The assessees were two American Companies, e-Funds Corporation, USA (e-Funds Corp) and e-Funds IT Solutions Group Inc., USA (e-Funds Inc). They operated ATM networks in North America and provided related servicing such as processing payments as well as servicing retail point of sale systems and also helped merchants reduce bad cheque risks and banks avoid losses on new accounts. 40% of the worldwide staff of the group were employed by an indirect Indian subsidiary of the first assessee (e-Fund India), which operated a call centre as well as providing software troubleshooting and testing services. Revenue sought to tax the assesses on the basis that they had a permanent establishment (PE) in India based on there being a fixed place of business there, or under the services PE provision in the India-U.S. Treaty which (in Art. 5(2)(l)), in relevant part, referred to “the furnishing of services…within a Contracting State by an enterprise through employees or other personnel.” Revenue submitted that the employees of e-Fund India “were de facto working under the control and supervision of e-Funds Corp” and that e-Funds Corp had seconded two senior employees to e-Fund India (para. 3).
In finding that the assessees did not have fixed places of business in India, Nariman J quoted extensively from Formula One and stated (at para 12):
…[I]t is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding … that … any fixed place of business has been put at the disposal of these companies. … The High Court … held:
...It is clear … that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad.
Nariman J further found that there was no services PE under Article 5(2)(l), stating (at paras 17, 18, 20):
Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of the DTAA is that an enterprise must furnish services “within India” through employees or other personnel. …
It has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) is not satisfied. …
If any customer is rendered a service in India, whether resident in India or outside India, a “service PE” would be established in India. ... All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India.
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