AI Structured Summary
Not yet generated for this judgment
Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
The above captioned appeal is preferred by the assessee against the assessment order dated 15.01.2025, passed by Assistant Commissioner of Income Tax, Circle International Taxation – 1(2)(2), Delhi (hereinafter referred to as ‘ld. AO), passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter ‘the Act’) in pursuance of directions of the ld. Dispute Resolution Panel-1, New Delhi (in short ‘ld. DRP') dated 19.12.2024 under section 144C(5) of the Act pertaining to Assessment Year 2022-23.
Assessee has filed additional grounds of appeal, as under:
1.On the facts and circumstances of the case and in law, the Final Order and DRP Directions are erroneous and bad in law.
2.On the facts and circumstances of the case and in law, the Final Order and DRP Directions are barred by limitation provided u/s 153 of the Act and deserves to be held as void-ab-initio. bad in law and time-barred.
3.On the facts and circumstances of the case & in law, the Ld. AO/Hon. DRP erred in determining the income of Appellant at INR 44,44,098 as against the nil returned income declared by Appellant.
4.On the facts and in the circumstances of the case and in law, the Hon. DRP has grossly erred by failing to independently verify the additional evidences filed by Appellant and by not issuing speaking directions with respect to such additional evidences filed. This is a gross violation of section 144C(6) of the Act and the Final Order is bad in law.
5.On the facts and circumstances of the case and in law, the Ld. AO/Hon. DRP erred in holding Expedia Online Travel Services India Private Limited ("EXP-IN") to be a Dependent Agent Permanent Establishment ["DAPE") of the Appellant in India under Article 5(5) of the Double Taxation Avoidance Agreement between India and Switzerland (IN-CH DTAA']. In doing so:
5.1the Ld. AO/Hon. DRP erred on facts while concluding that EXP-IN is a DAPE of the Appellant being involved in negotiating and concluding the contracts with Indian Lodging Suppliers:
5.2the Ld. AO/Hon. DRP erred in completely disregarding the fact that EXP-IN is rendering merely support services to Appellant; and
5.3the Ld. AO / Hon. DRP erred in concluding that EXP-IN is a DAPE without appreciating that the transactions between Appellant and EXP-IN were carried out on principal-to-principal basis.
6.On the facts and circumstances of the case and in law, the Ld. AO/ Hon. DRP erred in attributing a sum of INR 44,44,098 as business profits to the alleged PE of the Appellant in India. In doing so:
6.1the Ld. AO/Hon. DRP erred in law by applying Rule 10 of the Income-fax Rules. 1962 (Rules) for attribution of profits to PE by ignoring the settled principle that the attribution of profits to a PE needs to be undertaken by carrying out Functional, Asset and Risk ("FAR") analysis of the DAPE: and
6.2the Id. AO grossly erred in disregarding the fact that the transaction between Appellant and EXP-IN has been undertaken at an arm's length price (as confirmed by the transfer pricing report of EXP-IN), Accordingly, the Ld. AO erred in further attributing profits to the Appellant's alleged PE in India, without bringing any cogent material on record to establish that the alleged PE had been carrying out any other activity on behalf of the Appellant, apart from support services
7.On the facts and circumstances of the case and in law, Ld. AO grossly erred by incorrectly computing interest u/s 234B of the Act.
8.That the Ld. AO erred in proposing to initiate penalty proceedings u/s 270A of the Act.
The Appellant prays that appropriate relief be granted.
The above grounds and sub grounds of objections are without prejudice to each other.
The Appellant craves leave to alter, amend or withdraw all or any of the grounds of objections herein or submit any further grounds as may be considered necessary, together with applicable statements, documents and papers, either before or during the course of hearing.”
The brief facts of the case is that the assessee, Expedia Lodging Partner Services Sarl (ELPS), is a Non Resident limited liability company incorporated in Switzerland. Its holding company is incorporated in Luxembourg. Its ultimate parent company is incorporated in US. The Assessee is engaged in business of providing strategic lodging services to its group company situated in India and earns commission for it. In Expedia Group compensation is earned under agency model (Hotel collects) or merchant model (Expedia collects). Assessee is involved in hotel collect model in which travelers pay lodging supplier at stay and subsequently assessee receives a commission from lodging suppliers.
Assessee has claimed that it works via two Indian AEs to receive support services:
Hotel.com India Pvt Ltd (HCOM-IN) collects credit card related hotel commission paid by Indian lodging suppliers whereas other commission are received by it directly from Indian lodging suppliers. These commission payments are received in Indian account and repatriated subsequently in foreign account. Assessee claims that it has paid HCOM-IN at arm's length price for these services. Assessee has claimed that it is its business income which is not chargeable to tax in India. It has paid equalisation levy on it.
Expedia Online Travel Services India Pvt Ltd (EXP-IN) provides contracts software development (CSD) services and various supply support, services with local supplier at the request of the assessee which are mostly administrative in nature e.g. account management support, communication, information gathering, compiling and dissemination. Regarding CSD services assessee has submitted that they are low level designing testing and maintenance services. Assessee claims that it has paid Expedia India at arm's length price for these services.
Hotel partners of the assessee are categorised as-
Hotel Enterprise Partners(HEP)- these include large regional hotel chains managed directly by US and Swiss leadership and small hotel chains managed on a regional basis such as Indian sub-continent from Singapore. They are managed though especially curated and tailor made contracts.
Hotel Market Partnerships(HMP) which include independent properties managed through standard automated contracts.
The assessee, during the year under consideration, has received receipts in the nature of commission from Indian Lodging Suppliers, of an amount of Rs 12,88,18,444/- which it has claimed as business income but non-taxable in India as it has no PE in India. Accordingly, the assessee has filed an ITR on 30.12.2022 declaring nil income. The AO has held that the Indian AEs of the assessee namely Expedia India, are actively involved in the various core functions of the assessee and are therefore it is Dependent Agent of the assessee. The AO concludes that the assessee has a dependent agent permanent establishment (DAPE) under Article 5(5) of the India-Swiss DTAA. Accordingly, the AO calculates the profit of the assessee at 5.75% of the total receipt which works out to Rs 74,06,831/-. Thereafter, the AO attributes 60% of the profit earned in India i.e., Rs 44,44,098/- to the DAPE and taxes the same @ 40%. The Ld DRP upheld the findings of the AO. Aggrieved, the assessee is before us.
The ld AR made the following submissions:
1.It is submitted that Ground No. 1 is general in nature.
