TaxTMI 
TaxTMI 
2024 (11) TMI 364
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.... He submitted, as per notification F. No. 187/3/2020-ITA-1, dated 31st March, 2021 issued by Central Board of Direct Taxes (CBDT), assessment proceedings for a foreign company cannot fall within the purview of faceless assessment scheme prescribed under section 144B of the Act. Whereas, he submitted, notice under section 143(2) of the Act was issued by National Faceless Assessment Centre. Thus, he submitted, in terms with CBDT Notification, on the date of issue of notice under section 143(2) of the Act, National Faceless Assessment Centre did not have jurisdiction to initiate assessment proceedings. Thus, he submitted, the assessment orders passed in pursuance to an invalid notice issued under section 143(2) of the Act, are equally invalid, hence, deserve to be quashed. However, he fairly submitted that Hon'ble Karnataka High Court in case of Adarsh Developers Vs. DCIT, [2024]158 taxmann.com 81 (Karnataka) has taken a view against the assessee. 4. Learned Departmental Representative submitted that there is no lack of authority/jurisdiction on the part of National Faceless Assessment Centre in issuing notice under section 143(2) of the Act. In support, he relied upon Notification N....
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.... details including details of registration of the underlying Intellectual Property (IP), he observed that though the assessee claims itself to be the owner of IPs, however, the majority of patents are registered in various other countries, such as, USA, Austria, UK and Singapore, except three patents registered in Austria. He further observed that in spite of specific query raised for furnishing details of expenses incurred for use/maintenance and development of patents and IPs, the assessee did not furnish the documentary evidences. 9. Referring to OECD Guidelines, the Assessing Officer observed that the economic ownership is decided on the basis of development, enhancement, maintenance, protection and exploitation functions. He observed, the assessee cannot be taken as the economic owner of the IPs as it failed to substantiate that it performs and controls all development related functions and risks. Thus, he observed that the assessee may be the legal owner of the underlying IPs, however, the assessee visibly lacks economic substance with regard to holding of IPs at the level of Austria. While doing so, he referred to the "substance over form" test in deciding the taxation of c....
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....ized the assessments in both the assessment years under dispute by taxing the income from sale of software as business income under the Act denying treaty benefits. 13. Opening his arguments, Sh. Percy Pardiwala, learned Senior Counsel appearing for the assessee submitted that the assessee was in existence and operating in Austria in a non-company form, as early as, the year 1997. He submitted, the assessee was incorporated as company in Austria in the year 2007 and was carrying on the same business of developing and selling various testing software. Thus, he submitted, the allegation of the Departmental Authorities that the assessee was set up without any commercial substance and only for deriving treaty benefits is a baseless allegation, without being backed by any evidence. In this context, he drew our attention to a certificate of incorporation as company. He submitted, assessee's status as a tax resident of Austria has been duly recognized by the Austrian Revenue Authorities while issuing Tax Residency Certificates (TRC) on year-on-year basis. Thus, he submitted, once the assessee is the holder of a valid TRC, it cannot be denied treaty benefits. To support such proposition, ....
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....al owner of the IPs, in the same breath, he cannot hold that assessee is not the economic owner but someone else. He submitted, the assessee has furnished substantial evidence before learned DRP and Assessing Officer to demonstrate that it has employed adequate number of employees and incurred expenditure on research and development. He submitted, merely because the IPs are registered in various countries, assessee's ownership over such IPs cannot get divested. 16. He submitted, the assessee, being a legally incorporated entity in Austria having established business operations in Austria and being a recognized tax resident of Austria, is entitled to avail benefits under India - Austria DTAA. He submitted, in assessment year 2021-22, the Assessing Officer has denied treaty benefits to the assessee going beyond the TRC, relying upon two decisions of the Authority for Advance Ruling (AAR), which have subsequently been reversed by the Hon'ble High Courts. Thus, he submitted, the very basis for denying treaty benefits to the assessee has been knocked down. He submitted, unless the department brings on record strong corroborative evidence to establish that the assessee is a sham/shell c....
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....ials on record. The short issue arising for consideration is whether the receipts from sale of software licenses to Indian customers is taxable in India as business income. Insofar as the factual aspect of the issue is concerned, there is no dispute that the assessee has been incorporated as a company in Austria in the year 2007. Upon incorporation in Austria, the assessee also started its operations in India since the year 2007. It would be relevant to observe, the ultimate parent company of the assessee is Inside Venture Management LLC, an USA based company. 21. Facts on record reveal that the assessee had been selling testing software licenses to various entities across the globe including the entities in India and from past years and was offering them to tax as royalty income under the respective treaty provisions. Even, in the impugned assessment years, the assessee had sold software licenses to Indian customers and earned revenue. In the original returns of income filed for the current years, the assessee, being unsure about the taxability or otherwise of the receipts from sale of software licenses, offered them as royalty income. Subsequently, when the legal position regard....
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....session of the tax authorities to demonstrate that the entity claiming benefit is a sham/shell company and has been involved in fraud or illegal activity. In case of Bid Services Division (Mauritius) Ltd. Vs. Authority for Advance Ruling (supra), the Hon'ble Bombay High Court, while dealing with the acceptability or otherwise of TRC has observed as under: "45. No doubt mere holding of a TRC cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the Apex Court cited above have clearly upheld the conclusivity of the TRC absent fraud or illegal activities. Nowhere in the impugned ruling the existence of TRC has been denied. In fact, in paragraph 2 of the impugned Ruling, the Authority has itself set out the existence of a valid TRC in the name of the Petitioner. Further, except bald allegations, no material has been placed on record to demonstrate or establish that Petitioner was a device to avoid tax or that there was fraud or any illegal activity. There is hardly any discussion in the impugned Ruling on the applicability of the said Circulars No. 682, 789 or the Press Releases by the CBDT / Ministry of Fin....
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....vestment pathways ought not be halted by skepticism or mistrust except on the basis of well- established parameters. L. The principles of substance over form must be considered to be the prevailing norm and the Revenue entitled to doubt the bona fides of a transaction only in those situations where it be found that the transaction involves a sham device intended to achieve illegal objectives or formulated based on illegal motives. In light of the decisions rendered in Azadi Bachao Andolan and Vodafone, treaty shopping in itself cannot be rendered abhorrent unless it were categorically established that the device was incorporated with a view to evade tax and in a manner contrary to the intent of the Contracting States to the treaty. Therefore, it is only in those situations where no other conclusion can be drawn other than the entity being a conduit or lacking in commercial substance and intending to perpetuate fraud that the Revenue would be justified in doubting the nature and character of that transaction. M. The issuance of a TRC by the competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes certification of th....
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....behind the tax residency certificate issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, legal ownership and accordingly there is no capital gain earned by the petitioner liable to tax in India. Even the clarificatory press release dated March 1, 2013 issued by the Finance Ministry pursuant to the 2013 amendment makes it clear that a tax residency certificate is to be accepted and the tax authorities cannot go behind it. Further, since on the basis of repeated assurances by the Government of India which have been upheld by the apex court, the petitioner had invested in India, the respondent is estopped from arguing to the contrary." 4. In view of the aforesaid, we find no ground to interfere with the order impugned. The appeal raises no substantial question of law. Consequently, it fails and shall stand dismissed." 27. Identical view has been expressed by the Hon'ble Delhi High Court in case of Black Stone Capital Partners Vs. ACIT (supra). Thus, if we examine the issue of validity of TRC on the touchstone of the ratio laid down in the judicial precedents discussed above, it can be safely concluded that the sanct....
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.... and merely based on conjectures and surmises rather than corroborative evidence. 30. Further, allegation of the Assessing Officer that the assessee has been incorporated in Austria as part of treaty shopping arrangement to avoid taxation in USA, in our view, is totally irrelevant and should not have bothered the Assessing Officer. In any case of the matter, there cannot be any manner of doubt that the Revenue earned from sale of software licenses could not have been taxed as royalty income in India in view of the ratio laid down by the Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) and various other judicial precedents. Therefore, it is immaterial whether the assessee is located in Austria or USA. Even, assuming that in place of assessee, the entity earning revenue from sale of software licenses would have been located in USA, still, the revenue earned would not have been taxable in India as royalty income, in view of the law laid down by the Hon'ble Supreme Court. 31. Therefore, the receipts in dispute would not have been taxable in India, irrespective of the jurisdiction where the entity earning Revenue from sale of software is loc....