Permanent Establishment and software royalty issues resolved against taxability where no copyright rights were transferred.
No fixed place PE or dependent agent PE existed in India for the relevant years because contemporaneous evidence showed closure of the liaison office, vacation of premises, no expatriate employees, and no business activity through that office; profit attribution to an Indian PE was therefore impermissible. Receipts from supply of software were not royalty because the treaty position and settled law treat consideration for software resale or use as royalty only where copyright rights are transferred, and the receipts here related to embedded software supply without transfer of copyright rights. The consequential challenge to interest and penalty did not survive independently.
Issues: (i) whether the assessee had a fixed place Permanent Establishment and/or a Dependent Agent Permanent Establishment in India during the relevant assessment years and, if not, whether attribution of profits to an Indian PE was warranted; (ii) whether receipts from supply of software were taxable as royalty.
Issue (i): whether the assessee had a fixed place Permanent Establishment and/or a Dependent Agent Permanent Establishment in India during the relevant assessment years and, if not, whether attribution of profits to an Indian PE was warranted
Analysis: The assessee produced contemporaneous material showing closure of the liaison office, vacation of the earlier premises, absence of expatriate employees in India, and no business activity being carried on through the liaison office in the relevant years. The Revenue did not rebut those materials with contrary evidence and relied mainly on findings recorded for earlier years. The existence of a Permanent Establishment has to be examined on the facts of each year, and where the factual foundation for the earlier PE no longer survives, profit attribution cannot continue.
Conclusion: The assessee had no Permanent Establishment or Dependent Agent Permanent Establishment in India during the relevant assessment years, and no attribution of profits to an Indian PE was permissible.
Issue (ii): whether receipts from supply of software were taxable as royalty
Analysis: The software supply receipts were examined in the light of the governing treaty and the Supreme Court's settled position that consideration for resale or use of computer software, where no right in copyright is transferred, does not constitute royalty. The assessee's receipts were treated as embedded software supply and not as a transfer of copyright rights. The contrary view taken in the assessment order was therefore unsustainable.
Conclusion: The software supply receipts were not taxable as royalty.
Final Conclusion: The appeals succeeded substantially on the two contested substantive issues, while the consequential challenge relating to interest and penalty did not survive independently.
TaxTMI 
AI Drafter ✕
TaxTMI 
TaxTMI 
