering services to
such entities." - D
• The Master sub-contractor agreement bP;tween eFunds Corp and
eFunds India discussed in the CIT(A)'s order provides in clause
1.1 (a) as follows:
"Subcontractors personnel assigned to work with eFunds. E
TT or Customers located in the United States shall be directed
by eFunds TT or by Subcontractors supervisor acting at the
direction of eFunds TT. ln the event Subcontractors personnel
are assigned to perform such services in India, the
Subcontractor shall supervise such work, acting at the
direction of eFunds TT. eFunds TT shall be the sole judge of F
pe1formance and capability of each of subcontractors
personnel and may request the removal of one or more of
Subcontractors personnel from a project covered by any
statement of work as follows."
• It is submitted that the personnel engaged in providing these G
services were ostensibly the employees of eFunds India but were
de facto working under the control ana supervision of eFunds Corp.
In this regard, reference was made to Para 17 of the judgment in
DIT v. Morgan Stanley (2007) 7 SCC 1, where the Court held:
H
166 SUPREME COURT REPORTS [2017] 10 S.C.R.
A "17 ..... .It is important to note that where the activities of the
multinational enterprise entails it being responsible for the work
of deputationists and the employees continue to be on the payroll
of the multinational enterprise or they continue to have their
lien on their jobs with tire mu.ltinational enterprise. a service
PE can emerge."
B
• Furthermore, the AO in the 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. The activities of the
seconded employees go beyond mere 'stewardship activities' in
c terms of Morgan Stanley.
• The tem1 'Other Personnel' has to be seen in the context of the
facts of this case which show that eFunds India was not an
independent subsidiary.
D Further, he also argued that a dependent agent PE was made out under
Articles 5(4) and 5(5), there being a concurrent finding of facts of the
CIT (Appeals) and !TAT in this regard. Also, according to the learned
Attorney General, since the assessees failed to furnish information when
sought for, an adverse inference was sought to be drawn against them
and that, therefore, it is clear that once this inference is drawn, the burden
E shifts on to the assessees, which they will then have failed to discharge.
4. The learned Attorney General also relied heavily upon an
admission made under the mutual agreement procedure (MAP) under
Article 27 of the DTAA, in which, for the assessment year 2003-04 qua
e-Funds Corp., and assessment years 2003-04 and 2004-05 qua e-Funds
F IT Solution Inc., the assessees have admitted that income tax will be
attributable "to the Indian PEs" based on a certain ratio and that,
therefore, it is clear that this admission would continue to bind the
assessees in all subsequent years as there was no change in the factual
position.
G 5. As against this, Shri S. Ganesh, learned senior counsel for the
respondents, has argued that the tests for whether there is a fixed place
PE have now been settled by the judgment of this Court in Formula
One (supra), and that it is clear that for a fixed place PE, it must be
necessary that the said fixed place must be "at the disposal" of the
assessees, which means that the assessees must have a right to use the
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 167
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
premises for the purpose of their own business, which has not been A
made out in the facts of this case. He further argued that, on the facts
of this case, both the US companies as well as the Indian company pay
income tax, and the Transfer Pricing Officer by his order dated 22•d
February, 2006, has specifically held that whatever is paid under various
agreements between the US companies and the Indian company are on B
arm's length pricing and that, this being the case, even if a fixed place
PE is found, once arm's length price is paid, the US companies go out of
the dragnet oflndian taxation. He also adverted to Article 5(6) to state
that the mere fact that a 100% subsidiary may be carrying on business
in India does not by itself means that the holding company would have a
PE in India. Further, according to learned counsel, so far as the service C
PE is concerned, even the assessing officer did not find that such a PE
existed. According to him, under Article 5(2)(1), it is necessary that the
foreign enterprises must provide services to customers who are in India,
which is not Revenue's case as all their custoniers exist only outside
India. Further, according to the learned counsel, the entire personnel D
engaged in the Indian operations are employed only by the Indian
company and the fact that the US companies may indirectly control
such employees is only for purposes of protecting their own interest.
Ultimately, there are four businesses that the assessees are engaged in,
namely, ATM Management Services, Electronic Payment Management,
. Decision Support and Risk Management.and Global Outsourcing and E
Professional Services. Since all these businesses are carried on outside
India and the property 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,
the activities of e-Funds India are independent business activities on
F
which, as has been noticed by the High Court, independent profits are
made and income assessed to tax under the Income Tax Act. According
to the learned counsel, "agency PE" was never argued before the
assessing officer and even before the ITAT. Therefore, no factual
foundation for the same has been laid. Equally, according to the learned
counsel, the settlement procedure availed for the assessment years in G
question cannot be said to be binding for subsequent years as they were
without prejudice to the assessees' contention that they have no PE in
India. He also relied upon the OECD Commentary, paragraph 3.6 in
particular, to demonstrate that the so-called admissions made and relied
upon by the three authorities below were correctly overturned by the
H
168 SUPREME COURT REPORTS [2017) IO S.C.R.
A High Court. Learned counsel also stated that the ground of adverse
inference was never argued or put before any of the authorities below,
and the only place that it could be found is in the assessment order for
the year 2003-04, which order became non est as it was substituted by
the agreement entered into between the parties ending in withdrawal of
appeals before the CIT (Appeals). Thus, according to the learned counsel,
B
the view of the High Court is absolu_tely correct and should not be
interfered with. Learned counsel also argued that the cross-appeals of
the Revenue were correctly dismissed in that, even though the ITAT
decided the case in Jaw against the assessees, yet it found on facts,
differing from the calculation formula by the authorities below, that nil
c tax was payable. This is the only part of the ITAT judgment upheld by
the High Court, and should not, therefore, be disturbed in any case.
6. Before we deal with the submissions made on both sides, it is
necessary to first set out the statutory backgrounJ. This is contained in
Section 90 of the Income Tax Act, before it was amended in 200Q.
D Section 90( I) and 90(2) of the Income Tax Act, as it then stood, read as
under:
"Section 90. Agreement with foreign countries.-
I) The Central Government may enter into an agreement with
the Government of any country outside India-
E
(a) for the granting of relief iri 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 the
F corresponding Jaw in force in that country to promote mutual
economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this
Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion or
G
avoidance of income-tax chargeable under this Act or under the
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 the
corresponding law in force in that country,
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 169
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
and may, by notification in the Official Gazette, make such A
provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement
with the Government of any country outside India under sub-
section (l) for granting relief of tax, or as the case may be,
avoidance of double taxation, then, in relation to the assessee to B
whom such agreement applies, the provisions of this Act shall
apply to the extent they are more .beneficial to that assessee."
7. Under this provision, the India US Double Taxation Avoidance
Agreement of 1990 was made. We are directly concerned with Article
5 of the DTAA, which reads as under: c
"ARTICLE 5 - Permanent establishment -
1. For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business through which
the h11siness of an enterprise is wholly or partly carried on.
