2021 (9) TMI 1129 - AT - Income Tax

Tribunal rules in favor of assessee on software revenue, no additional income attributed

Mobileum Inc 20813 Stevens Creek Boulevard Versus DCIT (IT) -3 (2) (2), Mumbai

The Tribunal partly allowed the appeal, setting aside the CIT(A)'s decision on attributing further profits to DAPE and treating software revenue as ... Dependent Agent Permanent Establishment (DAPE) - income attributable for the PE of the assessee - HELD THAT:- It is not disputed that the AE has not been remunerated at ALP, no further income chargeable to tax in India can be said to be attributable for the PE of the assessee. Since, without prejudice to the ground is adjudicated in favour of the assessee, we are not adjudicating other grounds in this regard. Treatment of royalty - HELD THAT:- We note that the issue is now covered in favour of the assessee ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VERSUS THE COMMISSIONER OF INCOME TAX & ANR. [2021 (3) TMI 138 - SUPREME COURT] - Decided in favour of the assessee. Issues Involved:1. Determination of total income.2. Constituting Mobileum (India) Private Limited (MIPL) as Dependent Agent Permanent Establishment (DAPE).3. Attribution of further profits to DAPE.4. Adhoc attribution of income to DAPE.5. Treatment of revenue from supply of software as Royalty.6. Allegations of tax avoidance.Issue-Wise Detailed Analysis:1. Determination of Total Income:The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the action of the Assessing Officer (AO) in determining the total income of Mobileum Inc. at INR 2,18,99,797 as against the returned income of INR 1,57,88,512.2. Constituting Mobileum (India) Private Limited (MIPL) as Dependent Agent Permanent Establishment (DAPE):The AO determined that MIPL constitutes DAPE of Mobileum Inc. in India under Article 5(4) of the India-US tax treaty. The AO noted that MIPL is wholly dependent on Mobileum Inc., acts as a support center, and provides installation, maintenance, and support services. The CIT(A) upheld this view, emphasizing that MIPL's operations are integral to Mobileum Inc.'s business in India and that the brand name used by both entities is the same.3. Attribution of Further Profits to DAPE:The AO attributed further profits to DAPE, arguing that MIPL was not compensated at arm's length price (ALP). The CIT(A) agreed, noting the absence of a transfer pricing assessment for Mobileum Inc. and confirming the AO's estimation of revenue. The CIT(A) also referenced the withdrawal of Circular No. 23 of 1969 by the CBDT, which previously limited the assessment of non-resident income to the agent's services.4. Adhoc Attribution of Income to DAPE:The AO made an adhoc attribution of 50% of the entire revenue to DAPE, estimating profitability of 80% for software and technical fees and 20% for hardware. The CIT(A) upheld this estimation due to the lack of detailed expenditure information from the assessee.5. Treatment of Revenue from Supply of Software as Royalty:The CIT(A) upheld the AO's conclusion that revenue from the supply of Mobileum Software and third-party software constitutes 'Royalty' under Section 9(1)(vi) of the Act and Article 12(3) of the India-US tax treaty. The CIT(A) noted that the software licenses granted to customers allowed them to copy and download the software, thus constituting royalty.6. Allegations of Tax Avoidance:The CIT(A) upheld the AO's view that Mobileum Inc. was avoiding tax payments by not acknowledging its PE in India and circumventing the provisions of the Act.Appeal and Tribunal's Findings:- Grounds 2, 3, and 4:The Tribunal found that the issue of further attribution to the non-resident entity is covered in favor of the assessee, as the PE was remunerated at ALP. Citing various case laws, the Tribunal held that no further income chargeable to tax in India can be attributed to the PE if it is remunerated at ALP. Therefore, the Tribunal decided these grounds in favor of the assessee.- Ground 5:The Tribunal noted that the issue of treating revenue as royalty is covered by the Supreme Court decision in Engineering Analysis Centre of Excellence Private Limited v. CIT, which overruled the Karnataka High Court's decision in Samsung Electronics Co Ltd. The Supreme Court held that payments for software do not constitute royalty. Thus, the Tribunal decided this issue in favor of the assessee.Conclusion:The appeal filed by the assessee was partly allowed. The Tribunal set aside the order of the CIT(A) regarding the attribution of further profits to DAPE and the treatment of software revenue as royalty, deciding these issues in favor of the assessee.