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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU & SHRI SAKTIJIT DEY, VICE-
per the scope of work under the Master Services Licences Agreement, all services relating to those that the parties agreed will be supplied by the assessee. & 2148 /Del/2022 AYs: 2018-19 & 2019-20
As per the terms of the agreement, the assessee grants ANZ, a limited non-exclusive, non-transferable enterprise wide Annual Subscription Licence to use the products only for ANZ internal use in connection with ANZ ordinary business operations. The agreement further stipulates that ANZ may (a) install the server software on each service cline owns or controls, and (b) reproduce and install the Client Software on Client Computers client owns or controls. Client may make copies of the products for backup, testing, disaster recovery or archival purposes and may make a reasonable number of copies of the product documentation for internal use, provided client also reproduces of such copies any copyright, trademark or other proprietary markings and notices contained in the products and product documentation and does not remove any such marks from the original. In addition to the sale of licnece, the assessee also provides services in relation to RPA software.
As could be seen from the facts on record, the receipts from services rendered were offered to tax in India as FTS. However, insofar as receipts from sale of licences are concerned, the assessee claimed that, since, the licences were supplied from outside India and payments were also received outside India, they 16 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 are not taxable in India. Whereas, the Assessing Officer has linked such payments to the activities performed by the assessee through the alleged PE in India. Undisputedly, the Assessing Officer has concluded the existence of PE with reference to the employees of the assessee visiting India and utilizing the office premises of the India AE, AASPL. However, it is necessary to examine whether the assessee has a fixed place PE in India under Article 5(1) read with Article 5(2) and whether the receipts from sale of licence are connected to activities undertaken by the alleged PE. In this context, the allegation of the Assessing Officer is that a number of employees of the assessee have visited India for long duration and performed the core business activities of the assessee from the premises of AASPL. Thus, in sum and substance, the Assessing Officer has alleged that the premises of AASPL constitutes fixed place PE of the assessee in India.
A reading of Article 5(1), which defines fixed placed PE, makes it clear that a fixed place of business through which the business of an enterprise is wholly or partly carried on, can be treated as fixed place of business or PE. Article 5(2) further clarifies that the term PE includes, furnishing of services other than the services relating to royalties and FIS within a contracting 17 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 state by an enterprise through employees or other personnel subject to conditions of clause (i) and clause (ii).
Keeping in perspective the provisions of Article 5(i) read with Article 5(2) of the tax treaty, we have to determine whether any part of the income earned from licence fee can be said to have been earned through the activity of the alleged PE. Undisputedly, the Assessing Officer has stated that in the assessment years under dispute, 30 employees of the assessee have visited India for a total period of 459 days and have utilized the premises of AASPL to carry out the business activities of the assessee. In this context, the Assessing Officer has referred to the email dump furnished by the assessee with reference to its employees. The details of which are as under:
Name Citizenship Education Details description of Post held in Qualification work done in India during The the assessment year _____ company Participated in certain VP, Global Anthony Lopez US B.A. hiring matter. Talent Acquisition Anubhav Saxena US B.E EVP, Organising IMAGINE Partnerships, conference- in India and Strategy & sought participation of existing partners in India Operations Aymeric Ratel US M.S. To receive sales training VP, Regional Sales Clyde Rasheed US M.S. Meet and greet India Chief Hosein employees Financial Officer David Robert Keyes US M. S . Director, Receive training in respect Strategic o f s a l e s a n d p r o d u c t Partnerships support 18 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20
Edmundo Costa US MBA VP and GM For the period, in question, (Latin - he was travelling to Europe America) to meet KPMG, Deloitte UK Gerry Rice US B.S. VP, Finance Assess and standardize financial processes at India level HaeWon Bunzel. US 13.S Visual Provide guidance on technical standards Designer VP of Product Management Jayaraman. Assess and review US MBA in 2017; Is documentation processes Balasubramanian now SV P of Product Management Jon Stueve US M.S. Set-up training Manager. Automation Anywhere Training
Jonathan Malkin US B.S. Lead, Sales Assist with setting-up sales • Engineering engineering function at India level Joseph Crowley US B.S. Regional Sales Director To receive sales training
Judy 'Fran US MBA Director, Renewals Streamline processes in respect of sales operations
