2018 (6) TMI 1508 - AT - Income Tax

Assessee wins software supply case, not royalty but business profits. TTI India not a dependent agent PE.

The Tribunal ruled in favor of the assessee, determining that the amount received for the supply of software was not considered royalty but business ... Taxability of the amount received for supply of software as royalty - Held that:- We hold that the amount received by the assessee not being in the nature of royalty as per Article–12 of the India–Israel DTAA is not taxable as such in India, but, has to be treated as business profit of the assessee. Dependent agent PE in India - Held that:- We hold that TTI India cannot be treated as assessee’s dependent agent PE in India, hence, the amount is not taxable at the hands of the assessee. The grounds are allowed. The amount received by the assessee from supply of software to Reliance Communication Ltd. and Indus Towers Ltd. are not in the nature of royalty, this ground becomes redundant Issues Involved:1. Taxability of the amount received for the supply of software as royalty.2. Determination of TTI India as a dependent agent Permanent Establishment (PE) of the assessee.3. Redundancy of ground no. 3 if the payments are not considered royalty.4. Verification and allowance of credit to the assessee as directed by the DRP.Detailed Analysis:1. Taxability of the amount received for the supply of software as royalty:The assessee, a tax resident of Israel, engaged in the supply of software, filed a return of income declaring nil income. The Assessing Officer (AO) treated the amount received from Reliance Communication Ltd. and Indus Towers Ltd. for the supply of software as royalty, taxable in India under section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Israel Double Taxation Avoidance Agreement (DTAA). The Dispute Resolution Panel (DRP) upheld this view. However, the Tribunal, referencing its previous decisions in the assessee’s own case for earlier assessment years, concluded that the payments received were not in the nature of royalty but should be treated as business profits. The Tribunal noted that the original agreement and the supplementary agreement did not transfer the intellectual property rights or source code to Reliance, thus not constituting royalty under Article 12 of the DTAA.2. Determination of TTI India as a dependent agent Permanent Establishment (PE) of the assessee:The AO held that TTI India was a dependent agent PE of the assessee, making the business profits taxable in India. The DRP upheld this decision despite the assessee’s submission that TTI India had not undertaken any operations during the relevant year. The Tribunal, following its earlier decisions in the assessee’s own case, ruled that TTI India could not be treated as a dependent agent PE. The Tribunal highlighted that the transactions had been accepted by the Revenue in previous years and that TTI India had entered into agreements on an independent basis.3. Redundancy of ground no. 3 if the payments are not considered royalty:Both parties agreed that if the payments for the purchase of software were not considered royalty, ground no. 3 would become redundant. Since the Tribunal held that the payments were not in the nature of royalty, this ground was not adjudicated.4. Verification and allowance of credit to the assessee as directed by the DRP:The DRP had directed the AO to verify and allow credit to the assessee. The Tribunal instructed the AO to implement the DRP's direction on this issue.Conclusion:The Tribunal ruled in favor of the assessee on the primary issues, determining that the amounts received for the supply of software were not royalty but business profits, and that TTI India was not a dependent agent PE. Consequently, the appeal was partly allowed.