In the case of Ariba Inc. (Taxpayer[1]), the Taxpayer, incorporated in the US, was engaged in the business of conducting competitive bidding events (online auction services). The Taxpayer rendered auction services to its wholly owned subsidiary in India (I Co). The Taxpayer treated the receipts to be in the nature of business profits and in the absence of permanent establishment (PE) in India, the Taxpayer offered Nil income in its return of income.
During the assessment proceedings, the tax authority held that I Co was dependent agent PE (DAPE) of the Taxpayer and, hence, business profits are taxable in India under Article 5 (Permanent establishment) read with Article 7 (Business profits) of India-US double taxation avoidance agreement (DTAA). Further, the tax authority held that if the income is not taxable as business profits, then the same will be taxable as royalty.
On appeal, the first appellate authority upheld the tax authority’s view but allocated 50% of the payment made by I Co as royalty, taxable @ 15% on gross basis and remaining 50% as attributable to DAPE in India, taxable @ 20% on a net basis under the DTAA read with provisions of the Income Tax Laws (ITL).
On appeal by the Taxpayer, Delhi Income Tax Appellate Tribunal (Tribunal) noted that there were no transfer pricing adjustments made pursuant to appellate orders in the present case and accordingly, the transaction between taxpayer and I Co is held to be at arm’s length price. The Tribunal held that once a transfer pricing analysis has been undertaken in respect of the Indian associated enterprise (AE) which shows that the transactions are at arm’s length, nothing further can be attributed to it as the alleged PE of the Taxpayer[2] . Hence, no additional profits shall be taxed in the hands of I Co. The Tribunal did not comment further on the DAPE issue as the same became academic.
Furthermore, basis following reasons, the Tribunal also held that consideration paid by I Co for availing auction services is not in the nature of royalty under Article 12 of the India-US DTAA:
- The Taxpayer merely provides access to online auction platform and no right to use or control over the equipment on which auction platform is maintained was provided to I Co. The present transaction is of rendition of services by the Taxpayer through its equipment and it does not amount to providing use of equipment to I Co. Hence, such payment does not constitute royalty for use of equipment [3].
- No right over platform was granted by the Taxpayer to I Co. I Co merely conducted online auction on platform. However, the control on process and information etc. was with the Taxpayer. Reliance was placed on the Tribunal decision of Salesforce.com Singapore Pte[4] wherein it was held that mere access to database does not result a transfer of own experience, technique or methodology employed in evolving databases and, hence, cannot be taxed as royalty as per Section 9(1)(vi) of the ITL as well as Article 12C of the DTAA.
- The Tribunal also rejected the observation of the first appellate authority that granting access through user ID and passwords for availing the facility would grant control over the equipment involved in the process.
