2021 (8) TMI 1367 - AT - Income Tax

Income deemed to accrue or arise in India - taxability of software sale by the US entity to Indian entities - PE in India - sale of Novell Software Products as 'Royalties' on substantive basis both under the Income-tax Act as well as the India-USA DTAA - whether the receipts from sale of Novell Software Products being in the nature of business income and in the absence of Permanent Establishment ('PE') of appellant in India, the receipts from sale of Novell Software Products ought to have been considered as not taxable in India - HELD THAT - So far as taxability of software sale by the US entity to Indian entities is concerned learned representatives fairly agree that the said issue is now covered by case of Engineering Analysis Centre of Excellence (P.) Ltd. 2021 (3) TMI 138 - SUPREME COURT . The transactions in question were at arm s length price, no taxability survives in the hands of the assessee. Once basic taxability under the DAPE itself comes to an end, all other issues raised in the appeal are rendered academic and infructuous. We, therefore, uphold the plea of the assessee to this extent.

Issues Involved:
1. Tax treatment of the sale of Novell Software Products as 'Royalties'.
2. Determination of NSDIPL as a Dependent Agency Permanent Establishment (DAPE).
3. Attribution of business income to the alleged DAPE.
4. Arm's length nature of the transaction of sale of software.
5. Submission of relevant Transfer Pricing documentation.
6. Taxation of receipts from Novell Software products on a gross basis.
7. Attribution of revenues from sales made directly to third parties.
8. Applicable tax rate for the income.
9. Allowance of TDS credit.
10. Levy of interest under section 234B.

Detailed Analysis:

1. Tax Treatment of Sale of Novell Software Products as 'Royalties':
The core issue is whether the sale of Novell Software Products amounting to Rs.15,92,23,031 should be treated as 'Royalties' under both the Income Tax Act, 1961, and the India-USA DTAA. The appellant argued that these receipts should be considered business income and not taxable in India in the absence of a Permanent Establishment (PE). The Tribunal referenced the Supreme Court's judgment in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax, which clarified the tax treatment of software sales, ruling in favor of the assessee.

2. Determination of NSDIPL as a Dependent Agency Permanent Establishment (DAPE):
The appellant contended that the Assessing Officer misinterpreted the "Principal to Principal" arrangement between Novell Inc. and NSDIPL, erroneously determining NSDIPL as a DAPE. The Tribunal referred to the case of ADIT vs. Asia Today Ltd, where it was established that the existence of a DAPE is tax neutral if the agent is remunerated at arm's length. Consequently, the Tribunal found in favor of the assessee, holding that the DAPE determination was irrelevant for tax purposes.

3. Attribution of Business Income to the Alleged DAPE:
The Tribunal addressed the issue of attributing 100 percent of the gross revenue from the sale of Novell Software Products to the alleged DAPE. It reiterated that if the agent is paid an arm's length remuneration, no additional profits can be attributed to the DAPE. The Tribunal upheld the assessee's position, rendering the attribution of business income to the DAPE academic and infructuous.

4. Arm's Length Nature of the Transaction of Sale of Software:
The appellant argued that the transaction of the sale of software was at arm's length, as confirmed by the Transfer Pricing Authorities. The Tribunal supported this view, noting that the transactions were at arm's length price as per the TPO's order dated 31.10.2017, thus negating any additional tax liability.

5. Submission of Relevant Transfer Pricing Documentation:
The appellant claimed that the relevant Transfer Pricing documentation was duly submitted during the assessment proceedings, contrary to the Assessing Officer's conclusion. The Tribunal did not find any deficiencies in the documentation provided by the appellant, supporting the appellant's claim.

6. Taxation of Receipts from Novell Software Products on a Gross Basis:
The appellant contended that the receipts should not be taxed on a gross basis by applying a Gross Profit Ratio of 45.75 percent. The Tribunal upheld the appellant's view, emphasizing that the net profit ratio or appropriate deductions should be considered.

7. Attribution of Revenues from Sales Made Directly to Third Parties:
The appellant argued against attributing revenues of INR 9,21,29,797 from sales made directly to third parties to the alleged DAPE. The Tribunal found that such sales were not effected through NSDIPL and should not be taxed as business income in India.

8. Applicable Tax Rate for the Income:
The appellant contended that the income should be taxed at a more beneficial rate of 10% as per the Income Tax Act, 1961, rather than 15%. The Tribunal did not specifically address this issue, as the primary taxability itself was negated.

9. Allowance of TDS Credit:
The appellant claimed a TDS credit of INR 19,746,830, which was not allowed by the Assessing Officer. The Tribunal did not delve into this issue, given the primary ruling in favor of the appellant on the main taxability grounds.

10. Levy of Interest Under Section 234B:
The levy of interest under section 234B was deemed consequential by the Tribunal, and thus, not specifically adjudicated upon.

Conclusion:
The Tribunal ruled in favor of the appellant on all significant issues, primarily on the basis of the Supreme Court's judgment and the principle that the existence of a DAPE is tax-neutral if the agent is remunerated at arm's length. Consequently, the appeal was allowed, and the additional tax liabilities proposed by the Assessing Officer were negated.

← Previous Next →