2022 (10) TMI 1157 - AT - Income Tax

Income deemed to accrue or arise in India - Attributing any income in India - PE in India - activity relating to sale of network equipment and terminal equipments was carried out by the Appellant in India - Whether any portion of profits, if any, accruing to Appellant from off shore sale of terminal equipments to Indian customers can be attributed to the alleged PE in India given the nature of equipment, customer profile and modalities of undertaking sales - HELD THAT - For Assessment Years 2005-06 to 2008-09 2014 (4) TMI 770 - ITAT DELHI , the assessee has made no submission on profit attributed of alleged PE by the Assessing Officer in those years. That aspect has been duly noted by the Tribunal while upholding the order of the AO/DRP and dismissing the appeal filed by the assessee for those years. We note that this reference by the ld. counsel for the assessee is not factually correct as ITAT in its order has nowhere mentioned that this aspect has not been argued or this aspect has not been decided by the Tribunal. In this view of the matter, since the Tribunal in assessee s own case has rejected this ground, ground no.6 alongwith all its sub-grounds raised by the assessee is liable to be dismissed and the same is dismissed as such. We place reliance upon the decision of the Hon ble Apex Court in the case of Honda Siel Power Products Ltd. vs CIT 2007 (11) TMI 8 - SUPREME COURT regarding cannon of following Co-ordinate Bench decision. In this view of the matter, other case laws referred by the Ld. counsel for the assessee are not considered applicable in the particular facts of this case. This is more so when ITAT order has not been reversed by Hon ble jurisdictional High Court. Moreover, it is also noticed that assessee is already in appeal before the Hon ble High Court against this order of the Tribunal. We agree that the assessee can raise this necessary ground before the Tribunal but we are also of the opinion that judicial discipline also demands that we follow ITAT order in assessee s own case, facts being similar. Since ITAT in its common order dated 21.03.2014 2014 (4) TMI 770 - ITAT DELHI has categorically held that ground no.6 by the assessee is dismissed. We follow the same and hold that following the precedent in assessee s own case, this ground is dismissed. Taxation of software royalty - As both parties have accepted that in the assessee s own case for Assessment Years 2005-06 to 2008-09 2014 (4) TMI 770 - ITAT DELHI the Revenue s appeal in this regard was dismissed by ITAT and that Hon ble Delhi High Court has dismissed the appeal against this order.

Summary

Issues Involved:
1. Attribution of profits to the Permanent Establishment (PE) in India.
2. Taxation of software as royalty.

Issue-wise Detailed Analysis:

1. Attribution of profits to the Permanent Establishment (PE) in India:
The primary contention revolved around whether any income from the sale of network equipment and terminal equipment could be attributed to the appellant's PE in India. The appellant argued that since no part of the activity relating to the sale was carried out in India, attributing income to India was unjustified. The appellant also contended that no portion of profits from offshore sales to Indian customers could be attributed to the alleged PE in India due to the nature of the equipment, customer profile, and sales modalities. Furthermore, the appellant challenged the arbitrary estimation of profits at 725 percent on offshore sales and argued that as the alleged PE had been remunerated at arm's length price, confirmed by the Transfer Pricing Officer (TPO), no further income should be attributed and assessed to tax in India.

Analysis and Judgment:
The Tribunal noted that this issue had been previously adjudicated in the appellant's own case for AY 2005-06 to 2008-09, where it was held that the business of the appellant in India was conducted with the active involvement of employees of the Indian entity. These employees, along with the appellant's employees, prepared bidding documents, negotiated, and concluded contracts on behalf of the appellant with Indian customers. The Tribunal found that the employees of the Indian entity formed the sales team of the appellant and habitually secured orders in India wholly or almost wholly for the appellant. Consequently, the Tribunal rejected ground no. 6 and its sub-grounds, holding that the facts and circumstances had not changed, and judicial discipline required following the precedent set in the appellant's own case.

2. Taxation of software as royalty:
The appellant contested the allocation of 30% of the total supplies towards software in the equipment and the taxation of the same on a gross basis as 'Royalty' under the provisions of the Act and Tax Treaty. The appellant argued that if the revenue from the supply of software along with hardware was taxable as Royalty, it should be taxed on a net basis as 'Business Profits' under Article 7 of the Tax Treaty. Additionally, the appellant contended that the revenues from the supply of software should be subjected to tax as 'Business Profits' under Article 7 read with Article 5 of the Tax Treaty, in the event it was held that the appellant constituted a PE in India.

Analysis and Judgment:
The Tribunal acknowledged that in the appellant's own case for Assessment Years 2005-06 to 2008-09, the ITAT had dismissed the Revenue's appeal regarding the taxation of software as royalty, and the Hon'ble Delhi High Court had upheld this decision. Consequently, the Tribunal allowed ground no. 7, following the precedent and the decision of the Hon'ble Delhi High Court.

Conclusion:
The Tribunal dismissed ground no. 6 and its sub-grounds related to the attribution of profits to the PE in India, following the precedent set in the appellant's own case. Ground no. 7, concerning the taxation of software as royalty, was allowed in favor of the appellant, adhering to the previous decisions by the ITAT and the Hon'ble Delhi High Court. The order was pronounced in the open court on 13th October 2022, and it applied mutatis mutandis to all the appeals involved.