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Facts
The assessee, a non-resident foreign company, sold off-the-shelf software to Indian customers and considered the income non-taxable. The Assessing Officer (AO) held that its Indian associate, AppD India, constituted a Dependent Agent Permanent Establishment (DAPE) and attributed 75% of offshore sales profits to India.
Held
The Tribunal held that AppD India is not a DAPE of the assessee as it does not meet the conditions under Article 5(4) of the India-UK DTAA. AppD India only identifies leads, and the assessee handles contract negotiations and sales.
Key Issues
Whether the Indian subsidiary of a foreign company constitutes a Dependent Agent Permanent Establishment (DAPE) under the India-UK Double Taxation Avoidance Agreement (DTAA) based on its marketing and sales support activities.
Sections Cited
133(6), 5(4), 5(5)
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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI CHALLA NAGENDRAM PRASAD, & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appeal by the assessee is directed against the order dated 23.10.2023 for A.Y 2021-22.
[A.Y 2021-22] AppDynamics Intl 2. Briefly stated, the facts of the case are that the assessee e-filed its return of income for the A.Y 2021-22 under consideration on 11.03.2022 declaring total income of Rs. Nil. The assessee is a part of CISCO Group, and offers an integrated suite of products including the following four key applications: • Application Performance Monitoring ("APM") platform, • End user Monitoring, • Infrastructure Visibility, and • Application Analytics. Each of these key applications are offered on a subscription or perpetual license basis, with the majority of sales coming from subscriptions. Post the acquisition of AppDynamics group, AppD International became the distributor of Cisco products. AppD International is a non-resident foreign company incorporated in the United Kingdom, engaged in the sale of off-the-shelf software. AppD International does not have any presence in India and accordingly, in the absence of any statutory obligation under the Indian tax/corporate laws to maintain India specific books of accounts, profit & loss account statement or balance sheet and related notes in India, the Assessee does not prepare and maintain the same.
During the year under consideration, the assessee had receipts amounting to Rs 36,95,22,215/- from the sale of off-the-shelf software [A.Y 2021-22] AppDynamics Intl to its third-party customers in India which the assessee has considered the same as non-taxable in view of the decision of Hon’ble Supreme Court decision in the case of Engineering Analysis Centre of Excellence Pvt Ltd. While remitting payment for the off-the-shelf software, the customers in India have withheld taxes at source.
In the course of assessment proceedings, the AO found that the assessee has received Marketing and Sales Support Services from one of its associate Enterprise, AppDynamics Technologies India Pvt Ltd India, in India. Referring to the contract between AppD India (service provider) and the assessee (service recipient), and Article 5 of the UK-India DTAA, the AO held that the AppD India (service provider) is the DAPE (Dependent Agent Permanent Establishment) of the assessee. The Assessing Officer finally attributed 75% of profits from off-shore sales to the PE of the assessee for its operations carried out in India. The assessee has earned revenue of Rs. 36,95,22,215/- from sales and 25.75% of the said amount being Rs. 9,51,51,970/- was attributed to the PE in India and taxed in the hands of the assessee @ 40% plus applicable surcharge and cess.
Aggrieved, the assessee went in appeal before the DRP which concurred with the AO finding. The DRP took note of the fact that the assessee had filed some additional evidences in the shape of invoices [A.Y 2021-22] AppDynamics Intl raised by the AppD India which was not examined by the AO in the remand stage despite being given directions for examination of the invoices as to whether they were confined to marketing and sales support services or also included charges for technical assistance, administrative support services, advanced services, logistic services as mentioned in the intercompany agreement between assessee and AppD India.
Now the further aggrieved assessee is in appeal before us.
The ld counsel of the assessee heavily relied on the submissions made before the AO and argued that there is no factual foundation to consider AppD India as DAPE of the assessee. The ld. counsel for the assessee has placed reliance on decisions by the co-ordinate bench in the case of NCR Global Solutions Ltd in various A.Ys. The ld. counsel for the assessee has also placed reliance upon the decision of the Hon'ble Jurisdictional High Court in the case of Nortel India International Inc. for the proposition that the Indian entity cannot be considered as DAPE of the assessee and the decision of the Hon'ble Gujarat High Court in the case of Rajesh Babubhai Damania order dated 28.06.2000 for the proposition that the case be not set aside for verification of invoices.
Per contra, the ld. DR pointing out to pages 12 to 14 of the paper book argued that the services were provided which included technical [A.Y 2021-22] AppDynamics Intl assistance, advanced logistics and other support. The ld. DR continued by saying that the Assessing Officer had issued notice u/s 133(6) of the Act to the AppD India which did not respond to the Assessing Officer.
We have heard the rival submissions and have perused the relevant material on record. We find that the basis of considering the AppD India as DAPE of the assessee is the International Service Agreement and the interpretation of Article 5(4) of the India-UK DTAA. We find that the AO has examined the International Service Agreement (ISA) between AppD International, the assessee service recipient and AppD India, the Indian entity and service provider dated 05.12.2017. The AO after perusal of the list of activities to be provided by the service provider came to the conclusion that AppD India is a captive service provider, performing much more than just marketing services as the ISA provides for AppD India engagement in technical support services, administrative support services, logistical services etc also. Further, the AO held that the TP study report of AppDynamics India Private Limited clearly shows that AppD India was a captive service provider for AppDynamics international which indicates that all business of AppD India was based on the activities of the assessee in India. To corroborate the facts of the case, a notice under section 133(6) was issued to the AE of the assessee but no response has been received so far. Based on these facts, the AO [A.Y 2021-22] AppDynamics Intl applied the provisions of Article 5 of the UK-India DTAA, and held that the AppDynamics India is DAPE of AppDynamics International and taxed the proportionate off-shore sales in India.
We find that the AO has selectively read the ISA to arrive at his conclusions. We find from the ISA that the AppDynamics India is a separate legal entity engaged mainly in marketing and sales support services. We find substance in the assessee’s argument that while the overall marketing strategy is defined by AppD UK, the day-to-day management to execute on the defined strategy is monitored independently by AppD India, and AppD UK has no role in relation to the same. This is apparent from the perusal of the International Service Agreement(ISA), para 7.1 which provides as follows:
7.1 Independent Contractors. Service Recipient is engaging Service Provider to perform Services on behalf of Service Recipient as an independent contractor. Nothing in the Agreement shall be construed to: (i) give either Party the power to direct and control the day-to- day activities of the other Party or (ii) constitute the Parties as partners, joint venturers, principal and agent, employer and employee, co-owners or participants in a joint undertaking.
This part of agreement shows that AppDynamics India is an independent contractor both legally and economically as it employes its own resources and provides similar services to other parties such as being engaged into provision of software development services to CISCO which [A.Y 2021-22] AppDynamics Intl constitutes almost 60% of the total revenue for AppD India. Further we note that Para 3 of the ISA shows that the AppD India performs its function in ordinary course of business while the marketing strategy is determined by AppD UK, it is AppD India which executes the strategy and perform necessary actions as it may deem fit in the normal course of business.
Lets now examine the applicability of Article 5 of the UK-India DTAA. For that we reproduce the Article:
5(4). A person acting in a Contracting State for or on behalf of an enterprise of the other contracting State - other than an agent of an independent status to whom paragraph (5) of this Article applies, shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if: (a) he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 5(5). An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business.
[A.Y 2021-22] AppDynamics Intl However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.
We find that to be a dependent agent, AppD India needs to undertake certain activities for AppD International as per para 4 of Article 5. We do not find that the AO has established that the conditions in Article 5(4) is satisfied. We find that that AppD India only identifies leads/ potential customers for the assessee and once the leads are identified, the assessee does the contractual negotiations for determining the rates, terms and condition of software/product sold to such customer. We also find that the AO has not controverted the assertion of the assessee that AppD India does not maintain/delivers stock of goods/software on behalf o AppD International. Neither we find that the AO has established that the AppD India secures order, where leads identified by it, are definitely converted into orders. We therefore tend to agree with the assessee submission that none of the three conditions laid down in Article 5(4) of India UK DTAA is getting satisfied to contemplate that AppD UK has PE in India and hence there is no question of attributing profits to such PE.
Since we are of the considered view that AppD India is not a DAPE of the assessee, we are not going to deal with the issue that since AppD India [A.Y 2021-22] AppDynamics Intl has been already remunerated at arm's length consideration basis TP principles, no further profits can be attributed to the assessee as held the Hon'ble jurisdictional High Court's judgment in the case of Set Satellite (Singapore) Pte Ltd v. DDIT [(2008) 307 ITR 205 (Bom.) after taking note of Hon'ble Supreme Court's judgment in the case of CIT Vs Morgan Stanley & Co Inc [(2007) 292 ITR 416 (SC)].
In view of the discussion above, we are of the considered view that AppD India is not legally and economically dependent on the assessee nor its action legally binds the assessee to contract in India. None of the conditions laid down in para 4, 5 and 6 of the Article 5 of UK-India DTTA are fulfilled to consider AppD India as a DAPE of the assessee. AppD India only identifies the leads and it is AppD International which concludes the contract/negotiation with prospective customers. The AppD India provides marketing and sales support services independently out of its own resources, in ordinary course of business, on the basis of the instructions provided by the assessee, for which AppD India is remunerated at Arm's length. The ISA does not empower AppD India to enter into contracts, agreements, create or assume any obligation, negotiate or enter into any contracts on behalf of the assessee. We find that AppD India neither maintains any stock of goods/software nor delivers it to the customers on behalf of AppD International. We [A.Y 2021-22] AppDynamics Intl therefore have no reservation in rejecting the contentions of the AO and the DRP and hold that AppD India is not the DAPE of the assessee and accordingly the additions made by attributing profits of the assessee from off-shore sales to PE of the assessee, is deleted. Accordingly, Grounds 1 to 5 raised by the assessee are allowed. Since grounds on merits are allowed, no adjudication is made on grounds 6 and 7taken without prejudice.
In the result, appeal of the assessee in is allowed.
The order is pronounced in the open court on 19.09.2025