1  

REPORTABLE  

IN THE SUPREME COURT OF INDIA  

CIVIL APPELLATE JURISDICTION    

CIVIL APPEAL NO. 6082 OF 2015       

Assistant Director of Income Tax-I, New Delhi   …Appellant  

Versus   

M/s E-Funds IT Solution Inc.       … Respondent  

WITH  

CIVIL APPEAL NO. 2962 OF 2016  

CIVIL APPEAL NO. 6087 OF 2015  

CIVIL APPEAL NO.6102 OF 2015  

CIVIL APPEAL NO. 6084 OF 2015  

CIVIL APPEAL NO. 6100 OF 2015  

CIVIL APPEAL NO. 6094 OF 2015  

CIVIL APPEAL NO. 6083 OF 2015  

CIVIL APPEAL NO. 6096 OF 2015  

CIVIL APPEAL NO. 6089 OF 2015  

CIVIL APPEAL NO. 6104 OF 2015

2  

CIVIL APPEAL NO. 6088 OF 2015  

CIVIL APPEAL NO. 6091 OF 2015  

CIVIL APPEAL NO. 6103 OF 2015  

CIVIL APPEAL NO. 6093 OF 2015  

CIVIL APPEAL NO. 6085 OF 2015  

CIVIL APPEAL NO. 6090 OF 2015  

CIVIL APPEAL NO. 6095 OF 2015  

CIVIL APPEAL NO. 6099 OF 2015  

CIVIL APPEAL NO. 6092 OF 2015  

CIVIL APPEAL NO. 6101 OF 2015  

CIVIL APPEAL NO. 6097 OF 2015  

AND  

CIVIL APPEAL NO.   16958   OF 2017  (@S.L.P.(C) NO.27494 OF 2017 (CC NO.19128 OF 2014)  

                 J U D G M E N T   

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

3  

relate to two American Companies which are the assessees in  

the present case, 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 2000-01 to 2002-03 and 2005-06 to 2007-

08).  The appeals from the Income Tax Appellate Tribunal  

(ITAT) 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 100% shares in IDLX Corporation, another  company incorporated in USA. IDLX Corporation  held almost 100% 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 100% 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

4  

100% shares in e-Fund Inc., which as noticed  above, was a company incorporated in USA.  

7. Both e-Fund Inc. and e-Fund Corp. have entered  into international transactions with e-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 assessees 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 by e-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 by e-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.   

5  

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 if the  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, 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)

6  

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, and

7  

relied heavily upon the United States Securities and Exchange  

Commission Form 10K of e-Funds Corp. dated 31st 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.  

• eFunds Corp is essentially doing marketing work only  

and its contracts with clients are assigned, or sub-contracted to  

eFunds India.  

• The master services agreement between the American  

and the Indian entity gives complete control to the American  

entity in regard to personnel employed by the Indian entity.   

• It is only through the proprietary database and software  

of eFunds Corp, that eFunds India carries out its functions for  

eFunds Corp (The High Court records that the software,  

intangible data etc is provided free of cost and then states that  

this is irrelevant).

8  

• The Corporate office of eFunds India houses an  

‘International Division’ comprising the President’s office and a  

sales team servicing EFI and eFunds group entities in the  

United Kingdom, South East Asia, Australia and Venezuela.  

The President’s office primarily oversees operations of eFunds  

India and eFunds group entities overseas. The sales team  

undertakes marketing efforts for affiliate entities also.  

• The CIT(A) has referred to the Transfer Pricing Report  

which says that eFunds India provides management support  

and marketing support services to eFunds Corp group  

companies outside India. Regarding supervision of personnel  

rendering the services, the TP Report states as follows:  

“The President’s office manages the operations of  

eFunds India and eFunds group entities in UK and  

Australia and accordingly, employees of these  

entities report to the President. The President’s  

overall reporting is to EFC.  

Though the personnel rendering marketing services  

are employees of EFI, they report to overseas group

9  

entities to the extent that they are engaged in  

rendering services to such entities.”  

Applying the above facts, it is submitted that the assessees  

satisfy the requirements of a fixed place PE. The Supreme  

Court in the recent judgment in Formula One World  

Championship Ltd. v. Commissioner of Income Tax,  

International Taxation-3, Delhi and others, (2017) SCC  

Online SC 474 has held that “it universally accepted that for  

ascertaining whether there is a fixed place or not, PE must  

have three characteristics: stability, productivity and  

dependence. Further, fixed place of business connotes  

existence of a physical location which is at the disposal of the  

enterprise through which the business is carried on.” It was  

further held that “the physically located premises have to be ‘at  

the disposal’ of the enterprise” and that “the place will be  

treated as ‘at the disposal’ of the enterprise when the enterprise  

has right to use the said place and has control thereupon.  

Consequently, he argued that physically located premises are  

“at the disposal” of the assessees with the degree of  

permanence required, namely, the entire year.  In addition, he

10  

argued that the High Court was in error in holding that the place  

of management PE under Article 5(2)(a) was prima facie made  

out, but since the said provision had not been invoked and  

requires factual determination, Revenue’s argument was  

dismissed on this score.  Further, under Article 5(2)(l) of the  

DTAA, he argued that a service PE is clearly made out on facts  

because:  

• As per the consolidated Annual Report of eFunds Corp,  

most of the employees are in India. eFunds Corp has call  

centers and software development centers only in India.  

• eFunds Corp is essentially doing marketing work only  

and its contracts with clients are assigned, or  sub-contracted  

to eFunds India.  

• Regarding supervision of personnel rendering the  

services, the TP Report states as follows:  

“The President’s office manages the operations of  

eFunds India and eFunds group entities in UK and  

Australia and accordingly, employees of these  

entities report to the President. The President’s  

overall reporting is to EFC.

11  

Though the personnel rendering marketing services  

are employees of EFI, they report to overseas group  

entities to the extent that they are engaged in  

rendering services to such entities.”  

• The Master sub-contractor agreement between eFunds  

Corp and eFunds India discussed in the CIT(A)’s order  

provides in clause 1.1(a) as follows:  

“Subcontractors personnel assigned to work with  

eFunds IT or Customers located in the United  

States shall be directed by eFunds IT or by  

Subcontractors supervisor acting at the direction of  

eFunds IT. In the event Subcontractors personnel  

are assigned to perform such services in India, the  

Subcontractor shall supervise such work, acting at  

the direction of eFunds IT. eFunds IT shall be the  

sole judge of performance and capability of each of  

subcontractors personnel and may request the  

removal of one or more of Subcontractors personnel  

from a project covered by any statement of work as  

follows.”

12  

• It is submitted that the personnel engaged in providing  

these services were ostensibly the employees of eFunds India  

but were de facto working under the control and supervision of  

eFunds Corp. In this regard, reference was made to Para 17 of  

the judgment in DIT v. Morgan Stanley (2007) 7 SCC 1,  

where the Court held:  

“17……It is important to note that where the  

activities of the multinational enterprise entails it  

being responsible for the work of deputationists and  

the employees continue to be on the payroll of the  

multinational enterprise or they continue to have  

their lien on their jobs with the multinational  

enterprise, a service PE can emerge.”  

