2019 (3) TMI 563 - AT - Income Tax

Tribunal rules on appeal, deletes addition, no further profits in India. Interest levy dismissed. Penalty proceedings premature.

The Tribunal partially allowed the appeal, directing the deletion of the addition of Rs. 5,75,43,604 and ruling that no further profits were attributable ... Accrual of income in India - Provision of the software solutions for onward distribution to third party customers in India - Compensation remaining with the Indian subsidiary - characterisation of income - attribution of income - PE in India - Royalty’ or ‘Fee for Technical Services’ or even as ‘Business profits’ - AO has characterised such receipts as ‘Royalty’ in the draft assessment order, whereas the DRP treated the same as ‘business profits’ in terms of Article 7 of India-Israel Tax Treaty - Non-existence of a Dependent Agent Permanent Establishment (‘DAPE') - India-Israel Tax Treaty - HELD THAT:- The appellant before us is a tax resident of Israel and in terms of the arrangement with its subsidiary in India, i.e. Celltick India, it is engaged in providing software solutions for onward distribution to third party customers in India. In terms of such arrangement effective from March, 2011, a copy of which has been placed it emerges that the price realised from the ultimate customer is shared between the assessee and its Indian subsidiary, i.e. Celltick India, on 50-50 basis. For the present, the issue relating to characterisation of income is not being contested by the assessee as it has sought to challenge the untenability of the addition only on the basis of the proposition that once ‘arm’s length principle’ has been satisfied qua the relevant transactions, there can be no further profits attributable to the assessee in India even if it has a PE in India. While canvassing such proposition, assessee also does not bring into question the stand of the Revenue that there is a PE of the assessee in India. The point sought to be made by the assessee is that the compensation remaining with the Indian subsidiary, i.e. Celltick India, is adequate and justified on the basis of the Transfer Pricing analysis, and the same has been so accepted by the income-tax authorities in the case of Celltick India for the very same assessment year. According to the assessee, no further income could be attributable to it on account of its PE in India. In our considered opinion, the proposition sought to be canvassed by the assessee has the approval of the Hon'ble Supreme Court in the case of Morgan Stanley & Co. [2007 (7) TMI 201 - SUPREME COURT] In view of the aforesaid discussion, in our view, since the appropriate ‘arm’s length principle’ has been satisfied in the present case, nothing more would be left to be taxable in India by attributing any further income to the PE of the assessee in India. - Decided in favour of assessee. Charging of interest u/s 234B - HELD THAT:- This aspect of the matter, in our view, also loses its substantiveness since we have already deleted the addition. Nevertheless, in view of the judgment in the case of DIT (IT) vs NGC Network Asia LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT] since the income of the assessee is liable for deduction of tax at source, no interest for default of payment of advance tax is exigible. Thus, on this count too, assessee has to succeed with regard to levy of interest under Section 234B of the Act. Issues Involved:1. Determination of total income.2. Taxability of income as 'royalty' under the Income Tax Act.3. Taxability of income as 'royalty' under the India-Israel Tax Treaty.4. Existence of a Dependent Agent Permanent Establishment (DAPE) in India.5. Attribution of income and profits to the alleged DAPE.6. Application of the income tax rate.7. Levy and computation of interest under Sections 234A and 234B of the Act.8. Initiation of penalty proceedings under Section 271(1)(c) of the Act.Detailed Analysis:1. Determination of Total Income:The appellant contested the determination of total income at Rs. 5,75,43,604 against Nil income offered to tax. The Assessing Officer (AO) held that the income from software solutions provided to third-party customers in India was taxable as 'royalty' under the Act.2. Taxability of Income as 'Royalty' under the Income Tax Act:The AO characterized the receipts from software solutions as 'royalty' income. The appellant argued that there was no 'use' or 'right to use' of the 'copyright' in the software solutions provided, hence it should not be considered 'royalty' income.3. Taxability of Income as 'Royalty' under the India-Israel Tax Treaty:The appellant contended that the income should not be taxed as 'royalty' under Article 12 of the India-Israel Tax Treaty. The definition of 'royalty' under the treaty is restrictive compared to the Act. The DRP upheld the AO's view that the income was taxable as 'business profits' under Article 7 of the treaty.4. Existence of a Dependent Agent Permanent Establishment (DAPE) in India:The AO concluded that Celltick India, the appellant's 100% subsidiary, constituted a DAPE under Article 5 of the India-Israel Tax Treaty. The appellant argued that Celltick India operated independently and did not meet the conditions for being a DAPE. The DRP upheld the AO's decision.5. Attribution of Income and Profits to the Alleged DAPE:The AO attributed 50% of the gross revenues to the DAPE in India. The appellant argued that this attribution was arbitrary and that the DAPE had been remunerated at an arm's length price. The Tribunal referred to the Supreme Court judgments in Morgan Stanley & Co. and E-Funds IT Solution Inc., stating that once the arm's length principle is satisfied, no further profits should be attributable to the DAPE. The Tribunal directed the AO to delete the addition of Rs. 5,75,43,604.6. Application of the Income Tax Rate:The AO applied an incorrect income tax rate of 50% instead of the correct rate of 40% applicable to a foreign company. This issue was rendered academic due to the deletion of the addition.7. Levy and Computation of Interest under Sections 234A and 234B of the Act:The AO levied interest under Sections 234A and 234B. The Tribunal held that since the income was subject to tax deduction at source, no interest for default of payment of advance tax was exigible, following the Bombay High Court judgment in NGC Network Asia LLC.8. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:The AO initiated penalty proceedings under Section 271(1)(c) for alleged concealment of income and furnishing inaccurate particulars. The Tribunal deemed this premature and dismissed the ground.Conclusion:The Tribunal allowed the appeal partly, directing the deletion of the addition of Rs. 5,75,43,604 and holding that no further profits were attributable to the DAPE in India once the arm's length principle was satisfied. The issues regarding the characterization of receipts, existence of DAPE, and application of tax rates were rendered academic. The levy of interest under Section 234B was also dismissed. The initiation of penalty proceedings was considered premature and dismissed.