Cummins Inc., Pune V. Deputy Director of Income-tax , Pune

ITA 2506/PUN/2012

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6247 (ITAT-PUNE)
• Duration Of Justice: 6 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 09-07-2019
• Assessment Year: 2008-2009
• Appeal Filed On: 19-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief; Permanent establishment; Wholly owned subsidiary
• Section: 5(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / ITA NO.2506/PUN/2012 / ASSESSMENT YEAR : 2008-09 CUMMINS INC. C/O. CUMMINS INDIA LIMITED, KOTHRUD, PUNE 411038 PAN : AABCC6225D VS. DDIT (INTERNATIONAL TAXATION-I), PUNE 411 037 (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 25-10-2012 PASSED BY THE ASSESS ING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) IN RELATION TO THE ASSESSMENT YE AR 2008-09. ASSESSEE BY SHRI R. R.VORA & SHRI RAJENDRA AGIWAL REVENUE BY SHRI O.A. MAO, CIT DATE OF HEARING 05-08-2019 DATE OF PRONOUNCEMENT 07-08-2019 ITA NO.2506/PUN/2012 CUMMINCS INC. 2 2. GROUND NO.1 IS AGAINST TAXING A SUM OF RS.20,18,50,0 00/- AS BUSINESS INCOME. SUCCINCTLY, THE ASSESSEE IS A COMPANY INC ORPORATED IN AND A TAX RESIDENT OF THE USA. IT IS A CORPORATION OF COMPLEMENTARY BUSINESS UNITS THAT DESIGN, MANUFACTURE, DISTRIB UTE AND SERVICE ENGINES AND RELATED TECHNOLOGIES INCLUDING FUEL S YSTEMS, CONTROLS, AIR HANDLING, FILTRATION, EMISSION SOLUTIONS AND ELECTRIC POWER GENERATION SYSTEMS. THE ASSESSEE HAS A SUBSIDIARY IN INDIA KNOWN AS CUMMINS INDIA LTD., WHICH WAS INCORPORATED IN 1962 TO MANUFACTURE INTERNAL COMBUSTION DIESEL ENGINES. THE ASSESSE E FILED ITS RETURN DECLARING TOTAL INCOME OF RS.52,63,02,900/-. IN NOTES TO THE RETURN OF INCOME, THE ASSESSEE STATED THAT IT RECEIVED A S UM OF RS.20,18,50,000/- (EQUIVALENT TO US$ 50.00 LAKH) DURING TH E YEAR FROM KPIT CUMMINS GLOBAL BUSINESS SOLUTIONS (HEREINAFTER CALLE D KPIT-GBS) PURSUANT TO AN AGREEMENT DATED 17-07-2007 AS CONSIDERATION FOR GRANT OF RIGHT TO RENDER BUSINESS PROCESS OUTSOURCING (BPO) SERVICES TO CUMMINS GROUP ENTITIES GLOBALLY. IT WAS ALSO CLAIMED THAT THE SAID RECEIPT IS IN THE NATURE OF BUSINESS INCOME IN ITS HANDS, BUT IS NOT CHARGEABLE TO TAX BECAUSE THE ASSESSEE DOES NOT HAVE ANY PERMANENT ESTABLISHMENT (PE) IN INDIA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO REQUIRED THE ASSESSEE TO FURNISH NECESSARY DETAILS IN THIS RE GARD. ON ITA NO.2506/PUN/2012 CUMMINCS INC. 3 THEIR PERUSAL, THE AO HELD THAT BUSINESS CONNECTION WAS ESTA BLISHED IN RELATION TO SUCH INCOME IN INDIA. APPLYING EXPLANATION 2(A) AND (C) TO SECTION 9(1)(I) OF THE ACT, THE AO HELD THAT KPIT-GBS H AS BEEN BOUND BY THE ASSESSEE TO PROVIDE BPO SERVICES TO CUM MINS GROUP ENTITIES WORLDWIDE OUT OF ITS FACILITY IN PUNE. THIS, IN HIS OPINION, HAD THE EFFECT OF SECURING ORDERS FROM CUMMINS GROUP ENTITIES WORLDWIDE BY KPIT-GBS SO AS TO RENDER THEM THE SERVIC ES WHICH WERE EARLIER PROVIDED BY THE ASSESSEE. THE AO IN TH E DRAFT ORDER HELD THAT KPIT-GBS CARRIED OUT WORK THAT WAS A RESPON SIBILITY OF THE ASSESSEE COMPANY, WHICH INDIRECTLY PROVED THAT KPI T-GBS WAS ACTING WHOLLY FOR THE ASSESSEE COMPANY IN RESPECT OF TH E CONTRACTS SIGNED BY IT WITH LOCAL CUMMINS GROUP. THE AO ALSO INFERRED BUSINESS CONNECTION FROM THE AGREEMENT DATED ON 17-07- 2007 BETWEEN THE ASSESSEE, KPIT-GBS AND KPIT CUMMINS INFOSYSTEMS LTD. AFTER HOLDING THAT THE INCOME ACCRUED TO THE NON- RESIDENT ASSESSEE IN INDIA U/S 9(1)(I) OF THE ACT, HE WENT O N TO EXAMINE THE POSITION UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND USA (DTAA). HE HELD THAT THE ASSESSEE WAS HAVING AN AGENCY PE IN INDIA IN TERMS OF