E-Funds Corporation v. Asstt. Director of Income Tax (International Taxation)

INCOME TAX ACT, 1961

--Income deemed to accrue or arise in India under section 9(1)(i)--Business connection--Services rendered through Indian subsidiary--Assessee, an USA company, entered into contracts with its clients for providing certain IT enabled services and then the same contract is either assigned sub-contract the work to EFI, an Indian subsidiary, for execution. Therefore, both assessee and EFI, an Indian subsidiary come under legal obligation to provide services to clients of Corporation. (ii) There are contracts between the assessees (viz. E-Funds Corporation and EFI) and namely 'master sub-contractor agreement, financial shared services agreement and call centre agreement. Under these agreements, EFI provides various services to the assessees. Considering function performed, assets used and risks assumed (FAR analysis) by the assessees and EFI, it is clear that EFI is not having requisite material assets as the relevant software and database needed for providing IT enabled services so as to perform the requisite functions independently, therefore, to that extent they are made available by free of any charges. EFI does not bear any significant risk as the ultimate responsibility lies with the assessees. Held: These activities are carried on continuously over a period which includes the years in question. The gamut of activities and relationship clearly constitutes business connection in India. As per provisions of section 5(2), non-residents can be taxed on incomes which are received or deemed to be received in India and which accrue or arise or deemed to accrue or arise in India. The case under consideration falls in category of income deemed to accrue or arise in India. The EFI in view of the activities being carried out represents a PE of the appellants under articles 5(1), 5(2)(i) of the DTAA between India and US. AO has also referred to a number of other issues like patent registered by appellant in India and agreements entered into by the appellants with Indian entity in para 7 of the assessment order. The appellant had a PE in India under articles 5(1), 5(2)(i) of the Indo-US DTAA. It is not in dispute that entire activities of the appellant in India are carried out by EFI (an agent) and the agent has not been remunerated on arm's length price as defined by the Supreme Court in the case of Morgan Stanley. It shall be pertinent here to indicate that the whole exercise is to ascertain the effect of assessee's business connections in India in terms of profits, which are attributable. Part of the functions and consequent revenue is declared in the hands of subsidiary, EFI and part has not been attributed to any entity in India which is to be taxed. To sum up, assessees, as per above provisions, have PE in India, to which profits are to be attributed in India to the extent of this difference of revenue.