CONCENTRIX CVG CUSTOMER MANAGEMENT GROUP INC. ,UNITED STATES vs. ACIT, (INT.TAXATION) 1(2)(1), NEW DELHI

2.1 After revival of the above captioned appeals, we have been tasked to decider the following issues:

1. 7727/Del./2017 i. Fixed Place PE ii. Attribution of Profits 2. 7924/Del./2018 i. Fixed Place PE ii. Attribution of Profits i. 3. 1086/Del./2022 Fixed Place PE ii. Attribution of Profits i. 4. 667/Del./2023 Fixed Place PE ii. Attribution of Profits 5. 668/Del./2023 i. Fixed Place PE ii. Attribution of Profits 6. 3512/Del./2023 i. Grounds related to DIN issue ii. Fixed Place PE iii. Dependent Agent PE iv. Attribution of profits v. Interest under section 234A and 234B of the Income Tax Act, 1961 (‘Act’) vi. Penalty under section 270A of the Act 7. 1892/Del/2025 i. Fixed Place PE ii. Dependent Agent PE iii. Attribution of profits iv. Interest under section 234A and 234B of the Income Tax Act, 1961 (‘Act’) v. Penalty under section 270A of the Act 8. 130/Del./2018 i. Dependent Agent PE ii. Service PE and Ors. Concentrix CVG … iii. Attribution of Profits iv. IPLC/ Link Charges 9. 1281/Del./2022 i. Dependent Agent PE ii. Service PE iii. Attribution of Profits iv. IPLC/ Link Charges 10. 723/Del./2023 i. Dependent Agent PE ii. Service PE iii. Attribution of Profits iv. IPLC/ Link Charges 11. 724/Del./2023 i. Dependent Agent PE ii. Service PE iii. Attribution of Profits iv. IPLC/ Link Charges of AY 2013-14 is taken as lead case. and ITA No.130/Del/2018 of AY 2013-14: 4. The relevant facts giving rise to this appeal are that the assessee (‘CVG’), a company incorporated in the United States of America (‘USA’), is a tax resident of USA under terms of Article-4 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and USA. The assessee provides outsourced customer and marketing support services as well as comprehensive customer management services. Convergys Indian Services Pvt. Ltd. (‘CIS’) is a subsidiary of the assessee company in India. The assessee takes services of CIS, its Indian Associate Enterprise (‘AE’), for its overseas customers. The CIS provides IT enabled services i.e. call Centre and back-office services in the relevant year. The CIS provides services under the sub-contract arrangement with the assessee on service charge of and Ors. Concentrix CVG … 14% mark-up over the cost. The CIS has provided following services to the assessee: - 1. Client Relationship 2. Client Account Management 3. Sales/Marketing Technology & Brand Development

6. The Ld. AO/TPO has further held that the assessee was not only having the fixed place PE but also the dependent agent PE and the service PE in India. Consequentially, the Ld. AO/TPO worked out business income and Ors. Concentrix CVG … of INR 858,998,303 attributable to the PE in India. The Ld. CIT(A) upheld the finding of the Ld. AO/TPO that the assessee was having fixed place PE in India. However, the Ld. CIT(A) rejected the Ld. AO’s finding that the assessee was having the dependent agent PE and the service PE in India. The issue of fixed place PE has been challenged by the assessee whereas the issue of dependent agent PE and the service PE has been challenged by the Revenue. The issue of attribution of business income decided partly in favour of the assessee. The Ld. CIT(A), following the order of the Tribunal in the case of the assessee for AY 2006-07, restricted the attribution of business income @ 8.35% of the profit of CIS assessable in the hands of the assessee based on the profit split method. The issue of attribution of profit has been challenged by both parties in this appeal.