KPIT-GBS, WHO WAS RENDERING BPO SERVICES TO OTHER CUMMINS GROUP COMPANIES ON BEHALF OF THE ASSESSEE. HE, THEREFORE, HE LD IN PARA ITA NO.2506/PUN/2012 CUMMINCS INC. 4 15.8 OF THE DRAFT ORDER THAT KPIT-GBS CONSTITUTED A DEPENDANT AGENT PE OF THE ASSESSEE IN RESPECT OF RENDERING BPO SERVICES. ACCORDINGLY, THE BUSINESS PROFITS IN THE FORM OF LUMP SUM R ECEIVED BY THE ASSESSEE FOR ALIENATING ITS RIGHT TO RENDER BPO SERVICES TO ITS GROUP CONCERNS WAS HELD TO BE CHARGEABLE TO TAX IN INDIA A S PER ARTICLE 7 OF THE DTAA. THIS IS HOW, HE INCLUDED THE SUM O F RS.20.18 CRORE AND ODD IN THE TOTAL INCOME OF THE ASSESS EE. THE ASSESSEE ASSAILED THE DRAFT ORDER BEFORE THE DISPUTE RESO LUTION PANEL (DRP). VIDE ITS DIRECTION DATED 05-09-2012, THE DRP DID NOT CONCUR WITH THE AO THAT AN AGENCY PE WAS CONSTITUTED IN INDIA. A FINDING TO THIS EFFECT HAS BEEN RECORDED IN PARA 2.1.2.4 O F THE DIRECTIONS BY NOTICING THAT THE PROVISIONS OF DEPENDENT AGENCY REQUIRE THAT THE AGENT SHOULD HABITUALLY ACT ON BEHALF OF THE P RINCIPAL AND CONCLUDE CONTACTS ON HIS BEHALF TO BIND THE PRINCIPAL AND NO SUCH FACT TO THIS EFFECT WAS EVIDENT FROM THE AOS ORDER OR THE MASTER SERVICE AGREEMENT OR GRANT AGREEMENT. THEREAFTER , THE DRP HELD THAT THE RECEIPT OF AMOUNT BY THE ASSESSEE WOULD G ET COVERED UNDER THE TERM `SOURCE OF INCOME U/S 9(1)(I) OF THE ACT AND HENCE CHARGEABLE TO TAX UNDER THE ACT. IT FURTHER NOTICED , ON PERUSAL OF THE ADDENDUM AGREEMENT BETWEEN THE ASSESSEE AND KPIT -GBS, MORE SPECIFICALLY ITS CLAUSE X, THAT THE EMPLOYEES OF THE ASSE SSEE ITA NO.2506/PUN/2012 CUMMINCS INC. 5 COMPANY WERE ACTIVELY INVOLVED IN THE PROCESS OF RENDERING BPO SERVICES, WHICH RESULTED INTO EXISTENCE OF A SERVICE PE UNDE R ARTICLE 5(2)(L) OF THE DTAA. THE ACTION OF THE AO IN THE DRAFT ORD ER TREATING THE AMOUNT OF RS.20.18 CRORE AS CHARGEABLE TO TAX AS BUSINESS INCOME WAS UPHELD ALBEIT BY TREATING KPIT-GBS AS CONSTITUTING A SERVICE PE OF THE ASSESSEE IN INDIA RATHER TH AN AN AGENCY PE AS WAS HELD BY THE AO IN THE DRAFT ORDER. THE AO FINALIZED THE ASSESSMENT ORDER ACCORDINGLY ON 25-10-2012, INTER ALIA , MAKING AN ADDITION OF RS.20.18 CRORE AND ODD. THE AS SESSEE IS AGGRIEVED BY THE IMPUGNED ORDER ON THIS SCORE. 3. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. IT IS FOUND AS AN UNDISPUTED POSITION TH AT PRIOR TO EXECUTION OF THE GRANT OF RIGHT TO RENDER BPO SERVICES AGREEMENT (HEREINAFTER `THE GRANT AGREEMENT) DATED 17 .7.2007 BETWEEN THE ASSESSEE, KPIT CUMMINS INFOSYSTEMS LTD AND KPIT- GBS, INDIA, CUMMINS BUSINESS SERVICES, AN INTERNAL DIVISION OF THE ASSESSEE COMPANY, WAS RENDERING BPO SERVICES TO WORLDWID E CUMMINS ENTITIES INCLUDING SOME OTHER DIVISIONS OF THE ASSESSEE ITSELF. ON 17.7.2007, THE ASSESSEE ENTERED INTO THE GRANT A GREEMENT WITH KPIT-GBS IN INDIA, A WHOLLY OWNED SUBSIDIARY OF KPIT- CUMMINS: `TO UNDERTAKE OUTSOURCING OF THE CUMMINS WORLDWIDE ITA NO.2506/PUN/2012 CUMMINCS INC. 6 ACCOUNTING AND FINANCE FUNCTIONS AND OTHER PROCESSES. PRE AMBLE OF THIS AGREEMENT, A COPY OF WHICH HAS BEEN PLACED AT PAGE 220 ONWARDS OF THE PAPER BOOK. PROVIDES THAT : `WHEREAS, CUMM INS AND KPIT GBS ARE ENTERING INTO ONE MASTER SERVICES AGREEMENT DATE D AS OF THE SAME DATE HEREWITH (THE `BPO MSA) FOR KPIT GBS TO PERFORM A PORTION OF THE BUSINESS PROCESSING ACTIVITY CURREN TLY PERFORMED BY CUMMINS BUSINESS SERVICES (REFERRED TO A S `CBS, IT IS THE SHARED SERVICES DIVISION OF CUMMINS); AND WHEREAS, F OR ENTERING INTO THE BPO MSA AND GIVING A RIGHT TO KPIT GBS TO RENDER BUSINESS PROCESS OUTSOURCING SERVICES TO THE CUMM INS GROUP ENTITIES GLOBALLY, KPIT GBS HAS AGREED TO REMIT TO CUMMIN