TaxTMI 
TaxTMI 
TaxTMI 
2026 (1) TMI 1570
X X X X Extracts X X X X
X X X X Extracts X X X X
....h the parties before us fairly agreed that ITA No. 1833/DEL/2009 be taken as the lead case and the decision rendered thereon would apply with equal force in all other appeals in view of identical facts, except with variance in figures. Accordingly, we proceed to take up the appeal in ITA No. 1833/DEL/2009. ITA No. 1833/DEL/2009 [A.Y. 2001-02] 4. Grounds raised by the assessee in this A. Y read as under: "1.1. That on facts and in law the Commissioner of Income Tax (Appeals) (herein after referred to as 'CIT(A)'] erred in holding that compensation for services under Software Support Services Agreement dated 01 st June 1999 to Oracle India Private Limited (hereinafter referred to as "OIPL"} from another group entity constituted Royalty payable to the assessee and such alleged royalty was chargeable to tax as such u/s 9(1)(vi) of the Act and/or under Article 12 of the Double Tax Avoidance Agreement (DTAA) between Indian and USA. 1.2 That on facts and in law the CIT(A) erred in assuming jurisdiction to enhance the alleged royalty income allegedly due to the assessee u/s 250(1)(a) of the Act and in enhancing the same from estimated 30% of alleged revenue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticle 4 of the Double Taxation Avoidance Agreement ('DTAA' or Treaty') between India and USA. The assessee filed its return of income declaring income of Rs. 47,56,83,190/- on 04.01.2002. 6. The assessee has a wholly owned subsidiary in India - Oracle India Private Limited ('OIPL'). OIPL has two divisions- (i) Software Distribution Division where it is duplicating and distributing software to the customers under a license obtained from the assessee under an agreement. The assessee receives Royalty at agreed percentage of software duplicated and distributed by OIPL to Indian customers; and (ii) Software Development Support Division under which the Indian company is doing support functions like translation, porting, customisation and localisation etc in the development of software which has been outsourced by the assessee to the OIPL under an agreement. 7. The assessee, Oracle Corp does not directly license software to customers in India. Oracle Corp grants to OIPL, the right and authority to duplicate and license oracle software owned by Oracle Corp pursuant to the Software Duplication and Distribution License Agreement (SDDLA) entered into between Oracle C....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... royalty on global deals and the enhancement of its quantum by CIT(A). 11. Taking up the issue of PE in India first, the ld AR vehemently argued that there is no Fixed Place PE under Article 5(1) of INDIA-USA DTAA. It is submitted that the "Disposal Test", given in Article 5(1) is not met as the Assessee does not own, lease, or otherwise occupy any office premises in India. It is stated that the premises in Bangalore and Hyderabad are owned and operated by OIPL for its own business. The ld AR emphasized that the assessee does not have any right of access or control over these premises, and they are not at its disposal. As a matter of fact, this premises was never at the disposal of the assessee. Hence, the crucial "disposal test," as established by the Hon'ble Delhi High Court in the Adobe Systems Incorporated (2017) 292 CTR 407(Del) case, is not satisfied. 12. The ld AR forcefully argued that the Business Activity Test is also not met for the reason that the assessee has not carried out any part of its business operations in India. The business of the OIPL, even if it relates to outsourced activity of the assessee, cannot be regarded as the business of assessee. 13. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1-02, the AO accepted the arms' length nature under the provisions contained in old Section 92. 16. The ld AR submitted that in the present case, OIPL may be acting for the group entities, yet it is being remunerated at arms' length. Therefore, its independent status cannot be questioned. Hence, Article 5(4) is not applicable. The ld AR stated that conditions of Dependent Agent under Article 5(4) is also not fulfilled. It is stated that assuming OIPL is not an independent agent, it still cannot be regarded as dependent agent for the reason that it does not have the authority to, and does not in practice, conclude contracts, bind assessee, secure orders, or maintain stock of products on behalf of the assessee. Thus, all key conditions under Article 5(4) for the creation of an Agency PE remain unsatisfied. 17. On the issue of profit attribution (without prejudice) [Ground No. 3 in AY 2001-02 to 2004-05 & Ground No. 5 in AY 2005-06], the ld AR submitted that even if a PE were held to exist, no further profits can be attributed since OIPL has been renumerated at arm's length, as held by the TPO for AYs 2002-03 to 2005-06. For AY 2001-02, when current TP rules were not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing royalty at 56% to assessee on all revenues, including those from global deals. The assessee duly offered this 56% royalty income to tax in its returns. 21. The ld counsel of the assessee further argued that the Assessee pays Cost plus 15% to OIPL as compensation for the activity of development of software which has been outsourced to the OIPL under an agreement. It is forcefully submitted that both the amount of Royalty paid by OIPL to the assessee and the amount of compensation paid by the Assessee to OIPL have been tested by TPO under TP provisions and found to be at Arm's length for A. Y.s 2002-03 to 2005-06. For A.Y. 2001- 02 it was submitted that the old provisions of Section 92 gave similar powers of adjustment to the AO and the AO has made no addition for that year implying thereby that the transaction was at Arm's length. 22. On the issue of enhancement by CIT(A), the ld AR submitted that the CIT(A)'s action of enhancing the royalty from the actual 0%/56% (which was paid and offered to tax) to a notional 100% is entirely arbitrary and lacks any justification, especially when the TPO had accepted the underlying transactions with OIPL as being at arm'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as first made by the AO in AY 2001-02 vide his order dated 31.03.2004 which continued in subsequent AYs. The CIT(A) has passed a combined appellate order for AY 1997-98 to AY 2004-05 (dated January 20, 2009) and AY 2005-06 and AY 2006-07 (dated March 12, 2013) confirming the finding of AO on PE. The orders for AY 1997-98 to AY 2000-01 were passed under section 147 of the Act and the ITAT vide its order in ITA No. 1829 to 1812/Del/2009 dated 26.09.2022, has quashed these assessments on the grounds of improper assumption of jurisdiction u/s 147 which were affirmed by the Hon'ble High Court in ITA 414,416, 418 and 424/2024 vide dated 28 Oct 2024. 27. We find that the AO has held that OIPL constitutes PE of Oracle Corp in India in respect of its software development activities. In order to adjudicate the issue of PE, it would be apposite to refer the relevant provisions enumerated in the India-USA DTAA as under: ARTICLE 5 - Permanent establishment - 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered an agent of independent status within the meaning of this paragraph. ******** 28. It is the AO's findings that the assessee has all 3 kinds of PEs in India as contemplated under the India-USA DTAA namely (i) Fixed Place PE under Article 5(1); (ii) Service PE under Article 5(2)(l); and iii) Agency PE under Article 5(4) of the India-USA DTAA, in the form of OIPL in respect of Software development activities. We will accordingly deal with each provision of DTAA regarding PE and its application in the facts of the instant case. 29. Firstly, the AO has held that OIPL constitutes 'a fixed place of business' under Article 5(1) of the DTAA as the premises of OIPL in Hyderabad and Bangalore and machinery/equipment installed therein are owned by the assessee. The AO however, has not substantiated the said assertion by any cogent evidence/materials. On the other hand, the assessee statement that the assessee does not own, lease, or otherwise occupy any office premises or establishment in India, remains uncontroverted. We find that the premises in Bangalore and Hyderabad are leased by OIPL and the machinery/equipment are owned and operated by OIPL for its own bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nch or subsidiary, the business of the subsidiary (OIPL) will be regarded as business of the principal (OSC) as held by the hon'ble Supreme Court in the case of E-Funds (supra). 32. We are also of the considered view that the Business Activity Test is also not met for the reason that the AO has failed to show that the assessee has not carried out any part of its business operations in India. The AO's reliance on CBDT's Circular 1 of 2004 dated 02.01.2004 for contending that the OPIL software support activities constitute 'core' activity of the assessee, is considered as invalid as the said Circular was withdrawn immediately within eight months on 09.08.2004. We therefore, are in conformity with the assessee's submission that the business of the OIPL, even if it relates to outsourced activity of the assessee, cannot be regarded as the business of assessee. We find support from the hon'ble Delhi High Court and endorsed by the Supreme Court in E-funds(supra) as under: 12 .*** Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between the Indian subsidiary....
X X X X Extracts X X X X
X X X X Extracts X X X X
....services, its marketing and aligning goals of OIPL with Oracle's worldwide business and vision, also do not constitute Service PE under Article 5(2)(l) of DTAA as ruled by the hon'ble Supreme Court in the case of Morgan Stanley (supra). We are thus of the considered view that the assessee does not have Service PE in India under Article 5(2)(l) of the India-USA DTAA. 34. With respect to Agency PE under Article 5(4) of the DTAA, we agree with the assessee that OIPL is neither a Dependent Agent nor the Assessee has appointed OIPL as agent. Merely because OIPL is wholly and exclusively working for the assessee and does not develop software for any other entity, would not make OIPL as dependent agent of the assessee. We find that for considering OIPL as dependent agent of the assessee, it is essential for the Revenue to demonstrate that the conditions enumerated in the DTAA, available in Article 5(4), is met by OIPL. The AO is required to show that OIPL has the authority to habitually exercise authority to conclude contracts on behalf of the assessee under Article 5(4)(a) of the DTAA; or habitually maintains stock of products on behalf of the assessee under Article 5(4)(b) of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her the AO is correct in considering 30% of the revenue transfer from Global Deal as Royality to be paid by OIPL to the assessee which was enhanced by the CIT(A) to 100%. 38. Briefly, the facts for the AY 2001-02 to AY 2003-04 is that, in some cases, Oracle entities, outside India, enter transactions with (MNC), who have offices/subsidiaries in more than one country. Global Deals are global contracts in which Oracle group entities grant licenses of Oracle software to multinational customers (MNCs) for use in a number of countries. The licenses granted by the contracting regional/local Oracle entity are standard in nature without any customisation. Revenue from such global contracts are allocated to the Oracle entities as per agreed revenue sharing methodology or on basis of negotiated percentage of allocation by country. These allocations are then transferred to Oracle entities and such transfer is termed "revenue transfer". 39. Briefly, the OIPL's role/participation in Global Deals is to provide support service in India under a global deal agreement entered into by an overseas Oracle affiliate having users of Software in India, for which it receives a revenue transfer an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n AE of MNC GROUP (in respect of software which has been licensed by appellant to Oracle Japan). Thereafter, Gross receipt received from MNC GROUP [i.e. $100 in the CIT(A)'s example] which has been received by the assessee, includes $ 30 which is on account of installation/customization done in India by OIPL under the Global deal. The payment is made by Revenue transfer out of amount of US $ 100 receivable from Honda Japan which is in the nature of Royalty for which installation and customization has been agreed to by Oracle Inc USA in India also. 42. The CIT(A) further held that Oracle Corporation is into business of providing database software for commercial use and the software have to be adopted for individual specific requirement of every licensee depending upon the business requirement and that the licenses are merely sale of a copy right article. According to the CIT(A), therefore, the receipt from sale of such License, is Royalty u/s 9(1)(vi) of the Act and Article 12(7)(b) of the DTAA. The assessee has countered the view of the CIT(A) by submitting that under global deals, the agreement for granting licenses of Oracle software with the MNC is entered by regional/loc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. (7) (a) ** * (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State. 44. We find that the Act stipulates that Royalty which are 'payable' can be considered as income. We further find that under SSSA which governs Revenue transfer on Global deals, there is no provision for payment of any royalty to the assessee on Global deals as OIPL does not carry out any duplication of software supplied to multinational clients outside India. It is also noteworthy that OIPL was not permitted to pay royalty to the assessee, in view of RBI Circular No, 6 dated March 10, 1993 which permitted payment of royalty only on software duplication/reproduction. Moreover, the AO/CIT(A) has not unearthed any evidence/materials on record....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven where no duplication was undertaken in India, to the assessee from June 1, 2003 (AY 2004-05 onwards), the inter- company agreements were amended effective June 1, 2003 and OIPL started paying royalty at 56% to assessee on all revenues, including those from global deals. And this 56% royalty received by the assessee has been duly offered to tax in its returns. 48. To summarise at the cost of repetition, during the impugned years, the Assessee only received royalty from OIPL on software duplication in India under the terms of the SDDLA, which is a separate contractual arrangement. No royalty is paid or payable by OIPL to the Assessee on revenue transfers received by OIPL from Global deals under SSSA, because OIPL does not duplicate software in India under such Global deals. Even otherwise, under the prevailing exchange control regulations, payment of any royalty on global deals was prohibited. Furthermore, the Assessee assertion that it has not received royalty from OIPL or any other group entities outside India on the amount of revenue transfers received by OIPL for global deals during the impugned years, has not been controverted. Hence, no royalty accrues/payable to the Ass....