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2025 (5) TMI 508 - AT - Income TaxAddition as business income on account of fixed place PE to be taxed @40% sur-charge and taxes - HELD THAT - We find that in own case 2023 (8) TMI 1273 - ITAT DELHI the Coordinate Bench of the Tribunal has considered that the existence or otherwise of PE of the assessee in India and in case there is PE the profit attributable to the PE. There being no change in the facts and circumstances compared to the previous year therefore respectfully following the order of the Co-ordinate Bench of the Tribunal in assessee s own case we decided this issue in favour of the assessee. Accordingly the addition as business income on account of fixed place PE to be taxed @40% surcharge and taxes made by the Assessing Officer in the final assessment order is not sustainable and the same is deleted. Accordingly grounds are allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Existence of Permanent Establishment (PE) in India Relevant legal framework and precedents: The existence of a PE is governed by Article 5 of the India-USA DTAA, which defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The tests for a fixed place PE include whether the non-resident has free access to the place, can use it at any time, can carry on work relating to more than one customer, and can use it for internal administrative work. The burden of proof lies on the revenue to establish the existence of a PE. The Supreme Court's decisions in ADIT Vs. E Funds IT Solutions Inc. and Formula 1 World Championship Ltd. Vs. CIT were cited as authoritative on these principles. Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer had relied on the fact that the assessee outsourced preparatory activities to its Indian subsidiary AASPL, which was treated as a fixed place PE in earlier years (AY 2018-19 and 2019-20). However, the Tribunal observed that the assessee's employees only had access to AASPL premises with prior permission, and client meetings were organized by AASPL itself. The visiting employees were primarily engaged in training and stewardship activities rather than business operations related to software license sales. Key evidence and findings: The assessee had a separate inter-company agreement with AASPL, remunerating it at cost plus 18% markup for services such as coding, testing, financial modeling, and customer support. The transfer of software license occurred upon generation and delivery of license keys, not involving activities at AASPL premises. The Assessing Officer failed to produce credible evidence that the assessee used AASPL premises as a fixed place PE for sale of software licenses. The revenue's allegations were unsupported by documentary proof, and the assessee had consistently offered service income to tax in India. Application of law to facts: Applying the tests from the Supreme Court precedents, the Tribunal found that the assessee did not have free and unfettered use of the AASPL premises, nor was the place used for carrying out business activities related to software license sales. The burden of proof was not discharged by the revenue, and the facts mirrored those in the earlier Tribunal rulings for AY 2018-19 and 2019-20, where the PE was denied. Treatment of competing arguments: The revenue argued that the license agreement was executed in India and that the assessee carried out business activities through AASPL. However, no documentary evidence was produced to substantiate these claims. The assessee's reliance on prior Tribunal decisions was upheld as there was no change in facts or law. Conclusion: The Tribunal concluded that the revenue failed to establish the existence of a fixed place PE in India for the assessee in relation to software license sales. Consequently, no income from software license fees could be attributed to a PE in India. Issue 2: Taxability of Software License Fees and Service Income Relevant legal framework and precedents: Article 12 of the India-USA tax treaty governs the characterization and taxation of royalties and fees for technical services (FTS). The assessee contended that the software license fees were not in the nature of royalty or FTS and thus not taxable in India. Services rendered were offered to tax in India. Court's interpretation and reasoning: The Tribunal accepted the assessee's position that the software license fees did not constitute royalty or FTS under the treaty. The Assessing Officer had accepted the service income offered to tax. The dispute primarily concerned whether part of the license fees should be taxed as business income attributable to a PE in India, which was rejected as above. Key evidence and findings: The assessee's receipts from Indian clients consisted of approximately Rs. 98.27 crore as software license fees and Rs. 8.82 crore as service income. The license fees were not offered to tax in India, while service income was offered and accepted for taxation. The revenue's attempt to tax 25% of license fees as business income attributable to PE was based on the PE finding, which was disallowed. Application of law to facts: Since no PE was found to exist, the software license fees could not be taxed as business income in India. The license fees were not royalty or FTS under the treaty, and the service income was already offered to tax. Treatment of competing arguments: The revenue's argument that the license fees should be taxable as business income attributable to PE was rejected due to lack of evidence of PE. The assessee's treaty-based characterization was accepted. Conclusion: The software license fees are not taxable in India either as royalty/FTS or as business income attributable to a PE. The service income was correctly offered to tax and accepted. 3. SIGNIFICANT HOLDINGS The Tribunal, following the Coordinate Bench's earlier decisions, held:
Core principles established include:
Final determinations on each issue were in favour of the assessee, resulting in deletion of the addition of Rs. 24,56,98,463/- as business income attributable to PE and dismissal of the revenue's demand on that count. Remaining grounds were rendered academic and dismissed accordingly.
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