• Furthermore, the AO in the Assessment Order has  

observed that eFunds Corp has seconded two employees to  

eFunds India and these employees worked as Sr. Director-

Technical Services and Country Head-Business Development.  

The activities of the seconded employees go beyond mere  

‘stewardship activities’ in terms of Morgan Stanley.

13  

• The term ‘Other Personnel’ has to be seen in the context  

of the facts of this case which show that eFunds India was not  

an independent subsidiary.   

Further, he also argued that a dependent agent PE was made  

out under Articles 5(4) and 5(5), there being a concurrent  

finding of facts of the CIT (Appeals) and ITAT in this regard.   

Also, according to the learned Attorney General, since the  

assessees failed to furnish information when sought for, an  

adverse inference was sought to be drawn against them and  

that, therefore, it is clear that once this inference is drawn, the  

burden shifts on to the assessees, which they will then have  

failed to discharge.   

 4. The learned Attorney General also relied heavily upon an  

admission made under the mutual agreement procedure (MAP)  

under Article 27 of the DTAA, in which, for the assessment year  

2003-04 qua e-Funds Corp., and assessment years 2003-04  

and 2004-05 qua e-Funds IT Solution Inc., the assessees have  

admitted that income tax will be attributable “to the Indian PEs”

14  

based on a certain ratio and that, therefore, it is clear that this  

admission would continue to bind the assessees in all  

subsequent years as there was no change in the factual  

position.  

5. As against this, Shri S. Ganesh, learned senior counsel  

for the respondents, has argued that the tests for whether there  

is a fixed place PE have now been settled by the judgment of  

this Court in Formula One (supra), and that it is clear that for a  

fixed place PE, it must be necessary that the said fixed place  

must be “at the disposal” of the assessees, which means that  

the assessees must have a right to use the premises for the  

purpose of their own business, which has not been made out in  

the facts of this case.  He further argued that, on the facts of  

this case, both the US companies as well as the Indian  

company pay income tax, and the Transfer Pricing Officer by  

his order dated 22nd February, 2006, has specifically held that  

whatever is paid under various agreements between the US  

companies and the Indian company are on arm’s length pricing  

and that, this being the case, even if a fixed place PE is found,

15  

once arm’s length price is paid, the US companies go out of the  

dragnet of Indian taxation.   He also adverted to Article 5(6) to  

state that the mere fact that a 100% subsidiary may be carrying  

on business in India does not by itself means that the holding  

company would have a PE in India. Further, according to  

learned counsel, so far as the service PE is concerned, even  

the assessing officer did not find that such a PE existed.   

According to him, under Article 5(2)(l), it is necessary that the  

foreign enterprises must provide services to customers who are  

in India, which is not Revenue’s case as all their customers  

exist only outside India.  Further, according to the learned  

counsel, the entire personnel engaged in the Indian operations  

are employed only by the Indian company and the fact that the  

US companies may indirectly control such employees is only for  

purposes of protecting their own interest.  Ultimately, there are  

four businesses that the assessees are engaged in, namely,  

ATM Management Services, Electronic Payment Management,  

Decision Support and Risk Management and Global  

Outsourcing and Professional Services.   Since all these  

businesses are carried on outside India and the property

16  

through which these businesses are carried out, namely ATM  

networks, software solutions and other hardware networks and  

information technology infrastructure were all located outside  

India, the activities of e-Funds India are independent business  

activities on which, as has been noticed by the High Court,  

independent profits are made and income assessed to tax  

under the Income Tax Act.    According to the learned counsel,  

“agency PE” was never argued before the assessing officer and  

even before the ITAT.   Therefore, no factual foundation for the  

same has been laid.  Equally, according to the learned counsel,  

the settlement procedure availed for the assessment years in  

question cannot be said to be binding for subsequent years as  

they were without prejudice to the assessees’ contention that  

they have no PE in India.  He also relied upon the OECD  

Commentary, paragraph 3.6 in particular, to demonstrate that  

the so-called admissions made and relied upon by the three  

authorities below were correctly overturned by the High Court.   

Learned counsel also stated that the ground of adverse  

inference was never argued or put before any of the authorities  

below, and the only place that it could be found is in the

17  

assessment order for the year 2003-04, which order became  

non est as it was substituted by the agreement entered into  

between the parties ending in withdrawal of appeals before the  

CIT (Appeals).   Thus, according to the learned counsel, the  

view of the High Court is absolutely correct and should not be  

interfered with.  Learned counsel also argued that the cross-

appeals of the Revenue were correctly dismissed in that, even  

though the ITAT decided the case in law against the  

assessees, yet it found on facts, differing from the calculation  

formula by the authorities below, that nil tax was payable.  This  

is the only part of the ITAT judgment upheld by the High Court,  

and should not, therefore, be disturbed in any case.  

6. Before we deal with the submissions made on both sides,  

it is necessary to first set out the statutory background.   This is  

contained in Section 90 of the Income Tax Act, before it was  

amended in 2009.  Section 90(1) and 90(2) of the Income Tax  

Act, as it then stood, read as under:  

“Section 90. Agreement with foreign countries.—

18  

1) The Central Government may enter into an  agreement with the Government of any country  outside India—  

(a)  for the granting of relief in respect of—  

(i)  income on which have been paid both  income-tax under this Act and income-tax in that  country; or  

(ii)  income-tax chargeable under this Act and  under the corresponding law in force in that country  to promote mutual economic relations, trade and  investment, or  

(b) for the avoidance of double taxation of income  under this Act and under the corresponding law in  force in that country, or  

(c) for exchange of information for the prevention of  evasion or avoidance of income-tax chargeable  under this Act or under the corresponding law in  force in that country, or investigation of cases of  such evasion or avoidance, or  

(d) for recovery of income-tax under this Act and  under the corresponding law in force in that country,  

and may, by notification in the Official Gazette,  make such provisions as may be necessary for  implementing the agreement.  

(2) Where the Central Government has entered into  an agreement with the Government of any country  outside India under sub-section (1) for granting  relief of tax, or as the case may be, avoidance of  double taxation, then, in relation to the assessee to  whom such agreement applies, the provisions of  this Act shall apply to the extent they are more  beneficial to that assessee.”  

19  

7. Under this provision, the India US Double Taxation  

Avoidance Agreement of 1990 was made.   We are directly  

concerned with Article 5 of the DTAA, which reads as under:  

“ARTICLE 5 - Permanent establishment –   

1. For the purposes of this Convention, the term  “permanent establishment” means a fixed place of  business through which the business of an  enterprise is wholly or partly carried on.   

2. The term “permanent establishment” includes  especially:   (a) a place of management;   (b) a branch;   (c) an office;   (d) a factory;   (e) a workshop;   (f) a mine, an oil or gas well, a quarry, or any other  place of extraction of natural resources;   (g) a warehouse, in relation to a person providing  storage facilities for others;   (h) a farm, plantation or other place where  agriculture, forestry, plantation or related activities  are carried on;   (i) a store or premises used as a sales outlet;   (j) an installation or structure used for the  exploration or exploitation of natural resources, but  only if so used for a period of more than 120 days in  any twelve-month period;   (k) a building site or construction, installation or  assembly project or supervisory activities in  connection therewith, where such site, project or  activities (together with other such sites, projects or  activities, if any) continue for a period of more than  120 days in any twelve-month period;  

20  

(l) the furnishing of services, other than included  services as defined in Article 12 (Royalties and  Fees for Included Services), within a Contracting  State by an enterprise through employees or other  personnel, but only if:   

(i) activities of that nature continue within that  State for a period or periods aggregating more than  90 days within any twelve-month period; or   

(ii) the services are performed within that  State for a related enterprise [within the meaning of  paragraph 1 of Article 9 (Associated Enterprises)].   

