9911796707
TMI Blog2017 (7) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the Act read with the applicable provisions of the Treaty. 3. The learned AO has erred, in fact and law, by holding that the income from the sale of software is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 4. The learned AO has erred, in fact and law, by holding that the income from the sale of subscriptions is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 5. The learned AO has erred, in law and in facts, by holding that the income from the provision of the services is royalty income and fees for technical services ("FTS") under Article 12(4) of the Treaty and consequently liable tax in India. 6. The learned AO has erred, in law, by holding that despite payment of an arm's length price to NetApp India (the alleged PE of the Appellant in India) for the marketing and sales support services, additional income relating to supply of storage products, subscriptions and services is attributable to the alleged PE and taxable in India. 7. The learned AO has erred, in law, by holding that income from the supply of storage products is taxable in India in the absence of a PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AO has erred, in law and in facts, by artificially splitting income from storage products into the hardware component and software, and taxing these income streams separately under the provisions of the Act read with the applicable provisions of the Treaty. 3. The learned AO has erred, in facts and in law, by holding that the income from the sale of software is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 4. The learned AO has erred, in facts and in law, by holding that the income from the sale of subscriptions is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India. 5. The learned'AO has erred, in law and in facts, by holding that the income from the provision of the services is royalty income and fees for technical services ("FTS") under Article 12(4) of the Treaty and consequently liable tax in India. 6. The learned AO has erred, in law, by holding that despite payment of an arm's length price to NetApp India (the alleged PE of the Appellant in India) for the marketing and sales support services, additional income relating to supply of storage products, subscriptions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure of the company vis a vis group is that a. Network Appliances (in short Net App) group has a holding company in United States known as Net App USA (US Co). US Co has a subsidiary company in Netherland known as NAHM BV( BV Co). BV Co has a subsidiary company known as NetApp BV (the assessee in appeal) also in Netherland. b. US CO has a subsidiary in India known as Net App India (ICo). ICo, belonging to Net App Group, provides some services to assessee, which are marketing and sales support, assistance in organizing trade shows, ascertaining market trends, competition analysis and assistance in pre sales marketing as promotional material for Net App products and services. 5. The appellant is engaged in the business of selling storage equipment and products and rendering of certain services in the Asia-Pacific region including India. The products are sold through third party distributors who are appointed on a non-exclusive basis and sales are made to a global customer outside India entering into a master service agreement with a customer for sale of the products at preagreed terms. The company also engages in direct sales contracts and the title of the goods passes direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll provide information on market trends, competitions, and new products and services in the market. vii. NetApp India shall at the request of NetApp, provide technical support services for the products (Technical Services) including, without limitation, the following: * Services in fulfillment of NetAPP BV's warranty obligations * Maintenance services for customers and * Such other technical support services as NetApp shall required as mutually agreed to by the parties b. Financial and administrative activities of NetApp India. Subject to the terms and conditions herein, NetApp BV hereby appoints NetApp India, on a non-exclusive basis, to perform the following financial and administrative services with respect to this agreement. i. NetApp India shall account for expenditures and receipts ii. NetApp India shall report expenditure and receipts iii. NetApp India shall provide general administrative assistance c. Limitation of authority. NetAPP India shall not have the authority to conclude contracts in the name of NetApp and shall not maintain,. Except as provided under Clause 3(e), a stock of merchandise belonging to NetApp BV or otherwise make any commitments wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perations of its parent company in India. According to him, without association of NetApp India with the assessee company, activities of the assessee of supply and licenses cannot be performed in India. He was further of the view that NetApp India has many sales offices in India which are the outlets acting as "sales outlets' for the India customers. He further held that NetApp India's role is 'central and core' to the business of the assessee and as assessee is mainly engaged as a trader, the role of marketing and pre sales activities acquire more importance. Therefore, the ld Assessing Officer reached at a conclusion that the assessee has a fixed place of business in India through NetApp India and its various branches and hence, the assessee has a Fixed Place permanent establishment in India. He further held that NetApp India is a dependent agent of the assessee as economic and legal dependence of the NetApp India is obvious as it earns its revenue only from its foreign associated enterprise. He therefore held that the assessee has an agency PE in India. He further held that as the NetApp India and the assessee has common Directors, NetApp India does have powers to conclude contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no right, property or information for which the consideration is paid and further the services are not 'make available' to the purchaser and hence it is not fees for technical services in terms of DTAA. However, the ld Assessing Officer was of the view that the services are predominately technical in nature and further, it is falling within the definition of royalty it is chargeable to tax in India. He further held that as this payment is also effectively connected to the permanent establishment of the assessee, it is chargeable to tax under Article 7 of the DTAA. Therefore out of Rs. 223963915/- he granted deduction of Rs. 41113319/-and charged balance of Rs. 182850796/- as royalty effectively connected to the permanent establishment chargeable to tax under article 7 as business income attributable to the permanent establishment taxed it at normal rate of 42.23%. 13. Furthermore assessee has received a sum of Rs. 631007053/- as payments towards hardware. According to the assessing officer part of the profits arising from this revenue is also attributable to the activities of the permanent establishment in India of the assessee. The appellant contended before the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being contested at appeal stages. In nutshell, the Ld. DRP confirmed the action of the Ld. assessing officer. 15. Based on the direction issued by the Ld. the DRP, ld. assessing officer passed assessment order under section 143 (3) read with section 144C of the Income Tax Act on 25th of June 2013 determining the total taxable income of the assessee of Rs. 503257761/-. Against this assessment order, assessee is in appeal before us. 16. Ground No. 1 of the appeal challenges the order of the Ld. assessing officer holding that appellant has a permanent establishment in India according to the double taxation avoidance agreement. Ground No. 2, 6, 7, 8, and ground No. 9 are all related to the issue of permanent establishment of assessee in India and profit attribution to that permanent establishment. 17. Before us, Ld. Authorized representative submitted that assessee does not have any permanent establishment in India. He further submitted that assessee does not have any fixed place of business at its disposal through which it is carrying on its business wholly or partly in India. He further submitted that appellant does not have any employees in India nor its personnel visits or seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of the appellant are held outside India. In view of this, he submitted that there is no fixed place PE of assessee in India. 18. Regarding the agency PE, he submitted that such agency P E can be created only when there is a dependent agent in India, who has an authority to conclude contracts on behalf of the company or maintains any stock of goods of the company for delivery on behalf of the company. He submitted that majority of the sale is made by the assessee company to its distributors in India on principal-to-principal basis and not as an agent of the appellant. He further submitted that the distributors are not legally or economically dependent on the appellant. He further stated that Indian entity does not have an authority to conclude contracts on behalf of the company as well as it also does not maintain any stock of goods of the company for delivery on behalf of the company. He further drew distinction between the sales conclusion and marketing support services. He submitted that the Indian entity is providing marketing support services and not sales conclusions. Regarding sale of the products of the appellant, he submitted that it is made primarily to the distributor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t establishment has been compensated at arm's length price taking into account all the functions performed by it, there should not be further attribution of income to the permanent establishment in India. He further submitted that approach of the Ld. AO in attributing 90% of the appellant's profits from the sale of storage products and 100% of receipts from software licensing, subscription and services to the alleged permanent establishment in India is contrary to the income attribution principal laid down by article 7 of the double taxation avoidance agreement. He submitted that even if there is an attribution of income it shall be determined only based on the remuneration, which is attributable to the actual activity of the permanent establishment for such sales, or businesses and it cannot be determined based on the total amount received by the enterprise. Therefore, he submitted that, assuming while denying, the income that can be attributed to the Indian PE is what an independent marketing support service provider in India would in uncontrolled conditions earn. He further submitted that when the Indian enterprises have been compensated at arm's length price as per the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to the appellant and according to him these services for which the payment was received by the appellant directly for goods delivered to the customers by Netapp India. He stated that services to the customers of the appellant were provided by the employees of Indian entity who were science graduates/engineers and he also submitted that 20 employees of Indian entity provided technical services, which apparently included two non-Indians who might be on deputation from the group companies. He further referred to the business of the appellant in India and business of the Indian company, based on that he submitted that services are provided by an Indian entity to customers but the customers instead of paying to the Indian entity are paying to the appellant. He further stressed that it is obvious that Indian employees advise the customers to raise purchase orders and make payment to appellant though all the services are provided by Indian entity. He further referred to the agreement between Indian entity and the appellant and then submitted that the agreement between the parties is purposefully silent on the role of Indian entity in the process leading to receipt of the orders from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices are being carried out through the office of the Indian entity by Indian entity and it also provides replacement of parts, spares within limited number hours of receipt of the complaint. He therefore submitted that Indian entity offices are sales outlet of the appellant. He further stated that agreements explicitly referred to the local sales offices as local offices of NetAPP BV( Assessee) in India and Indian entity does not have any business of providing services. Based on the above arguments, he submitted that appellant has fixed place of business at its disposal and therefore there is a permanent establishment of the assessee in India. 27. He further stressed that Indian entity is not an agent of independent status and therefore there is an agency permanent establishment of the assessee in India. To support his argument, he referred to the relevant treaty provisions in article 5 (5) of the double taxation avoidance agreement and raised the argument that Indian entity has obtained orders from the customers of the appellant and in absence of direct presence of persons in India of appellant, there is no doubt that Indian entity is habitually finalizing all the terms and condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial and administrative activities performed by Indian entity for appellant. He alleged that Indian entities' offices acted as local sales offices and employees of Indian entity acted as local managers of the appellant. He further stated that Indian entity has provided pre sales and post sales support services from various offices in India however to the learned TPO, assessee submitted that it has only three offices in India i.e. at Bangalore, Delhi and Mumbai. Further, according to him functional analysis did not identify any functions of Indian entity with regard to sales of appellant's products in India. He further stated that the transfer pricing analysis was also faulty for the reason that internal cup is not used when the assessee has repeatedly claimed before the assessing officer that services have been provided by 3rd parties and Indian entity. Therefore, he stated that the transfer pricing analysis carried out in the case of Indian entity has not considered many vital functions performed by Indian entity and the use of assets of appellant by the Indian entity. He therefore submitted that decision of the Hon'ble Supreme Court in the case of Morgan Stanley (292 ITR 416 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proceedings under consideration. 32. On the subsequent date of hearing, Ld. departmental representative submitted that existence of business connection of the appellant in India is not under challenge despite specific query to the assessee, it did not object to Indian associated enterprise being considered as a business connection of the assessee in India. He further submitted that the appellant had two directors who are also on the board of the Indian company which fact should be taken into account. He further referred to the Commission Agency Agreement of assessee with Indian associated enterprise effective from 27/04/2002, which provides marketing sales technical activities, which are the core activities for assessee since it is a trading concern. The main contention was that these are the critical and pivotal role of Indian entity to the entire business of assessee in India. He further submitted that revenue is not saying that permanent establishment of the assessee is merely because Indian associated enterprise is a subsidiary or merely because appellant has subcontracted certain services to the Indian associated enterprises but because of this sum total of all the above ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Ld. TPO has compared the function of the Indian entity with that of a commission agent and goes on to observe that the commission agent also does not make any sales to the customers but acts only as a link between the buyers and the seller. Therefore, he held that NetApp India is not involved in the process of concluding contracts or negotiation of prices. On the issue of transaction of the appellant with Indian entity at arm's length, he submitted that first appellate authority in the case of the Indian entity additions so made were deleted on issue of comparability. He therefore submitted that price charged from the appellant by the Indian entity was held to be at arm's length. The revenue has challenged this appeal before the Bangalore bench of the ITAT for exclusion of the comparables. He submitted that there is no allegation in the transfer pricing assessment that Indian entity is making any sales to the customers in India. In nutshell, he submitted that it is not the case of the revenue that Indian entity is making sales in India but primarily is that the functions undertaken by Indian entity are very vital and without this core functions, appellant would not be in a posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness, he submitted that Indian entity is carrying on its own business as a service provider and not the business of the appellant. Merely because there are transactions between the Indian subsidiary and the foreign company, it does not mean that Indian subsidiary constitutes a permanent establishment for the foreign parent in India. He further relied upon the order of the Ld. TPO in case of Indian entity where it is stated that NetApp India does not conclude contracts for the sale of NetApp products in India. He submitted that permanent establishment is required to be seen from the provisions of the Double Taxation Avoidance Agreement between the two countries on the criteria prescribed therein such as Constitution of a fixed place of business, dependent agency. He submitted that in the present case both these conditions and definitions are not satisfied. For this proposition, he relied upon the decision of CIT versus Morgan Stanley & Co inc 292 ITR 416, DIT v E- funds IT solutions and Adobe Systems Inc. d. On the issue whether the Indian entity constitutes a place of management for appellant he submitted that Ld. assessing officer has failed to establish that appellant takes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive that activities of Indian entity are not proprietary auxiliary in nature he submitted that the activities of the Indian entity does not meet the threshold for creating a permanent establishment under the Double Taxation Avoidance Agreement. He submitted that where there is no authority to conclude contracts no permanent establishment is created of the appellant in India. i. With respect to the contention of revenue, that Net App India is not providing mere back-office support services he submitted that the Indian entity is carrying on its own business as a service provider and not the business of the appellant. He submitted that because there are certain transactions between the Indian subsidiaries in the foreign parent it does not mean that the Indian subsidiary constitutes a permanent establishment for the foreign parent in India. j. On the issue whether the Indian entity is an independent agent or not and that all the services being provided by Indian entity on behalf of the appellant, he submitted that that Indian entity is legally and economically independent as it is compensated on an arm's length basis by the appellant. He further submitted that majority of the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g technical support services, he submitted that these are the pure guesswork and there is no material to suggest or support the revenue's argument on these aspects. He submitted that customers in India are customers of the distributors and the distributors engage themselves into the sales process with the customers and Indian entity only performs a marketing support role to the distributors who sell to the end user customers. Regarding the issue of obtaining orders from the customers and purchase orders routed through Indian entity, he submitted that Indian entity does not solicit or accept the purchase orders on behalf of appellant. The purchase orders are raised on appellant by the distributors and role of such distributors are ignored to perform functions of getting purchase orders raised on the appellant. He submitted that mere securing the orders even otherwise does not constitute a permanent establishment with respect to the double taxation avoidance agreement. Regarding not capturing the all the functions of the Indian entity he submitted that transfer pricing study report has listed out all the marketing and sales support functions that Indian entity is performing. It also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that there are no employees which are seconded to the Indian entity which is confirmed by Indian entity as part of reply to inquiry under section 133 (6) of the act by the assessing officer. Regarding the payment of royalty, he submitted that Indian entity from time to time participates in trade fairs for dissemination of information about the products and promotional activities and for this purpose it needs to have the right to use the trade Marks given that it is a separate legal entity different from the appellant. He submitted that even otherwise this is not a condition for determination of the PE of the appellant. m. On the last issue of the claim of text deducted at source he submitted that tax deduction at source has been made on services and subscription payments received by the appellant which can be verified from the certificates of tax deduction at source. He submitted that merely because a tax return was filed for the first time in assessment year 2008 - 09 does not mean that appellant has conceded the tax liability in the earlier years. He submitted that even otherwise this cannot be a factor which affects the criteria of permanent establishment in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justifies taxation of a non-resident under Section 9(1)(i) of the Act on income which is deemed to be accrue or arise in India. The Tribunal in the impugned order has held that the assessees had business connection in India for the points noted in paragraph 18.3. Though the reasons stated in paragraph 18.3 do appear to be widely and broadly stated, but keeping in view the mandate and the ratio of the decisions of the Supreme Court in CITv. R.D. Aggarwal & Co. [1965] 56 ITR 20, CITv. Toshoku Ltd. [1980] 125 ITR 525 (SC), Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC) and the amendments incorporated and made to Section 9 (1)(i), it has to be held that business connection did exist, not because the assessees were associated enterprise or had a subsidiary in India, but because the e-Funds India was providing information and details to the assessees in USA for the purpose of entering into contracts with third parties and subsequently the said contracts were performed fully or partly by e-Funds India as an assignee or sub-contractee and looking at the nature of the said transactions and the manner in which contracts were executed and where the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has presence in India in the form of net app India Ltd, which has been appointed to perform marketing support services attached to the sales in India for the sole benefit of Net app BV. According to him the Indian company is a subsidiary of the net app group which has been formed for performing marketing and other services which are attached to the sale of net products. According to the assessing officer the subsidiary company is performing the marketing and promotion activities and without such activity no sale/supply/licensing can happen. Therefore, without the association of Net App India the business of Net App (Appellant) as regards supply/license to India cannot be performed. According to him the Net app India has many sales offices in India to cater to the sales enquiries to the potential and existing customers and for this he relied upon the 'contact us' link of the net app website where as many as 9 Indian addresses are mentioned. Therefore according to him these are the 'outlets' which also act as 'sales outlets' for Indian customers. He further reached conclusion that Indian entity's role is 'Central and core' to the commercial business of appellant. With resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at arm's length and dependence is reflected by the facts of arrangement or agreement between the foreign enterprise and the agent. The directors on the board of the agent company are on the payrolls of the group entity and the principal is able to exercise at least persuasive authority over the agent and therefore the Indian entity is a dependent agent of the assessee. In the end he held that appellant has a permanent establishment in India in the form of the business premises of net app India and also net app India is a dependent agent of the foreign entity within the meaning of articles 5 (1), 5 (2) and 5 (5) of the double taxation avoidance agreement. 39. Therefore now we first look at article 5 of India - Netherland treaty which deals with the issue of permanent establishment. 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 the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise from which he regularly delivers goods or merchandise on behalf of the enterprise ; 6. An enterprise of one of the States shall not be deemed to have a permanent establishment in the other State merely because it carries on business in that other State through a broker, a general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transaction between the agent and the enterprise were not made under arm's length conditions. 7. The fact that a company which is a resident of one of the States controls or is controlled by a company which is a resident of the other State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment or the other. 40. According to the article 5 (1) of DTAA permanent establishment means a fixed place of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." 10. The aforesaid paragraph in categorical terms states that a holding or a subsidiary company by themselves would not become PE of each other. The words used in the said paragraph are equally important because the term "holding" or "parent company" or a "subsidiary company" is not used. The said paragraph uses the expression "controls or is controlled by a company", which is resident of the other contracting State. Use of the word "controls" or "controlled" is significant and defines the scope and ambit of the said clause. Paragraph 6 states that the company, which controls or is controlled and carries on business in the other State, would by itself not constitute PE of the other company. Therefore, even carrying on business in the other country by either the "controlled company" or the "controlling company", but and though the other company would not make them, i.e. the two companies, a PE of each other. However, this does not mean that a subsidiary can never be a PE of the holding company, though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal position at page 540 paragraph 36.2.1 as under:- "The treaty-based protection of related companies recognises the legal independence of related companies for tax purposes as a material reality until the opposite is proved. This affects both the constitution of PE, and the allocation of income to a separate entity." 13. It is further clarified and elucidated at pages 541-42 paragraph 36.2.3 as :- "36.2.3 POLICY CONSIDERATIONS A neutral tax system would allow a subsidiary PE to be constituted in all cases where the same conclusion would be reached for unrelated companies. This solution is expressly stated for a subsidiary PE under the agency clause. Consequently, the position of some older pre-OECD authors, that a subsidiary can never constitute a PE for the parent, has not been sustained. The conventional position of the OECD-based tax treaty doctrine is that a subsidiary PE can only be based on the agency clause. However, the tax treaties aim at allowing the source state to tax business profits with a certain economic allegiance to the country expressed through the enterprise's PE. This intention must also apply when the parent company's business income is earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporate on the basis of the concept of Economic Nexus is an important feature of Attributable Profits (profits attributable to the PE)." (Emphasis supplied) 15. ECONOMIC AND SOCIAL COUNCIL in their report dated 17.10.2008 have stated;- "38.1 In relation to the test of legal dependence, it should be noted that the control which a parent company exercises over its subsidiary in its capacity as shareholder is not relevant in a consideration of the dependence or otherwise of the subsidiary in its capacity as an agent for the parent. This is consistent with the rule in paragraph 7 of Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless these activities are limited to those referred to in Art. 5(4) or unless the subsidiary does not act in the ordinary course of its business as an independent agent within the meaning of Art. 5(6)..." on the basis of above guiding principles laid down by the Hon'ble high court it is apparent that assessee has not deputed any of its personnel in India and also the directors of the Indian company have not functioned for the business of the appellant company. Further, the control over the financial and administrative activities of Indian company by the appellant by virtue of clause 2 (b) of the agreement wherein that the Indian company shall account for expenditure and receipts, and shall also report and provide general administrative services to the appellant are also for the reason of the control over the commission agent itself and cannot be said that such reporting of expenditure and receipts results into the control over the Indian entity by the appellant resulting in to PE. Therefore it cannot be said that appellant controls or is controlled by the Indian company or vice a versa. Therefore, on the basis of the above, it is apparent that a group subsidiary can be permane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... response mechanism probably to all the enquiries and request by the customer or potential customers relating to the sale of products by the appellant. For the services the Indian company will be remunerated a service fee as stated in paragraph No. 5 of that agreement. Therefore, on reading of the agreement it is apparent that Indian company is a service provider to the appellant and it does not have any authority to conclude any contracts on behalf of the appellant. The Indian company is a separate legal entity undeniably, which has its own Board of Directors premises employees contracts etc and the employees of Indian company work under the control and supervision of Indian company only and not the appellant for provision of its services to the appellant. The Ld. assessing officer has stated that the services provided by the Indian company to the appellant's Central and core activities to hold that Indian entity is a permanent establishment of the appellant. The Ld. assessing officer has also not put forth any evidence which leads to the fact that it is not the business of the Indian company that is being carried out in India, but it is the business of the appellant being carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obe India represent the Assessee's fixed place of business. Thus, clearly the right to use test or the disposal test is not satisfied for holding that the Assessee has a PE in India in terms of Article 5(1) of the Indo-US DTAA. 33. In E-Funds IT Solution (supra), this Court had expressly negated that an assignment or a sub-contract of any work to a subsidiary in India could be a factor for determining the applicability of Article 5(1) of the Indo-US DTAA. The Court had further expressly held that: "Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location permanent establishment. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place permanent establishment exists. Reference to core of auxiliary or preliminary activity is relevant when we apply paragraph 3 of Article 5 or when sub-clause (a) to paragraph 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative in the sections which mentions the offices of Indian entity. It is further contended that net app India is not providing mere back-office support services, but it is engaged in the capacity building of the group and appellant. We are of the opinion that common directors of the appellant and net app India. They are not engaged in the day-to-day activities of the appellant renegotiation of any contracts or performing any marketing functions in India on behalf of the appellant. Merely because there are common directors is not determinative factor whether the net app India as an authority to conclude contracts on behalf of appellant. The reliance is aptly placed on the decision of the coordinate bench in ITO versus Pubmatic India (P.) Ltd. (158 TTJ 398) (MUM) wherein it has been held that merely because one of the directors is common in both the companies does not constitute the assessee as PE. Even otherwise the common director and holding of the company by itself does not constitute either company as a Permanent Establishment of the other as per Para 6 of Article 5 of Indo-US DTAA. We also do not see any such provision in the double taxation avoidance agreement applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales offices in India of Indian entity are being used by the appellant and therefore there are sales outlets in India which falls under the article 5 (2) (h) has permanent establishment. The term sales outlet is not defined in any legislation. However, the general meaning of the term is a place of business for retailing of the goods and Tom outlet in particular is generally defined as a store that sells the goods of a particular manufacturer or wholesaler. Therefore Sales outlets are generally understood as a place of business for retailing of the goods, from where the goods are sold and delivered to the customers. No doubt the Indian entity has several local offices in India but these offices as stated by the Ld. authorized representative are with regard to the marketing support function that net app India is required to provide under the terms of the commission agent agreement with the appellant. According to him the distributors undertakes the sales to the customers, in the local offices of the Indian entity are only providing marketing support function and not making sales of the net app products. In the website of the group also these are the contact us places therefore they a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Delhi High Court in case of Adobe System Incorporation (Supra) has also held that a permanent establishment cannot be constituted in India only on account of the fact that appellant has a right to ask for the expenditure and income in terms of the agreement between the parties. There may be reasons for doing so because of the commercial aspect for the provision of specifications, assistance, and supervision etc however it cannot lead to an inference that the appellant by exercising the above rights creates its permanent establishment in India. For an agent to be of an independent status, (1) the agent must be legally independent of the principal, (2) the agent must be economically independent of the principal; and (3) the agent must represent the principal in the ordinary course of business. Legal Independence of the agent must be tested on the line of agent's obligation. In the present case, the appellant has not brought it on record that the activities of the agents are subject to detailed instructions or comprehensive control. The only reason is that the company is managed by common directors. Further mere persuasive control is not enough. This sole fact in absence of ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the resellers are signed after 40 days and net app India has incurred expenses on freight, shipping and transportation of the goods and therefore it is engaged in delivery of goods and performing functions of sale on behalf of appellant. It is further alleged that storage systems sold by the appellant on being replacement warranty the parts are replaced in merely 4 hours. Therefore, the inventory is maintained by appellant in India and Indian entity is performing functions of maintaining stock of such goods for sale. It was further alleged by revenue that Indian entity has the right to use the trademarks etc of the appellant and therefore is paying royalty and hence it makes sales in India. We have carefully analyzed all the contentions of the Ld. departmental representative made before us, however, we do not agree with any of them as no evidence has been laid before us which even remotely suggest that Indian entity discusses all terms with the distributors, negotiates discounts to the resellers and decision on sale is taken by the Indian entity in India. With respect to the purchase orders the Indian entity do not solicit or accept purchase orders on behalf of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot lead to any indication of the permanent establishment of the appellant. We do not find any such provision in the double taxation avoidance agreement except where the premises are used as sales outlet. In any case, no evidences or instances have been led that the Indian entity is maintaining any stock of goods of the appellant for delivery on behalf of the appellant. With respect to the allegation that Indian entity has a call Centre, It was submitted that the net app group operated call centers in four locations across the world including India and the post sales support services are provided through its call centre to the customers throughout the world. Income from such call Centre operations are part of ITES segment and are considered in the transfer pricing documentation of the Indian entity. It was further contended that with respect to the services provided by the employees of Indian entity that such services are also provided by other third-party service providers in India, which are also listed on the website of the net app group. It was further stated that net app India provide such services to the appellant's customers in India as part of its own business functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 5(5) relies on the formal conclusion of contracts in the name of the foreign enterprise, it is possible to avoid the application of that rule by changing the terms of contracts without material changes in the functions performed in a State. 'Commissionaire arrangements' as it is in the present case have been major pre-occupations of tax. In most of the cases that went to court, the tax administration's arguments were rejected. The only answer to that would be factually establishing the role of the Icos regarding their actual authority of concluding the contracts. Therefore while deciding the appeals before us; we were led by the facts for the year under appeals only. 46. In view of our above findings, we hold that the assessee does not have a permanent establishment in India under the provisions of double taxation avoidance agreement between India and Netherland. In view of this ground No. 1 of the appeal of the assessee is allowed. 47. Consequently, Ground No. 2, ground No. 6, 7, 8 and 9 of the appeal of the assessee are not required to be adjudicated further, hence they are dismissed. 48. Ground No. 3 and 4 of the appeal of the assessee are against the order of the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w: "(f) The Software shall be used only for Licensee's own business as defined within the InfrasoftLicence Schedule and shall not, without prior written consent from Infrasoft: (i) be loaned, rented, sold, sublicensed or transferred to any third party (ii) used by any parent, subsidiary or affiliated entity of Licensee (iii) Used for the operation of a service bureau or for data processing." * Clause 1 of Software License: "Supplier grants to Buyer a non-exclusive license to use the accompanying software in machine-readable form ("Software"), together with the accompanying documentation." * Clause 2 of End User Software License: "NetApp shall retain title to the Software and the accompanying documentation and all copies and any derivative works thereof. Customer shall not make any copies of the Software except as reasonably required for backup purposes." * Clause 2 of Software License: "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 conceal any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fees for technical services under article 12 (4) of the treaty and consequently liable to be tax in India. The Ld. assessing officer has dealt with this issue in para No. 7 of assessment order. During the year the assessee has received a payment. In view of services rendered to its Indian customers amounting to Rs. 2 2396 3915/-. The above payment has been received for the installation services warranty services and professional services rendered by the assessee to its customer with third-party service providers in India. The customers of deducted tax at source on these payments under the fees for technical services. According to the assessee the above income is not chargeable to tax in India, as Indian customers or distributors does not envisage the use of any right, property or information for which are royalty under article 12 (4) of the tax treaty. Further, it is stated that the these services would not also be regarded as fees for technical services as they do not make available technical knowledge, experience etc to the service recipient. Therefore according to the assessee. It was not services that make available technical knowledge, skill etc to Indian customers and it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dominately-technical services in the nature and has concluded that it is ancillary to the royalty and hence royalty as defined in the act as well as the double taxation avoidance agreement and therefore it is chargeable to tax in India. The Ld. assessing officer has further held that as the assessee is rendering service through qualified personnel of net app India or third-party service providers it is being made available to the Indian customers. We also carefully considered the decision of the Hon'ble Delhi High Court in case of DIT versus Guy Carpenter 346 ITR 504 (Delhi), wherein the Hon'ble Delhi High Court has dealt with the concept of "make available' as mentioned in the double taxation avoidance agreement. As the services rendered by the assessee are installation services, warranty services and professional services. It cannot be said that they are made available to the customers using Net app BV products. In fact, the warranty service is taken by the buyer of the product to keep the goods purchased in good condition for its lifespan. We simply failed to understand that how the installation and warranty services at least can be said to be make available to the buyer. In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore same is dismissed 57. In the result appeal of the assessee is partly allowed with above direction. 58. Coming to the appeal of the assessee for assessment year 2010- 2011 that is on the similar facts as agreed by the parties. In view of our decision for the assessment year 2008 -2009, we similarly hold for assessment year 2010 - 2011 as under:- a) as assessee does not have a permanent establishment in India. Therefore, the income of the assessee is not chargeable to tax with respect to sale of the hardware products in India. b) Income arising to the assessee from sale of software and sale of subscription is set aside to the file of the Ld. assessing officer to decide the issue in view of the decision of the Hon'ble Delhi High Court in case of CIT versus infra soft Ltd (supra). c) Income from the provision of the services such as installation, warranty services and professional fees are not fees for technical services in terms of article 12 (4) of the treaty and therefore it is not chargeable to tax in India. d) The Ld. assessing officer is directed to grant credit of the tax deducted at source of withholding tax certificate produced by the assessee, if they are found ..... X X X X Extracts X X X X X X X X Extracts X X X X
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