Indian subsidiary providing back office support to its overseas parent co. to be treated as fixed place PE; Tribunal provides a method to allocate profits to PE

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.)

Tribunal applied ‘force of attraction rule’ to tax income indirectly connected to PE in India

The basic philosophy underlying the ‘force of attraction’ rule is that when an enterprise sets up a PE in another country, it brings itself within the jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from such country- whether the transactions are routed and performed through the PE or not

In the instant case, the moot question that arose for consideration before the Tribunal was “Whether services rendered by PE in India to Indian project could only be made taxable and similar services rendered by general enterprise of such PE outside India will not be taxable as the same doesn’t amount to income indirectly attributable to PE in India”

The Tribunal held in favour of revenue as under:

1) It held that not only the profits directly attributable to the work performed by the PE but the entire profits whether “directly” or “indirectly” attributable to the PE could be made taxable;

2) The connotations of “profits indirectly attributable to permanent establishment” do indeed extend to incorporation of the ‘force of attraction’ rule embedded in Article 7(1);

3) In addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the PE, should also to be taxed in India in the hands of the assessee irrespective of the fact whether such services are rendered through the PE, or directly by the general enterprise;

4) This indirect attribution, in view of the specific provisions of India UK tax treaty, was enough to bring the income from such services within ambit of taxability in India. The twin conditions to be satisfied for taxability of related profits are: (i) the services should be similar or relatable to the services rendered by the PE in India; and (ii) the services should be ‘directly or indirectly attributable to the Indian PE’, i.e., rendered to a project or client in India. In effect, thus, entire profits relating to services rendered by the assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India;

5) The Tribunal has taken a considered view on interpretation of the aforesaid article that the entire profit relating to services rendered by the assessee whether rendered in India or outside India, in respect of Indian Project are taxable in India and it was not permissible to review the decision of the Tribunal in the guise of rectification under section 254(2) - Linklaters & Paines v. ITO, International Taxation [2012] 28 taxmann.com 250 (Mumbai - Trib.)