TMI Blog2021 (9) TMI 1372X X X X Extracts X X X X X X X X Extracts X X X X ..... but by different entity, these facts does not lead to creation of a permanent establishment in India of appellant Thus we hold that the assessee company does not have any Permanent Establishment in India. Since, the question regarding Permanent Establishment is being answered in favour of the assessee, the issue of attribution of income in the hands of such Permanent Establishment becomes infrutuous. Accordingly, the grounds raised by the assessee are allowed. Treatment of software and sale of subscription receipts as the royalty income under Article 12(3) of the India-Netherlands DTAA - HELD THAT:- The issue of software royalty was recently adjudicated by the Hon ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] has analyzed various aspects of the issue taking into consideration end user license, Copy Right Act, and provisions contained in DTAA and the Income Tax Act and has laid down the parameters to test whether the receipt from sale of software would tantamount to royalty or not. Therefore, in view of the above, the Assessing Officer is directed to carry out the necessary exercise in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he resident state unless such business is carried in other State through PE. In the present case, we have already held that the assessee company does not have a Permanent Establishment in India and as such the business income so arising on sale of equipment cannot be taxed in India as per the express provision of Article 7 of DTAA. Accordingly, the Assessing Officer is directed to delete the addition made on account of business income. This ground is accordingly allowed. Charging to interest u/s 234B - HELD THAT:- This issue of chargeability of interest is set aside to the file of the Assessing Officer with a direction that in case the assessee has any income chargeable to tax in India and if the same is subject to withholding to tax, no interest u/s 234B should be charged. Ground No.10 accordingly is allowed. - I.T.A No.1882/Del/2017 (ASSESSMENT YEAR 2013-14) - - - Dated:- 20-9-2021 - SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER Appellant By : Sh. G.C. Srivastava, Sr. Adv. Sh. Mayank Patawari, CA Respondent by : Dr. Prabhakant, CIT-DR ORDER PER SUDHANSHU SRIVASTAVA, JM: This appeal has been preferred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fact and law, by holding that the income from the sale of software is royalty income under Article12(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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the facts of the case and gone though the order passed by the Co-ordinate Bench of this Tribunal for Assessment Years 2008-09 and 2010-11. We note that ground Nos.1,2,6,7 8 in the captioned appeal related to the issue of Permanent Establishment and attribution of profits. It is seen that the Assessing Officer, while holding that the assessee company has Permanent Established in India, has primarily relied upon and followed the finding recorded in Assessment orders for Assessment Years 2008-09 and 2010-11. Since, the appeals of the assessee against the said assessment orders for Assessment Years 2008-09 and 2010-11 have been decided by a Co-ordinate Bench of this Tribunal in the favor of the assessee in ITA Nos.4781/Del/2013 and 634/Del/2014 vide order dated 16.01.2017 by holding that the assessee company does not have Permanent Establishment in India in terms of Article 5 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA), we are respectfully following the same on identical facts and identical reasoning. The relevant observations of the Co-ordinate Bench of the Tribunal are reproduced herein under for a ready reference:- 42. Now we proceed to examine wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 out in India through the Indian entity such as deployment of the staff by appellant to the Indian company and working in tandem with the employees of the Indian entity for effecting sales in India. Further the Indian company is also remunerated by the appellant on cost plus basis. Identical issue has been decided by the Hon ble Delhi High Court in case of Adobe Syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 does not create a fixed place permanent establishment. 34. Thus, the AO's view that Adobe India constituted the Assessee's PE in terms of paragraph 1 of Article 5 of the Indo-US DTAA is palpably erroneous and not sustainable on the basis of the facts as recorded by him. In the present case, it is been alleged that the transfer pricing officer of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. There 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 in this case. Therefore, we reject that contention of the revenue. There is no evidence found by the Ld. assessing officer during the year that Indian company has concluded any contracts on behalf of appellant. For holding permanent establishment in terms of article 5 (5) of the double taxation avoidance agreement, it is imperative that the agent has and is habitually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally 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 are only contact points for the customers for enquiring about the goods of appellant. Therefore, the activities of Indian entity are only part of its marketing support services and are for the business of the Indian entity and cannot be said that they are made for sales in India by the appellant through Indian entity. With reference to the storage of the goods for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 other vital facts, which may depend on the facts of the each case, revenue should establish the comprehensive control over the entity. Further the income stream of the ICO itself suggests that its revenue is not wholly or substantially derived from the activities of the appellant but from other AEs also. It was submitted that85% to 90 % of the revenue for the year of IC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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 there sellers 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 but the purchase orders raised on the appellant are through distributors. The receipt of the purchase orders by the Indian entity is only for facilitation for onward transmission to the appellant. In this aspect, the revenue has totally ignored the functions performed for getting purchase orders by the distributors. Even otherwise this function alone do not constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the course of carrying on its own business in India and for this, the Indian entity is remunerated for such services which are already been captured in the transfer pricing documentation. It was also vehemently contended that the allegation of the revenue about deputation of two employees for rendering technical support services is devoid of any merit as this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restored to the file of the Assessing Officer with the direction to verify whether the facts of the case were identical to those as decided by the Hon ble Delhi High Court in the case of Infrasoft Ltd. reported in 264 CTR 329 (Delhi). It was accordingly submitted that this issue also may be similarly restored as per the order of the Co-ordinate Bench in Assessment Year 2008-09 and 2010-11. 7.0 Per contra, the Ld. CIT-DR relied upon the assessment order. 8.0 Having heard the rival submissions and after having perused the final assessment order, we fully agree with the contentions of the Ld. AR that the addition of software income is wholly based on the assessment order passed for Assessment Year 2008-09. This assessment order was the subject matter of appeal before the Co-ordinate Bench in ITA No. 4871/Del/2013, wherein after noting the parity of facts between the case of the assessee and facts involved in the case decided by the Hon ble Delhi High Court in the case of Infrasoft Ltd. (supra), the matter was restored to the Assessing Officer for verification. The relevant observations of this Tribunal are being reproduced herein under: 48. Ground No. 3 and 4 of the appeal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (supra) and adjudicate the issue accordingly after giving due and proper opportunity to the assessee to present its case. Thus, ground Nos. 3 4 are allowed for statistical purposes. 9.0 Ground No.5 is against the taxing of income from provisions of service by treating the same as Fee for Technical Services. The assessee has received payment to the extent or ₹ 28,05,48,505/- in lieu of services rendered to Indian customers. The services so provided are in the nature of installation services, warranty services, or professional services such as data migration, disaster management etc. These services were rendered to Third Party service providers in India and NetApp in India. The Assessing Officer, on the basis of view taken in Assessment Years 2008-09 and 2010-11, held that the services rendered by the assessee were in the nature of Royalty /FTS and were, therefore, taxable in India. The receipts to the tune of ₹ 38,34,85,588/- were brought to tax u/s 44 DA of the Act. 9.1 The Ld. AR assailed the addition made and relied upon the order of the Tribunal in Assessment Year 2008-09 wherein under identica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther 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 view of this we reject the argument of the revenue that such services fees are chargeable to tax as fees for technical services. In the result ground No.5 of the appeal of the assessee is allowed. 11.1 Thus, the Co-ordinate Bench of the Tribunal has specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X
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