In the instant case, the assessee, i.e., 'CCMG', a US based company, providing IT enabled customer management services, had a subsidiary in india in name of CIS which was providing IT enabled call centre or back office support service to assessee to service its Indian customers. Issues that arose before the Tribunal were as under:
a) Whether assessee had a Fixed Place PE?
b) Determination of profits attributable to the alleged PE in India.
The Tribunal held as under:
On the issue of PE
1) The employees of the assessee 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;
2) CIS was practically the projection of assessee's business in India and carried out its business under the control and guidance of the assessee, without assuming any significant risk in relation to such functions;
3) Thus, the finding of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the India-USA DTAA was upheld. There was no infirmity in the order of the CIT(A) that CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the India-USA DTAA were not satisfied.
On the issue of profits attributable to PE
4) An overall attribution of profits to the permanent establishment is a transfer pricing issue and no further profits can be attributed to a PE once an arm's length price has been determined for the Indian associated enterprise, which subsumes the functions, assets and risk profile of the alleged PE;
5) The correct approach to arrive at the profits attributable to the PE should be as under:
Step 1: Compute global operating income percentage of the customer care business as per annual report/10K of the company.
Step 2: 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 would be the operating income from Indian operations.
Step 3: 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.
Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above - Convergys Customer Management Group Inc. v. ADIT (International taxation) [2013] 34 taxmann.com 24 (Delhi - Trib.)
a) Whether assessee had a Fixed Place PE?
b) Determination of profits attributable to the alleged PE in India.
The Tribunal held as under:
On the issue of PE
1) The employees of the assessee 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;
2) CIS was practically the projection of assessee's business in India and carried out its business under the control and guidance of the assessee, without assuming any significant risk in relation to such functions;
3) Thus, the finding of the CIT(A) that assessee has a fixed place PE in India under Article 5(1) of the India-USA DTAA was upheld. There was no infirmity in the order of the CIT(A) that CIS did not constitute a dependent agent PE of the assessee in India as the conditions provided in paragraph 4 of Article 5 of the India-USA DTAA were not satisfied.
On the issue of profits attributable to PE
4) An overall attribution of profits to the permanent establishment is a transfer pricing issue and no further profits can be attributed to a PE once an arm's length price has been determined for the Indian associated enterprise, which subsumes the functions, assets and risk profile of the alleged PE;
5) The correct approach to arrive at the profits attributable to the PE should be as under:
Step 1: Compute global operating income percentage of the customer care business as per annual report/10K of the company.
Step 2: 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 would be the operating income from Indian operations.
Step 3: 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.
Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above - Convergys Customer Management Group Inc. v. ADIT (International taxation) [2013] 34 taxmann.com 24 (Delhi - Trib.)
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