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2022 (10) TMI 762 - AT - Income TaxIncome deemed to accrue or arise in India - attribution made to the alleged PE- existence of Dependent Agent Permanent Establishment (DAPE) - HELD THAT - When the AE has been remunerated at arm s length. We find that it is undisputed that this ground is without prejudice to the ground that the AE is not a DAPE as held in all the appeals. It has been brought to our notice that in the assessments made for Ariba Inc. for all the AYs in question either no transfer pricing adjustments was done or they were deleted by the TPO pursuant to the direction of ITAT in this regard. Hence considering the fact that no transfer pricing adjustment has been done/sustained in case of assessments of the AE, it is the assessee s plea that no further attribution is permissible on the touchstone of Hon ble Apex Court decision pronounced in the case of DIT vs. Morgan Stanley and Co. Inc. 2006 (2) TMI 77 - AUTHORITY FOR ADVANCE RULINGS Once a transfer pricing analysis has been undertaken in respect of the Indian AE, nothing further would be left to be attributed to it as the alleged PE of the assessee and that, accordingly, would automatically extinguish the need for attribution of any additional profits to the alleged PE. In all these cases, it has been submitted by the assessee that the transactions have been found to be at Arm's Length by the Transfer Pricing Officer in the Transfer pricing order of the AE or the adjustment stood deleted pursuant to appellate order. This is not disputed by the Revenue. We hold that it is undisputed that in the assessment of the AE, the transfer pricing adjustments do not survive. Hence, attribution of income to the alleged PE is not sustainable. Hence, we decide this ground in favour of the assessee. Whether receipt should be taxed as royalty within the meaning of Article 12(3)(b) of the India USA DTAA and also under Explanation 2(iva) to section 9(1)(vi)? - assessee s submission in this regard is that this payment was not received by the assessee for any use of commercial or scientific equipment, hence it cannot be in the nature of royalty under Article (12)(3)(b) of the DTAA and Explanation 2 (iva) of section 9(1)(vi) - HELD THAT - Once it is clear that at no point of time the control of equipment is exclusively granted to AE i.e. Ariba India or its clients, the treatment of the receipt as royalty is not tenable and ld. CIT(A) s observation that the grant of access through userid and password is giving control of the equipment is an erroneous proposition, which is not sustainable. It is absolutely absurd proposition granting access through userid and passwords for availing the facility would grant control over the equipments involved in the process. We sustain the assessee s plea that it cannot be said that the receipts of the assessee from Ariba India can come within the purview of royalty as defined under Article 12(3) of the DTAA and the assessee has been merely providing services of conducting online auctions to Ariba India and no exclusive right to use the equipment / process has been granted in favour of either Ariba India or its customers in India to qualify as royalty . In the case of CIT v. De Beers India Minerals (P.) Ltd. 2012 (5) TMI 191 - KARNATAKA HIGH COURT wherein it is observed that in order to satisfy the requirement of the make available clause , technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like; that the service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. Admittedly, this is not the case here. Hence, we agree with the ld. Counsel of the assessee that ld. CIT (A) has erred in not appreciating that no technical knowledge, know-how and the like were transferred by the assessee to Ariba India or its customers in India while rendering the online auction services. Hence, we agree that the services provided by the assessee cannot be characterized as FTS under the India-US DTAA. Another point which goes to support the case of the assessee is the assessee s submission that there is no base erosion in this case. It has been submitted that Ariba India has retained majority of the revenues earned from the clients (around 88% to 97% from AY 2004- 05 to AY 2011-12) and offered the same to tax in India in its income tax returns for each of these years, only a miniscule percentage of the revenues (around 3% to 12.50%) have been paid to Ariba Inc. This clearly shows that there has been no base erosion in terms of taxes to be paid in India by the relevant parties. Hence, we agree that there is no base erosion on account of non-taxability of the assessee. Notional income confirmed by the ld. CIT (A) - We note that Revenue has not preferred an appeal against such order of ld. CIT (A), hence ld. CIT (A) s order in this regard is final. Since the position of law on this point has been accepted by the Revenue in other assessment years, we agree that the notional income cannot be taxed in the hands of the assessee. Reliance has been placed on the decision of ITAT Pune Bench in the case of GKN Holdings Plc. 2014 (12) TMI 128 - ITAT PUNE for the proposition that unless an agreement is proved beyond doubt to be a colourable device, the Revenue cannot disregard such an agreement. In our considered opinion, it is duly applicable on the facts of the case and supports the case of the assessee. Appeals filed by the assessee stand partly allowed
Issues Involved:
1. Existence of Dependent Agent Permanent Establishment (DAPE) of the assessee. 2. Attribution of income to the alleged PE when the AE has been remunerated at arm's length. 3. Taxation of receipts as royalty under Articles 5(4) and 12(3)(b) of the India-USA Double Taxation Avoidance Agreement (DTAA). 4. Applicability of section 44D read with section 115A of the Income Tax Act, 1961. 5. Levy of interest under section 234B of the Act. Detailed Analysis: 1. Existence of Dependent Agent Permanent Establishment (DAPE): The assessee argued that Ariba India is not an agent of the assessee as it operates independently and does not act on behalf of the assessee. The CIT(A) erroneously concluded that Ariba India held itself out as an agent of the assessee to its clients. The assessee highlighted that the relationship between the assessee and Ariba India is on a principal-to-principal basis, as evidenced by the terms of their agreement. The assessee also referred to the Supreme Court decision in CIT vs. E-Funds 399 ITR 34 (SC), which held that a wholly-owned subsidiary does not constitute a PE by itself. 2. Attribution of Income to the Alleged PE: The assessee contended that since the transactions between the assessee and Ariba India were at arm's length, there should be no further attribution of income in India. The CIT(A) had noted that transfer pricing adjustments for Ariba India were either deleted or not made, supporting the assessee's claim. The assessee relied on the Supreme Court ruling in DIT vs. Morgan Stanley and Co. Inc., which held that no further attribution is required if the transactions are at arm's length. The tribunal agreed with the assessee, stating that no further attribution is permissible when transfer pricing adjustments do not survive. 3. Taxation of Receipts as Royalty: The assessee argued that the payments received were not for the use of commercial or scientific equipment and thus did not qualify as royalty under Article 12(3)(b) of the DTAA and Explanation 2(iva) to section 9(1)(vi) of the Act. The assessee was merely providing online auction services, which did not grant control over the equipment to Ariba India. The tribunal referred to the Delhi High Court decision in Asia Satellite Telecommunications Co. Ltd., which held that payments for services provided through equipment do not constitute royalty. The tribunal concluded that the receipts could not be considered royalty as the assessee did not grant any exclusive right to use the equipment. 4. Applicability of Section 44D Read with Section 115A: The assessee argued that the CIT(A) erred in applying these provisions, as the true intent of Article 7 of the DTAA is to tax the receipts as business income on a net basis. The tribunal did not specifically address this issue but resolved it implicitly by addressing the other grounds in favor of the assessee. 5. Levy of Interest under Section 234B: The assessee contended that the CIT(A) should have deleted the interest levied under section 234B. The tribunal did not specifically address this issue, but the resolution of the primary issues in favor of the assessee would likely impact the interest calculation. Conclusion: The tribunal allowed the appeals partly in favor of the assessee, holding that: - No further attribution of income is required when transactions are at arm's length. - The receipts from Ariba India do not qualify as royalty under the DTAA. - The issue of DAPE is now academic and not engaged. - The notional income cannot be taxed in the hands of the assessee. - The AO should consider the credit of taxes withheld and deposited on behalf of the assessee as per law.
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