Permanent establishment must be tested year-wise, and software supply receipts are not royalty without copyright transfer.

Permanent establishment and business connection must be determined on the facts of each relevant assessment year, and a finding cannot be carried forward mechanically from earlier years; where specific objections such as expatriate presence or office use are raised, they require year-wise fact-finding, so the matter was remanded for reconsideration. Receipts from supply of software were not taxable as royalty under the Income-tax Act and the India-USA DTAA, because the Supreme Court in Engineering Analysis held that consideration for resale or use of computer software without transfer of copyright does not constitute royalty; the software royalty addition was deleted.

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Issues: (i) Whether the assessee had a business connection and Permanent Establishment in India for the relevant assessment years, and whether the matter required fresh examination on the facts of each year. (ii) Whether receipts from supply of software were taxable as royalty under the Income-tax Act, 1961 and the India-USA DTAA.

Issue (i): Whether the assessee had a business connection and Permanent Establishment in India for the relevant assessment years, and whether the matter required fresh examination on the facts of each year.

Analysis: The finding on Permanent Establishment cannot be carried forward mechanically from earlier assessment years. The record showed that the authorities below had relied substantially on prior years, while no specific finding had been recorded for the relevant years regarding the presence of expatriate employees or the continued use of office premises. Where specific objections are raised, they must be dealt with on the facts of the year in question. The matter therefore required fresh fact-finding and reconsideration.

Conclusion: The issue was remanded for fresh adjudication and is partly in favour of the assessee.

Issue (ii): Whether receipts from supply of software were taxable as royalty under the Income-tax Act, 1961 and the India-USA DTAA.

Analysis: The question stood covered by the Supreme Court ruling in Engineering Analysis Center of Excellence Pvt. Ltd., which held that consideration for resale or use of computer software under such agreements does not amount to royalty where no right in copyright is transferred. Applying that ruling, the software receipts could not be taxed as royalty.

Conclusion: The addition made on this count was directed to be deleted and the issue is in favour of the assessee.

Final Conclusion: The appeals succeeded only to the extent of deletion of the software royalty addition, while the Permanent Establishment and business connection issue was sent back for reconsideration on year-specific facts.

Ratio Decidendi: A finding of Permanent Establishment must be based on the facts of the relevant assessment year, and consideration for supply or resale of computer software without transfer of copyright does not constitute royalty.

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