3. Notwithstanding the preceding provisions of this  Article, the term “permanent establishment” shall be  deemed not to include any one or more of the  following:   

(a) the use of facilities solely for the purpose of  storage, display, or occasional delivery of goods or  merchandise belonging to the enterprise;   (b) the maintenance of a stock of goods or  merchandise belonging to the enterprise solely for  the purpose of storage, display, or occasional  delivery;   (c) the maintenance of a stock of goods or  merchandise belonging to the enterprise solely for  the purpose of processing by another enterprise;   (d) the maintenance of a fixed place of business  solely for the purpose of purchasing goods or  merchandise, or of collecting information, for the  enterprise;   (e) the maintenance of a fixed place of business  solely for the purpose of advertising, for the supply  of information, for scientific research or for other  activities which have a preparatory or auxiliary  character, for the enterprise.     4. Notwithstanding the provisions of paragraphs 1  and 2, where a person—other than an agent of an  independent status to whom paragraph 5 applies -

21  

is acting in a Contracting State on behalf of an  enterprise of the other Contracting State, that  enterprise shall be deemed to have a permanent  establishment in the first-mentioned State, if:   

(a) he has and habitually exercises in the first- mentioned State an authority to conclude on behalf  of the enterprise, unless his activities are limited to  those mentioned in paragraph 3 which, if exercised  through a fixed place of business, would not make  that fixed place of business a permanent  establishment under the provisions of that  paragraph;   (b) he has no such authority but habitually maintains  in the first-mentioned State a stock of goods or  merchandise from which he regularly delivers goods  or merchandise on behalf of the enterprise, and  some additional activities conducted in the State on  behalf of the enterprise have contributed to the sale  of the goods or merchandise; or   (c) he habitually secures orders in the first- mentioned State, wholly or almost wholly for the  enterprise.     5. An enterprise of a Contracting State shall not be  deemed to have a permanent establishment in the  other Contracting State merely because it carries on  business in that other State through a broker,  general commission agent, or any other agent of an  independent status, provided that such persons are  acting in the ordinary course of their business.  However, when the activities of such an agent are  devoted wholly or almost wholly on behalf of that  enterprise and the transactions between the agent  and the enterprise are not made under arm’s length  conditions, he shall not be considered an agent of  independent status within the meaning of this  paragraph.    

22  

6. The fact that a company which is a resident of a  Contracting State controls or is controlled by a  company which is a resident of the other  Contracting State, or which carries on business in  that other State (whether through a permanent  establishment or otherwise), shall not of itself  constitute either company a permanent  establishment of the other.”  

 8. Article 7 has also been referred to, by which the profits of  

an enterprise of a contracting State may be taxed in the other  

State only to the extent of so much of the business as is  

attributable to a permanent establishment in the other State.   

Article 25 was referred to by the learned Attorney General to  

counter an argument made by Shri Ganesh based upon  

affidavits filed before this Court stating that if the assessees  

were made to pay tax in India, there would be double taxation.   

Article 25 provides for relief from such double taxation, by  

which the United States shall allow to a resident or citizen of the  

United States as a credit against US tax on income tax that is  

paid to India by or on behalf of such citizen in India.  Article 27  

is also important and reads as under:  

“ARTICLE 27 - Mutual agreement procedure –  

23  

1. Where a person considers that the actions of one  or both of the Contracting States result or will result  for him in taxation not in accordance with the  provisions of this Convention, he may, irrespective  of the remedies provided by the domestic law of  those States, present his case to the competent  authority of the Contracting State of which he is a  resident or national. This case must be presented  within three years of the date of receipt of notice of  the action which gives rise to taxation not in  accordance with the Convention.   

2. The competent authority shall endeavour, if the  objection appears to it to be justified and if it is not  itself able to arrive at a satisfactory solution, to  resolve the case by mutual agreement with the  competent authority of the other Contracting State,  with a view to the avoidance of taxation which is not  in accordance with the Convention. Any agreement  reached shall be implemented notwithstanding any  time limits or other procedural limitations in the  domestic law of the Contracting States.   

3. The competent authorities of the Contracting  States shall endeavour to resolve by mutual  agreement any difficulties or doubts arising as to the  interpretation or application of the Convention. They  may also consult together for the elimination of  double taxation in cases not provided for in the  Convention.   

4. The competent authorities of the Contracting  States may communicate with each other directly  for the purpose of reaching an agreement in the  sense of the preceding paragraphs. The competent  authorities, through consultations, shall develop  appropriate bilateral procedures, conditions,  methods and techniques for the implementation of  the mutual agreement procedure provided for in this  Article. In addition, a competent authority may

24  

devise appropriate unilateral procedures,  conditions, methods and techniques to facilitate the  above-mentioned bilateral actions and the  implementation of the mutual agreement  procedure.”  

9. This Article must be read with Rule 44H of the Income  

Tax Rules, 1962, which reads as under:  

“Action by the Competent Authority of India and  procedure for giving effect to the decision under  the agreement.  

44H. (1) Where a reference has been received from  the competent authority of a country outside India  under any agreement with that country with regard  to any action taken by any income-tax authority in  India, the Competent Authority in India shall call for  and examine the relevant records with a view to  give his response to the competent authority of the  country outside India.  

(2) The Competent Authority in India shall  endeavour to arrive at a resolution of the case in  accordance with such agreement.  

(3) The resolution arrived at under mutual  agreement procedure, in consultation with the  competent authority of the country outside India,  shall be communicated, wherever necessary, to the  Chief Commissioner or the Director-General of  Income-tax, as the case may be, in writing.  

(4) The effect to the resolution arrived at under  mutual agreement procedure shall be given by the  Assessing Officer within ninety days of receipt of the  same by the Chief Commissioner or the Director- General of Income-tax, if the assessee,—

25  

(i)   gives his acceptance to the  resolution taken under mutual  agreement procedure; and  

(ii)   withdraws his appeal, if any,  pending on the issue which  was the subject matter for  adjudication under mutual  agreement procedure.  

 (5) The amount of tax, interest or penalty already  determined shall be adjusted after incorporating the  decision taken under mutual agreement procedure  in the manner provided under the Income-tax Act,  1961 (43 of 1961), or the rules made thereunder to  the extent that they are not contrary to the  resolution arrived at.  

Explanation.—For the purposes of rules 44G and  44H, “Competent Authority of India” shall mean an  officer authorised by the Central Government for the  purposes of discharging the functions as such.”  

10. The Income Tax Act, in particular Section 90 thereof,  

does not speak of the concept of a PE.  This is a creation only  

of the DTAA.  By virtue of Article 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 to which it is attributable to such PEs, would be taxable  

in India.  Article 5 of the DTAA set out hereinabove provides for

26  

three distinct types of PEs with which we are concerned in the  

present case: fixed place of business PE under Articles 5(1)  

and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and  

agency PE under Article 5(4).  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 Revenue.   With these prefatory remarks, let us  

analyse whether the respondents can be brought within any of  

the sub-clauses of Article 5.    

