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TMI Blog2017 (7) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, if they are found in order. Interest chargeable u/s 234A and 234B - Held that:- Assessing officer is directed to re-compute the interest chargeable under section 234A of the income tax act after granting credit of tax deduction at source claimed by the assessee, if found in order. The Ld. and assessing officer is further directed to not to charge interest under section 234B of the income tax act on the income of the assessee which is subject to withholding tax. X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the Appellant outside India and by considering 100% of such receipts as being attributable to the alleged PE in India. 10. In computing the Appellant's tax liability, the learned AO has erred in not providing credit for taxes deducted at source amounting to INR 3,05,91,767, as claimed by the Appellant for AY 2008-09. 11. The learned AO has erred in levying interest under section 234A the Act amounting to INR 4,25,05,160, for a period in excess of the actual delay of 18 months in filing the return of income for AY 2008-09 and computing such interest without considering credit for tax deducted at source of INR 3,05,91,767. 12. The learned AO has erred in law and in fact, in levying interest under section 234B of the Act, amounting to INR 13,38,91,254, disregarding the fact that the entire income of Net App B.V., which has been held to be taxable, was subject to withholding of taxes in India owing to which advance tax was not liable to be paid. 13. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act, since the Appellant is not liable to tax in India." 3. The assessee has raised the following grounds of appeal for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. 9. In computing the Appellant's tax liability, the learned AO has erred in not providing credit for taxes deducted at source amounting to INR 4,57,54,106, as claimed by the Appellant for AY 2010-11. 10. The learned AO has erred in levying interest under section 234A the Act amounting to INR 1,96,73,100 by computing such interest without considering credit for tax deducted at source of INR 4,57,54,106 11. The learned AO has erred in law and in fact, in levying interest under section 234B of the Act, amounting to INK 6,22,98,150,disregarding the fact that the entire income of NetApp B.V., which has been held to be taxable, was subject to withholding of taxes in India owing to which advance tax was not liable to be paid. 12. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act, since the Appellant is not liable to tax in India." 4. Facts are common to both the appeals for impugned assessment years, which are set out in narrow compass. The appellant company is a non-resident company situated at Netherlands, part of "NetApp group", engaged in the business of selling storage system equipments and products including embedded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, data integration and disaster recovery services. As stated, assessee deals with the distributors in India on principle-to-principle basis, hence, it is claimed that it does not have any income on sale of these products in India. 7. ICo, belonging to Net App Group, provides some services to assessee such as marketing and sales support, assistance in organizing trade shows, ascertaining market trends, competition analysis and assistance in pre sales marketing as promotional material for Net App products and services. For rendering these services ICo has entered into an agreement on 27.04.2002 with M/s. Network Appliances BV (known as NetApp BV)(the assessee) titled as "Commission Agent Agreement". According to this agreement, the assessee was to perform following activities as per clause 2 of the agreement. "2. Appointment of NetApp India a. Activities of NetApp India. Subject to the terms and conditions herein, NetApp BV hereby appoints NetApp India, on a non-exclusive basis, to perform the following functions on behalf of NetApp BB: i. NetApp India shall identify potential business opportunities and customers for NetApp products and services. ii. NetApp India shall distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld NetApp BV free and harmless form, any and all claims, damages or lawsuits (including attorney's fees incurred by NetApp BV) arising out of its acts or the acts of NetApp India employees or its agents." 8. For AY 2008-09 Assessee has filed its return of income showing Nil income and claimed refund of tax withheld by the distributors and customers amounting to ₹ 3,05,91,767/-. As the assessee is a company incorporated under the laws of Kingdom of Netherland, having tax residency certificate issued by the Netherland Tax Officer dated 04.11.2010, therefore is entitled to the benefits of Double Taxation Avoidance Agreement between India and Netherland. 9. Vide draft assessment order, ld. Assessing Officer held that the assessee has a business connection in India u/s 9(1) of the Income Tax Act, therefore its income is chargeable to tax in India as it deemed to accrue and arise in India in terms of section 9 (1) (i) of the act. It was also held that assessee has a permanent establishment in India in accordance with Article 5 of India Netherland DTAA because of existence of NetApp India. The main reasons for reaching at this conclusion is that Indian Subsidiary of USco i.e. Net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee that,assuming while denying, the sum is chargeable to tax as royalty, it can be taxed under Article 12 of the DTAA and not article 12(7) and Article 7 of the DTAA. Therefore, in nutshell the contention of the assessee is that software licensing income is not chargeable to tax in India as royalty income and even otherwise if it is taxed as royalty income it is not effectively connected with its alleged PE and hence, not chargeable as business income. 