TaxTMI 
TaxTMI 
2017 (7) TMI 420
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...., and taxing these income streams separately under the provisions of the Act read with the applicable provisions of the Treaty. 3. The learned AO has erred, in fact and law, by holding that the income from the sale of software is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 4. The learned AO has erred, in fact and law, by holding that the income from the sale of subscriptions is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 5. The learned AO has erred, in law and in facts, by holding that the income from the provision of the services is royalty income and fees for technical services ("FTS") under Article 12(4) of the Treaty and consequently liable tax in India. 6. The learned AO has erred, in law, by holding that despite payment of an arm's length price to NetApp India (the alleged PE of the Appellant in India) for the marketing and sales support services, additional income relating to supply of storage products, subscriptions and services is attributable to the alleged PE and taxable in India. 7. The learned AO has erred, in law, by holding that....
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....a"), a permanent establishment ("PE") is constituted for NetApp B.V. in India under the India-Netherlands Treaty ("Treaty"). 2. The learned AO has erred, in law and in facts, by artificially splitting income from storage products into the hardware component and software, and taxing these income streams separately under the provisions of the Act read with the applicable provisions of the Treaty. 3. The learned AO has erred, in facts and in law, by holding that the income from the sale of software is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 4. The learned AO has erred, in facts and in law, by holding that the income from the sale of subscriptions is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 5. The learned'AO has erred, in law and in facts, by holding that the income from the provision of the services is royalty income and fees for technical services ("FTS") under Article 12(4) of the Treaty and consequently liable tax in India. 6. The learned AO has erred, in law, by holding that despite payment of an arm's length price to NetApp India ....
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....s who are appointed on non-exclusive basis and they purchases NetApp products and services from the company on principal to principal basis and resale the same to customers or to other resellers. The Structure of the company vis a vis group is that a. Network Appliances (in short Net App) group has a holding company in United States known as Net App USA (US Co). US Co has a subsidiary company in Netherland known as NAHM BV( BV Co). BV Co has a subsidiary company known as NetApp BV (the assessee in appeal) also in Netherland. b. US CO has a subsidiary in India known as Net App India (ICo). ICo, belonging to Net App Group, provides some services to assessee, which are marketing and sales support, assistance in organizing trade shows, ascertaining market trends, competition analysis and assistance in pre sales marketing as promotional material for Net App products and services. 5. The appellant is engaged in the business of selling storage equipment and products and rendering of certain services in the Asia-Pacific region including India. The products are sold through third party distributors who are appointed on a non-exclusive basis and sales are made to a globa....
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....gaged in promotional activity for BV products and services iv. NetApp India shall respond to inquiries for NetApp BV products and services v. NetApp India shall advise NetApp BV on marketing strategies and local market conditions. vi. NetApp India shall provide information on market trends, competitions, and new products and services in the market. vii. NetApp India shall at the request of NetApp, provide technical support services for the products (Technical Services) including, without limitation, the following: * Services in fulfillment of NetAPP BV's warranty obligations * Maintenance services for customers and * Such other technical support services as NetApp shall required as mutually agreed to by the parties b. Financial and administrative activities of NetApp India. Subject to the terms and conditions herein, NetApp BV hereby appoints NetApp India, on a non-exclusive basis, to perform the following financial and administrative services with respect to this agreement. i. NetApp India shall account for expenditures and receipts ii. NetApp India shall report expenditure and receipts iii. NetApp India shall provide ....
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....es that are in the nature of marketing and other services which are attached to the sale of NetApp Products. Further, marketing activity is an integral part of the business operation and since the Indian Company is engaged in marketing of products of parent company, therefore, it carried on the business operations of its parent company in India. According to him, without association of NetApp India with the assessee company, activities of the assessee of supply and licenses cannot be performed in India. He was further of the view that NetApp India has many sales offices in India which are the outlets acting as "sales outlets' for the India customers. He further held that NetApp India's role is 'central and core' to the business of the assessee and as assessee is mainly engaged as a trader, the role of marketing and pre sales activities acquire more importance. Therefore, the ld Assessing Officer reached at a conclusion that the assessee has a fixed place of business in India through NetApp India and its various branches and hence, the assessee has a Fixed Place permanent establishment in India. He further held that NetApp India is a dependent agent of the assessee as economic and l....