D
2. The term "permanent establishment" includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
E
(d) a factory;
(e) a workshop;
(t) a mine, an oil or gas well, a quarry, or any other place of
extraction of natural resources;
F
(g) a warehouse, in relation to a person providing storage facilities
for others;
(h) a farm, plantation or other place' where agriculture, forestry,
plantation or related activities are carried on;
(i) a store or premises used as a sales outlet; G
U) an installation or structure used for the exploration or
exploitation of natural resources, but only if so used for a period
of more than 120 days in any twelve-month period;
(k) a building site or construction, installation or assembly project
H
170 SUPREME COURT REPORTS [2017] I0 S.C.R.
A or supervisory activities in connection therewith, where such site,
project or activities (together with other such sites, projects or
activities, if any) continue for a period of more than 120 days in
any twelve-month period:
(I) the furnishing of services, other than included services as
B defined in Article 12 (Royalties and Fees for Included Services),
within a Contracting State by an enterprise through employees
or other personnel, but only if:
(i) activities of that nature continue within that State for a period
or periods aggregating more than 90 days within any twelve-
C month period; or
(ii) the services are performed within that State for a related
enterprise [within the meaning of paragraph 1 of Article 9
(Associated Enterprises)].
3. Notwithstanding the preceding provisions of this Article, the
D term "permanent establishment" shall be deemed not to include
any one or more of the following:
(a) the use of facilities solely for the purpose of storage, display,
or occasional delivery of goods or merchandise belonging to
the enterprise;
E
(b) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of storage,
display, or occasional <lei ivery;
(c) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of processing
F
by another enterprise;
(d) the maintenance of a fixed place of business solely for the
purpose of purchasing goods or merchandise, or of collecting
information, for the enterprise;
G (e) the maintenance of a fixed place of business solely for the
purpose of advertising, for the supply of information, for
scientific research or for other activities which have a
preparatory or auxiliary character, for the enterprise.
4. Notwithstanding the provisions of paragraphs I and 2, where
H a person-other than an agent of an independent sta::l~ t0 whom
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 171
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
paragraph 5 applies - is acting in a Contracting State on behalf A
of an enterprise of the other Contracting State, that enterprise
shall be deemed to have a permanent establishment in the first-
mentioned State, if:
(a) he has and habitually exercises in the first-mentioned State
an authority to conclude on behalf of the enterprise, unless his B
activities are limited to those mentioned in paragraph 3 which,
if exercised through a fixed place of business, would not make
that fixed place of business a permanent establishment under
the provisions of that paragraph;
(b) he has no such authority but habitually maintains in the c
first-mentioned State a stock of goods or merchandise from
which he regularly delivers goods or merchandise on behalf of
the enterprise, and some additional activities conducted in the
State on behalf of the enterprise have contributed to the sale
of the goods or merchandise; or
D
(c) he habitually secures orders in the first-mentioned State,
wholly or almost wholly for the enterprise.
5. An enterprise of a Contracting State shall not be deemed to
have a permanent establishment in the ot~er Contracting State
merely because it carries on business in that other State through E
a broker, general commission agent, or any other agent of an
independent status, provided that such persons are acting in the
ordinary course of their business. However, when the activities
of such an agent are devoted wholly or almost wholly on behalf
of that enterprise and the transactions between the agent and
the enterprise are not made under arm's length conditions, he F
shall not be considered an agent of independent status within the
meaning of this paragraph.
6. The fact that a company which is a resident of a Contracting
State controls or is controlled by a company which is a resident
of the other Contracting State, or which carries on business in G
that other State (whether through a permanent establishment or
otherwise), shall not of itself constitute either company a
permanent establishment of the other."
8. Article 7 has also been referred to, by which the profits of an
·enterprise of a contracting State may be taxed in the other State only to H
172 SUPREME COURT REPORTS [2017] IO S.C.R.
A the extent of so much of the business as is attributable to a permanent
establishment in the other State. Article 25 was referred to by the learned
Attorney General to counter an argument made by Shri Ganesh based
upon affidavits filed before this Court stating that if the assessees were
made to pay tax in India, there would be double taxation. Article 25
provides for relief from such double taxation, by which the United States
B
shall allow to a resident or citizen of the United States as a 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 -
c 1. Where a person considers that the actions of one or both of
the Contracting States result or will result for him in taxation not
in accordance with the provisions of this Convention, he may,
irrespective of the remedies provided by the domestic law of
those States, present his case to the competent authority of the
Contracting State of which he is a resident or national. This case
D must be presented within three years of the date of receipt of
notice of the action which gives rise to taxation not in accordance
with the Convention.
2. The competent authority shall endeavour, if the objection
appears to it to be justified and if it is not itself able to arrive at a
E satisfactory solution, to resolve the case by mutual agreement
with the competent authority of the other Contracting State, with
a view to the avoidance of taxation which is not in accordance
with the Convention. Any agreement reached shall be
implemented notwithstanding any time limits or other procedural
F limitations in the domestic law of the Contracting State;~·
3. The competent authorities of the Contracting States shall
endeavour to resolve by mutu.al agreement any difficulties or
doubts arising as to the interpretation or application of the
Convention. They may also consult together for the elimination
G of double taxation in cases not provided for in the Convention.
4. The competent authorities of the Contracting States may
communicate with each other directly for the purpose of reaching
an agreement in the sense of the preceding paragraphs. The
competent authorities, through consultations, shall develop
appropriate bilateral procedures, conditions, methods and
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 173
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
techniques for the implementation of the mutual agreement A
procedure provided for in this Article. In addition, a competent
authority may devise appropriate unilateral procedures, conditions,
methods and techniques to facilitate the above-mentioned bilateral
actions and the implementation of the mutual agreement
procedure."
B
9. This Article must be read with Rule 44H of the Income Tax
Rules, 1962, which reads as under:
"Action by the Competent Authority oflndia and procedure
for giving effect to the decision under the agreement . .
44H. (1) Where a reference has been received from the C
competent authority of a country outside India under any
agreement with that country with regard to any action taken by
any income-tax authority in India·, the Competent Authority in
India shall call for and examine the relevant records with a view
to give his response to the competent authority of the country D
outside India.
(2) The Competent Authority in India shall endeavour to arrive
at a resolution of the case in accordance with such agreement.
(3) The resolution arrived at under mutual agreement procedure,
in consultation with the competent authority of the country outside E
India, shall be com.municated, wherever necessary, to the Chief
Commissioner or the Director-General of Income-tax, as the
case may be, in writing.
(4) The effect to the resolution arrived at under mutual agreement
procedure shall be given by the Assessing Officer within ninety F
days of receipt of the same by the Chief Commissioner or the
Director-General of Income-tax, if the assessee,-
(i) gives his acceptance to the resolution taken under mutual
agreement procedure; and
G
(ii) withdraws his appeal, if any, pending on the issue which
was the subject matter for adjudication under mutual
agreement procedure.
