CISCO SYSTEMS SERVICES B.V.,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1(1), BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(IT)A Nos. 858 & 859/Bang/2022 Assessment Years : 2017-18 & 2018-19 M/s. Cisco Systems Services B.V., The Deputy C/o. Ernst & Young LLP Commissioner of (Authorised Representative) Income Tax, “Divyasree Chambers”, International First Floor, ‘A’ Wing, taxation, # 11 O’ Shaughnessy Road, Vs. Circle – 1(1), Langford Gardens, Bengaluru. Bengaluru – 560 025. PAN: AACCC4836D APPELLANT RESPONDENT : Shri Nageshwar Rao, Assessee by Advocate : Shri Sankar Ganesh K., Addl. Revenue by CIT (DR) Date of Hearing : 16-05-2023 Date of Pronouncement : 30-05-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by assessee against the assessment orders passed by Ld.DCIT, International Taxation, Circle – 1(1), Bangalore on 25.07.2022 and 22.07.2022 for A.Ys. 2017-18 and 2018-19 respectively.

Page 2 IT(IT)A Nos. 858 & 859/Bang/2022 2. The Ld.AR submitted that the issues raised by assessee in both these appeals are identical and against taxing non-resident assessee in India as per Article 5 of DTAA without establishing a PE in India for the said assessment years under consideration. 3. For the sake of convenience, we reproduce herewith the grounds raised by assessee for A.Y. 2017-18 which is as under: “Based on the facts and circumstances of the case and in law, Cisco Systems Services B.V. (hereinafter referred to as 'the Appellant'), respectfully craves leave to prefer an appeal against the order passed by the learned Assessing Officer (hereinafter referred to as the 'learned AO') dated July 25, 2022 under section 143(3) read with 144C(13) of the Income-tax Act, 1961 ('the Act') pursuant to the directions dated June 17, 2022 issued by the DRP under section 144C(5) of the Act ('the Impugned order') inter-alia on the following grounds: That on the facts and circumstances of the case and in law, the learned DRP/ AO erred in law and in fact: General Ground: 1. In assessing income of the Assessee at INR 71,11,97,293 as against returned income of INR 2,20,00,670. Grounds relating to taxability of service fees receipts from Indian Clients of the Appellant 2. In holding that the service fees receipts reflected in the Form 26AS are taxable as business profit at 40% as they are intrinsically linked to the Permanent Establishment ('PE') i.e., the Branch Office, without appreciating the fact that Assessee does not have PE nor operational Branch Office in India for the Financial Year ('FY') 2016-17. 3. In concluding that the PE existed as the business activities were carried out by the Appellant through branch office during FY 2016-17, without appreciating that the operations of the branch office were closed vide board resolution dated August 06, 2015 and hence, no business was carried on by the branch on behalf the Appellant and hence, there was no PE for the said year as per Article 5 of the DTAA and section 92F(iiia) of the Act. 4. In erroneously concluding that the effective date of closure of the branch is May 31, 2017 as per board

Page 3 IT(IT)A Nos. 858 & 859/Bang/2022 resolution dated May 31, 2017, without appreciating the fact that Branch had closed its operation from August 6, 2015 and had no employees/ assets, to undertake any activity on behalf of the Appellant and no activities were carried out by the Appellant directly or indirectly in India which could be taxable in India as per the DTAA. 5. Without prejudice to above, the learned DRP has erroneously classified the receipts of the Assessee as Fees for Technical Services ('FTS'), without appreciating that it does not satisfy the 'make available' clause as per the DTAA. 6. Without further prejudice to above, even if the service fees received from Indian Clients are held to be taxable in India, corresponding cost incurred by Assessee ought to be allowed as deduction, while computing the taxable income A. Grounds of appeal relating to other matters 7. Levying interest of INR 6,61,19,552 under section 234B of the Act, which is on account of the adjustments proposed to the returned income. 8. Levying interest of INR 1,09,25,966 under section 234D of the Act, which is on account of the adjustments proposed to the returned income. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” 4. Brief facts of the case are as under: 4.1 The assessee is a non-resident company incorporated in Netherlands in May 2004 and has its registered office in Amsterdam. It has entered into contracts with third party customers in India to provide certain advanced and technical services in the networking domain. 4.2 For the A.Y. 2017-18, the assessee filed return of income on 29.11.2017 declaring a taxable income of Rs.2,20,00,670/-

