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Facts
NCR Global Solutions Limited (GSL), an Irish tax resident, distributes software and hardware globally, with NCR Corporation India Pvt. Ltd. (CIPL) acting as its non-exclusive distributor in India. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) concluded that CIPL constituted both a Fixed Place Permanent Establishment (PE) and a Dependent Agent PE (DAPE) for GSL in India under Article 5 of the India-Ireland DTAA, attributing substantial business income to this alleged PE, including revenues from hardware sales.
Held
The Tribunal held that the distribution agreement between GSL and CIPL established a principal-to-principal relationship, with CIPL acting as an independent distributor selling products on its own account, not as GSL's agent. It found no evidence of GSL having a fixed place of business or employees in India at CIPL's disposal. Therefore, the authorities below erred in concluding the existence of a PE and in attributing income, particularly from hardware sales, to a non-existent PE.
Key Issues
Whether NCR Corporation India Pvt. Ltd. constituted a Fixed Place Permanent Establishment or a Dependent Agent Permanent Establishment for NCR Global Solutions Limited in India, and whether the attribution of income, including hardware sales, to such an alleged PE was justified.
Sections Cited
Income Tax Act, 1961: Sections 143(3), Income Tax Act, 1961: Section 144C(13), Income Tax Act, 1961: Section 142(1), Income Tax Act, 1961: Section 253(1)(d), Income Tax Act, 1961: Section 144C(5), Income Tax Act, 1961: Section 270A, India-Ireland Double Taxation Avoidance Agreement (DTAA): Article 5, India-Ireland Double Taxation Avoidance Agreement (DTAA): Article 12
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Income Tax Appellate Tribunal, DELHI BENCHES : D : NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI ANUBHAV SHARMA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : D : NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE VICE PRESIDENT AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.3230/Del/2023 Assessment Year: 2021-22 NCR Global Solutions Limited, Vs DCIT, Lakeview Drive, Circle 2(2)(2), Airside Business Park, International Taxation, Swords, Co. Dublin, K67 N2N9, New Delhi. Ireland. PAN: AADCN5762E (Appellant) (Respondent) Assessee by : Shri Nageshwar Rao & Ms Viyushti Rawat, Advocate Revenue by : Shri Vizay B. Vasanta, CIT-DR Date of Hearing : 25.07.2024 Date of Pronouncement : 26.07.2024 ORDER PER ANUBHAV SHARMA, JM: This appeal is preferred by the assessee against the order dated 09.08.2023 of the Dispute Resolution Panel-2, New Delhi (hereinafter referred to as ‘the Ld. DRP’) in Objection No.220 dated 20.01.2023 arising out of the objection before it against the order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), by the DCIT, Circle
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International Taxation 2(2)(2), New Delhi (hereinafter referred to as the Ld. AO).
The assessee is a tax resident of Ireland. It is the principal distributor and licensor for software and hardware products and related support services. The assessee sells NCR software and hardware products and related support services through its Affiliates. Assessee has claimed that in India, GSL has appointed M/s NCR Corporation India Pvt. Ltd. (CIPL) as its non-exclusive distributor in exchange for payments for NCR’s distribution activities.
The return was filed for the year under consideration declaring an income of Rs.19,85,92,410/- which was offered to tax at a special rate of 10% claiming benefit of provisions of DTAA between India and Ireland.
During the year under consideration, the assessee company has earned revenue from CIPL in the form of Sale of Software, Export of Goods, Reimbursements and Royalty for use of technology and brand. Out of these transactions the assessee has offered to tax the Royalty for use of technology and brand received as ‘Royalty’.
The case of the assessee was selected for scrutiny and relevant notices were issued.