2.With respect to ground 3 to 5, EXP-IN's primary role is to provide certain Contract Software Development (CSD) and other support services to various EG entities, including EXP-US and ELPS, during the Subject Year. Regarding the CSD services provided by EXP-IN, EXP-IN's role is limited to low level designing, coding, testing, and maintenance.With respect to the other support services provided by EXP-IN (including AM supply support), the Ld. AO leveraged responses submitted by certain indian lodging suppliers (ie.. Indian (The) Hotels Company Limited d/b/a Taj Hotels and Hotel Vellara) (collectively, the "Lodging Suppliers"), as well as materials available in public domain (I.e., Linkedin), to allege that the employees of EXP-IN are engaged in contract negotiation and conclusion on behalf of Appellant.
3.The allegations of the Ld. AO/Hon, DRP are based on wrongly interpreting the factual elements gathered during the audit proceedings, particularly with respect to the functions performed by the employees of EXP-IN. The responses from the Lodging Suppliers must be read in the right context. Moreover, the Ld. AO /Hon. DRP did not consider numerous factors that clearly undermine their conclusion, including (e., in the Final Order) only some isolated responses that could not be considered adequate to ground their claim and support their PE theory. In this regard, Appellant wishes to submit the below:
4.It should be considered that the Ld. AO presented responses from only three hotel partners of approximately 10,500 hotel partners present in India for the Subject Year. Such a sample size is statistically insignificant. Considering there are thousands of Indian hotels on the EG POSa, it would be unrealistic to consider that 21 AM employees (at Manager level or below) actively engage with each hotel partner during the Subject Year, hence, the foundational relevance and importance of the technology tools and robust data analytics developed and provided by ELPS, including automated communications and partner self-service.
5.EXP-IN'S AM employees did not take any action that went beyond the services requested by ELPS. according to the provisions of its intercompany agreement. The activity performed by local AM should only be seen as a way to manage hotel partnerships for Appellant, which did not require the performance of any type of key activity. This should be qualified as an ancillary service. In this regard, please refer to details explained at p.16-18 of the submission dated 11 Nov 2024 fled before the Hon. DRP refer to Paperbook p.414-416).
Contracting Process: role of ELPS and EXP-IN
6.Irrespective of whether local AM is interacting with an HEP or HMP partner, EXP-IN did not have the authority to negotiate or conclude contracts with hotel partners, as summarized below.
7.HEP Partners. Relationships with HEP partners (including Taj Hotels) were (and are) managed centrally. most often from the United States, Switzerland, or Singapore, with limited involvement of the local team of EXP-IN, With respect to HEP partners, the senior leadership teams of ELPS and EXP-US directly negotiated contracts with the largest hotel chains, as those hotel chains received bespoke treatment with respect to the customization of their lodging supply agreements. During the Subject Year, there was one local AM role that assisted with Indian HEP partners (I.e., Kanupriya Joshi). The support provided by Ms. Joshi for ELPS with the Indian HEP partner, with respect to the contract renewal process, was limited to communications/liaison. Specific activities included, as appropriate: preparing meeting summaries: gathering partner feedback/input that would be considered and approved by ELPS leadership (e.g.. partner requests for non-standard terms such as marketing commitment): communicating pre-approved terms to HEP partners and helping with administrative items related to the contracting process (e.g.. preparing decks, routing contracts for signature, emailing informed stakeholders, etc.) all such services rendered at the direction of Appellant and being considered as "Implementing the strategies devised by ELPS." At no point was Ms. Joshi (or any other local AM) able to conclude any commercial aspect of a deal, explicitly lacking authority to deviate from pre-approved conditions. With regard to the detailed steps involved in HEP contract renewal and approval matrix for any non-standard terms, please refer to details at p.18-21 of the submission dated 11 Nov 2024 filed before the Hon. DRP (refer to Paperbook p.416-419).
8.The Ld. AO/Hon. DRP is misguided and misconstrued communications / liaison activities as pricing negotiations. Additionally, the Ld. AO/ Hon. DRP has not given due appreciation to internal communications among ELPS and EXP-IN leadership, as well as with regional HEP leadership in Singapore. and Ms. Joshi, whereby all commercial terms were approved outside India and contract negotiations were even handled by the ELPS President directly with the CEO of Taj Hotels. The Ld. AO/Hon. DRP did not acknowledge the more complete email chain, including communications within EG, as well as between EG and Taj Hotels, that demonstrates the limited liaison role provided by Ms. Joshi prefer to Paperbook p.340-352).
9.HMP Partners. With respect to indian HMP partners, agreements use standard, pre-set terms concluded /established by ELPS and EXP-US, and are generated electronically and completed online through an automated process. Furthermore, prospective hotel partners have the option to independently contact EG and sign-up online without any involvement from local AM, For Indian HMP partners, these rates are fixed and non-negotiable, Furthermore, during the Subject Tear, new HMP partner acquisition slowed, as global leadeship pivoted towards a strategy of maintaining relationships with existing HMP hotel partners
10.The Ld. AO/Hon. DRP refers to the contracting process with Hotel Vellara as additional examples of hotel partner contracts that were negotiated and concluded by local AM. Hotel Vellara is an HMP partner that was confirmed to have executed its partner contract through EG's online portal. Please refer to the executed contract for Hotel Vellara filed as additional evidence before Hon. DRP (refer to Paperbook p.353-3701. Such contract clearty indicated an online process (e.g. references to lacking scanned signature and references to "click" actions of contract acceptance). It is important to note that, even in the emaill extracts provided by the Ld. AO in the Final Order, Hotel Vellara indicated that followed a self-registration process online (see further Figure 4 at p.23 of the submission dated 11 Nov 2024 fled before the Hon. DRP (refer to Paperbook p.421). Ultimately, the conclusion of a contract for an Indian lodging supplier does not involve local personnel in India.
Relevance of Expedia technology and the sell-on boarding process
11.The primary function of the AM role is account management (e., supporting certain hotel partner relationships with EG through the supplementary communication of information). Such actions are surfaced to and prioritized for each AM via Salesforce [le. Partner Central or "EPC") and generally involves drawing partners attention to "opportunities to improve their competitiveness. These opportunities are also provided directly to hotel partners via EPC automation, allowing them to self-serve based on robust data analytics performed by the AEs, without any necessary AM involvement. In fact, the majority of EG's interactions with hotel partners takes place on EPC without any AM involvement. Ultimately, the functions performed by local AM are only limited and auxiliary to the hotel's self-serve engagement with EPC.
12.The limited involvement of EXP-IN becomes clear when one considers the role of overseas EG's technology and online tools. As explained above, the role of EXP-IN is limited primarily to providing support and guidance to hotel partners. In short, the long-term hotel partner relationship is driven by the data analytics. not the periodic touches local AM have with hotel partners, as that interaction is standard and only a small part of the interaction a hotel partner regularly has with EG. Furthermore, the interaction any one individual AM has with a single hotel partner is short-lived given high employee tumover as well as the lifetime that any single hotel partner is within an individual's portfolio.
13.It is respectfully submitted that the factual matrix outlined in this synopsis substantiates that EXP-IN's role is confined to communication and liaison activities in its capacity as a support service provider. It does not engages with travelers or enter into contracts with lodging suppliers. Additionally, EXP-IN also does not operate the POSa platform.
14.Further, it is also submitted that the functions of EXP-IN have already been subjected to detailed examination by the India Competent Authorities through a comprehensive functional review including site visits, questionnaire issued and detailed information required pertaining to Appellant. It is imperative to mention that the Indian land by extension. US) Competent Authorities reviewed contractual arrangement, delegation of authority, processes for concluding contracts and for accepting order, and day-to-day operational documents. The activities that are being undertaken by EXPIN have been subjected to a comprehensive review by the Competent Authorities and thereafter a determination has been made by them. This determination is a reasoned and authoritative finding and therefore such a determination should be accorded due deference and respect by the ld Assessing Officer. in the interests of legal certainty and international comity, full effect should be to given to the Competent Authority's finding.
15.Infact, at this stage it is important to note that the draft assessment order for the subject year itself was furnished to the Competent Authority. Thereafter, the Competent Authority raised a detailed questionnaire seeking response to various queries. Pursuant to the said queries, detailed facts and evidences were furnished by EXP-IN before Competent Authorities vide letter dated 5 Sep 2024. After taking into consideration all the functions undertaken by EXP-IN and examining the documents (as mentioned of 37 above), it was agreed pursuant to BAPA that the transactions entered into by EXP-IN shall be considered to be at an arm's length, if the operating margin in each previous year is 17.15% for the non-CSD services. Consequently, the corresponding additional income was duly offered to tax by EXP IN in its modified return of income.
16.Accordingly, any attempt to recharacterize or expand the functional profile of EXP-IN beyond the scope of these accepted and substantiated facts would be purely conjectural and devoid of legal merit. The settled position, based on verified facts and authoritative review, cannot be displaced by speculative assertions and is liable to rejected.
Conclusion: EXP-IN's AM functions do not create a Permanent Establishment
17.The primary function of the AMs is account management (i.e., supporting certain hotel partner relationships with EG through the supplementary communication of information the results of data analytics performed by ELPS and EXP-US) concerning the competitiveness of a given hotel partner relative to its peers in the market. In this case, the activities of EXP-IN'S AMs must be considered as mere support activities and not activities in connection with the negotiation and conclusion of contracts for several reasons:
a. Simply communicating supplementary information cannot be considered an essential, revenue-generating activity. The quality of the information, its relevancy to specific hotel partners, its scope. and its feasibility (i.e., whether hotel partners can put actions/recommendations into practice) is paramount in this context. This is only achieved by substantial financial investment in innovation outside of india and supporting the work performed by lodging data analytics personnel outside of India, including data scientists who build and leverage technologies, fools, and machine learning algorithms to process big data and provide actionable insights based on sophisticated analytics.
b. The same data analytics and actionable insights provided through Salesforce to AMs for use in their daily AM activities are also provided directly to hotel partners through EPC. EPC was a central self-service tool for hotel partners with high engagement and no AM involvement.
c. Furthermore, the activities performed by EXP-IN AMS were aimed at promoting how EG's products and services could help identify ways to increase hotel partners' competitiveness in the indian market.
d. Finally, the AMs were not responsible for or had authority to make strategic decisions regarding EG's relationships with its existing and prospective hotel partners, EG's strategic pillars-technology, demand, and supply were led by executive leadership outside of india, who are responsible for the strategic management and decision-making related to the initiatives and investments in those business areas. As such, the activities performed by EXP-IN cannot reasonably be viewed as anything other than support services.
18.With respect to HEP partners, senior leadership teams in the United States, Switzerland and Singapore made all commercial decisions regarding contract terms to be communicated to hotel partners, as well as directly negotiated with the largest hotel chains. During the Subject Year, one individual (e.. Ms. Joshi) supported Indian HEP partners from a limited communications / liaison role (e.g.. preparing meeting summaries, communicating pre-approved terms to HEP partners, and helping with administrative tasks). At no point was Ms. Joshi (or any other local AM) able to conclude any commercial aspect of a deal. explicitly lacking any authority to deviate from pre-approved conditions.
19.With respect to Indian HMP partners, agreements use standard, pre-set terms established by the AEs, and are generated electronically and completed online through an automated process. Furthermore. prospective hotel partners have the option to independently contact EG and sign-up online without any involvement of local AM. The conclusion of an HMP contract does not involve local personnel in India. It is clear from the email evidence showcased in the Final Order that local AM (specifically, Ms. Khuntia) merely contacted the partner and pointed them to the EG online portal to register and list their respective properties. Simple communication does not involve any contract negotiation, nor conclusion.
Conclusion
20.Indeed, based on the analysis of domestic and treaty tax rules, it is hereby concluded that:
a. EXP-IN does not qualify as an agent of ELPS as it is working on a principal-to-principal basis under a contracting arrangement:
b. EXP-IN does not qualify as a dependent agent of ELPS; and
c. the activities carried out by EXP-IN should be considered as support activities for which EXP-IN is already remunerated on an arm's length basis.
21.There should be no doubt that the id. AO'S/Hon. DRP's assertion of the existence of a DAPE of ELPS in India is unfounded. The activities performed by EXP-IN very clearly align with the description of activities that do not create a PE. Furthermore, it is submitted that, for a DAPE to be constituted one of the activities mentioned of Article 5(5)(-) of the IN CH DTAA needs to be satisfied. From the above. it is abundantly clear that activities carried out by EXP-IN do not fall in any such clauses, EXP-IN neither has nor habitually exercised an authority to conclude contracts, which the IN-CH DTAA of Article 5(5) sets forth as the fest for establishing a DAPE. It is submitted that EXP-IN's role is merely to act as a communication channel between indian lodging suppliers and Appellant.
Ground No. 6: On the facts and circumstances of the case and in law, the Ld. AO/Hon. DRP erred in attributing a sum of INR 44,44,098 as business profits to the alleged PE of the Appellant in india, in doing so:
22.the Ld. AO/ Hon. DRP erred in law by applying Rule 10 of the Income-tax Rules. 1962 (Rules) for attribution of profits to PE by ignoring the settled principle that the attribution of profits to a PE needs to be undertaken by carrying out a Functional, Asset and Risk ("FAR") analysis of the DAPE: and
23.the Ld. AO/ Hon. DRP erred in disregarding the fact that the transaction between the Appellant and EXP-IN has been undertaken at arm's length (as confirmed by the transfer pricing report of EXP-IN). Accordingly, the Ld. AO erred in further attributing profits to the Appellant's alleged PE in India without bringing any cogent material on record to establish that the alleged PE had been carrying out any other activity on behalf of the Appellant apart from support services.
24.Appellant entered into a principal-to-principal contract with EXP-IN for CSD and (non-CSD) support services, remunerating EXP-IN at an arm's length price in line with transfer pricing principles. Despite this. the Ld. AO attributed profits to Appellant's alleged PE using an ad hoc profit attribution rate of 60 percent of the global average profit margin.
25.Appellant respectfully challenges the decision of the Ld. AO/Hon, DRP in applying Rule 10 of the Rules for attributing profits to a PE. The application of Rule 10 in this context ignored the settled principle that such attribution must be based on a thorough examination of the actual activities undertaken by the (alleged) PE and the value it adds to the foreign enterprise's business. That is, the Ld. AO failed to conduct the necessary FAR analysis of EXP-IN and follow a well-established approach in international tax jurisprudence, supported by guidelines provided by the Organisation for Economic Co-operation and Development.
26.Furthermore, in this regard, Appellant humbly submits that such a thorough examination of all activities of EXP-IN was undertaken during BAPA proceedings recently signed between EXP-IN and CBDT vide agreement dated 16 Apr 2025. Therefore, no question arises on any further attribution of profits to the alleged DAPE in the present case (refer to Case law Paperbook p. 163-189)
27.The key points of the BAPA are summarized below:
a. The Subject Year is a covered year under the BAPA and both the CSD and non-CSD support services provided by EXP-IN are covered transactions. The AM support services that the Ld. AO/Hon. DRP wrongfully concluded to have risen to the level of contract negotiation and conclusion are included in the non CSD support services covered transaction:
b. The service recipient AEs with respect to the non-CSD support services provided by EXP-a ore, infer alla, Expedia Inc. and Expedia Group international Holdings I. LLC (EGIHO) Supply side functions carried on by Appellant were transferred to EGH3 effective 31 Dec 2022 (refer to Case law Paperbook p. 194 at point 4):
c. During the course of the BAPA proceedings, the draft orders passed by the Ld. AO in case of Appellant were furnished before the BAPA Authorities vide letter dated 24 Apr 2024 as the same pertained to the non-CSD support services which was a covered transaction of the BAPA (refer to Case Law Paperbook p.190-191):
d. As part of the BAPA examination process, the Indian Competent Authority-vide site visit dated May 8. 2024, e-mall dated 1 Jul 2024, and questionnaire dated 14 Aug 2024-sought detalled information /documentation to examine the functions undertaken by EXP-IN
e. EXP-IN vide letter dated 5 Sep 2024 (refer to Case Law Paperbook p. 214-222) provided the requisite information/documentation for a complete understanding of the role of EXP-IN with respect to its provision of non-CSD support services, which included the following:
Details about hotel partners and their categories (I.e., HEP or HMP)
Contracting process between Appellant and hotel partners, including the roles of AEs and EXP-IN Executed HMP contracts with Hotel Vellara and Sun Hotel that substantiate these contracts were executed on EG's online portal Email evidence provided in the Draft Order clarifying that AMs merely contacted the partner and pointed them to the EG online portal to register and list their respective properties Sample emails of contracting process between EG and Taj Hotels which substantiate that EXP-IN employees did not play a role in negotiation and conclusion of (HEP) contracts Detailed role of AMS in India which demonstrate such role is limited to communication/llaising with HEP partners
The said information is already on record/furnished as additional evidence before the Hon. DRP (refer to Paperbook p.327-392).
28.It is humbly submitted that the Competent Authorities of the United States and India have duly examined the functions performed by EXP-IN during the course of BAPA proceedings. Accordingly, pursuant to the said examination, an operating profit margin of 17.15% has been determined as an arm's length price in respect of the non-CSD Service'. It is further submitted that consequent to the BAPA, EXP-IN offered additional income of INR 324,915,088 emanating from the agreed mark-up in respect of these non-CSD services by filling of its modified return of income.
29.In view of the above, it is submitted that where the remuneration/arm's length mark-up has already been determined/agreed in the BAPA and offered to tax, no question arises for any further attribution. Hence, the Final Order should not be sustained.
30.Given the above facts, it is respectfully submitted that assuming, without admitting, EXP-IN constitutes a DAPE of Appellant in india-no further profit can be attributed to Appellant as EXP-IN has already been compensated for all functions performed, assets deployed and risks assumed on an arm's length basis by its AEs.
31.Accordingly, further attribution of income made by the Ld. AO is baseless and not in accordance with the law." Therefore, such adjustment should be deleted,
Ground No. 7: On the facts and circumstances of the case and in law, Ld. AO grossly erred by incorrectly computing interest u/s 234B of the Act.
32.The levy of interest u/s 234B of the Act is consequential to the determination of assessed tax liability, which inter alia is dependent on the decision in respect of the other grounds: hence, no detailed submission is made in this regard.
Ground No. 8: That the Ld. AO erred in proposing to initiate penalty proceedings u/s 270A of the Act.
33.Appellant respectfully submits that initiating penalty proceedings u/s 274 r.w.s. 270A of the Act is erroneous and bad in law. The legislative intent to initiate penalty proceedings under such regulations relates to the under-reporting or misreporting of income. In the instant case, neither condition is satisfied. It is an undisputed fact that Appellant has duly furnished all material details in the return of income as well as during the assessment proceedings.
34.Accordingly, it is urged that the proposed penalty proceedings may kindly be quashed in the interest of justice.”
