Section 9(1)(i) of the Act; Article 5, 13 of India-UK DTAA –Indian company to whom Taxpayer outsources some of its business in a continuous, real and intimate manner results in business connection under the Act; (ii) on facts, the Taxpayer did not have ‘fixed place PE’ or ‘service PE’ or ‘dependent agent PE’ under DTAA Where PE is remunerated on arm’s length basis, no further profit can be attributed; Amount paid as consideration for equipment use, qualifies as royalty, even if it is paid at cost
Facts
The Taxpayer was a company resident in the UK (“UKCo”). It was engaged in providing sales related outsourcing services to its clients. The Taxpayer had a group company, which was resident of India (“ICo”). The Taxpayer had outsourced certain services to ICo. The Taxpayer incurred certain expenses in respect of treasury, taxation, and finance to facilitate ICo in delivering its services to the customer. ICo reimbursed such expenses to the Taxpayer. Taxpayer had claimed that since payments received from ICo were towards reimbursement of expenses and hence not taxable in India.
Further, the Taxpayer had granted ICo right to use certain equipments outside India. In its return of income, the Taxpayer claimed that consideration received from ICo for equipment use was in the nature of royalty in terms of Article 13(3)(b) of India-UK DTAA . It also claimed that since the reimbursement was on cost basis, it was not taxable.
However, the AO concluded that Taxpayer had Permanent Establishment (PE) in India in terms of India-UK DTAA and it also had ‘business connection’ in terms of the Act. Accordingly, he taxed profit attributable to the PE. He also attributed the reimbursement of expenses and royalty in hands of the Indian PE of the Taxpayer.
The questions before the Tribunal were as follows.
(i) Whether the Taxpayer had a business connection in India?
(ii) Whether the Taxpayer had a fixed place PE in India?
(iii) Whether the Taxpayer had a service PE in India?
(iv) Whether the Taxpayer had a dependent agent PE in India?
(v) If a transaction is at an arm’s length price, whether any further profit can be attributed to PE?
(vi) Whether in absence of any income element, mere expense reimbursement could be considered royalty chargeable to tax in terms of India-UK DTAA ?
Held
(i) ‘Business Connection’ in India
On the basis of various decisions on the issue, it is apparent that there should be a continuous, real and intimate connection between the activity carried on by the non-resident (NR) outside India and the activities carried on in India. Further, such activity should contribute to the profits of the NR in his business. The relationship between the NR and the resident should be something more than mere trading on principal-toprincipal basis.
In the present case the Taxpayer secures orders from its customers on behalf of the ICo and outsources the job to ICo. There is a continuous relationship between the Taxpayer and ICo in India. The contract entered by the Taxpayer outside India are carried out in India. The responsibility of the Taxpayer vis-à-vis its customer is concluded in India. The responsibility of the Taxpayer cannot be segregated and will complete only after ICo provides services to the customers. Hence, the Taxpayer had a continuous, real and intimate connection resulting in business connection in India in terms of section 9(1)(i) of the Act.
(ii) Fixed place PE in India
To constitute a fixed place PE, all the following conditions should be satisfied.
(a) There is a place of business.
(b) Such place is at the disposal of the Taxpayer.
(c) Such place is fixed.
(d) Business of the Taxpayer is wholly or partly carried on through such place.
In case of the Taxpayer, it was not established whether the premises of ICo or client was made available to the Taxpayer. Thus, ICo’s premises cannot be said to be at the disposal of Taxpayer since it has no right to occupy the premises but is merely given access for the purpose of work. Also the services provided in India were in the nature of Business process outsourcing (BPO) services and back office operations. Thus, relying on India UK DTAA and the decision in DIT vs. Morgan Stanley & Co. Inc. [2007] 292 ITR 416 (SC), the Tribunal held that the Taxpayer did not have a fixed place PE in India.
(iii) Service PE in India
In the absence any material brought on record to show that of the Taxpayer having deputed its employees to India, question of ‘Service PE’ cannot arise.
(iv) Dependent agent PE in India
An agent is not considered an independent agent if: (a) he performs activities wholly or almost wholly for the non-resident and its group companies; and (b) the transactions between the agent and the non-resident are not on arm’s length basis. In absence of any material on record to show that ICO was a dependent agent of Taxpayer, the Taxpayer cannot be said to have ‘dependent agent PE’ in India.
(v) Attribution of further profit
No further profit can be attributed to the PE in respect of transaction if transfer pricing analysis has fully captured functions performed, assets deployed and risks assumed. Thus even if it is accepted that the taxpayer has PE in India, since the PE is remunerated at arm’s length price, no further profit can be attributed to the PE.
(vi) Reimbursement characterized as royalty.
The reimbursement on cost basis as consideration received for equipment use qualifies as royalty under India-UK DTAA . The amount claimed by the Taxpayer as reimbursement on cost basis is similar to the consideration received for equipment use. Accordingly, the amount should also be treated as royalty.
