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2021 (7) TMI 91 - AT - Income TaxAttribution of profit - attribution rate of 35% has been applied - AR submitted that the activities relatable to India and rate of attribution to be applied in relation to such activities undertaken has been adjudicated - HELD THAT - Considering that there is no material change in facts and the legal issue on attribution of profit is already sub-judice in Assessee's appeal before High Court, whilst respectfully following the decision of co-ordinate Bench in earlier years we dispose off the grounds raised in Assessee's appeal for AY 2016-17 and AY 2017-18. As been brought to our attention that in AY 2017-18, the Assessing Officer has taken the operating profitability instead of the net-operating profitability as per published accounts. In view of the decision as rendered in the preceding years, we direct the Assessing Officer to take the net-operating profitability as per published accounts whilst calculating the attribution. Taxability of income from supply of software as Royalty - HELD THAT - Respectfully following the decision of the co-ordinate Bench as approved by the jurisdictional High Court 2017 (8) TMI 1638 - DELHI HIGH COURT we rule in favour of the Assessee. We also agree with the alternate argument of the Assessee that since the sale of software is inextricably linked with sale of software than the provision of Article 12(5) of the India-China DTAA would be applicable and such income from supply of software could be taxed only as business profits in terms of Article 7 of the India-China DTAA.
Issues Involved:
1. Condonation of delay in filing the appeal for AY 2016-17. 2. Existence of Permanent Establishment (PE) in India. 3. Attribution of profit to the PE. 4. Taxability of income from the supply of software as royalty. Detailed Analysis: 1. Condonation of Delay: The Assessee filed an appeal for AY 2016-17 with a delay of 274 days. The delay was attributed to visa issues, inadvertent omissions by an authorized signatory, and the COVID-19 pandemic. The Tribunal condoned the delay, emphasizing that substantial justice should prevail over technical considerations. The Tribunal referenced the Supreme Court's liberal approach in condoning delays, as seen in the case of "Collector, Land Acquisition, Anantnag v. Mst. Katiji." 2. Existence of Permanent Establishment (PE): The Assessee initially contested the existence of a PE in India but later chose not to press this issue to avoid prolonged litigation. The Tribunal noted that similar concessions were made in previous years (AY 2004-05 to AY 2015-16) and declined to dwell on this issue, thereby disposing of the relevant grounds accordingly. 3. Attribution of Profit: The Tribunal discussed the attribution of profit to the PE in detail. The Assessee argued that the activities in India were preparatory and auxiliary, and thus, no income should be attributed. Alternatively, the Assessee contended that the attribution rate should be 20% instead of 35%. The Tribunal followed its previous decisions, which attributed 35% of net global profits to the PE in India. The Tribunal directed the Assessing Officer to use "net-operating profitability" as per published accounts for AY 2017-18, aligning with the method used in earlier years. 4. Taxability of Income from Supply of Software as Royalty: The Assessee contended that income from the supply of software should not be treated as royalty. The Tribunal referred to its previous judgments and the Delhi High Court's decision, which ruled in favor of the Assessee, stating that such income should be taxed as business profits under Article 7 of the India-China DTAA. The Tribunal also noted the Supreme Court's approval of this view in "Engineering Analysis Centre of Excellence Private Limited v. CIT." Conclusion: The appeals for AY 2016-17 and AY 2017-18 were partly allowed, with the Tribunal ruling in favor of the Assessee on the attribution of profit and taxability of software income issues. The Department's appeal and the Assessee's cross-objection for AY 2016-17 were dismissed. The stay application was dismissed as infructuous.
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