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2019 (2) TMI 1942 - AT - Income TaxPE in India - net global profits - Attribution of profits to the PE in India in respect of hardware components of the telecom equipments and the mobile handsets as business profits under article 7 of the Indo-China DTAA - Measurement of profit - HELD THAT - As decided in own case 2016 (6) TMI 329 - ITAT DELHI we find that the level of operations carried out by assessee through its PE in India are considerable enough to conclude that almost entire sales functions including marketing banking and after sales were carried out by PE in India and therefore keeping in view th decision of Rolls Royce 2007 (10) TMI 321 - ITAT DELHI-C and Nortel Networks India International Inc. 2014 (6) TMI 941 - ITAT DELHI we are of the opinion that it would meet the ends of justice if 35% of net global profits as per published accounts out of transactions of assessee with India are attributed to PE in India in respect of both hardware and software supplied by assessee to Indian customers. At this juncture we may point out that while deciding the department s appeal in subsequent part of this order we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. Taxability of software as royalty - HELD THAT - As decided in own case 2016 (6) TMI 329 - ITAT DELHI Receipts on account of supply of software were integrally connected to the supply of hardware and therefore AO was not right in taxing such receipts as royalty. In view of the decision of Hon ble Delhi High Court in the case of DIT v. Nokia India 2012 (9) TMI 409 - DELHI HIGH COURT software supplies could not be taxed even under the amended law - as per the provisions of Article 12(5) of the DTAA the supply of software being integral to the supply of hardware and the finding of existence of a PE of assessee in India Article 12(5) of the DTAA would cease to apply and the provision of Article 7 would be applicable and therefore the income from software is to be taxed as business income. - Decided in favour of assessee Levy of interest u/s 234B - Held that - We find that the facts are almost identical to the facts as obtaining in the case of GE Packaged Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT which is the latest decision of Hon ble Jurisdictional High Court on this issue and therefore respectfully following it we hold that assessee was not liable to pay interest u/s 234B.- Decided in favour of assessee
Issues Involved:
1. Denial of having any Permanent Establishment (PE) in India. 2. Attribution of profit to the PE. 3. Taxability of software as royalty. 4. Levy of interest under Section 234B of the Income Tax Act. Detailed Analysis: 1. Denial of Having Any Permanent Establishment (PE) in India The first common grievance in the assessee’s appeal relates to the denial of having any Permanent Establishment (PE) in India. The counsel for the assessee stated that to avoid protracted litigation, he is not pressing this common grievance. Consequently, the Tribunal did not consider this issue in the current assessment years, following a similar concession made in earlier assessment years (2004-05 to 2009-10). 2. Attribution of Profit to the PE The second grievance relates to the attribution of profit. The lower authorities followed the findings from earlier assessment years (2004-05 to 2009-10), where the Tribunal had settled this issue. The Tribunal observed that the issue of attribution of profits depends on the level of operations carried out by the PE in India. The AO had attributed 20% of the operating profit for AYs 2004-05 to 2008-09 and 45% for AY 2009-10. The Tribunal concluded that almost the entire sales functions, including marketing, banking, and after-sales, were carried out by the PE in India. Therefore, it was decided that 35% of net global profits from transactions with India should be attributed to the PE in India for both hardware and software supplied. 3. Taxability of Software as Royalty The third grievance relates to the taxability of software as royalty, which was raised in the revenue’s appeal. This issue had been previously settled by the Tribunal and upheld by the Hon’ble Delhi High Court. The Tribunal found that the receipts from the supply of software were integrally connected to the supply of hardware and could not be taxed as royalty. The Hon’ble Delhi High Court confirmed that the software supplies were in the nature of articles or goods and not royalty payments. 4. Levy of Interest under Section 234B of the Income Tax Act The last grievance relates to the levy of interest under Section 234B of the I.T. Act. The Hon’ble High Court, while considering this issue, referred to its judgment in the case of GE Packaging Power Inc., where it was held that the interest under Section 234B is not applicable. However, the Finance Act, 2012, added a proviso to Section 209(1)(d) of the Act, applicable from AY 2013-14 onwards. Therefore, the Tribunal directed the Assessing Officer to charge interest under Section 234B from AY 2013-14 onwards as per the amended provision. Conclusion In summary, the Tribunal dismissed the assessee’s grievance regarding the denial of PE in India due to the concession made by the assessee. The issue of attribution of profit was settled by attributing 35% of net global profits to the PE in India. The taxability of software as royalty was rejected, following the decisions of the Hon’ble Delhi High Court. Lastly, the levy of interest under Section 234B was directed to be applied prospectively from AY 2013-14 onwards. The appeals of the assessee were partly allowed, whereas the appeals of the Revenue were dismissed.
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