2024 (2) TMI 743 - AT - Income Tax

US entity's Indian subsidiary as Dependent Agent PE with arm's length remuneration prevents additional income taxation

ITAT Mumbai held that when a US entity's Indian subsidiary constitutes a Dependent Agent Permanent Establishment (DAPE) and is remunerated at arm's ... Taxability of software sale by the US entity to Indian entities - Indian subsidiary is held as DAPE [Dependent Agent Permanent Establishment] of the assessee in India - when DAPE is remunerated at arm’s length - HELD THAT:- Tribunal in assessee’s own case in preceding assessment years [2022 (5) TMI 1513 - ITAT MUMBAI] has decided the similar issue in favour of the assessee and held that once the DAPE is remunerated at arm’s length no further addition can be made in the hands of the assessee. As transactions in question were at arm’s length price, no taxability survives in the hands of the assessee. Once basic taxability under the DAPE itself comes to an end, all other issues raised in the appeal are rendered academic and infructuous - Decided in favour of assessee. Short grant of credit of TDS - This issue is restored to the file of the AO with the direction to grant TDS credit, in accordance with the law, after conducting the necessary verification. As a result, ground raised in assessee’s appeal is allowed for statistical purposes. Issues Involved:1. Legality of the assessment order.2. Determination of Dependent Agency Permanent Establishment (DAPE).3. Verification of invoices.4. Arm's length nature of transactions.5. Interpretation of Bilateral Advance Pricing Agreement (BAPA).6. Consistency with previous Tribunal rulings.7. Attribution of profits to DAPE.8. Attribution of revenues from direct sales.9. Short grant of TDS credit.10. Initiation of penalty proceedings under section 270A.11. Levy of interest under sections 234A and 234B.Summary of Judgment:1. Legality of the Assessment Order:The assessee contended that the assessment order passed by the AO, pursuant to the DRP's directions, is 'bad in law and liable to be quashed.' The Tribunal did not specifically address this issue, making it general in nature and not requiring specific adjudication.2. Determination of DAPE:The AO and DRP erred in holding that Micro Focus Software India Private Limited (MFSIPL) is a DAPE of Micro Focus Software Inc. (MFSI) by misinterpreting the 'Principal to Principal' arrangement. The Tribunal found that similar issues in preceding years were decided in favor of the assessee, holding that once the DAPE is remunerated at arm's length, no further addition can be made.3. Verification of Invoices:The AO concluded that the appellant did not provide copies of invoices raised by MFSIPL to third-party customers. However, the Tribunal noted that the AO had requested invoices raised by MFSI on MFSIPL, not those raised by MFSIPL on third-party customers, thus supporting the assessee's contention.4. Arm's Length Nature of Transactions:The AO and DRP erred in holding that the transaction of sale of software is not at arm's length. The Tribunal upheld the assessee's plea, noting that the transactions were reported as per the agreed APA margin in the original return of income filed.5. Interpretation of BAPA:The AO and DRP failed to appreciate the objective of a BAPA and misinterpreted its terms. The Tribunal found that the BAPA dated 20/08/2020 was binding and that no further profit should be attributed to the DAPE since the transaction between the assessee and the Indian subsidiary was on an arm's length basis.6. Consistency with Previous Tribunal Rulings:The AO and DRP did not follow favorable Tribunal rulings in the company's own case for previous assessment years. The Tribunal reiterated that the issue was decided in favor of the assessee in preceding assessment years.7. Attribution of Profits to DAPE:The AO arbitrarily attributed significant profits to the alleged DAPE of MFSI, disregarding the arm's length arrangement. The Tribunal held that once an arm's length remuneration is paid to the agent, nothing further survives for taxation in the hands of the DAPE.8. Attribution of Revenues from Direct Sales:The AO erred in attributing revenues from the sale of software products made by MFSI directly to third parties to the alleged DAPE. The Tribunal upheld the assessee's plea, deleting the addition made by the AO.9. Short Grant of TDS Credit:The AO erred in short granting the TDS credit. The Tribunal restored this issue to the file of the AO with the direction to grant TDS credit after necessary verification.10. Initiation of Penalty Proceedings:The initiation of penalty proceedings under section 270A was deemed premature and therefore dismissed by the Tribunal.11. Levy of Interest:The charging of interest under sections 234A and 234B of the Act was considered consequential in nature and allowed for statistical purposes.Conclusion:The appeal by the assessee was partly allowed for statistical purposes, with specific directions to the AO to grant TDS credit and delete the impugned addition. The Tribunal upheld the plea of the assessee based on consistency with previous rulings and the binding nature of the BAPA.