(5) The amount of tax, interest or penalty already determined
shall be adjusted after incorporating the decision taken under
H
174 . SUPREME COURT REPORTS (2017] 10 S.C.R.
A mutual agreement procedure in the manner provided under the
Income-tax Act, 1961 (43 of 1961 ), or the rules made thereunder
·to the extent that they are not contrary to the resolution arrived
at.
Explanation.-For the purposes of rules 440 and 44H,
B "Competent Authority oflndia" shall mean an officer authorised
by the Central Government for the purposes of discharging the
functions as sud~."
10. The Income Tax Act, in particular Section 90 thereof, does
not speak of the concept of a PE. This is a creation only of the DTAA.
c By virtue of Article 7(1) of the DTAA. the business income of companies
which are incorporated in the US will be taxable only in the US, unless it
is found that they were PEs in India, in which event their business income,
to the extent to which it is attributable to such PEs, would be taxable in
India. Article 5 of the DTAA set out hereinabove provides for three
distinct types of PEs with which we are concerned in the present case:
D fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k);
service PE under Article 5(2)(1) and agency PE under Article 5(4).
Specific and detailed criteria are set out in the aforesaid provisions in
order to fulfill the conditions of these PEs existing in India. The burden
of proving the fact that a foreign assessee has a PE in India and must,
E therefore, suffer tax from the business generated from such PE is initially
on the Revtnue. With these prefatory remarks, let us analyse whether
the respondents ca!'! 1'e brought within any of the sub-clauses of Article
5.
11. Since the Revenue originally relied on fixed place of business
F PE, this will be tackled first. Under Article 5(1 ), a PE means a fixed
place of business through which the business of an enttrprise is wholly
or partly carried on. What is a "fixed place ofbusim:ss" is no longer res
integra. In Formula One (supra), this Court, after setting out Article 5
of the DTAA, held as follows:
0 "32. The principal test, in order to ascertain as to whether an
establishment has a fixed place of business or not, is that such
physically located premises have to be 'at the disposal' of the
enterprise. For this purpose, it is not necessary that the premises
are owr.ed or even rented by the enterprise. It will be sufficient
ifthe premises are put at the disposal of the enterprise. However,
H merely giving access to such a place to the enterprise for the
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 175
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
purposes of the project would not suffice. The place would be A
treated as 'at the disposal' of the enterprise when the enterprise
has right to use the said place and has control thereupon.
xxx xxx xxx
34. According to Philip Baker, the aforesaid illustrations confirm
that the fixed place of business need not be owned or leased by B
the foreign enterprise, provided that is at the disposal of the
enterprise in the sense of having some right to use the premises
for the purposes of its business and not solely for the purposes
of the project undertaken on behalf of the owner of the premises.
35. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel c
has remarked that insofar as the term 'business' is concerned,
it is broad, vague and of little relevance for the PE definition.
According to him, the crucial element is the term 'place'.
Importance of the term 'place' .is explained by him in the following
manner: D
"In conjunction with the attribute 'fixed', the requirement
of a place reflects the strong link between the land and the
taxing powers of the State. This territorial link serves as
the basis not only for the distributive rules which are tied to
the existence of PE but also for a considerable number of E
other distributive rules and, above all, for the assignment of
a person to either Contracting State on the basis of residence
(Article I, read in conjunction with Article 4 OECD and
UN MC)."
36. We would also like to extract below the definition to the
F
expression 'place' by Vogel, which is as under:
"A place is a certain amount of space within the soil or on
the soil. This understanding of place as a three-dimensional
zone rather than a single point on the earth can be derive·d
from the French Version ('installation fixe') as well as the G
term 'establishment'. As a rule, this zone is based on a
certain area in, on, or above the surface of the earth. Rooms
or technical equipment above the soil may qualify as a PE
only if they are fixed on the soil. This requirement, however,
stems from the term 'fixed' rather than the term 'place',
given that a place (or space) does not necessari:y consist H
176 SUPREME COURT REPORTS [2017] 10 S.C.R.
A of a piece ofland. On the contrary, the term 'establishment'
makes clear that it is not the soil as such which is the PE
but that the PE is constituted by a tangible facility as distinct
from the soil. This is particularly evident from the French
version of Article 5(1) OECD MC which uses the term
'installation' instead of 'place'.
B
The term 'place' is used to define the term 'establishment'.
Therdc~e. 'place' includes all tangible assets used for
carrying on the business, but one such tangible asset can
be sufficient. The characterization of such assets under
private law as real property rather than personal property
c (in common law couniries) or immovable rather than movable
property (in civil law countries) is not authoritative. It is
rather the context (including, above all, the terms 'fixed'/
'fixe'), as well as the object and purpost of Article 5 OECD
and UN MC itself, in the light of which the term 'place'
D needs to be interpreted. This approach, which follows from
the general rules on treaty interpretation, gives a certain
leeway for including movable property in the understanding
of 'place' and, therefore, we assume a PE once such
property has been 'fixed' to the soil.
E For example, a work bench in a caravan, restaurants on
permanently anchored river boats, steady oil rigs, or a
tr::nsformator or generator on board a former railway wagon
qualify as places (and may also be 'fixed').
In contrast, purely intangible property cannot qualify in any
F case. In particular, rights such as participations in a
corporation, claims, bundles of claims (like bank accounts),
any other type of intangible proverty (patents, software,
trademarks etc.) or intangible economic assets (a regular
clientele or the goodwill of an enterprise) do not in themselves
constitute a PE. They can only form part of PE constituted
G otherwise. Likewise, an internet website (being a
combination of software and other electronic data) does
not constitute tangible property and, therefore, does not
constitute a PE.
Neither does the mere incorporation of a company in a
H Contracting State in itself constitute a PE of the company
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 177
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
in that State. Where a company has its seat, according to A
its by-laws and/or registration, in State A while the POEM
is situated in State B, this company will usually be liable to
tax on the basis of its worldwide income in both Contracting
States under their respective· domestic tax law. U.nder the
A-B treaty, however, the company will be regarded as a B
resident of State B only (Article 4(3) OECD and UN MC).
In the absence of both actual facilities and a dependent
agent in State A, income of this company will be taxable
only in State B under the 1" sentence of Article 7(1) OECD
and UNMC.
There is no minimum size of the piece of land. Where the C
qualifying business activities consist (in full or in part) of
human activities by the taxpayer, his employees or
representatives, the mere space needed for the physical
presence of these individuals is not sufficient (if it were
sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN D
MC and the notion of agent PEs were superfluous). This
can be illustrated by the example of a salesman who regularly
visits a major customer to take orders, and conducts meetings
in the purchasing director's office. The OECD MC Comm.
has convincingly denied the existence of a PE, based on
the implicit understanding that the relevant geographical unit E
is not just the chair where the salesman sits, but the entire
office of the customer, and the office is not at the disposal
of the enterprise for which the salesman is working."
