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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI ANUBHAV SHARMA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
The above captioned three separate appeals by the assessee are preferred against the orders dated 04.01.2017, 30.08.2017 and 29.10.2018, framed under section 144C(13) r.w.s 143(3) the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Years 2012-13, 2014-15 and 2015-16.
Since the underlying facts in issue are common in all these three appeals, they were heard together and are disposed of by this common order for the sake of convenience and brevity.
The common challenge in all the above captioned appeals is that the DRP erred in upholding the action of the Assessing Officer in holding that the appellant has a business connection as well as Permanent Establishment [PE] in India. Placing reliance on earlier Assessment Years 2002-03 to 2006-07 and holding that the payment received by the appellant from supply of equipment on an offshore basis were taxable in India u/s 9(1)(i) of the Act r.w. Article 7 of the India –USA DTAA.
Second challenge is in respect of payments for supply of software trading receipts of income from supply of software in India as royalty in terms of the provisions of section 9(1)(vi) of the Act and Article 12 of the DTAA.
Briefly stated, the facts of the case are that the appellant is a foreign company incorporated in USA and is engaged in the business of supplying of goods and software to its various customers in India. The appellant is a wholly owned subsidiary of General Electric Company.
Since the underlying facts in issues are identical, we have considered the facts of Assessment Year 2012-13 in ITA No. 732/DEL/2017.
A perusal of the draft assessment order dated 17.03.2016 shows that while issuing show cause, the Assessing Officer specifically asked the assessee as to why the findings and conclusions made by the Assessing Officer in Assessment Years 2002-03 to 2006-07 may not be adopted. The assessee was also asked to explain as to why it may not be held that it has business connection and PE in India and its income is taxable accordingly.
Vide reply dated 10.03.2015, the assessee specifically contended that it does not have a PE in India under Article 5 of the India-USA DTAA.
In the alternative, the assessee contended that even if it is presumed that it has a PE in India, no further profits can be attributed in the hands of such alleged PE, as the assessee has adequately remunerated GE India Industrial Private Limited [GEIIPL] for local marketing support provided by it.
In support, the assessee submitted transfer pricing order passed in the case of GEIIPL for Assessment Year 2011-12 wherein it has been held that GEIIPL has been compensated at an arm’s length price for marketing support services provided to GE’s overseas affiliates.
After considering the detailed submissions and referring to various judicial decisions, the Assessing Officer observed that the assessee itself has admitted that it has availed certain marketing support services from GEIIPL pursuant to service agreement effective from 01.08.2010.
Therefore, GEIIPL has played a vital role in assessee’s business in India.
Once again, referring to the assessment proceedings for Assessment Year 2006-07, the Assessing Officer based his findings and came to the conclusion that the assessee’s employees regularly used the office space of the Indian company. The Assessing Officer was of the opinion that as an enterprise has certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business no formal legal right to use that right is, therefore, required.
Once again, referring to the findings given in Assessment Years 2002-03 t0 2006-07 wherein it was held that the assessee has PE in India and as there is no change in the factual matrix of the case as compared to earlier years, the Assessing Officer concluded by holding that there is no reason to draw a different conclusion in the matter and finally held that the assessee has business connection as well as PE in India in the year under consideration and went on to attribute the profits to the PE.
Specific objections were raised before the DRP claiming that there were no expat employees present during the year under appeal and there is no mention of such employees in the assessment order.
Objections of the assessee did not find any favour with the DRP which was also influenced by the findings given in Assessment Years 2002- 03 to 2006-07.
We have carefully considered the orders of the authorities below.
There is no dispute that the Revenue has taken a particular stand in Assessment Years 2002-03 to 2006-07 which was upheld in the subsequent appellate proceedings. It is also not in dispute that for the year under consideration, there is no specific finding given neither by the Assessing Officer nor by the DRP in respect of the presence of the expat employees. In our considered opinion, whether an assessee has PE in a particular Assessment Year has to be decided on facts of that Assessment Year and not by the facts of earlier Assessment Years.
Moreover, when the assessee has raised specific objections before the DRP, the DRP ought to have given findings on the objections raised by the assessee. We find that the order of the DRP is silent in this respect.
Moreover, the premises which were considered to be at the disposal of the employees of the assessee were not in use any more in Assessment Years 2014-15 and 2015-16. This fact is also not dealt with by the revenue authorities.
Since the entire assessment order/DRP orders are based on the findings given in Assessment Years 2002-03 to 2006-07, cannot be basis for framing assessment under consideration. Therefore, in the interest of justice and fair play, we deem it proper to restore the appeals to the file of the Assessing Officer/DRP.
The Assessing Officer is directed to examine the presence of expat employees for each Assessment Year under consideration and decide the issue afresh after giving reasonable and sufficient opportunity of hearing to the assessee. The Assessing Officer is further directed to examine the transactions claimed to be at arm’s length and if found correct, decide the issue as per provisions of law and settled propositions of the Hon'ble High Courts/Supreme Court.
The assessee is directed to furnish all necessary details in support of its claim that no expat employees were present during the Assessment Year under consideration.
With these directions, the first challenge is allowed for statistical purposes.
Second challenge is in respect to receipts of income from supply of software in India treating the same as royalty in terms of provisions of section 9(1)(vi) of the Act and Article 12 of the DTAA.
A perusal of the assessment order shows that referring to the definition of royalty as in India-USA DTAA, the Assessing Officer was of the opinion that the words “use of or right to use” denote that both specific use and use of copy right result in earning of royalty income, even if it is called as ‘sale’ can be treated as royalty under the provisions of the Act.
This quarrel is now well settled by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Center of Excellence Pvt Ltd. [2021] 432 ITR 471. The conclusion drawn by the Hon'ble Supreme Court in respect of such quarrel read as under:
“Given the definition of royalties contained in article 12 of the DTAAs 168 mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end- users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(l)(vi), along with Explanations 2 and 4 thereof), which deal with royalty, not being beneficial to the assessees, have no application in the facts of these cases.
"Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer s. manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the pay of royalty for the use of copyright in the computer software, and that same does not give rise to any income taxable in India, as a result of the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by paragraph 4 of this judgment.
"The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The rule the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from impugned judgments of the High Court of Delhi are dismissed.”
Respectfully following the decision of the Hon'ble Supreme Court [supra] we direct the Assessing Officer to delete the impugned addition in the captioned Assessment Years.
In the result, all the three appeals of the assessee in 6304 and 484/DEL/2017 are allowed in part for statistical purposes.
The order is pronounced in the open court on 07.03.2022.