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2024 (11) TMI 955 - AT - Income TaxIncome deemed to accrue or arise in India - assessee having business connection in India and the LO was treated as PE of the assessee in India - onus to prove - assessee is a US based company engaged in the business of supplying goods from outside India. The assessee is a wholly owned subsidiary of a General Electric Company and made offshore sale of goods and offshore sale of software and related support services to its various customers in India - as argued assessee has no PE or DAPE in India - HELD THAT - Relevant documents were placed before the AO by the assessee to substantiate its claim of having no LO in India, the onus shifts on the Revenue to prove otherwise. The AO has made no effort to examine claim of the assessee and to check the veracity of documents furnished during the assessment proceedings. The Tribunal sought remand report from the AO in September 2023. Six weeks time was given to the AO to furnish the report. AO furnished the report in December 2023, the said report is stated to be based on the information provided by the assessee. AO had also expressed his helplessness in providing the said report without complete verification due to paucity of time. We do not agree with the Revenue/AO on the excuse of time limitation in furnishing the report. This appeal is taken up for hearing after almost 10 months from the date of furnishing report. If, the AO had something more to add to the report dated 19.12.2023 or had any contrary material to rebut the contentions of the assessee, the AO could have very well furnished the same by way of supplementary report. The AO has not placed on record any material whatsoever to rebut contentions of the assessee with regard to closure of LO operations and no expatriate employees in India during the relevant period. The closure of LO operations in India result in paradigm shift in taxability and attribution of profits in India. With the closure of LO operations in India, the assessee will have no PE or DAPE in India. Revenue has not placed on record any material to show that even after closure of LO operations, the assessee still has business connection that can be termed as PE or DAPE in India. In light of above, we find merit in the case of assessee. We have no hesitation in holding that the assessee has no PE in India during the impugned AY, hence, question of attribution of profits to PE in India does not arise. In the result, ground no. 1 to 11 of appeal are allowed. Holding receipts from supply of software in India as Royalty - We find that in the assessment order the AO has treated the receipts from sale of software as royalty under the provisions of section 9(1)(vii). The assessee raised objections before the DRP, the DRP directed the Assessing Officer to verify the records and, if, software supplied by the assessee is found to be embedded in hardware itself, the addition on account of royalty income was directed to be deleted. We find that the AO without complying with the directions of the DRP reiterated the findings given in draft assessment order and treated the receipts from software related support as Royalty. This issue was also considered by the coordinate Bench in assessee s own case in the preceding assessment years i.e. AY 2012-13, 2014-15 2015-16 2022 (3) TMI 1209 - ITAT DELHI as held amounts paid by resident Indian end-users/distributors to non-resident computer manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the pay of royalty for the use of copyright in the computer software, and that same does not give rise to any income taxable in India, as a result of the persons referred to in section 195 were not liable to deduct any TDS u/s 195 - Decided in favour of assessee.
Issues Involved:
1. Existence of Permanent Establishment (PE) in India. 2. Attribution of profits to the PE. 3. Classification of receipts from software supply as 'Royalty'. 4. Levy of interest under sections 234A and 234B of the Income Tax Act. 5. Initiation of penalty proceedings under section 270A(9)(a). Issue-wise Detailed Analysis: 1. Existence of Permanent Establishment (PE) in India: The primary issue was whether the assessee had a Permanent Establishment (PE) in India for the assessment years 2017-18 to 2020-21. The assessee, a US-based company, argued that it did not have a PE in India as it had closed its Liaison Office (LO) operations in 2012 and had no expatriate employees in India during the relevant period. The Tribunal noted that the Assessing Officer (AO) had relied on past assessments from 2002-03 to 2006-07 without adequately considering the changed circumstances. The Tribunal found that the AO failed to verify the documents submitted by the assessee, which substantiated the closure of the LO and absence of expatriates. The Tribunal concluded that the assessee did not have a PE in India for the years in question, as there was no business activity through the LO and no expatriate employees present. 2. Attribution of Profits to the PE: Since the Tribunal concluded that the assessee did not have a PE in India, the question of attributing profits to a PE did not arise. The Tribunal allowed the assessee's appeal on this ground, as the absence of a PE meant that there was no basis for attributing profits to India. 3. Classification of Receipts from Software Supply as 'Royalty': The assessee contested the AO's classification of receipts from software supply as 'Royalty'. The Tribunal noted that similar issues had been decided in favor of the assessee in previous years, following the Supreme Court's decision in the case of Engineering Analysis Center of Excellence Pvt Ltd., which held that payments for software do not constitute 'Royalty'. The Tribunal directed the AO to delete the addition related to software receipts being treated as royalty, consistent with the earlier decision. 4. Levy of Interest under Sections 234A and 234B: The assessee challenged the levy of interest under sections 234A and 234B as consequential. The Tribunal held that charging of interest under these sections is mandatory and consequential, thus dismissing the grounds related to interest levy. 5. Initiation of Penalty Proceedings under Section 270A(9)(a): The assessee also challenged the initiation of penalty proceedings under section 270A(9)(a). The Tribunal found this challenge to be premature, as penalty proceedings are separate and follow the assessment order. Consequently, this ground was dismissed. Conclusion: The Tribunal allowed the appeals of the assessee for the assessment years 2017-18 to 2020-21 in part. It concluded that the assessee did not have a PE in India, thus negating the attribution of profits to a PE. The Tribunal also ruled in favor of the assessee regarding the classification of software receipts, directing the deletion of additions made as 'Royalty'. The grounds related to interest levy were dismissed as mandatory, and the challenge to penalty proceedings was deemed premature. The findings for the lead case (AY 2017-18) were applied mutatis mutandis to the subsequent assessment years.
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