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....d taxed it at normal rate of 42.23%. 12. Similarly, the assessee is also earning service fees on account of services rendered to its India clients of Rs. 223963915/-. The contention of the assessee the such payments are not chargeable to tax in India either as royalty or as a fees for technical services as there is no right, property or information for which the consideration is paid and further the services are not 'make available' to the purchaser and hence it is not fees for technical services in terms of DTAA. However, the ld Assessing Officer was of the view that the services are predominately technical in nature and further, it is falling within the definition of royalty it is chargeable to tax in India. He further held that as this payment is also effectively connected to the permanent establishment of the assessee, it is chargeable to tax under Article 7 of the DTAA. Therefore out of Rs. 223963915/- he granted deduction of Rs. 41113319/-and charged balance of Rs. 182850796/- as royalty effectively connected to the permanent establishment chargeable to tax under article 7 as business income attributable to the permanent establishment taxed it at normal rate of 42.23%. ....
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....services rendered is fees for technical services. On the issue of Indian associated enterprise remunerated at arm's length, it was held that Ld. TPO has already established that the remuneration paid to the Indian associated enterprise is not at arm's length and therefore an adjustment has been made, which is still being contested at appeal stages. In nutshell, the Ld. DRP confirmed the action of the Ld. assessing officer. 15. Based on the direction issued by the Ld. the DRP, ld. assessing officer passed assessment order under section 143 (3) read with section 144C of the Income Tax Act on 25th of June 2013 determining the total taxable income of the assessee of Rs. 503257761/-. Against this assessment order, assessee is in appeal before us. 16. Ground No. 1 of the appeal challenges the order of the Ld. assessing officer holding that appellant has a permanent establishment in India according to the double taxation avoidance agreement. Ground No. 2, 6, 7, 8, and ground No. 9 are all related to the issue of permanent establishment of assessee in India and profit attribution to that permanent establishment. 17. Before us, Ld. Authorized representative submitted that assessee ....
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....ng a permanent establishment under article 5 (1) of the Double Taxation Avoidance Agreement. He further submitted that appellant does not have a place of effective management in India since all significant decisions in relation to the operation and management of the appellant are undertaken outside India and board meetings of the appellant are held outside India. In view of this, he submitted that there is no fixed place PE of assessee in India. 18. Regarding the agency PE, he submitted that such agency P E can be created only when there is a dependent agent in India, who has an authority to conclude contracts on behalf of the company or maintains any stock of goods of the company for delivery on behalf of the company. He submitted that majority of the sale is made by the assessee company to its distributors in India on principal-to-principal basis and not as an agent of the appellant. He further submitted that the distributors are not legally or economically dependent on the appellant. He further stated that Indian entity does not have an authority to conclude contracts on behalf of the company as well as it also does not maintain any stock of goods of the company for delivery ....
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....company and subsidiary company between the parties it does not become the permanent establishment of the appellant. 21. On the issue of attribution of income to the permanent establishment in India, he relied on the decision of Hon'ble Supreme Court in case of Morgan Stanley where it is held in principle that, if the permanent establishment has been compensated at arm's length price taking into account all the functions performed by it, there should not be further attribution of income to the permanent establishment in India. He further submitted that approach of the Ld. AO in attributing 90% of the appellant's profits from the sale of storage products and 100% of receipts from software licensing, subscription and services to the alleged permanent establishment in India is contrary to the income attribution principal laid down by article 7 of the double taxation avoidance agreement. He submitted that even if there is an attribution of income it shall be determined only based on the remuneration, which is attributable to the actual activity of the permanent establishment for such sales, or businesses and it cannot be determined based on the total amount received by the enterprise....
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.... company in Netherland pays royalty to the subsidiary of NetApp Inc. Therefore, he pointed out that a trading company, which is a reseller, is paying the royalty and that is unusual. He further referred to the business of the assessee in India and submitted that various customers of the appellant has deducted tax at source on income paid to the appellant and according to him these services for which the payment was received by the appellant directly for goods delivered to the customers by Netapp India. He stated that services to the customers of the appellant were provided by the employees of Indian entity who were science graduates/engineers and he also submitted that 20 employees of Indian entity provided technical services, which apparently included two non-Indians who might be on deputation from the group companies. He further referred to the business of the appellant in India and business of the Indian company, based on that he submitted that services are provided by an Indian entity to customers but the customers instead of paying to the Indian entity are paying to the appellant. He further stressed that it is obvious that Indian employees advise the customers to raise purcha....
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....med by the employees of Indian entity on behalf of appellant. 26. He further stated that offices of Indian entity are local sales office of the appellant and that is the fixed place of business of the appellant in India. For this he submitted that t business with regard to the sale of products, licensing of software and after sale services are being carried out through the office of the Indian entity by Indian entity and it also provides replacement of parts, spares within limited number hours of receipt of the complaint. He therefore submitted that Indian entity offices are sales outlet of the appellant. He further stated that agreements explicitly referred to the local sales offices as local offices of NetAPP BV( Assessee) in India and Indian entity does not have any business of providing services. Based on the above arguments, he submitted that appellant has fixed place of business at its disposal and therefore there is a permanent establishment of the assessee in India. 27. He further stressed that Indian entity is not an agent of independent status and therefore there is an agency permanent establishment of the assessee in India. To support his argument, he referred to t....
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....He further referred to the clause (4) of the commission agent agreement and said that the various expenses incurred in India by the Indian entity for performing value-added activities are obligation of the appellant in India and for which attribution of profits is required. He further submitted that functional analysis has not considered the financial and administrative activities performed by Indian entity for appellant. He alleged that Indian entities' offices acted as local sales offices and employees of Indian entity acted as local managers of the appellant. He further stated that Indian entity has provided pre sales and post sales support services from various offices in India however to the learned TPO, assessee submitted that it has only three offices in India i.e. at Bangalore, Delhi and Mumbai. Further, according to him functional analysis did not identify any functions of Indian entity with regard to sales of appellant's products in India. He further stated that the transfer pricing analysis was also faulty for the reason that internal cup is not used when the assessee has repeatedly claimed before the assessing officer that services have been provided by 3rd parties and ....
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....evidence under rule 29 of Income Tax Tribunal Rules, 1963 that are in the form of information available in public domain and downloaded from the website of the appellant. This information is related to storage systems and software, how to buy it and the press release. He therefore submitted that the same may be admitted as additional evidence to the proceedings under consideration. 32. On the subsequent date of hearing, Ld. departmental representative submitted that existence of business connection of the appellant in India is not under challenge despite specific query to the assessee, it did not object to Indian associated enterprise being considered as a business connection of the assessee in India. He further submitted that the appellant had two directors who are also on the board of the Indian company which fact should be taken into account. He further referred to the Commission Agency Agreement of assessee with Indian associated enterprise effective from 27/04/2002, which provides marketing sales technical activities, which are the core activities for assessee since it is a trading concern. The main contention was that these are the critical and pivotal role of Indian entit....
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....of the assessment order where functional profile of the Indian entity is incorporated and therefore he submitted that there is no finding that Indian entity is engaged in any sales to the customers in India. He further referred to the assessment order of Indian entity wherein the functional profile of that particular entity was examined. He submitted that Ld. TPO has compared the function of the Indian entity with that of a commission agent and goes on to observe that the commission agent also does not make any sales to the customers but acts only as a link between the buyers and the seller. Therefore, he held that NetApp India is not involved in the process of concluding contracts or negotiation of prices. On the issue of transaction of the appellant with Indian entity at arm's length, he submitted that first appellate authority in the case of the Indian entity additions so made were deleted on issue of comparability. He therefore submitted that price charged from the appellant by the Indian entity was held to be at arm's length. The revenue has challenged this appeal before the Bangalore bench of the ITAT for exclusion of the comparables. He submitted that there is no allegation ....