11. Since the Revenue originally relied on fixed place of  

business PE, this will be tackled first.  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.  What is a “fixed  

place of business” is no longer res integra.  In Formula One  

(supra), this Court, after setting out Article 5 of the DTAA, held  

as follows:

27  

“32. The principal test, in order to ascertain as to  

whether an establishment has a fixed place of  

business or not, is that such physically located  

premises have to be ‘at the disposal’ of the  

enterprise. For this purpose, it is not necessary that  

the premises are owned or even rented by the  

enterprise. It will be sufficient if the premises are put  

at the disposal of the enterprise. However, merely  

giving access to such a place to the enterprise for  

the purposes of the project would not suffice. The  

place would be treated as ‘at the disposal’ of the  

enterprise when the enterprise has right to use the  

said place and has control thereupon.  

xxx xxx xxx  

34. According to Philip Baker, the aforesaid  illustrations confirm that the fixed place of business  need not be owned or leased by the foreign  enterprise, provided that is at the disposal of the  enterprise in the sense of having some right to use  the premises for the purposes of its business and  not solely for the purposes of the project undertaken  on behalf of the owner of the premises.  

35. Interpreting the OECD Article 5 pertaining to PE,  Klaus Vogel has remarked that insofar as the term  ‘business’ is concerned, it is broad, vague and of  little relevance for the PE definition. According to  him, the crucial element is the term ‘place’.  Importance of the term ‘place’ is explained by him in  the following manner:  

“In conjunction with the attribute ‘fixed’,  the requirement of a place reflects the  strong link between the land and the  taxing powers of the State. This  territorial link serves as the basis not

28  

only for the distributive rules which are  tied to the existence of PE but also for a  considerable number of other  distributive rules and, above all, for the  assignment of a person to either  Contracting State on the basis of  residence (Article 1, read in conjunction  with Article 4 OECD and UN MC).”  

36. We would also like to extract below the  definition to the expression ‘place’ by Vogel, which  is as under:  

“A place is a certain amount of space  within the soil or on the soil. This  understanding of place as a three- dimensional zone rather than a single  point on the earth can be derived from  the French Version (‘installation fixe’) as  well as the term ‘establishment’. As a  rule, this zone is based on a certain  area in, on, or above the surface of the  earth. Rooms or technical equipment  above the soil may qualify as a PE only  if they are fixed on the soil. This  requirement, however, stems from the  term ‘fixed’ rather than the term ‘place’,  given that a place (or space) does not  necessarily consist of a piece of land.  On the contrary, the term  ‘establishment’ makes clear that it is not  the soil as such which is the PE but that  the PE is constituted by a tangible  facility as distinct from the soil. This is  particularly evident from the French  version of Article 5(1) OECD MC which  uses the term ‘installation’ instead of  ‘place’.  

The term ‘place’ is used to define the  term ‘establishment’. Therefore, ‘place’

29  

includes all tangible assets used for  carrying on the business, but one such  tangible asset can be sufficient. The  characterization of such assets under  private law as real property rather than  personal property (in common law  countries) or immovable rather than  movable property (in civil law countries)  is not authoritative. It is rather the  context (including, above all, the terms  ‘fixed’/‘fixe’), as well as the object and  purpose of Article 5 OECD and UN MC  itself, in the light of which the term  ‘place’ needs to be interpreted. This  approach, which follows from the  general rules on treaty interpretation,  gives a certain leeway for including  movable property in the understanding  of ‘place’ and, therefore, we assume a  PE once such property has been ‘fixed’  to the soil.  

For example, a work bench in a  caravan, restaurants on permanently  anchored river boats, steady oil rigs, or  a transformator or generator on board a  former railway wagon qualify as places  (and may also be ‘fixed’).  

In contrast, purely intangible property  cannot qualify in any case. In particular,  rights such as participations in a  corporation, claims, bundles of claims  (like bank accounts), any other type of  intangible property (patents, software,  trademarks etc.) or intangible economic  assets (a regular clientele or the  goodwill of an enterprise) do not in  themselves constitute a PE. They can  only form part of PE constituted

30  

otherwise. Likewise, an internet website  (being a combination of software and  other electronic data) does not  constitute tangible property and,  therefore, does not constitute a PE.  

Neither does the mere incorporation of a  company in a Contracting State in itself  constitute a PE of the company in that  State. Where a company has its seat,  according to its by-laws and/or  registration, in State A while the POEM  is situated in State B, this company will  usually be liable to tax on the basis of its  worldwide income in both Contracting  States under their respective domestic  tax law. Under the A-B treaty, however,  the company will be regarded as a  resident of State B only (Article 4(3)  OECD and UN MC). In the absence of  both actual facilities and a dependent  agent in State A, income of this  company will be taxable only in State B  under the 1st sentence of Article 7(1)  OECD and UN MC.  

There is no minimum size of the piece of  land. Where the qualifying business  activities consist (in full or in part) of  human activities by the taxpayer, his  employees or representatives, the mere  space needed for the physical presence  of these individuals is not sufficient (if it  were sufficient, Article 5(5) OECD MC  and Article 5(5)(a) UN MC and the  notion of agent PEs were superfluous).  This can be illustrated by the example of  a salesman who regularly visits a major  customer to take orders, and conducts  meetings in the purchasing director's

31  

office. The OECD MC Comm. has  convincingly denied the existence of a  PE, based on the implicit understanding  that the relevant geographical unit is not  just the chair where the salesman sits,  but the entire office of the customer, and  the office is not at the disposal of the  enterprise for which the salesman is  working.”  

37. Taking cue from the word ‘through’ in the Article,  Vogel has also emphasised that the place of  business qualifies only if the place is ‘at the  disposal’ of the enterprise. According to him, the  enterprise will not be able to use the place of  business as an instrument for carrying on its  business unless it controls the place of business to  a considerable extent. He hastens to add that there  are no absolute standards for the modalities and  intensity of control. Rather, the standards depend  on the type of business activity at issue. According  to him, ‘disposal’ is the power (or a certain fraction  thereof) to use the place of business directly. Some  of the instances given by Vogel in this behalf, of  relative standards of control, are as under:  

“The degree of control depends on the  type of business activity that the  taxpayer carries on. It is therefore not  necessary that the taxpayer is able to  exclude others from entering or using  the POB.  

The painter example in the OECD MC  Comm. (no. 4.5 OECD MC Comm. on  Article 5) (however questionable it might  be with regard to the functional  integration test) suggests that the type  and extent of control need not exceed  the level of what is required for the

32  

specific type of activity which is  determined by the concrete business.  

By contrast, in the case of a self- employed engineer who had free access  to his customer's premises to perform  the services required by his contract, the  Canadian Federal Court of Appeal ruled  that the engineer had no control  because he had access only during the  customer's regular office hours and was  not entitled to carry on businesses of his  own on the premises.  