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The assessee was asked vide notice u/s 142(1) dated 29.09.2022 to furnish the details of Branch Offices/Project offices/Liaison office/Godowns, Warehouses and construction or other business sites in India and detail of agents in India. Also to give a note on why the above do not constitute a ‘business connection’ and a ‘Permanent Establishment’ in India? 7. The assessee submitted that it does not have any branch office / project office / liaison office / godown / warehouse / construction or other business sites or any other form of business presence in India which constitute a Permanent Establishment in the form of Fixed place PE, Agency PE, Installation PE, Construction PE or Service PE in India in accordance with Article 5 of the India-lreland Tax Treaty or a business connection. 8. Further; the assessee has provided the details of revenue received during the FY 2020-21. The details of the revenue as under-
Nature of receipt Amount of Income Reason for not offering receipts (in offered to tax income to tax INR) Royalty for use of 198,592,411 198,592,411 Not applicable technology and brand Sale of goods 402,131,498 - In absence of permanent establishment in India, receipts from sale of hardware is not taxable in India. Sale of software 409,265,172 - -Receipts not in the nature of "Royalty/ Fees for Technical Services' pursuant to Article 12 of India- Ireland Tax Treaty. Further, in absence of a 3
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permanent establishment in India, the said receipts are not taxable in India. - This position is also upheld by the Hon'ble Supreme Court vide order dated 2 March 2021, in the case of Engineering Analysis Centre of Excellence Private Limited v. The Commissioner of Income Tax & Anr (CIVIL APPEAL NOS. 8733-8734 OF 2018) on similar issue of whether payments in respect of embedded software made by distributors qualify as "royalty" under the Act, as well as the India-Ireland Tax Treaty. Total 1,009,989,081 198,592,411
The AO was not satisfied and after taking into consideration the judgement of the Hon’ble Supreme Court of India in the case of Formula One World Championship (Civil Appeal Nos.3849 to 3851 of 2017), concluded as follows:- “11. The Hon’ble SC judgment in Formula One World Championship (Civil Appeal Nos. 3849 to 3851 of 2017) has relied on OECD commentary on Model Tax Convention which states that it is immaterial whether the premises, facilities of installations are owned or rented by or otherwise at the disposal of the enterprise. It further mentions again that the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprises have at their constant disposal certain premises or part thereof owned by another enterprise. It is further explained that the mere fact that the 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 right to use that place is therefore required. It also states that the words 'through which' must be given a wide meaning so as to apply to any situation where
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business activities are carried on at a particular location which is at the disposal of the enterprise for that purpose. Further in the case of the assessee in the agreement between parent and Indian company it is seen that in the Obligations of Distributor under Local Markets it is stated: Distributor hereby appoints NCR as its attorney in fact to execute all documents necessary to effect this assignment. This authorization shows that NCR India is acting on behalf of NCR Global in the local Market i.e. in India. 12. The assessee is a foreign company incorporated in Ireland and is a tax resident of Ireland in accordance of Article 4 of the Double Taxation Avoidance Agreement between India and Ireland (Tax Treaty’ or ‘DTAA’). It is the principal distributor and licensor for NCR software and hardware products and related support services in India. The assessee sells NCR software and hardware products and related support services through its Affiliates. In India, GSL has appointed a group entity in India, NCR Corporation India Pvt Ltd (‘CIPL’) as its non-exclusive distributor of NCR software products and services, and hardware support services in exchange for payments for CIPL’s distribution activities. Therefore, the assessee, GSL, through CIPL is procuring orders, executing sales to the Indian (purchasers/parties which cannot be done without having any place of business in India, in view of the above detailed discussion, it is held that the assessee has a fixed place PE in India in terms of Article 5(1) of India Ireland treaty. 13. Further, the provisions of dependent Agent PE as provided in paragraph 6 of article 5, states that for holding an agent to be a deemed PE is that, a person/enterprise who is not an agent of independent status is acting in a contracting state (here in this case India) on behalf of an enterprise of other contracting state (here Ireland) in respect of any activities where he habitually exercises an authority to conclude contracts on behalf of the enterprise; or if he has no such authority, but habitually maintains stock of goods or merchandise which he regularly delivers goods or merchandise on behalf of the enterprise, then he is deemed to be DAPE. Having been tasked with exclusive distributorship of NCR software products and services CIPL is thus a DAPE of NCR Global.” 10. It was further held by the AO as follows:- “21. In the present case CIPL works mainly or wholly on behalf of the non-resident assessee, it has authority to conclude contracts on behalf of the non-resident, it habitually secures orders in the India, mainly or wholly for the non-resident assessee, therefore, it is evident that the assessee has an agency PE in India in the form of CIPL.”
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Accordingly, the income was computed as follows:- “24. Now, to determine the business income of the assessee a net profit of 35% is considered reasonable. This ratio is applied on the gross amount of end user license fee for software license and software updates received from GIPL. As substantial sales and marketing activities are being earned out in India, 70% of the business income is considered attributable to the PE in India. Since the profit margin has been adopted, all other expenses in the books of the assessee incurred for the purposes of business have been given credit for. Computation of income of PE
Particulars Amount End user license fee for software product Rs. 40,92,65,172/- Export of goods Rs. 40,21,31,498/- Gross revenue Rs. 81,13,96,670/- Profit @35% Rs. 28,39,88,835/- Profit attributable to PE in India taxable as Rs. 19,87,92,185/- Business income (70% of Business Income). 12. The assessee is in appeal raising the following grounds:- “Based on the facts and circumstances of the case and in law, NCR Global Solutions Limited (“NCR GSL1’ or "the Company" or “the Appellant”) respectfully craves leave to. prefer an appeal under Section 253(1 )(d) of the Income-tax Act, 1961 (“the Act”), against final assessment order dated 20 September 2023 ("impugned order”) issued under Section 143(3) read with Section 144C(13) of the Act passed by Ld, Deputy Commissioner of Income-tax, Circle-2(2)(2), International Tax, New Delhi (“AO”) in pursuance of the Directions dated 09 August 2023 issued under Section 144C(5) by Hon'ble Dispute Resolution Panel -2 (“DRP”), New Delhi, on the following grounds which are without prejudice to each other: 1. Directions issued by DRP under section 144C(5) of the Act without bearing DIN on the body of such order, without recording reasons for not doing so renders same and subsequent final assessment order passed pursuant thereto are invalid and deemed to have never been issued as per CBDT Circular 19/2019 dated 14 August 2019. 2. Impugned order erred in making adjustment aggregating to INR 19,87,92,185 to the returned income of the Appellant and in assessing the total income of the Appellant at INR 39,73,84,596. 3. Conclusions reached in Impugned order are based on non/ incorrect appreciation of facts, ignoring to consider submissions and material on
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record as also due to wrong interpretation and application of law and therefore, are bad in law. 4. Impugned order grossly erred, in alleging that Appellant has a Fixed place Permanent Establishment (“PE”) for business in India, to carry on the business of sale of software products without indicating any basis for same. 4.1. Impugned order have failed to provide even a vague indication on why contentions of Appellant are incorrect and further in substituting imaginary facts as basis for alleging existense of fixed place permanent establishment in India to carry on the business. 4.2. Impugned order erred in ignoring relevant and complete facts brought on record explaining Appellant's business with Indian entity and proceeded on unsubstantiated and imaginary presumptions to hold existence of PE and further perpetuated such error by attributing income on imaginary and baseless presumptions. 4.3. Impugned order erred in confirming existence of a Fixed place of business in India through NCR Corporation India Private Limited (“NCR India”), an independent legal entity conducting its own business, without indicating any basis and by overlooking material placed on record by the Appellant.” 5. Impugned order erred in alleging without any basis that NCR India is acting as an agent on behalf of the Appellant and concluding that it is constitutes agency PE of Appellant. 5.1. Presumptions that NCR India works mainly or wholly on behalf of the Appellant and that NCR India has authority to conclude contracts on behalf of the Appellant and NCR India habitually secures orders in India, mainly or wholly for the Appellant and is executing sales to India purchasers/ parties for and on behalf of the Appellant are totally baseless and incorrect. 5.2. Impugned order failed in not appreciating that Appellant merely sells goods and software to NCR India bn principal to principal basis and that NCR India is engaged in manufacturing of ATMs for its own business, and alleging existence of PE. 6. Non-speaking impugned order totally failed to discharge burden of proof to establish existence of PE of any form in India.
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6.1. DRP directions pursuant to which impugned order is passed erred in law, by not following binding order passed by the Tribunal for AY 2018-19 and AY 2019-20 on identical facts and issues; 6.2. Impugned order misinterprets Distribution agreement and reaches at perverse conclusion on existence of Agency PE and Fixed place PE by placing selective reliance on clause 6.1(a) and 6.1(b) ignoring all relevant facts and material on record. 7. Without prejudice to the above grounds of appeal, impugned order erred, in law and on facts, in attributing income to' alleged PE without indicating any valid basis, purely based on speculations and without taking cognizance of the fact that profits/ income earned in relation to activities in India (by alleged PE, i.e., NCR India), have already been offered to tax in India and which is at arm’s length. 8. Without prejudice to the above grounds of appeal, impugned order erred, in law and on facts, in attributing the profit to the alleged PE in India, in an arbitrary manner contrary to established principles. 9. Without prejudice to the above grounds of appeal, impugned order erred, in law and on facts, in including consideration received towards sale of hardware (goods) while attributing income to the alleged PE without providing any basis/reasons for inclusion of such consideration. Impugned order alleged fixed place PE and agency PE of the Appellant in India only in respect of the software distribution activities but arbitrarily included hardware sale for attributing income to the alleged PE in India. 10. Without prejudice to the above grounds of appeal, impugned order has erred, in law and on facts, in taking 35% of the gross amount of international transactions as the net business income accruing from the business of Appellant in India, on an arbitrary basis without any indicating any basis/reasons. 11. Without prejudice to the above grounds of appeal, impugned order has erred, in law and on facts, in arbitrarily considering 70% of the alleged business income to be attributable to the alleged PE in India, on the pretext that substantial sales and marketing activities are being carried out in India. Other grounds: 12. Impugned order has erred, in law and on facts, in considering INR 14,43,230, purported to be tax deduction at source (“TDS”) by Revenue on interest towards income-tax refund which is not issued to the Appellant.
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The learned AO has erred, in law and on facts, in initiating penalty proceedings under Section 270A of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with law.”
Heard and perused the ground. The ld. counsel for the assessee, Shri Nageshwar Rao, has primarily relied the objections which were filed before the DRP as the foundation of the arguments in support of the grounds. It was submitted that the DRP has failed to take into consideration that the AO has not given any reasoning and justification to establish the existence of the PE. It was submitted that the AO has failed to establish the stability, productivity and dependence of the assessee on NCR India to constitute fixed place PE of the assessee in India. It was submitted that NCR India was its non-exclusive distributor and none of the employees of the assessee has ever visited India. Thus, there was no place of business and no permanent location of the assessee in India. The ld. counsel submitted that adjustments are made on the basis of pre-conceptions and notions without appreciating that the assessee is engaged in development of software and manufacturing of information technology related hardware products which is different from the manufacturing activities carried out by NCR India. The ld. counsel submitted that NCR India is into manufacture of ATMs as well as hardware and software produced by NCR
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India are sold by NCR India to its own customers on its own accounts and not on behalf of NCR-GSL. The relationship of NCR India and the assessee under the distributor agreement is on principal to principal basis. It was also pointed out that the AO has erred in including consideration received towards hardware while computing the net business income attributable to alleged PE without holding that it is attributable to the PE and the basis thereof.
The ld. DR has, however, relied the orders of the ld. tax authorities below.
As we appreciate the matter on record, the important piece of evidence is the distribution agreement executed between the assessee and NCR India made available at pages 49-63 of the paper book. This agreement defines in the preamble that: “WHEREAS, GSL develops, manufactures, markets, installs, licenses and services business information processing equipment software and related products and-desires that such equipment and software be sold to customers in the Territory; WHEREAS, Distributor conducts sales and service activities in the Territory; and WHEREAS, GSL and Distributor desire to have Distributor act as distributor of GSL’s Hardware and licensee of GSL’s Software in the Territory;”
The agreement further provides that “2.1 Appointment. NCR appoints Distributor as the nonexclusive distributor of the Hardware and licensee of Software in the Territory. NCR further grants Distributor the non-exclusive right to provide NCR- 10
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authorized service in the Territory for Hardware and Software released for sale or license through the Distributor. The rights granted herein apply to both currently released and future Hardware and Software, but Distributor shall not advertise any new Hardware or Software without NCR's prior written consent. Distributor shall limit its marketing of Hardware and Software to Customers located within the Territory. 2.2 Reservation of Rights to NCR. NCR reserves the right to enter the Territory and sell, lease or service Hardware or license or service Software, directly or indirectly and to appoint other distributors within the Territory. Distributor shall be entitled to credit or compensation for any such direct or indirect activities Distributor performs within the Territory which facilitate the sale, lease or service of Hardware and license or service of Software by NCR within the Territory.”
As we go through the obligations and distributorship covenants described in section 6 of the agreements, we find that for the local markets these two parties had agreed as follows:- “b. Local Markets. Distributor shall make such changes to any Hardware and Software that NCR deems appropriate to adapt such Hardware and Software for use in the Territory. Distributor shall be responsible for translating NCR materials into the languages of the Territory and shall be responsible for making such changes to the Hardware and Software, manuals, and promotional materials as are required to comply with the laws of the Territory. Distributor hereby assigns to NCR all of its rights in such Hardware and Software and documentation adaptations including but not limited to, all local language translations of NCR materials, advertising and promotional materials, and in related patents and copyrights. Distributor hereby appoints NCR as its attorney in fact to execute all documents necessary to effect this assignment.”
Further, with regard to the business operations, it was agreed as follows:- “6.3 Business Operations. The business and other operations of Distributor under this Agreement shall be solely under the control, direction and management of the Distributor. a. Expenses. Distributor shall be solely responsible for its own expenses and employees and agents and shall provide at its own expense, such office space and facilities, and hire and train such personnel, as may be required
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to effectively carry out its obligations pursuant to this Agreement. Distributor agrees that it shall incur no expense chargeable to NCR except as may be authorized in advance. b. Premises and Staff. Distributor agrees to maintain properly equipped and located premises with suitable fixtures and a competent staff of marketing personnel dedicated to the promotion and sale of products. Distributor shall employ trained, competent technicians, field engineers, programmers, analyst and other maintenance personnel to service all Hardware and Software within the Territory.”
Then, section 11.1 of this agreement defines the relationship of the parties as follows:- “11.1 Relationship of Parties. Distributor is an independent purchaser of Hardware and licensee of Software. During the term of this Agreement, the relationship of the Parties is and shall remain that of independent contractors. Distributor shall not be considered, an agent or legal representative of NCR for any purpose, and neither Distributor nor any director, officer, agent, or employee of Distributor shall be, or be considered, an agent or employee of NCR. Distributor is not granted, and shall not exercise, the right or authority to assume or create any obligation or responsibility, including without limitation, contractual obligations and obligations base on representations, warranties, guaranties on behalf of or in the name of NCR.”
As we take into consideration the aforesaid, we have no doubt in our mind that the NCR India was appointed out rightly as a distributor with non- exclusive rights of service for hardware and software released for sale or licence to the distributor. The definition of hardware provided in clause 1.6 of the agreement establishes that the assessee was to sell the hardware to the NCR India for resale pursuant to this agreement. This resale signifies that the property in these products stood transferred to NCR India and what NCR India got was
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merely right to provide services in the territory to the hardware sold by the assessee.
It appears the AO has randomly picked up certain part of the terms of obligation of distributor regarding local markets to hold that the distributor was given rights to execute all documents. As for the purpose of Article 5(6) of the DTAA, there is nothing to establish that NCR India under the agreement has and habitually exercises an authority to conclude contracts for and on behalf of the assessee or maintained stock or goods on behalf of the assessee or otherwise secured orders in India for the assessee. The assessee merely sold hardware and softwares on a non-exclusive basis to NCR India which are used by NCR India as raw material in manufacturing of ATMs or the same are directly sold to third party customers/sub-distributors. The ATMs manufactured by NCR India as well as the hardware and software procured by NCR India from the assessee are sold by NCR India to its customers on its own account and not on behalf of NCR.
Then, there is no absolute findings on the basis of any material that the assessee had any place of business in India which was fixed in terms of permanency or if any employees of the assessee resided in India were at the disposal of NCR India.
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Thus, we have no hesitation to conclude that authorities below have fallen in error to hold the existence of assessee’s PE in India in the form of CIPL. In the result, the grounds are sustained and the appeal filed by the Assessee is allowed. Order pronounced in the open court on 26.07.2024. Sd/- Sd/- (G.S. PANNU) (ANUBHAV SHARMA) VICE PRESIDENT JUDICIAL MEMBER Dated: 26th July, 2024. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi