MOBILEUM INC,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION-3(2)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “I” Bench, Mumbai Before Shri Shamim Yahya (AM) & Shri Pavan Kumar Gadale (JM)

I.T.A. No. 5115/Mum/2017 (Assessment Year 2012-13) Vs. DCIT(IT)-3(2)(2) Mobileum Inc 20813 Stevens Creek Air India Building Boulevard, Suite#200 Nariman Point Cupertino Mumbai-400 021 California-95014, USA

PAN : AADCR2661L (Respondent (Appellant)

Assessee by Shri Neeraj Seth Department by Shri Srinivasaraghavan S.Iyengar Date of Hearing 29.06.2021 Date of Pronouncement 22.09.2021

O R D E R Per Shamim Yahya (AM) :-

This appeal by the Assessee is directed against the order of learned CIT(A)-57 dated 30.03.2017 and pertains to Assessment Year 2012-13.

Ground No. 2: Treating Mobileum (India) Private Limited ('MIPL') as Dependent Agent Permanent Establishment of the Appellant in India

2.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO in constituting MIPL as Dependent Agent

2 Mobileum Inc.

Permanent Establishment ('DAPE') of the Appellant in India under Article 5(4) of Double Taxation Avoidance Agreement between India and United States of America ('India-US tax treaty')- The learned CIT(A) erred in ignoring the fact that MIPL is neither an agent of the Appellant (but a service provider), nor dependant on the Appellant and that MIPL neither has nor exercised any authority to conclude contracts on behalf of the Appellant and do not bind the Appellant in any other manner.

Ground No. 3: Attribution of further profits to the DAPE of the Appellant in India i.e. to MIPL, over and above the arms's length remuneration paid to MIPL 3.1 Without prejudice to Ground No. 2, on the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO in attributing further profits to DAPE, thereby ignoring the fact that MEPL has already been compensated at arm's length remuneration.

Ground No. 4: Making adhoc attribution of income to DAPE of the Appellant in India

4.1 Without prejudice to Ground Nos. 2 and 3, on the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO in holding that entire revenue earned by the Appellant arises through and is effectively connected to such DAPE of the Appellant in India and in making adhoc attribution of 50% of entire revenue to such DAPE, without even calling for the factual details from the Appellant.

4.2 On the facts and circumstances of the case and in law, the learned C1T (A) erred in upholding the action of the AO in considering adhoc profitability of 80% for supply of Mobileum Software, Third Party Software and Fees for Technical Services and adhoc profitability of 20% for supply of Third Party Hardware, without even calling for the factual details from the Appellant.

Ground No. 5: Treating the revenue earned from Indian customers from supply of Mobileum Software and Third Party Software as Royalty 5.1 On the facts and circumstances of the case and in law, the learned CIT (A) erred in upholding the action of the AO in concluding that revenue earned from supply of Mobileum Software constitutes 'Royalty' as per the provisions of Article 12(3) of the India - US tax treaty.

5.2 On the facts and circumstances of the case and in law, the learned CIT (A) erred in upholding the action of the AO in concluding that revenue earned from supply of Third Party Software constitutes 'Royalty' as per the provisions of section 9(l)(vi) of the Act and Article 12(3) of the India - US tax treaty without appreciating that the Appellant is merely acting as a trader of Third Party Software.

3 Mobileum Inc.

Ground No. 6 - Treating affairs of the Appellant as a way to avoid payments of taxes in India 6.1 On the facts and circumstances of the case and in law, the learned CIT (A) erred in upholding the action of the AO in treating affairs of the Appellant as a way to avoid payments of taxes by non-submitting the fact that the Appellant has a Permanent Establishment in India and that the Appellant has circumvented the provisions of the Act.

Mobileum Inc (hereinafter referred to as 'the Appellant' or 'Mobileum') is a Company incorporated under the laws of United States of America ('USA') and a tax resident of USA. The Appellant is engaged in the business of developing and providing voice and data roaming solution to worldwide mobile operators. The Appellant sells 'Mobileum Software / Mobileum Product1 alongwith third party hardware and third party software to mobile operators across the globe and also provides incidental services.

