2018 (11) TMI 783 - AT - Income Tax

Addition for payment of supply of software - nature of Royalty as per Article 12 of the India-Israel DTAA - taxability in India - PE in India - Held that - Referring to assessee s own case, we hold that TTI India cannot be treated as assessee s dependent agent PE in India, hence, the amount is not taxable at the hands of the assessee. The grounds are allowed.

Summary

Issues Involved:
1. Indian subsidiary considered as Permanent Establishment (PE) of the Appellant.
2. Reimbursement of expenses considered as Fees for Technical Services (FTS) taxable as Business Profits.

Issue-wise Detailed Analysis:

I. Indian subsidiary considered as Permanent Establishment (PE) of the Appellant

1.1 The appellant contended that the learned CIT(A) erred in holding that TTI Team Telecom Software Pvt. Ltd. (TTI India) is a Dependent Agent PE of the appellant company in India, assessing an amount of INR 39,84,177 as business income without satisfying the conditions prescribed under Article 5(5) of the India-Israel Double Taxation Avoidance Agreement (DTAA). The Tribunal observed that similar issues were decided in favor of the assessee in previous assessment years (2006-07, 2008-09, 2009-10, and 2010-11), where it was held that the amount received by the assessee on account of the supply of software was not in the nature of Royalty as per Article 12 of the India-Israel DTAA and was not taxable in India.

1.2 The appellant argued that TTI India independently entered into an agreement with Reliance Communication Limited and should not be considered a representative of the appellant in India. The Tribunal noted that in previous years, the addition for payment of the supply of software was deleted by the CIT(A), holding that the amount received was not in the nature of Royalty and not taxable in India.

1.3 The appellant contended that the learned CIT(A) wrongly interpreted the facts and clauses of agreements. The Tribunal reiterated that the facts and circumstances remained unchanged from previous years, and the decision of the Coordinate Bench in favor of the assessee should be followed.

1.4 Without prejudice, the appellant argued that even if the income earned is taxable as Business Profits, the executive and general administrative expenses incurred in earning this income should be allowed as a deduction. The Tribunal did not find it necessary to discuss this ground as Ground No. 1.1 was allowed.

1.5 Without prejudice, the appellant contended that the learned CIT(A) erred in not allowing the deduction of salary expenses amounting to INR 39,84,177 from the business profits as per the provisions of Article 7 read with Article 5 of DTAA. This ground was also deemed academic as Ground No. 1.1 was allowed.

II. Reimbursement of expenses considered as Fees for Technical Services (FTS) taxable as Business Profits

2.1 The appellant argued that the learned CIT(A) erred in holding reimbursement of expenses as Fees for Technical Services (FTS) in cases where TTI India is not considered a PE of the appellant. The Tribunal noted that in previous assessment years (2006-07, 2008-09, and 2012-13), it was held that TTI India could not be treated as the assessee’s dependent agent PE in India.

2.2 Without prejudice, the appellant contended that even if the reimbursements are treated as FTS under the Income Tax Act, 1961, they cannot be treated as FTS within the meaning of Article 13 of the DTAA read with the Protocol to the DTAA and Article 12 of the India-Canada DTAA, as the services neither make available technical knowledge, experience, skill, etc., nor consist of the development and transfer of a technical plan or design. The Tribunal followed the consistent view taken in previous years that TTI India cannot be treated as the assessee’s dependent agent PE in India.

2.3 The appellant argued that the learned CIT(A) disregarded the order of the Honorable Income Tax Appellate Tribunal in the appellant’s own case for AY 2006-07 and AY 2007-08. The Tribunal reiterated that the consistent view taken in previous assessment years was that the reimbursement of expenses could not be considered as FTS and was not taxable in India.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the income earned by the assessee was not taxable in India as it was not in the nature of Royalty as per Article 12 of the India-Israel DTAA and that TTI India could not be treated as the assessee’s dependent agent PE in India. Consequently, the reimbursement of expenses was also not taxable as FTS. The Tribunal followed the consistent view taken in the assessee’s own case in previous assessment years.