Page 4 IT(IT)A Nos. 858 & 859/Bang/2022 (comprising of interest income and foreign exchange gain) under the normal provisions of the Act. The same was discharged by way of credit for taxes deducted at source amounting to Rs.20,43,52,101/- and a refund of Rs.19,51,06,540/- was claimed by the assessee in its return of income. The case was selected for scrutiny for verifying large value of international transaction. Accordingly, statutory notice were issued in response to which the representatives of assessee filed requisite details as called for. 4.3 The case was referred to the Ld.TPO to determine the arms length price for the international transactions. The Ld.TPO passed the order u/s. 92CA of the act on 22.01.2020 and proposed nil amount as the transfer pricing acyustment to arrive at arms length price of the international transactions reported by the tax payer. 4.4 Subsequently during scrutiny proceedings a survey u/s. 133A was carried on in the premise of the assessee on 06.12.2017. It was found that assessee was not maintaining any records in its registered office. Statement of the tax analyst of Cisco Systems India Pvt. Ltd. was recorded to ascertain the location of the records pertaining to the assessee. It was stated by the tax analyst of Cisco Systems India Pvt. Ltd. that the HO- BO agreement was mutually terminated on 01.09.2016 and thereafter operations of the assessee stopped. However the returns were filed for the year under consideration. The survey team learned that details of the assessee were maintained in the premises of Cisco Systems India Pvt. Ltd.

Page 5 IT(IT)A Nos. 858 & 859/Bang/2022 4.5 During the assessment proceedings, various details were called for by the assessing officer and assessee was called upon to establish the closure of branch office of assessee in India. Summons were also issued to random employees as per the payroll provided by the authorised representatives and statements of such employees were recorded under oath who stated that they had no letter from the assessee and they had worked for Cisco in general with no clarity about which specific projects under which Cisco entity had been serviced. The details of employment filed by such employees contains form-16 that stated the deductor as Cisco Systems Services B.V. (being the assessee before us) for A.Y. 2014-15. A statement of one Shri Ashok Kumar EshwariRavindran has been scanned and reproduced in draft assessment order. Assessee was called upon to furnish employee-wise details working on various projects which were furnished by the assessee. It was noted by the Ld.AO that income that appearing in form 26AS in the preceding assessment years pertain to head office and assessee had apportioned income that was attributable to the branch office operations which was accepted by the revenue however for the year under consideration, no such income was offered. 4.6 The claim of the assessee that the branch office in India had stopped its functions and had surrendered its STPI license in the year May, 2015 was not acceptable. The Ld.AO thus treated the entire head office income to be the income of branch office as the PAN No. for head office and branch office was the same. The Ld.AO thus added the head office income that was appearing in form 26AS to be relatable to the business of assessee in India. It

Page 6 IT(IT)A Nos. 858 & 859/Bang/2022 thus proposes the addition of Rs.72,14,58,193/- in the hands of the assessee. Aggrieved by the order of the Ld.AO, in the draft assessment order, assessee filed its objections before the DRP. 4.7 The DRP while considering various objections observed and held as under:

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The DRP thus dismissed the objections raised by the assessee. 4.8 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition of Rs.72,14,58,193/- in the hands of the assessee. Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. The Ld.AR submitted that ground nos. 2-4 are challenging the existence of PE of assessee in India. 3.1 The Ld.AR vehemently submitted that the operations of the erstwhile branch office were closed vide Board Resolution dated 06.08.2015 before the relevant AY under consideration. He also submitted that the revenue has not been able to establish the existence of PE of assessee in India during the relevant period under consideration.

