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SUPREME COURT OF INDIA
R.F. Nariman, Sanjay Kishan Kaul, JJ.
Assistant Director of Income Tax-I, New Delhi – Appellant
Versus
M/s E-Funds IT Solution Inc. – Respondent
CIVIL APPEAL NO. 6082 OF 2015 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 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)
Decided On : 24-10-2017
(a) India US Double Taxation Avoidance Agreement of 1990 – Article 5(1) – Fixed place of business PE – No specific finding about any fixed place being put up at disposal of the companies – Merely contracting with 100% subsidiary and outsourcing business to such subsidiary would not give rise to a fixed place PE – Finding that assessees were a joint venture or sort of partnership with the Indian subsidiary wholly incorrect and perverse. (Para 12, 13, 16)
(2017) SCC Online SC 474 – Relied upon
(b) India US Double Taxation Avoidance Agreement of 1990 – Article 5(2)(l) – Service PE – An enterprise must furnish services “within India” through employees or other personnel – Instantly, no customer of the assesses located or received services in India – Article 42.31, OECD Commentary – Held, companies did not establish a ‘service PE’ in India. (Para 18, 20)
Facts of the case:
The assessees are companies incorporated in United States of America 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 India’). IDLX International BV was also the parent/holding company having almost 100% shares in e-Fund Inc., which was a company incorporated in USA.
Both e-Fund Inc. and e-Fund Corp. have entered into international transactions with e-Fund India.
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. The international transactions between the assessees and e-Fund India and the income of e-Fund India were made subject matter of arms length pricing adjudication by the Transfer Pricing Officer and the Assessing Officer in the returns of income filed by e-Fund India.
The assessing authority decided that the assessees had a permanent establishment 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 (DTAA) was attracted. Consequently, the assessees were liable to pay tax in respect of what they earned from the aforesaid fixed place PE in India. The CIT (Appeals) dismissed the appeals of the assessees holding that Article 5 was attracted, not only because there was a fixed place where the assessees carried on their business, but also because they were “service PEs” and “agency PEs” under Article 5.
In an appeal to the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a “fixed place PE” and “service PE” had been made out under Article 5, but said nothing about the “agency PE” as that was not argued by the Revenue before the ITAT. However, the ITAT, on a calculation formula different from that of the CIT (Appeals), arrived at a nil figure of income for all the relevant assessment years.
The appeal of the assessees to the High Court was allowed and the High Court has set aside the findings of all the authorities, and further dismissed the cross-appeals of the Revenue.
Finding of the Court:
High Court rightly agreed with ITAT about ‘nil’ taxation against the companies.
Result: Appeals dismissed.
JUDGMENT
R.F. Nariman, J.
Leave granted.
1. These appeals are from a judgment of the Delhi High Court disposing off several appeals and cross appeals. They relate to two American Companies which are the assessees in the present case, 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 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.
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 a
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