R.F.NARIMAN,J. - (1.) Leave granted. These appeals are from a judgment of the Delhi High Court disposing off several appeals and cross appeals. They relate to two American Companies which are the assessees in the present case, namely, e-Funds Corporation, USA (relating to assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08) and e-Funds IT Solutions Group Inc., USA (relating to assessment years 2000-01 to 2002-03 and 2005-06 to 2007- 08). The appeals from the Income Tax Appellate Tribunal (ITAT) by the assessees were allowed by the High Court, whereas cross-appeals by the department were rejected. After framing several substantial questions of law, the High Court narrated the undisputed facts as follows: "6. Undisputed facts in brief may be first noticed. The assessees are companies incorporated in United States of America (USA, for short) and were residents of the said country. They were assessed and have paid taxes on their global income in USA. e-Fund Corp. was the holding company having almost 100% shares in IDLX Corporation, another company incorporated in USA. IDLX Corporation held almost 100% shares in IDLX International BV, incorporated in Netherlands and later in turn held almost 100% shares in IDLX Holding BV, which was a subsidiary again incorporated in Netherlands. IDLX Holding BV was almost a 100% shareholder of e-Funds International India Private Limited, a company incorporated and resident of India (e-Fund International India Private Limited has been described as 'e-Fund India'). IDLX International BV was also the parent/holding company having almost 100% shares in e-Fund Inc., which as noticed above, was a company incorporated in USA. 7. Both e-Fund Inc. and e-Fund Corp. have entered into international transactions with e-Fund India. The details of these transactions have to be examined in depth and have to be referred below. e-Fund India being a domestic company and resident in India was taxed on the income earned in India as well as its global income in accordance with the provisions of the Act. The international transactions between the assessees and e-Fund India and the income of e-Fund India, it is accepted, were made subject matter of arms length pricing adjudication by the Transfer Pricing Officer (TPO, for short) and the Assessing Officer (AO, for short) in the returns of income filed by e-Fund India. We are not primarily concerned with the merits of the computation of income declared and assessed in the hands of e-Fund India in the present appeals, though the factum that e-Fund India was assessed to tax on its global income as per law or on arms length pricing in relation to associated transactions and the basis of the said computation of income earned by e-Fund India, as noticed below, is a relevant and an important fact. Revenue has not disputed the said legal position. It is the contention of the Revenue that income of the two assessees were attributable to India because the two assessees had PE in India and should be taxed in India, irrespective of whether the said assessees had paid taxes in USA. Income earned and taxed in the hands of e-Fund India was different from the income attributable to the two assessees. Thus the balance or differential amount, i.e., income attributable to the two assessees, which was not included in income earned and taxed in the hands of e-Fund India, should be taxed in India. 8. As a principle what is stated and submitted by the Revenue cannot be contested and in fact not contested by the assessees as it is a principle applicable to international taxation. A foreign or a non-resident company can be taxed in the country where it has a subsidiary, which is also a PE on the income attributable to the said PE, even if the subsidiary (in the present case of e-Fund India) is being taxed in the said country. The principle being that subsidiary being an independent and a distinct entity is taxed for its income, whereas the foreign entity, i.e., holding company is taxed for the income earned by the said independent entity attributable to the PE in the country where subsidiary is situated. The income of the subsidiary is not taxed in the hands of the non-resident principal and vice-versa. Thus, there is no double taxation in the hands of the holding company as income of the subsidiary is not taxed as income of foreign holding assessee. The principle is that a subsidiary constitutes an independent legal entity for the purpose of taxation."
(2.) The assessing authority decided that the assessees had a permanent establishment (hereinafter referred to as PE) as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as DTAA) was attracted. Consequently, the assessees were liable to pay tax in respect of what they earned from the aforesaid fixed place PE in India. The CIT (Appeals) dismissed the appeals of the assessees holding that Article 5 was attracted, not only because there was a fixed place where the assessees carried on their business, but also because they were "service PEs" and "agency PEs" under Article 5. In an appeal to the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a "fixed place PE" and "service PE" had been made out under Article 5, but said nothing about the "agency PE" as that was not argued by the Revenue before the ITAT. However, the ITAT, on a calculation formula different from that of the CIT (Appeals), arrived at a nil figure of income for all the relevant assessment years. The appeal of the assessees to the High Court proved successful and the High Court, by an elaborate judgment, has set aside the findings of all the authorities referred to above, and further dismissed the cross-appeals of the Revenue. Consequently, the Revenue is before us in these appeals.
