2024 (5) TMI 345 - AT - Income Tax

Canadian software company's receipts from Indian customers not taxable under section 44BB without permanent establishment

Computer Modelling Group Ltd. Versus ACIT, Circle International Taxation-1 (2) (1), New Delhi

ITAT Delhi held that a Canadian software company's receipts from Indian customers were not taxable in India under section 44BB. The assessee had no ... Income taxable in India or not - Business of supplying reservoir simulation software and related services. - Receipts from Indian customers - Finding or allegation of a Permanent Establishment (PE) of the assessee in India - taxability of its impugned receipts from Indian customers - taxing the entire receipts of the assessee by applying the provisions of section 44BB - HELD THAT:- It is an admitted fact that the assessee does not have a PE in India and that being a resident of Canada it is governed by the beneficial provisions of the India-Canada DTAA. The Revenue has not been able to bring anything on record to prove the contrary. The main grievance of the assessee relates to taxability of its impugned receipts from Indian customers by applying the provisions of section 44BB of the Act despite the fact that the assessee does not have any presence (PE) in India. Section 44BB does not override the provisions of section 90 and therefore, a non-resident assessee can opt to be governed by the applicable treaty if more beneficial to it, which is now a settled position of law. The impugned receipts of the assessee are not taxable in India under the provisions of section 44BB of the Act for the reason that the assessee does not have a PE in India in the relevant AYs under consideration and that being a resident of Canada, the assessee is governed by the more beneficial provisions under the India-Canada DTAA. It is the claim of the Revenue that the assessee’s case is covered by the decision of the Apex Court in the case of ONGC [2015 (7) TMI 91 - SUPREME COURT] We do not agree with this contention of the Revenue as in our considered view, the assessee’s case is distinguishable on facts as the substantial question of law determined in ONGC’s case was not concerning the eligibility of tax payers to the beneficial provisions of tax treaty but the taxability of income in the nature of FTS whether under the provisions of section 44D or 44BB of the Act. The Revenue has not been able to bring on record anything to establish the existence/ presence of a PE of the assessee in India either before us or before the lower authorities. It is not even the case of the Revenue that the assessee has PE in India in the relevant AYs under consideration. In this view of the matter, non-existence of PE of the assessee in India is unquestionable. Since the assessee does not have a PE in India in the relevant AYs, its business income (impugned receipts) under dispute in the relevant AYs is not taxable under section 44BB of the Act. Whether the impugned receipts are not in the nature of royalty/ FTS in terms of the provisions of Article 12 of the India-Canada DTAA? - It is not in dispute that the impugned receipts partake the character of business income of the assessee for the relevant AYs under consideration. In this view of the matter, the question of treating the impugned receipts as royalty or FTS is irrelevant and becomes academic in nature. Having said so, as per Article 7 of DTAA, the impugned receipts being the business profit/income of the assessee during the relevant AYs under consideration are not taxable in India in the absence of a PE of the assessee in India. Levy of interest u/s 234B of the Act on the ground of its inapplicability in case of a non-resident - HELD THAT:- As clarifying the position that proviso to Section 209(1) issued by Finance Act, 2012 was applicable prospectively after FY 2012-13, there was no liability for the assessee to pay interest under Section 234B of the Act for the impugned AYs, since the entire income was tax deductible at source in the hands of the payer. Respectfully following the decision in the case of Mitsubishi Corporation and Amadeus IT Group SA [2021 (9) TMI 875 - SUPREME COURT] we hold that levy of interest under section 234B of the Act is not called for. Issues Involved:1. Validity of treating the appellant as an eligible assessee u/s 144C.2. Taxability of receipts under Section 44BB in the absence of a Permanent Establishment (PE).3. Admission of additional evidence under Rule 46A.4. Taxation of software license fees and maintenance/support services under India-Canada DTAA.5. Levy of interest under sections 234A and 234B.6. Initiation of penalty proceedings under sections 271(1)(c) and 270A.7. Grant of TDS credit and interest under Section 244A.Summary:Issue 1: Validity of Treating the Appellant as an Eligible Assessee u/s 144CThe appellant argued that the assessment order was passed beyond the period of limitation prescribed u/s 153, making the assessment proceedings barred by limitation. The Tribunal did not specifically address this issue in the final judgment.Issue 2: Taxability of Receipts under Section 44BB in the Absence of a Permanent Establishment (PE)The Tribunal noted that the assessee, a tax resident of Canada, did not have a PE in India. It was held that Section 44BB does not override provisions of Section 90, allowing the assessee to opt for the more beneficial provisions of the India-Canada DTAA. The Tribunal relied on various judicial precedents, including the Delhi High Court's decision in OHM Ltd. and the Supreme Court's decision in Sedco Forex International, to conclude that the impugned receipts are not taxable under Section 44BB in the absence of a PE. Accordingly, the grounds related to this issue were allowed.Issue 3: Admission of Additional Evidence under Rule 46AThe CIT(A) declined to admit additional evidence, rejecting the explanation that the assessee was unfamiliar with Indian tax procedures. The Tribunal did not find it necessary to address this issue separately, given its findings on the core taxability issue.Issue 4: Taxation of Software License Fees and Maintenance/Support Services under India-Canada DTAAThe Tribunal noted that the receipts from software license fees and maintenance/support services do not qualify as 'royalty' or 'Fee for Technical Service' (FTS) under Article 12 of the India-Canada DTAA. The Tribunal relied on its earlier decision in the assessee's own case and the Supreme Court's decision in Engineering Analysis Centre of Excellence. The Tribunal held that these receipts are business income and not taxable in India in the absence of a PE.Issue 5: Levy of Interest under Sections 234A and 234BThe Tribunal held that interest under Section 234A is consequential. Regarding Section 234B, it was noted that the entire income was subject to TDS, making the levy of interest under Section 234B inapplicable. The Tribunal relied on the Supreme Court's decision in Mitsubishi Corporation and the Delhi High Court's decision in Amadeus IT Group SA to support this conclusion.Issue 6: Initiation of Penalty Proceedings under Sections 271(1)(c) and 270AThe Tribunal found that the initiation of penalty proceedings is premature and does not require adjudication at this stage.Issue 7: Grant of TDS Credit and Interest under Section 244AThe Tribunal directed the AO to grant TDS credit and interest under Section 244A in accordance with the law.Conclusion:The appeals for AY 2012-13, 2019-20, 2020-21, and 2021-22 were allowed for statistical purposes. The main issues were resolved in favor of the assessee, particularly concerning the non-taxability of receipts under Section 44BB due to the absence of a PE and the applicability of the more beneficial provisions of the India-Canada DTAA.