Similarly, a Special Bench of Delhi's  Income Tax Appellate Tribunal denied  the existence of a PE in the case  of Ericsson. The Tribunal held that it  was not sufficient that Ericsson's  employees had access to the premises  of Indian mobile phone providers to  deliver the hardware, software and  know-how required for operating a  network. By contrast, in the case of a  competing enterprise, the Bench did  assume an Indian PE because the  employees of that enterprise (unlike  Ericsson's) had exercised other  businesses of their employer.  

The OECD view can hardly be  reconciled with the two court cases. All  three examples do indeed shed some  light onto the method how the relative  standards for the control threshold  should be designed. While the OECD  MC Comm. suggests that it is sufficient  to require not more than the type and  extent of control necessary for the  specific business activity which the  taxpayer wants to exercise in the source

33  

State, the Canadian and Indian  decisions advocate for stricter standards  for the control threshold.  

The OECD MC shows a paramount  tendency (though no strict rule) that PEs  should be treated like subsidiaries (cf.  Article 24(3) OECD and UN MC), and  that facilities of a subsidiary would rarely  been unusable outside the office hours  of one of its customers (i.e. a third  person), the view of the two courts is still  more convincing.  

Along these lines, a POB will usually  exist only where the taxpayer is free to  use the POB:  

- at any time of his own choice;  

- for work relating to more than one  customer; and  

- for his internal administrative and  bureaucratic work.  

In all, the taxpayer will usually be  regarded as controlling the POB only  where he can employ it at his discretion.  This does not imply that the standards  of the control test should not be flexible  and adaptive. Generally, the less  invasive the activities are, and the more  they allow a parallel use of the same  POB by other persons, the lower are the  requirements under the control test.  There are, however, a number of  traditional PEs which by their nature  require an exclusive use of the POB by  only one taxpayer and/or his personnel.  A small workshop (cf. Article 5(2)(e)  OECD and UN MC) of 10 or 12 square

34  

meters can hardly be used by more than  one person. The same holds true for a  room where the taxpayer runs a noisy  machine.”  

38. OECD commentary on Model Tax Convention  mentions that a general definition of the term ‘PE’  brings out its essential characteristics, i.e. a distinct  “situs”, a “fixed place of business”. This definition,  therefore, contains the following conditions:  

- the existence of a “place of business”, i.e. a facility  such as premises or, in certain instances,  machinery or equipment;  

- this place of business must be “fixed”, i.e. it must  be established at a distinct place with a certain  degree of permanence;  

- the carrying on of the business of the enterprise  through this fixed place of business. This means  usually that persons who, in one way or another,  are dependent on the enterprise (personnel)  conduct the business of the enterprise in the State  in which the fixed place is situated.”  

12. 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

35  

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.  The High Court has dealt with this aspect in  

some detail in which it held:  

“49. The Assessing Officer, Commissioner  (Appeals) and the tribunal have primarily relied  upon the close association between e-Fund India  and the two assessees and applied functions  performed, assets used and risk assumed, criteria  to determine whether or not the assessee has fixed  place of business. This is not a proper and  appropriate test to determine location PE. The fixed  place of business PE test is different. Therefore, the  fact that e-Fund India provides various services to  the assessee and was dependent for its earning  upon the two assessees is not the relevant test to  determine and decide location PE. The allegation  that e-Fund India did not bear sufficient risk is  irrelevant when deciding whether location PE exists.  The fact that e-Fund India was reimbursed the cost  of the call centre operations plus 16% basis or the  basis of margin fixation was not known, is not  relevant for determining location or fixed place PE.  Similarly what were the direct or indirect costs and  corporate allocations in software development  centre or BPO does not help or determine location  PE. Assignment or sub-contract to e-Fund India is  not a factor or rule which is to be applied to  determine applicability of Article 5(1). Further  whether or not any provisions for intangible software  was made or had been supplied free of cost is not  the relevant criteria/test. e-Fund India was/is a

36  

separate entity and was/is entitled to provide  services to the assessees who were/are  independent separate taxpayers. Indian entity i.e.  subsidiary company will not become location PE  under Article 5(1) merely because there is  interaction or cross transactions between the Indian  subsidiary and the foreign Principal under Article  5(1). Even if the foreign entities have saved and  reduced their expenditure by transferring business  or back office operations to the Indian subsidiary, it  would not by itself create a fixed place or location  PE. The manner and mode of the payment of  royalty or associated transactions is not a test which  can be applied to determine, whether fixed place PE  exists.”  

13. It further went on to hold that the ITAT’s 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  

vs. 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 regard.

37  

14. 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 the e-Funds  

group of 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 worldwide.    

15. Also, Shri Ganesh has pointed out that the two American  

companies have four main business activities which are: ATM  

Management Services, Electronic Payment Management,  

Decision Support and Risk Management and Global  

Outsourcing and Professional Services.  He was at great pains  

to point out the report of Deloitte Haskins and Sells dated 13th  

March, 2009, produced before the CIT (Appeals), in which, on  

behalf of their American clients, the said firm of Chartered  

Accountants stated:  

“2. The nature of business under each of the above  verticals is detailed below:  

a)     ATM Management Services

38  

eFunds US’s ATM Management Services (“ATM  Services”) segment covers the business of ATM  deployment, management and branding services.  eFunds US is an independent provider of ATMs and  it places ATMs in convenience, grocery, general  merchandise, and drug stores as well as gas  stations located throughout the United States and  Canada. The ATMs run on an operating software  which is generally owned by the original ATM  manufacturer whereas the datacentre, to which  such ATMs are connected, operate on the software  platforms such as ‘Connex’ which have been  developed and maintained by eFunds US.    Services provided by eFunds US: eFunds US  provided the processing for over 11,000 of the ATM  machines in its network. Most of the ATMs were  owned by the Appellant and its associate  companies. All these ATMs were installed outside  India and mainly in United States.    Services provided by eFunds India: The only  involvement of eFunds India was responding to  queries raised by the customers, if they faced any  difficulty in operation of their transaction which was  part of activity (d) referred above.  

b)    Electronic Payment Management  

eFunds US’s Electronic Payment Management  segment provides products and services in two  broad categories: Payment Processing Software  and Electronic Payment Processing Services. The  business involves processing transactions for  regional automated teller machine or ATM networks  in the United States and also transaction processing  for retail point-of-sale terminals that accept  payments from debit cards and paper cheques that  have been converted into electronic transactions.

