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TMI Blog2024 (11) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Shri Saktijit Dey, Vice-President And Shri S. Rifaur Rahman, Accountant Member For the Assessee : Sh. Percy Pardiwalla, Sr. Advocate, Sh. Ketan Ved, CA For the Department : Sh. Vijay B. Vasanta, CIT(DR) ORDER PER SAKTIJIT DEY, VICE-PRESIDENT Captioned appeals have been filed by the assessee challenging the final assessment orders passed under section 143(3) read with section 144(C)(13) of the Income-tax Act, 1961 (in short the Act ) pertaining to assessment years 2020-21 and 2021-22, in pursuance to directions of learned Dispute Resolution Panel (DRP). 2. Grounds raised in both the appeals are more or less identical, except variation in figures. Ground No. 1, being a general ground, does not require adjudication. In ground no. 2 of both the appeals the assessee has challenged validity of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Authorities, the assessee is engaged in the business of providing software quality assurance solutions by selling licenses of its testing software, such as, Tosca, Flood, qTest etc. to various customers across the world, including India. In the assessment years under dispute, the assessee had earned income from third party customers in India for providing End User Licences (EULS) of its testing software and also from provision of support and consultancy services. In the returns of income filed for the assessment years under dispute, the assessee had offered the income from sale of software license as royalty income. Whereas, it offered income from support services and consulting services as Fee for Technical Services (FTS) under the provisions of India Austria Double Taxation Avoidance Agreement (DTAA). Subsequently, the assessee filed revised returns of income claiming exemption from taxation qua the income from sale of EULS, relying upon the decision of the Hon ble Supreme Court in case of M/s. Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (Civil Appeal) 8733-8744 of 2018). 8. In course of assessment proceedings, the Assessing Officer called upon the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoiding payment of legitimate tax in India, Austria and USA, through treaty shopping by exploitation of both the tax treaty Rules and favourable domestic tax regime. Hence, he concluded that the assessee is not entitled to take benefit under India Austria DTAA and its income from sale of software has to be treated as business income in terms of the ratio laid down by the Hon ble Supreme Court in case of M/s. Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) and has to be brought to tax in India under the provisions of domestic law. He further held that the assessee had business connection in India. 11. Having held so, the Assessing Officer 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. 12. Against the draft assessment orders so passed, the assessee raised objections before learned DRP. While disposing of the objections in assessment year 2020-21, learned DRP directed the Assessing Officer to re-examine claim of treaty benefits keeping in view the additional evidences furnished by the assessee. Whereas, in assessment years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to tax in Austria. In support of such contention, he drew our attention to the tax returns filed in Austria and the assessment orders passed by the Austrian Revenue Authorities. He submitted, the assessee is also offering all its income including the revenue earned in India and Austria. Thus, he submitted, the allegation of the departmental authorities that the assessee is not offering its income to tax in Austria is contrary to facts on record. In this context, he drew our attention to the financial statements containing balance-sheet and profit and loss account. 15. He submitted, the assessee is in operation in India since the year 2007 and offering the income from sale of software as royalty income under the treaty provisions. He submitted, the department had all along assessed the royalty income under the treaty provisions. He submitted, due to change in legal position, when the assessee claimed the royalty income to be not taxable in India in terms of treaty provisions, the Assessing Officer introduced theory of substance over form , lack of commercial substance etc. He submitted, the assessee is not only the legal owner but even the economic owner of all software licenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Bench in case of Additional Director of International Taxation Vs. Baker Hughes [2015] 57 taxmann.com 191 (Delhi Trib.). He submitted, BEPS Action Plan is a tax policy, which may be relevant to law making, but it cannot have any role in judicial decision making process. Thus, learned counsel submitted, additions made, being unsustainable, should be deleted. 18. Sh. Vijay B. Vasanta, learned CIT(DR), drawing our attention to the observations made by the Assessing Officer as well as learned DRP, submitted that the Assessing Officer has clearly establish on record that the assessee lacks commercial substance to be treated as tax resident of Austria. He submitted, not only majority of the IPs have been registered in jurisdictions outside Austria, but the assessee failed to prove that it has incurred any expense in respect of the IPs registered outside Austria. 