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....of whether Netapp India (ICo) has an authority to conclude contract or not. For this, he relied on the decision of ITO Vs Pubmatic India Private Limited 7044/Mum/2011. c. On allegation of the departmental representative that the activities performed by Indian entity of marketing sales and technical support are core and vital activities of the appellant's trading business, he submitted that Indian entity is carrying on its own business as a service provider and not the business of the appellant. Merely because there are transactions between the Indian subsidiary and the foreign company, it does not mean that Indian subsidiary constitutes a permanent establishment for the foreign parent in India. He further relied upon the order of the Ld. TPO in case of Indian entity where it is stated that NetApp India does not conclude contracts for the sale of NetApp products in India. He submitted that permanent establishment is required to be seen from the provisions of the Double Taxation Avoidance Agreement between the two countries on the criteria prescribed therein such as Constitution of a fixed place of business, dependent agency. He submitted that in the present case both these ....
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....ity. g. With respect to the allegation that sales are not on principal-to-principal basis and Net App India doing financial and administrative functions, he submitted that such financial and administrative functions are only in relation to the marketing and support functions of the Indian entity, which does not sell products. h. With respect to the denial of learned departmental representative that activities of Indian entity are not proprietary auxiliary in nature he submitted that the activities of the Indian entity does not meet the threshold for creating a permanent establishment under the Double Taxation Avoidance Agreement. He submitted that where there is no authority to conclude contracts no permanent establishment is created of the appellant in India. i. With respect to the contention of revenue, that Net App India is not providing mere back-office support services he submitted that the Indian entity is carrying on its own business as a service provider and not the business of the appellant. He submitted that because there are certain transactions between the Indian subsidiaries in the foreign parent it does not mean that the Indian subsidiary co....
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....s on freight shipping and transportation etc by the Indian entity, sales of products that consist of hardware with software component embedded in it, and the obligation on the Indian entity for replacement of part within a short span of 4 hours, that Indian entity has a call Centre and it also makes for sales forecast on behalf of appellant, services provided by the employees of net tap India and deputation of 2 employees for rendering technical support services, he submitted that these are the pure guesswork and there is no material to suggest or support the revenue's argument on these aspects. He submitted that customers in India are customers of the distributors and the distributors engage themselves into the sales process with the customers and Indian entity only performs a marketing support role to the distributors who sell to the end user customers. Regarding the issue of obtaining orders from the customers and purchase orders routed through Indian entity, he submitted that Indian entity does not solicit or accept the purchase orders on behalf of appellant. The purchase orders are raised on appellant by the distributors and role of such distributors are ignored to perform fun....
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....ted that same is also captured in TP study report of Indian entity that is carrying on ITES services. He further submitted that preparation of the sales forecast for the appellant is also part of the marketing support services and cannot be used against the assessee unless it performs a sales function, which the Indian entity does not. With respect to the allegation that 2 employees debited for rendering technical support services he submitted that there are no employees which are seconded to the Indian entity which is confirmed by Indian entity as part of reply to inquiry under section 133 (6) of the act by the assessing officer. Regarding the payment of royalty, he submitted that Indian entity from time to time participates in trade fairs for dissemination of information about the products and promotional activities and for this purpose it needs to have the right to use the trade Marks given that it is a separate legal entity different from the appellant. He submitted that even otherwise this is not a condition for determination of the PE of the appellant. m. On the last issue of the claim of text deducted at source he submitted that tax deduction at source has been made....
