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 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 ... 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.