Section 9(1)(i) read with section 28(va) of the Act, Article 5(2)(1) of the India-US DTAA – Consideration received for granting the right to render BPO services to group entities qualified as business income u/s 28(va) of the Act – Such income was not taxable in India under the Act as well as the DTAA in absence of any business activity and PE in India

Section 9(1)(i)
read with section 28(va) of the Act, Article 5(2)(1) of the India-US DTAA –
Consideration received for granting the right to render BPO services to group
entities qualified as business income u/s 28(va) of the Act – Such income was
not taxable in India under the Act as well
as the DTAA in absence of any business activity and PE in India

FACTS

The assessee, a resident of USA, was part of a multi-national group
called the ‘Cummins’ group  and rendered
certain BPO services to the group entities as well as to its internal
divisions. During the relevant year, the assessee entered into an agreement
(assignment agreement) with an Indian company (ICo) to transfer the right to
render these BPO services for a lump sum consideration.

Pursuant to the assignment agreement, ICo was entitled to render BPO
services to all the Cummins group entities including the assessee. The assessee
contended that the lump sum consideration received was in the nature of
business income and such income was not taxable in India in the absence of a PE
in India.

The AO contended that by virtue of the assignment agreement, the
assessee mandated ICo to secure orders and render BPO services to the Cummins
group entities on his behalf. Therefore, the AO was of the view that this
resulted in continuing business activity for the assessee and hence it
established a business connection in India. For the same reason, the AO held
that ICo triggered a dependent agency PE for the assessee in India under the India-US
DTAA and, hence, the lump sum consideration was chargeable to tax in India both
under the Act as well as Article 7 of the DTAA.

Aggrieved, the assessee approached the Dispute Resolution Panel (DRP).

The DRP did not concur with the AO that an agency PE was constituted in
India. However, on the basis of the assignment agreement, the DRP held that the
employees of the assessee were actively involved in rendering BPO services,
which triggered Service PE in India of the assessee under the India-USA DTAA.
Further, the DRP held that the amount received by the assessee would amount to
an income arising from a ‘source of income’ in India and hence chargeable u/s
9(1)(i) of the Act.

Aggrieved, the assessee appealed before the Tribunal.

HELD

(i) Prior to the assignment agreement
between the assessee and ICo, the BPO services were rendered by one of the
units of the assessee to other Cummins entities as well as to other units of
the assessee. Pursuant to the assignment agreement, ICo was required to render
services to the assessee as well as other Cummins group entities;

(ii) The assessee obtaining BPO services from ICo could not be equated
to granting of a right to ICo to render BPO services. This was evident from the
fact that a portion of the lump sum consideration was returned to ICo in the
form of higher outgo in the form of payment for receipt of services;

(iii) The lump sum compensation received in respect of granting right to
render BPO services to other Cummins group entities would be governed by
section 28(va) of the Act, under which any sum received for not carrying out
any activity in relation to any business or profession should be treated as
business income. This indicated that the assessee had a business connection in
India¹. However, in the absence of any business operations in India,
such income was not taxable in India;

(iv) DRP misinterpreted the assignment agreement to
conclude that employees of the assessee were involved in rendering BPO services
in India. In fact, no material was brought on record to demonstrate that the
employees of the assessee were involved in rendition of the BPO services;

(v) In the present case, there were no services which were rendered by
the assessee in India through its employees or other personnel. Hence, there
was no service PE of the assessee in India.

(vi) In the absence of a PE of the assessee in India under the DTAA, the
lump sum consideration was not taxable in India under the DTAA.

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1. ITAT seems to be of the view
that since the income qualifies as a business income u/s 28(va), the assessee
creates a business connection in India