2018 (8) TMI 1135 - AT - Income Tax

Existence of permanent establishment in India (PE) - DRP observed that in the absence of a permanent establishment the action of the AO proposing to attribute 32% of total receipts from supply of software as taxable business profits is not correct. - Held that - the issue is covered in favour of the assessee as decided by the Tribunal in 2013 (9) TMI 374 - ITAT MUMBAI - Decided in favor of assessee.

Summary

Issues Involved:
1. Permanent Establishment (PE) in India.
2. Attribution of business profits from software supply.
3. Taxability of income as royalty.
4. Levy of interest under section 234B.
5. Initiation of penalty proceedings under section 271(l)(c).

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The core issue was whether the assessee had a Permanent Establishment (PE) in India. The Dispute Resolution Panel (DRP) held that the assessee did not have a PE in India. The Tribunal upheld this decision, citing the absence of substantive business activities or personnel in India that could constitute a PE. The Tribunal referenced its previous order dated 06.09.2013, which concluded that the agreements entered into were on a principal-to-principal basis, and there was no evidence of the assessee’s personnel being deputed to India.

2. Attribution of Business Profits from Software Supply:
The Revenue argued that 32% of the total receipts from the supply of software should be attributed as taxable business profits in India. However, the Tribunal found that since the assessee did not have a PE in India, no business profits could be attributed. This decision was consistent with the Tribunal’s earlier findings that the agreements were independent and did not establish an agency PE or service PE.

3. Taxability of Income as Royalty:
The DRP and AO had classified the amounts received from the supply of software to Reliance Communications Limited as "royalty" under the Income Tax Act and Article 12 of the DTAA between India and the USA. The Tribunal, however, found that these payments did not qualify as royalty. It referenced its decision in the case of Reliance Communications Ltd., where it was held that the payments were for copyrighted articles and not for the use of copyright. The Tribunal emphasized that the software was an integral part of the wireless network equipment and had no independent value, and the customers did not have the right to commercially exploit the software.

4. Levy of Interest under Section 234B:
The assessee contested the levy of interest under section 234B. The Tribunal did not provide a detailed discussion on this issue in the judgment, but it can be inferred that since the primary issues were decided in favor of the assessee, the levy of interest under section 234B would not stand.

5. Initiation of Penalty Proceedings under Section 271(l)(c):
The assessee also challenged the initiation of penalty proceedings under section 271(l)(c). The Tribunal’s decision to rule in favor of the assessee on the primary issues likely negates the basis for penalty proceedings, although specific details on this point were not elaborated in the judgment.

Conclusion:
The Tribunal ruled in favor of the assessee on all counts, dismissing the Revenue’s appeal and allowing the assessee’s appeal. The payments received from the supply of software were not considered royalty, there was no PE in India, and hence no business profits could be attributed. Consequently, the related interest and penalty proceedings were also negated.