Kajaal 13hatti US B.S. Senior Organising i: PVIAGINE Marketing conference in India Manager (Events) Kathleen Holmuen US MBA. Member, Meet employees and gain Board of understanding of India Directors operations Manish Rai US MBA and VP, Product Assess marketing MSEE Marketing opportunities at India level
Mihir Shukla US B.S. Chief Meet employees and Executive review organization Officer Nancy Householder US B.S. Chief Human Hauge Resource Meet employees and Officer review IIR processes
Pankaj Kumar US 13.Se Director, N. Set-up partner service America standards Strategic Partnerships & 2148 /Del/2022 AYs: 2018-19 & 2019-20
Peter Meechan US Post Graduate EVP, Assess Business Corporate Development opportunities at Development India level Pradeep Vhanshetti US B.Sc Senior Not applicable as such. He Solutions was on a personal visit to Architect - IQ India BoT Rajesh US M.S. EVP, Digital Provide guidance for Radhakrishnan Workforce standards related to digital Solutions workforce solutions Ran Sandler US 13.Sc Senior Field Assist with escalation Escalation processes and build team for Engineer India Sathi Tadi US B.E. Senior Meeting with engineers Director, regarding technical Enterprise processes Engineering Suan Alexander US I3.A. Executive Provided assistance Assistant - with Office of the issues around immigration CEO Sujai Vasudavan US M.S. Senior Engineer, To receive product training Development operations Thomas Corcoran US B.E Lead Assist in conducting Demo at Machine IMAGINE conference Learning Engineer Zulfikarali US 13.Sc and Senior Product Assess product issues and Barodawala MCA Manager provide guidance
From the details of employees visiting India, duration of stay and the purpose for which they visited as mentioned in the tabular chart given above, it is observed that none of the employees came for the purpose of either development or sale of or any activity related to development and sale of RPA software platform. From the materials on record, it does not appear that any of the employees visiting Indian were carrying on any activity with regard to sale of licence. Neither from the email dump, nor & 2148 /Del/2022 AYs: 2018-19 & 2019-20 any other material available on record, it is forthcoming that the employees visiting India were involved in the activity of sale of licence.
As could be seen from the details available, the purpose of visit are for shareholder’s activity, stewardship activity, marketing events, for receiving training etc. Though, the Assessing Officer has referred to the information received under section 133(6) of the Act from the Indian AE, however, such information nowhere reveals that the assessee was carrying on any activity of sale of licence through its employees by utilizing the premises of AASPL in India. There is nothing on record that could even remotely suggest that assessee’s employees were carrying out core business activities, either wholly or partly from the premises of AASPL.
On the contrary, from the assessment stage itself the assessee has clarified that its employees had access to AASPL premises only with prior permission. The assessee has further stated that visiting employees were given temporary space for meeting with employees of AASPL and cannot directly undertake client meeting in the premises of the AASPL. It appears that, even clients meetings are organized by the AASPL. The visiting of high 21 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 officials of the assessee, like, CEO, CFO, Chief HR etc. appears to be for meeting officers of AASPL for the sake of owners/shareholders’ interests in the subsidiary. Some of the personnel visiting the premises of AASPL are for receiving training for stewardship activity. Though, the Assessing Officer has made allegation that the assessee has carried out its business activities, either wholly or partly through the premises of AASPL, however, such allegations are not backed by any supporting evidence. It is relevant to observe, the assessee has entered into a separate inter-company agreement with AASPL, through which, the assessee receives services from AASPL by remunerating the Indian AE at cost plus 18% mark-up. As per the terms of the agreement, the Indian AE provides RPA related software development and related services, which includes without limitation, coding, testing, financial modeling, customers support etc.
As could be seen from the aforesaid facts, even part of the services to be provided by the assessee under the master service agreement with ANZ is outsourced to the India AE. In any case of the matter, the assessee has offered the receipts from services as FTS income and it is a fact on record that the Assessing Officer 22 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 has accepted such income without assessing it as income attributable to the PE. Thus, as per the facts and material available on record, there is nothing to demonstrate that the assessee has carried out any activity, either wholly or partly in relation to sale of software licence through the alleged PE in India so as to satisfy the conditions of Article 5(1) read with Article 5(2) of the tax treaty. It is trite law that the burden of proving the existence of fixed place PE is on the Assessing Officer. In this context, we may refer to the decision of the Hon’ble Supreme Court in case of ADIT Vs. E Funds IT Solutions Inc. (supra).
Further, in case of Formula 1 World Championship Ltd. Vs. CIT (supra), the Hon’ble Supreme Court has laid down certain tests for ascertaining a fixed place of business. The tests are the non- resident is free to use the place of business at any time of his own choice and has free access, it can carry on work relating to more than one customer, it can use the place of business for internal administrative and bureaucratic work. However, factually the Assessing officer has failed to satisfy any of the aforesaid tests.
Facts on record reveal that, though, many of the employees visited India, but there is no evidence to suggest that all of them used the premises of AASPL. Even assuming that all those 23 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 employees used the premises of AASPL but there is no evidence to suggest that they used the premises for the activity relating to the sale of software. Undisputedly, the receipts, which are sought to be attributed to the PE are from sale of software licence, however, as could be seen from the facts on record, the transfer of licence takes place, once, the licence key is generated and made available to the licencee after execution of the contract. Insofar as the receipts from provision of services, undisputedly, the assessee has offered them to tax. Though, learned Departmental Representative has alleged before us that the licence agreement was executed in India contrary to the claim of the assessee, however, no documentary evidences has been brought to establish such facts.
Thus, considering the totality of facts and circumstances of the case, we are of the view that the Revenue has failed to establish on record through credible evidence that the assessee has a fixed placed PE in India through which it has earned the income relating to sale of software licence. Therefore, in our considered opinion, no part of such income can be attributed to the PE. Grounds are disposed of accordingly. & 2148 /Del/2022 AYs: 2018-19 & 2019-20
In addition to the main grounds, vide letter dated 29.11.2022, the assessee has raised the following additional grounds:
A. First Additional Ground: Additional Claim A.1 In riling the Income Tax Return for AY 2018-19, the Assessee erred in law in offering to tax the amount of INR 12,07,18,557, which are towards receipts for rendering "professional services" to Indian customers, under the head of "fee for technical or included services", as provided under Article 12(4)(a) of the Double Tax Avoidance Agreement (DTAA) signed between the USA and India. Instead, such receipts should have been treated as excluded from the scope of "fee for technical or included services" under Article 12(5)(a) of the DTAA. A.2 Therefore, the Assessee prays the Hon'ble Bench to direct the ld. AO to delete the tax of INR 1,20,71,856 levied at Sr. No. 25(ii) of the computation sheet annexed to the assessment order passed by the Ld. AO on 26 July 2022. B. Second Additional Ground: B.1 Without prejudice to any other grounds, the Ld. AO erred in law and facts in NOT including the receipts for professional service as the revenue of the fixed place Permanent Establishment. B.2 Therefore, the Assessee prays the Hon’ble Bench to direct the Ld. AO. to add the receipts of INR 12,07,18,557 to the receipts of the fixed place PE and attribute the profit on account of such receipts based on Rule 10(ii) of the Income Tax Rule, 1962.
As could be seen from the grounds raised, the assessee has disputed the taxability of amount offered by it towards FTS/FIS.
Alternatively, the assessee has submitted that, if at all, the 25 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 receipts are held to be taxable, they have to be included as the income of the PE and taxed by applying rule 10(ii) of the Income Tax Rules.
Learned Representatives appearing for the parties were heard at length on the preliminary issue of admission of additional grounds. Our decision on the issue follows in the ensuing paragraphs.
Undisputedly, in the returns of income filed for the impugned assessment years, the assessee has suo motu offered the income received from the services rendered as FTS/FIS under Article 12(4) of India – USA DTAA. It is the claim of the assessee that the receipts cannot fall within the ambit of FIS in view of Article 12(5)(a) of the tax treaty. Admittedly, the aforesaid claim was not made by the assessee either before the Assessing Officer or even before learned DRP. Neither of the authorities have factually examined the nature and character of such receipts by investigating into the relevant facts. Therefore, entertaining assessee’s claim at this stage, would require fresh investigation into the facts, which in our view, is not permissible. In our view, the issues raised in additional grounds do not fall in the category of pure legal issues, but are mixed question of fact and law. Since, 26 | P a g e & 2148 /Del/2022 AYs: 2018-19 & 2019-20 facts relating to the issues have not been examined at any stage, we decline to entertain the additional grounds.
In the result, the appeals are partly allowed.
Order pronounced in the open court on 24th August, 2023