INCOME TAX ACT, 1961

Section 9(1)(i) Article 7

Income deemed to accrue or arise in India under section 9(1)(i) - Business connection - -

Assessee was a company incorporated in and a tax resident of the USA. It is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies. The assessee had a subsidiary in India known as Cummins India Ltd., which was incorporated in 1962 to manufacture internal combustion diesel engines. In Notes to the return of income, the assessee stated that it received a sum of Rs. 20,18,50,000 (equivalent to US$ 50.00 lakh) during the year from KPIT Cummins Global Business Solutions ('KPIT-GBS') pursuant to an agreement dt. 17-7-2007 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 was 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. AO held that business connection was established in relation to such income in India. Applying Explanation 2(a) and (c) to section 9(1)(i), the AO held that KPIT-GBS had been bound by the assessee to provide BPO services to Cummins group entities worldwide out of its facility in Pune. He, therefore, held in para 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 busienss profits in the form of lump sum received by the assessee for alienating its right to render BPO services to its group concerns was held to be chargeable to tax in India as per article 7 of the DTAA. Action of the AO in the draft order treating the amount of Rs. 20.18 crore as chargeable to tax as business income was upheld by DRP albeit by treating KPIT-GBS as constituting a service PE of the assessee in India, rather than an agency PE as was held by the AO in the draft order. The AO finalized the assessment order accordingly inter alia, making an addition of Rs. 20.18 crore and odd. Held: In the present case, there were no services, whatsoever, which have been provided by the assessee in India through its employees 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 assessee was established in India qua the transaction under consideration of receipt of Rs. 20.18 crore from KPIT-GBS. Even though the receipt of Rs. 20.18 crore was in the nature of a revenue receipt and otherwise chargeable to tax, but the same cannot be so included under section 9(1)(i) in the facts and 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. Tribunal therefore, overturn the impugned order on this score and the addition of Rs. 20.18 crore was therefore, directed to deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2008-09

INCOME TAX ACT, 1961

Section 9(1)(vi) Article 5 Article 45

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