2020 (7) TMI 191 - AT - Income Tax

Business connection/PE in India - Revenue earned from supply of soft ware taxed as royalty - assessee has offered to tax only receipts on account of professional services in the tax return filed by it to be taxed @ 15% in terms of Article 12 of the DTAA between India and USA - HELD THAT - On finding party that there is no change in the factual matrix in Assessment Year under consideration as compared to earlier years, which has also been accepted by the lower authorities, respectfully following the findings of the co-ordinate bench, being upheld by ASPECT SOFTWARE INC. 2015 (5) TMI 726 - ITAT DELHI we are of the considered view that receipts would constitute business receipts and is to be assessed as such, subject to the assessee having business connection/PE in India. Installation and dependent agent/PE in India - HELD THAT - Tribunal has set aside the issue of dependent agent/PE, the ld. DR vehemently stated that the other inter-related issues relating to attribution of income and claim of remuneration to be at arms length need to be re-examined by the Assessing Officer after examining the issue relating to dependent agent/PE. We find force in this contention of the ld. DR. AO is directed to decide the issue relating to dependent agent/PE in line with the direction of the co-ordinate bench and thereafter should decide attribution of income and the issue relating to transactions being at arms length price. Grant of TDS credit - HELD THAT - AO is directed to give credit of TDS as per provisions of law.

Issues Involved:
1. Taxation of revenue earned from the supply of software as 'royalty.'
2. Existence of a Permanent Establishment (PE) in India.
3. Attribution of income and arm's length price.
4. Grant of TDS credit.
5. Initiation of penalty proceedings.

Detailed Analysis:

1. Taxation of Revenue Earned from Supply of Software as 'Royalty':

The primary issue was whether the revenue earned from the supply of software should be taxed as 'royalty.' The assessee, engaged in various activities including hardware sales, software licensing, and professional services, had only offered receipts from professional services for taxation. The Assessing Officer, following past assessment orders, treated the revenue from software supply as 'royalty.' This issue had previously been contested up to the Hon'ble High Court of Delhi, which ruled in favor of the assessee, stating that revenue from software supply is not taxable as royalty under the treaty. The Tribunal reiterated that the consideration received for supplying software along with a license to end-users is not 'royalty' under Article 12 of the Tax Treaty. The payment is for a copyrighted article and represents the purchase price of an article, hence constituting business receipts to be assessed as business income, subject to the assessee having a business connection/PE in India.

2. Existence of a Permanent Establishment (PE) in India:

The second issue revolved around whether the assessee had a fixed PE, installation PE, or dependent agent PE in India. The Tribunal referred to a previous decision that had set aside the matter for verification. For Fixed PE, it was noted that neither party conclusively demonstrated the presence or absence of a fixed place of business in India. For Installation PE, the Tribunal found no basis for such a PE as the assessee did not carry on business through a building site or construction. Regarding Dependent Agent PE, the Tribunal noted that the assessee had not provided sufficient information to substantiate its claims, and thus, the matter was remitted to the Assessing Officer for fresh consideration.

3. Attribution of Income and Arm's Length Price:

The Tribunal acknowledged the interrelation of the issues concerning the existence of a dependent agent PE, attribution of income, and transactions being at arm's length price. It directed the Assessing Officer to re-examine these issues in line with the Tribunal's directions on the dependent agent PE.

4. Grant of TDS Credit:

The Tribunal directed the Assessing Officer to grant TDS credit as per the provisions of the law.

5. Initiation of Penalty Proceedings:

The issue of initiation of penalty proceedings was deemed premature and dismissed accordingly.

Conclusion:

The Tribunal allowed the appeals in part for statistical purposes, directing the Assessing Officer to re-examine specific issues and grant TDS credit as per law. The order was pronounced in the open court on 25.06.2020.

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