2021 (8) TMI 1405 - AT - Income Tax

Accrual of income in India - sale of Novell Software Products as 'Royalties' on substantive basis both under the Income-tax Act, 1961 as well as the India-USA DTAA - PE in India or not? - AO held that Novell Software Development India Private Limited ('NSDIPL') is a Dependent Agency Permanent Establishment ('DAPE') of Appellant in India - whether there is Principal to Principal arrangement between Novell Inc. and NSDIPL under the Distribution Agreement - 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 Hon ble Supreme Court s judgement in the case of Engineering Analysis Centre of Excellence (P.) Ltd 2021 (3) TMI 138 - SUPREME COURT Existence of the dependent agency permanent establishment DAPE or not? - In the light of Hon'ble jurisdictional High Court's judgment in the case of Set Satellite ( 2008 (8) TMI 96 - BOMBAY HIGH COURT ), so far as profit attribution of a DAPE is concerned, the legal position is that as long as an agent is paid an arm's length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment. Viewed thus, the existence of a dependent agency permanent establishment is wholly tax neutral. As 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.

Issues Involved:
1. Tax treatment of the sale of Novell Software Products as 'Royalties' under the Income Tax Act, 1961, and the India-USA DTAA.
2. Determination of Novell Software Development India Private Limited (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 the sale of software.
5. Provision of relevant Transfer Pricing documentation.
6. Taxation of receipts from supply of Novell Software products on a gross basis.
7. Attribution of revenues from sales made directly to third parties to the alleged DAPE.
8. Application of tax rate and education cess.
9. Grant of TDS credit.
10. Levy of interest under section 234A of the Income-tax Act, 1961.

Detailed Analysis:

1. Tax Treatment of Software Sales as 'Royalties':
The appellant contended that the sale of Novell Software Products should not be treated as 'Royalties' under both the Income Tax Act, 1961, and the India-USA DTAA. The appellant argued that the receipts from the sale of software products were business income and, in the absence of a Permanent Establishment (PE) in India, should not be taxable in India. This issue was resolved by referring to the Supreme Court’s judgment in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax [2021] 125 taxmann.com 42 (SC), which covered the taxability of software sales in favor of the assessee.

2. Determination of NSDIPL as a DAPE:
The appellant challenged the Assessing Officer's decision to classify NSDIPL as a Dependent Agency Permanent Establishment (DAPE) by misinterpreting the "Principal to Principal" arrangement under the Distribution Agreement. The tribunal referred to the coordinate bench decision in the case of ADIT vs Asia Today Ltd [(2021) 124 taxmann.com 1 (Mum)], which established that the existence of a DAPE is tax neutral if the agent is remunerated at arm’s length. It was concluded that the existence of a DAPE does not lead to additional tax liability if the agent is paid an arm’s length remuneration.

3. Attribution of Business Income to the Alleged DAPE:
The appellant argued against the attribution of 100% of gross revenue from the sale of software products to the alleged DAPE. The tribunal, following the principles laid down in the Set Satellite (Singapore) Pte Ltd case, held that as long as the agent is remunerated at arm’s length, no further profits are attributable to the DAPE. Thus, the attribution of business income to the DAPE was rendered academic and tax-neutral.

4. Arm's Length Nature of the Transaction:
The appellant contended that the transaction of the sale of software was at arm’s length, as examined by the Transfer Pricing Authorities. The tribunal upheld this view, noting that the transactions were at arm’s length price, as confirmed by the TPO’s order dated 31.10.2017.

5. Provision of Relevant Transfer Pricing Documentation:
The appellant argued that the relevant Transfer Pricing documentation was provided during the assessment proceedings. The tribunal found no fault with the documentation provided and noted that the transactions were at arm’s length.

6. Taxation of Receipts on Gross Basis:
The appellant challenged the taxation of receipts from the supply of software products on a gross basis using a Gross Profit Ratio of 41.07%. The tribunal, following the coordinate bench decisions, held that once the transactions are at arm’s length, no additional tax liability arises on a gross basis.

7. Attribution of Revenues from Direct Sales to Third Parties:
The appellant argued against attributing revenues from direct sales to third parties to the alleged DAPE. The tribunal held that such attribution was academic and tax-neutral if the agent is remunerated at arm’s length.

8. Application of Tax Rate and Education Cess:
The appellant contended that the beneficial tax rate under the India-USA DTAA should apply, and education cess should not be levied. The tribunal upheld the appellant’s view, noting that the beneficial tax rate of 15% should apply without the additional education cess.

9. Grant of TDS Credit:
The appellant argued that the TDS credit of INR 2,08,06,820 claimed in the income tax return was not granted. The tribunal did not specifically address this issue, as the primary taxability under the DAPE was resolved in favor of the appellant.

10. Levy of Interest under Section 234A:
The appellant contested the levy of interest under section 234A despite filing the return of income on the due date. The tribunal did not specifically address this issue, as the primary taxability under the DAPE was resolved in favor of the appellant.

Conclusion:
The tribunal upheld the appellant’s plea, concluding that the existence of a DAPE is tax-neutral if the agent is remunerated at arm’s length. Consequently, all other issues raised in the appeal were rendered academic and infructuous. The appeal was allowed in favor of the appellant.

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