Law on what constitutes a PE and how to attribute profits to a PE explained
The Tribunal had to consider the following legal issues: (i) whether the assessee could be said to have a PE in terms of Article 5(1) and 5(2) of the DTAA? (ii) what is the correct method to allocate profits to the PE?, (iii) whether fees for software is assessable as royalty after the retrospective amendment to s. 9(1)(vi) and (iv) whether the payment for link charges is taxable as ‘equipment royalty’? HELD by the Tribunal:
(i) The assessee’s argument that it does not have a PE under Article 5(1) cannot be accepted because its employees frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal. CIS was practically the projection of assessee’s business in India and carried out its business under the control and guidance of the assessee and without assuming any significant risk in relation to such functions. Besides the assessee has also provided certain hardware and software assets on free of cost basis to CIS. However, it does not constitute a dependent agent PE in terms of Article 5(4) and 5(5) of the DTAA;
(ii) The correct approach to arrive at the profits attributable to the PE should. be as under: (i) compute the Global operating Income percentage of the customer care business as per annual report/10K of the company, (ii) this percentage should be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at is the Operating Income from Indian operations, (iii) the operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India, (iv) the profit attributable to the PE should be estimated on residual profits as determined under Step 3 above;
(iii) As regards the taxability of software license fees, he retrospective amendment to s. 9(1)(vi) by the Finance Act, 2012 widens the scope of the term “royalty” but does not impact the provisions of the DTAA in any manner. Consequently, the purchase of software falls within the category of copyrighted article and not towards acquisition of any copyright in the software and hence the consideration is not assessable as Royalty. Even otherwise, as the payment is in the nature of reimbursement of expenses, it is not taxable in the hands of the assessee (B4U International Holding & Nokia Networks OY followed);
(iv) As regards the payment of link charges as equipment royalty, there is no transfer of the right to use, either to the assessee or to CIS. The assessee has merely procured a service and provided the same to CIS, no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee.