2026 (3) TMI 373 - AT - Income Tax

Dependent agent permanent establishment not found where distributors acted in their own name and lacked authority to bind the enterprise.

Whether a Denmark-resident software vendor had a dependent agent permanent establishment under Article 5(4) was decided by applying the Article's three ... Dependent Agent Permanent Establishment/DAPE in India - deemed PE - conclusion of contracts on behalf of the assessee - relationship of the assessee with the distributors - person acting in the State on behalf of the enterprise habitually exercises authority to conclude contracts on behalf of the enterprise - Whether the assessee, a Denmark resident selling software via Indian distributors and resellers, had a dependent agent permanent establishment (DAPE) in India under Article 5(4) of the India Denmark DTAA? HELD THAT: - The Tribunal examined Article 5(4) and held that the Department bears the onus of establishing that an agent in India habitually exercises authority to conclude contracts on behalf of the foreign enterprise or otherwise fulfils the alternative conditions in sub clauses (a) to (c). The sample Distributor Partner Agreement shows distributors are appointed as non exclusive authorized distributors who purchase and sell in their own name and for their own account, risk and cost, and that neither party is authorised to make commitments on behalf of the other. Clause 3.3 permits distributors to set resale prices subject only to a lawful maximum resale price; this limited restriction reflects compliance with Indian requirements to display maximum retail price and does not demonstrate control over pricing. The assessee's certification of resellers was held to be a quality control measure to ensure competent installation and service, and not a mechanism that curtails the distributors' business liberty or converts them into dependent agents habitually concluding contracts for the assessee. AO's reliance on website descriptions to characterise the software as tailor made was found inadequate; the website excerpts merely describe flexibility and scalability, not customer specific customization establishing a different nexus. Revenue did not place material to show that distributors habitually conclude contracts on behalf of the assessee, maintain stock delivering on behalf of the assessee, or habitually secure orders on its behalf. Consequently, the conditions of Article 5(4) are not satisfied and there is no DAPE in India; attribution of profits to a non existent PE therefore does not arise. [Paras 8, 15] The assessee does not have a Dependent Agent Permanent Establishment in India; the conditions of Article 5(4) are not satisfied and the assessment treating the software income as taxable in India is without merit. Final Conclusion: The assessment attributing profits to an alleged DAPE was set aside and the appeal of the assessee is allowed, the Tribunal finding no DAPE in India and no basis for taxing the contested software licence revenue in India for AY 2022-23. Issues: Whether the assessee, a Denmark resident selling software via Indian distributors and resellers, had a dependent agent permanent establishment (DAPE) in India under Article 5(4) of the India Denmark DTAA for AY 2022 23.Analysis: Article 5(4) requires that a person acting in the State on behalf of the enterprise habitually exercises authority to conclude contracts on behalf of the enterprise, or satisfies the other alternative conditions (stock of goods for regular delivery; habitually secures orders). The distributor agreements on record grant non exclusive distribution rights, state that distributors purchase and sell in their own name and for their own account, and explicitly describe the parties as independent contractors not authorised to bind one another absent written authorisation. The agreement permits distributors to sell competitors' products and contains a reseller certification program limited to ensuring technical competence; the certification does not restrict distributors' freedom to select resellers. Price provisions permit distributors to set resale prices subject only to a lawful maximum retail price; this reflects statutory MRP requirements rather than supplier control over pricing. The assessing officer relied on website language suggesting software configurability and on asserted controls, but no material shows that distributors habitually concluded contracts on behalf of the assessee, maintained stock for regular delivery on the assessee's behalf, or habitually secured orders wholly or almost wholly for the assessee. Consequently, none of the conditions in Article 5(4)(a)-(c) are established on the factual record.Conclusion: The assessee did not have a dependent agent permanent establishment in India under Article 5(4) of the India Denmark DTAA; therefore, no profits are attributable to a PE and the impugned assessment disallowance is set aside in favour of the assessee.Ratio Decidendi: A non exclusive distributor arrangement where distributors purchase and sell in their own name and for their own account, may include reseller certification and a lawful maximum retail price clause, but absent evidence that distributors habitually conclude contracts on behalf of the foreign enterprise, maintain stock for regular delivery on its behalf, or habitually secure orders for it, the conditions of Article 5(4) for deeming a dependent agent permanent establishment are not satisfied.