37. Taking cue from the word 'through' in the Article, Vogel
has also emphasised that the place of business qualifies only if F
the place is 'at the disposal' of the enterprise. According to
him, the enterprise will not be able to use the place of business
as an instrument for carrying on its business unless it controls
the place of business to a considerable extent. He hastens to
add that there are no absolute standards for the modalities and G
intensity of control. Rather, the standards depend on the type of
business activity at issue. According to him, 'disposal' is the
power (or a certain fraction thereof) to use the place of business
directly. Some of the instances given by Vogel in this behalf, of
relative standards of control, are as under:
H
178 SUPREME COURT REPORTS [2017] I0 S.C.R.
A "The degree of control depends on the type of business
activity that the taxpayer carries on. It is therefore not
necessary that the taxpayer is able to exclude others from
entering or using the POB.
The painter example in the OECD MC Comm. (no. 4.5
B OECD MC Comm. on Article 5) (however questionable it
might be with regard to the functional integration test)
suggests that the type and extent of control need not exceed
the level of what is required for the specific type of activity
which is determined by the concrete business.
c By contrast, in the case of a self-employed engineer who
had free access to his customer's premises to perform the
services required by his contract, the Canadian Federal
Court of Appeal ruled that the engineer had no control
because he had access only during the customer's regular
office hours and was not entitled to carry on businesses of
D his own on the premises.
Similarly, a Special Bench of Delhi's Income Tax Appellate
Tribunal denied the existence of a PE in the case
of Ericsson. The Tribunal held that it was not sufficient
that Ericsson's employees had access to the premises of
E Indian mobile phone providers to deliver the hardware,
software and know-how required for operating a network.
By contrast, in the case of a competing enterprise, the
Bench did assume an Indian PE because the employees of
that enterprise (unlike Ericsson's) had exercised other
F businesses of their employer.
The OECD view can hardly be reconciled with the two
court cases. All three examples do indeed shed some light
onto the method how the relative standards for the control
threshold should be designed. While the OECD MC Comm.
G
suggests that it is sufficient to require not more than the
type and extent of control necessary for the specific business
activity which the taxpayer wants to exercise in the source
State, the Canadian and Indian decisions advocate for stricter
standards for the control threshold.
The OECD MC shows a paramount tendency (though no
H
r· r
ASSISTANT,DIRECTOR OF INCOME TAX-I, NEW DELHI v, 179
M/S, E-FUNDS IT SOLUTION INC [R, E NA.RIMAN, J,]
strict rule) that PEs should be treated like subsidiaries (cf, A
Article 24(3) OECD and UN MC), and that facilities of a
subsidiary would rarely been unusable outside the office
hours of one of its customers (i.e. a third person), the view
of the two courts is still more convincing,
Along these lines, a POB will usually exist only where the B
taxpayer is.free to use the POB:
- at any time of his own choice;
- for work relating to more than one customer; and
- for his internal administrative and bureaucratic work. c
In all, the taxpayer will usually be regarded as controlling
the POB only wher-e he cai:i employ it at his discretion.
This does not imply that the standards of the control test
should not be flexible and adaptive. Generally, the less
invasive the activities are, and the more they allow a parallel D
use of the same POB by other persons, the lower are the
requirements under the control test. There are, however, a
number of traditional PEs which by their nature require an
exclusive use of the POB by only one taxpayer and/or his
personnel. A small workshop (cf. Article 5(2)(e) OECD
and UN MC) of I0 or 12 square meters can hardly be used E
by more than one person. The same holds true for a room
where the taxpayer runs a noisy machine."
38. OECD commentary on Model Tax Convention mentions that
a general definition of the term 'PE' brings out its essential
characteristics, i.e. a distinct "situs", a "fixed place ofbusiness". F
This definition, therefore, contains the following conditions:
- the existence of a "place of business", i.e. a 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 a distinct place with a certain degree of permanence; G
- the carrying on of the business of the enterprise through this
fixed place of business. This means usually that persons who, in
one way or another, are dependent on the enterprise (personnel)
conduct the business of the enterprise in the State in which the
fixed place is situated." H
180 SUPREME COURT REPORTS [2017] JO S.C.R.
A 12. Thus, it is clear that there must exist a fixed place of business
in India, which is at the disposal of the US companies, through which
they carry on their own business. There is, in fact, no specific finding in
the assessment order or the appellate orders that applying the aforesaid
tests, any fixed place of business has been put at the disposal of these
companies. The assessing officer, CIT (Appeals) and the ITAT have
B
essentially adopted a fundamentally erroneous approach in saying that
they were contracting with a 100% subsidiary and were outsourcing
business to such subsidiary, which resulted in the creation of a PE. The
High Court has dealt with this aspect in some detail in which it held:
"49. The Assessing Officer, Commissioner (Appeals) and the
c tribunal have primarily relied upon the close association between
e-Fund India and the two assessees and applied functions
performed, assets used and risk assumed, criteria to determine
whether or not the assessee has fixed place of business. This is
not a proper and appropriate test to determine location PE. The
D fixed place of business PE test is different. Therefore, the fact
that e-Fund India provides various services to the assessee and
was dependent for its earning upon the two assessees is not the
relevant test to determine and decide location PE. The allegation
that e-Fund India did not bear sufficient risk is irrelevant when
deciding whether location PE exists. The fact that e-Fund India
E was reimbursed the cost of the ca11 centre operations plus 16%
basis or the basis of margin fixation was not known, is not relevant
for determining location or fixed place PE. Similarly what were
the direct or indirect costs and corporate a11ocations in software
development centre or BPO does not help or determine location
F PE. Assignment or sub-contract to e-Fund India is not a 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 the relevant
criteria/test. e-Fund India was/is a separate entity and was/is
entitled to provide services to the assessees who were/are
G 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 the
Indian subsidiary and the foreign Principal under Article 5(1 ).
Even if the foreign entities have saved and reduced their
H expenditure by transferring business or back office operations
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 181
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
to the Indian subsidiary, it would not by itself create a fixed place A
or location PE. The manner and mode of the payment of royalty
or associated transactions is not a test which can be applied to
determine, whether fixed place PE exists."
13. It further went on to hold that the ITAT's finding that the
assessees were a joint venture or sort of partnership with the Indian B
subsidiary was wholly incorrect. Also, none of these arguments have
been invoked by the Revenue and such a finding would, therefore, be
perverse. After citing Klaus Vogel on Double Taxation Conventions,
Arvid A. Skaar in Permanent Establishment: Erosion of a Tax Treaty
Principle and Bollinger vs. Commissioner, I 08 S.Ct. 1173, the High
Court found against the Revenue, holding that there is no fixed place PE C
on the facts of the present case. We agree with the findings of the High
Court in this regard.
