TaxTMI 
TaxTMI 
2021 (9) TMI 1372
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....a through third party distributors appointed on a non-exclusive basis. During the year under consideration, the Assessing Officer (AO), on the basis of the view taken while framing assessments for Assessment Years 2008-09, 2010-11 and 2012-13, held that the assessee has Permanent Establishment ("PE") in India. The Assessing Officer, vide para 10 of the final assessment order, has held that the business premises of NetApp India constituted Permanent Establishment of the assessee company in terms of Article 5 of the Double Taxation Avoidance Agreement (DTAA). The Assessing Officer further held that M/s NetApp India was an agency of the assessee company in India and attribution of income/loss was done as per para 16 of the draft assessment order. In addition to this, the Assessing Officer also held that the receipt from sale of embedded software in the nature of royalty and taxed an amount of Rs. 14,99,39,032/- as business income under Article 7 of DTAA. On similar lines, the service levy charged by the assessee was brought to tax as Fees for Technical Services (FTS) effectively connected to the PE. 2.1 The assessee company filed objections before the Ld. Dispute Resolution Panel (....
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....provisions of section 44DA to tax the income from the sale of software, subscriptions and services in India without allowing for any expenditure incurred by the Appellant outside India and by considering 100% of such receipts as being attributable to the alleged PE in India. 9. The learned AO has erred, in law and in facts, by holding that the sale consideration received by the Appellant from the sale of NetApp B.V. products to NetApp India Marketing is the business income of the appellant and consequently liable to tax in India. 10. The learned AO has erred in law and in fact, in levying interest under section 234B of the Act, amounting to INR 7,53,38,064 disregarding the fact that the entire income of Net App B.V., which has been held to be taxable, was subject to withholding of taxes in India owing to which advance tax was not liable to be paid. 11. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act, since the Appellant is not liable to the alleged PE in India." 3.0 At the outset, the Ld. Authorized Representative (AR) submitted that the issues raised by the assessee before this Tribunal are squarely covere....
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....ent of the appellant. We are of the view that there needs to be a clear-cut distinction between the business of the appellant as well as the business carried on by the Indian company itself for its own purposes. The Indian company is merely a service provider to the appellant and it would not be appropriate here to say that where a person opt in service in relation to his business from another person. Then the service provider carries on the business of the services recipient. As it is stated that there is an agreement between appellant and the Indian company for provision of certain services which are listed in paragraph 3 of the commission agent agreement dated27/04/2002. According to that agreement the Indian company shall in form 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....
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.... includes premises, facilities, offices which are used by an enterprise for carrying on its business. The fixed place must be at the disposal of an enterprise through which it carries on its business wholly or partly. Although, the word 'through' has been interpreted liberally but the very least, it indicates that the particular location should be at the disposal of an Assessee for it to carry on its business through it. These attributes of a PE under Article 5(1) of the Indo-US DTAA were elucidated by the Supreme Court in Morgan Stanley & Co. Ltd. (supra). In a recent decision, a Division Bench of this Court in DIT v. EFunds IT Solution [2014]364 ITR 256/226 Taxman 44/42 taxmann.com 50 (Delhi) reiterated 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 In....
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....they are liable to be resolved in proceedings of the Indian entity and not in the proceedings of the appellant. He therefore relied on the decision of the Hon'ble Delhi High Court in case of Adobe Systems Inc (Supra) wherein it has been held that even if there is a dispute in relation to this, it is liable to be resolved in proceedings relating to the Indian entity. We are of the opinion that transfer-pricing dispute in the assessment proceedings of the Indian entity does not have any bearing on determination of permanent establishment of appellant in India. Indeed, it is a matter of dispute between Indian revenue authorities and the Indian entity only. Therefore, respectfully following the 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 ....
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....ion that according to article 5 (5) of double taxation avoidance agreement, assessee does not have permanent establishment in India. Regarding reference to the website of the net app group the references with respect to how to buy and contact us section which are very common looking to the services that has been rendered by Indian entity to its potential customers to reach out to the Indian entity to discuss product features information and response to the Canaries as part of the marketing support function only. It is pertinent to note here that the website pages under this section also referred to the list of the addresses of other resellers and service providers were the parties who conducted 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 outsid....
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....n place from these outlets. In view of this we do not agree with the views of the revenue that the local offices of the assessee ares ales outlet constituting permanent establishment of the appellant. With respect to the allegation that Indian entity is not providing mere backup office support services, but engaged in the capacity building of the net app India group, we are of the opinion that Indian entity is carrying on its own business as a service provider and not the business of the appellant is being carried out by the Indian entity. Merely because there are certain transactions between the Indian subsidiary and the foreign parent, group it does not mean that the Indian subsidiary constitutes 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 no....