11. Ld. AO rejected contention of the assessee of not having a permanent establishment in India. Therefore he held that payment received by the assessee towards licensing of the software are taxable as royalty and further this software payment are 'effectively connected' with the permanent establishment in terms of Article 12 and 7 of the DTAA, same shall be chargeable to tax in India. Assessee has received ₹ 339284582/- as software services income and from this deduction of ₹ 62282566/- was granted towards the proportionate cost of sum paid to the permanent establishment. Balance of ₹ 277002016/- was treated as business income chargeable to tax under Article 7 of the DTAA as royalty income effecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting as the local sales office as per the distributors agreement and therefore Ld. assessing officer attributed 90% of the profit applying the gross profit margin of 26% to the permanent establishment of the assessee in India. Thereby the gross profit of ₹ 160061938/-was estimated and from that a proportionate expenses of ₹ 115834216/-was granted as deduction resulting into net profit of ₹ 48227721/-. Hence, 90% thereof was held to be attributable to the permanent establishment of the assessee amounting to ₹ 43404949/-. 14. Accordingly the Ld. assessing officer issued draft assessment order where total taxable income of assessee was computed at ₹ 503257761/-. Aggrieved by the draft Assessment order, appellant preferred objection before the Ld. Dispute Resolution Panel-II, New Delhi. Ld. DRP vide its direction under section 144C (5) of the Income Tax Act 1961 dated 28th of May 2013 held that consideration received by the assessee from license of software and subscription is nothing but royalty. It further held that subscription revenue is also royalty and confirm the attribution at the rate of 90% of the profits of the assessee to the permanent estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submitted that the function test together with not having any fixed place of business shows that appellant does not have a permanent establishment in India in terms of article 5 (1) of the Double Taxation Avoidance Agreement. He relied on the decision of Hon'ble Supreme Court in case of Morgan Stanley & Co. inc 292 ITR 416 and of Hon'ble Delhi High Court in case of DIT vs. E-Funds IT solutions. He further relied on the decision of Hon'ble Delhi High Court in case of Adobe Systems Inc ( WPS 2384/2013 & CM 4515/2013). He further stressed his argument by drawing support from OECD commentary on article 5 which suggest that carrying on of a business to a fixed place means usually that person who, in one way or another, are dependent on the enterprise conduct the business of the enterprise in the state in which the fixed place is situated. He further submitted that activities performed by the Indian entity are mostly in the nature of preparatory and auxiliary activities such as conducting market survey, distributing information on appellant's product, responding to Inquiries, promotional activity such as presentations etc. In nutshell he submitted that no activities performed or servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have any role to play with respect to conclusion of the sales of the appellant. He further took us to the agreement entered in to by assessee with the Indian entity demonstrating that Indian entity does not have any authority to conclude contracts on behalf of the assessee. He submitted that Indian entity does not habitually conclude contracts on behalf of the company but it is the distributors in India who will conclude contracts with the end-users, customers in their own name. 19. Regarding the dependency of the Indian entity on the appellant, he submitted that revenue of the Indian entity is derived from providing information technology services and IT enabled services and not the marketing and sales support services, therefore his argument was that Indian entity is not solely reliant on the appellant in relation to its operations and under article 5 (6) of the treaty there is no agency PE of the appellant in India. 20. He further submitted that merely because the directors are common of the appellant as well as the Indian entity it does not create any PE. For this proposition, he relied on the decision of coordinate bench in ITO versus M/S Pubmatic India private limited. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t filed its first return of income for assessment year 2008 2009 on 31/3/2010 i.e. after 27 months of the due date to claim refund of tax deducted at source. This proved that the assessee was carrying on its business activities in India since then. Therefore according to him the assessee is carrying business activities in earlier years therefore there is withholding tax on the income of the appellant in India, hence assessee is claiming the credit of tax deducted in India against its tax liability in its country of residence of tax deducted at source in India. The assessee has never disputed its tax liability in the past and as there is no change in the DTAA now there is no dispute about the taxability of that particular income arising in the hands of the assessee in India for this year. He further stressed that that appellant has entered into various commission agent agreements for sale of products and technical support service. The assessee has entered in to a distributorship agreement with Nat App holding and manufacturing B.V., the immediate holding company in the Netherlands and as a result of the distributorship agreement, Assessee Company has been charged with costs relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is remunerated on cost plus basis and no independent party would agree for such a kind of arrangement of remuneration. In nutshell, his argument was that Indian entity is functioning exclusively for the appellant and Indian entities prohibited to perform similar services to any other entity and hence Indian entity is not an agent of independent status in terms of paragraph 5 and 6 of article 5 of the double taxation avoidance agreement but is a "dependent Agent'. Based on the above arguments he submitted that it is the Indian entity who is selling the products and rendering the services and must be asking the customers to make payments to appellant outside India. He further refuted the claim of the assessee that Indian entity's role is limited to marketing and sales support services and claimed that it is a self-serving statement, which is contrary to the real facts. He also refuted the claim of the appellant that the terms of the contracts are decided by the appellant outside India for the reason that when the employees of the Indian entity do not discuss with the customers about the prices, then how the purchase orders can be issued by the customers directly to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agent of independent status and therefore in terms of article 5(5) of the double taxation avoidance agreement, assessee has a permanent establishment in India. 28. He further assailed the argument of the appellant that transactions of appellant with Indian entity are not at arm's length. For this he referred to the transfer pricing study report and functional analysis, which showed that international transactions of the Indian entity in providing marketing support services. He further referred that the Ld. transfer pricing officer has held that it did not receive compensation at arm's length and made an adjustment on account of transfer pricing of ₹ 184528940/-. He further submitted that though the functional analysis carried out by the assessee is not disturbed by the Ld. transfer pricing officer, but he did not take into account several functions, which have been identified in the assessment, order as well as apparent from document submitted by the appellant. He mainly stated that the transfer pricing analysis has not considered the cost of assets provided free of cost to Indian entity for providing these services which are in the nature of process, technical data softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorized representative he submitted that the contention of the Ld. authorized representative is against the methodology described in article 7 (2) of the double taxation avoidance agreement. He further stated that appellant's reliance on the decision of Hon'ble Delhi High Court in case of BBC worldwide Ltd is not correct because in that case 15% of all receipts were paid to the Indian company towards commission for services provided as an agent were attributable and further as per the protocol the attribution cannot be based on the total receipt. 30. In the end, he submitted that if the argument of revenue with respect to the sale of software and license subscription income that consideration for the same is taxable as royalty then revenue relies on the decision of coordinate bench in case of Rolls-Royce plc, which is confirmed by the Hon'ble Delhi High Court. Similar argument was raised that if the income from services is not acceptable as fees for technical services than full profit need to be attributable to India as all services are performed in India and no operations in this regard are performed outside India. 31. During the course of hearing Ld. departmental representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . departmental representative. On the issue of the basic facts, he submitted that that appellant is engaged in the business of selling storage equipment and products and rendering of certain services in Asia-Pacific region including India. These products are sold through Third party distributors who are appointed on a non-exclusive basis. Sales are made to global customers outside India through Master Service agreements at pre agreed terms. The company also engages itself in direct sales contracts, where though the distributors are responsible for the sale process, title of the goods passes directly to the customers to enable them claim of indirect tax exemptions on import of goods. The appellant provides services to their customers through third-party service providers and Indian entity by virtue of separate agreements entered into with them by the appellant. He submitted that that the functional profile of Indian entity is accepted by the Ld. that assessing officer of the appellant and only observation made by the assessing officer is that Indian entity acts as sales outlets when there is no allegation that Indian entity is doing any function other than what is stated in the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isting on record even if they are incorporated or not in the assessment order. Despite this, he submitted that all such allegations are unsubstantiated and they are repudiated as under. a. On the issue of the business connection, it was submitted that appellant is governed by the provisions of the India- Netherlands Double Taxation Avoidance Agreement, as they are more favorable to the appellant compared to the Indian tax laws. He further submitted that business connection would not exist in the condition prescribed under the definition in the Income Tax Act 1961 i.e. authority to conclude contracts mainly or wholly for appellant are not satisfied. For this proposition he relied upon the decision of National petroleum construction company versus DCIT, Blue Star Engineering company vs. CIT 73 ITR 283 and DCIT vs. Ericsson A B 343 ITR 470. b. On allegation that Indian entity has authority to conclude contracts by virtue of common directors he submitted that directors of both the entity are not in engaged in day-to-day activities of the appellant or in negotiation of any contracts or performing the marketing functions in India on behalf of the appellant. He submitted that mere com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue, that appellant has 'sales outlets' he submitted that that Indian entity is not a store that sells the goods of a particular manufacturer or wholesaler therefore it is not falling within the definition of sales outlet. He further referred that provisions of DTAA has carved out an exclusion from the definition of permanent establishment whether the place of business for the purpose of storage display of goods or the supply of information does not constitute a fixed place permanent establishment. f. With respect to the additional evidences filed by the Ld. departmental representative of the website extract, he submitted that this information is provided with respect to the information of services that Indian entity renders to enable potential customers to reach out to NetApp India to discuss product feature, information and respond to queries as part of the marketing support function. He further referred to the website page where the address of the resellers and service providers who conclude the sales is also mentioned. Therefore he submitted that this information does not have any relationship or with existences or otherwise of permanent establishment of the appellant in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and Indian entity are at arm's length. He further submitted that there is no dispute on the functional profile of the Indian entity between that particular entity as well as the Ld. Transfer pricing officer in case of Indian entity. He further submitted that despite the fact that revenue has challenged the order of the Ld. First appellate authority in case of the Indian entity before coordinate bench of the tribunal there is no bearing on the determination of the permanent establishment of the appellant. l. With respect to certain arguments of the learned DR stating that Indian entity discusses all terms with distributors, it negotiates discounts to resellers, decision on sales are taken by Indian entity, the Indian entity obtains orders from customers, the purchase orders are rooted through Indian entity, from the perspective of customers who makes no distinction between the appellant and the Indian entity and that not all the functions are captured in the transfer pricing study of the Indian entity where assets given free of cost is not taken into consideration, the delay of 40 days in signing the agreement with the resellers, incurring of expenses on freight shipping and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. He further submitted that all the costs, which are related to the transaction with the appellant, are duly accounted for and even otherwise, it does not have any impact in determination of the P permanent establishment. He further submitted that that separate disclosure with respect to hardware and software components embedded in it is only because of the different rate structure of custom duty payable on these products and which does not have any bearing on the determination of the permanent establishment of the appellant. On the issue of the spare parts required for performing certain services in India he submitted that they are stalked by a third-party logistics and warehouse service providers in India and Indian entity does not deliver on behalf of appellant. He further submitted that as Indian entity does not maintain any stock of goods of the appellant for delivery on behalf of the appellant it does not constitute an agency permanent establishment. On the issue of maintenance of call centers of Indian entity he submitted that it is but natural for a marketing support service provider to have the call Centre facilities. In any way, he submitted that same is also captu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax according to The Income Tax Act 1961. If the answer is yes then it is further required to be tested wither it is eligible for the benefit of Double taxation Avoidance Agreement between the two countries or not. If the answer to that is also positive then it is required to be seen what is more beneficial to the assessee, applicability of DTAA or The Income tax Act and whatever is more beneficial shall be applied to the assessee. 