Permanent establishment and software royalty principles applied to deny Indian tax attribution on sales and licence fees.

A foreign enterprise's Indian subsidiary was treated as performing only preparatory or auxiliary functions for direct sales, with no authority to conclude contracts and no substantive canvassing or negotiation; the Tribunal therefore found no permanent establishment or business connection and no attribution of profits to India. Licence fees for Norton Antivirus software were also held not to be royalty because the transaction involved only use of a copyrighted article, with no transfer of copyright rights or right to commercially exploit the software. Interest under section 234B was treated as consequential and left to recomputation in line with the final tax position.

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Issues: (i) Whether the Indian subsidiary constituted a permanent establishment or dependent agent of the foreign assessee for sales of completely built units and raw materials, and whether profits from those sales were taxable in India; (ii) Whether licence fees received for Symantec Norton Antivirus software amounted to royalty; (iii) Whether interest under section 234B was chargeable.

Issue (i): Whether the Indian subsidiary constituted a permanent establishment or dependent agent of the foreign assessee for sales of completely built units and raw materials, and whether profits from those sales were taxable in India.

Analysis: The Tribunal followed its earlier orders in the assessee's own case and held that the subsidiary's role in relation to direct sales of completely built units was limited to passing communications and performing preparatory or auxiliary functions. It had no authority to conclude contracts, did not actively canvass or negotiate sales, and the sales were on a principal to principal basis. On the raw material and CKD unit sales, the Tribunal held that the assessee merely sold goods to the subsidiary and carried out no further operations in India. On these facts, no business connection or permanent establishment was established, and no profits from those transactions could be attributed to activities in India.

Conclusion: The issue was decided in favour of the assessee and against the revenue.

Issue (ii): Whether licence fees received for Symantec Norton Antivirus software amounted to royalty.

Analysis: The Tribunal held that the software transaction was in substance a supply of a copyrighted article for internal use, and not a transfer of rights in copyright. It noted that the payer was only permitted to use the software and was not granted rights to modify, reverse engineer, decompile, disassemble, or commercially exploit the software. In the absence of material showing transfer of copyright rights, the consideration could not be characterised as royalty.

Conclusion: The issue was decided in favour of the assessee and against the revenue.

Issue (iii): Whether interest under section 234B was chargeable.

Analysis: The Tribunal followed the view taken in the assessee's earlier year that the question of interest was consequential and required computation in accordance with the final tax determination.

Conclusion: The issue was decided partly in favour of the revenue for statistical purposes.

Final Conclusion: The cross appeals were disposed of by accepting the assessee's substantive claims on permanent establishment, business connection, attribution of profits, and royalty, while granting the revenue relief only on the consequential question of interest.

Ratio Decidendi: A foreign enterprise's Indian presence will not constitute an agency permanent establishment or business connection unless the Indian entity habitually concludes contracts or otherwise performs substantive income-generating functions for the foreign enterprise, and payments for mere use of software without transfer of copyright rights are not royalty.

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