39  

 Processing Services: eFunds US processes  transactions for regional ATM networks in the  United States. They also provide transaction  processing for retail point of sale (“POS”) terminals  that accept payments from debit cards and paper  cheques that have been converted into electronic  transactions. Transaction processing involves  electronically transferring money from a person’s  checking or savings account according to his or her  instructions. To carry out the tasks required, each  ATM or POS device is typically connected to  several computer networks. None of these networks  is installed in India. These networks include private  networks that connect the devices of a single  owner, shared networks that serve several device  owners in a region, and national shared networks  that provide access to devices across regions. Each  shared network has numerous financial institution  members. eFunds US provides its Customers with  access across multiple networks.    eFunds US’s Government services EBT (Electronic  Benefits Transfer) business was started in response  to federal mandates that require state and local  Governmental agencies to convert to electronic  payment methods for the distribution of benefits  under entitlement programs, primarily food stamps  and Transitional Aid to Needy Families. The EBT  processing system manages, supports, and controls  the electronic payment and distribution of cash  benefits to program participants through ATMs and  POS networks. As mentioned earlier, these are  mostly located in USA. In any case, none was  located in India.    Software Products: eFunds US develops and sells  electronic funds transfer software, Connex and  Architect, used in electronic payment services to in-

40  

house processors and regional networks in 23  foreign countries and in the United States. None of  the software products of eFunds US was licensed or  installed in India. This software runs on IBM and  Tandem computing platforms. eFunds US also  provides software maintenance and support  services as part of its Global Outsourcing business.  eFunds US has developed various other  software/solutions.    Services provided by eFunds US: eFunds US  was responsible for Customer Interface and  customization of products and services as per the  dictates of the Customer. Agreement/contracts with  the Customer were entered into by eFunds US. All  risks and responsibilities for performance of the  Contract at all times were of eFunds US only. All  Software’s/solutions are developed by eFunds US.  Software writing and conceptualization of ideas  were done by eFunds US. All Networks and  Infrastructure for this category of services is owned  by eFunds US only. Connex was developed by a  company acquired by eFunds US. eFunds US’s  associate company in United Kingdom has  developed and owns the Architect software which is  middleware used primarily by financial institutions in  Europe (there is one customer in Chicago). This  software runs on IBM and Tandem computing  platforms. All of them were located outside India.    In accordance with the terms of the contract with  Government Agencies, eFunds US is responsible  for management, support and control of the  electronic payment band distribution of cash  benefits to program participants through its ATM  and point of sale network.    Services provided by eFunds India: eFunds India  provided testing, bug fixing and other related

41  

software development support services to eFunds  US for various software/software based solutions  developed by eFunds US. Such services are  required by eFunds US in the course of  development of software/software based solutions  and their use in providing services to customers.  The process of development of software/solutions  involves testing the same with sample data to  determine the workability of the software. Further,  certain errors or bugs may be found in the  software/solutions at such eFunds US avails the  services of eFunds India for bug fixing.    The work performed by eFunds India for eFunds  Government Services Business (EBT Processing)  was limited to responding to the inbound calls made  to its call centre for enquiry on non-acceptance of  cheques and opening of accounts.  

c)     Decision Support & Risk Management  

eFunds’ US Decision Support & Risk Management  (“Risk Management”) segment provides risk  management-based data and other products to  financial institutions, retailers and other businesses  that assist in detecting fraud and assessing the risk  of opening a new account or accepting a cheque.  This segment offers products and services that help  determine the likelihood of account fraud and  identity manipulation and assess the overall risks  involved in opening new accounts or accepting  payment transactions.    SCAN: SCAN or Shared Cheque Authorization  Network, helps retailers reduce the risk of write-offs  for dishonoured cheques due to insufficient funds  and other forms of account fraud or identity  manipulation. When a cheque is presented as  payment at the point-of-sale, SCAN members run

42  

the cheque through a scanner. The information on  the cheque is then compared to the SCAN database  to determine whether there have been payment  problems with the cheque writer or his or her  account. SCAN then reports any issues to the  retailer and the merchant decides whether or not to  accept the cheque.    ChexSystems: The ChexSystems business is a  provider of new account applicant verification  services for financial institutions. ChexSystems  provides access to more than 17 million closed-for- cause account histories and has recorded 124  million new account enquiries. An account is  considered closed-for-cause when, for example, a  consumer refuses to pay the account fee and the  bank closes the account. ChexSystems helps  financial institutions immediately assess the risks  involved in opening an account for a new customer  by supporting real-time enquiries to its database of  consumer debit account performance.  ChexSystems’ database includes account history  data provided by or purchased from financial  institutions and other data purchased from third  parties including driver’s license data, deceased  person’s records and suspect address lists. All such  data base relates to the persons located in the US  and the customers of this data base were banks  and retailers located in the US.    Services provided by eFunds US: eFunds US  was responsible for Customer interface and  agreement/contracts with the customers were  entered into by eFunds US. All risks and  responsibilities for performance of contracts at all  times were of eFunds US only. All eFunds risk  management services are based on, or enhanced  by eFunds’ proprietary DebitBureau database,  which is located in data centres of the group

43  

situated in USA. DebitBureau contains over three  billion records and includes data form eFunds  ChexSystemsSM and SCANSM databases and  other sources. The data in DebitBureau is used to  screen for potentially incorrect, inconsistent, or  fraudulent social security numbers, home  addresses, telephone numbers, driver license  information, and other indicators of possible identity  manipulation. Using this data, eFunds US can  perform various tests to validate a consumer’s  identity  and assess and rank the risk of fraud  associated with opening  an account for or  accepting a payment  from that consumer. eFunds  US software development centers in the United  States, as well as in the U.S. data centers and  remotely at the customers’ sites develop and  maintain software for these service offerings.    Services provided by eFunds India: The work  performed by eFunds India involved responding to  the inbound calls made by the customers located  outside India to customer support center of eFunds  US. These calls were routed to eFunds India for  enquiry on non-acceptance of cheques and opening  of accounts.  

eFunds India also provided software support  services for SCAN and Chex process. eFunds India  was only involved in bug fixing and software  maintenance.  

d) Global Outsourcing Services &  Professional Services  

eFunds US provide its clients with information  technology and business process outsourcing  services to complement and support its electronic  payments business. Its business process  management and outsourcing services focus on  both back-office and customer support business

44  

processes, such as accounting operations, help  desk, account management, transaction processing  and call center operations. It consists of providing  information technology services including  maintenance of hardware and networks, installation  of eFunds US electronic payment products and the  integration of these products within the customer’s  existing information technology infrastructure. All of  these hardwares, networks and information  technology infrastructure were located outside India.  Professional services include customizing standard  eFunds US products and developing new  applications for clients who want additional features  and functionality and help clients test and refine  eFunds US products in their information technology  environments. In addition, it also covers providing  on-site user training on eFunds US products and  solutions for the information technology, operations  and management staff of clients.  

Services provided by eFunds US: eFunds US  was responsible for Customer Interface and  customization of products and services as per the  dictates of the Customer. Agreement/ contracts with  the customers were entered into by eFunds US. All  risks and responsibilities for performance of the  contracts at all times were of eFunds US only.  

Services provided by eFunds India: eFunds US  subcontracted part of its responsibilities under  professional services contract with some of its  customers to eFunds India which involve the  following:  

• Data Processing Services including making  outbound calls to collate data;  

• Making soft outbound calls to customers of  eFunds US clients to follow up payment; and   

• Responding to inbound calls from customers  from dealers/customers of telecom services

45  

providers (who are customers of eFunds US), to  check on the status of applications made for new  connections, change in billing plans etc.  

Note: Logica Global, an independent company, had  received an order from the Reserve Bank of India  for development and implementation of certain  software. A part of this work was subcontracted to  eFunds India directly by Logica Global. The  Appellant had nothing to do with this contract.”  

 16. 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 score.    

17. Insofar as a service PE is concerned, the requirement of  

Article 5(2)(l) of the DTAA is that an enterprise must furnish  

services “within India” through employees or other personnel.   

