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2019 (10) TMI 302 - AT - Income TaxAccrual of income in India - TP Adjustment - profit attributed to the Indian subsidiary - characterization of income - attribution of income - PE in India - 'Royalty or Fee for Technical Services or even as Business profits - India-Israel Tax Treaty - HELD THAT - We find that the issue that where the attribution of profits to the Indian subsidiary of the assessee i.e M/s Celltick Mobile Media (India) Pvt. ltd. was found to be adequate and justified on the basis of the transfer pricing analysis, then, no further income could be attributed to it is squarely covered by the order of the Tribunal in the assesses own case for A.Y 2012-13. Apart there from, we find that the Indian subsidiary of the assessee viz. M/s Celltick Mobile Media (India) Pvt. Ltd. had for A.Y. 2015-16 to A.Y 2019-20 entered into an APA with the CBDT. As is discernible from the APA , the functions of the subsidiary company inter alia included marketing and sale of various software solutions of the assessee company. As per the APA the operating profit margin of M/s Celltick Mobile Media (India) Pvt. Ltd. up to its revenue of ₹ 50 crore was to be taken at 7% of its Operating revenue . Admittedly, the FAR analysis and overall functions of the subsidiary company i.e M/s Celltick Mobile Media (India) Pvt. ltd. had remained the same during the period covered by the APA and that for the year under consideration i.e A.Y 2014-15. Though, the APA in the case of the assessee had been entered into for the period spread over A.Y. 2015- 16 to A.Y 2019-20, however, as held by the ITAT, Mumbai in the case of 3i India Pvt. Ltd. Vs. DCIT 2016 (9) TMI 1320 - ITAT MUMBAI a subsequent APA would also have a bearing on the earlier years. Accordingly, we find that the ALP of the transactions covered by the APA up to INR 50 cr. was to be taken @ 7% of its operating revenue. As such, as the operating revenue of M/s Celltick Mobile Media (India) Pvt. Ltd. during the year under consideration viz. A.Y 2014-15 was ₹ 32,71,03,165/-, therefore, the ALP of the covered transactions @ 7% worked out at ₹ 2,30,20,874/-. As against the aforesaid ALP, the Indian subsidiary of the assessee viz. M/s Celltick Mobile Media (India) Pvt. Ltd. had shown a profit of ₹ 3,65,52,479/- as per its profit and loss account for the year under consideration. Accordingly, we are of the considered view that as the income disclosed by M/s Celltick Mobile Media (India) Pvt. Ltd. is higher than the ALP as per its APA for the succeeding years, therefore, no further income on the said count also could be attributed to it. Finding ourselves to be in agreement with the view taken by the Tribunal in the assesses own case for A.Y 2012-13, thus, conclude that now when the amount remunerated by the assessee to M/s Celltick Mobile Media (India) Pvt. Ltd. is found to be satisfying the arms length principle, therefore, no further profits could be attributed to the assessee in India even if it was to be held that the latter had a PE in India. Accordingly, we delete the addition made by the A.O by attributing the same to the Indian subsidiary of the assessee viz. M/s Celltick Mobile Media (India) Pvt. Ltd. - Decided in favaor of assessee.
Issues Involved:
1. Wrong determination of the total taxable income of the Appellant. 2. Non-taxability of the income earned by the Appellant as 'royalty' income. 3. Wrongly treating Celltick India as a Dependent Agent Permanent Establishment (DAPE) of the Appellant in India and taxing the income of the appellant as 'business profits' under the India-Israel Tax Treaty. 4. Wrong attribution of income and profits to the alleged DAPE of the Appellant in India. 5. Initiation of penalty proceedings under Section 271(1)(c) of the Act. Detailed Analysis: 1. Wrong Determination of Total Taxable Income: The Appellant contested the assessment order issued by the A.O, which determined the total income at ?6,52,66,290/- against the 'Nil' income declared in the return filed by the Appellant. The A.O's assessment was based on the directions of the Dispute Resolution Panel (DRP), which upheld the proposed action of the A.O. 2. Non-Taxability of Income as 'Royalty': The A.O concluded that the income received by the Appellant from providing software solutions to Celltick India for onward distribution to third-party customers in India constituted 'royalty' under Section 9(1)(vi) of the I-T Act and Article 12 of the India-Israel Tax Treaty. The Appellant argued that there was no 'use' or 'right to use' of the 'copyright' in the software solutions provided, and thus the income should not be classified as 'royalty'. The Tribunal noted that the issue of characterizing the receipts as 'royalty' was not contested by the Appellant in the current appeal. 3. Dependent Agent Permanent Establishment (DAPE): The A.O held that Celltick India was the DAPE of the Appellant in India under Article 5 of the India-Israel Tax Treaty and taxed the income as 'business profits' under Article 7. The Appellant contended that the agreement between the Appellant and Celltick India was on a principal-to-principal basis, and thus Celltick India could not be treated as a DAPE. The Tribunal, however, focused on the alternative claim that once the 'arms length' principle was satisfied, no further income could be attributed to the Appellant in India, even if there was a PE. 4. Attribution of Income and Profits: The A.O attributed 50% of the gross revenues of the Appellant to the alleged DAPE in India and estimated the profits at 40% of the gross revenues. The Appellant argued that the Indian subsidiary was remunerated at an arm's length price, as evidenced by the APA for subsequent years. The Tribunal agreed with the Appellant, stating that the profit attributed to the Indian subsidiary during the year under consideration satisfied the 'arms length' principle. The Tribunal relied on its own decision in the Appellant's case for A.Y. 2012-13 and the APA for A.Y. 2015-16 to A.Y. 2019-20, concluding that no further income could be attributed to the Appellant in India. 5. Initiation of Penalty Proceedings: The A.O initiated penalty proceedings under Section 271(1)(c) on the grounds that the Appellant had concealed and furnished inaccurate particulars of its income. The Tribunal dismissed this ground as premature. Conclusion: The Tribunal allowed the appeal of the Appellant, directing the A.O to delete the addition of ?6,52,66,294/- made to the returned income. The grounds related to the characterization of receipts as 'royalty' and the existence of a DAPE were rendered academic and not adjudicated. The initiation of penalty proceedings was dismissed as premature. The order was pronounced in the open court on 11.06.2019.
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