2021 (11) TMI 585 - AT - Income Tax

Assessee wins appeal: No taxable income in India. Payments not royalty. Interest under Section 234B.

The A.C.I.T. Circle 1 (2) (2) International Taxation New Delhi Versus Ericsson, AB Sweden S 16480, Stockholm, Sweden And Ericsson, AB Sweden C/o Price Water House Coopers Pvt Ltd, Gurgaon Versus The ACIT/DDIT Circle 1 (2) (2), New Delhi

The Tribunal allowed the assessee's appeals, holding that there was no business connection or PE in India, and the income from hardware and software ... Income accrued in India - attribution of profit - PE in India - HELD THAT:- Considering the facts emanating from the orders of the first appellate authority, we are of the considered opinion that they are not at all distinguishable on the facts of Assessment Years 1997-98 and 1998-99 and since on those facts the Special Bench of this Tribunal has decided the appeal in favour of the assessee, which order has been upheld by the Hon'ble High Court of Delhi [2011 (12) TMI 91 - DELHI HIGH COURT] we are of the considered view that the property in goods have been passed outside India alongwith risks and reward. No doubt the contract in question was signed in India and the acceptance test had to be performed in India would not justify the findings of the ld. CIT(A) in light of the judgment of the Hon'ble Andhra Pradesh High Court in the case of Additional CIT Vs. Skoda Export [1986 (10) TMI 9 - ANDHRA PRADESH HIGH COURT] The ratio laid down by the Hon'ble Supreme Court in the case of Ishibkawajima-Harima Heavy Industries Ltd [2007 (1) TMI 91 - SUPREME COURT] squarely apply on the facts of the case wherein the Hon'ble Supreme Court has held that the fact that the contract was signed in India is of no material consequence since all the activities in connection with off shore supplies were carried outside India. We are therefore, of the view that the decision in the case of Ishibkawajima-Harima Heavy Industries Ltd [supra] covers the issue as to whether any part of the profit arising from supply of equipment by the assessee is chargeable to tax. We do not find any merits in the findings of the ld. CIT(A) in respect of addition sustained by him. We are of the considered view that the appellant has no business connection in India in respect of supply of GSM System by the appellant to cellular operators in India and further, there is no PE in any form in India in the captioned Assessment Years and therefore, the question of attribution of profit does not arise at all. DR has placed strong reliance on the decision of this Tribunal in the case of Huawei Technologies Co. [2020 (12) TMI 857 - ITAT DELHI] and others for Assessment Years 2009-10 to 2016-17. However, we are of the considered view that the facts of the case in hand are clearly distinguishable from the facts of that case in as much as in that case wherein at Article 6.3 it has been mentioned “Risk of loss of goods shall pass from seller to owner upon acceptance of the goods.” Whereas the facts of the case in hand show that risk and reward pass over at the Port of Sweden at the time of delivery of goods. Charging of interest u/s 234B - HELD THAT:- This issue is now no more res integra in light of the judgment of the Hon'ble Supreme Court in the case of Mitsubishi Corporation [2021 (9) TMI 875 - SUPREME COURT] as held that prior to Assessment Year 2013-14, interest cannot be charged u/s 234B of the Act.We, accordingly, direct the Assessing Officer to charge interest as per provisions of law keeping in mind the ratio laid down by the Hon'ble Supreme Court in the case of Mitsubhishi Corporation [supra]. TDS u/s 195 - payment in respect of supply of software was in nature of business income and cannot be characterized as Royalty either under the Income Tax Act or under the Indo-Sweden DTAA - HELD THAT:- This issue in now no more res integra by the judgment of the Hon'ble Supreme Court in the case of Enginering Analysis Centre of Excellence Pvt Ltd [2021 (3) TMI 138 - SUPREME COURT] The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. - Decided against revenue. Issues Involved:1. Business connection and Permanent Establishment (PE) in India.2. Taxability of income from the supply of hardware.3. Taxability of income from the supply of software as royalty.4. Attribution of profits to PE.5. Charging of interest under Section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Business Connection and Permanent Establishment (PE) in India:The appellant company argued that it had supplied equipment at the port in Sweden and its income was not liable to tax in India under the provisions of the Income Tax Act, 1961, and the Indo-Swedish Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) and the CIT(A) held that the appellant had a fixed place of business and dependent agents in India, constituting a PE under Article 5 of the DTAA. However, the Tribunal referred to the Special Bench decision for AYs 1997-98 and 1998-99, upheld by the Delhi High Court, which ruled that the appellant did not have a PE in India. The CIT(A) attempted to distinguish the facts for the current years based on new evidence from a survey conducted in 2007, but the Tribunal found these observations factually incorrect and not distinguishable from earlier years.2. Taxability of Income from the Supply of Hardware:The AO and CIT(A) held that the income from the supply of hardware was business profits taxable in India. The Tribunal, however, referred to the Delhi High Court’s decision, which stated that the property in goods passed outside India and the acceptance test in India was not determinative for tax purposes. The Tribunal concluded that the appellant's business model had not changed for the years under appeal and that the property in goods, along with risks and rewards, passed outside India.3. Taxability of Income from the Supply of Software as Royalty:The AO characterized the payments for software supply as 'royalty' under the DTAA. The Tribunal, relying on the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt Ltd, ruled that payments for software did not constitute royalty and were not taxable in India. Thus, the Tribunal held that the income from software supply was business income and not royalty.4. Attribution of Profits to PE:The Revenue contended that a higher percentage of profits should be attributed to the PE based on survey findings. The Tribunal, however, found no basis for higher attribution, noting that the facts were consistent with earlier years where no PE was established. The Tribunal dismissed the Revenue’s appeals, holding that there was no business connection or PE in India for the supply of GSM systems.5. Charging of Interest under Section 234B:The Tribunal referred to the Supreme Court’s decision in Mitsubishi Corporation, which held that interest under Section 234B could not be charged prior to AY 2013-14. Consequently, the Tribunal directed the AO to charge interest as per the law, considering the Supreme Court’s ratio.Conclusion:The Tribunal allowed the assessee’s appeals, holding that there was no business connection or PE in India, and the income from hardware and software supply was not taxable in India. The Tribunal dismissed the Revenue’s appeals, confirming that the payments for software were not royalty and that no higher attribution of profits was warranted. The Tribunal also directed the AO to charge interest under Section 234B in accordance with the Supreme Court’s decision.