and Ors. Concentrix CVG … …… …… 60. Before the Commissioner (Appeals), the assessee in their submission had stated that the President of e-Fund Indian provided management support services in U.K. and Australia, while certain personnel of South- east Asia region provided marketing support services to e-Fund India as well as e-Fund group entities overseas. The e-Fund India had an international division which consisted of President's office and South-east Asia Region office. Thus services rendered by e-Fund India personnel comprised of marketing support provided by President and Sales Team to U.K. and Australia and e- Fund Group overseas. It was further mentioned by the assessee that the President's office managed operations of e-Fund Group entities in U.K. and Australia and accordingly employees of said entities reported to the President. The President in turn was reporting to e- Fund Corp. Aforesaid factual position prima facie indicates that the said activities may have resulted in a PE under Article 5(2)(a) under the heading ‗Place of Management' but the said provision has not been invoked. This court while exercising jurisdiction under Section 260A of the Act would not like to invoke the said provision as it requires factual determination as well as computation of the income attributable to the PE. We do not have any finding on the exact nature of the services rendered whether it was only relating to accounts, receivables, human resource management or related to other direct management services. Services of the nature specified in paragraph 3 of Article 5 have to be excluding while in determining and deciding whether or not a PE exists under Article 5(2). There is another difficulty if we apply Article 5(2)(a) - Place of Management principle; - enterprises in UK and Australia were subsidiaries or legal entities and not branches of the assessees. To what extent and when ―place of management‖ principle will be applicable in such cases, DTAA which will be applicable as the associated enterprise were located in UK and Australia and computation of income attributable to the PE are highly debatable and contentious questions which require findings of facts at the first instance and cannot be made matters to be decided for the first time in an appeal under section 260A of the Act. …… …… 63. Two employees of e-Fund Corp were deputed to e-Fund India in the assessment years 2005-06. The case of the assessee and e-Fund India is that they were deputed to look towards development of domestic work in and Ors. Concentrix CVG … India. Payment of these employees as per the Revenue to the extent of 25% was borne by e-Fund India and balance 75% was borne by e-Fund Corp. The Assessing Officer on this basis has observed that this reduced cost base of e-Fund India as remuneration was paid by e-Fund Corp and the said employees were at liberty to perform functions of e-Fund Corp even while working for e- Fund India. The response of the assessee as quoted in the assessment order was that e-Fund India, apart from export activities had also domestic business in India. This was evident from the return of income filed by e-Fund India where domestic income was computed separately as it was not eligible for deduction under Section 10A of the Act. Copy of the return was furnished. It was further stated that cost of personnel seconded in India was fully borne by e-Fund India i.e. 100% of the salary paid to the said employees seconded to India were debited to profit and loss accounts. 75% of the salary component was paid abroad by e-Fund Corp but the same was reimbursed by e-Fund India. This was in accordance with and permitted under the Indian Exchange Control Regulations. It was further stated that the Assessing Officer was wrong in assuming that the two seconded employees were at liberty to function for e-Fund Corp while they were working for e- Fund India. The seconded employees were working under the control and supervision of e- Fund India. The Assessing Officer thereupon has not commented on the reply of the assessee, though he has recorded comments in respect of replies to other issues raised by him (see paragraph 7 of the assessment order). The aforesaid factual assertion made by the assessee, therefore, was not negated or questioned by the Assessing Officer. …… …… 70. The Assessing Officer has recorded and in our opinion incorrectly that majority of the employees of the two assessees operate from India. The said finding is legally untenable and drawn on a wrong legal principle. Employees of e-Fund India were not employees of e-Fund Corp or e-Fund Inc. Seconded employees were only two in number and only in assessment year 2005-06. It is further observed that the two assessee had significant assets in India on wrong legal assumption that assets of e-Fund India were assets of e-Fund Corp and e-Fund Inc. He has held that the assessee and e-fund India did not operate on arm's length basis as in respect of some contracts, e- Fund India had raised bills directly to the customer but for similar contracts/ arrangement the entire amount was paid to the two foreign assessees and only a miniscule amount or and Ors. Concentrix CVG … profit was transferred or paid to e-Fund India. The said finding/conclusion again is not a correct inference. It is not born out from the record and has not been accepted by the tribunal as it has accepted attribution of income made by the assessee.”

7.0.1 We also note that the Ld. CIT (A) has returned a finding based on the order of the ITAT and has also noted that even in assessment year 2006- 07, the Ld. CIT (A) had held that there was no service PE in India and that the AO had not challenged this before the ITAT. The findings of the Ld. CIT (A) are reproduced here in under for a ready reference: - “On the issue of service PE, AO has mentioned in the assessment order for AY 2013-14 that the Appellant is providing services to CIS and these services are not in the nature of fee for included services. In this regard, the appellant has submitted that, the personnel of the Company visited and Ors. Concentrix CVG … India for rendering services that qualify as Fee for Included Services under Article 12 of the DTAA and the company has accordingly offered such income to tax in its tax return. Even in the assessment order the Ld. AO has accepted the returned position and taxed the said amount as Fee for Included Services in terms of Article 12 of the DTAA. Even in AY 2006-07, the CIT(A) has held that there is no Service PE in India and the AO had not challenged this before ITAT. Accordingly, I hold that the Appellant does not have a Service PE under Article 5(2X1) of the DTAA. Accordingly, Ground no 5.12 is allowed.”

7.0.2 Therefore, in absence of the department pointing out any distinguishing facts in this year, on identical facts, we dismiss the related grounds raised by the department.

7.1 As far as the issue of dependent agent PE is concerned, it is again seen that this issue was decided in favour of the assessee by the Tribunal in assessee’s own case in assessment year 2006-07 and the relevant observations are contained in Para 4.26 which are reproduced here in under for a ready reference: - “4.26. In the light of above, even assuming, CIS is not an agent of CMG, it does not have any authority to conclude contracts or secure orders on behalf of CMG and hence CMG does not have a Dependent Agent PE in India.”

7.1.1 We also note that the Ld. CIT (A) has duly taken note of this order of the Tribunal as has made the following observations:

Regarding the constitution of dependent agent of PE (DAPE) of the Appellant in India, I am in agreement with the submission of the Appellant and the order of the ITAT in Appellant’s own case for AY 2006-07 and AY 2008-09. In view of the business model of the Appellant and in absence of any material on record that the conditions mentioned in Article 5(4) of the DTAA is satisfied viz. habitually exercising authority to conclude contracts or maintaining stock of goods or habitually securing orders. I am of the view that CIS did not constitute a dependent agent PE of the Appellant in India. In view of this, Grounds 5.9 to 5.11 are allowed. and Ors. Concentrix CVG … 7.1.2 In this case also, the department has not been able to bring out any distinguishing facts in this year under consideration and, therefore, following the order of the ITAT in earlier assessment years, we dismiss the related grounds in department’s appeal in this year also.”

relating to PE and attribution of profits raised by the assessee and Revenue stand disposed off accordingly. The assessee gets consequential relief. Taxability of link charges/IPLC charges as royalty:

