The Delhi Tribunal has described the method to arrive at an appropriate
profit, which is attributable to the permanent establishment when transfer
pricing methods fail to compute reasonable profit.
The recent decision of the Delhi Income Tax Appellate Tribunal in
the case of Convergys Customer Management is significant as it deals with
attribution of profits to Permanent Establishments (PE). It is important to
foreign entities procuring services from India through PEs. The taxpayer, a
foreign company, was providing customer management services by utilising its
advanced information system capabilities, human
resource management skills and
industry experience. The taxpayer procured services from its subsidiary in
India, namely Convergys India Services Pvt Ltd, on a principal-to-principal
basis, while it did not carry out any business operations in India.
The tribunal held that the taxpayer had a fixed place in India as
its employees frequently visited the premises of CIS to provide supervision,
direction and control over operations, and such employees had a fixed place of
business at their disposal. CIS was practically the projection of the taxpayer’s
business in India and carried it out under the control and guidance of the
taxpayer without assuming any related significant risks.
The tribunal relied on the Supreme Court’s decision in the case of
Morgan Stanley and Circular No. 5 of 2004 to observe that the taxpayer’s revenue
cannot be considered as the revenue of the PE by any stretch of imagination. The
tribunal prescribed a methodical approach by applying the percentage of global
income to the end-customer revenue from India operations. From the resultant
figure the profit-before-tax of CIS was to be reduced and then the rate of 15
per cent applied to the residual amount.
This decision will be helpful to foreign companies with a PE in
India, to compute the profit attributable to the PE. The tribunal has described
the method to arrive at an appropriate profit, which is attributable to the PE
when the transfer pricing methods fail to compute reasonable profit. The
guidelines will provide clarity to foreign companies in determining their tax
liability in India.
— KPMG
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