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2024 (11) TMI 364 - AT - Income TaxTaxability of income earned from sale of software license as business income - Income deemed to accrue or arise in India - assessee is a non-resident corporate entity incorporated in Austria - AO proceeded to compute the profit in relation to sale of software licenses by estimating at 15% and brought such profit to tax by applying the rate of 40% in both the assessment years under dispute - primary allegation of the AO is to the effect that the assessee is not the economic owner of the IPs as majority of them have been registered outside Austria and mostly in USA and further the assessee has not incurred any expenditure for developing such IPs HELD THAT - Assessee has brought to our notice the financial statements of the assessee, which reveal that the assessee has earned substantial revenue from its operations in different geographical jurisdictions, including Austria. The assessee also files its tax returns regularly in Austria and has been assessed to tax by the Austrian Revenue Authorities. Copies of the assessment orders clearly establish the aforesaid factual position. The financial statement further reveal that the assessee has incurred expenditure in Research and Development (R D) segment towards employee cost and other R D. Receipts from sale of software licenses in India formed a very small part of the total revenue earned by the assessee from its operations. Therefore, the allegation of the department that the assessee has entered into treaty shopping arrangement to escape taxation, is without any credible reasoning and merely based on conjectures and surmises rather than corroborative evidence. Allegation of the AO that the assessee has been incorporated in Austria as part of treaty shopping arrangement to avoid taxation in USA , in our view, is totally irrelevant and should not have bothered the Assessing Officer. In any case of the matter, there cannot be any manner of doubt that the Revenue earned from sale of software licenses could not have been taxed as royalty income in India in view of the ratio laid down in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT and various other judicial precedents. Therefore, it is immaterial whether the assessee is located in Austria or USA. Even, assuming that in place of assessee, the entity earning revenue from sale of software licenses would have been located in USA, still, the revenue earned would not have been taxable in India as royalty income, in view of the law laid down by the Hon ble Supreme Court. Therefore, the receipts in dispute would not have been taxable in India, irrespective of the jurisdiction where the entity earning Revenue from sale of software is located. Whether the assessee has been set up in Austria to avoid tax liability in USA is a matter which should concern the tax authorities in USA and not the Assessing Officer in India. There is no mandate on the AO in India to take up cudgel on behalf of the USA tax authorities. There is nothing on record to suggest that the USA tax authorities or tax authorities of other overseas jurisdictions have raised any dispute regarding the genuineness of assessee company and the status of its tax residency. When other tax jurisdictions including USA have not raised any doubt regarding the tax residency of the assessee, in our view, the AO in India cannot question the tax residency of the assessee, that too, in absence of any corroborative evidence to establish any fraud or illegal activity of the assessee. Thus, Assessing Officer could not have doubted the tax residency and the genuineness of the assessee company in the teeth of the TRC issued by the Austrian tax authorities. Insofar as reference to BEPS Action Plan by the Assessing Officer is concerned, as held by the coordinate Bench in case of Additional Director of Income Tax Vs. Bakers Hughes (Singapore) Pte. Ltd. 2015 (5) TMI 582 - ITAT DELHI it cannot have a role in judicial decision-making process. That too, in absence of any material brought on record by the Assessing Officer to conclusively establish that the assessee has no commercial or economic substance. Merely because, majority of the IPs are registered in different jurisdictions, that by itself would not divest the ownership rights of the assessee over the IPs. No evidence has been brought on record by the Departmental authorities to demonstrate that revenue earned by the assessee has been repatriated to either the parent company or any other related party. Thus, we hold that the assessee is entitled to the benefits under India Austria DTAA. Once the receipts from sale of software licenses are held as business income, they cannot be taxed in India in absence of PE. Accordingly, we direct the Assessing Officer to delete the additions. In view of our decision above, we refrain from examining as to whether the receipts are taxable under section 9(1)(i) through business connection. Assessee appeal allowed.
Issues Involved:
1. Validity of assessment orders issued by the National Faceless Assessment Centre under section 143(2) of the Income-tax Act, 1961. 2. Taxability of income from the sale of software licenses as business income under the India-Austria Double Taxation Avoidance Agreement (DTAA). 3. Entitlement of the assessee to treaty benefits under the India-Austria DTAA. 4. Allegations of treaty shopping and lack of commercial substance by the assessee. Issue-wise Detailed Analysis: 1. Validity of Assessment Orders: The assessee challenged the validity of the assessment orders issued by the National Faceless Assessment Centre, arguing that the notice under section 143(2) of the Act was invalid due to jurisdictional issues as per the CBDT notification. The assessee contended that the assessment proceedings for a foreign company should not fall under the faceless assessment scheme. However, the tribunal found that the issue is covered against the assessee by the decision of the Karnataka High Court in Adarsh Developers Vs. DCIT. Therefore, the tribunal upheld the validity of the assessment orders, dismissing the assessee's ground on this issue. 2. Taxability of Income from Sale of Software Licenses: The core issue was whether the income from the sale of software licenses should be taxed as business income in India. The assessee, a non-resident corporate entity incorporated in Austria, argued that the income should be treated as royalty income under the India-Austria DTAA. However, the Assessing Officer contended that the income should be treated as business income due to the lack of economic ownership of the IPs by the assessee. The tribunal found that the assessee had been offering the income as royalty income under the treaty provisions in previous years. However, following the Supreme Court's decision in M/s. Engineering Analysis Centre of Excellence Pvt. Ltd., the assessee claimed exemption from taxation for the income from the sale of software licenses. The tribunal concluded that the income from the sale of software licenses should be treated as business income, but it cannot be taxed in India in the absence of a Permanent Establishment (PE). 3. Entitlement to Treaty Benefits: The assessee claimed entitlement to treaty benefits under the India-Austria DTAA, supported by a valid Tax Residency Certificate (TRC) issued by the Austrian Revenue Authorities. The tribunal emphasized the sanctity of the TRC, noting that it cannot be doubted unless there is strong evidence of fraud or illegal activity. The tribunal referred to several judicial precedents, including decisions by the Bombay and Delhi High Courts, which upheld the conclusivity of the TRC. The tribunal found no evidence of fraud or illegal activity by the assessee and concluded that the assessee is entitled to the treaty benefits under the India-Austria DTAA. 4. Allegations of Treaty Shopping and Lack of Commercial Substance: The Assessing Officer alleged that the assessee was involved in treaty shopping and lacked commercial substance, claiming that the assessee was incorporated in Austria to avoid taxation in the USA. The tribunal dismissed these allegations, finding them contrary to the facts on record. The tribunal noted that the assessee had been operating in Austria since 2007, filing regular tax returns, and being assessed to tax by the Austrian Revenue Authorities. The tribunal also highlighted that the revenue earned from the sale of software licenses in India formed a small part of the assessee's total revenue. The tribunal concluded that the allegations of treaty shopping were based on conjectures and lacked corroborative evidence. Conclusion: The tribunal allowed the appeals, directing the Assessing Officer to delete the additions made on the basis of the disputed issues. The tribunal upheld the assessee's entitlement to treaty benefits under the India-Austria DTAA and found that the income from the sale of software licenses cannot be taxed in India in the absence of a PE. The tribunal's decision was pronounced in the open court on 6th November 2024.
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