2017 (4) TMI 391 - AT - Income Tax

Branch office in India constituted a permanent establishment (PE) - article 5 of the India-US Double Taxation Avoidance Agreement - Held that - As various features as have been brought out before us, the activity profile of the branch office has not been examined by either of the lower authorities. As has been observed by us in the earlier part of our order that the Assessing Officer has not done any factual analysis at all and the learned Commissioner of Income-tax (Appeals) has done a brief factual analysis but that was full of mistakes or lacks clarity and precision. Under these circumstances, it is difficult at this stage to apply the correct legal principles on the real facts. Therefore, we find it appropriate to send this issue back to the file of the Assessing Officer who shall take into account. All the facts and circumstances of the case and pleadings and documentary evidences as has been made before us and that may be made by the assessee before the Assessing Officer in support of its claim. The Assessing Officer shall give adequate opportunity of hearing to the assessee for furnishing all detailed submissions and requisite documentary evidences and these shall be taken into account before deciding this issue afresh. The Assessing Officer shall accordingly decide the issue keeping in view the facts of the case and applicable judgments as may be relied upon by the learned counsel before the Assessing Officer to decide whether the Indian branch constitutes a permanent establishment in India of the assessee-company in terms of article 5 of the India-US Double Taxation Avoidance Agreement. This ground may be treated as allowed for statistical purposes. Sale of shrink wrap software - whether did not involve receipt of consideration which could be said to be royalty - Held that - Revenue has contended that the learned Commissioner of Income-tax (Appeals) has erred in taking this decision as the Indian branch office acted as permanent establishment in India of the assessee-company. Thus, this ground is dependent upon the outcome of the issue of determination of permanent establishment. The issue of permanent establishment has been restored to the file of the Assessing Officer for deciding it afresh. Since the issue in the Revenue s appeal is dependent upon the issue of permanent establishment which has been restored to the file of the Assessing Officer, this ground is also restored to the file of the Assessing Officer. The Assessing Officer shall first decide the issue of permanent establishment which has a bearing on the ground raised by the Revenue in its appeal and then decide the issues under appeal.

Issues Involved:
1. Whether the assessee's branch office in India constitutes a permanent establishment (PE) in India under Article 5 of the India-US Double Taxation Avoidance Agreement (DTAA).
2. Whether the fee for software maintenance received by the assessee constitutes fee for included services (FIS) under Article 12 of the India-US DTAA.
3. Attribution of income to the Indian branch office.
4. Taxability of income offered as FIS in the return of income.
5. Whether the sale of shrink wrap software involves receipt of consideration classified as "royalty."

Issue-wise Detailed Analysis:

1. Permanent Establishment (PE):
The primary issue was whether the assessee's branch office in India constituted a PE under Article 5 of the India-US DTAA. The Assessing Officer (AO) treated the branch office as a PE, thereby taxing the gross revenue from software sales in India. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this view, citing that the branch office maintained a stock of merchandise and exercised authority to carry out contracts on behalf of the head office. However, the Tribunal noted contradictions in the factual analysis by the lower authorities. The Tribunal observed that the branch office was engaged in marketing support services without authority to conclude contracts or receive payments. The Tribunal found it necessary to remand the issue back to the AO for a detailed factual analysis and proper application of legal principles, considering the activity profile and documentary evidence provided by the assessee.

2. Fee for Included Services (FIS):
The AO and CIT(A) held that the fee for software maintenance received by the assessee constituted FIS under Article 12 of the DTAA. The assessee contested this, arguing that the services provided did not meet the criteria for FIS. The Tribunal noted that this issue was dependent on the determination of the PE status. Hence, it remanded this issue back to the AO for reconsideration based on the outcome of the PE determination.

3. Attribution of Income to the Indian Branch Office:
The assessee argued that there was no need for further attribution of income to the Indian branch office as it was compensated at arm's length. The CIT(A) did not accept this argument. The Tribunal, noting that this issue was also dependent on the PE determination, remanded it back to the AO for fresh consideration.

4. Taxability of Income Offered as FIS:
The assessee contended that the income of ?1,14,00,547, though offered in the return as FIS, was not taxable under Article 12 of the DTAA. The CIT(A) upheld the AO's view that this income was taxable as FIS. The Tribunal remanded this issue back to the AO, linking it to the PE determination.

5. Royalty from Sale of Shrink Wrap Software:
The Revenue appealed against the CIT(A)'s decision that the sale of shrink wrap software did not involve receipt of consideration classified as "royalty." The Tribunal noted that this issue was dependent on the PE determination. Therefore, it remanded the issue back to the AO for fresh consideration after deciding the PE status.

Conclusion:
The Tribunal remanded all issues back to the AO for a detailed factual analysis and fresh consideration, providing the assessee an opportunity to present submissions and evidence. The AO was directed to decide the issues in light of applicable judgments and legal principles, particularly focusing on whether the Indian branch office constituted a PE under Article 5 of the India-US DTAA.

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