Per contra, the ld DR, on the issue of DAPE submitted the following:
i)that U/s 133(6), information was called by the AO from Taj Holiday, who reported that for contract conclusion and negotiation they were in touch with Ms Kanupriya Joshi who is Senior Manager, Strategic partners, Asia Pacific of Expedia. The e-mails provided by Taj Holiday u/s 133(6), corroborate with this information given by Taj. From these emails it is seen that the conversations revolve around contract negotiations.
ii) Reply from Hotel Vellara u/s 133(6), mentioned in the draft order, also shows that they were in contact with Ms. Namita Khuntiya, Market Manager, Expedia for contract negotiation.
iii) Assessee has argued that, as mentioned in the agreement, it has a principal-to-principal relationship with Expedia India. However, from the sample emails provided by assessee as additional evidence before DRP, pertaining to Taj Group, placed at page no. 340-352 of the PB, it is seen that the Expedia India, wrt negotiation of contract with hotels, is acting at the behest of and for the assessee, and the language therein is not language of a principal.
iv) It has been argued that supply management services provided by Expedia India are limited to account management and HR type services. From the information obtained by the AO u/s 133(6), mentioned in the assessment order, and the e-mails provided by the assessee as additional evidence before DRP, placed at page no. 340-352 of the PB, show that Expedia India is directly, actively and decisively negotiating contracts on behalf of the assessee.
v)A plain reading of all the e-mails, emanating from draft order and filed by assessee as additional evidence before DRP, reveal that Ms. Kanupriya Joshi, who is employee of Expedia India, is actively and purposefully involved in the on-going negotiations with Taj, as has been brought out by the AO in the order. The mails are internal communications of Expedia group and of Expedia India with Taj group. Taj group is addressing emails directly to Expedia India employee, Ms Kanupriya and are marking copy of mails to other employees of Expedia Group. Had the main negotiators been the employees of assessee, the e-mails would have been addressed to them and not to Ms Kanupriya, who is employee of Expedia, India. In fact, in such a case there would not have been a need of even marking email copy to Ms Knaupriya, and she would have been only a silent spectator to the negotiations. The conversations reveal that claim of assessee regarding the supply services being in the nature of account management services etc. is a completely misguiding submission and is contrary to information available in the aforesaid mails and information obtained through 133(6) exercises.
vi) In the order on page no. 20, AO has given finding that Indian AE has the power to negotiate agreement with prospective customers, obtain purchase order and vendor support services along with the assessee. This finding is corroborated by the e-mails submitted by the assessee before DRP as additional evidence. Sample of e-mails submitted by the assessee are under the belief that the mails support its case. There would be thousands of such mails with other clients which are in exclusive domain of the assessee. The emails filed by assessee before DRP are just a handful of such mails. From the e-mails placed at page no. 342-352, it is seen that only e-mail at page 351 pertains to conversation with Taj Group, all other e-mails pertain to conversation within Expedia Group. The e-mails submitted by the assessee have been claimed to be e-mails within Expedia group evidencing that decision making did not lie with Expedia India. The point that assessee has missed it that as per treaty uses terms power to 'negotiate and conclude contracts' and Expedia India is seen doing that in these mails. To conclude a contract does not necessarily mean sign the contract, it means taking negotiations to a logical end and then, presenting before concerned authority to sign it. In this regard a note may be made of his observations on page 16 of the order, wherein it is mentioned that "the expression 'an authority to conclude contracts' has not been defined in the DTAA. Para 5 of Article 5 of OECD Model Convention also uses the similar expression, namely: 'an authority to conclude contracts. Paras 31-35 of the OECD commentary deal with para 5 of the OECD Model Convention whose language, is similar to Para 4 of Article 5 of the DTAA. It is pertinent to mention here that India has clarified its position in 2008 on para 33 of the OECD commentary by making it clear that it does not agree with both these sentences from para 33 of the OECD commentary as in its view the mere fact that a person has attended or participated in negotiations in a State between an enterprise and a client, can, in certain circumstances, be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise: and that a person who is authorized to negotiate the essential element of contract, and not necessarily all the elements, can be said to exercise the authority to conclude contracts. 'Skaar' a well-known author, proposes to apply business activity test in such situations: where the intermediary also performs activities like locating customers, explaining the conditions of the contract and finally concluding the contract on behalf of the foreign enterprise, it appears obvious that the main parts of the business were conducted by the intermediary and the constitution of an Agency PE seems to be justified. Therefore, for discussion as made above, Indian AE is acting as DAPE of assessee."
vii) The other e-mails submitted by the assessee reveal that the mails have been written primarily by Kanupriya to other employees of Expedia Group and the conversation revolves around her discussions with Taj group w.r.t. the contract. She initiates discussion points within the group related to the contract with Taj group, which are further deliberated upon by the other employees of Expedia Group. Such services provided by Expedia India, by no stretch of imagination, can be considered as account management type services claimed by the assessee.
viii) The assessee is covered under para 5 of Article 5 of the DTAA since Expedia India is acting on behalf of the assessee in India in terms of sub-clause (i) of para 5 Expedia India and habitually exercising authority to negotiate contract in India on behalf of the assessee.
ix) The argument of assessee related to clause 'auxiliary and preparatory in character' applies to PE in terms of para 3 of Article 5, related to fixed place PE, and not para 5 of Article 5 of DTAA, related to agent PE. Even if for the sake of argument, it is considered that whether or not "auxiliary or preparatory in character" applies to case of the assessee, the nature of conversations in the said mails, makes it clear that role of Expedia India is crucial in the negotiations. It is Expedia India to whom the mails are addressed, while a copy is marked to other employees of Expedia Group. Had the services been auxiliary or preparatory in nature, the mails would include discussions directly with other employees of Expedia Group and the role of Kanupriya would have been limited to checking font size of the agreement or arranging for a zoom meeting or seeking time for a phone call between the two parties, which is not the case here.
x)The core activity of the assessee is related to offering platform to hotels for selling their rooms to tourists. This requires contracts to be signed with hotels. Expedia India is actively and openly involved in negotiations related to this core activity of the assessee.
xi) Sub-clause 6 of Article 5 of DTAA also mentions about agent being wholly or almost wholly devoted to the enterprise or its AEs. In this case Expedia India is catering only to the assessee and its other group companies so there is complete economic dependence of Expedia India on the Expedia Group.
xii) Against agreement with Expedia India provided by the assessee and its claims in written submissions to prove its case, there is evidence obtained through enquiries u/s 133(6) and e-mails submitted by assessee during DRP proceedings. The latter have greater evidentiary value. The agreement between related parties and submissions of the assessee are evidences where assessee is interested party on both the sides. Whereas evidence obtained through enquiries u/s 133(6) and e-mails submitted by assessee during DRP proceedings are evidences where a 3rd party is also involved and hence give a more unbiased view.