S THE CASH CONSIDERATION SET FORTH HEREIN. CLAUSE 1 OF THE GRANT AGREEMENT SPELLS OUT THE `PURPOSE OF THE AGREEMENT AND STA TES THAT: `CUMMINS IS GRANTING TO KPIT-GBS A RIGHT TO RENDER BUSINES S PROCESS OUTSOURCING SERVICES TO THE CUMMINS GROUP ENTITIES ON A GLOBAL BASIS FROM KPIT-GBSS OFFICES IN PUNE, INDIA. CLAUS E 2 OF THE GRANT AGREEMENT PROVIDES THAT: `IN CONSIDERATION OF SECU RING THE RIGHT TO RENDER BUSINESS PROCESS OUTSOURCING SERVICES TO CUMMINS GROUP ENTITIES GLOBALLY, KPIT-GBS AGREES TO PAY CUMMINS CASH PAYMENT IN US DOLLARS AS FOLLOWS. THEN, THERE IS REFERENCE TO TWO TRENCHES, NAMELY, TRENCH-A PAYMENT OF US $ 5 ITA NO.2506/PUN/2012 CUMMINCS INC. 7 MILLION PAYABLE NOT LATER THAN SEPTEMBER 30, 2007, WHICH IS TH E AMOUNT IN DISPUTE WITH EQUIVALENT OF INDIAN RS.20,18,50,000. THEN THERE IS REFERENCE TO TRENCH-B PAYMENT IN THE GRANTS AGRE EMENT, WHICH WAS TO TAKE EFFECT AFTER THE EXPIRY OF 60 MONTHS UPON CERTAIN CONDITIONS, BUT THE RELEVANT CONDITIONS WERE NOT FULFILLED AND THE LD. AR STATED THAT NO PAYMENT WAS EVER MADE BY KPIT GBS TO THE ASSESSEE UNDER TRENCH-B. THE SUM AND SUBSTANCE OF TH E GRANT AGREEMENT IS THAT THE ASSESSEE RECEIVED A SUM OF US DOLLAR 50.00 LAKH AS A QUID PRO QUO FOR `GRANTING TO KPIT-GBS A RIGHT TO RENDER BUSINESS PROCESS OUTSOURCING SERVICES TO THE CUMMINS GROU P ENTITIES ON A GLOBAL BASIS. TO IMPLEMENT THE GRANT AGREEMENT, THE ASSESSEE AND KPIT GBS EXECUTED A MASTER SERVICE AGREEM ENT FOR BPO SERVICES (HEREINAFTER CALLED `THE MSA BPO) ON THE SAME DATE, NAMELY, 17-07-2007, A COPY OF WHICH HAS BEEN PLAC ED AT PAGE 163 ONWARDS OF THE PAPER BOOK. THIS AGREEMENT OPENS BY STATING IT TO BE BETWEEN : `CUMMINS INC., AN INDIANA CORPORATION WITH ITS PRINCIPAL OFFICES AT 500 JACKSON STREET, COLUMBUS, INDIANA U SA 47202-3005 AND ITS DIVISIONS AND AFFILIATES INCLUDING WITHOUT LIMITATION JOINT VENTURES, PARTNERSHIPS, LIMITED PARTNERSHIPS, DISTRIBUTORS AND SUBSIDIARIES (`CUMMINS, WHICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT THEREOF BE DEEMED TO INCLUDE ITS ITA NO.2506/PUN/2012 CUMMINCS INC. 8 SUCCESSORS AND PERMITTED ASSIGNS)AND KPIT- GBS. THE TERM `AFFILIATE HAS BEEN DEFINED IN THE DEFINITION CLAUSE OF THE AGREEMENT TO MEAN: `WITH RESPECT TO ANY PERSON OR ENTITY, AN ENTITY THAT NOW OR HEREAFTER DIRECTLY OR INDIRECTLY CONTROLS, IS CONTR OLLED BY, OR IS UNDER COMMON CONTROL WITH SUCH PERSON OR ENTITY.. . CLAUSE II OF THE AGREEMENT WITH CAPTION GENERAL PROVIDES THAT KPIT - GBS AGREES TO PROVIDE THE SERVICES TO VARIOUS LOCAL CUMMINS ENTITIES WORLDWIDE OUT OF THIS FACILITY IN PUNE, INDIA AND OTHER LOCATIONS AT THE PRICE SET FORTH IN THIS AGREEMENT AND VARIOUS SERVICES ADDENDUM, AS AMENDED FROM TIME TO TIME. A S ERVICE ADDENDUM (NO. 1) FINANCE AND ACCOUNTING BPO SERVICES (HEREINAFTER CALLED `THE ADDENDUM) WAS EXECUTED ON THE S AME DATE, NAMELY, 17-07-2007, WHOSE COPY IS AVAILABLE ON PAGE 196 ONWARDS OF THE PAPER BOOK. THIS IS AGAIN BETWEEN `CUMMINS INC., A N INDIANA CORPORATION WITH ITS PRINCIPAL OFFICES AT 500 JACKSON STREET, COLUMBUS, INDIANA USA 47202-3005 AND ITS DIVISIONS AND AF FILIATES INCLUDING WITHOUT LIMITATION JOINT VENTURES, PARTNERSHIPS, LIMITED PARTNERSHIPS, DISTRIBUTORS AND SUBSIDIARIES (`CUMMINS, WHIC H EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT THEREOF BE D EEMED TO INCLUDE ITS SUCCESSORS AND PERMITTED ASSIGNS)AND KPIT- G BS. IT PROVIDES FOR PERFORMING FINANCE AND ACCOUNTING SERVICES TO THE ITA NO.2506/PUN/2012 CUMMINCS INC. 9 CUMMINS. WE FIND THAT, IN FACT, THE ADDENDUM IS AN EXTENSION AND PART AND PARCEL OF THE BPO MSA. IT IS IN PURSUANCE OF THE BPO MSA READ WITH THE ADDENDUM