2023 (5) TMI 1299 - AT - Income Tax

Taxability of software sale by the US entity to Indian entities - Indian subsidiary is held as DAPE Dependent Agent Permanent Establishment of the assessee in India - when DAPE is remunerated at arm s length - whether transaction of sale of software is not at arm's length? - HELD THAT - Similar issue was considered and adjudicated by the Coordinate Bench in assessee s own case for the A.Y. 2017-18 2022 (5) TMI 1513 - ITAT MUMBAI and decided the issue in favour of the assessee as held that once the DAPE is remunerated at arm s length no further addition can be made in the hands of the assessee. 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 - Decided in favour of assessee.

Summary

Issues Involved:

1. Legality of the order passed by the Assessing Officer (AO) pursuant to the directions of the Dispute Resolution Panel (DRP).
2. Determination of whether Micro Focus Software India Private Limited (MFSIPL) is a Dependent Agency Permanent Establishment (DAPE) of Micro Focus Software Inc. (MFSI) in India.
3. Assessment of whether the transaction of sale of software is at arm's length.
4. Examination of the adequacy of transfer pricing documentation provided by the assessee.
5. Attribution of profits to the alleged DAPE.
6. Consistency with previous Tribunal rulings in the assessee's own case.
7. Attribution of revenues as business activity through PE.
8. Attribution of revenues from direct sales to third parties.
9. Taxation rate applied to the total assessed income.
10. Initiation of proceedings under section 270A of the Act.
11. Levy of interest under section 234B of the Act.
12. Overall sustainability of the impugned order passed by the AO.

Summary:

1. Legality of the Order:
The assessee argued that the order passed by the AO pursuant to the DRP's directions is "bad in law and liable to be quashed."

2. Dependent Agency Permanent Establishment (DAPE):
The AO/DRP erred in holding that MFSIPL is a DAPE of MFSI in India by misinterpreting the "Principal to Principal" arrangement under the Distribution Agreement and Bilateral Advance Pricing Agreement (BAPA) between India and USA, disregarding the arm's length arrangement between MFSI and MFSIPL.

3. Arm's Length Transaction:
The AO/DRP erred in holding that the transaction of sale of software is not at arm's length.

4. Transfer Pricing Documentation:
The AO/DRP erred in concluding that the appellant did not provide relevant transfer pricing documentation, despite the same being submitted during the assessment proceedings.

5. Attribution of Profits:
The AO/DRP erred in arbitrarily attributing unreasonable significant profits to the alleged DAPE of MFSI, disregarding the arm's length arrangement approved by Transfer Pricing Authorities and the Central Board of Direct Taxes as per BAPA.

6. Consistency with Previous Tribunal Rulings:
The AO/DRP erred in not following the favorable Tribunal rulings in the company's own case for previous assessment years, despite no change in the factual matrix.

7. Attribution of Revenues as Business Activity:
The AO/DRP erred in attributing revenues of INR 14,18,01,254 as business activity through PE from MFSIPL, whereas the income earned from MFSIPL during AY 2018-19 is INR 13,84,73,189, claimed as exempt.

8. Attribution of Revenues from Direct Sales:
The AO/DRP erred in attributing revenues of INR 35,23,717 from direct sales to third parties to the alleged DAPE without appreciating that such sales were not affected through MFSIPL.

9. Taxation Rate:
The AO/DRP erred in taxing the total assessed income at the rate of 40% along with surcharge and education cess, without considering that interest on refund is offered to tax at a flat rate of 15% as per the India-USA DTAA.

10. Proceedings under Section 270A:
There was no basis for the AO to initiate proceedings under section 270A of the Act.

11. Levy of Interest:
The levy of interest under section 234B of the Act is consequential in nature.

12. Overall Sustainability:
The impugned order passed by the AO is otherwise unsustainable in law and on facts.

Decision:
The Tribunal observed that similar issues were considered and adjudicated in the assessee's own case for previous assessment years, and decided in favor of the assessee. The Tribunal upheld the plea of the assessee and directed the AO to delete the impugned addition. The appeals filed by the assessee for both AY 2018-19 and AY 2019-20 were allowed.