Permanent establishment profit attribution, software receipts and advance tax interest treated under settled tax principles.

Profits are attributable to an Indian permanent establishment according to the extent of its revenue-generating operations in India, including marketing, contracting, banking, installation, support and after-sales activities; on that basis, attribution of 35% of net global profits was upheld. Software receipts supplied with hardware were treated as part of the business transaction and not as royalty merely because they were separately invoiced or described as licensed, so they were held not taxable as royalty. Interest under section 234B was directed to apply prospectively from assessment year 2013-14 in line with the amended provision.

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Issues: (i) attribution of profits to the Indian permanent establishment; (ii) taxability of software receipts as royalty; (iii) levy of interest under section 234B.

Issue (i): Attribution of profits to the Indian permanent establishment

Analysis: The Tribunal followed its earlier view that where the Indian presence carried out substantial revenue-generating functions connected with marketing, contracting, banking, installation, support and after-sales activities, profits had to be attributed to the Indian permanent establishment on the basis of the level of operations carried on in India. It rejected the revenue's challenge and applied the settled approach of attribution on facts and on the basis of the published accounts and the relevant methodology under the tax rules.

Conclusion: The attribution of 35% of the net global profits to the Indian permanent establishment was upheld.

Issue (ii): Taxability of software receipts as royalty

Analysis: The Tribunal treated the issue as covered by the jurisdictional High Court decisions holding that consideration for supply of software, where it enabled the use of the supplied hardware, did not amount to royalty merely because separate invoicing was done or the software was described as licensed. The receipts were held to be part of the business transaction and not royalty under the treaty or the Act.

Conclusion: The software receipts were not taxable as royalty and the revenue's challenge failed.

Issue (iii): Levy of interest under section 234B

Analysis: The Tribunal followed the High Court on the applicability of section 234B, while also noting that the proviso inserted by the Finance Act, 2012 to section 209(1D) operated prospectively from assessment year 2013-14. It therefore directed charging of interest only from assessment year 2013-14 onwards in terms of the amended provision.

Conclusion: Interest under section 234B was directed to be charged from assessment year 2013-14 onwards as per the amended law.

Final Conclusion: The assessee succeeded on the principal issues concerning attribution and the revenue's royalty challenge failed, while the interest issue was sustained only prospectively from assessment year 2013-14.

Ratio Decidendi: Profits are attributable to an Indian permanent establishment according to the extent of its revenue-generating operations, software supplied as an integral part of hardware supply is not royalty merely because it is separately invoiced, and the charging of interest for shortfall of advance tax follows the law as prospectively amended.

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