THAT KPIT GBS RENDERED BPO SERVICES TO VARIOUS ENTITIES OF CUMMINS COLLECTIVELY REFERRED TO AS CUMMINS INCLUDING THE ASSESSEE ITSELF AND RAISED SEPARATE BILLS ON THE CONCERNED CUMMINS ENTITY. TO CITE AN EXAMPLE, KPIT-GB S RENDERED SERVICES TO CUMMINS INDIA LTD. THROUGH A PURCHAS E ORDER, A COPY OF WHICH HAS BEEN PLACED AT PAGE 30 ONWARDS OF THE PAPER BOOK. IT GIVES DESCRIPTION OF SERVICES AND THE AMOUNT BILLED, WHICH WAS TO BE BORNE BY CUMMINS INDIA LTD. 4. FOLLOWING POINTS EMERGE ON GOING THROUGH THE ABOVE FACTUA L SCENARIO AS COMING OUT FROM THE AGREEMENTS REFERRED TO HEREINABOVE. I. PRIOR TO 2007, CUMMINS BUSINESS SERVICES, AN INTERNAL DIVISIO N OF THE ASSESSEE WAS RENDERING BPO SERVICES TO CUMMINS ENTITIES GLOBALLY INCLUDING OTHER DIVISIONS OF THE ASSESSEE. II. ON 17-07-2007, THE ASSESSEE ENTERED INTO THE GRANT AGR EEMENT WITH KPIT-GBS UNDER WHICH SUCH SERVICES WERE ASSIGNED TO TH E LATER. (HEREINAFTER TRANSACTION NO. 1) III. A CONSIDERATION OF US $ 50.00 LAKH WAS PAID BY KPIT-GBS TO THE ASSESSEE IN LIEU OF TRANSACTION NO. 1, THAT IS, GRANTING TH E RIGHT TO RENDER BPO SERVICES. ITA NO.2506/PUN/2012 CUMMINCS INC. 10 IV. PURSUANT TO EXECUTING THE GRANT AGREEMENT, KPIT-GBS STA RTED RENDERING BPO SERVICES TO VARIOUS CUMMINS GROUP ENTITIES INCLUDING THE ASSESSEE IN USA, FOR WHICH SEPARATE BILLS WERE RAISED ON THEM AND THE AMOUNTS WERE PAID BY THE RESPECTIVE ENTITIES. (HEREINAFTER TRANSACTION NO. 2). 5. THE LD. AR HAS SUBMITTED A CHART SHOWING THAT KPIT-G BS RECEIVED A SUM OF RS.7,00,59,042/- DURING THE YEAR UN DER CONSIDERATION FROM THE CUMMINS GROUP ENTITIES FOR RENDERING BPO SERVICES. OUT OF SUCH SUM, CUMMINS USA, THAT IS, THE ASSE SSEE PAID A SUM OF RS.3.65 CRORE (CONSTITUTING 52.11% OF THE TOTAL PA YMENT); CUMMINS UK PAID RS. 1.98 CRORE (CONSTITUTING 28.32%); CUMM INS INDIA PAID RS.1.32 CRORE (CONSTITUTING 18.85%); AND CUMMINS CHINA PAID RS.5.01 LAKH (CONSTITUTING 0.72%). THUS, IT FOLLOWS THAT TH ERE WERE TWO TRANSACTIONS BETWEEN THE ASSESSEE AND KPIT-GBS. THE FIRST TRANSACTION IS OF RECEIPT BY THE ASSESSEE OF RS.20.18 CRORE AND ODD FROM KPIT-GBS TOWARDS GRANT OF RIGHT TO RENDER BPO SERVICES AND THE SECOND TRANSACTION IS OF PAYMENT BY THE AS SESSEE OF RS.3.65 CRORE TO KPIT-GBS FOR RECEIPT OF BPO SERVICES. THE DISPUTE IN THE EXTANT APPEAL IS ONLY QUA THE FIRST TRANSACTION OF RECEIPT OF RS.20.18 CRORE FOR GRANT OF RIGHT TO RENDER BP O SERVICES TO WORLDWIDE CUMMINS GROUP ENTITIES INCLUDING ITSELF. ITA NO.2506/PUN/2012 CUMMINCS INC. 11 6. THE ASSESSEE IS A TAX RESIDENT OF THE USA. SECTION 5 (2) OF THE ACT DEALING WITH THE SCOPE OF TOTAL INCOME PROVIDES THAT THE TOTA L INCOME OF A PERSON WHO IS NON-RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE WHICH IS RECEIVED OR IS DEEMED TO BE RECE IVED IN INDIA OR ACCRUES OR ARISES OR IS DEEMED TO ACCRUE TO ARIS E IN INDIA DURING THE YEAR. SECTION 9 DEALS WITH INCOMES DEEMED TO ACC RUE OR ARISE IN INDIA. SECTION 9(1)(I) STATES THAT ALL INCOME ACCRUING OR ARISING, WHETHER DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY B USINESS CONNECTION IN INDIA OR SOURCE OF INCOME IN INDIA ETC. SHALL B E DEEMED TO ACCRUE OR ARISE IN INDIA. CLAUSE (A) OF EXPLAN ATION 1 TO SECTION 9(1)(I) PROVIDES THAT IN THE CASE OF A BUSINESS OF WHICH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA SHALL B E ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA. THE TERM BUSINESS CONNEC TION HAS BEEN DEFINED IN EXPLANATION 2 AS INCLUDING ANY BUSINESS ACTIV ITY CARRIED OUT THROUGH A PERSON WHO, ACTING ON BEHALF OF THE NON- RESIDENT HAS AND HABITUALLY EXERCISES IN INDIA, AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE NON-RESIDENT, UNLESS H IS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDIS E FOR THE NON-RESIDENT. ETC. ITA NO.2506/PUN/2012 CUMMINCS INC. 12 7. ON GOING THROUGH THE ABOVE PROVISIONS, IT TRANSPIRE S THAT ALL INCOME ACCRUING OR ARISING DIRECTLY OR INDIRECTLY TO A NON-RESID ENT FROM BUSINESS CONNECTION IN INDIA IS DEEMED TO ACCRUE OR ARISE IN INDIA. THE EXISTENCE OF BUSINESS CONNECTION IN INDIA, IN THE PRESENT CONTEXT, IS SINE QUA NON FOR AN INCOME TO ACCRUE OR ARISE IN INDIA IN TERMS OF CLAUSE (I) OF SECTION 9(1) OF THE ACT. SUCH BUSINE SS CONNECTION CAN BE ESTABLISHED DIRECTLY BY THE NON-RESIDENT BY DOING BUSINESS ACTIVITY IN INDIA OR INDIRECTLY THROUGH SOME DEPENDENT AGENT ETC. 8. LET US EXAMINE IF THE ASSESSEE HAD ANY BUSINESS C ONNECTION IN INDIA BECAUSE OF THE TRANSACTION OF RECEIPT OF RS.20.18 C RORE FROM KPIT GBS ON GRANT OF RIGHT TO RENDER BPO SERVICES. IT IS SEEN THAT ONE OF THE OWN UNITS OF THE ASSESSEE WAS EARLIER RENDER ING BPO SERVICES TO OTHER CUMMINS ENTITIES AND OTHER UNITS OF THE ASSES SEE. RECEIPT FROM CUMMINS ENTITIES FOR RENDERING SUCH BPO SERVICE S WAS ADMITTEDLY A SOURCE OF INCOME AND A REVENUE RECEIPT O F THE ASSESSEE. WE HAVE NOTICED ABOVE THAT THE ASSESSEE AVAILED BPO SERVICES FROM KPIT GBS AT 52.11% OF THE OVERALL SERVICES. P RICE PAID BY THE ASSESSEE FOR THE RECEIPT OF SERVICES IS SERIOUS LY IMPACTED BECAUSE OF RECEIPT OF RS.20.18 CRORE, WHICH IS A CONSID ERATION FOR THE GRANT OF THE RIGHT TO RENDER BPO SERVICES TO KPIT GBS. THE ITA NO.2506/PUN/2012 CUMMINCS INC. 13 EXPRESSION USED IN THE AGREEMENT AS A CONSIDERATION FOR GR ANT OF THE RIGHT TO RENDER BPO SERVICES IS, IN FACT, A MISNOMER. OBTAININ G A SERVICE FROM AN OUTSIDE PARTY CANNOT BE EQUATED WITH PARTING WITH A RIGHT TO DO SUCH A THING IN FAVOUR OF THAT PERSON, WARRANTIN G RECEIPT OF SOME SEPARATE CONSIDERATION DE HORS THE PAYMENT FOR THE SERVICE OBTAINED. WHATEVER IS RECEIVED FROM THE SUPPLIER OF SERVICE, CANNOT BE CONSIDERED AS ANYTHING UNRELATED WITH THE TRANSACTION OF RE CEIPT OF SERVICE. IT IS, IN FACT, A PART OF THE SAME TRANSACTION OF THE RECEIPT OF SERVICE. ONE CAN CONSIDER IT AS A REVENUE RECEIPT TO BE COMPENSATED LATER WITH THE HIGHER OUTGO AS A CONSIDERATION FOR RECEIPT OF SERVICE. IN SO FAR AS COMPENSATION FOR GRANTIN G THE RIGHT TO RENDER BPO SERVICES IN RELATION TO OTHER CUMMINS GROUP EN TITIES IS CONCERNED, THE SAME IS ALSO CHARGEABLE TO TAX U/S 28(VA) WHICH PROVIDES THAT ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN C ASH OR KIND, UNDER AN AGREEMENT FOR (A) NOT CARRYING OUT ANY AC TIVITY IN RELATION TO ANY BUSINESS OR PROFESSION SHALL BE CONSIDERED AS BUSINESS INCOME. THUS THE REVENUE CHARACTER OF THE SUM OF RS. 20.18 CRORE IS NOT IN DISPUTE. PERTINENTLY, THE ASSESSEE ALSO TREATED IT AS A BUSINESS RECEIPT AS IS COMING OUT FROM THE NO TES TO THE RETURN, REPRODUCED IN PARA 13 OF THE ASSESSMENT ORDER, WHEREIN THE ASSESSEE ADMITTED THAT : `THE PAYMENT IS IN THE NATURE OF BUSI NESS ITA NO.2506/PUN/2012 CUMMINCS INC. 14 INCOME IN THE HANDS OF CUMMINS INC. AND THEN CLAIMED AS NOT TAXABLE DUE TO ABSENCE OF ANY PERMANENT ESTABLISHMENT IN IND IA. TO THE SAME EFFECT, THERE IS A COPY OF THE CERTIFICATE PLACED AT PAGE 29 OF THE PAPER BOOK, IN WHICH THE ASSESSEE CERTIFIED THAT : `IN ACCORDANCE WITH THE ACCOUNTING TREATMENT PRESCRIBED UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (`GAAP), CUMMINS INC. IN ITS BOOKS OF ACCOUNTS HAS RECOGNIZED THE CONSIDERA TION RECEIVED FOR GRANT OF RIGHTS TO RENDER BPO SERVICE AS BUSINESS INCOME OVER THE TERM OF THE CONTRACT WITH KPIT GBS. 9. HAVING FOUND THAT THE BUSINESS