14. Reliance placed by the Revenue on the United States Securities
and Exchange Commission Form IOK Report, as has been correctly
pointed out by the High Court, is also misplaced. It is clear that the D
report speaks of thee-Funds group of companies worldwide as a whole,
which is evident not only from going through the said report, but also
from the consolidated financial statements appended to the report, which
show the assets of the group worldwide.
15. Also, Shri Ganesh has pointed out that the two American E
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 the report of Deloitte
Haskins and Sells dated J3 1h March, 2009, produced before the CIT F
(Appeals), in which, on behalf of their American clients, the said firm of
Chartered Accountants stated:
"2. The nature of business under each of the above ve11icals is
detailed below:
a) ATM Management Services G
eFunds US's ATM Management Services ("ATM Services")
segment covers the business of ATM deployment, management
and branding services. eFunds US is an independent provider of
ATMs and it places ATMs in convenience, grocery, general
merchandise, and drug stores as well as gas stations located H
182 SUPREME COURT REPORTS [2017] 10 S.C.R.
A throughout the United States and Canada. The ATMs run on an
operating software which is generally owned by the original ATM
manufacturer whereas the datacentre, to which such ATMs are
connected, operate on the software platforms such as 'Connex'
which have been developed and maintained by eFunds US.
B Services provided by eF1111ds US: eFunds US provided the
processing for over 11,000 of the ATM machines in its network.
Most of the ATMs were owned by the Appellant and its associate
companies. All theseATMs were installed outside India and mainly
in United States.
·c Services provided by eFunds India: The only involvement of
eFunds India was responding to queries raised by the customers,
if they faced any difficulty in operation of their transaction which
was part of activity (d) referred above.
b) Electronic Payment Management
D eFunds US's Electronic Payment Management segment provides
products and services in two broad categories: Payment
Processing Software and Electronic Payment Processing
Services. The business involves processing transactions for
regional automated teller machine or ATM networks in the United
E 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.
Processing Services: eFunds US processes transactions for
regional ATM networks in the United States. They also prov;de
transaction processing for retail point of sale ("POS") terminals
F
that accept payments from debit cards and paper cheques that
have been converted into electronic transactions. Transaction
processing involves electronically transferring money from a
person's checking or savings account according to his or her
instructions. To carry out the tasks required, each ATM or POS
G device is typically connected to several computer networks. None
of these networks is installed in India. These networks include
private networks that connect the devices of a single owner.
shared networks that serve several device owners in a region,
and national shared networks that provide access to devices
across regions. Each shared network has numerous financial
H
ASSISTANT DIRECTOR OF INCOM_E TAX-I, NEW DELHI v. 183
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
institution members. eFunds US provides its Customers with A
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 the distribution of benefits under B
entitlement programs, primarily food stamps and Transitional Aid
to Needy Families. The EBT processing system manages,
__supports, and controls the 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.
c
Software Products: eFunds US develops and sells electronic
funds transfer software, Connex an'd Architect, used in electronic
payment service~ to in-house processors and regional networks
in 23 foreign countries and in the United States. None of the
software products of eFunds US was licensed or installed in D
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 E
for Customer Interface and customization of products and
services as per the dictates of the Customer. Agreement/contracts
with the Customer were entered into by eFunds US. All risks
and responsibilities for performance of the Contract at all times
were of eFunds US only. All Software's/solutions are developed F
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. Ccinnex
was developed by a company acquired by eFunds US. eFunds
US's associate company in United Kingdom has developed and
owns the Architect software which is middleware used primarily G
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 the terms of the contract with Government
Agencies, eFunds US is responsible for management, supp011 H
184 SUPREME COURT REPORTS [2017] IO S.C.R.
A and control of the 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 software development support
B services to eFunds ·US for various software/software based
solutions developed by eFunds US. Such services are required
by efunds US in the course of development of software/software
based solutions and their use in providing services to customers.
The process of development of software/solutions involves testing
the same with sample data to determine the workability of the
c software. Further, certain errors or bugs may be found in the
software/solutions at such eFunds US avails the services of
eFuncls India for bug fixing.
The work performed by eFunds India for eFunds Government
Services Business (EBT Processing) was limited to respondin&
D to the 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
E Management") segment provides risk management-based data
and other products to financial institutions, retailers and other
businesses that assist in detecting fraud and assessing the risk of
opening a new account or accepting a cheque. This segment
offers products and services that help determine the likelihood
of account fraud and identity manipulation and assess the overall
F risks involved in opening new accounts or accepting payment
transactions.
SCAN: SCAN or Shared Cheque Authorization Network, helps
retailers reduce the risk of write-offs for dishonoured cheques
due to insufficient funds and other forms of account fraud or
G identity manipulation. When a cheque is presented as payment
at the point-of-sale, SCAN members run the cheque through a
scanner. The information on the cheque is then compared to the
SCAN database to determine whether there have been payment
problems with the cheque writer or his or her account. SCAN
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 185
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
then reports any issues to the retailer and the merchant decides A
whether or not to accept the cheque.
ChexSystems: The ChexSystems business is a 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 B
account enquiries. An account is considered closed-for-cause
when, for example, a consumer refuses to pay the account fee
and the bank closes the account. ChexSystems helps financial
institutions immediately assess the risks involved in opening an
account for a new customer by supporting real-time enquiries to
its database of consumer debit account performance. c
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 the persons· located in the US and the D
customers of this data base were banks and retailers located in
the US.
Services provided by eFu11ds US: eFunds US was responsible
for Customer interface and agreement/contracts with the
customers were entered into by eFunds US. All risks and
E
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 the group situated in USA.
DebitBureau contains over three billion records and includes data
form eFunds ChexSystemsSM and SCANSM databases and F
other sources. The 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
G
a consumer's identity and assess and rank the risk of fraud
associated with opening an account for or accepting a payment
from that· consumer. eFu~ds US software development centers
in the United States, as well as in the U.S. data centers and
remotely at the customers' sites develop and maintain software
for these service offerings. I-I
186 SUPREME COURT REPORTS [2017] 10 S.C.R.
A Services provided by eFunds India: The work performed by
eFunds India involved responding to the inbound calls made by
the 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.
B 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
c 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 processes, such as accounting
operations, help desk, account management, transaction
D 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 the integration of these products within
the customer's existing information technology infrastructure.
All of these hardwares, networks and informat10n technology
E 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
F covers providing on-site user training on eFunds US products
and solutions for the information technology, operations and
ma;1a~rn1ent staff of clients.
Services provided by eFunds US: eFunds US was responsible
for Customer Interface and customization of products and
G services as per the dictates of the Customer. Agreement/
contracts with the customers were entered into by eFunds US.