In this regard, this Court has held, in Morgan Stanley (supra),  

as follows:

46  

“16. Article 5(2)(l) of DTAA applies in cases where  

MNE furnishes services within India and those  

services are furnished through its employees. In the  

present case we are concerned with two activities,  

namely, stewardship activities and the work to be  

performed by deputationists in India as employees  

of MSAS. A customer like MSCo who has worldwide  

operations is entitled to insist on quality control and  

confidentiality from the service provider. For  

example in the case of software PE a server stores  

the data which may require confidentiality. A service  

provider may also be required to act according to  

the quality control specifications imposed by its  

customer. It may be required to maintain  

confidentiality. Stewardship activities involve  

briefing of the MSAS staff to ensure that the output  

meets the requirements of MSCo. These activities  

include monitoring of the outsourcing operations at  

MSAS. The object is to protect the interest of  

MSCo. These stewards are not involved in day-to-

day management or in any specific services to be  

undertaken by MSAS. The stewardship activity is  

basically to protect the interest of the customer. In  

the present case as held hereinabove MSAS is a  

service PE. It is in a sense a service provider. A  

customer is entitled to protect its interest both in  

terms of confidentiality and in terms of quality  

control. In such a case it cannot be said that MSCo  

has been rendering the services to MSAS. In our  

view MSCo is merely protecting its own interests in  

the competitive world by ensuring the quality and  

confidentiality of MSAS services. We do not agree  

with the ruling of AAR that the stewardship activity  

would fall under Article 5(2)(l). To this extent we find

47  

merit in the civil appeal filed by the appellant  

(MSCo) and accordingly its appeal to that extent  

stands partly allowed.  

17. As regards the question of deputation, we are of  

the view that an employee of MSCo when deputed  

to MSAS does not become an employee of MSAS.  

A deputationist has a lien on his employment with  

MSCo. As long as the lien remains with MSCo the  

said company retains control over the  

deputationist’s terms and employment. The concept  

of a service PE finds place in the UN Convention. It  

is constituted if the multinational enterprise renders  

services through its employees in India provided the  

services are rendered for a specified period. In this  

case, it extends to two years on the request of  

MSAS. It is important to note that where the  

activities of the multinational enterprise entails it  

being responsible for the work of deputationists and  

the employees continue to be on the payroll of the  

multinational enterprise or they continue to have  

their lien on their jobs with the multinational  

enterprise, a service PE can emerge.  

18. Applying the above tests to the facts of this case  

we find that on request/requisition from MSAS the  

applicant deputes its staff. The request comes from  

MSAS depending upon its requirement. Generally,  

occasions do arise when MSAS needs the expertise  

of the staff of MSCo. In such circumstances,  

generally, MSAS makes a request to MSCo. A  

deputationist under such circumstances is expected  

to be experienced in banking and finance. On  

completion of his tenure he is repatriated to his  

parent job. He retains his lien when he comes to

48  

India. He lends his experience to MSAS in India as  

an employee of MSCo as he retains his lien and in  

that sense there is a service PE (MSAS) under  

Article 5(2)(l). We find no infirmity in the ruling of  

ARR on this aspect. In the above situation, MSCo is  

rendering services through its employees to MSAS.  

Therefore, the Department is right in its contention  

that under the above situation there exists a service  

PE in India (MSAS). Accordingly, the civil appeal  

filed by the Department stands partly allowed.”  

(at pages 15-16)  

18. 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 India.  Para 42.31 of  

the OECD Commentary reads as under:  

“Whether or not the relevant services are furnished  to a resident of a state does not matter: what  matters is that the services are performed in the  State through an individual present in that State.”  

49  

19. Based upon the said paragraph, Shri Venugopal has  

argued that in assessment year 2005-06, two employees of the  

American firm were seconded in India and that, therefore, it is  

clear that management of the American company through these  

employees has obviously taken place.  The High Court, in  

dealing with this contention, has found as follows:  

“62. The appellants had pleaded before the  authorities and the tribunal that prior to assessment  year 2005-06 not even a single employee of the  assessee ever visited India even for a short period  and in 2005-06, two employees of e-Fund were  transferred to e-Fund India and that the entire  expenditure for these two employees were borne by  e-Fund India. No employees were present in India  after 2005-06. Presence of employees in India is  relevant under Article 5(2)(l) but the said employees  should furnish services within the contracting State.  These services should not be mere stewardship  services. The Assessing Officer has recorded that  employees were seconded to e-Fund India but the  functions they performed and whether they  performed functions and reported to e-Fund  Corp/associated enterprise was not known or  ascertained. This was not the correct way of  determining and deciding whether service PE  existed. Whether the seconded employees were  performing stewardship services or were directly  involved with the working operations was relevant. It  is also not known whether the services were  performed related to services provided to an  associated enterprise in which case clause 5(2)(l)(ii)  would be applicable. In the said situation, the

50  

question of attribution of income etc. would also  arise.   

63. Two employees of e-Fund Corp were deputed to  e-Fund India in the assessment years 2005-06. The  case of the assessee and e-Fund India is that they  were deputed to look towards development of  domestic work in India. Payment of these  employees as per the Revenue to the extent of 25%  was borne by e-Fund India and balance 75% was  borne by e-Fund Corp. The Assessing Officer on  this basis has observed that this reduced cost base  of e-Fund India as remuneration was paid by e- Fund Corp and the said employees were at liberty  to perform functions of e-Fund Corp even while  working for e-Fund India. The response of the  assessee as quoted in the assessment order was  that e-Fund India, apart from export activities had  also domestic business in India. This was evident  from the return of income filed by e-Fund India  where domestic income was computed separately  as it was not eligible for deduction under Section  10A of the Act. Copy of the return was furnished. It  was further stated that cost of personnel seconded  in India was fully borne by e-Fund India i.e. 100% of  the salary paid to the said employees seconded to  India were debited to profit and loss accounts. 75%  of the salary component was paid abroad by e-Fund  Corp but the same was reimbursed by e-Fund India.  This was in accordance with and permitted under  the Indian Exchange Control Regulations. It was  further stated that the Assessing Officer was wrong  in assuming that the two seconded employees were  at liberty to function for e-Fund Corp while they  were working for e-Fund India. The seconded  employees were working under the control and  supervision of e-Fund India. The Assessing Officer  thereupon has not commented on the reply of the  assessee, though he has recorded comments in

51  

respect of replies to other issues raised by him (see  paragraph 7 of the assessment order). The  aforesaid factual assertion made by the assessee,  therefore, was not negated or questioned by the  Assessing Officer.”  

20. 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

52  

the said Article does not arise.  It is perhaps for this reason that  

the assessing officer did not give any finding on this score.    

21. Shri Ganesh has argued before us that the “agency PE”  

aspect of the case need not be gone into as it was given up  

before the ITAT.  He 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 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.  This aspect of the case, therefore,  

need not detain us any further.  