(3.) The learned Attorney General, Shri K.K. Venugopal, has argued before us that, under Article 5(1) of the DTAA, a fixed place PE has been made out on the facts of these cases, and relied heavily upon the United States Securities and Exchange Commission Form 10K of e-Funds Corp. dated 31st March, 2003. According to the learned Attorney General: ? Most of the employees are in India (In fact, the High Court records that 40% of the employees of the entire group are in India). ? eFunds Corp has call centers and software development centers only in India. ? eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India. ? The master services agreement between the American and the Indian entity gives complete control to the American entity in regard to personnel employed by the Indian entity. ? It is only through the proprietary database and software of eFunds Corp, that eFunds India carries out its functions for eFunds Corp (The High Court records that the software, intangible data etc is provided free of cost and then states that this is irrelevant). ? The Corporate office of eFunds India houses an 'International Division' comprising the President's office and a sales team servicing EFI and eFunds group entities in the United Kingdom, South East Asia, Australia and Venezuela. The President's office primarily oversees operations of eFunds India and eFunds group entities overseas. The sales team undertakes marketing efforts for affiliate entities also. ? The CIT(A) has referred to the Transfer Pricing Report which says that eFunds India provides management support and marketing support services to eFunds Corp group companies outside India. Regarding supervision of personnel rendering the services, the TP Report states as follows: "The President's office manages the operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to the President. The President's overall reporting is to EFC. Though the personnel rendering marketing services are employees of EFI, they report to overseas group entities to the extent that they are engaged in rendering services to such entities." Applying the above facts, it is submitted that the assessees satisfy the requirements of a fixed place PE. The Supreme Court in the recent judgment in Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation-3, Delhi and others, (2017) SCC Online SC 474 has held that "it universally accepted that for ascertaining whether there is a fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on." It was further held that "the physically located premises have to be 'at the disposal' of the enterprise" and that "the place will be treated as 'at the disposal' of the enterprise when the enterprise has right to use the said place and has control thereupon. Consequently, he argued that physically located premises are "at the disposal" of the assessees with the degree of permanence required, namely, the entire year. In addition, he argued that the High Court was in error in holding that the place of management PE under Article 5(2)(a) was prima facie made out, but since the said provision had not been invoked and requires factual determination, Revenue's argument was dismissed on this score. Further, under Article 5(2)(l) of the DTAA, he argued that a service PE is clearly made out on facts because: ? As per the consolidated Annual Report of eFunds Corp, most of the employees are in India. eFunds Corp has call centers and software development centers only in India. ? eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India. ? Regarding supervision of personnel rendering the services, the TP Report states as follows: "The President's office manages the operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to the President. The President's overall reporting is to EFC. Though the personnel rendering marketing services are employees of EFI, they report to overseas group entities to the extent that they are engaged in rendering services to such entities." ? The Master sub-contractor agreement between eFunds Corp and eFunds India discussed in the CIT(A)'s order provides in clause 1.1(a) as follows: "Subcontractors personnel assigned to work with eFunds IT or Customers located in the United States shall be directed by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds IT. In the event Subcontractors personnel are assigned to perform such services in India, the Subcontractor shall supervise such work, acting at the direction of eFunds IT. eFunds IT shall be the sole judge of performance and capability of each of subcontractors personnel and may request the removal of one or more of Subcontractors personnel from a project covered by any statement of work as follows." ? It is submitted that the personnel engaged in providing these services were ostensibly the employees of eFunds India but were de facto working under the control and supervision of eFunds Corp. In this regard, reference was made to Para 17 of the judgment in DIT v. Morgan Stanley (2007) 7 SCC 1, where the Court held: "17......It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge." ? Furthermore, the AO in the Assessment Order has observed that eFunds Corp has seconded two employees to eFunds India and these employees worked as Sr. Director- Technical Services and Country Head-Business Development. The activities of the seconded employees go beyond mere 'stewardship activities' in terms of Morgan Stanley. ? The term 'Other Personnel' has to be seen in the context of the facts of this case which show that eFunds India was not an independent subsidiary. Further, he also argued that a dependent agent PE was made out under Articles 5(4) and 5(5), there being a concurrent finding of facts of the CIT (Appeals) and ITAT in this regard. Also, according to the learned Attorney General, since the assessees failed to furnish information when sought for, an adverse inference was sought to be drawn against them and that, therefore, it is clear that once this inference is drawn, the burden shifts on to the assessees, which they will then have failed to discharge. ;