By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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India-US DTAA – Frequent visits of employees of FCo to premises of Indian subsidiary (IndCo), their having a “fixed place” at their disposal and their occupying key positions in IndCo constituted PE of FCo in India, which was practically the projection of FCo’s business in India. On facts, profit to be attributed to Indian PE was to be calculated based on formulary apportionment.
Facts:
Convergys Customer Management Group Inc (FCo) provides information technology (IT) enabled customer management services by utilising its advanced information system capabilities, human resource management skills and industry experience. FCo has a subsidiary in India, IndCo, which provides IT-enabled call centre/back office support services to FCo on a principal-to-principal basis.
FCo claimed that it procured from ICo services on a principal-to-principal basis and FCo’s business was not carried out in India. Furthermore, substantial risks of business such as market, price, R&D, service liability risks etc., vested with FCo outside India. Additionally, there was no tax liability as procurement of services was akin to purchasing goods/merchandise and, accordingly, the benefit of the PE exclusion for purchase/preparatory or auxiliary function should also be available.
The Tax Authority alleged that FCo, in its activities in India through its employees and subsidiary, satisfied the requirement of a fixed place, services and also a Dependant Agent PE (DAPE) in India. For the purposes of attributing profits, the Tax Authority recomputed the taxable income by allocating global revenue in proportion to the number of employees. On appeal, CIT(A) agreed with the Tax Authority that a fixed place PE was constituted. On attribution of profits, the CIT(A) however held that no further profits can be attributed to FCo’s PE as the transfer pricing (TP) study of IndCo supported that ICo was remunerated at ALP.
Both FCo and the Tax Authority appealed before the Tribunal.
Held:
On existence of a PE
Considering the entirety of facts, the view of CIT(A) on fixed place PE was upheld for the following reasons:
FCo’s employees frequently visited the premises of IndCo to provide supervision, direction and control over the business operations of IndCo. Accordingly, such employees had a “fixed place” at their disposal. IndCo was practically the projection of FCo’s business in India and IndCo carried out its business under the control and guidance of FCo, without assuming any significant risk in relation to such functions. FCo has also provided certain assets/software on “free of cost” basis to IndCo.
On attribution of profits
An overall attribution of profits to the PE is a TP issue and no further profits can be attributed once an arm’s length price has been determined for IndCo, as TP analysis subsumes the risk profile of the alleged PE. Thus, there can however be further attribution if it is found that PE has risk profile which is not captured in IndCo TP analysis.
The correct approach thereafter to arrive at the profits attributable to the PE is to compute global operating income percentage of a particular line of business as per annual report of FCo and applying such percentage to the end customer revenue with regard to contracts/projects, where services are procured from IndCo. The amount arrived at is the operating income from Indian operations and such operating income is to be reduced by the profit before tax of IndCo. This residual profit which represents income of FCo is to be apportioned to the US and India. Profit attributable to the PE should be estimated on residual profits.