22. Shri Ganesh has referred to and relied upon an order of  

the Additional Taxation Commissioner, who is the Transfer  

Pricing Officer.  The said order is dated 22nd February, 2006  

and states as under:  

“The taxpayer company filed its return of income  with ACIT Circle 11(1), New Delhi. A reference was  received from the Assessing Officer to determine

53  

the ‘arm’s length price’ u/s 92CA(3) in respect of  ‘international transactions’ entered into by the  assessee during the F.Y. 2002-03. In response to  notice u/s 92CA, Shri Vijay Iyer, CA of S.R. Batliboi  & Co.   Chartered Accountants, authorized  representative of the assessee appeared form time  to time. The documentation prescribed under Rule  10D of the Income Tax Rules was submitted and  placed on record.    The taxpayer company is engaged in providing IT  enabled services which include Back office services  and Call centre services. It also has a software  design center for development of software for call  centres.    eFunds International (India) Pvt. Ltd. is a wholly  owned subsidiary of IDLX Holdings BV,  Netherlands. IDLX is a wholly owned subsidiary of  eFunds Corp.    The major international transactions undertaken by  the assessee during the year is given below:     S.No Description of transaction Method Value  

(In Rs.)  

1. Financial Shared Services  

(Back Office)  

TNMM 33.9  

Cr.  

2. Call Center Services (Shared  

Service Centre)  

TNMM 88.03  

Cr.  

3. Software Development  

(Off-shore for call centres)  

TNMM 57.58  

Cr.  

54  

In addition to the above the assessee has also  provided software development services to  overseas eFunds group entities. The international  transactions undertaken by the assessee were  examined vis-a-vis the method applied by the  assessee for arriving at the arm’s length price. The  assessee has relied on the Transactional Net  Margin Method (TNMM) in respect of all the major  international transactions.    After examination of the documentation and  discussion with the authorized representative of the  assessee, no adverse inference is drawn in respect  of the Arm’s Length Price (ALP) of the international  transactions, as declared by the assessee in Form  3CEB, annexed to the return of the Income.”    

Shri Ganesh is correct in stating that as the arm’s length  

principle has been satisfied in the present case, no further  

profits would be attributable even if there exists a PE in India.    

This was specifically held in Morgan Stanley (supra) as  

follows:  

“32. As regards determination of profits attributable  

to a PE in India (MSAS) is concerned on the basis  

of arm’s length principle we have quoted Article 7(2)  

of DTAA. According to AAR where there is an  

international transaction under which a non-resident  

compensates a PE at arm’s length price, no further  

profits would be attributable in India. In this  

connection, AAR has relied upon Circular No. 23 of  

1969 issued by CBDT as well as Circular No. 5 of

55  

2004 also issued by CBDT. This is the key question  

which arises for determination in these civil appeals.  

(at page 25)  

xxx xxx xxx  

35. The object behind enactment of transfer pricing  

regulations is to prevent shifting of profits outside  

India. Under Article 7(2) not all profits of MSCo  

would be taxable in India but only those which have  

economic nexus with PE in India. A foreign  

enterprise is liable to be taxed in India on so much  

of its business profit as is attributable to the PE in  

India. The quantum of taxable income is to be  

determined in accordance with the provisions of the  

IT Act. All provisions of the IT Act are applicable,  

including provisions relating to depreciation,  

investment losses, deductible expenses, carry-

forward and set-off losses, etc. However, deviations  

are made by DTAA in cases of royalty, interest, etc.  

Such deviations are also made under the IT Act (for  

example Sections 44-BB, 44-BBA, etc.).  

36. Under the impugned ruling delivered by AAR,  

remuneration to MSAS was justified by a transfer  

pricing analysis and, therefore, no further income  

could be attributed to the PE (MSAS). In other  

words, the said ruling equates an arm’s length  

analysis (ALA) with attribution of profits. It holds that  

once a transfer pricing analysis is undertaken, there  

is no further need to attribute profits to a PE. The  

impugned ruling is correct in principle insofar as an  

associated enterprise, that also constitutes a PE,  

has been remunerated on an arm’s length  

basis taking into account all the risk-taking functions

56  

of the enterprise. In such cases nothing further  

would be left to be attributed to PE. The situation  

would be different if transfer pricing analysis does  

not adequately reflect the functions performed and  

the risks assumed by the enterprise. In such a  

situation, there would be a need to attribute profits  

to PE for those functions/risks that have not been  

considered. Therefore, in each case the data placed  

by the taxpayer has to be examined as to whether  

the transfer pricing analysis placed by the taxpayer  

is exhaustive of attribution of profits and that would  

depend on the functional and factual analysis to be  

undertaken in each case. Lastly, it may be added  

that taxing corporates on the basis of the concept of  

economic nexus is an important feature of  

attributable profits (profits attributable to PE).”  

(at pages 27-28)  

23. As a large portion of Shri Venugopal’s argument was in  

relation to the MAP settlement in the present case, it would be  

necessary to refer, in some detail, to the documents produced  

on this account.      

24. Resolution dated 23rd April, 2007 passed by the  

competent authority of India, which was strongly relied upon by  

Shri Venugopal, is set out hereinbelow:  

57  

“Resolution under Section 90 of Income Tax Act,  1961 read with Article 27 of Indo-USA Double  Taxation Avoidance Agreement    1. The Acting Director (International), Competent  Authority of USA initiated Mutual Agreement  Procedure in the case of M/s eFunds Corporation  and eFunds I.T. Solutions Inc. for the previous year  ending 31.03.2003 with the Competent Authority of  India under the Double Taxation Avoidance  Agreement vide their letter No.SE:LM:IN:T:2:JN  dated 8.05.2006. Subsequently, vide letter dated  16.02.2007 Competent Authority of USA initiated  Mutual Agreement Procedure for the previous year  ending 31.03.2004 in the eFunds I.T. Solution  Group Inc. The Competent Authorities of both the  countries after having examined the facts of the  case and issues involved have arrived at a  resolution in terms of Section 90 of Income Tax Act,  1961 read with Article 27 of Indo-USA Double  Taxation Avoidance Agreement and Rule 44H of  Income Tax Rules, 1962.    2. The Competent Authorities of USA and India  have reached an agreement as follows with respect  to the tax assessment on M/s eFunds Corporation  and eFunds IT Solutions Group Inc.:-     Income will be attributed to the Indian PEs  based on the ratio of certain developed and  acquired tangible and intangible assets in India and  outside India. Out of the total assets for the AY  2003-04, 10.48% of the assets were located in India  and accordingly 10.48% of the income would be  attributable to India. The percentage attributable to  India for the AY ending 2005 was arrived at 11.11%.  These percentages will be applied to the base of  consolidated gross income as reduced by the  income of subsidiary eFunds India Pvt. Ltd. already

58  

reported in India. Thereafter, the total income so  attributed will be apportioned between eFunds and  IT solutions in the ratio of 85% (to  eFunds) and  15% (to IT Solutions) for the AY 2003-04 and 87%  (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. 2003-04 A.Y.  

2004-05  

Figures in US  

$ million  

Figures in  

US $  

million  

Apportionable base  

income  

25.12 30.71  

Percentage attributed  

to India   

10.48% 11.11%  

Income attributed to  

India   

2.63 3.41  

Allocation between IT  

Solutions and eFunds  

IT Solutions  

eFunds  

0.39 (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.   

59  

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

60  

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

61  

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

62  

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 Court’s  

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.

63  

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.   

30. The appeals are accordingly dismissed with no order as  

to costs.   

…………………………......J.  (R.F. Nariman)  

..……………………...........J.  (Sanjay Kishan Kaul)  

New Delhi;  October 24, 2017.