Assistant Director Of Income Tax-I, New Delhi v. Mis. E-Funds It Solution Inc

[2017] 10 S.C.R. 157 ASSISTANT DIRECTOR OF INCOME TAX-I, NEW DELHI MIS. E-FUNDS IT SOLUTION INC. (Civil Appeal No. 6082 of 2015) OCTOBER 24, 2017 [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 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 [ 2017 ] 10 ( 2015 157 1990 - Art.5। 6089 , 6104 , 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. 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 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 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 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 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. [ 2017 ] Bollinger v. Commissioner, 108 S.Ct. 1173 - referred to. Case Law Reference 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- 01 to 2002-03 and 2004-05 to 2007-08) and e-Funds IT Solutions Group 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 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 E noticed above, was a company incorporated in USA. 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 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 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 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, 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 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 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 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. 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 assessees carried on their business, but also because they were "service 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 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. 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 1 OK of e-Funds Corp. dated 31" March, 2003. According to the learned Attorney 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.