2024 (2) TMI 1327 - AT - Income Tax

Accrual of income in India - Fixed place Permanent Establishment ( PE ) for business in India, to carry on the business of sale of software products - HELD THAT - The issues involved have been squarely covered by the order of the coordinate bench 2023 (4) TMI 1303 - ITAT DELHI wherein as find merit into the contention of the assessee that the Assessing Authority was not justified in making addition in the hands of the assessee when in the case of alleged PE of the assessee, the transactions have been treated to be arm s length price. Furthermore, the assessee has pointed out that while making addition, the AO has also included the transaction related to hardware whereas allegation of PE is related to software. In the light of the binding precedents, we are of the considered view that the authorities below erred in making the impugned additions. We therefore, direct the AO to delete the same. Decided in favour of assessee.

Issues Involved:
1. Adjustment to returned income.
2. Incorrect appreciation of facts and application of law.
3. Existence of Fixed Place Permanent Establishment (PE) in India.
4. Existence of Agency PE in India.
5. Burden of proof for PE existence.
6. Attribution of income to alleged PE.
7. Arbitrary profit attribution to PE.
8. Inclusion of hardware sales in PE income.
9. Calculation of business income from international transactions.
10. Attribution of business income to PE.
11. Arithmetical error in interest computation.
12. Incorrect interest calculation period.
13. Erroneous tax refund consideration.
14. Initiation of penalty proceedings.

Summary:

1. Adjustment to Returned Income:
The assessee contested the adjustment of INR 48,20,43,605 to the returned income, resulting in a total assessed income of INR 77,69,81,839.

2. Incorrect Appreciation of Facts and Application of Law:
The assessee argued that the order was based on incorrect appreciation of facts and wrong interpretation of law, making it legally untenable.

3. Existence of Fixed Place Permanent Establishment (PE) in India:
The assessee challenged the allegation of having a Fixed Place PE in India for software sales, claiming no basis was provided for this assertion. The authorities failed to indicate why the assessee's contentions were incorrect and relied on unsubstantiated presumptions.

4. Existence of Agency PE in India:
The assessee disputed the claim that NCR India acted as an agent, creating an Agency PE in India. The authorities did not provide any factual foundation or evidence to support this conclusion.

5. Burden of Proof for PE Existence:
The authorities were criticized for not discharging the burden of proof while arbitrarily holding that the assessee had a place of business in India. Reliance on previous years' directions without considering the business model was deemed erroneous.

6. Attribution of Income to Alleged PE:
The assessee argued that income attribution to the alleged PE was speculative and lacked a valid basis. Profits from Indian activities were already taxed at arm's length, negating further attribution.

7. Arbitrary Profit Attribution to PE:
The authorities were faulted for arbitrarily attributing 70% of business income to the alleged PE, without following the authorized OECD approach.

8. Inclusion of Hardware Sales in PE Income:
The inclusion of hardware sales consideration in PE income attribution was contested, as the PE allegation pertained only to software distribution.

9. Calculation of Business Income from International Transactions:
The authorities were criticized for assuming 35% of gross international transactions as business income accruing in India without any basis.

10. Attribution of Business Income to PE:
The arbitrary attribution of 70% of business income to the alleged PE was challenged, arguing substantial sales and marketing activities were not conducted in India.

11. Arithmetical Error in Interest Computation:
An arithmetical error was identified in the computation of interest under Sections 234A and 234B, totaling INR 3,28,86,212 instead of INR 2,94,94,369.

12. Incorrect Interest Calculation Period:
Interest under Section 234A was calculated for four months instead of three, up to the return filing date.

13. Erroneous Tax Refund Consideration:
The authorities erroneously considered INR 57,30,832 as a refund issued, which pertained to pending tax deducted at source on interest.

14. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under Section 270A was contested as premature.

Judgment:
The Tribunal found merit in the assessee's contentions, particularly regarding the lack of evidence for PE existence and arbitrary income attribution. The authorities' reliance on previous years' directions without considering the specific business model was criticized. The Tribunal directed the deletion of the impugned additions and allowed the assessee's appeal, applying the same reasoning to the subsequent assessment year. The appeal was partly allowed, and the initiation of penalty proceedings was deemed premature.

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