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2016 (12) TMI 1542 - AT - Income TaxTaxability of Software Supply - Royalty or Business Income - DTAA between India & Israel - Permanent Establishment (PE) - Held that - In view of the judgment of Hon ble Supreme Court in the case of Radhasoami Satsang (1991 (11) TMI 2 - SUPREME Court ), we respectfully follow the order of the Tribunal for A.Ys. 2003-04 & 2006-07 and hold that the payment received by the assessee on account of supply of software by the assessee to Reliance in pursuance to agreements made between both the parties dated 27th September, 2002 read with supplementary agreement 17th September, 2007 is not in the nature of Royalty within the meaning of Article 12 of DTAA between India and Israel and therefore not liable to tax as such, but assessable as business income of the assessee subject to other provisions of the Act and DTAA. Thus, Ground decided in favour of the assessee. TTI India was Dependent Agent Permanent Establishment (DAPE) of the assessee company in India - Held that - As per Section 12 of agreement dated 27th September 2002, between the assessee and Reliance, it was agreed that a separate agreement would be entered into for providing annual maintenance services by the assessee to Reliance but this agreement was never entered into. Subsequently, assessee s subsidiary i.e. TTI India entered into a separate agreement with Reliance for verification of AMC dated 28th May 2003. The said agreement was executed independently by TTI India as independent terms and conditions and on Principal to Principal basis, and assessee was not part to the said agreement. Articles of Indo Israel DTAA have not been referred to at all while deciding this issue against the assessee. Dependent agency principles were not applicable in this case. It was also submitted that in A.Y. 2006-07, the Tribunal has already examined all the facts and held that assessee did not have any PE in India, and thus he requested for following order of the Tribunal. - Decided in favour of the assessee Expenses taxed as Fees for Technical Services in the hands of assessee - Held that - In A.Y. 2005-06, Ld. CIT(A) decided this issue in favour of the assessee wherein it was held that amount of reimbursement of expenses (which were similar to expenses reimbursed in the impugned year) could not be taxed as FTS in the hands of assessee and this issue was not contested by the Revenue and thus attained finality. - Decided in favour of the assessee Levy of interest u/s 234B - Held that - Interest under section 234B was not leviable upon the assessee being non-resident, in view of the judgment of Hon ble Bombay High Court in the case of DIT v. NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT ). - Decided in favour of the assessee
Issues Involved:
1. Taxability of Software Supply as Royalty instead of Business Income. 2. Indian subsidiary considered as Permanent Establishment (PE) of the Appellant. 3. Reimbursement of Expenses considered as Fees for Technical Services (FTS). 4. Incorrect addition of income of earlier years. 5. No credit of tax deducted at source. 6. Levy of interest under Section 234B. Detailed Analysis: 1. Taxability of Software Supply as Royalty instead of Business Income: - The primary issue was whether the consideration for the supply of software should be taxed as 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and Israel. - The assessee argued that the issue had already been decided in its favor by the Tribunal in previous assessment years (2003-04, 2005-06, 2006-07, and 2007-08) and that there was no change in material facts. - The Revenue contended that the amended agreement during the year under consideration brought new facts to light and cited judgments from the Karnataka High Court against the assessee. - The Tribunal examined whether the facts and legal positions were identical to the earlier years and found no material change, especially regarding the transfer of the source code. - The Tribunal followed its previous decisions, concluding that the payment received by the assessee did not constitute 'royalty' and should be treated as business income, not taxable in India in the absence of a Permanent Establishment (PE). 2. Indian subsidiary considered as Permanent Establishment (PE) of the Appellant: - The AO held that the Indian subsidiary, TTI India, was a dependent agent PE of the assessee, as it undertook obligations that were the assessee's responsibility and had no other independent business. - The CIT(A) upheld this view, relying on the Delhi High Court's judgment in Rolls Royce PLC. - The Tribunal noted that this was the sixth year of similar transactions, which had been accepted by the Revenue in earlier years. It found that TTI India operated independently and that the Tribunal had already held in A.Y. 2006-07 that the assessee had no PE in India. - The Tribunal decided in favor of the assessee, holding that TTI India was not a PE of the assessee in India. 3. Reimbursement of Expenses considered as Fees for Technical Services (FTS): - The AO and CIT(A) held that reimbursement of expenses was taxable as FTS under Article 13 of the Indo-Israel DTAA. - The Tribunal noted that in A.Y. 2005-06, the CIT(A) had decided this issue in favor of the assessee, and this decision was not contested by the Revenue. - The Tribunal followed its earlier decisions, holding that the reimbursement of expenses did not constitute FTS and was not taxable in India. 4. Incorrect addition of income of earlier years: - The CIT(A) directed the AO to verify the taxability of reimbursement of expenses from earlier years, which the assessee argued had already been taxed on an accrual basis and subsequently deleted on appeal. - The Tribunal noted that this ground was not pressed by the assessee during the hearing and dismissed it as not pressed. 5. No credit of tax deducted at source: - The CIT(A) directed the AO to verify the credit for taxes deducted on amounts received towards the supply of software and reimbursement of expenses. - The Tribunal noted that this ground was also not pressed by the assessee during the hearing and dismissed it as not pressed. 6. Levy of interest under Section 234B: - The CIT(A) held that the levy of interest under Section 234B was consequential to the grant of tax credit. - The Tribunal, following the Bombay High Court's judgment in DIT v. NGC Network Asia LLC, held that interest under Section 234B was not leviable on the assessee, a non-resident whose revenues were subject to tax withholding in India. Conclusion: - The Tribunal allowed the assessee's appeal on the primary issues, holding that the income from the supply of software was not 'royalty' and that TTI India was not a PE of the assessee. It also held that the reimbursement of expenses was not taxable as FTS and that interest under Section 234B was not leviable. The grounds related to the addition of income from earlier years and tax credit were dismissed as not pressed.
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