xiii) Before DRP assessee has contended that it has 10,500 hotel partners in India whereas AO has obtained evidence from only 3 partners. The point here to notice is that all the 3 parties from whom enquires u/s 133(6) were done, submitted evidences that go against the assessee. It may also be noted that assessee has provided a handful of mails, from thousands of mails to prove its case. Therefore, on either side there are only a handful of evidences to prove its case. Since Income Tax law is a civil proceeding, what is required to be proven here is a preponderance of the evidence or balance of probabilities. It is not criminal law where a case has to be proven beyond a reasonable doubt. Moreover, the e-mails which have been submitted by the assessee itself, is evidence against the assessee and corroborates 3rd party information obtained by the AO.
xiv) In order to prove its case assessee has taken recourse to its Hotel Market Partnerships which include independent properties managed through standard automated contracts and in which Expedia India employees have no role. This claim of assessee is incorrect, in view of evidences on record. The reply filed by Hotel Vellara is related to an automated online contract, and they reported that for negotiation of the contract they were in contact with Ms Namita Kunthia, who is also an employee of Expedia India, just as Ms Kanupriya. Assessee cannot hide behind the argument of automated contracts in proving it is not a DAPE. In these standard automated contracts, there may not be significant role of any employee, be it that of Expedia India or any other group concern, as the contracts are with smaller players in the lodging sector, but as per evidence, whatever contact existed was with Expedia India employees. What is important and relevant is the fact that wherever negotiations are required, Expedia India employees are involved in main part of the negotiations with the external party.
xv) Another significant additional evidence filed by the assessee before DRP is placed at page no. 390-391 of PB which is final audit report of copy of sample contract approval routing form showing that the main document has been created by Kanupriya Joshi which has been stage wise viewed and signed by other Expedia Group employees. It may be noted that Kanupriya, who is in touch with Taj group, is the one creating the document, after back-and-forth discussions and deliberations with Taj and Expedia group employees, which makes her the main negotiator. As per this audit trail they have been no changes in the basic agreement created by Kanupriya after final draft has been put up by her.
xvi) The fact that Expedia India, has been acting as an agent of the assessee, is clear from aforesaid evidences, most of which have been submitted by the assessee. As per Section 182 of the Indian Contract Act, 1872, meaning of the term "agent," is "a person who is employed to do any act for another or to represent another in dealings with third persons whether by implied or express consent". When a person has authority or capacity to negotiate relations between a person occupying the position of principal, in this instant assessee, and third parties, such as Taj, the person involved in negotiations, in this case Expedia India, becomes an agent, of the principal.
xvii) In case of GE Energy Parts Inc. vs. CIT, IT, Delhi, the Hon'ble Delhi High Court has held in the favour of Revenue that the negotiation of contracts will also give rise to the formation of a DAPE while considering India's position on the negotiation of contracts from OECD commentary and the reservations expressed by India on the issue of conclusion of contracts. (Para 63-70).
xviii) On the issue of FAR for determination of attribution of profit to PE, the ld DR submitted that FAR methodology has no legal basis in India. It is not an accepted principal or rule under Income Tax Act of DTAA. FAR methodology was introduced through revised Article 7 in OECD Model Tax Convention of year 2010. India has reserved the right to use the pre-2010 version of Article 7 in its tax treaties, completely rejecting the authorized OECD approach. It disagrees with treating a PE as a separate and independent enterprise and refuses to recognize notional intra-entity dealings or deduct executive and general administrative expenses under domestic law mechanisms. The specific, official quote of India's reservation to the revised Article 7 (Business Profits) in the OECD Model Tax Convention reads as follows:
"India reserves the right to use the previous version of Article 7, i.e., the version that was included in the Model Tax Convention immediately before the 2010 update, subject to its positions on that previous version. It does not agree with the approach to the attribution of profits to permanent establishments introduced in 2010, which is based on the fiction that a permanent establishment is a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions."
xix) Profit attribution in India is done as per Rule 10 of IT Rules, 1962. India has not adopted revised year 2010 version of Article 7 of OECD Model Tax Convention in its Tax treaties. The reservation of India and other such developing countries emanates from the fact that FAR methodology is favourable, towards developed countries who are owners of patents, trademarks, trade secrets, industrial designs, copyright etc. It is heavily tilted against developing countries which are markets for such intellectual property assets.
xx) As against FAR methodology emanating from OECD Model Tax Convention, which is document with only persuasive value, there is a specific profit attribution rule/method emanating from Rule 10 of IT Rules, 1962. To any rational mind, in India the FAR methodology for profit attribution can be a matter of debate and discussion, however, when it comes to application for profit determination it has to be as per Rule 10. It is a well-known legal provision that where a specific rule exists, especially emanating from a statute enacted under authority of Indian Parliament, a general provision, without any legal standing cannot be given precedence to. In case there still exists a doubt on the issue, the same can be resolved in favour of Rule 10, given the specific objection of Indian govt. on an international forum against FAR, which unambiguously brings out intention of the Govt.
xxi) In related to the case of assessee being covered by BAPA agreement-
1.The APA pertains to Indian AE of the Assessee Expedia Online Travel Services India Pvt Ltd, hence it is required to be treated as additional evidence by Hon'ble Court. If it is decided to take the evidence on record, it is further submitted that-
i)The agreement is between Expedia India & Indian Govt and Expedia India USA Govt as per section 92CC
ii) In response to the APA, Expedia India is required to file revised return as per section 92CD
iii) It is a confidential document which is not publicly available
iv) In para 21 of the agreement, it is specifically mentioned that it will not have any impact on tax assessment of AEs of the assessee
v)For Assessee to be covered under APA it has to make a separate application
vi) The services covered under head non CDS services do not include contract negotiation services of Expedia India
In view of the above, it is humbly submitted that BAPA of Expedia India does not have bearing in case of the assessee.
The ld DR concluded that :
1.Expedia India has been determined as DAPE of the assessee u/A 5(5) of India- Swiss DTAA
2.Rule 10 applied instead of FAR for attribution of profits.
3.Profits attributed despite transaction being at Arm-length and without brining on record any services other than support services being provided by Expedia India to assessee.
We have heard the rival submissions and have perused the materials on record. Certain admitted facts, in the instant case, are the assessee, Expedia Lodging Partner Services Sarl (ELPS), is a foreign entity, incorporated in Switzerland and earns revenue in the nature of commission from lodging suppliers. The Assessee has two Indian AEs which collects commission from Indian lodging suppliers and also provides contracts software development services and various supply support.