35. On examining the contention of the assessee with respect to the services provided by the Indian company to the appellant which are in the nature of order processing function, providing marketing strategies such as providing of marketing information analysis and pre-sales support to educate customers or products, advertisement and sales promotion, identification of the potential business opportunities and customers for appellant, distribution and dissemination of information of such products and services, response to the enquiries for such products, marketing strategies and local market conditions advisory services, information on marketing trends and providing technical support services for the products including warranty obligations, maintenance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finition of "Royalty" or "fees for technical services" or "Business Income". Based on these characterizations the Income shall be determined for chargeability under respective articles of DTAA. The Main Income Stream of the assessee is ₹ 631007453/- as hardware Income, Software and Subscription Income of ₹ 339284582/- and service income of ₹ 223963915/-. For taxation of Business Income, the Ld AO has held that in view of the permanent establishment of the assessee in the form of 'Fixed Place of Business' available of the Net App India (Ico) to assessee and Net App has 'dependent Agent' the hardware income shall be chargeable to tax in terms of Article 5 and Article 7 of The DTAA. With respect to the Software and subscription income it has been held that it is chargeable to tax as Royalty income in terms of Article 12 of the DTAA and as it is effectively connected with the PE, it shall also be chargeable to tax as Business Income. Service Fees Income of the assessee of ₹ 223963915/- for installation, warranty and professional services was also considered as Royalty or FTS and as held to be effectively connected with the Permanent establishment was charged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract does not necessarily mean written or formal contract but it can also be oral or verbal as well as implied. He further stated that actual conclusion/signing of contract is not material and by virtue of common directors, they were eligible to sign contracts for foreign company as well as for Indian agent establishes that agent do have powers to conclude contract. He further held that appellant has the sole responsibility of providing technical/maintenance assistance to its customers and this activity is done with the help of the Indian company. He held that when Indian company personnel are providing such services or imparting such information as required under the agreement to a 3rd party it represents the foreign company in India. He therefore held that the foreign company cannot disown the responsibility towards the third party while implementation of the services by Indian company. Therefore, for its conduct the Indian agent does bind the foreign company. He held that the title and risk passes outside India is immaterial because some integral part of the entire business operations are being carried out in India. According to him as the installation activities happen in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage of display ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for other activities which had preparatory or auxiliary character, for the enterprise ; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting in one of the States, on behalf of an en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y which is a resident of the other state, or which carries on business in the other state (whether through a permanent establishment or otherwise), shall not of itself constitute another company a permanent establishment of the other. On looking at the above clause it is apparent that holding or a subsidiary company by themselves would not become permanent establishment of each other. The words used in the said paragraph are equally important because the term holding or parent company or a subsidiary company is not used in the above clause but it uses the clause 'controls or is controlled by a company which is a resident of the other contracting state. The above issue is also considered by the Hon'ble Delhi High Court in case of the DIT versus M/s e-funds IT solutions (supra) as under:- "9. Before we examine whether e-Fund India and its activities constitute PE of the foreign assessees as under the applicable Double Taxation Avoidance Agreement between India and USA, (The agreement for the sake of convenience is being referred to as DTAA), it would be appropriate, at the outset, dispel any doubt or contention that establishing a subsidiary in the other treaty country would result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfies the postulates and requirements of other paragraphs of Article 5, notwithstanding and negating the protection provided under paragraph 6 of Article 5, which recognizes legal independence of the two entities for tax purposes. This legal principle that the holding or contracting company and the subsidiary or the controlled company are two separate and independent tax entities and must be so treated permeates and pervades but will give way to the exceptions carved out and stated in the DTAA. The legal principle is simple, a subsidiary being a resident of the State in which it is incorporated and functioning is taxed for its income. Subsidiary's income is separately allocated and brought to tax in the country where it is situated or is a resident of. This clearly distinguishes a subsidiary form a foreign assessee, which is directly carrying on business and has residence in another country through their own branches/offices, personnel, etc. 11. Klaus Vogel on Double Taxation Conventions, Third Edition, states the following principle:- "40. [Principle] It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present factual matrix has been touched below. 