The Appellant has entered into agreements with various customers in India for supply of Mobileum Products, third party hardware and third party software and provision of allied services like installation, training, maintenance and support.

During the year under consideration, the Appellant has earned following revenue from its customers in India: i) Supply of Mobile urn Software- USD 2,15,841; ii) Provision of installation, training, maintenance and support services ('Fee for Technical Services') - USD 3,11,349; iii) Supply of Third Party Software- USD 1,60,253; and iv)Supply of Third Party Hardware- USD 15,68,864; The revenue earned by the Appellant from its Indian customers during the year under consideration towards installation, training, maintenance and support has been offered to tax by the Appellant in its return of income as fees for technical services on gross basis at the rate of 10.506% (including surcharge and education cess) as per the provisions of section USA of the Act.

The revenue earned by the Appellant from its Indian customers during the year under consideration from supply of Mobileum Software, third party software and third party hardware constituted the Appellant's business income which in absence of Permanent Establishment ('PE') of the Appellant in India was not offered to tax by the Appellant in its return of income filed in India. The AO made certain addition in the assessment which were confirmed by the Ld.CIT(A). Assessee has filed this appeal as a consequence.

4 Mobileum Inc.

This ground is general.

Further, the assessing officer has rejected the assessee's arguments that the MIPL was compensated at arm's length price for the reason that transfer pricing assessment in the case of appellant has not being carried out. The assessing officer has also relied on the fact of the withdrawal of circular No. 23 of 1969 by the CBTD. The TPO has attributed 50% of the revenue received by the appellant from its Indian customers has since details of expenditure were not provided by the assesee; the TPO

5 Mobileum Inc.

has estimated 80% in case of income from sale of software and technical fees, and profitability of 20% on sale of third party hardware. Before the Ld.CIT(A), the assessee submitted that the transfer pricing assessment was done in the case of MIPL, the associate enterprise of the assessee, further the withdrawal of circular No. 23 of 1969 does not have any effect since circular No. 5 of 2004 enumerates where BPO unit renders service at ALP then there would be no further attribution. The assessee also objected for the arbitrary estimation of amount without considering the details of expenditure.

However, Ld.CIT(A) rejected the contention. He held that the transfer pricing assessment in the case of the assessee which was not carried out is very significant and in the absence of the same the determination of ALP in transactions with the AE's is very difficult therefore, the view of the assessing officer estimating the revenue is confirmed.

“He further held that it is noticed that the AO has treated the royalty income, Thirty Party Hardware and Fees for Technical Service aggregating to Rs. 1,57,88,512/- as business income of the assessee relying on the new CBDT circular No. 7/2009 (F No. 500/135/2005-FTD-I) dated 22.10.2009, wherein the CBDT has withdrawn the old Circular No. 23 dated 23.07.1969 which had specified in para 3(6)(c) that where a non-resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent's services, provided that (i) the non-resident principal's business activities in India are wholly channelled through his agents, (ii) the contacts to sell are made outside India, and (iii) the sales are made on a principal-to-principal basis. Therefore, on the background of the withdrawal of the said CBDT Circulars No. 23 of 1961, the AO was correct in disallowing the claim of the assessee that the assessee company's PE in India had been financially compensated at arm's length price for the services provided by RIPL (now known as MIPL) and therefore, no further attribution of any profits to the DAPE of the assessee company in India could be made. The assessee's reliance on circular No. 5 dt. 28,09.2004 is misplaced, because it is actually not on the issue of attribution of profits for a PE but it is for the entities which are not having any business connection and also a permanent establishment, therefore, the assessee's contention is not accepted. As regards the quantum of attribution of revenue the assessing officer's view has to be upheld in the absence of details of expenditure. The assessee even during appellate proceeding^ has not given the details. Therefore, this ground of appeal is dismissed.”

