CUMMINS INC.,PUNE vs. DEPUTY DIRECTOR OF INCOME-TAX, PUNE

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final assessment order dated 25-10-2012 passed by the Assessing 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 year 2008-09.

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business income. Succinctly, the assessee is 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 including fuel systems,

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 assessee 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 sum of

Rs.20,18,50,000/- (equivalent to US$ 50.00 lakh) during the year

from KPIT Cummins Global Business Solutions (hereinafter called

‘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 regard. On

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their perusal, the 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) of the Act, the AO held that KPIT-GBS has

been bound by the assessee to provide BPO services to Cummins

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 services

which were earlier provided by the assessee. The AO in the draft

order held that KPIT-GBS carried out work that was a responsibility

of the assessee company, which indirectly proved that KPIT-GBS

was acting wholly for the assessee company in respect of the

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 on 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, held in para

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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 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. This is how, he included the sum of

Rs.20.18 crore and odd in the total income of the assessee. The

assessee assailed the draft order before the Dispute Resolution 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 of the

directions by noticing that the provisions of dependent agency

require that the agent should habitually act on behalf of the principal

and conclude contacts on his behalf to bind the principal and no

such fact to this effect was evident from the AO’s order or the

Master Service Agreement or Grant Agreement. Thereafter, the

DRP held that the receipt of amount by the assessee would get

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 assessee

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company were actively involved in the process of rendering BPO

services, which resulted into existence of a service PE under Article

5(2)(l) of the DTAA. The 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 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 on 25-10-2012, inter

alia, making an addition of Rs.20.18 crore and odd. The assessee is

aggrieved by the impugned order on this score.

material on record. It is found as an undisputed position that 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 worldwide

Cummins entities including some other divisions of the assessee

itself. On 17.7.2007, the assessee entered into the Grant Agreement

with KPIT-GBS in India, a wholly owned subsidiary of KPIT-

Cummins: `to undertake outsourcing of the Cummins worldwide

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accounting and finance functions and other processes’. Preamble of

this Agreement, a copy of which has been placed at page 220

onwards of the paper book. Provides that : `Whereas, Cummins and

KPIT GBS are entering into one Master Services Agreement dated

as of the same date herewith (the `BPO MSA’) for KPIT GBS to

perform a portion of the business processing activity currently

performed by Cummins Business Services (referred to as `CBS’, it

is the shared services division of Cummins); and Whereas, for

entering into the BPO MSA and giving a right to KPIT GBS to

render business process outsourcing services to the Cummins

Group entities globally, KPIT GBS has agreed to remit to Cummins

the cash consideration set forth herein’. Clause 1 of the Grant

Agreement spells out the `Purpose’ of the Agreement and states

that: `Cummins is granting to KPIT-GBS a right to render business

process outsourcing services to the Cummins group entities on a

global basis from KPIT-GBS’s offices in Pune, India’. Clause 2 of

the Grant Agreement provides that: `In consideration of securing

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

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million payable not later than September 30, 2007’, which is the

amount in dispute with equivalent of Indian Rs.20,18,50,000. Then

there is reference to Trench-B payment in the Grants Agreement,

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 the 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 Group

entities on a global basis’. To implement the Grant Agreement, the

assessee and KPIT GBS executed a Master Service Agreement for

BPO Services (hereinafter called `the MSA BPO’) on the same

date, namely, 17-07-2007, a copy of which has been placed 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 USA

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

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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 controlled 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 Service

Addendum (No. 1) – Finance and Accounting BPO Services

(hereinafter called `the Addendum’) was executed on the same date,

namely, 17-07-2007, whose copy is available on page 196 onwards

of the paper book. This is again between `Cummins Inc., an Indiana

corporation with its principal offices at 500 Jackson Street,

Columbus, Indiana USA 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 successors and permitted assigns)’and KPIT- GBS. It

provides for performing Finance and accounting services to the

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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-GBS

rendered services to Cummins India Ltd. through a Purchase 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.

scenario as coming out from the Agreements referred to

hereinabove.

i. Prior to 2007, Cummins Business Services, an internal division 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 Agreement with KPIT-GBS under which such services were assigned to the 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 the right to render BPO services.

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iv. Pursuant to executing the Grant Agreement, KPIT-GBS started 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).

received a sum of Rs.7,00,59,042/- during the year under

consideration from the Cummins group entities for rendering BPO

services. Out of such sum, Cummins USA, that is, the assessee paid

a sum of Rs.3.65 crore (constituting 52.11% of the total payment);

Cummins UK paid Rs. 1.98 crore (constituting 28.32%); Cummins

India paid Rs.1.32 crore (constituting 18.85%); and Cummins China

paid Rs.5.01 lakh (constituting 0.72%). Thus, it follows that there

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 assessee 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 BPO services to

worldwide Cummins group entities including itself.

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Act dealing with the scope of total income provides that the total

income of a person who is non-resident includes all income from

whatever source which is received or is deemed to be received in

India or accrues or arises or is deemed to accrue to arise in India

during the year. Section 9 deals with incomes deemed to accrue or

arise in India. Section 9(1)(i) states that all income accruing or

arising, whether directly or indirectly through or from any business

connection in India or source of income in India etc. shall be

deemed to accrue or arise in India. Clause (a) of Explanation 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 be only

such part of the income as is reasonably attributable to the

operations carried out in India. The term “business connection” has

been defined in Explanation 2 as including any business activity

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 his

activities are limited to the purchase of goods or merchandise for

the non-resident. etc.

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income accruing or arising directly or indirectly to a non-resident

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 business

connection can be established directly by the non-resident by doing

business activity in India or indirectly through some dependent

agent etc.

India because of the transaction of receipt of Rs.20.18 crore 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 rendering BPO

services to other Cummins entities and other units of the assessee.

Receipt from Cummins entities for rendering such BPO services

was admittedly a source of income and a revenue receipt of the

assessee. We have noticed above that the assessee availed BPO

services from KPIT GBS at 52.11% of the overall services. Price

paid by the assessee for the receipt of services is seriously impacted

because of receipt of Rs.20.18 crore, which is a consideration for

the grant of the right to render BPO services to KPIT GBS. The

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expression used in the agreement as a consideration for grant of the

right to render BPO services is, in fact, a misnomer. Obtaining a

service from an outside party cannot be equated with parting with a

right to do such a thing in favour of that person, warranting 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 receipt

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 granting the right

to render BPO services in relation to other Cummins group entities

is concerned, the same is also chargeable to tax u/s 28(va) which

provides that any sum, whether received or receivable, in cash or

kind, under an agreement for (a) not carrying out any activity 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 Notes to the

return, reproduced in para 13 of the assessment order, wherein the

assessee admitted that : `The payment is in the nature of business

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income in the hands of Cummins Inc.’ and then claimed as not

taxable due to absence of any Permanent establishment in India. 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 consideration

received for grant of rights to render BPO service as business

income over the term of the contract with KPIT GBS’.

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 operations

carried out in India shall be deemed to accrue or arise in India. To

the same effect is the position under the DTAA, which provides

under Article 7 that the profits of an enterprise of a Contracting

State shall be taxable in the other Contracting State only to such an

extent as are attributable to the permanent establishment in the other

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 DTAA

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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 the

carrying on of operations in India. Even if there is a business

income of a non-resident, the same would escape Indian taxation net

in the absence of the assessee carrying out any operations in India or

having a permanent establishment in India.

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 view 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 need not

focus on examining whether or not KPIT-GBS constituted a

dependant agent PE of the assessee in India. The AO, following 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 concentrate

on finding if any service PE of the assessee was constituted in India

triggering the taxability of the amount.

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Establishment. Para 1 provides that the term ‘Permanent

establishment' means a fixed place of business through which 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 fees for

included services), within a Contracting State by an enterprise

through employees or other personnel, but only if : (i) activities 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).’

assessee in India noted in para 2.1.2.6 of its direction that : `The

assessee company received annual payment towards consideration

for granting right to render business process outsourcing services’.

The position stated by the DRP is not correct because the amount

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

17 ITA No.2506/PUN/2012 Cummincs Inc.

the DRP noted in para 2.1.2.9 of its direction that : `KPIT GBS has

provided business process outsourcing services to the assessee

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 been

collectively explained in both the Agreements as the assessee and its

divisions and affiliates (an entity that now or hereafter directly or

indirectly controls, is controlled by, or is under common control

with such person or entity) including joint ventures, partnerships,

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 actively

involved in the process of providing BPO services by KPIT GBS. In

para 2.1.2.15, it noticed that the assessee company deployed 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 Addendum

with the caption “Governance Structure and Management Report”

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

18 ITA No.2506/PUN/2012 Cummincs Inc.

umbrella Agreements providing for the rendition of BPO services

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 confusion.

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 assessee

were involved in rendering BPO services by KPIT GBS, which led

to the creation of the Service PE, is itself without any bedrock.

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 Transaction 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

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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 receipt 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.

enterprise renders services in India to its customers and such

services are rendered through its own employees or other personnel.

In the present case, there are 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 is

established in India qua the transaction under consideration of

receipt of Rs.20.18 crore from KPIT-GBS.

20 ITA No.2506/PUN/2012 Cummincs Inc.

revenue receipt and otherwise chargeable to tax, but the same

cannot be so included u/s 9(1)(i) of the Act 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. We, therefore, overturn the

impugned order on this score and direct to delete the addition of

Rs.20.18 crore.

Rs.6,22,96,401/- as Royalty income or fees for technical services as

against the assessee’s claim of the same being not chargeable to tax.

The assessee has filed an application seeking withdrawal of Form

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 user

rights in off-the-shelf software and providing related standard

support services against the assessee. The assessee filed appeals

against this order, which were admitted by the Hon’ble High Court.

In the mean time, the assessee filed Form no. 8 for the year under

consideration on the same issue, which is subject matter of the

instant ground nos. 2 and 3. Later on, the earlier order passed by the

21 ITA No.2506/PUN/2012 Cummincs Inc.

Tribunal for the assessment years 2004-05 and 2006-07 was

recalled followed by the assessee withdrawing its appeals from the

Hon’ble 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.

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.Ys. 2004-

05 and 2006-07, has decided this issue in favour of the assessee by

holding that the same is not in the nature of Royalty and hence 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 extant

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

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into the issue, we determine the grounds on this score in favour of

the assessee. The impugned order is, therefore, overturned on this

issue.

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.

Order pronounced in the Open Court on 07th August, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 07th August, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.2506/PUN/2012 Cummincs Inc.

Date 1. Draft dictated on 05-08-2019 Sr.PS 2. Draft placed before author 07-08-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/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. *