CONNECTION SUBSISTED W ITH THE RECEIPT OF RS.20.18 CRORE, NOW IT NEEDS TO BE CONSIDERED WHETHER OR NOT IT IS CHARGEABLE TO TAX UNDER THE ACT AND THE DTAA? WE HAVE NOTED ABOVE EXPLANATION 1 TO SECTION 9(1)(I) OF THE ACT, WHICH STATES THAT ONLY SUCH PART OF THE INCOME AS IS ATTRIBUTABLE TO THE OPE RATIONS CARRIED OUT IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN I NDIA. TO THE SAME EFFECT IS THE POSITION UNDER THE DTAA, WHICH PROVIDE S UNDER ARTICLE 7 THAT THE PROFITS OF AN ENTERPRISE OF A CONTRAC TING STATE SHALL BE TAXABLE IN THE OTHER CONTRACTING STATE ONLY TO SUCH AN EXTENT AS ARE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT IN THE O THER STATE ETC. THE NET EFFECT OF EXPLANATION 1 TO SECTION 9(1)(I) UNDER THE ACT ON ONE HAND AND ARTICLE 7 READ WITH ARTICLE 5 UNDER THE D TAA ITA NO.2506/PUN/2012 CUMMINCS INC. 15 ON THE OTHER IS THAT ONLY SUCH AMOUNT OF BUSINESS INCOME OF A NON- RESIDENT CAN BE CHARGED TO TAX IN INDIA AS IS ATTRIBUTABLE TO TH E CARRYING ON OF OPERATIONS IN INDIA. EVEN IF THERE IS A BUS INESS INCOME OF A NON-RESIDENT, THE SAME WOULD ESCAPE INDIAN TAX ATION NET IN THE ABSENCE OF THE ASSESSEE CARRYING OUT ANY OPERATIO NS IN INDIA OR HAVING A PERMANENT ESTABLISHMENT IN INDIA. 10. IT IS NOTED THAT THE AO MADE OUT A CASE IN THE DRAFT ORDER THAT EXPLANATION 2 TO SECTION 9(1)(I) WAS ATTRACTED AS KPIT GBS, BY RENDERING BPO SERVICES FROM INDIA TO CUMMINGS GROUP ENTITIES, WAS ACTING AS A DEPENDENT AGENT OF THE ASSESSEE IN INDIA. IN V IEW OF THE FACT THAT THE CONCLUSION DRAWN BY THE AO ON TREATING KPIT-GBS AS A DEPENDANT AGENT PE HAS BEEN REVERSED BY THE DRP, WE N EED NOT FOCUS ON EXAMINING WHETHER OR NOT KPIT-GBS CONSTITUTED A DEPENDANT AGENT PE OF THE ASSESSEE IN INDIA. THE AO, FOLLO WING THE DIRECTIONS GIVEN BY THE DRP, HAS HELD IN THE FINAL ASSESSMENT ORDER THAT A SERVICE PE OF THE ASSESSEE CAME INTO EXISTENCE IN INDIA BY THE RENDITION OF SERVICES BY KPIT-GBS. AS SUCH, WE WILL CONCEN TRATE ON FINDING IF ANY SERVICE PE OF THE ASSESSEE WAS CONSTITUTE D IN INDIA TRIGGERING THE TAXABILITY OF THE AMOUNT. ITA NO.2506/PUN/2012 CUMMINCS INC. 16 11. ARTICLE 5 OF THE DTAA GIVES MEANING TO THE PERMANENT ESTABLISHMENT. PARA 1 PROVIDES THAT THE TERM PERMANENT ESTABLISHMENT' MEANS A FIXED PLACE OF BUSINESS THROUGH WHIC H THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. PARA 2(L) DEALS WITH SERVICE PE AND STATES THAT THE TERM PERMANENT ESTABLISHMENT' INCLUDES: `THE FURNISHING OF SERVICES, OTHER THAN INCLUDED SERVICES AS DEFINED IN ARTICLE 12 (ROYALTIES AND FEE S FOR INCLUDED SERVICES), WITHIN A CONTRACTING STATE BY AN ENTERPRISE THROUGH EMPLOYEES OR OTHER PERSONNEL, BUT ONLY IF : (I) ACTIV ITIES 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). 12. THE DRP IN REACHING ITS CONCLUSION OF THE SERVICE PE OF THE ASSESSEE IN INDIA NOTED IN PARA 2.1.2.6 OF ITS DIRECTION THAT : `THE ASSESSEE COMPANY RECEIVED ANNUAL PAYMENT TOWARDS CONSIDE RATION FOR GRANTING RIGHT TO RENDER BUSINESS PROCESS OUTSOURCING S ERVICES. THE POSITION STATED BY THE DRP IS NOT CORRECT BECAUSE THE AMOU NT RECEIVED BY THE ASSESSEE WAS A ONE-TIME PAYMENT IN TERMS OF CLAUSE 2(A) OF THE GRANT OF RIGHT TO RENDER BPO SERVICES AGREEMENT. THEN ITA NO.2506/PUN/2012 CUMMINCS INC. 17 THE DRP NOTED IN PARA 2.1.2.9 OF ITS DIRECTION THAT : `KPIT GBS HAS PROVIDED BUSINESS PROCESS OUTSOURCING SERVICES TO THE ASS ESSEE COMPANY. THIS POSITION IS AGAIN NOT CORRECT. WE HAVE NOTED ABOVE FROM THE BPO MSA AND THE ADDENDUM THAT KPIT GBS WAS TO RENDER BPO SERVICES TO CUMMINS, WHICH EXPRESSION HAS BEE N COLLECTIVELY EXPLAINED IN BOTH THE AGREEMENTS AS THE ASSESSEE A ND ITS DIVISIONS AND AFFILIATES (AN ENTITY THAT NOW OR HEREAFTER DIRECTL Y OR INDIRECTLY CONTROLS, IS CONTROLLED BY, OR IS UNDER COMMON CONTR OL WITH SUCH PERSON OR ENTITY) INCLUDING JOINT VENTURES, PARTNERS HIPS, LIMITED PARTNERSHIPS, DISTRIBUTORS AND SUBSIDIARIES EVEN INCLUDING ITS SUCCESSORS AND PERMITTED ASSIGNS. THEN THE DRP IN PARA 2. 1.2.13 HAS NOTED THAT THE EMPLOYEES OF THE ASSESSEE COMPANY WERE ACTIV ELY INVOLVED IN THE PROCESS OF PROVIDING BPO SERVICES BY KPIT GB S. IN PARA 2.1.2.15, IT NOTICED THAT THE ASSESSEE COMPANY DEPLOYE D ITS EMPLOYEES TO WORK ALONG WITH EMPLOYEES OF KPIT-GBS FOR RENDERING BPO SERVICES WHICH HAS RESULTED INTO EXISTENCE OF A SERVICE PE IN ARTICLE 5(2) OF THE INDO-USA DTAA. SUCH AN INFERENCE WAS DRAWN BY REPRODUCING CLAUSE X OF THE ADDE NDUM WITH THE CAPTION GOVERNANCE STRUCTURE AND MANAGEMENT REPOR T IN PARA 2.1.2.10 OF ITS DIRECTION, WHICH REFERS TO CUMMINS . WE HAVE NOTED ABOVE THAT THE MSA BPO AND THE ADDENDUM ARE THE ITA NO.2506/PUN/2012 CUMMINCS INC. 18 UMBRELLA AGREEMENTS PROVIDING FOR THE RENDITION OF BPO SERVICE S BY KPIT GBS TO CUMMINS (WHICH EXPRESSION INCLUDES NOT ONLY THE ASSESSEE BUT ALL THE WORLDWIDE CUMMINS GROUP ENTITIES). THUS REFERENCE TO EMPLOYEES OF CUMMINS IN CLAUSE X OF THE ADDENDUM, AS ACTUALLY RELATING TO EMPLOYEES OF THE CONCERNED CUMMINS ENTITY, CAME TO BE MISUNDERSTOOD BY THE DRP AS RELATING TO THE EMPLOYEES OF THE ASSESSEE ALONE, WHICH LED TO THE C ONFUSION. NO MATERIAL HAS BEEN PLACED BEFORE US TO DEMONSTRATE THAT THE EMPLOYEES OF THE ASSESSEE WERE INVOLVED IN THE RENDITION OF THE BPO SERVICES TO VARIOUS CUMMINS ENTITIES IN UK, INDIA OR CHINA . THUS THE VIEW POINT OF THE DRP THAT THE EMPLOYEES OF THE AS SESSEE WERE INVOLVED IN RENDERING BPO SERVICES BY KPIT GBS, WHICH LED TO THE CREATION OF THE SERVICE PE, IS ITSELF WITHOUT ANY BEDROC K. 13. NOTWITHSTANDING THE ABOVE, IT IS FOUND THAT THE DRP CONSIDERED THE ADDENDUM, WHICH IS PART OF THE MSA BPO, FOR ARRIVING AT THE CONCLUSION OF EXISTENCE OF SERVICE PE OF THE ASSESSEE IN INDIA. WE HAVE NOTED SUPRA IN PARA 4 OF THIS ORDER THAT THE ASSESSEE RECEIVED RS.20.18 CRORE PURSUANT TO THE TRANS ACTION NO. 1 IN LIEU OF GRANTING THE RIGHT TO RENDER BPO SERVICES. THEN WE HAVE NOTED TRANSACTION NO. 2 UNDER WHICH THE ASSESSEE PAID TO KPIT- GBS A CERTAIN SUM FOR RECEIPT OF BPO SERVICES. WHEREAS THE BPO ITA NO.2506/PUN/2012 CUMMINCS INC. 19 MSA AND THE ADDENDUM ARE CONCERNED WITH THE TRANSACTION NO . 2, THE GRANT AGREEMENT IS CONCERNED WITH THE TRANSACTION NO. 1. WHAT IS UNDER CONSIDERATION IS THE TRANSACTION NO. 1, BEING THE R ECEIPT BY THE ASSESSEE OF RS.20.18 CRORE FROM KPIT-GBS AND NOT THE PAYMENT OF RS.3.65 CRORE TO KPIT-GBS FOR AVAILING THE BPO SERVICES. THE DRP INADVERTENTLY CONSIDERED BPO MSA AND THE ADDENDUM UNDER WHICH THE ASSESSEE PAID FOR AVAILING BPO SERVICES, FOR INFERRING THE EXISTENCE OF SERVICE PE OF THE ASSESSEE IN INDIA QUA THE TRANSACTION OF RECEIPT FOR GRANTING RIGHT TO RENDER BPO SERVICES. 14. A SERVICE PE IS ORDINARILY CONSTITUTED WHEN THE FOREIGN ENTERPRISE RENDERS SERVICES IN INDIA TO ITS CUSTOMERS AND SU CH SERVICES ARE RENDERED THROUGH ITS OWN EMPLOYEES OR OTHER PERSONNEL. IN THE PRESENT CASE, THERE ARE NO SERVICES WHATSOEVER, W HICH HAVE BEEN PROVIDED BY THE ASSESSEE IN INDIA THROUGH ITS EMPLOYE ES OR OTHER PERSONNEL FOR WHICH A SUM OF RS.20.18 CRORE WAS RECEIVED. IT IS, THEREFORE, AMPLY CLEAR THAT NO SERVICE PE OF THE ASSESSE E IS ESTABLISHED IN INDIA QUA THE TRANSACTION UNDER CONSIDERATION OF RECEIPT OF RS.20.18 CRORE FROM KPIT-GBS. ITA NO.2506/PUN/2012 CUMMINCS INC. 20 15. EVEN THOUGH THE RECEIPT OF RS.20.18 CRORE IS IN THE NATURE OF A REVENUE RECEIPT AND OTHERWISE CHARGEABLE TO TAX, BUT THE SA ME CANNOT BE SO INCLUDED U/S 9(1)(I) OF THE ACT IN THE FACTS A ND CIRCUMSTANCES OF THE INSTANT CASE FOR THE ABSENCE OF ANY BUSINESS OPERATIONS CARRIED OUT IN INDIA OR THE EXISTENCE OF ANY PE OF THE ASSESSEE IN INDIA UNDER THE DTAA. WE, THEREFORE, OVERTU RN THE IMPUGNED ORDER ON THIS SCORE AND DIRECT TO DELETE THE ADDITION OF RS.20.18 CRORE. 