TMI Blog2022 (10) TMI 762X X X X Extracts X X X X X X X X Extracts X X X X ..... left to be attributed to it as the alleged PE of the assessee and that, accordingly, would automatically extinguish the need for attribution of any additional profits to the alleged PE. In all these cases, it has been submitted by the assessee that the transactions have been found to be at Arm's Length by the Transfer Pricing Officer in the Transfer pricing order of the AE or the adjustment stood deleted pursuant to appellate order. This is not disputed by the Revenue. We hold that it is undisputed that in the assessment of the AE, the transfer pricing adjustments do not survive. Hence, attribution of income to the alleged PE is not sustainable. Hence, we decide this ground in favour of the assessee. Whether receipt should be taxed as royalty within the meaning of Article 12(3)(b) of the India USA DTAA and also under Explanation 2(iva) to section 9(1)(vi)? - assessee s submission in this regard is that this payment was not received by the assessee for any use of commercial or scientific equipment, hence it cannot be in the nature of royalty under Article (12)(3)(b) of the DTAA and Explanation 2 (iva) of section 9(1)(vi) - HELD THAT:- Once it is clear that at no poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 3% to 12.50%) have been paid to Ariba Inc. This clearly shows that there has been no base erosion in terms of taxes to be paid in India by the relevant parties. Hence, we agree that there is no base erosion on account of non-taxability of the assessee. Notional income confirmed by the ld. CIT (A) - We note that Revenue has not preferred an appeal against such order of ld. CIT (A), hence ld. CIT (A) s order in this regard is final. Since the position of law on this point has been accepted by the Revenue in other assessment years, we agree that the notional income cannot be taxed in the hands of the assessee. Reliance has been placed on the decision of ITAT Pune Bench in the case of GKN Holdings Plc. [ 2014 (12) TMI 128 - ITAT PUNE] for the proposition that unless an agreement is proved beyond doubt to be a colourable device, the Revenue cannot disregard such an agreement. In our considered opinion, it is duly applicable on the facts of the case and supports the case of the assessee. Appeals filed by the assessee stand partly allowed - ITA No.4582 to 4584/Del./2010, ITA No.6090/Del./2010, ITA No.3923/Del./2012, ITA No.1538/Del./2013, ITA No.1469/Del./2015, ITA No.147 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA and also under section 9(1) (vi) Explanation 2(iva) of the Act. 3.1 On the facts and in law, the Ld. CIT (Appeals) grossly erred in concluding that the case of the Appellant would come within the purview of equipment royalty on the basis of the ruling of Advance Authority in the case of Cargo Community Network (P) Ltd. 4. On the facts and in law, the Ld. CIT (Appeals) grossly erred in applying the provisions of section 44D read with section 115A of the Act in the case of the Appellant without appreciating that the true intent of the provisions of Article 7 is to tax the receipts as a business income on net basis of taxation. 4.1 On the facts and in law, without prejudice the Ld. CIT (Appeals) failed to appreciate that in case it is held that the Appellant is having a PE in India and is liable to be taxed under Article 7 of the DTAA, then as per Article 7(3) the Appellant would be entitled to the deductions as per the provisions of section 28 to 43 C of the Act. 4.2 On the facts and in law, the Ld. CIT (Appeals) erred in not appreciating that in the assessment order the expenses were estimated to be 50% of the receipts from India and accordingly a view taxing the who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the A.Y. 2005-06 and 2006-07, the assessee received an amount of Rs.1,25,82,496/- and Rs.53,77,834/- respectively from Ariba India but filed its return of income at Nil income In the assessment order passed for these years, the AO held the receipts of the assessee from Ariba India to be in the nature of royalty income and taxed the same at the rate of 15%. Moreover, the AO assessed the assessee at an income of Rs.7,12,21,675/- against the actual receipts of Rs.1,25,82,496/- for A.Y. 2005-06 and at Rs.8,83,60,840/- against the actual receipts of Rs.53,77,834/- for the A.Y. 2006-07. This was done by the AO on the basis of the agreement between the assessee and Ariba India according to which Ariba India was to pay to the assessee 45% of its receipts for the online auction services provided to it by the assessee whereas it actually paid only 7.95% of its earning to the assessee amounting to Rs.1,25,82,496/- in A.Y. 2005-06 and about 3% of its earnings amounting to Rs.53,77,834/- in A.Y. 2006-07. The AO further held that the Ariba India was assessee's DAPE in India and alternatively the payments received by the assessee from Ariba India were in the nature of business income. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011- 12, the Assessee filed appeals before the C]T(A). The appeals were disposed of by CIT(A) vide separate orders from AYs 2008-09 to 2011- 12 (collectively referred to as Impugned Orders for AY 2008-09 to 2011- 12). The CIT (A), following the earlier year's approach. held that the amounts received from Ariba India during the A Ys were taxable as royalty under Article 12(3)(b). Further, it was held that the Assessee has a DAPE in India in terms of Article 5(4)(a) and Article 5(4)(c) of the DTAA. 12. As in prior years. the CIT (A) held that 50% of the amounts received from Ariba India was royalty attributable to the Assessee's DAPE. Further, there was no difference between the terms of the Original and the Amended Agreement and the only difference was with respect to the rate of payment and that the Amended Agreement was subject to the laws of California instead of the laws of India. Thus, the CIT (A) held that the Original Agreement was applicable. The CIT (A) directed the AO to tax 50% of the royalty income (which was held to be attributable to the DAPE of the Assessee) at the rate of 20% under section 44D read with section 115A(1)(b) of the ITA. The balance amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Ariba India, whereas Ariba India is liable to the end customer for much more and on its own behalf. 13. In view of the above, it is apparent that Ariba India is providing services to the third parties on its own and not on behalf of the Assessee. Thus, Ariba India cannot constitute a DAPE of the Assessee. 14. Further, in the present case, none of the conditions laid down in Article 5(4) of the DTAA are met as discussed below: Ariba India is not authorized to enter into contracts for or on behalf of the Assessee. Moreover, the Assessee is not even a party to the contracts entered into by Ariba India. Ariba India bears all the risks and responsibilities in connection with the contracts entered into with its clients. Ariba India does not enter into the contracts or secures orders for or on behalf of the Assessee. It enters into contracts with the clients in its own right and secures orders for itself and not for the Assessee. 15. Also, it is now a settled legal position that wholly-owned subsidiary does not constitute a PE by itself. [CIT vs. E-Funds 399 ITR 34 (SC)]. In view of the above, it is submitted that Ariba India is economically independent from the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Therefore, there is no base erosion on account of non-taxability of the Assessee. 18. Vide ground no.3.1 for AYs 2004-05 to 2006-07 and Ground No.2 for AYs 2007-08 to 2011-12, the authorities below have treated the payments received by the assessee as taxable as royalty. In this regard, it is the submission of the ld. Counsel of the assessee that this payment is not received by the assessee for any use of commercial or scientific equipment, hence it cannot be in the nature of royalty under Article 12(3)(b) of the DTAA and Explanation 2 (iva) to section 9(1)(vi) of the Income-tax Act, 1961 (for short 'the Act'). The detailed submissions of the assessee s counsel in this regard read as under :- 23. The CIT(A) held that payments received by the Assessee from Ariba India is in the nature of royalty since the Assessee has granted right to use its scientific equipment to Ariba India and it Indian customers. It is submitted that the Assessee is merely providing services to Ariba India and in the course of providing these online auction services, it provides access to the online auction platform. Such access does not entail providing a right to use the equipment owned b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts platform and at all times the control on process and information etc. remains with the assessee. In other words, at no point of time the control of anything is transferred to Ariba India or its clients and therefore, there is no reason it can be said that the consideration is paid for the use or right to use has been granted to Ariba India / its clients. 31. The Assessee further relies on the following rulings of Bharat Sanchar Nigam Ltd. v. UOI (AIR 2006 SC 1383); Rackspace US Inc v. DCIT (International Taxation) [2020] 113 taxmann.com 382 (Mumbai - Trib.) - Para 5; Akamai Technologies Inc., In re [2018] 93 taxnutnn.com 471 (AAR - New Delhi) - Para 13; The Income Tax Officer (IT) TDS-4, Mumbai vs. People Interactive (I) P Ltd ITA No.2180/Mum/2009 - (para 8.2 of the order); Pinstorm Technologies Pvt. Ltd. v. ITO (154 TTJ 173) - Para 6; ITO v. Right Florist (P.) Ltd. (154 TTJ 142) - Para 21. 32. The assessee in this regard would like to place reliance on the recent ruling in the case of Salesforce.com Singapore Pte vs The Dy DIT Circle 2(2) International Taxation, Delhi TS- 222-ITAT-2022(DEL) wherein the Hon ble ITAT held that by granting access to the information forming p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. ADIT [2012] 18 ITR (T) 333 which was confirmed by the Hon'ble High Court in the case of DIT v. Guy Carpenter Co. Ltd. [2012] 20 taxmann.com 807 (Delhi). 37. In the present case, the CIT (A) made bald observations that services provided by the Assessee qualify as FTS without giving any reasons as to how services provided by the Assessee satisfy the 'make available' clause in Article 12(4)(a) of the India-US DTAA. The CIT (A) grossly erred in not appreciating that no technical knowledge, know-how and the like were transferred by the Assessee to Ariba India or its customers in India which rendering the online auction services. Accordingly, it is humbly submitted that the services provided by the Assessee cannot be characterized as FTS under the India-US DTAA. 19. Further, ld. Counsel of the assessee had suggested that he shall not be pressing certain grounds and the certain grounds are academic in nature. The submissions of the ld. Counsel of the assessee in this regard can gainfully be referred as under :- 38. Ground No. 4.1 to 4.3 for AYs 2004-05 to 2006-07; Ground No, 4.1 for AY 2007-08; Ground No. 5.1 for AYs 2008-09 to 2011-12: Not pressed. 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actual payment made by Ariba India to the assessee at Rs.125,82,496/- and Rs.53,77,831/- respectively. The AO is directed accordingly. 43. The Revenue has not preferred an appeal against the orders of the CIT (A) and thus, the decision of the CIT (A) has become final. Since the position of law on this point has been accepted by the Revenue in other AYs, it is humbly submitted that notional income cannot be taxed in the hands of the Assessee. Ground No.4 for AY 2007-08; Ground No.6 for AYs 2008-09 to 2011-12: The Amended Agreement between the Assessee and Ariba India cannot be held to be a mere extension of the Original Agreement 44. It is submitted that the Amended Agreement provided for 12.5% of the gross receipts to be paid to the Assessee by Ariba India for services provided. The said Agreement was effective from 1 April 2006. 45. However, the AO took notional receipts of the Assessee at 45% of the gross payments instead of 12.5% as stated in the Amended Agreement. In doing so, the AO disregarded the Amended Agreement entered between the Assessee and Ariba India citing that. in substance. the business model of the Assessee under Original Agreement and the Amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the alleged PE of the assessee when the AE has been remunerated at arm s length. We find that it is undisputed that this ground is without prejudice to the ground that the AE is not a DAPE as held in all the appeals. It has been brought to our notice that in the assessments made for Ariba Inc. for all the AYs in question either no transfer pricing adjustments was done or they were deleted by the TPO pursuant to the direction of ITAT in this regard. Hence considering the fact that no transfer pricing adjustment has been done/sustained in case of assessments of the AE, it is the assessee s plea that no further attribution is permissible on the touchstone of Hon ble Apex Court decision pronounced in the case of DIT vs. Morgan Stanley and Co. Inc. 292 ITR 416. To the same effect is the order of the ADIT v. E-Funds IT Solution Inc. [2017] 399 ITR 34(SC), Honda Motor Co. Ltd vs. ADIT (301 CTR 601)(SC) and of the Hon'ble Delhi High Court in the case of Adobe Systems Inc. v. ADIT [WP(C)2384, 2385, 2390 of 2013] and DIT v.SSC Worldwide Ltd.[2011] 203 Taxman 554(Delhi), once a transfer pricing analysis has been undertaken in respect of the Indian AE, nothing further would be left to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satellite company for uplinking and down linking of TV signals will not be royalty for use of transponders inside the satellite. In our considered opinion, this case law applies on the fours on the present case. 26. Further assessee placed reliance on the decision of ISRO Satellite Centre (ISAC) (supra), wherein, it was held that for equipment royalty to arise, the payer needs to have control over the equipment. If the payer merely receives a service without control or possession of the equipment, no royalty can arise. We find that it is nobody s case that on the platform that is being used by the AE, the AE has any such control over it. To the same effect, following decisions are cited :- (i) Director of Income-tax v. New Skies Satellite BY (2016) 382 ITR 114 (Del HC) (ii) Yahoo India (P.) Ltd. v. DCIT 140 TTJ 195 (Mumbai) Hence, once it is clear that at no point of time the control of equipment is exclusively granted to AE i.e. Ariba India or its clients, the treatment of the receipt as royalty is not tenable and ld. CIT(A) s observation that the grant of access through userid and password is giving control of the equipment is an erroneous proposition, which is not su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (SC). In our considered opinion, it duly supports the case of the assessee. 30. Further, assessee has contended that for FTS to arise under Article 12(4)(a) of the India-US DTAA, the Assessee has to make available technical know-how, skills or experience etc. to Ariba India. In this regard, reference has been made to Hon'ble Karnataka High Court in the case of CIT v. De Beers India Minerals (P.) Ltd. (supra) wherein it is observed that in order to satisfy the requirement of the make available clause , technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like; that the service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. Admittedly, this is not the case here. Hence, we agree with the ld. Counsel of the assessee that ld. CIT (A) has erred in not appreciating that no technical knowledge, know-how and the like were transferred by the assessee to Ariba India or its customers in India while ..... X X X X Extracts X X X X X X X X Extracts X X X X
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