2006 (7) TMI 349 - AT - Income Tax

Tribunal Affirms CIT's Decisions: UK Company Has PE in India, Software Income as Business Profits, No Interest Charged.

The Tribunal dismissed the Revenue's appeal, affirming the CIT (Appeals)'s decisions on all issues. It upheld that the UK-based company had a Permanent ... Taxability - PE of the assessee is in India or not - Income Deemed to accrue or arise in India - profit margin of the assessee on supply of hardware was 40 per cent is reasonable or not - consideration received by the assessee on licensing of software should be taxed as the business income or as royalty - interest under sections 234A and 234B of Income Tax Act. Action of the CIT (Appeals) in reducing the profit attributable to profits from 40 per cent to 8 per cent - HELD THAT:- The case of Motorola Inc. [...............................................] dealt with by the Special Bench also involved a case of ascertainment of profits attributable to PE in India, which had supplied hardware in India. In fact in the case of Motorola Inc. there were three activities attributable to the PE, namely, (i) network planning; (ii) negotiations in connection with the sale of equipment; and (iii) the signing of the supply and installation contracts. The Tribunal sustained 20 per cent of the net profits in respect of the Indian sales as income attributable to the PE - In the present case, it is already stated that the PE was merely doing the job business of negotiations - From the material available in the present case, the CIT (Appeals) was justified in reducing the profits attributable to PE to 8 per cent. The above percentage would also meet the requirements of rule 10(ii) of the I. T. Rules - there are no merits in the first ground of appeal of the Revenue and consequently, the same is dismissed. Whether the consideration received by the assessee on licensing of software should be taxed as the business income or as royalty? - HELD THAT:- In the light of the similarity of facts as it exists in the case of the assessee and that of the case of Motorola Inc. as is evident from the comparative chart filed, the plea of the assessee was rightly accepted by the CIT (Appeals) - it was held in the case of Motorola Inc. that Since we have held that the payments cannot be assessed either as royalties or as business profits, the ground is dismissed. - the order of the CIT (Appeals) confirmed on this issue and this ground of appeal of the Revenue is dismissed. Charging of interest under sections 234A and 234B of the Act - HELD THAT:- In the light of the decision of the Delhi Bench of the Tribunal in the case of SSEDCO FOREX INTERNATIONAL DRILLING INC. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX [1999 (3) TMI 111 - ITAT DELHI-B], which has since been confirmed by the Hon’ble Uttranchal High Court in the case of COMMISSIONER OF INCOME-TAX AND ANOTHER VERSUS SEDCO FOREX INTERNATIONAL DRILLING CO. LTD. [2003 (10) TMI 40 - UTTARANCHAL HIGH COURT]. No interference with the order of the CIT (Appeals) is called for. Consequently, the third ground of appeal of the Revenue is also dismissed. Appeal of Revenue dismissed. Issues Involved:1. Permanent Establishment (PE) in India2. Taxability of income from supply of hardware3. Taxability of income from supply of software as royalty4. Charging of interest under sections 234A and 234B of the Income-tax ActDetailed Analysis:1. Permanent Establishment (PE) in India:The primary issue was whether the assessee, a UK-based company, constituted a PE in India under the India-UK tax treaty. The assessee argued that it did not have a PE in India as it did not carry out any business operations in India, had no branch or office, and its expatriates were employees of an Indian joint venture. The Assessing Officer (AO) contended that the assessee had a PE through its employees who stayed in India for more than one year and were involved in negotiations, contract finalizations, and after-sales services. The CIT (Appeals) upheld the AO's view, indicating that the presence of employees constituted a PE under Article 5(2)(k) of the DTAA. The Tribunal agreed with the CIT (Appeals) that the assessee had a PE in India.2. Taxability of Income from Supply of Hardware:The assessee argued that income from hardware supply was not taxable in India as the business was conducted outside India, and the title of goods transferred outside India. The AO attributed 40% of the hardware supply value as the assessee's profit, which was later reduced to 12% by the CIT (Appeals), attributing 8% to PE operations in India. The Tribunal upheld the CIT (Appeals)'s decision, noting that the profit margin of 8% was reasonable and aligned with Rule 10(ii) of the Income-tax Rules.3. Taxability of Income from Supply of Software as Royalty:The AO treated the income from software supply as royalty, arguing that the software was licensed and not sold, thus falling under the definition of royalty in Article 13 of the India-UK DTAA. The assessee contended that the software was an 'off the shelf' product, and the payment was for a copyrighted article, not a copyright, thus not qualifying as royalty. The CIT (Appeals) held that the transaction was one of sale leading to business profits, not royalties, aligning with the Andhra Pradesh High Court decision. The Tribunal confirmed this view, referencing the Special Bench decision in the case of Motorola Inc., which held that payments for copyrighted articles do not constitute royalty.4. Charging of Interest under Sections 234A and 234B:The CIT (Appeals) ruled that interest for non-payment of advance tax could not be levied on the assessee, following the Tribunal's decision in Sedco Forex International Drilling Inc. The Tribunal upheld this decision, noting that the obligation to deduct tax at source negated the liability to pay advance tax.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT (Appeals)'s decisions on all issues. The cross-objection by the assessee, challenging the assessment order as null and void due to late issuance of notice under section 142(1), was dismissed as not pressed.