16. GROUND NOS. 2 AND 3 ARE AGAINST TREATING A SUM OF RS.6,22,96,401/- AS ROYALTY INCOME OR FEES FOR TECHNICAL SERVICES AS AGAINST THE ASSESSEES CLAIM OF THE SAME BEING NOT CHARGEA BLE TO TAX. THE ASSESSEE HAS FILED AN APPLICATION SEEKING WITHDRAWAL OF F ORM NO. 8 FILED U/S 158A OF THE ACT ON THIS ISSUE. THE TRIBUNAL, FOR THE ASSESSMENT YEARS 2004-05 AND 2006-07, DECIDED THE ISSUE OF TAXABILITY AS ROYALTY OF CONSIDERATION RECEIVED FOR PROVIDING U SER RIGHTS IN OFF-THE-SHELF SOFTWARE AND PROVIDING RELATED STANDAR D SUPPORT SERVICES AGAINST THE ASSESSEE. THE ASSESSEE FILED APPEALS AGAINST THIS ORDER, WHICH WERE ADMITTED BY THE HONBLE HIGH C OURT. IN THE MEAN TIME, THE ASSESSEE FILED FORM NO. 8 FOR THE YE AR UNDER CONSIDERATION ON THE SAME ISSUE, WHICH IS SUBJECT MATTER OF THE INSTANT GROUND NOS. 2 AND 3. LATER ON, THE EARLIER ORDER P ASSED BY THE ITA NO.2506/PUN/2012 CUMMINCS INC. 21 TRIBUNAL FOR THE ASSESSMENT YEARS 2004-05 AND 2006-07 W AS RECALLED FOLLOWED BY THE ASSESSEE WITHDRAWING ITS APPEALS FROM THE HONBLE HIGH COURT. THIS IS HOW, THE ASSESSEE NOW SEEKS WITHDRAWAL OF THE FORM NO. 8. AS THE CAUSE OF ACTION DOES NOT SURVIVE ANY MORE, WE PERMIT THE ASSESSEE TO WITHDRAW FORM NO. 8 AND TAKE UP THE ISSUE FOR DISPOSAL ON MERITS. 17. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT SIMILAR TO THE EARLIER YEARS, THE ASSESSEE PROVIDED OFF-THE-SHELF SOFTWARE AND RELATED SUPPORT SERVICES TO ITS ASSOCIATES IN INDIA. THE SAID AMOUNT WAS CLAIMED AS EXEMPT BEING REIMBURSEMENT OF EXPENSES. THE AO AS WELL AS THE DRP DECIDED THIS ISSUE AGAINST THE ASSESSEE HOLDING THE SAME AS ROYALTY CHARGEABLE TO TAX IN INDIA U/S 9(1)(VI) OF THE ACT. THE TRIBUNAL, IN THE LATER ORDER DATED 5.7.2019 FOR THE A.Y S. 2004- 05 AND 2006-07, HAS DECIDED THIS ISSUE IN FAVOUR OF THE A SSESSEE BY HOLDING THAT THE SAME IS NOT IN THE NATURE OF ROYALTY AND HENC E NOT CHARGEABLE TO TAX. A COPY OF SUCH ORDER HAS BEEN PLACED ON RECORD. BOTH THE SIDES HAVE CANDIDLY ADMITTED THAT THE FACTS AND CIRCUMSTANCES RELATING TO THE GROUNDS ON THIS ISSUE FOR THE EX TANT YEAR ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF THE EARLIER YEARS AS FAVOURABLY DECIDED BY THE TRIBUNAL IN ITS AFORESAID ORDER. RESPECTFULLY FOLLOWING THE PRECEDENT AND WITHOUT GOING FURTHER DEEP ITA NO.2506/PUN/2012 CUMMINCS INC. 22 INTO THE ISSUE, WE DETERMINE THE GROUNDS ON THIS SCORE IN FA VOUR OF THE ASSESSEE. THE IMPUGNED ORDER IS, THEREFORE, OVERTUR NED ON THIS ISSUE. 18. GROUND NO.4 WAS STATED BY THE LD. AR TO HAVE BECOME ACADEMIC; GROUND NO.5 IS CONSEQUENTIAL IN SO FAR AS LEVY OF INTEREST U/S.234B AND 234C IS CONCERNED; AND GROUND NO.6 AGAINST THE INITIATION OF PENALTY IS PREMATURE WHICH IS HEREBY DISMISSED. 19. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH AUGUST, 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 07 TH AUGUST, 2019 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. 6. THE PR.CIT-V, PUNE , , / DR C, ITAT, PUNE; / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE ITA NO.2506/PUN/2012 CUMMINCS INC. 23 DATE 1. DRAFT DICTATED ON 05-08-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 07-08-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *