Permanent establishment and royalty principles: Indian subsidiary, global deal receipts, and training income were not taxable as PE profits or royalty.

A foreign enterprise's Indian subsidiary was held not to be a permanent establishment under the India-USA DTAA because the premises were not at the foreign enterprise's disposal, the subsidiary operated its own business, and no dependent agency or qualifying service presence was proved. Without a PE, no profit attribution survived. Revenue transfers under global deals could not be treated as notional royalty absent any contractual obligation to pay royalty, and the proposed enhancement lacked support under section 9(1)(vi) or the treaty royalty article. Training and consulting receipts were also outside royalty, as they did not involve any right to use intellectual property. Interest under section 234B was to be charged as per law.

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Issues: (i) Whether the Indian subsidiary constituted a permanent establishment of the assessee in India under the India-USA DTAA, and whether any profits could be attributed to such alleged permanent establishment; (ii) Whether revenue transfers received by the subsidiary under global deals could be treated as royalty payable to the assessee and enhanced on a notional basis; (iii) Whether receipts from training and consulting services could be brought to tax as royalty; (iv) Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): Whether the Indian subsidiary constituted a permanent establishment of the assessee in India under the India-USA DTAA, and whether any profits could be attributed to such alleged permanent establishment?

Analysis: A fixed place permanent establishment requires both a place at the disposal of the enterprise and business carried on through that place. The premises in India were leased, owned and operated by the subsidiary for its own business, and no evidence showed access, control or disposal in favour of the assessee. The record also did not establish that the assessee furnished services in India through its employees for the requisite period, or that the subsidiary satisfied the conditions for dependent agency. The subsidiary was treated as a separate legal and functional entity, and the transfer pricing position did not justify further profit attribution once the alleged PE basis failed.

Conclusion: The subsidiary was not a permanent establishment of the assessee in India, and no profit attribution to a PE survived.

Issue (ii): Whether revenue transfers received by the subsidiary under global deals could be treated as royalty payable to the assessee and enhanced on a notional basis?

Analysis: The governing arrangement for global deals did not contain any contractual obligation to pay royalty to the assessee on the revenue transfers. The relevant regulatory position also did not permit such royalty in the absence of duplication of software in India for the earlier years. The receipts were already taxed in the hands of the subsidiary, and the attempt to impute royalty at 30% and enhance it to 100% had no legal foundation under section 9(1)(vi) or the treaty royalty article.

Conclusion: The notional royalty addition on global deal revenue transfers was unsustainable and was deleted.

Issue (iii): Whether receipts from training and consulting services could be brought to tax as royalty?

Analysis: Training and consulting receipts did not involve any use of, or right to use, intellectual property, copyright, patent, trademark or similar rights. In the absence of any contractual or treaty basis treating such receipts as royalty, the addition could not stand.

Conclusion: The receipts from training and consulting services were not taxable as royalty.

Issue (iv): Whether interest under section 234B of the Income-tax Act, 1961 was leviable?

Analysis: The levy had to be computed in accordance with law, keeping in view the governing principle that tax deductible at source is relevant for advance tax computation in the relevant period.

Conclusion: Interest under section 234B was directed to be charged as per law.

Final Conclusion: The assessee succeeded on the substantive additions relating to permanent establishment, profit attribution and royalty, and the connected appeals were allowed, with only the consequential interest issue left to be worked out in accordance with law.

Ratio Decidendi: A subsidiary does not constitute a permanent establishment unless the foreign enterprise has the place at its disposal and carries on business through it, and royalty cannot be imputed in the absence of a contractual or treaty basis creating a payable right to receive such consideration.

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