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....s including warranty obligations, maintenance service for customers etc it is apparent that assessee has business connection in India and, therefore the income of assessee is chargeable to tax under the provisions of section 9 of the income tax act. Honourable Delhi high court in case of DAT versus M/s E funds IT solution (364 ITR 256) (Delhi) has held as under:- "72. No arguments have been addressed before us on the aspect of legal connection which justifies taxation of a non-resident under Section 9(1)(i) of the Act on income which is deemed to be accrue or arise in India. The Tribunal in the impugned order has held that the assessees had business connection in India for the points noted in paragraph 18.3. Though the reasons stated in paragraph 18.3 do appear to be widely and broadly stated, but keeping in view the mandate and the ratio of the decisions of the Supreme Court in CITv. R.D. Aggarwal & Co. [1965] 56 ITR 20, CITv. Toshoku Ltd. [1980] 125 ITR 525 (SC), Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC) and the amendments incorporated and made to Section 9 (1)(i), it has to be held that business connection did exist, not beca....
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.... Permanent establishment was charged to tax as business income applying provision of article 12 (7) and Article 7 of DTAA. 38. The main thrusts of the argument of the revenue are listed in paragraph No. 5 of the final assessment order passed by the Ld. Assessing officer on 25/06/2013. According to him Article 5 (2) list out places which prima facie constitute a permanent establishment and that is the place of management. According to the Ld. assessing officer the assessee has presence in India in the form of net app India Ltd, which has been appointed to perform marketing support services attached to the sales in India for the sole benefit of Net app BV. According to him the Indian company is a subsidiary of the net app group which has been formed for performing marketing and other services which are attached to the sale of net products. According to the assessing officer the subsidiary company is performing the marketing and promotion activities and without such activity no sale/supply/licensing can happen. Therefore, without the association of Net App India the business of Net App (Appellant) as regards supply/license to India cannot be performed. According to him the Net app ....
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....s the installation activities happen in India, which last for 1 to 2 days the contract for supply of goods is not completed on mere delivery of goods but by acceptance of the goods by the buyer. He further held that the Indian company is a dependent agent of the foreign company as the independence of agent must exist in both legal and economic respects. He further stated that the economic relation between the assessee and the Indian agent i.e. Indian company are not at arm's length and dependence is reflected by the facts of arrangement or agreement between the foreign enterprise and the agent. The directors on the board of the agent company are on the payrolls of the group entity and the principal is able to exercise at least persuasive authority over the agent and therefore the Indian entity is a dependent agent of the assessee. In the end he held that appellant has a permanent establishment in India in the form of the business premises of net app India and also net app India is a dependent agent of the foreign entity within the meaning of articles 5 (1), 5 (2) and 5 (5) of the double taxation avoidance agreement. 39. Therefore now we first look at article 5 of India - Netherl....
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....graphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting in one of the States, on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if- (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise ; or (b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise ; 6. An enterprise of one of the States shall not be deemed to have a permanent establishment in the other State merely because it carries on business in that other State through a broker, a general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be consider....
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....agreement for the sake of convenience is being referred to as DTAA), it would be appropriate, at the outset, dispel any doubt or contention that establishing a subsidiary in the other treaty country would result in creating or establishing a PE of a foreign holding company in the said third country. Again to be fair to the Revenue, no such contention has been raised and the said legal position is clear and luminescent from paragraph 6 to Article 5 of the DTAA. The said paragraph reads:- "6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." 10. The aforesaid paragraph in categorical terms states that a holding or a subsidiary company by themselves would not become PE of each other. The words used in the said paragraph are equally important because the term "holding" or "parent company" or a "subsidiary company" is not used. The said paragraph uses the expression "contr....
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....le:- "40. [Principle] It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by the subsidiary company is managed by the parent company does not constitute the subsidiary company a permanent establishment of the parent company." 12. Similarly, in Arvid A. Skaar in Permanent Establishment, Erosion of Tax Treaty Principle, Second Indian, Reprint, 2008 has succinctly explained the legal position at page 540 paragraph 36.2.1 as under:- "The treaty-based protection of related companies recognises the legal independence of related companies for tax purposes as a material reality until the opposite is proved. This affects both the constitution of PE, and the allocation of income to a separate entity." 13. It is further clarified and elucidated at pages 541-42 paragraph 36.2.3 as :- "36.2.3 POLICY CONSIDERATIONS A neutral tax system would allow a ....
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....t (for example: Sections 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attr....
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....parent) can have an (agent) PE in its subsidiary's state of residence if the general requirements for a PE set out in Art. 5(1) to (5) of the OECD Model are met. Accordingly, any space or premises belonging to the subsidiary that is at the disposal of the parent (the "right-to-use test") and that constitutes a fixed place of business (the "location test" and the "duration test") through which the parent carries on its own business (the "business activity test"), gives rise to a PE of the parent under Art. 5(1), subject to Art. 5(3) and (4), of the OECD Model. In addition, under Art. 5(5) of the OECD Model, a subsidiary constitutes an agency PE of its parent if the subsidiary has the authority to conclude contracts in the name of its parent and habitually exercises this authority, unless these activities are limited to those referred to in Art. 5(4) or unless the subsidiary does not act in the ordinary course of its business as an independent agent within the meaning of Art. 5(6)..." on the basis of above guiding principles laid down by the Hon'ble high court it is apparent that assessee has not deputed any of its personnel in India and also the directors of the Indian ....
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....ian company shall inform appellant of all the orders placed by the customers immediately upon receipt and such order shall be accepted or rejected at the sole discretion of the appellant. It is further submitted in the agreement itself that Indian company shall not have any authority whatsoever to bind appellant with respect to any of the orders received. It was also the obligation of the Indian company that it will maintain a competent and fully trained organization of itself. It will provide a monthly sales forecast to the appellant. As assessee is engaged in sale of such products and the Indian entity is a commission agent of the appellant the Indian company shall maintain a representative set of products for demonstration purposes only. The Indian company is also responsible to maintain a response mechanism probably to all the enquiries and request by the customer or potential customers relating to the sale of products by the appellant. For the services the Indian company will be remunerated a service fee as stated in paragraph No. 5 of that agreement. Therefore, on reading of the agreement it is apparent that Indian company is a service provider to the appellant and it does no....
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....rated the above-stated attributes; after quoting from various authors, this Court held that "The term 'through' postulates that the taxpayer should have the power or liberty to control the place and, hence, the right to determine the conditions according to its needs". In the present case, there is no allegation that the Assessee has any Branch Office or any other office or establishment through which it is carrying on any business other than simply stating that Adobe India's constitutes the Assessee's PE. There is no evidence that the Assessee has any right to use the premises or any fixed place at its disposal. The AO has simply proceeded on the basis that the R&D services performed by Adobe India are an integral part of the business of the Assessee and therefore, the offices of Adobe India represent the Assessee's fixed place of business. Thus, clearly the right to use test or the disposal test is not satisfied for holding that the Assessee has a PE in India in terms of Article 5(1) of the Indo-US DTAA. 33. In E-Funds IT Solution (supra), this Court had expressly negated that an assignment or a sub-contract of any work to a subsidiary in India could be a fact....
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....he decision of the Hon'ble Delhi High Court in Adobe System Incorporated ( Supra), we reject the contention of the revenue that there is a permanent establishment of the appellant in terms of article 5 (1) of the double taxation avoidance agreement. 43. Now we come to the agency PE and other aspects of permanent establishment of the appellant. The main allegation of the Ld. Assessing officer is that Indian entity has the authority to conclude contracts by virtue of common directors who are eligible to sign contracts on behalf of foreign company as well as Indian agent. On these facts, it was also contended by revenue that it constitutes a place of management for the appellant. It is further contended that Indian entity has local sales offices in India. Further, the website of the net Group mentions the Indian entity sales representative in the sections which mentions the offices of Indian entity. It is further contended that net app India is not providing mere back-office support services, but it is engaged in the capacity building of the group and appellant. We are of the opinion that common directors of the appellant and net app India. They are not engaged in the day-to-day ac....
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....sales process and perform sales in India. Therefore this argument of the revenue also does not find favour with us. On the contention of that Indian entity constitutes a place of management for appellant is devoid of any merit as the Ld. and assessing officer has not led to any evidence to establish that the appellant does take significant and strategic decisions relating to its global business in India. In fact it was contended that the board meetings of the appellant company is held outside India and, therefore, there cannot be any fixed place of permanent establishment in India. The support for this contention has been correctly drawn by the assessee from the commentary of Prof Klaus Vogel and paragraph No. 12 of the OECD commentary on article 5 of double taxation avoidance agreement. The allegation of revenue that the local sales offices in India of Indian entity are being used by the appellant and therefore there are sales outlets in India which falls under the article 5 (2) (h) has permanent establishment. The term sales outlet is not defined in any legislation. However, the general meaning of the term is a place of business for retailing of the goods and Tom outlet in partic....
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....utes a permanent establishment for the foreign parent in India. This has been conclusively held by the Hon'ble Delhi High Court in DIT versus E funds IT solutions (supra). 44. With respect to the agency PE, It is alleged by revenue that activities of Indian entity are not on principle-to-principle basis as it is also doing financial and administrative functions, also reports of expenditure incurred to the appellant according to the terms of the commission agreement. However, we do not find any evidence on record to support the above contention as no evidence has been drawn to our attention that these functions are with respect to the sale of products or services of the appellant. According to the agreement, these functions are with respect to the marketing and support sales function carried on by the Indian entity. Further, the Hon'ble Delhi High Court in case of Adobe System Incorporation (Supra) has also held that a permanent establishment cannot be constituted in India only on account of the fact that appellant has a right to ask for the expenditure and income in terms of the agreement between the parties. There may be reasons for doing so because of the commercial aspect for....
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....ment is required to be established with respect to the appellant and not to the group. Ld. departmental representative could not draw our attention to any such provision in double taxation avoidance agreement. Further, the contention of the revenue that Indian entity discusses all terms with the distributors, discount to resellers are negotiated by net app India, decision on sales are also taken by Indian entity in India, the Indian entity obtains orders from customers, purchase orders are rooted through Indian entity, customers do not make any distinction between Indian entity and the appellant and further that all functions of the Indian entity are not captured in transfer pricing documentation prepared by Indian entity which did not include assets given free of cost to the Indian entity. It is further contended that the agreement with the resellers are signed after 40 days and net app India has incurred expenses on freight, shipping and transportation of the goods and therefore it is engaged in delivery of goods and performing functions of sale on behalf of appellant. It is further alleged that storage systems sold by the appellant on being replacement warranty the parts are rep....
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....he revenue before us and even otherwise; this aspect on standalone basis does not give any indication that the appellant has a permanent establishment in India. No evidence has been brought on record by revenue to suggest that this expenditure is incurred on import of goods, which are sold by the appellant. With respect to the allegation that the parts are replaced in 4 hours and therefore inventory is maintained by Indian entity for the purpose of sale. It was submitted that's required for performing certain services in India are warehoused by third-party warehousing service provider in India and Indian entity does not deliver spares on behalf of appellant. It was further submitted that such third-party service provider are not at the disposal of Indian entity or of the appellant and are independent parties and therefore this fact cannot lead to any indication of the permanent establishment of the appellant. We do not find any such provision in the double taxation avoidance agreement except where the premises are used as sales outlet. In any case, no evidences or instances have been led that the Indian entity is maintaining any stock of goods of the appellant for delivery on behal....
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....he DTAA. In the present case the Ld AO has merely examined the documents submitted by the appellant and has not carried out detailed exercise to arrive at the facts and unless that exercise is carried out it is difficult to demonstrate existence of fixed place PE and Agency PE. To carry out this exercise the ld AO is empowered in many ways by the Income tax Act such as survey u/s 133 A and examination of the employees and customers of the company to determine the actual activities carried out by the Ico in India. Further BEPS Action point 7 is also on the issue to address the tax experience that the foreign enterprise is able to avoid the application of Article 5(5) of the OECD Model Tax Convention, to the extent that the contracts concluded by the person acting as a commissionaire are not binding on the foreign enterprise. Since Article 5(5) relies on the formal conclusion of contracts in the name of the foreign enterprise, it is possible to avoid the application of that rule by changing the terms of contracts without material changes in the functions performed in a State. 'Commissionaire arrangements' as it is in the present case have been major pre-occupations of tax. In most of....
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....greement: "(h) Licensee may not copy, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Licensee's rights shall not be restricted by this Clause 2(h) to the extent that local law grants Licensee a right to do so for the purpose of achieving interoperability with other software and in addition thereto Infrasoft undertakes to make information relating to interoperability available to Licensee subject to such reasonable conditions as Infrasoft may from time to time impose including a reasonable fee for doing so. To ensure Licensee receives the appropriate information, Licensee must first give Infrasoft sufficient details of its objectives and the other software concerned. Requests for the appropriate information should be directed to the Vice president Technical of Infrasoft." • Clause 2(f) of the Infrasoft license agreement is quoted as below: "(f) The Software shall be used only for Licensee's own business as defined within the InfrasoftLicence Schedule and shall not, without prior written consent from Infrasoft: (i) be loaned, rented, sold, sublicensed or transferred to any third party (....
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....ent." • Clause 7 of End User Software License: "THIS LICENSE IS PERSONAL TO CUSTOMER. CUSTOMER SHALL NOT ASSIGN, SUBLICENSE OR TRANSFER THE LICENSE OR AGREEMENT WITHOUT NETAPP'S PRIOR WRITTEN APPROVAL; ANY ATTEMPT TO DO SO SHALL BE VOID." 49. The revenue is also not seriously disputed before us that the issue is not covered by the decision of the Hon'ble Delhi High Court. However the issue needs to be verified by the Ld. assessing officer whether the licensing agreement involved in the present appeal is similar to the issue decided by the Hon'ble Delhi High Court. Therefore we set aside ground 34 of the appeal of the assessee back to the file of the Ld. assessing officer to decide the issue afresh considering the decision of the Hon'ble Delhi High Court. In the result ground No. 3 and 4 of the appeal of the assessee is allowed with above direction. 50. The ground No. 5 of the appeal of the assessee is with respect to the treatment given by the Ld. assessing officer to the service income as royalty income and fees for technical services under article 12 (4) of the treaty and consequently liable to be tax in India. The Ld. assessing officer has d....
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..... The company provides installation, integration and training assistance to the Indian customer in relation to the products sold by it. The company also provides warranty services for the products purchased by the customers in India. For a period of 3 years and the warranties undertaken without any additional cost to the customer as the prize of the warranties already included in the sale prices. The company also offers supplementary or and hence warranty packages for a separate charge. The warranties also extendable payment of appellate judges by the customers. Over and above this, it also provides professional services to the customers who can avail such services such as data migration, integration, disaster recovery or backup configuration etc. For rendition of the services. The company has entered into technical support services arrangement with third-party service providers in India and has similar technical support arrangement with Indian company through the sales support agreement. The Ld. assessing officer has held that the services are predominately-technical services in the nature and has concluded that it is ancillary to the royalty and hence royalty as defined in the ac....
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....ing officer to compute the interest under section 234A of the income tax act if there is any tax liability after granting credit of such TDS. In the result ground No. 11 of the appeal of the assessee is allowed accordingly. 55. Ground No. 12 of the appeal of the assessee was with respect to the levy of interest under section 234B of the income tax act, despite the entire income of appellant is subject to withholding taxes in India and, therefore, no such advance tax was payable by the assessee. This ground of appeal is also set aside to the file of the Ld. assessing officer with a direction that if the income of the appellant is chargeable to tax in India and, if it is subject to tax withholding the no interest under section 234B of the income tax act is chargeable. In the result ground No. 12 of the appeal of the assessee is also allowed. 56. Ground No. 13 of the appeal of the assessee is against initiating penalty proceedings under section 271 (1) (c) of the act, since the appellant is not liable to tax in India. This ground is premature and therefore same is dismissed 57. In the result appeal of the assessee is partly allowed with above direction. 58. Coming to the a....