19. Thus, facts on record clearly reveal that the assessee has no role to play in development of the software registered outside Austria. He submitted, since, the assessee had a clear tax advantage in Austria, it has been incorporated to derive treaty benefits. Thus, he submitted, the departmental authorities have proceeded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt proceedings the assessee has furnished all statutorily required documents, including TRC, for claiming benefits under India Austria DTAA. The Assessing Officer has denied treaty benefits to the assessee broadly on the following reasons: (a) The assessee lacks any economic or commercial substance and has been incorporated solely for the purpose of deriving benefits under the treaty provisions. (b) The assessee cannot be treated as economic owner of IPs registered in USA, Austria, UK and Singapore. Hence, the receipts from sale of software registered in other countries would be governed by the treaties entered into between those countries. (c) As per the BEPS Action Plan 8-10 under cost share arrangement, assessee s incorporation in Austria and booking of sales proceeds and software lacks any commercial rationale as this could have been carried out in location of the owner of the IPs. (d) Since, the economic owner of IPs is based mainly in USA and as per India- USA DTAA, the global income of USA tax resident is taxable in USA, to avoid such taxability, assessee was incorporated in Austria. 24. Now, it is fairly well established through series of judicial precedents that the sancti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat could be obtained by investors from its treaty networks, because of which there was nothing inherently objectionable about treaty shopping but that any concerns surrounding the practice of treaty shopping is best left for the consideration of the executive which may examine the political and economic implications of any measures taken by it to combat treaty shopping, particularly in light of the changing world order requiring nations to adopt measures to attract capital and technological inflows. K. In a similar vein the decision of Vodafone noted that there has been a steady increase in multinational corporations seeking to invest in markets and businesses across the globe, which would thus lend credence to the position that establishment of offshore companies could be motivated by bona fide commercial purposes. Accordingly, the decisions of the Supreme Court accepted the changed world order necessitating cross-border movement of capital and investments and those in turn resulting in the creation of trans-national corporations, the incorporation of entities in different jurisdictions and thus facilitating investments in diverse parts of the world which inevitably led to entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exercise of their sovereign powers and based on economic and political considerations. In view of the same, such reciprocal arrangements cannot be subjected to aspersions cast on its validity. It would accordingly be erroneous for courts to manufacture grounds of disqualification from treaty benefits over and above those as formulated by the Contracting States. Section 90 of the Act itself formulates the legislative intent to lend primacy to treaty enactments. Courts have accordingly taken the consistent stand that treaty benefits ought not be overridden by provisions and that the sanctity which attaches to a treaty restrains parties from attempting to subvert the same by way of unilateral amendments. 26. In case of CIT Vs. SAIF II-SE Investment Mauritius Ltd., the Hon ble Jurisdictional High Court, while dealing with the sanctity of TRC has held as under: 3. As would be manifest from a reading of the order impugned before us, the ITAT has essentially based its conclusions on the valid Tax Residency Certificate [ TRC ) which was held by the assessee and the following principles as laid down by this Court in Blackstone Capital Partners v. Asst. CIT [2023 SCC OnLine Del 475] :- 93. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to avoid payment of tax in USA, whose tax resident is taxable on the entire global income as per the relevant treaty, the assessee has been incorporated in Austria to derive benefit of taxation. 29. In our view, the aforesaid observations of the Assessing Officer are completely contrary to facts on record and lacks substance. In course of hearing, the 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. It is also observed that the 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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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., 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. More so, when the Assessing Officer accepts that the assessee is the legal owner of the IPs. Though, there is a passing observation by the Assessing Officer that there is a back to back arrangement of passing over of income to some other entities located in other jurisdictions, however, he has failed to identify even a single such entity which can be held as the beneficial owner of income and not the assessee. 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. 34. It is relevant to observe, in assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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