6 Mobileum Inc.

Ground No. 5: This issue relates to treatment of receipt from Indian customers from supply of Mobileum Software and third party software as royalty. The Ld.CIT(A) held that the assessee, though stated that limited rights have been given to the customers to enable the user to operate the programme but it is given with same rights to the end user. Hence, he was in agreement with the AO, as, in substance the license is granted permitting the ultimate user to copy and download the software, the CD would not be helpful to the end user and accordingly, it constitutes royalty under the provisions of Section 9(1)(vi) of the Act and Article 12(3) of the India-US tax treaty. That, therefore, any consideration made for the use of a process would constitute royalty and since the definitions of term "royalty" as appearing in Explanation 2 to Section 9(1)(vi) of the Act and Paragraph 3 of Article 12 of India-US DTAA are identical, payment received by the assessee is taxable in India as royalty. That based on the principles laid down in the above rulings, Hon'ble Karnataka High Court in case of CIT vs. Samsung Electronics Co Ltd and others (supra) and as per the terms and conditions of the agreements entered into with the Indian customers as well as manner of supply of software, in my view consideration received by the assessee from supply of Roamware/Mobileum Software and third party software to its Indian customers constitutes 'royalty' both under Section 9(1)(vi) of the Act and Article 12 of India-US Tax Treaty and chargeable to tax accordingly. That in view of the above, the 'AO' is correct in concluding that amount received by the assessee amounts to royalty.

Submissions with respect to Ground No 2,3 and 4: 3.1 It was submitted with reference to Ground No. 3 that, irrespective of whether or not MI PL constituted a DAPE of the Appellant, since the TPO had accepted the remuneration received by MIPL to be at arm's length, no further profits could be attributed to the Appellant. In this connection, attention of the Hon'ble Bench was invited to the Transfer Pricing Order dated 28 January 2016 passed in case of MIPL For AY 20I2-13under section 92CA(3)of the Income-tax Act, 1961 [Ref: pg. 1-4 of paper book].

7 Mobileum Inc.

3.2 Reliance was placed on various judicial precedents with reference to the Paper Book filed before the Hon'ble ITAT wherein it has been held that if PE is remunerated at ALP, then there cannot be any further attribution to the non-resident assessee.

3.3 It is respectfully submitted that if Ground No. 3 is decided in favour of the Appellant, Grounds No. 2 and 4 would become academic and would not require adjudication.

Submissions with respect to Ground No. 5:

3.4 The AO inter alia placed reliance on the decision of Hon'ble Karnataka High Court in case of CIT vs. Samsung Electronics Co Ltd and others (ITA 2802/2005) and treated the revenue earned by the Appellant from supply of off the shelf computer software to Indian customers as Royalty under Article 12 of India-USA Tax Treaty. The said view was upheld by the CIT(A).

3.5 It is submitted that the amount in question cannot be brought to tax in India for the following reasons

a. Since one proceeds on the footing that there exists a PE of the Appellant in India, then, as per the provisions of Article 12(6) of India-US DTAA, the alleged royalty, which would be effectively connected with the so-called PE, would be dealt with as per 'Article 7 - Business Profits' and not as per 'Article 12 - Royalties and Fees for Included Services*. The consequence would be that since the so-called PE is already remunerated at an arm's length, ' neither the royalty nor any other income would be chargeable to tax in the Appellant's hands ft is submitted that if this submission is upheld, then, it would not be necessary to go into the question as to whether or not the amounts in question are in the nature of royalty.

b. In any event, the decision of Karnataka High Court relied on by the AO has been overruled by the Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Private Limited v. CIT and ANR (Civil Appeal Nos. 8733-8734 of 2018) [Ref: pg. 87-312 of paper book filed on 26 March 2021 ], by virtue of which the amount cannot be regarded as royalty.

3.6 In view of the above submissions, it is most respectfully submitted that it be held that: a. The so-called agent having been remunerated at arm's length, no income (including business profits and the alleged royalty) can be brought to tax in the hands of the Appellant.

b. In any event, the revenues from supply of software cannot be regarded as royalty.

