Case: Assistant Director of Income Tax-I, New Delhi Vs. M/s E-Funds IT Solution Inc

(to eFunds and 13% (to IT Solutions) for the AY 2004-05. In view of the above, the income attributor, as agreed upon is given below:- A.Y. 2003-04A.Y. 2004-05 Figures in US $ millionFigures in US $ million Apportionable base income25.1230.71 Percentage attributed to India10.48%11.11% Income attributed to India2.633.41 Allocation between IT Solutions and eFunds IT Solutions eFunds0.39 (15%) 2.24 (85%)0.45(13%) 2.96(87%) 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 Appeals, if any, filed by both the parties will be withdrawn. 25.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 7th 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. 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 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 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 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 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 1.3.1 of the OECD Manual and Best Practice No.3, in particular, which reads as under: Best Practice NO3: Principled approach to resolution of 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 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 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. 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 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.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 only to the respondent companies, and not to any general category 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 Courts conclusion on this aspect is also correct. 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 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 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 calculation of the ITAT would lead to nil taxation. This point would not arise in view of our decision on the facts of the present case. It is, therefore, unnecessary to go into this aspect of the matter.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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, therefore, suffer tax from the business generated from such PE is initially on the Revenue12. 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 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 PE13. It further went on to hold that the ITATs finding that the assessees were a joint venture or sort of partnership with the Indian 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 v. Commissioner, 108 S.Ct. 1173, the High Court found against the Revenue, holding that there is no fixed place PE on the facts of the present case. We agree with the findings of the High Court in this regard14. Reliance placed by the Revenue on the United States Securities and Exchange Commission Form 10K Report, as has been correctly pointed out by the High Court, is also misplaced. It is clear that the report speaks of theof 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 worldwide16. 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 has 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 a fixed place PE and the High Court judgment is, therefore, correct on this score18. It has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) 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 India20. 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 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 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)(l) 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 scoreHe 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 of Revenue thatauthorized 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 furtherShri Ganesh is correct in stating that as the arms length principle has been satisfied in the present case, no further profits would be attributable even if there exists a PE in IndiaA perusal of the above would show that a competent authority should engage in discussion with the other competent authority in a 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.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 only to the respondent companies, and not to any general category 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 Courts conclusion on this aspect is also correctWe are afraid that this argument 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 matter29. Having held in favour of the assessees that no permanent 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 thes that were filed before the High Court, which were dismissed by the High Court agreeing with the ITAT that the calculation of the ITAT would lead to nil taxation. This point would not arise in view of our decision on the facts of the present case. It is, therefore, unnecessary to go into this aspect of the matter.