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....asis by the appellant in terms of the agreement entered into between them. It was submitted before us that the85% of the revenue of the Indian entity is derived from IT, ITES services, and not the marketing and sales support services. Therefore, it was contended that Indian entity is not solely reliant on the appellant in relation to its operation and it is an independent agent and therefore it would not create an agency PE in India of the appellant. These facts remain uncontroverted. Furthermore, merely because the Indian entity provides services to the net app group including the appellant, it cannot be said that permanent establishment of the appellant is in India because the permanent establishment 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 ....
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....hat even if the software or intangible data was provided free of cost or otherwise by the appellant to an Indian entity, it does not automatically result in the Indian entity constituting a permanent establishment of the appellant in India. Therefore, we reject the contention of the revenue on this count. With respect to the incurring of the freight and transportation cost incurred by the Indian entity. It was submitted that these costs are incurred by Indian entity for the purpose of transportation of demo products and samples and other assets of net app India only and further the transportation cost of Rs. 12 lakhs pertains to travelling and conveyance expenditure. This fact has not been controverted by the 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 r....
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.... time participates in various trade fairs and disseminate information about the products and engaged in promotional activity and for this purpose, it has right to use the trademark which is not held by the appellant but different entity. As this transaction is not between the appellant and the Indian entity where it is undisputed that the trademarks are not owned by the appellant but by different entity, these facts does not lead to creation of a permanent establishment in India of appellant." 5.1 It remains undisputed that the facts in the present year are identical to the facts as in Assessment Years 2008-09 and 2010-11 and, therefore, in absence of any distinguishing feature and respectfully following the orders of the Co-ordinate Bench as reproduced above, we hold that the assessee company does not have any Permanent Establishment in India. Since, the question regarding Permanent Establishment is being answered in favour of the assessee, the issue of attribution of income in the hands of such Permanent Establishment becomes infrutuous. Accordingly, the grounds raised by the assessee are allowed. 6.0 Ground Nos.3 & 4 are directed against the treatment of software and sale ....
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.... of the assessee in view of the decision of the Hon'ble Delhi High Court in case of Director of income tax versus Infrasoft Ltd 264 CTR 329 (Delhi).He also submitted a chart during the course of hearing that compares the software considered by Hon'ble Delhi High Court and the features of the software licensing agreement in the present case. He has demonstrated that the issue involved is similar stating various aspects of software licensing agreement as under: 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 ground3 and 4 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 allowed with above direction." 8.1 It is also pertinent to note that the issue of software royalty was recently adjudicated by the ....
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....impugned addition in the year under consideration is solely based on the reasoning recorded in assessment orders for Assessment Years 2008-09 and 2010-11. Since, the findings of the Assessing Officer with regard to this issue in 2008-09 & 2010-11 are no longer valid as having been disproved by the Co-ordinate Bench of this Tribunal, we find no reason to uphold the action of the Assessing Officer in taxing the impugned receipts in India. The relevant observations of the Tribunal are being reproduced herein under:- "52. We have carefully considered the rival contentions. 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 profession....
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....by addition of Rs. 40,09,832/- made on account of sale of products by the assessee company to M/s NetApp India. The Assessing Officer, in para 17 of the impugned order, has observed that the assessee failed to explain why the amount so received is not taxable in India and that no agreement, evidence or documents were produced before him to demonstrate the nature of transactions and goods sold. 12.1 The Ld. AR argued that the transaction in dispute is sale of computer equipment to M/s Net App which were used for the purpose of demonstration of the assessee company's products, who were Indian customers. It was submitted that the sale of equipment took place off-shore and that there was no case of any income accruing or arising in India for the purpose of taxation. 13.0 Per contra, the Ld. CIT-DR argued that the assessee had failed to substantiate the nature of transaction before the Assessing Officer and, therefore, the addition had been rightly made. 14.0 We have heard the rival submissions on the issue and have also gone through the facts of the case. The Assessing Officer has considered the income from the sale of equipment as business income taxable in India. However, it....
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....e Software except as reasonably required for backup purposes." "(h) Licensee may not copy, decompile, disassemble or reverse-engineer the Software Clause 2 of Software License: 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 "Buyer must not make any copies of the Software except as reasonably necessary for backups. Neither Buyer nor any third party may: (a) reverse engineer or try to reconstruct or discover any source code or underlying ideas used in the Software; or (b) remove or....