8 Mobileum Inc.

9 Mobileum Inc.

The Ld. Counsel for the assessee, at the outset submitted that the issue raised in the cross objection by the assessee that, even if it is held that the assessee has permanent establishment in India its income is not taxable in India as it has paid arm’s length remuneration/commission to its agent in India which is taxed in India and therefore no adjustment to be made in the hands of the assessee, is decided in favour of the assessee in assessee’s own case for the A.Y. 2007-08 by the Coordinate Bench of the Tribunal in ITA No. 8862/Mum/2010 by order dated 17.11.2017 following the decision of the Hon’ble supreme Court in the case of CIT v. E-funds I.T. Solutions Inc., in Civil Appeal No. 6082 of 2015 dated 24.10.2017.

Ld. Counsel for the assessee submitted that following the decision of the Hon’ble supreme Court, the Coordinate Bench held that once no income is chargeable to tax in India is attributable to the assessee for the reason that the transaction between the assessee and its AE has been found at arm’s length price, no further income chargeable to tax in India can be said to be attributable on account of PE. Ld. Counsel for the assessee referring to the order passed by the Transfer Pricing Officer u/s. 92CA (3) of the Act for the A.Y. 2005-06 in the case of M/s. Zee Telefilms Ltd., which is the agent of the assessee, it is submitted that the TPO accepted the transactions are at arm’s length and no adjustment has been made to the International transactions entered into by the assessee with its associate enterprises. Therefore, it is submitted that this issue is squarely covered in favour of the assessee by the Coordinate Bench in Assessee’s own case for the A.Y. 2007-08 and the said order may be followed for this assessment year.

Ld. DR vehemently supported the orders of the Assessing Officer.

On hearing both the parties and perusing the orders of the authorities below and the Coordinate Bench decision, we find that similar issue came up before the Coordinate Bench for the A.Y. 2007-08 wherein the alternative contention of the assessee that income of the assessee is not chargeable to tax in India as the assessee has paid arm’s length remuneration/commission to its agent in India which was taxed in India, has been accepted following the decision of the Hon’ble Supreme Court in the Case of CIT v. E- funds I.T. Solutions Inc., (supra) while holding so the Coordinate Bench observed as under:-

“The learned Counsel for the assessee stated that no adjustment on account of ALP of space selling is considered by TPO and once, no transfer pricing adjustment is made, no further income chargeable to tax in India can be attributable to the assessee for the reason that the transaction between the assessee and AE has been found at arm’s length price. For this the learned Counsel for the assessee relied on the decision of Hon’ble Supreme Court in the case of ADIT vs. E-Funds IT Solution Inc. in Civil Appeal No. 6082 of 2015 vide order dated 24.10.2017 wherein vide Para 22 reads as under: -

“Shri Ganesh has referred to and relied upon an order of the Additional Taxation Commissioner, who is the Transfer Pricing Officer. The said order is dated 22nd February, 2006 and states as under: “The taxpayer company filed its return of income with ACIT Circle 11(1), New Delhi. A reference was received from the Assessing Officer to determine the ‘arm’s length price’ u/s 92CA(3) in respect of ‘international transactions’ entered into by the assessee during the F.Y. 2002-03. In response to notice

10 Mobileum Inc.

u/s 92CA, Shri Vijay Iyer, CA of S.R. Batliboi & Co. Chartered Accountants, authorized representative of the assessee appeared form time to time. The documentation prescribed under Rule 10D of the Income Tax Rules was submitted and placed on record. The taxpayer company is engaged in providing IT enabled services which include Back office services and Call centre services. It also has a software design center for development of software for call centres. eFunds International (India) Pvt. Ltd. is a wholly owned subsidiary of IDLX Holdings BV, Netherlands. IDLX is a wholly owned subsidiary of eFunds Corp. The major international transactions undertaken by the assessee during the year is given below:

Sl.No Description of Method Value (In Rs.) transaction 1 Financial Shared TNMM 33.9 Cr. 5 Services (Back Office) 2 Call Center Services TNMM 88.03 Cr. 3. (Shared Service Centre) 3 Software TNMM 57.58 Cr Development (Offshore for call centres) In addition to the above the assessee has also provided software development services to overseas eFunds group entities. The international transactions undertaken by the assessee were examined visa-vis the method applied by the assessee for arriving at the arm’s length price. The assessee has relied on the Transactional Net Margin Method (TNMM) in respect of all the major international transactions. After examination of the documentation and discussion with the authorized representative of the assessee, no adverse inference is drawn in respect of the Arm’s Length Price (ALP) of the international transactions, as declared by the assessee in Form 3CEB, annexed to the return of the Income.” Shri Ganesh is correct in stating that as the arm’s length principle has been satisfied in the present case, no further profits would be attributable even if there exists a PE in India. This was specifically held in Morgan Stanley (supra) as follows: “32. As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm’s length principle we have quoted Article 7(2) of DTAA. According to AAR where there is an international transaction under which a nonresident compensates a PE at arm’s length price, no further profits would be attributable in India. In this connection, AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 also issued by CBDT. This is the key question which arises for determination in these civil appeals. (at page 25). xxx xxx xxx 35. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in

11 Mobileum Inc.

India. The quantum of taxable income is to be determined in accordance with the provisions of the IT Act. All provisions of the IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carryforward and set-off losses, etc. However, deviations are made by DTAA in cases of royalty, interest, etc. Such deviations are also made under the IT Act (for example Sections 44-BB, 44-BBA, etc.)

Under the impugned ruling delivered by AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm’s length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken, there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm’s length basis taking into account all the risktaking functions of the enterprise. In such cases nothing further would be left to be attributed to 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 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 corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to PE).” (at pages 27-28)”

The learned Counsel also relied in ITAT’s decision in the case of Taj TV Ltd. vs ADIT (international Taxation) (2017) 162 ITD 674 (MumTrib.) “18. As regards ground No.1 of the Revenue's appeal, it is admitted fact that, similar to ground which has been decided in the assessment year 2007-08. Therefore, in view of the finding given there in, we hold that no further income chargeable to tax in India can be said to be attributable to the assessee for the reasons that the transaction between the assessee and PE has been found at arm's length price and for this year also the TPO's order in case of the assessee and Taj India has been placed on record wherein the transaction has been accepted at arm's length price. Thus, ground No. 1 is dismissed.”

In view of the above, the learned Counsel for the assessee argued that in case alternate arguments of the assessee is accepted that no further income chargeable to tax in India can be said to be attributable to the assessee for the reason that the transaction between the assessee and its AE has been found at arm’s length price in the present case on the issue of agent for space selling, there is no requirement for dealing with the issue of, whether there is PE or not and no addition on this count can be made in the case of assessee. When these facts were confronted to the learned CIT Departmental Representative, he fairly conceded the position as regards to alternative contention of the assessee.

After hearing rival contentions and gone through the facts and circumstances of the case. We find that the alternative contention made by the assessee that once no income chargeable to tax in India is attributable to the assessee for the reason that the transaction

12 Mobileum Inc.

between the assessee and its AE has been found at arm’s length price, no further income chargeable to tax in India can be said to be attributable on account of PE. Accordingly, this issue is squarely covered in favour of assessee by the decision of Hon’ble Supreme Court in the case of EFunds IT Solution Inc. (supra) and also co-ordinate Bench decision in the case of Taj TV Ltd. (supra). Respectfully following the same we allow the appeal of the assessee.” Respectfully following the decision of the Coordinate Bench, we hold that since transactions between the assessee and its AE have been found at arm’s length prices no further income chargeable to tax in India can be said to be attributable for the PE of the assessee. Hence this ground is decided in favour of the assessee. Since we have decided issue on the preliminary point, we are not inclined to go into the merits of other grounds.

Given the definition of royalties contained in Article 12 of the DTAAs 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(1)(vi), along with explanations 2 and 4 thereof, which deal with royalty, not being more 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 software manufacturers/suppliers, as

13 Mobileum Inc.

consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which 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 us in 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 ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.

Pronounced in the open court on 22.09.2021

Sd/- Sd/- (PAVAN KUMAR GADALE) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 22/09/2021 Sr.PS. Thirumalesh Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai