2021 (9) TMI 1372 - AT - Income Tax

PE in India - attribution of profits - existence of a subsidiary in India which is carrying on its own business as commission agent of the appellant - Scope of India-Netherlands Double Taxation Avoidance Agreement - HELD THAT - As relying on assessee's own case 2017 (7) TMI 420 - ITAT DELHI substantiate the allegation of deputation of any employees for rendering Technical support services, in view of this we do not agree with the revenue that services are rendered in India by deputation of employees in India by the appellant. With respect to the payment of royalty, It was submitted that Indian entity from time to time participates in various trade fairs and disseminate information about the products and engaged in promotional activity and for this purpose, it has right to use the trademark which is not held by the appellant but different entity. As this transaction is not between the appellant and the Indian entity where it is undisputed that the trademarks are not owned by the appellant but by different entity, these facts does not lead to creation of a permanent establishment in India of appellant Thus we hold that the assessee company does not have any Permanent Establishment in India. Since, the question regarding Permanent Establishment is being answered in favour of the assessee, the issue of attribution of income in the hands of such Permanent Establishment becomes infrutuous. Accordingly, the grounds raised by the assessee are allowed. Treatment of software and sale of subscription receipts as the royalty income under Article 12(3) of the India-Netherlands DTAA - HELD THAT - The issue of software royalty was recently adjudicated by the Hon ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT has analyzed various aspects of the issue taking into consideration end user license, Copy Right Act, and provisions contained in DTAA and the Income Tax Act and has laid down the parameters to test whether the receipt from sale of software would tantamount to royalty or not. Therefore, in view of the above, the Assessing Officer is directed to carry out the necessary exercise in accordance with the directions issued by the Co-ordinate Bench in Assessment Year 2008-09 2017 (7) TMI 420 - ITAT DELHI duly keeping in mind the ratio laid down by the Hon ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (supra) and adjudicate the issue accordingly after giving due and proper opportunity to the assessee to present its case. Thus, ground Nos. 3 4 are allowed for statistical purposes. Taxing of income from provisions of service by treating the same as Fee for Technical Services - assessee has received payment to the extent in lieu of services rendered to Indian customers. The services so provided are in the nature of installation services, warranty services, or professional services such as data migration, disaster management etc. - HELD THAT - It is undisputed that the impugned addition in the year under consideration is solely based on the reasoning recorded in assessment orders for Assessment Years 2008-09 and 2010-11. Since, the findings of the Assessing Officer with regard to this issue in 2008-09 2010-11 are no longer valid as having been disproved by the Co-ordinate Bench of this Tribunal, we find no reason to uphold the action of the Assessing Officer in taxing the impugned receipts in India. Thus, the Co-ordinate Bench of the Tribunal has specifically held that services performed by the assessee company cannot be taxed in India in absence of satisfaction of make available clause. In absence of change in facts and keeping in view the uniformity in the nature of services, we find no justification in the action of the Assessing Officer in bringing to tax service receipts as FTS and the addition so made is directed to be deleted. Accordingly, Ground No.5 stands allowed. Addition on account of sale of products by the assessee company to M/s NetApp India - AO as observed that the assessee failed to explain why the amount so received is not taxable in India and that no agreement, evidence or documents were produced before him to demonstrate the nature of transactions and goods sold - HELD THAT - Assessing Officer has considered the income from the sale of equipment as business income taxable in India. However, it is worthwhile to know that as per Article 7 of the India-Netherland DTAA, the business income earned by a resident of a state from business carried in another State is taxable only in the resident state unless such business is carried in other State through PE. In the present case, we have already held that the assessee company does not have a Permanent Establishment in India and as such the business income so arising on sale of equipment cannot be taxed in India as per the express provision of Article 7 of DTAA. Accordingly, the Assessing Officer is directed to delete the addition made on account of business income. This ground is accordingly allowed. Charging to interest u/s 234B - HELD THAT - This issue of chargeability of interest is set aside to the file of the Assessing Officer with a direction that in case the assessee has any income chargeable to tax in India and if the same is subject to withholding to tax, no interest u/s 234B should be charged. Ground No.10 accordingly is allowed.

Summary

Issues Involved:
1. Permanent Establishment (PE) in India.
2. Attribution of income from storage products.
3. Taxation of software income as royalty.
4. Taxation of subscription income as royalty.
5. Taxation of service income as Fees for Technical Services (FTS).
6. Additional income attribution to PE.
7. Taxation of income from supply of storage products without PE.
8. Application of Section 44DA for taxing software, subscriptions, and services.
9. Taxation of sale consideration received from NetApp India.
10. Levy of interest under Section 234B.
11. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The Tribunal examined whether the assessee company had a PE in India under Article 5 of the India-Netherlands DTAA. The Tribunal noted that the Assessing Officer (AO) had relied on previous assessment orders for AY 2008-09 and 2010-11, which had been decided in favor of the assessee. The Tribunal reiterated that the assessee did not have a PE in India, as the Indian subsidiary was merely a service provider and did not have the authority to conclude contracts on behalf of the assessee. The Tribunal emphasized the distinction between the business of the appellant and the business of the Indian company, which operated independently.

2. Attribution of Income from Storage Products:
The Tribunal held that since the assessee did not have a PE in India, the issue of attribution of income to such PE became infructuous. The grounds related to this issue were allowed in favor of the assessee.

3. Taxation of Software Income as Royalty:
The Tribunal noted that the AO had considered the software income as royalty based on previous assessments. The matter was restored to the AO for verification in line with the Hon'ble Delhi High Court's decision in Infrasoft Ltd. and the recent Supreme Court judgment in Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT. The AO was directed to adjudicate the issue accordingly after giving the assessee an opportunity to present its case.

4. Taxation of Subscription Income as Royalty:
Similar to the software income, the Tribunal restored the issue of subscription income to the AO for verification and adjudication in light of relevant judicial precedents.

5. Taxation of Service Income as Fees for Technical Services (FTS):
The Tribunal observed that the AO had taxed the service income as FTS based on previous assessments. However, the Tribunal referred to its earlier decision, which held that the services provided by the assessee did not satisfy the "make available" clause and, therefore, could not be taxed as FTS. The addition made by the AO was directed to be deleted.

6. Additional Income Attribution to PE:
Since the Tribunal held that the assessee did not have a PE in India, the issue of additional income attribution to such PE was rendered moot. The grounds related to this issue were allowed in favor of the assessee.

7. Taxation of Income from Supply of Storage Products without PE:
The Tribunal reiterated that in the absence of a PE in India, the business income from the supply of storage products could not be taxed in India under Article 7 of the DTAA. The AO was directed to delete the addition made on this account.

8. Application of Section 44DA for Taxing Software, Subscriptions, and Services:
The Tribunal directed the AO to re-examine the application of Section 44DA in light of the Supreme Court's judgment in Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT and other relevant judicial precedents. The matter was restored to the AO for fresh adjudication.

9. Taxation of Sale Consideration Received from NetApp India:
The Tribunal held that the sale of equipment to NetApp India took place off-shore and did not result in any income accruing or arising in India. As the assessee did not have a PE in India, the business income from such sales could not be taxed in India. The AO was directed to delete the addition made on this account.

10. Levy of Interest under Section 234B:
The Tribunal set aside the issue of interest under Section 234B to the AO with a direction that no interest should be charged if the income was subject to withholding tax in India. The ground was allowed.

11. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed the ground related to the initiation of penalty proceedings as premature.

Conclusion:
The appeal of the assessee was partly allowed, with several issues being restored to the AO for fresh adjudication in light of relevant judicial precedents and the Supreme Court's judgment. The Tribunal consistently held that the assessee did not have a PE in India, which significantly influenced the outcome of various grounds.