The AO has held that the Indian AEs of the assessee namely Expedia India, is actively involved in the various core functions of the assessee and therefore is Dependent Agent of the assessee under Article 5(5) of the India-Swiss DTAA. The Ld. AO has leveraged responses submitted by certain Indian lodging suppliers (ie.. The Hotels Company Limited Taj Hotels and Hotel Vellara) (collectively, the "Lodging Suppliers"), as well as materials available in public domain ie., Linkedin), to conclude that the employees of EXP-IN are engaged in contract negotiation and conclusion, on behalf of assessee. Whereas the assessee stand is that EXP-IN's primary role is to provide certain Contract Software Development (CSD) and other support services to various EG entities, including EXP-US and ELPS. The assessee asserts that the employees of the Expedia India merely provided administrative and ancillary support.
In order to adjudicate the issue before us, it would be relevant to reproduce the Article 5(5) of the India- Switzerland DTAA as under:
ARTICLE 5 PERMANENT ESTABLISHMENT
1.For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of the enterprises is wholly or partly carried on.
2.*******
3.*******
4.*******
[5.] A person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [...other than an agent of an independent status to whom paragraph 6 applies...] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if :
(i)he has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or
(ii)he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or
(iii)in so acting, he manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise, provided that this provision shall apply only in relation to the goods or merchandise so manufactured or processed.
3[6.] An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it, he would not be considered an agent of an independent status within the meaning of this paragraph.
3[7.] ******* The India–Switzerland DTAA in Article 5(5)(i), uses the formulation that a person acting for an enterprise is deemed to constitute a Agency PE where he “has and habitually exercises … an authority to negotiate and enter into contracts” for or on behalf of the enterprise. We therefore have to determine the question whether Ms Kanupriya Joshi, Senior Manager, Strategic partners, Asia Pacific of Expedia, habitually exercises, in India, had authority to negotiate and enter into the material contractual relationship for or on behalf of the Swiss enterprise, or whether she merely transmitted, explained and administered terms determined by ELPS's overseas decision-makers.
Before we deliberate on the issue, we first establish the legal requirement of the issue at hand. The hon’ble Supreme Court in ADIT v. E-Funds IT Solution Inc.,(2017) 86 taxmann.com 240(SC) mandated that the burden of establishing the existence of a PE initially rests upon the Revenue. The Court also stressed that the particular treaty conditions must be demonstrated rather than inferred merely from the existence of an Indian subsidiary. We find that EXP-IN is admittedly a group entity but having a group relationship by itself is insufficient. Therefore, the Revenue must establish the Article 5(5) conditions through evidence of actual functions and authority. These principles were reiterated in Formula One World Championship Ltd. v. CIT, reported in (2017) 8 SCC 600 wherein the Supreme Court held that Article 5(5) contains positive preconditions: the agent must possess the relevant contractual authority and habitually exercise it. Mere corporate connection is insufficient; what must be established is that the contracts/business were undertaken for and on behalf of the foreign enterprise. In the instant case therefore, EXP-IN's status as an AE is not determinative but the actual authority and conduct of Ms Kanupriya is determinative. Mere back-office/support activity does not constitute agency PE. In the hon’ble Supreme Court's discussion of agency PE in the Morgan Stanley (2007) 162 Taxman 165(SC) context, the Court accepted that where the Indian entity had no authority to enter into or conclude contracts, and contracts were entered into/concluded abroad with India AE performing only back-office implementation, an agency PE did not arise.
In the above legal matrix, we have to examine the role of Indian AE. The Revenue has a built up a case that Ms Kanupriya was the direct interface with Hotel Taj group; she negotiated substantive terms and exchanged counter-proposals; she generated the final draft where the commercial terms were not materially altered by ELPS; and that the overseas approval was merely formal/confirmatory. The Revenue holds that similar conduct occurred repeatedly with other Indian hotels. It is the case of the Revenue that the emails submitted by the assessee, before the DRP, clearly depict that the employees of Indian AE are negotiating and concluding contracts and are the main point of contact for the Indian Hotels. Further, the employees of Indian AE propose the final negotiating value which is discussed by the assessee and Indian AE employees, and final decision is taken based on consensus. Hence, clearly the Indian AE is functioning as the Dependent Agent PE of the assessee.
On the other hand, the assessee argues that the said correspondence demonstrates that Ms Kanupriya had no authority to deviate from pre-approved terms; she could neither accept nor reject commercial proposals; every counter-proposal was escalated to overseas leadership; overseas personnel negotiated the material terms; Ms Kanupriya merely communicated the final decision. The assessee further contends that HMP contracts were generated automatically through the portal and HEP negotiations were substantively undertaken by US/Swiss/Singapore leadership. The assessee stand is that Ms Kanupriya’s document preparation was administrative in nature. The assessee further emphasises that the Bilateral Advance Pricing Agreement (BAPA) has independently examined the same contracting process and characterised it as non-CSD support services.
We find that the sample e-mail communication gives a glimpse of the contract negotiation and execution process. We have examined the sample emails relied upon by the Revenue appearing at pages 340 to 352 of the paper book. From a dispassionate reading of the emails, we do not find that the inference drawn by the ld AO that the employees of Indian AE have authority to negotiate and conclude the contracts with the end customers, has a sound basis. Instead, we find that once terms are agreed between an Indian HEP hotel supplier i.e., HMP suppliers were entirely online processes) and assessee, EXP-IN merely assists with internal administrative procedures, including the Contract Approval and Routing Form ("CARF") sign-off process. The Ld AO has not been able to show that EXP-IN employees were actually signing on the CARF. Also, the final terms and conditions were only communicated to hotel partners after receiving approval from AE leadership in Switzerland, Singapore and the United States. We therefore are of the view that the Ld. AO's inference that EXP-IN negotiated with the supplier, is not backed by cogent evidence.
