2021 (5) TMI 857 - AT - Income Tax

Income taxable in India - Income accrued or deemed to accrues/arise in India - taxability under the DAPE - Permanent Establishment (PE) - 'Royalties' on substantive basis - Addition both under the Income-tax Act, 1961 as well as the Double Taxation Avoidance Agreement entered into between India and USA - computing the taxable income of alleged DAPE - HELD THAT - The issue in appeal is covered in favour of the assessee by a co-ordinate bench decision in the case of ADIT vs Asia Today Ltd 2021 (2) TMI 95 - ITAT MUMBAI inasmuch as the very basis of taxability in the impugned appeal is existence of the dependent agency permanent establishment DAPE, in short but then, as held in the case of Asia Today (supra), the existence of a DAPE is wholly tax neutral As no reasons to take any other view of the matter than the view so taken by the co-ordinate bench. In this view of the matter, and having regard to the undisputed position vide TPO s order that the 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

Issues Involved:
1. Treatment of sale of Novell Software Products as 'Royalties' under the Income Tax Act, 1961 and the India-USA DTAA.
2. Classification of Novell Software Development India Private Limited (NSDIPL) as a Dependent Agency Permanent Establishment (DAPE).
3. Taxation of revenues from supply of Novell Software Products to NSDIPL as Business Income attributable to DAPE.
4. Arm's length nature of the transaction of sale of software.
5. Attribution of revenues from direct sales to third parties to the alleged DAPE.
6. Double taxation of revenues from the sale of Novell Software Products.
7. Levy of interest under Section 234A despite timely filing of the Return of Income.
8. Levy of interest under Section 234B without considering withholding tax under Section 195.
9. Levy of surcharge and education cess at incorrect rates.

Detailed Analysis:

1. Treatment of Sale of Novell Software Products as 'Royalties':
The appellant challenged the Assessing Officer's (AO) decision to treat the sale of Novell Software Products worth ?9,04,66,939 as 'Royalties' under both the Income Tax Act, 1961, and the India-USA DTAA. The appellant argued that the receipts should be considered business income and not taxable in India due to the absence of a Permanent Establishment (PE) in India. The tribunal referred to the case of ADIT vs Asia Today Ltd, which established that the existence of a DAPE is tax-neutral if the agent is paid an arm's length remuneration. Thus, the tribunal found no basis for treating the sales as royalties.

2. Classification of NSDIPL as a Dependent Agency Permanent Establishment (DAPE):
The AO's classification of NSDIPL as a DAPE was contested by the appellant. The tribunal noted that the existence of a DAPE is tax-neutral if the agent is remunerated at arm's length. The tribunal relied on the case of Asia Today Ltd, where it was held that the existence of a DAPE does not trigger additional tax liability if the agent is adequately compensated. Therefore, the tribunal concluded that the classification of NSDIPL as a DAPE was irrelevant for tax purposes.

3. Taxation of Revenues from Supply of Novell Software Products to NSDIPL:
The AO taxed the revenues from the supply of Novell Software Products to NSDIPL on a protective basis and attributed 100% of the gross revenue to the alleged DAPE. The tribunal reiterated that the existence of a DAPE is tax-neutral if the agent is paid an arm's length remuneration. Hence, the tribunal found no basis for taxing the revenues from the supply of software products to NSDIPL.

4. Arm's Length Nature of the Transaction of Sale of Software:
The appellant argued that the AO ignored the transfer pricing documentation, which was examined by the Transfer Pricing Authorities and confirmed that the transactions were at arm's length. The tribunal upheld this argument, noting that the transactions were indeed at arm's length, as confirmed by the TPO’s order dated 31.10.2017.

5. Attribution of Revenues from Direct Sales to Third Parties to the Alleged DAPE:
The AO attributed revenues from direct sales to third parties to the alleged DAPE and taxed it as business income. The tribunal found this attribution to be unnecessary, given the tax-neutrality of the DAPE when arm's length remuneration is paid to the agent.

6. Double Taxation of Revenues from the Sale of Novell Software Products:
The appellant contended that the AO's approach resulted in double taxation—once as royalty and again by attributing the entire sales revenue to the alleged DAPE. The tribunal agreed with the appellant, stating that such double taxation was unwarranted.

7. Levy of Interest under Section 234A:
The AO levied interest under Section 234A despite the timely filing of the Return of Income. The tribunal did not find merit in this levy as the return was filed on time.

8. Levy of Interest under Section 234B:
The AO levied interest under Section 234B without considering the withholding tax under Section 195. The tribunal noted that the income from Novell Software Products was not taxable under the DTAA, and thus, the appellant was not liable to pay advance tax.

9. Levy of Surcharge and Education Cess at Incorrect Rates:
The AO levied surcharge and education cess at incorrect rates. The tribunal did not find justification for this levy and noted that the correct rates should be applied.

Conclusion:
The tribunal upheld the appellant's arguments, emphasizing that the existence of a DAPE is tax-neutral if the agent is paid an arm's length remuneration. Consequently, the tribunal found no basis for the additional tax liabilities imposed by the AO and allowed the appeal in favor of the appellant. All other issues raised in the appeal were rendered academic and infructuous.

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