16. The next issue raised by the Revenue is the taxability of payment of link charges/IPLC charges as royalty. We have taken note of finding of the Tribunal, in first round of appeal, with respect to this issue as under: and Ors. Concentrix CVG … “4.3 Arguing against the grounds raised by the department on the issue of payment of link charges/IPLC being taxable under ‘equipment royalty’ and ‘process royalty’, the Ld. AR submitted that during the year under consideration, an amount of INR 37,279,929 (USD 684,072) was paid/ payable by CIS to the Assessee pertaining to link charges. The link charges pertain to International Private Leased Circuits ('IPLC') that provide a point-to-point private line used by an organization for communication. An IPLC can be used for Internet access, business data exchange, video conferencing, and any other form of telecommunication. IPLC is one of the basic requirements for Information Technology enabled services like Business Process Outsourcing. In the instant case, IPLCs allow a dedicated capacity for a private, secure communication link from India to the US over the Internet which enables CIS to communicate with the customer. It was submitted that CVG makes payment for such link charges to telecom service providers in the USA and cross charges the portion of the cost incurred by it in connection with the India half link to CIS, which is accordingly reimbursed by CIS to CVG. The Ld. AR submitted that the AO has made an addition on account of such link charges by stating that they are taxable as 'Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA and accordingly taxed it @ 10% on gross basis. In addition to the finding of the AO that link charges are taxable as 'Equipment Royalty', the AO also held that the payments pertaining to link charges are taxable as 'Process Royalty' both under the Act as well as DTAA. It was submitted that the link charges do not qualify as Equipment Royalty. The Indian judiciary has made it clear that it is important to see whether there was any intention to transfer the right to use or not. It was submitted that it cannot be controverted that CVG/CIS have any control or possession over the equipment i.e. the network facilities are under the control of and maintained and operated by the service providers. CVG/CIS merely avail a service. With regard to Equipment Royalty, it was submitted that the Tribunal for AY 2006-07 held the issue in favour of CVG and the Ld. CIT (A) has followed the order of the ITAT in the year under consideration and has allowed assessee’s ground. ……. ……. 7.2 Similarly, the issue of payment link charges/IPLC charges being taxable under royalty has been decided in assessee’s favour by the Tribunal in assessment year 2006-07 in Para 3.5 of the said order. The same is being reproduced here in under for a ready reference: - and Ors. Concentrix CVG … “3.5. In view of the foregoing observations we hold that there is no transfer of the right to use, either to the assessee or to CIS. The assessee has merely procured a service and provided the same to CIS, no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. Therefore, it is held, that the said payments do not constitute Royalty under the provisions of Article 12 of the tax treaty and the ground is allowed in favour of assessee.”

7.2.1 It is also seen that the Ld. CIT (A) has taken due cognizance of this finding of the Tribunal in the year under consideration and has allowed relief to the assessee. The findings of the Ld. CIT (A) are contained in paragraph 8-9 which is being reproduced here in under: - “8.9 The Hon'ble Delhi High Court in the case of New Skies Satellite BV (supra) further held that India's change in position to the OECD commentary cannot act as influence in interpreting the word royalty as it stands today. The only way such change can he brought about is through such change being incorporated in the DTAA itself an amendment in the domestic law cannot bring about a unilateral change in the DTAA. Further, Hon'ble court observed that the argument that certain incomes would slip out of the bands of Revenue, where such position is taken, cannot be accepted. The Hon'ble Court concluded that amendment in section 9 will not affect DTAA, and the term Royalty' would have to be understood as defined DTAA only.

8.10 As discussed above, the Hon'ble I TAT, Delhi in its order dated May 10, 2013 in Appellants own case/or Assessment Tear 2006-07 and Assessment Year 2008-09 has held that there is no transfer of the right to use, either to CMG or to CIS. The ITAT observed that the Appellant has merely procured a service and provided the same to CIS. Further, ITAT observed that even otherwise, the payment is in the nature or reimbursement of expenses and accordingly not taxable in the hands of the Appellant. Therefore, it is held that the said payments do not constitute Royalty under the provisions of the DTAA.

8.11 Respectfully following the Hon’ble ITAT decision in the case of the Appellant and jurisdiction High Court’s decision of New Skies Satellite and Ors. Concentrix CVG … BV (Supra) wherein it is held that the amendment in section 9 will not affect the DTAA, I find that the payment of link charges received by the Appellant from Convergys India Services Rut. Ltd. would not qualify as “process” royalty in terms of Article 12 of lndia-US DTAA. Hence, the ground of appeal, including additional ground of appeal is allowed. ……..”

7.2.2 Therefore, in absence of any contrary facts having been pointed out by the department, in view of the order of the coordinate bench in assessee’s own case as aforementioned, we dismiss the related grounds raised by the department in this regard.”