We find from the aforesaid emails that the EXP-IN employees were participating in initial part of negotiation in liasioning capacity only. The EXP-IN employees, most certainly had no authority to conclude contracts on behalf of Assessee. Furthermore, EXP-IN were one of many points-of-contact for lodging suppliers, including those in India. The email communications between ELPS leadership in Switzerland, regional HEP leadership in the United States and Singapore, and EXP-IN support employees, indicate that all commercial terms were approved outside India: contract negotiations even escalated directly to the ELPS President (e.g.. directly with the CEO of Taj Hotels). The employees of the AE were merely providing liaison activities and were not authorized to conclude contract. We also find that the functional leadership outside India frequently engaged with HEP partners during the contracting process to seek commitment, address partner concerns, and/or discuss counter-proposals and non-standard terms. This is evident from the correspondence during the renewal process with Taj Hotels during FY 2021 where Cyril Ranque (ELPS President) engaged in direct conversations/negotiations with the CEO of Taj Hotels. Even after this discussion, Mr. Ranque continued to be actively involved with determining commercial terms (e.g.. approving and re-approving marketing commitments) relating to Taj Hotels. We further find that the employees of EXP-IN communicated pre-approved deal terms to an HEP partner, using language and processes approved by functional leadership outside India. The rejection of any proposal or renewal term was summarized and reverted to AE Leadership for guidance and next steps, without any further discussions by local AM with the partner. Non-approved terms could not be discussed by local AM. For example, sample emails from Ms. Kanupriya Joshi (ie.. during FY 2022) to AM leadership in Singapore (ie.. Sarah Montgomery, Senior Director), Switzerland (i.e., Mr. Ranque) and the United States (ie.. Zuhairah Washington, Senior Vice President) requested their reviews and, ultimately, approvals on marketing commitments for Taj Hotels. Following the receipt of such approvals, Ms. Kanupriya Joshi communicated the approved terms to Taj Hotels. Rejected proposals (and summary details of counter-proposals) were communicated by Ms. Kanupriya Joshi, who subsequently reverted to Ms. Montgomery, Ms. Washington and Mr. Ranque for approval on next steps. The email extract with Hotel Vellara, clearly states that the registration and execution of the contract with assessee was through an online portal. After self-registering, Hotel Vellara received a contract electronically to execute. Therefore, it is evident that EXP-IN employees are not involved in deciding and concluding the contractual terms including pricing. As against this, the ultimate approvals are provided by leadership in Singapore, Switzerland and the United States. The EXP-IN employees are limited to liaising and administrative activities. We are of the view that the Ld. AO has cherry-picked certain portions of responses and email communications furnished by the Indian Lodging Suppliers to form a view that EXP-IN employees negotiated and concluded contracts with these Indian Lodging Suppliers.
We also find that the functions of EXP-IN have already been subjected to detailed examination by the Competent Authorities in India as well as USA through a comprehensive functional review including site visits, questionnaire issued and detailed information required pertaining to assessee. The Competent Authorities have reviewed contractual arrangements, delegation of authority, processes for concluding contracts and for accepting orders, and day-to-day operational and thereafter a determination has been made by them.
The decision of Mumbai ITAT in the case of eBay International AG v. ADIT (2012) 25 taxmann.com 500(Mumbai) supports the case of the assessee which concerned the India–Switzerland DTAA, where the ITAT held that the Indian companies provided marketing/support services, payment collection and other administrative functions. The Tribunal held that even though the Indian entities were dependent agents, they did not become DAPE because the Revenue failed to establish that they negotiated or entered into contracts on behalf of eBay AG and therefore conditions of Article 5(5) was not satisfied.
The hon’ble Delhi High Court decision in GE Energy Parts Inc. v. CIT (International Taxation), (2019) 101 taxmann.com 142(Delhi), relied upon by the Revenue, had considered India's position on the OECD Commentary and accepted the proposition that, in appropriate circumstances, participation in negotiations and authority over essential elements can constitute the requisite contractual authority. The Court also considered the argument that employees in India merely participated in negotiations without formal authority to conclude contracts. The Court ultimately regarded the Indian activities as extending beyond merely preparatory negotiations where the Indian personnel were involved in core contractual matters such as price, technical specifications and other material terms. Applying the ratio of GE Energy Parts Inc, the Revenue would have a substantial case notwithstanding formal signature/approval outside India, if the evidence establishes that Ms Kanupriya had authority to negotiate the essential commercial elements, and her negotiations were routinely adopted in the final contract. The decisive distinction therefore, is whether Ms Kanupriya had the decision-making authority over negotiation of essential commercial terms, in terms of express condition enumerated in Article 5(5)(i) of the India–Swiss treaty i.e., authority to “negotiate and enter into contracts”. The analysis of the emails leads us to answer the said question in negative.
Furthermore, the decision in GE Energy Parts Inc (supra) does not establish the proposition that any employee participating in any negotiation automatically creates DAPE. It lays down that where the Indian personnel play a substantive role in the core/essential elements of contract formation, formal signing or final approval outside India will not necessarily prevent a DAPE. But GE Energy does not eliminate the requirement of actual authority which is crucial distinction in the present case.
We are of the considered view that the Revenue has failed to establish that Ms Kanupriya had (i) “authority”, express or implied, to negotiate (ii) “for or on behalf of” the Swiss enterprise. The additional mandatory requirement of DTAA is (iii) “habitually” exercise of authority. One isolated Taj negotiation cannot automatically establish habitual exercise. The Revenue itself acknowledges that there were approximately 10,500 hotel partners, while the AO's direct enquiries apparently covered only three partners which is statistically not much relevant. The ld AO has to demonstrate with cogent evidence of a recurring course of conduct. The Revenue has to demonstrate with identifiable evidences that Ms Kanupriya has actually negotiated the essential contractual elements such as commission percentage; room-rate arrangements; marketing commitments; cancellation terms; inventory commitments; payment terms; commercial liability; other material contractual terms. The AO’s failure to analyse the role of Ms Kanupriya in the negotiation process, in the context of Article 5(5) of DTAA, has materially weakened the Revenue's case.
The Revenue has also failed to rebutt the assessee’s reliance on contractual agreement with EXP-IN's which describes their relationship as principal-to-principal, with any contemporaneous evidence that EXP-IN did not act on principal-to-principal basis.
The assessee another argument however, that the arm's-length remuneration to Indian AE would prevent DAPE, is negatived as both are conceptually separate. An Indian AE can be compensated at arm's length; and nevertheless constitute a DAPE, if conditions of Article 5 independently exist. Arm's-length remuneration becomes particularly relevant at the profit-attribution stage, rather than automatically determining whether a PE exists.
We are of the considered view that on a holistic consideration of the inter-company agreement, delegation/approval matrix, contemporaneous e-mail correspondence, third-party responses under section 133(6), executed hotel contracts and BAPA material, the Indian personnel—particularly Ms. Kanupriya Joshi activities were confined to communicating pre-approved commercial terms, liaison, account management and other support functions. The essential conditions of DAPE i.e., habitually exercised authority to negotiate and enter into contracts for or on behalf of the assessee within the meaning of Article 5(5)(i) of the India–Switzerland DTAA, is not established. Accordingly, we hold that the EXP-IN does not constitute aDAPE in India for the assessee. Ground 5 is allowed.
Ground No. 2 and 3 are not pressed, hence dismissed as not pressed.
Ground 6 relates to attribution of profits. As we have held that the assessee does not have DAPE in India, the issue of profit attribution to the PE is rendered academic.
Ground 7 relating to interest u/s 234B is consequential and ground 8 relating to penalty is premature.
In the result, the appeal of the ITA 1886/Del/2025 is partly allowed.