All risks and responsibilities for performance of the 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
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 187
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
with some of its customers to eFunds India which involve the A
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 B
• Responding to inbound calls from customers from dealers/
customers oftelecom services providers (who are customers
of eFunds US), to check on the status of applications made
for new connections, change in billing plans etc.
Note: Logica Global, an independent company, had received an
order from the Reserve Bank of India for development and ~
implementation of certain software. A part of this work was
subcontracted to eFunds India directly by Logica G\oqal. The
Appell:mt had nothing tu do with this contract."
D
16. This report would show that no part of the main business and
revenue earning activity of the two American companies is carried on
through a fixed business place in India which ha.s been put at their disposal.
It is clear from the above that the Indian company only renders support
services which enable the assessees in turn to render services to their
clients abroad. This outsourcing of work to India would not give rise to E
a fixed place PE and the High Court judgment is, therefore, correct on
this score.
17. Insofar as a service ·pE is concerned, the requirement of
Article 5(2)(1) of the DTAA is that an enterprise must furnish services
"within India" through employees or other personnel. In this regard, this F
Court has.held, in Morgan Stanley (supra), as follows:
"16. Article 5(2)(/) of DTAA applies in cases where MNE
furnishes services within India and those services arc furnished
through its employees. In the present case we are concerned
with two activities, namely, stewardship activities and the work G
to be performed by deputationists in India as employees ofMSAS.
A customer like MSCo who has worldwide operations is entitled
to insist on quality control and confidentiality from the service
provider. For example in the case of software PE a server stores
the data which may require confidentiality. A service provider
H
./
188 SUPREME COURT REPORTS [2017] IOS.C.R.
A may also be required to act according to the quality control
specifications imposed by its customer.. It may be required to
maintain confidentiality. Stewardship activities involve briefing
of the MSAS staff to ensure that the output meets the
requirements of MSCo. These activities include monitoring of
the outsourcing operations at MSAS. The object is to protect the
B
interest of MSCo. These stewards are not involved in day-to-
day management or in any specific services to be undertaken by
MSAS. The stewardship activity is basically to protect the interest
of the customer. In the present case as held hereinabove MSAS
is a service PE. It is in a sense a strvice provider. A customer is
c entitled to protect its interest both in terms or confidentiality and
in terms of quality control. In such a case it cannot be said that
MSCo has been rendering the services to MSAS. In our view
MSCo is merely protecting its own interests in the competitive
world by ensuring the quality and confidentiality of MSAS
services. We do not agree with the ruling of AAR that the
D
stewardship activity would fall under Article 5(2)([). To this extent
we find merit in the civil appeal filed by the appellant (MS Co)
and accordingly its appeal to that extent stands partly allowed.
I 7. As regards the question of deputation, we are of the view
that an employee of MSCo when deputed to MSAS does not
E become an employee ofMSAS. Adeputationist has a lien on his
employment with MSCo. As long as the lien remains with MSCo
the said company retains control over the deputationist's terms
and employment. The concept of a service PE finds place in the
UN Convention. It is constituted if the multinational enterprise
F renders services through its employees in India provided the
services are rendered for a specified period. In this case, it
extends to two years on the request of MSAS. It is important to
note that where the activities of the multinational enterprise entails
it being responsible for the work of deputationists and the
employees continue to be on the payroll of the multinational
G enterprise or they continue to have their lien on their jobs with
the multinational enterprise, a service PE can emerge.
18. Applying the above tests to the facts of this case we find
that on request/requisition froni MSAS the applicant deputes its
staff. The request comes from MSAS depending upon its
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 189
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
requirement. Generally, occasions do arise when MSAS needs A
the expertise of the staff of MSCo. In such circumstances,
generally, MSAS makes a request to MSCo. Adeputationist 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 wheh he comes to India. He lends B
his experience to MSAS in India as an employee ofMSCo as he
retains his lien and in that sense there is a service PE (MSAS)
under Article 5(2)(1). We find no infirmity in the ruling of ARR
on this aspect. In the above situation, MSCo is rendering services
through its employees to MSAS. Therefore, the Department is
right in its contention that under the above situation there exists C
a service PE in India (MSAS). Accordingly, the civil appeal filed
by the Department stands partly allowed."
(at pages 15-16)
18. It has already been seen that none of the customers of the
assessees are located in India or have received any services in India. D
This being the case, it is clear that the very first ingredient contained in
Article 5(2)(1) is not satisfied. However, the learned Attorney General,
relying upon paragraph 42.31 of the 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 the E
OECD Commentary reads as under:
"Whether or not the relevant services are furnished to a resident
of a state does not matter: what matters is that the services are
performed in the State through an individual present in that State."
19. Based upon the said paragraph, Shri Venugopal has argued F
that in assessment year 2005-06, two employees of the American firm
were seconded in India and that, therefore, it is clear that management
of the American company through these employees has obviously taken
place. The High Court, in dealing with this contention, has found as
follows: G
"62. The appellants had pleaded before the authorities and the
tribunal that prior to assessment year 2005-06 not even a single
employee of the assessee ever visited India even for a short
period and in 2005-06, two employees of e-Fund were transferred
to e-Fund India and that the entire expenditure for these two H
190 SUPREME COURT REPORTS [2017] 10 S.C.R.
A 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)(1) but the said employees should
furnish services within the contracting State. These services
should not be mere stewardship services. The Assessing Officer
has recorded that employees were seconded toe-Fund India but
B
the functions they performed and whether they performed
functions and reported toe-Fund Corp/associated enterprise was
not known or ascertained. This was not the correct way of
determining and deciding whether service PE existed. Whether
the seconded empl\)yees were performing stewardship services
c or were directly involved with the working operations was
relevant. It is also not known whether the services were
p~rformed related to services provided to an associated enterprise
in which case clause 5(2)(l)(ii) would be applicable. In the said
situation, the question of attribution of income etc. would also
arise.
D
63. Two employees of e-Fund Corp were deputed to e-Fund
India in the assessment years 2005-06. The case of the 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 the Revenue to the extent of 25% was borne
E by e-Fund India and balance 75% was borne by e-Fund Corp.
The Assessing Officer on this basis has observed that this reduced
co~i base of e-Fund India as remuneration was paid by e-Fund
Corp and the said employees were at liberty to perform functions
of e-Fund Corp even while working for e-Fund India. The
F response of the assessee as quoted in the assessment order was
that e-Fund India, apart from export activities had also domestic
business in India. This was evident from the return of income
filed by e-Fund India where Jomestic income was computed
separately as it was not eligible for deduction under Section IOA
of the Act. Copy of the return was furnished. It was further
G stated that cost of personnel seconded in India was fully borne
bye-Fund India i.e. 100% of the salary paid to the said employees
seconded to India were debited to profit and loss accounts. 75%
of the salary component was paid abroad by e-Fund Corp but
the same was reimbursed by e-Fund India. This was in
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 191
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
accordance with and permitted under the Indian Exchange A
Control Regulations. It was further stated that the Assessing
Officer was wrong in assuming that the two seconded employees
were at liberty to function for e-Fund Corp while they were
working fore-Fund India. The seconded employees were working
under the control and supervision of e-Fund India. The Assessing
B
Officer thereupon has not commented on the reply. of the
assessee, though he has recorded comments in respect of replies
to other issues raised by him (see paragraph 7 of the assessment
order). The aforesaid factual assertion made by the assessee,
therefore, was not negated or questioned by the Assessing
Officer." C
20. We entirely agree with the approach of the High Court in this
regard. Article 42.31 of the OECD Commentary does not mean that
services need not be rendered by the foreign assessees in India. If any
customer is rendered a service in India, whether resident in India or
outside India, a "service PE" would be established in India. As has been D
noticed by us hereinabove, no customer, resident or otherwise, receives
any service in India from the 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 the other ground namely, that "other personnel" would cover
personnel employed by the Indian company as well, and that the US
E
companies through such personnel are furnishing services in India. This
being the case, it is clear that as the very·first part of Article 5(2)(1) is
not attracted, the question of going to any other part of the said Article
does not arise. It is perhaps for this reason that the assessing officer did
not give any finding on this score. F
21. Shri Ganesh has argued before us that the "agency PE" aspect
of the case need not be gone into as it was given up before the ITAT.
He is right in this submission as no argument on this score is found
before the ITAT. However, for the sake of completeness, it is only
· necessary to agree with the High Court, that it has never been the case G
of Revenue that e-Funds India was authorized to or exercised any
authority to conclude contracts on behalf of the US company, nor was
any factual foundation laid to attract any of the said clauses contained in
Article 5( 4) of the DTAA. This aspect of the case, therefore, need not
detain us any further.
H
192 SUPREME COURT REPORTS [2017] 10 S.C.R.
A 22. Shri Ganesh has referred to and relied upon an order of the
Additional Taxation Commissioner, who is the Transfer Pricing Officer.
The said order is dated 22°<1 February, 2006 and states as under:
"The taxpayer company filed its return of income with ACIT
Circle 11(1), New Delhi. A reference was received from the
B Assessing Officer to determine the 'arm's length price' u/s
92CA(3) in respect of 'international transactions' entered into
by the assessee during the F.Y. 2002-03. ln response to notice u/
s 92CA, Shri Vijay Iyer, CA ofS.R. Batliboi & Co. Chartered
Accountants, authorized representative of the assessee appeared
form time to time. The documentation prescribed under Ruic
c IOD of the Income Tax Rules was submitted and plal'.ed on
record.
The taxpayer company is engaged in providing IT enabled
sen ices which include Back office services and Call centre
services. It also has a software design cei1ter for development
D of soilware for call centres.
cFunds International (India) Pvt. Ltd. is a wholly owned subsidiaiy
of IDLX Holdings BV, Netherlands. IDLX is a wholly owned
subsidiary of eFunds Corp.
E The major international transactions undertaken by the assessce
during the year is given below:
S.No Description of transaction Method Value
(In Rs.)
-~--·- ----------~--- ·- ---------- -----
1. Financial Shanxi Services TNMM 33.9 Cr.
F
(Back Office)
2. Call Center Services (Shared TNMM 88.03 Cr.
Service Centre)
3. Software Development TNMM 57.58 Cr.
(Off-shoce for call <--cntres)
G
In addition to the above the assessec has also provided software
development services to overseas eFunds group entities. The
international transactions undertaken by the assesscc were
examined vis-a-vis the method applied by the assessee for arriving
at the arm's length price. The assessee has relied on the
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 193
M/S. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
Transactional NetMargin Method (TNMM) in respect of all the A
major international transactions.
After examination of the documentation and discussion with the
authorized representative of the assessee, no adverse inference
is drawn in respect of the Arm's Length Price (ALP) of the
international transactions, as declared by the assessee in Form B
3CEB, annexed to the return of the Income."
Shri Ganesh is correct in stating that as the arm's length principle has
been satisfied in the present case, no further profits would be attributable
even ifthere exists a PE in India. This was specifically held in Morgan
Stanley (supra) as follows:
c
"32. As regards determination of profits attributable to a PE in
India (MSAS) is concerned on the basis ofarm 's length principle
we have quoted Article 7(2) ofDTAA. According to AAR where
there is an international transaction under which a non-resident
compensates a PE at arm's length price, no further profits would
be attributable in India. In this connection, AAR has relied upon D
Circular No. 23 of 1969 issued by CBDT as well as Circular
No. 5 of 2004 also issued by CBDT. This is the key question
which arises for determination in these civil appeals.
(at page 25)
xxxxxxxxx E
35. The object behind enactment of transfer pricing regulations
is to prevent shifting of profits outside India. Under Article 7(2)
not all profits ofMSCo would be taxable in India but only those
which have economic nexus with PE in India. A foreign enterprise
is liable to be taxed in India on so much of its business profit as F
is attributable to the PE in India. The quantum of taxable income
is to be determined in accordance with the provisions of the IT
Act. All provisions of the IT Act are applicable, including
provisions relating to depreciation, investment losses, deductible
expenses, carry-forward and set-off losses, etc. However,
deviations are i:nade by DTAA in cases of royalty, interest, etc. G
Such deviations are also made under the IT Act (for example
Sections 44-BB, 44-BBA, etc.).
36. Under the impugned ruling delivered by AAR, remuneration
to MSAS was justified by a transfer pricing analysis and,
therefore, no further income could be attributed to the PE H
SUPREME COURT REPORTS (2017] 10 S.C.R.
A (MSAS). In other words. the said ruling equates an arm's length
analysis (ALA) with attribution of profits. It holds that once a
transfer pricing analysis is undertaken, there is no further need
to attribute profits to a PE. 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
B
into account all the risk-taki11g functions of the enterprise.
In such cases nothing further would be left to be attributed to
PE. The situation would be different if transfer pricing analysis
docs not adequately reflect the functions performed and the risks
assumed by the enterprise. In such a situation, there would be a
c need to attribute profits to 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
D
that taxing corporates on the basis of the concept of economic
nexus is an important feature of attributable profits (profits
attributable to PE)."
(at pages 27-28)
23. As a large portion of Shri Venugopal's argument was in relation
E to the MAP settlement in the present case, it would be necessary to
refer, in some detail, to the documents produced on this account.
24. Resolution dated 23"1 April, 2007 passed by the competent
authority oflndia, which was strongly relied upon by Shri Venugopal, is
set out herein below:
F "Resolution under Section ·90 of Income Tax Act, 1961
read with Article 27 of lndo-USA Double Taxation
Avoidance Agreement
1. The Acting Director (International), Competent Authority of
USA initiated Mutual Agreement Procedure in the case of Mis
G eFunds Corporation and eFunds I.T. Solutions Inc. for the
previous year ending 31.03.2003 with the Competent Authority
of India under the 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 the previous year ending
H
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 195
M/S. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
31.03.2004 in the cFunds LT. Solution Group Inc. The Competent A
Authorities of both the countries after having examined the facts
of the case and issues involved have arrived at a resolution in
terms of Section 90 oflncome Tax Act, '1961 read with Article
27 ofindo~USADouble Taxation Avoidance Agreement and Rule
44H oflncome Tax Rules, 1962.
B
.2. The Competent Authorities of USA and India have reached
an agreement as follows with respect to the tax assessment on
Mis cFunds Corporation and efunds IT Solutions Group Inc.:-
Incomc will be attributed to the Indian PEs based on the
ratio of certain developed and acquired tangible and intangible C
assets in India and outside India. Out of the total assets for the
AY 2003-04, 10.48'!/o of the assets were located in India and
according! y l 0.48% of the income would be attributable to India.
The percentage attributable to India for the AYending 2005 was
arrived at 11.11 %. These percentages will be applied to the base
of consolidated gross income as reduced by the income of D
subsidiary eFunds India Pvt. Ltd. already repo1ted in India.
Thereafter, the total income so attributed will be apportioned
between eFunds and IT solutions in the ratio of85% (to eFunds)
and 15% (to IT Solutions) forthcAY2003-04 and 87% (to efunds
and 13% (to IT Solutions) for theAY 2004-05.
E
In view of the above, the income attributor, as agreed upon· is
given below:-
r· ·----·
A.Y. 2003-04 A.Y. 2004-05
Figures in US Figures in US
$million $million F
--------------
Apportionable base 25.1-2---ro~----
111con1c
Percentage attributed 10.48% I l.11%
to India
Income attributed to 2.63 3.41
India G
Allocation between
IT Solutions and
eFunds IT Solutions
eFunds 0.39 (15%) 0.45(13%)
2.24 (85%) 2.96(87%)
H
196 SUPREME COURT REPORTS [2017] l 0 S.C.R.
A Interest will be chargeable as per provisions of the Income -Tax
Act, 1961.
3. The Assessing Officer will give effect to this resolution in
terms of clause 4 of Rule 44H of the Income Tax Rules, 1962.
4. Appeals, if any, filed by both the parties will be withdrawn."
B
25. However, Shri Ganesh stated that this was not the end of the
matter as the Department of Treasury in Washington, by a letter dated
Tli May, 2007, specifically stated, "although we do not agree on the
technical merits that e-Funds and IT Solutions had a PE in India, we
· reached a mutual agreement with a view to avoid double taxation".
C Equally the same document states:
"Effect on Future Years: The competent authority determination
made herein is not binding on subsequent years."
26. To the same effect are the letters dated May 14, 2007 written
D by e-Funds Corp. to the Deputy Director of International Tax Circle in
India. Shri Ganesh has also referred to and relied upon paragraph 3.6 of
the OECD Manual on MAP Procedure, which reads as follows:
"3.6. Competent Authority Agreements
Competent authority agreements or resolutions are often case
E and time specific. They are not considered precedents for either
the taxpayer or the tax administrations in regard to adjustments
or issues relating to subsequent years or for competent authority
discussions on the same issues for other taxpayers. In fact, the
letters exchanged between competent authorities to resolve a
case often state as much. This is because the competent
F
authorities have reached an agreement that often takes into
account the facts of the particular taxpayer, the differences in
the provisions of the tax law in each country, as well as the
effects of the economic indicators on the particular transactions
at the relevant time. Any review or adjustments of subsequent
G years by a taxpayer or tax administration is best based upon the
particular circumstances, facts and documentary evidence
existing for those years."
27. However, the learned Attorney General relied upon paragraph
1.3.l of the OECD Manual and Best Practice No.3, in particular, which
H reads as under:
ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI v. 197
MIS. E-FUNDS IT SOLUTION INC. [R. F. NARIMAN, J.]
"Best Practice N°3: Principled approach to resolution of A
cases
In the resolution of MAP cases, a competent authority should
engage in discussions with other competent authorities in a
principled, fair, and objective manner, with each case being
decided on its own merits and not by reference to any balance B
of results in other cases. To the extent applicable, the Commentary
to the OECD Model Tax Convention and the OECD Transfer
Pricing Guidelines are an appropriate basis for the development
of a principled approach. As part of a principled approach to
MAP cases, competent authorities should be consistent and
reciprocal in the positions they take and not change position on c
an issue from case to case, depending on which side of the issue
produces the most revenue. Although a principled approach is
paramount, where an agreement is not otherwise achievable,
both competent authorities should look for appropriate
opportunities for compromise in order to eliminate double taxation. D
To the extent possible, competent authorities who face significant
recurring issues in their bilateral relationship may_ wish to reach
agreement on the consistent treatment of such issues."
A perusal of the above would show that a competent authority
should engage in discussion with the other competent authority in a E
principled, fair and objective manner, with each case being decided on
its own merits. It is also specifically observed that where an agreement
is not otherwise achievable, then both parties should look for appropriate
opportunities for compromise in order to eliminate double taxation on the
facts of the case, even though a principled approach is important. The
learned Attorney General also relied upon Best Practice No. I of the F
said OECD Manual, which requires the publication of mutual agreements
reached that may apply to a general category of taxpayers which would
then improve guidance for the future. Best Practice No. I has no
application on the facts of the present case, as the agreement reached
applies only to the respondent companies, and not to any general category G
of taxpayers. - It is clear, therefore, that Shri Ganesh is right in relying
upon Article 3.6 of the OECD Manual. It is very clear, therefore, that
such agreement cannot be considered as a precedent for subsequent
years, and the High Court's conclusion on this aspect is also correct.
H
198 SUPREME COURT REPORTS [2017] IOS.C.R.
A 28. The learned Attorney General has also laid great emphasis on
non-disclosure of documents and has relied upon a long list of documents
that the assessees were asked to disclose and which they did not. From
this, according to the learned Attorney General, an adverse inference
should be drawn, and from this alone it should be inferred that a PE of
the assessees, therefore, exists in India. We are afraid that this argument
B
cannot be countenanced at this stage as it has never been raised before
any of the authorities below and has not been raised before the High
Court also. This being the case, we do not think it necessary to get into
this aspect of the matter.
29. Having held in favour of the assessees that no permanent
c establishment in India can possibly be said to exist on the facts of the
present case, we do not deem it necessary to go into the cross-appeals
that were filed before the High Court, which were dismissed by the
High Court agreeing with the ITAT that the calcul;;tion of the ITAT
would lead. to nil taxation. This point would not arise in view of our
D decision on the facts of the present case. It is, therefore, unnecessary
to go into this aspect of the matter.
30. The appeals are accordingly dismissed with no order as to
costs.
Devika Gujral Appeals dismissed.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "Permanent establishment"Sign in to search