14. The aforesaid principle is no longer res integra and has been lucidly elucidated by the Supreme Court in DIT (International Taxation) v. Morgan Stanley & Co. Inc. [2007] 292 ITR 416/62 Taxman 165 (SC) in the following words:- "32. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCO would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of I.T. Act. All provisions of I.T. Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry-forward and set-off losses etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are also made under the I.T. Act (for example: Sections 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hind a dependent operating company, i.e. if an operating company in addition to its own business also carries on another company's business as a PE of the latter. In this regard, the 2010 OECD Model Tax Convention (the "OECD Model") states in Art. 5(7) that: [t]he fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other state (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other (emphasis added) This follows from the principle that, for the purpose of taxation, such a subsidiary constitutes an independent legal entity.7 Accordingly, both companies are subject to unlimited tax liability in the state in which they are resident or where their place of management is located. However, by using the wording "not of itself", the provision clarifies that a parent company (parent) can have an (agent) PE in its subsidiary's state of residence if the general requirements for a PE set out in Art. 5(1) to (5) of the OECD Model are met. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither has any employees in Indian nor does its personal or employees visit or is seconded to India. The only reason why it has been held by the Ld. assessing officer that assessee has a fixed place permanent establishment in India is merely because the existence of a subsidiary in India which is carrying on its own business as commission agent of the appellant. We are of the view that there needs to be a clear-cut distinction between the business of the appellant as well as the business carried on by the Indian company itself for its own purposes. The Indian company is merely a service provider to the appellant and it would not be appropriate here to say that where a person opt in service in relation to his business from another person. Then the service provider carries on the business of the services recipient. As it is stated that there is an agreement between appellant and the Indian company for provision of certain services which are listed in paragraph 3 of the commission agent agreement dated 27/04/2002. According to that agreement the Indian company shall inform appellant of all the orders placed by the customers immediately upon receipt and such order shall be accepted o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tems incorporation, Indian company is remunerated on cost plus basis and transaction is undertaken at arm's length, it has been held as under:- "32. Para (1) of Article 5 defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term 'fixed place of business' includes premises, facilities, offices which are used by an enterprise for carrying on its business. The fixed place must be at the disposal of an enterprise through which it carries on its business wholly or partly. Although, the word 'through' has been interpreted liberally but the very least, it indicates that the particular location should be at the disposal of an Assessee for it to carry on its business through it. These attributes of a PE under Article 5(1) of the Indo-US DTAA were elucidated by the Supreme Court in Morgan Stanley & Co. Ltd. (supra). In a recent decision, a Division Bench of this Court in DIT v. E-Funds IT Solution [2014] 364 ITR 256/226 Taxman 44/42 taxmann.com 50 (Delhi) reiterated the above-stated attributes; after quoting from various authors, this Court held that "The term 'through' postulates that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decided against the Indian entity. Therefore it was contended that the transaction between the Indian entity and the appellant are not at arm's length. The contention of the Ld. authorized representative was that notwithstanding the fact that the Ld. 1st appellate authority has held that the payments made to Net app India are not at arm's length, they are liable to be resolved in proceedings of the Indian entity and not in the proceedings of the appellant. He therefore relied on the decision of the Hon'ble Delhi High Court in case of Adobe Systems Inc (Supra) wherein it has been held that even if there is a dispute in relation to this, it is liable to be resolved in proceedings relating to the Indian entity. We are of the opinion that transfer-pricing dispute in the assessment proceedings of the Indian entity does not have any bearing on determination of permanent establishment of appellant in India. Indeed, it is a matter of dispute between Indian revenue authorities and the Indian entity only. Therefore, respectfully following the decision of the Hon'ble Delhi High Court in Adobe System Incorporated ( Supra), we reject the contention of the revenue that there is a permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that such authority is vested in Indian company and Indian company habitually exercises that authority. The contract placed before us emphatically denies any such authority with the agent and further in absence of any evidence placed before us by revenue, this argument of revenue does not find support from us. Therefore we are of the opinion that according to article 5 (5) of double taxation avoidance agreement, assessee does not have permanent establishment in India. Regarding reference to the website of the net app group the references with respect to how to buy and contact us section which are very common looking to the services that has been rendered by Indian entity to its potential customers to reach out to the Indian entity to discuss product features information and response to the Canaries as part of the marketing support function only. It is pertinent to note here that the website pages under this section also referred to the list of the addresses of other resellers and service providers were the parties who conducted sales process and perform sales in India. Therefore this argument of the revenue also does not find favour with us. On the contention of that Indian entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndise belonging to the enterprise shall not constitute as permanent establishment. Therefore storing of the goods falls into the exclusionary clause of permanent establishment. Even otherwise, we did not find any instances brought to our notice by the Ld. departmental representative or in the orders of the lower authority when sales has taken place from these outlets. In view of this we do not agree with the views of the revenue that the local offices of the assessee are sales outlet constituting permanent establishment of the appellant. With respect to the allegation that Indian entity is not providing mere backup office support services, but engaged in the capacity building of the net app India group, we are of the opinion that Indian entity is carrying on its own business as a service provider and not the business of the appellant is being carried out by the Indian entity. Merely because there are certain transactions between the Indian subsidiary and the foreign parent, group it does not mean that the Indian subsidiary constitutes a permanent establishment for the foreign parent in India. This has been conclusively held by the Hon'ble Delhi High Court in DIT versus E funds IT s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d AO. Further, it is not the case of the revenue that ICO is performing wholly and exclusively for the assessee. Therefore, in absence of any evidence of economic and legal dependence of the agent the argument of revenue cannot be sustained. The Indian entity is legally and economically independent and is compensated at arm's-length basis by the appellant in terms of the agreement entered into between them. It was submitted before us that the 85% of the revenue of the Indian entity is derived from IT, ITES services, and not the marketing and sales support services. Therefore, it was contended that Indian entity is not solely reliant on the appellant in relation to its operation and it is an independent agent and therefore it would not create an agency PE in India of the appellant. These facts remain uncontroverted. Furthermore, merely because the Indian entity provides services to the net app group including the appellant, it cannot be said that permanent establishment of the appellant is in India because the permanent establishment is required to be established with respect to the appellant and not to the group. Ld. departmental representative could not draw our attention to any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Indian entity are not captured in the transfer pricing documentation and assets given free of cost are not recorded therein, we are of the opinion that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in case of E funds IT solutions (supra) wherein it has been held that even if the software or intangible data was provided free of cost or otherwise by the appellant to an Indian entity, it does not automatically result in the Indian entity constituting a permanent establishment of the appellant in India. Therefore, we reject the contention of the revenue on this count. With respect to the incurring of the freight and transportation cost incurred by the Indian entity. It was submitted that these costs are incurred by Indian entity for the purpose of transportation of demo products and samples and other assets of net app India only and further the transportation cost of ₹ 12 lakhs pertains to travelling and conveyance expenditure. This fact has not been controverted by the revenue before us and even otherwise; this aspect on standalone basis does not give any indication that the appellant has a permanent establishment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not substantiate the allegation of deputation of any employees for rendering Technical support services, in view of this we do not agree with the revenue that services are rendered in India by deputation of employees in India by the appellant. With respect to the payment of royalty, It was submitted that Indian entity from time to time participates in various trade fairs and disseminate information about the products and engaged in promotional activity and for this purpose, it has right to use the trademark which is not held by the appellant but different entity. As this transaction is not between the appellant and the Indian entity where it is undisputed that the trademarks are not owned by the appellant but by different entity, these facts does not lead to creation of a permanent establishment in India of appellant. 