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2022 (5) TMI 1513 - AT - Income TaxIncome 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 - Issue decided in favour of the assessee, by a decision of coordinate bench dated 31st August 2021, in assessee own cases for the assessment year 2016-17 2021 (8) TMI 1367 - ITAT MUMBAI wherein held 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. - Decided in favour of assessee.
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 from the sale of Novell Software Products to the alleged DAPE. 4. Arm's length nature of the transaction of sale of software. 5. Provision of relevant Transfer Pricing documentation. 6. Taxation of receipts from the sale of Novell Software Products on a gross basis. 7. Attribution of revenues from direct sales to third parties to the alleged DAPE. 8. Levy of interest under section 234A. 9. Levy of interest under section 234B. Detailed Analysis 1. Tax Treatment of the Sale of Novell Software Products as 'Royalties' The appellant challenged the treatment of the sale of Novell Software Products amounting to INR 10,62,80,020 as 'Royalties' under both the Income-tax Act, 1961, and the India-USA DTAA. The appellant contended that the receipts should be considered business income and not taxable in India due to the absence of a Permanent Establishment (PE) in India. The Tribunal noted that this issue is covered by the Hon'ble Supreme Court's judgment in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax, which ruled in favor of the assessee. 2. Determination of NSDIPL as a Dependent Agency Permanent Establishment (DAPE) The appellant argued against the determination of NSDIPL as a DAPE, stating that the arrangement between Micro Focus Software Inc. and NSDIPL was a "Principal to Principal" arrangement. The Tribunal referred to the decision in ADIT vs Asia Today Ltd., which clarified that the existence of a DAPE is tax-neutral if the agent is paid an arm's length remuneration. The Tribunal upheld this view, rendering the existence of a DAPE as having no tax consequence. 3. Attribution of Business Income from the Sale of Novell Software Products to the Alleged DAPE The Tribunal held that the issue of attributing business income to the alleged DAPE is covered by the principle that if the agent is remunerated at arm's length, no further profits are attributable to the DAPE. This view was consistent with the coordinate bench's decision in the appellant's own case for previous assessment years and the judgment of the Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pte Ltd. vs. CIT. 4. Arm's Length Nature of the Transaction of Sale of Software The Tribunal noted that the transactions were at arm's length price as per the Transfer Pricing Officer’s (TPO) order dated 31.10.2017. Therefore, no additional taxability arises from these transactions. 5. Provision of Relevant Transfer Pricing Documentation The appellant contended that the relevant Transfer Pricing documentation was duly submitted during the assessment proceedings. The Tribunal did not find any merit in the Assessing Officer's claim that the documentation was not provided. 6. Taxation of Receipts from the Sale of Novell Software Products on a Gross Basis The Tribunal rejected the Assessing Officer's approach of taxing the receipts on a gross basis by applying a Gross Profit Ratio of 39.80 percent. It upheld the appellant's contention that the Net Profit Ratio should be applied, or at least the remuneration retained by NSDIPL should be deducted. 7. Attribution of Revenues from Direct Sales to Third Parties to the Alleged DAPE The Tribunal found that the sales made directly to third parties were not effected through NSDIPL and thus should not be attributed to the alleged DAPE. The application of an arbitrary profit ratio for such sales was also rejected. 8. Levy of Interest under Section 234A The Tribunal noted that the appellant had filed the return of income within the due date as per section 139(1) of the Act. Therefore, the levy of interest under section 234A was not justified. 9. Levy of Interest under Section 234B The Tribunal held that the levy of interest under section 234B is consequential in nature and would depend on the final tax liability determined. Conclusion The Tribunal upheld the appellant's plea, directing the Assessing Officer to delete the impugned addition of INR 10,62,82,020. The appeal was allowed, and the issues raised were rendered academic and infructuous in light of the findings. The judgment was pronounced in the open court on the 30th day of May, 2022.
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