Page 13 IT(IT)A Nos. 858 & 859/Bang/2022 3.2 The Ld.AR has filed certain documents like; a) Surrender of Software Technology Parks of India (‘STPI’) license b) Employee transfer c) Application filled with Authorized Dealer Banker (‘AD banker’) for closure of branch office in India 3.3 It is submitted that Ld.DRP/AO failed to indicate reasons for ignoring documents / evidence supporting closure of erstwhile branch office and consequently, no PE being in existence in India during period relevant to present appeal. Assessee submitted that from above mentioned documents any iota of residual doubt about existence of PE, in absence of any effort by department authorities to establish existence thereof, would be easily dispelled. 3.4 The Ld.AR thus submitted that a) As per Article 7 r.w. Article 5 of India –Netherlands DTAA, the business profits of an enterprise situated in Netherlands shall be taxable only in Netherlands unless such enterprise carries on business in India through PE situated in India. Assessee contended that it does not have any premium establishment in India during the financial years relevant to A.Ys. under consideration and therefore do not fall under Article 12 DTAA and hence is not allowable to be taxed as the PE of foreign company in India for the years under consideration. b) Various details were called for by the Ld.AO/TPO and after considering the same, the Ld.TPO observed that being tax resident of Netherlands, the assessee opted to be governed

Page 14 IT(IT)A Nos. 858 & 859/Bang/2022 by the provisions of the tax treaty between India and Netherlands (‘tax treaty’). Hence, given that, the operations of the Branch were closed during the subject assessment year, no profit was attributable to its Branch and consequently there is no PE as per Article 7 read with Article 5 of India-Netherland DTAA. However, while making remittance to the assessee, certain Indian customers have withheld taxes on payment made. Given that, the same were not taxable in India, the assessee claimed the refund of such withheld taxes on such non-taxable income. We have perused the submissions advanced by both sides in the light of records placed before us. 3.5 We note that the documents filed by the Ld.AR before us that forms part of paper book at pages 320-360, annexure 1 – annexure 4 has not been properly looked into by the authorities below. Necessary verification in order to ascertain whether the employees were actually transferred pursuant to the alleged closure of branch office has also been not carried out. Admittedly, the branch closure document has not been obtained by the assessee yet. It also cannot be ignored that in the preceding AYs, the assessee has offered the income attributable to branch office in India which has been accepted by the revenue. Therefore the nature of income cannot be FTS, it has to be computed under the business income in the event, taxability of the proportionate income arises and therefore all the benefit available to assessee under such circumstances must be granted. We direct the Ld.AO to carry out verification to the extent possible based on the evidences filed by the assessee to ascertain

Page 15 IT(IT)A Nos. 858 & 859/Bang/2022 if any activities are being carried out under the branch office name and then to ascertain the taxability to the extent that is attributable to such branch office if any. Accordingly, grounds raised by assessee in ground nos. 2-4 stands allowed for statistical purposes. 4. Ground nos. 5 & 6 are without prejudice grounds that are kept open at this moment. 5. Ground nos. 7 & 8 are consequential in nature and therefore do not require adjudication. Accordingly, the appeal filed by the assessee for A.Y. 2017-18 stands partly allowed for statistical purposes. 6. As this issue is remanded hereinabove while considering assessment year 2017-18, applying the same view mutatis mutandis, the present appeal for A.Y. 2018-19 also stands remanded to the Ld.AO, with the direction to verify the claim in accordance with the principles laid down in various decisions. In the result, both the appeals filed by the assessee stands partly allowed for statistical purposes. Order pronounced in open court on 30th May, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 30th May, 2023. /MS /

Page 16 IT(IT)A Nos. 858 & 859/Bang/2022 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore