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2022 (8) TMI 889 - AT - Income TaxIncome accrued in India - PE in India - attributing profits to the P.E - amount of income which can be attributed to the P.E and which is taxable in the hands of the assessee - revenue determined the assessee as being a Dependent Agent PE (DAPE) - assessee emphatically denies that the Appellant has a P.E. in India. - HELD THAT - On a plain reading of Article 7(1) of the DTAA, the question of attributing profits to the P.E. arises only if the foreign enterprise is making a profit. This is the condition precedent. If it is making a loss then no question arises at all of attributing any profit to the P.E., which would be taxable in India. AO has taken gross profit margins of the Appellant Company for 2009 and 2010 as per its audited accounts instead of the net profit margins. The gross profits margins of the Appellant Company for 2009 and 2010 were positive, and that was how the A.O. could attribute profits to the P.E. In so adopting the gross profit margins of the Appellant Company, the A.O. has acted in a manner which is directly contrary to Article 7(1) of the DTAA and also contrary to the said Special Bench Judgment. It is the Net Profits margins which are to be considered as for attribution as per the DTAA. Computation made by the A.O. in his assessment order is incorrect as the AO has not allowed the payments made by the Appellant to NSN India for the services rendered by NSN India as a deduction from the profit attributable to the alleged PE. If the said payments are allowed as a deduction from the gross profit figures taken by the A.O., then again the resultant figure would be losses. Consequently, even if the method of attribution adopted by the A.O. is considered to be correct, in any event, there would be no profit/income attributable to the PE. Consequently, even if the Appellant has a P.E. in India, no profit or income can in law at all be attributed to the P.E. which would be taxable in India. Hence, we hold that the adjudication on issue of PE would be academic in nature. R D centre FPPE - The issue of Global Development Centres not being a fixed place PE would also be an academic discussion owing to nonavailability of the attributable profits. Further, the Hon ble Jurisdictional High Court in the case of Adobe Systems Incorporated 2016 (5) TMI 728 - DELHI HIGH COURT and the Hon ble Supreme Court in the case of ADIT vs. E-Funds IT Solution Inc. 2017 (10) TMI 1011 - SUPREME COURT held that R D centres cannot give rise to any PE. Software supply Royalty - This issue is covered in favour of the Appellant by the Judgment of the Delhi High Court in the case of Ericssion AB 2011 (12) TMI 91 - DELHI HIGH COURT .The Supreme Court of India in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT settled the long-running contentious issue over how payments made by Indian customers to non-resident suppliers for the use or resale of computer software should be characterised, providing much-needed tax certainty on the issue.Thus Software sales cannot give raise to Royalty income taxable in India in the case of the assessee before us. Appeal of assessee allowed.
Issues Involved:
1. Permanent Establishment (P.E.) in India. 2. Attribution of income to the P.E. 3. Software supply and its classification as royalty. Detailed Analysis: Permanent Establishment (P.E.) in India: The core issue is whether the assessee has a Permanent Establishment (P.E.) in India. The revenue determined the assessee as being a Dependent Agent PE (DAPE) based on several observations: - The Indian AE was involved in various activities such as market survey, marketing promotion, after-sale services, and warranty services, creating mutual goodwill and dependency. - The sale orders were secured by NSN Oy through the efforts of the Indian AE. - Instances of secondment of employees and visits by foreign expats were noted. - The engagement of the two companies was end-to-end, including pre-bid discussions, bid discussions, conclusion of contracts, and installation & commissioning of equipment. The appellant argued that for the assessment year 2010-11, securing orders was not a condition for creating DAPE under the India-Finland DTAA. The only condition was whether the agent had the authority to conclude contracts. The AO concluded that the Indian AE was playing a significant role in bid negotiations and capturing technical requirements, thus constituting a DAPE. Attribution of Income to the P.E.: The AO attributed profits to the P.E. by invoking Rule 10 of the Income Tax Act, considering the global accounts of the assessee. The AO determined a gross profit margin of 106.48% on R&D expenses, attributing a net profit of Rs. 344,893,214 to the P.E. The assessee contended that even if a P.E. existed, no profit could be attributed as the global net profit was a loss. The Special Bench Judgment in the case of Nokia Corporation was cited, which held that the global net profit margins should be applied for determining the quantum of income attributable to the P.E. Since the appellant had global net losses, no profit or income could be attributed to the P.E. The AO's computation was incorrect as it did not allow deductions for payments made to NSN India for services rendered. If these payments were deducted, the resultant figure would show losses, and no profit would be attributable to the P.E. Software Supply and Its Classification as Royalty: The AO classified the amount charged for software as "Royalty" taxable in India. This issue was covered by the Delhi High Court in the case of Ericsson AB and the Supreme Court in Engineering Analysis Centre of Excellence Private Limited, which held that payments for the resale/use of computer software do not constitute royalty and are not taxable in India. The Supreme Court clarified that there is no obligation to deduct tax at source for such payments as they do not create any interest or right amounting to the use of copyright. Consequently, the software sales in the case of the assessee do not give rise to royalty income taxable in India. Conclusion: The Tribunal held that: 1. The issue of P.E. was academic as no profit could be attributed to the P.E. due to global net losses. 2. The software sales did not constitute royalty income taxable in India. 3. All appeals of the assessee were allowed.
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