45. We would like to mention here that in the present case the Ico has performed many functions but has not reached at the threshold of becoming a permanent Establishment of the appellant according to Article 5 of the DTAA. In the present case the Ld AO has merely examined the documents submitted by the appellant and has not carried out detailed exercise to arrive at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Director of income tax versus Infrasoft Ltd 264 CTR 329 (Delhi). He also submitted a chart during the course of hearing that compares the software considered by Hon'ble Delhi High Court and the features of the software licensing agreement in the present case. He has demonstrated that the issue involved is similar stating various aspects of software licensing agreement as under:- soft Limited Assessee * Clause 2(a) of the Infrasoft License Agreement: "(a) Infrasoft grants Licensee a non-exclusive, non-transferable license to use the software in accordance with this Agreement and the Infrasoft License Schedule." * Clause 2(d) of the Infrasoft License Agreement: "(d) Licensee may make one copy of the software and associated support information for backup purposes, provided that the copy shall include Infrasoft's copyright and other proprietarynotices. All copies of the Software shall be the exclusive property of Infrasoft" * Clause 2(h) of Infrasoft license agreement: "(h) Licensee may not copy, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Licensee's rights shall not be restricted by this Clause 2(h) to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... steps to protect the Software from unauthorized use or disclosure." * Clause 2 of End User Software License: "Customer shall not, nor shall Customer allow any third party to: (i)decompile, disassemble, decrypt, extract, or otherwise reverse engineer or attempt to reconstruct or discover any source code or underlying ideas, algorithms, or file formats of, or of any components used in the Software by any means whatever; or (ii)remove or conceal any product identification, copyright, patent or other notices contained in or on the Software or accompanying documents; or (iii) modify the Software, incorporate it into or with another Software, or create a derivative work of any part of the Software. Customer must not publish or provide any results of benchmark tests run on the Software to a third party without NetApp's prior written consent." * Clause 7 of End User Software License: "THIS LICENSE IS PERSONAL TO CUSTOMER. CUSTOMER SHALL NOT ASSIGN, SUBLICENSE OR TRANSFER THE LICENSE OR AGREEMENT WITHOUT NETAPP'S PRIOR WRITTEN APPROVAL; ANY ATTEMPT TO DO SO SHALL BE VOID." 49. The revenue is also not seriously disputed before us that the issue is not covered by the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us that payments for provision of installation, warranty and professional services are not FTS as they are not ancillary and subsidiary to a royalty transaction. Further, these services do not make available any technical knowledge, experience, etc., nor involve imparting of industrial, commercial or scientific experience to Indian customers, in terms of Article 12 of the Tax Treaty read with notification No. S.O., 693E dated August 30, 1999.he further placed reliance on the decision of the Hon'ble Delhi HC in the case of DIT vs. Guy Carpenter (346 ITR 504) and DIT v. Sheraton International Inc. (221 CTR 752). In view of this he submitted that these incomes are not chargeable to tax in India in terms of the double taxation avoidance agreement. 52. We have carefully considered the rival contentions. The company provides installation, integration and training assistance to the Indian customer in relation to the products sold by it. The company also provides warranty services for the products purchased by the customers in India. For a period of 3 years and the warranties undertaken without any additional cost to the customer as the prize of the warranties already included in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. Therefore we set aside ground No. 10 of the appeal of the assessee to the file of the Ld. assessing officer to grant credit of the about tax deduction at source after verification of the tax deduction at source certificates provided by the appellant. In the result ground No. 10 of the appeal of the assessee is allowed accordingly. 54. Ground No. 11 of the appeal of the assessee is against levy interest under section 234A of the income tax act for the period of excess of the actual delay of 18 months in filing the return of income for assessment year 2008 2009 and computing such interest without considering credit for tax deducted at source of ₹ 3 059 1767/-. As already held in ground No. 10 by us that the assessee should be granted credit for the tax deducted at source, therefore, we direct the assessing officer to compute the interest under section 234A of the income tax act if there is any tax liability after granting credit of such TDS. In the result ground No. 11 of the appeal of the assessee is allowed accordingly. 55. Ground No. 12 of the appeal of the assessee was with respect to the levy of interest under section 234B of the income tax act, despite the entire i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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