NetApp B.V., New Delhi V. DDIT, New Delhi

ITA 4781/DEL/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6953 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 07-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 12-08-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A N UJ ARORA CIT INT TAXATION
• Assessee Lawyers: G C SRIVASTAVA
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Additional evidence; Permanent establishment; Tangible material
• Section: 5(2); 234B

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E : NEW DELHI BEFORE SHRI I.C.SUDHIR , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 4781 /DEL/2013 (ASSESSMENT YEAR: 2008 - 09 ) NET APP B.V. BOEING AVENUE - 300 , 111PZ, SCHIPHOL, RIJK, THE NETHERLANDS PAN: AADCN217 8 C VS. DDIT, CIRCLE - 2(1), INTERNATIONAL TAX, NEW DELHI (APPELLANT) (RESPONDENT) ITA NO. 634 /DEL/2015 (ASSESSMENT YEAR: 2010 - 11) NET APP B.V. C/O. SRBC & ASSOCIATES LLP, 6 TH FLOOR, HINDUSTAN TIMES BLDG, KASTURBA GANDHI MARG, NEW DELHI - 300, PAN: AADCN2178 C VS. D CIT, CIRCLE - 2(2), INTERNATIONAL TAXATION, NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. G . C . SRIVASTAVA, ADV REVENUE BY: SH. A N UJ ARORA, CIT INT TAXATION DATE OF HEARING 20/10/2016 DATE OF PRONOUNCEMENT 16/1/2017 O R D E R PER PRASHANT MAHARISHI, A. M. 1. TH ESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD ASSESSING OFFICER DATED 25.06.2013 AND 04.12.2014 FOR THE ASSESSMENT YEAR 200 8 - 09 AND 2010 - 11 RESPECTIVELY. PAGE 2 OF 63 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL FOR THE ASSESSMENT YEAR 2008 - 09: - 1. THE LEARNED AO HAS ERRED, IN LAW, BY HOLDING THAT ON ACCOUNT OF THE ACTIVITIES OF NETAPP INDIA PRIVATE LIMITED ('NETAPP INDIA'), A PERMANENT ESTABLISHMENT ('PE') IS C ONSTITUTED FOR NETAPP B.V. IN INDIA UNDER THE INDIA - NETHERLANDS TREATY ('TREATY'). 2. THE LEARNED AO HAS ERRED, IN LAW AND IN FACTS, BY ARTIFICIALLY SPLITTING INCOME FROM STORAGE PRODUCTS INTO THE HARDWARE COMPONENT AND SOFTWARE, AND TAXING THESE INCOM E STREAMS SEPARATELY UNDER THE PROVISIONS OF THE ACT READ WITH THE APPLICABLE PROVISIONS OF THE TREATY. 3. THE LEARNED AO HAS ERRED, IN FACT AND LAW, BY HOLDING THAT THE INCOME FROM THE SALE OF SOFTWARE IS ROYALTY INCOME UNDER ARTICLE 12(3) OF THE TREATY AND CONSEQUENTLY LIABLE TO TAX IN INDIA. 4. THE LEARNED AO HAS ERRED, IN FACT AND LAW, BY HOLDING THAT THE INCOME FROM THE SALE OF SUBSCRIPTIONS IS ROYALTY INCOME UNDER ARTICLE 12(3) OF THE TREATY AND CONSEQUENTLY LIABLE TO TAX IN INDIA. 5. THE LEARNED AO HAS ERRED, IN LAW AND IN FACTS, BY HOLDING THAT THE INCOME FROM THE PROVISION OF THE SERVICES IS ROYALTY INCOME AND FEES FOR TECHNICAL SERVICES ('FTS') UNDER ARTICLE 12(4) OF THE TREATY AND CONSEQUENTLY LIABLE TAX IN INDIA. 6. THE LEAR NED AO HAS ERRED, IN LAW, BY HOLDING THAT DESPITE PAYMENT OF AN ARM'S LENGTH PRICE TO NETAPP INDIA (THE ALLEGED PE OF THE APPELLANT IN INDIA) FOR THE MARKETING AND SALES SUPPORT SERVICES, ADDITIONAL INCOME RELATING TO SUPPLY OF STORAGE PRODUCTS, SUBSCRIPTI ONS AND SERVICES IS ATTRIBUTABLE TO THE ALLEGED PE AND TAXABLE IN INDIA. 7. THE LEARNED AO HAS ERRED, IN LAW, BY HOLDING THAT INCOME FROM THE SUPPLY OF STORAGE PRODUCTS IS TAXABLE IN INDIA IN THE ABSENCE OF A PE IN INDIA AND ATTRIBUTING 90% OF THE GROSS PROFITS OF NETAPP B.V. FROM THE SALE OF STORAGE PRODUCTS, TO THE PE IN INDIA, WHILE DISREGARDING THE INCOME ATTRIBUTION PRINCIPLES UNDER ARTICLE 7 OF THE TREATY, READ TOGETHER WITH THE PROTOCOL TO THE TREATY ('PROTOCOL') AND WELL ESTABLISHED JUDICIAL PREC EDENTS IN THE MATTER. 8. THE LEARNED AO HAS ERRED IN LAW, IN NOT GIVING EFFECT TO THE DRP'S DIRECTIONS FOR ADOPTING THE GROSS PROFIT MARGIN (OF 26% FOR AY 2008 - 09) OF THE APPELLANT IN COMPUTING INCOME FROM THE SALE OF SOFTWARE, SUBSCRIPTIONS AND SERVICE S IN INDIA, ATTRIBUTABLE TO THE ALLEGED PE IN INDIA AND HAS INSTEAD CONSIDERED 100% OF SUCH RECEIPTS AS BEING ATTRIBUTABLE TO THE ALLEGED PE IN INDIA. PAGE 3 OF 63 9. THE LEARNED AO HAS ERRED, IN LAW, BY INVOKING THE PROVISIONS OF SECTION 44DA TO TAX THE INCOME FRO M THE SALE OF SOFTWARE, SUBSCRIPTIONS AND SERVICES IN INDIA WITHOUT ALLOWING FOR ANY EXPENDITURE INCURRED BY THE APPELLANT OUTSIDE INDIA AND BY CONSIDERING 100% OF SUCH RECEIPTS AS BEING ATTRIBUTABLE TO THE ALLEGED PE IN INDIA. 10. IN COMPUTING THE APPEL LANT'S TAX LIABILITY, THE LEARNED AO HAS ERRED IN NOT PROVIDING CREDIT FOR TAXES DEDUCTED AT SOURCE AMOUNTING TO INR 3,05,91,767, AS CLAIMED BY THE APPELLANT FOR AY 2008 - 09. 11. THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234A THE ACT AMOU NTING TO INR 4,25,05,160, FOR A PERIOD IN EXCESS OF THE ACTUAL DELAY OF 18 MONTHS IN FILING THE RETURN OF INCOME FOR AY 2008 - 09 AND COMPUTING SUCH INTEREST WITHOUT CONSIDERING CREDIT FOR TAX DEDUCTED AT SOURCE OF INR 3,05,91,767. 12. THE LEARNED AO HAS ERRED IN LAW AND IN FACT, IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT, AMOUNTING TO INR 13,38,91,254, DISREGARDING THE FACT THAT THE ENTIRE INCOME OF NET APP B.V., WHICH HAS BEEN HELD TO BE TAXABLE, WAS SUBJECT TO WITHHOLDING OF TA XES IN INDIA OWING TO WHICH ADVANCE TAX WAS NOT LIABLE TO BE PAID. 13. THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT, SINCE THE APPELLANT IS NOT LIABLE TO TAX IN INDIA. 3. THE ASSESSEE HAS RAISED THE FOLLOWI NG GROUNDS OF APPEAL FOR THE ASSESSMENT YEAR 2010 - 11: - 1. THE LEARNED AO HAS ERRED, IN LAW, BY HOLDING THAT ON ACCOUNT OF THE ACTIVITIES OF NETAPP INDIA PRIVATE LIMITED ('NETAPP INDIA'), A PERMANENT ESTABLISHMENT ('PE') IS CONSTITUTED FOR NETAPP B.V. IN INDIA UNDER THE INDIA - NETHERLANDS TREATY ('TREATY'). 2. THE LEARNED AO HAS ERRED, IN LAW AND IN FACTS, BY ARTIFICIALLY SPLITTING INCOME FROM STORAGE PRODUCTS INTO THE HARDWARE COMPONENT AND SOFTWARE, AND TAXING THESE INCOME STREAMS SEPARATELY UNDER THE PROVISIONS OF THE ACT READ WITH THE APPLICABLE PROVISIONS OF THE TREATY. 3. THE LEARNED AO HAS ERRED, IN FACTS AND IN LAW, BY HOLDING THAT THE INCOME FROM THE SALE OF SOFTWARE IS ROYALTY INCOME UNDER ARTICLE 12(3) OF THE TREATY AND CONSEQUENTLY LIABLE T O TAX IN INDIA. 4. THE LEARNED AO HAS ERRED, IN FACTS AND IN LAW, BY HOLDING THAT THE INCOME FROM THE SALE OF SUBSCRIPTIONS IS ROYALTY INCOME UNDER ARTICLE 12(3) OF THE TREATY AND CONSEQUENTLY LIABLE TO TAX IN INDIA. 5. THE LEARNED'AO HAS E RRED, IN LAW AND IN FACTS, BY HOLDING THAT THE INCOME FROM THE PROVISION OF THE SERVICES IS ROYALTY INCOME AND FEES PAGE 4 OF 63 FOR TECHNICAL SERVICES ('FTS') UNDER ARTICLE 12(4) OF THE TREATY AND CONSEQUENTLY LIABLE TAX IN INDIA. 6. THE LEARNED AO HAS ERRED, IN LAW, BY HOLDING TH AT DESPITE PAYMENT OF AN ARM'S LENGTH PRICE TO NETAPP INDIA (THE ALLEGED PE OF THE APPELLANT IN INDIA) FOR THE MARKETING AND SALES SUPPORT SERVICES, ADDITIONAL INCOME RELATING TO SUPPLY OF STORAGE PRODUCTS, SUBSCRIPTIONS AND SERVICES IS ATTRIBUTABLE TO THE ALLEGED PE AND TAXABLE IN INDIA. 7. THE LEARNED AO HAS ERRED, IN LAW, BY HOLDING THAT INCOME FROM THE SUPPLY OF STORAGE PRODUCTS IS TAXABLE IN INDIA IN THE ABSENCE OF A PE IN INDIA AND ATTRIBUTING 90% OF THE GROSS PROFITS / LOSSES OF NETAPP B.V. FROM THE SALE OF STORAGE PRODUCTS, TO THE PE IN INDIA, WHILE DISREGARDING THE INCOME ATTRIBUTION PRINCIPLES UNDER ARTICLE 7 OF THE TREATY, READ TOGETHER WITH THE PROTOCOL TO THE TREATY ('PROTOCOL') AND WELL ESTABLISHED JUDICIAL PRECEDENTS IN THE MATTER. 8. THE LEARNED AO HAS ERRED, IN LAW, BY INVOKING THE PROVISIONS OF SECTION 44DA TO TAX THE INCOME FROM THE SALE OF SOFTWARE, SUBSCRIPTIONS AND SERVICES IN INDIA WITHOUT ALLOWING FOR ANY EXPENDITURE INCURRED BY THE APPELLANT OUTSIDE INDIA AND BY CONSIDERING 100% O F SUCH RECEIPTS AS BEING ATTRIBUTABLE TO THE ALLEGED PE IN INDIA. 9. IN COMPUTING THE APPELLANT'S TAX LIABILITY, THE LEARNED AO HAS ERRED IN NOT PROVIDING CREDIT FOR TAXES DEDUCTED AT SOURCE AMOUNTING TO INR 4,57,54,106, AS CLAIMED BY THE APPELLANT FOR AY 2010 - 11. 10. THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234A THE ACT AMOUNTING TO INR 1,96,73,100 BY COMPUTING SUCH INTEREST WITHOUT CONSIDERING CREDIT FOR TAX DEDUCTED AT SOURCE OF INR 4,57,54,106 11. THE LEARNED AO HAS ERRED IN LAW AND IN FACT, IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT, AMOUNTING TO INK 6,22,98,150,DISREGARDING THE FACT THAT THE ENTIRE INCOME OF NETAPP B.V., WHICH HAS BEEN HELD TO BE TAXABLE, WAS SUBJECT TO WITHHOLDING OF TAXES IN INDIA OWING TO WHICH ADVANCE TAX WAS NOT LIABLE TO BE PAID. 12. THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT, SINCE THE APPELLANT IS NOT LIABLE TO TAX IN INDIA. 4. FACTS ARE COMMON TO BOTH THE APPEALS FOR IMPUGNED ASSESSMENT YEARS, WHICH ARE SET OUT IN NARROW COMPASS . THE APPELLANT COMPANY IS A NON - RESIDENT COMPANY SITUATED AT NETHERLANDS, PART OF NETAPP GROUP, PAGE 5 OF 63 ENGAGED IN THE BUSINESS OF SELLING STORAGE SYSTEM EQUIPMENTS AND PRODUCTS INCLUDING EMBEDDED SOFTWARE AND RENDERING CERTA IN SERVICES IN INDIA . ASSESSEE SALES NETAPP PRODUCTS AND SERVICES IN INDIA THROUGH THIRD PARTY DISTRIBUTORS WHO ARE APPOINTED ON NON - EXCLUSIVE BASIS AND THEY PURCHASES NETAPP PRODUCTS AND SERVICES FROM THE COMPANY ON PRINCIP A L TO PRINCIP A L BASIS AND RESALE THE SAME TO CUSTOMERS OR TO OTHER RESELLERS . THE STRUCTURE OF THE COMPANY VIS A VIS GROUP IS THAT A. NET WORK APP LIANCES (IN SHORT NET APP) GROUP HAS A HOLDING COMPANY IN UNITED S T ATES KNOWN AS NET APP USA (US CO) . US CO HAS A SUBSIDIARY COMPANY IN NETHERLAND KNOWN AS NAHM BV ( BV CO ) . BV CO HAS A SUBSIDIARY COMPANY KNOWN AS NETAPP BV (THE ASSESSEE IN APPEAL ) ALSO IN NETHERLAND. B. US CO HAS A SUBSIDIARY IN INDIA KNOWN AS NET APP INDIA ( ICO ) . ICO, BELONGING TO NET APP GROUP, PROVIDES SOME SERVICES TO ASSESSEE , WHICH ARE MARKETING AND SALES SUPPORT, ASSISTANCE IN ORGANIZING TRADE SHOWS, ASCERTAINING MARKET TRENDS, COMPETITION ANALYSIS AND ASSISTANCE IN PRE SALES MARKETING AS PROMOTIONAL MATERIAL FOR NET APP PRODUCTS AND SERVI CES. 5. THE APPELLANT IS ENGAGED IN THE BUSINESS OF SELLING STORAGE EQUIPMENT AND PRODUCTS AND RENDERING OF CERTAIN SERVICES IN THE ASIA - PACIFIC REGION INCLUDING INDIA . THE PRODUCTS ARE SOLD THROUGH THIRD PARTY DISTRIBUTORS WHO ARE APPOINTED ON A NON - EXCLUSIVE BASIS AND SALES ARE MADE TO A GLOBAL CUSTOMER OUTSIDE INDIA ENTERING INTO A MASTER SERVICE AGREEMENT WITH A CUSTOMER FOR SALE OF THE PRODUCTS AT PREAGREED TERMS . THE COMPANY ALSO ENGAGES IN DIRECT SALES CONTRACTS AND THE TITLE OF THE GOODS PASSES DIRECTLY TO THE CUSTOMER TO ENABLE THEM T O CLAIM INDIRECT TAXES SUCH AS CUSTOMS ETC . HOWEVER, THE DISTRIBUTOR IS RESPONSIBLE FOR THE SALE PROCESS. 6. APPELLANT PROVIDES SERVICES THROUGH THIRD PARTY SERVICE PROVIDERS AND N ETAPP INDIA PRIVATE LIMITED I.E. ICO , IN TERMS OF AGREEMENTS ENTERED WITH THEM BY THE APPELLANT . THE ASSESSEE EARNS INCOME IN INDIA FROM PAGE 6 OF 63 (I) SALE OF STORAGE PRODUCTS, (II) SALE OF SUBSCRIPTIONS AND (III) PROVISION OF SUPPORT SERVICES. THE SUBSCRIPTIONS FOR SOFTWARE ARE SOLD INDEPENDENTLY WITH RESPECT TO NETAPP PRODUCTS AND IT CHARGES FOR PRODUCT UPGRADES , ENHANCEMENTS, BUG FIXING AND RELEASE OF PATCHES . THE SOFTWARE CONTAINED IN NETAPP PRODUCTS IS SPECIFICALLY DESIGNED FOR HARDWARE OF NET APP AND IS NOT GENERAL - PURPOSE SOFTWARE . THE ASSESSEE ALSO PROVIDES INSTALLATION, WARRANTY AND PROFESSIONAL SERVICES WITH RESPECT TO DATA MIGRATION, DATA INTEGRATION AND DISASTER RECOVERY SERVICES . AS STATED , ASSESSEE DEALS WITH THE DISTRIBUTORS IN INDIA ON PRINCIPLE - TO - PRINCIPLE BASIS, HENCE, IT IS CLAIMED THAT IT DOES NOT HAVE ANY INCOME ON SALE OF THESE PRODUCTS IN INDIA. 7. ICO, BELONGING TO NET APP GROUP, PROVIDES SOME SERVICES TO ASSESSEE SUCH AS MARKETING AND SALES SUPPORT, ASSISTANCE IN ORGANIZING TRADE SHOWS, ASCERTAINING MARKET TRENDS, COMPETITION ANALYSIS AND ASSIST ANCE IN PRE SALES MARKETING AS PROMOTIONAL MATERIAL FOR NET APP PRODUCTS AND SERVICES. FOR RENDERING THESE SERVICES ICO HAS ENTERED INTO AN AGREEMENT ON 27.04.2002 WITH M/S. NETWORK APPLIANCES BV (KNOWN AS NETAPP BV)(THE ASSESSEE) TITLED AS COMMISSION AGENT AGREEMENT . ACCORDING TO THIS AGREEMENT, THE ASSESSEE WAS TO PERFORM FOLLOWING ACTIVITIES AS PER CLAUSE 2 OF THE AGREEMENT. 2. APPOINTMENT OF NETAPP INDIA A. ACTIVITIES OF NETA PP INDIA. SUBJECT TO THE TERMS AND CONDITIONS HEREIN, NETAPP BV HEREBY APPOINTS NETAPP INDIA, ON A NON - EXCLUSIVE BASIS, TO PERFORM THE FOLLOWING FUNCTIONS ON BEHALF OF NETAPP BB: I. NETAPP INDIA SHALL IDENTIFY POTENTIAL BUSINESS OPPORTUNITIES AND CUSTOMERS FOR NETAPP PRODUCTS AND SERVICES. II. NETAPP INDIA SHALL DISTRIBUTE DISSEMINATE INFORMATION ON NETAPP BV PRODUCTS AND SERVICES III. NETAPP INDIA SHALL ENGAGED IN PROMOTIONAL ACTIVITY FOR BV PRODUCTS AND SERVICES PAGE 7 OF 63 IV. NETAPP INDIA SHALL RESPOND TO INQUIRIES FOR NETAPP BV PRODUCTS AND SERVICES V. NETAPP INDIA SHALL ADVISE NETAPP BV ON MARKETING STRATEGIES AND LOCAL MARKET CONDITIONS. VI. NETAPP INDIA SHALL PROVIDE INFORMATION ON MARKET TRENDS, COMPETITIONS, AND NEW PRODUCTS AND SERVICES IN TH E MARKET. VII. NETAPP INDIA SHALL AT THE REQUEST OF NETAPP, PROVIDE TECHNICAL SUPPORT SERVICES FOR THE PRODUCTS (TECHNICAL SERVICES) INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: SERVICES IN FULFILLMENT OF NETAPP BVS WARRANTY OBLIGATIONS MAINTENANCE SERVICES FOR CUSTOMERS AND SUCH OTHER TECHNICAL SUPPORT SERVICES AS NETAPP SHALL REQUIRED AS MUTUALLY AGREED TO BY THE PARTIES B. FINANCIAL AND ADMINISTRATIVE ACTIVITIES OF NETAPP INDIA. SUBJECT TO THE TERMS AND CONDITIONS HEREIN, NETAPP BV HEREBY APPOINTS NETAPP INDIA, ON A NON - EXCLUSIVE BASIS, TO PERFORM THE FOLLOWING FINANCIAL AND ADMINISTRATIVE SERVICES WITH RESPECT TO THIS AGREEMENT. I. NETAPP INDIA SHALL ACCOUNT FOR EXPENDITURES AND RECEIPTS II. NETAPP INDIA SHALL REPORT EXPENDITURE AND RECEIPTS III. NETAPP INDIA SHALL PROVIDE GENERAL ADMINISTRATIVE ASSISTANCE C. LIMITATION OF AUTHORITY. NETAPP INDIA SHALL NOT HAVE THE AUTHORITY TO CONCLUDE CONTRACTS IN THE NAME OF NETAPP AND SHALL NOT MAINTAIN,. EXCEPT AS PROVIDED UNDER CLAUSE 3 (E), A STOCK OF MERCHANDISE BELONGING TO NETAPP BV OR OTHERWISE MAKE ANY COMMITMENTS WHATEVER ON BEHALF OF NETAPP BV, AS AGENT OR OTHERWISE, OR BIND NETAPP BV IN ANY RESPECT. NETAPP INDIA SHALL NOT HAVE THE POWER OR AUTHORITY TO COMMIT OR OBLIGATE NETAPP B V TO SUPPLY PRODUCTS OR SERVICES OR BIND IT TO A CONTRACT AND IN NO EVENT SHALL NETAPP INDIA HOLD ITSELF OUT AS HAVING SUCH POWER OR AUTHORITY. D. INDEPENDENT CONTRACTOR. THE RELATIONSHIP OF NETAPP INDIA AND NETAPP BV ESTABLISHED BY THIS AGREEMENT SHALL B E CONSTRUED TO (I) GIVE EITHER PARTY THE POWER TO DIRECT AND CONTROL THE DAY TO DAY ACTIVITIES OF THE OTHER (II) CONSTITUTE THE PARTIES AS PARTNERS, JOINT VENTURES, EMPLOYER AND EMPLOYEE, CO - OWNERS, OR OTHERWISE AS PARTICIPANTS IN A JOINT UNDERTAKING, OR ( III) ALLOW EITHER PARTY TO CREATE OR ASSUME ANY OBLIGATION ON BEHALF OF THE OTHER FOR ANY PURPOSE WHATSOEVER. NETAPP INDIA SHALL BE SOLELY RESPONSIBLE FOR, AND SHALL INDEMNIFY, AND HOLD NETAPP BV FREE AND HARMLESS FORM, ANY AND ALL CLAIMS, DAMAGES OR LAWSU ITS (INCLUDING ATTORNEYS FEES INCURRED BY NETAPP BV) ARISING OUT OF ITS ACTS OR THE ACTS OF NETAPP INDIA EMPLOYEES OR ITS AGENTS. PAGE 8 OF 63 8. FOR AY 2008 - 09 A SSESSEE HAS FILED ITS RETURN OF INCOME SHOWING NIL INCOME AND CLAIMED REFUND OF TAX WITHHELD BY THE DISTRIBUTORS AND CUSTOMERS AMOUNTING TO RS. 3 , 05 , 91 , 767/ - . AS THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE LAWS OF KINGDOM OF NET H ERLAND , HAVING TAX RESIDENCY CERTIFICATE ISSUE D BY THE NETHERLAND TAX OFFICER DATED 04.11. 2010 , THEREFORE IS ENTITLED TO THE BENEFITS OF DOUBLE TAXATION A VOIDANCE A GREEMENT BETWEEN INDIA AND NETHERLAND. 9. VIDE DRAFT ASSESSMENT ORDER, LD. ASSESSING OFFICER HELD THAT THE ASSESSEE HAS A BUSINESS CONNECTION IN INDIA U /S 9(1) OF THE INCOME TAX ACT , T HEREFORE ITS INCOME IS CHARGEABLE TO TAX IN INDIA AS IT DEEMED TO ACCRUE AND ARISE IN INDIA IN TERMS OF SECTION 9 (1) (I ) OF THE ACT . IT WAS ALSO HELD THAT ASSESSEE HAS A PERMANENT ESTABLISHMENT IN INDIA IN ACCORDANCE WITH ARTICLE 5 OF INDIA NETHERLAND DTAA BECAUSE OF EXISTENCE OF NETAPP INDIA. THE MAIN REASONS FOR REACHING AT TH IS CONCLUSION IS THAT INDIA N SUBSIDIARY OF USCO I.E. NETAPP INDIA , ICO, IS PERFORMING SERVICES THAT ARE IN THE NATURE OF MARKETING AND OTHER SERVICES WHICH ARE ATTACHED TO THE SALE OF NETAPP PRODUCTS. FURTHER, MARKETING ACTIVITY IS AN INTEGRAL PART OF THE BUSINES S OPERATION AND SINCE THE INDIAN COMPANY IS ENGAGED IN MARKETING OF PRODUCTS OF PARENT COMPANY , THEREFORE, IT CARRIED ON THE BUSINESS OPERATIONS OF ITS PARENT COMPANY IN INDIA . ACCORDING TO HIM , WITHOUT ASSOCIATION OF NETAPP INDIA WITH THE ASSESSEE COMPANY , ACTIVITIES OF THE ASSESSEE OF SUPPLY AND LICENSES CANNOT BE PERFORMED IN INDIA . HE WAS FURTHER OF THE VIEW THAT NETAPP INDIA HAS MANY SALES OFFICES IN INDIA WHICH ARE THE OUTLETS ACTING AS SALES OUTLETS FOR THE INDIA CUSTOMERS. HE FURTHER HELD THAT NETAPP INDIAS ROLE IS CENTRAL AND CORE TO THE BU SINESS OF THE ASSESSEE AND AS ASSESSEE IS MAINLY ENGAGED AS A TRADER , THE ROLE OF MARKETING AND PRE SALES ACTIVITIES ACQUIRE MORE IMPORTANCE. THEREFORE, THE LD ASSESSING OFFICER REACHED AT A CONCLUSION THAT THE ASSESSEE HAS A FIXED PLACE OF BUSINESS IN IN DIA THROUGH NETAPP INDIA AND ITS VARIOUS BRANCHES AND HENCE, THE ASSESSEE HAS A FIXED PLACE PERMANENT PAGE 9 OF 63 ESTABLISHMENT IN INDIA. HE FURTHER HELD THAT NETAPP INDIA IS A DEPENDENT AGENT OF THE ASSESSEE AS ECONOMIC AND LEGAL DEPENDENCE OF THE NETAPP INDIA IS OB VIOUS AS IT EARNS ITS REVENUE ONLY FROM ITS FOREIGN ASSOCIATED ENTERPRISE. HE THEREFORE HELD THAT THE ASSESSEE HAS AN AGENCY PE IN INDIA. HE FURTHER HELD THAT AS THE NETAPP INDIA AND THE ASSESSEE HAS COMMON DIRECTOR S , NETAPP INDIA DOES HAVE POWERS TO CONCL UDE CONTRACTS ON BEHALF OF NETAPP BV (ASSESSEE) . THEREFORE, THE PROVISIONS OF ARTICLE 5 (5) (B) DOES NOT APPLY IN THE PRESENT CASE . ON THE BASIS OF ABOVE PREMISES , THE LD ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAS PERMANENT ESTABLISHMENT IN INDIA IN FORM OF NETAPP INDIA WITHIN THE MEANING OF ARTICLE 5(1), 5(2) AND 5(5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND NETHERLAND. 10. THE ASSESSEE HAS RECEIVED A SUM OF RS. 339284582/ - TOWARDS SOFTWARE SUBSCRIPTION WHICH ACCORDING TO THE ASSESSEE IS NOT CHARGEABLE TO TAX IN INDIA AS IT IS NOT A ROYALTY INCOME , BECAUSE THE PAYMENT WOULD BE FOR THE USE OF A COPYRIGHTED ARTICLE AND NOT USE OF COPYRIGHT . IT WAS FURTHER ARGUMENT THAT THE SOFTWARE IS EMBEDDED IN THE STORAGE EQUIPMENT AND IS SOLD AS CONSOLIDATED PRODUCT AND THEREFORE IT IS NOT ROYALTY INCOME. IT WAS THE FURTHER CONTENTION OF THE ASSESSEE THAT , ASSUMING WHILE DENYING , THE SUM IS CHARGEABLE TO TAX AS ROYALTY , IT CAN BE TAXED UNDER ARTICLE 12 OF THE DTAA AND NOT ARTICLE 12(7) A ND ARTICLE 7 OF THE DTAA. THEREFORE, IN NUTSHELL THE CONTENTION OF THE ASSESSEE IS THAT SOFTWARE LICENSING INCOME IS NOT CHARGEABLE TO TAX IN INDIA AS ROYALTY INCOME AND EVEN OTHERWISE IF IT IS TAXED AS ROYALTY INCOME IT IS NOT EFFECTIVELY CONNECTED WITH ITS ALLEGED PE AND HENCE, NOT CHARGEABLE AS BUSINESS INCOME. 11. LD. AO REJECTED CONTENTION OF THE ASSESSEE OF NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA . THEREFORE HE HELD THAT PAYMENT RECEIVED BY THE ASSESSEE TOWARDS LICENSING OF THE SOFTWARE ARE TA XABLE AS ROYALTY AND FURTHER THIS SOFTWARE PAYMENT ARE EFFECTIVELY CONNECTED WITH THE PERMANENT ESTABLISHMENT IN TERMS OF ARTICLE 12 AND 7 OF THE DTAA, SAME PAGE 10 OF 63 SHALL BE CHARGEABLE TO TAX IN INDIA . A SSESSEE HAS RECEIVED RS. 339284582/ - AS SOFTWARE SERVICES INCOME AND FROM THIS DEDUCTION OF RS. 62282566/ - WAS GRANTED TOWARDS THE PROPORTIONATE COST OF SUM PAID TO THE PERMANENT ESTABLISHMENT. B ALANCE OF RS. 277002016/ - WAS TREATED AS BUSINESS INCOME CHARGEABLE TO TAX UNDER ARTICLE 7 OF THE DTAA AS ROYALTY INCOM E EFFECTIVELY CONNECTED TO THE PERMANENT ESTABLISHMENT AND TAXED IT AT NORMAL RATE OF 42.23%. 12. SIMILARLY, THE ASSESSEE IS ALSO EARNING SERVICE FEES ON ACCOUNT OF SERVICES RENDERED TO ITS INDIA CLIENTS OF RS. 223963915/ - . THE CONTENTION OF THE ASSESSEE THE SUCH PAYMENTS ARE NOT CHARGEABLE TO TAX IN INDIA EITHER AS ROYALTY OR AS A FEES FOR TECHNICAL SERVICES AS THERE IS NO RIGHT, PROPERTY OR INFORMATION FOR WHICH THE CONSIDERATION IS PAID AND FURTHER THE SERVICES ARE NOT MAKE AVAILABLE TO THE PURCHASER AND HENCE IT IS NOT FEES FOR TECHNICAL SERVICES IN TERMS OF DTAA . HOWEVER, THE LD ASSESSING OFFICER WAS OF THE VIEW THAT THE SERVICES ARE PREDOMINATELY TECHNICAL IN NATURE AND FURTHER, IT IS FALLING WITHIN THE DEFINITION OF ROYALTY IT IS CHARGEABLE TO TAX IN INDIA. HE FURTHER HELD THAT AS THIS PAYMENT IS ALSO EFFECTIVELY CONNECTED TO THE PERMANENT ESTABLISHMENT OF THE ASSESSEE , IT IS CHARGEABLE TO TAX UNDER ARTICLE 7 OF THE DTAA . THEREFORE OUT OF RS. 223963915/ - HE GRANTED DEDUCTION OF RS. 41113319/ - AND CH ARGED BALANCE OF RS. 182850796/ - AS ROYALTY EFFECTIVELY CONNECTED TO THE PERMANENT ESTABLISHMENT CHARGEABLE TO TAX UNDER ARTICLE 7 AS BUSINESS INCOME ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT TAXED IT AT NORMAL RATE OF 42.23%. 13. FURTHERMORE ASSESSEE HAS RECEIVED A SUM OF RS. 631007053 / - A S PAYMENTS TOWARDS HARDWARE . A CCORDING TO THE ASSESSING OFFICER PART OF THE PROFITS ARISING FROM THIS REVENUE IS ALSO ATTRIBUTABLE TO THE ACTIVITIES OF THE PERMANENT ESTABLISHMENT IN INDIA OF THE ASSESSEE. THE APPELLANT CONTENDED BEFORE THE ASSESSING OFFICER THAT THE INDIAN ASSOCIATED ENTERPRISE HAS BEEN REMUNERATED AT ARMS LENGTH PRICING AND HENCE NO FURTHER ATTRIBUTION IS PAGE 11 OF 63 WARRANTED ON THIS ACCOUNT. LD. AO REJECTED THE CONTENTION OF THE APPELLANT AS IN THE CASE OF INDIA N ASSOCIATED ENTERPRISE , LD. TPO HAS PROPOSED AN ADJUSTMENT TO THE TOTAL INCOME OF THAT INDIAN AE. FURTHER ASSESSEE SUBMITTED THAT THERE CANNOT BE ANY ATTRIBUTION OF INCOME AS ASSESSEE HAS INCURRED OPERATING LOSSES. THIS ARGUMENT WAS ALSO REJECTED BY THE LD. ASSESSING OFFICER STATING THAT THE OPERATING LOSSES ARISE BECAUSE OF THE HUGE COMMISSION EXPENSES PAID BY THE ASSESSEE FOR BOOKING GLOBAL SALES. FURTHER ACCORDING TO LD . ASSESSING OFFICER , ASSESSEE IS ONLY A TRADING COMPANY AND NO RESEARCH AND DE VELOPMENT ACTIVITIES UNDERTAKEN, THE INDIAN OFFICE OF THE PERMANENT ESTABLISHMENT ARE ALSO ACTING AS THE LOCAL SALES OFFICE AS PER THE DISTRIBUTORS AGREEMENT AND THEREFORE LD. ASSESSING OFFICER ATTRIBUTED 90% OF THE PROFIT APPLYING THE GROSS PROFIT MARGIN OF 26% TO THE PERMANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA. THEREBY THE GROSS PROFIT OF RS. 160061938/ - WAS ESTIMATED AND FROM THAT A PROPORTIONATE EXPENSES OF RS. 1 1583 4216/ - WAS GRANTED AS DEDUCTION RESULTING INTO NET PROFIT OF R S 48227721/ - . HENCE, 90 % THEREOF WAS HELD TO BE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT OF THE ASSESSEE AMOUNTING TO RS. 43404949/ - . 14. ACCORDINGLY THE LD. ASSESSING OFFICER ISSUED DRAFT ASSESSMENT ORDER WHERE TOTAL TAXABLE INCOME OF ASSESSEE WAS COMPUTED AT RS. 50325 7761/ - . A GGRIEVED BY THE DRAFT ASSESSMENT ORDER , APPELLANT PREFERRED OBJECTION BEFORE THE LD. D ISPUTE R ESOLUTION P ANEL - II, NEW DELHI. LD. DRP V IDE ITS DIRECTION UNDER SECTION 144C (5) OF THE I NCOME T AX A CT 1961 DATED 28 TH OF MAY 2013 HELD THAT CONSIDERATION REC EIVED BY THE ASSESSEE FROM LICENSE OF SOFTWARE AND SUBSCRIPTION IS NOTHING BUT ROYALTY . IT FURTHER HELD THAT SUBS CRIPTION REVENUE IS ALSO ROYALTY AND CONFIRM THE ATTRIBUTION AT THE RATE OF 90% OF THE PROFITS OF THE ASSESSEE TO THE PERMANENT ESTABLISHMENT IN INDIA . HE FURTHER HELD THAT THE REMUNERATION RECEIVED BY ASSESSEE FOR SERVICES RENDERED IS FEES FOR TECHNICAL SERVICES . ON THE ISSUE OF INDIAN AS SOCIATED ENTERPRISE REMUNERATED AT ARMS LENGTH , IT WAS HELD THAT LD. PAGE 12 OF 63 TPO HAS ALREADY ESTABLISHED THAT THE REMUNERATION PAID TO THE INDIAN ASSOCIATED ENTERPRISE IS NOT AT ARMS LENGTH AND THEREFORE AN ADJUSTMENT HAS BEEN MADE, WHICH IS STILL BEING CONTESTE D AT APPEAL STAGES . IN NUTSHELL, THE LD. DRP CONFIRMED THE ACTION OF THE LD. ASSESSING OFFICER. 15. BASED ON THE DIRECTION ISSUED BY THE LD. THE D RP , LD . ASSESSING OFFICER PASSED ASSESSMENT ORDER UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE I NCOME T A X A CT ON 25 TH OF JUNE 2013 DETERMINING THE TOTAL TAXABLE INCOME OF THE ASSESSEE OF RS. 503257761/ - . AGAINST THIS ASSESSMENT ORDER, ASSESSEE IS IN APPEAL BEFORE US. 16. GROUND NO. 1 OF THE APPEAL CHA LLENGES THE ORDER OF THE LD. ASSESSING OFFICER HOLDING THAT APPELLANT HAS A PERMANENT ESTABLISHMENT IN INDIA ACCORDING TO THE DOUBLE TAXATION AVOIDANCE AGREEMENT . GROUND NO. 2, 6, 7, 8, AND GROUND NO. 9 ARE ALL RELATED TO THE ISSUE OF PERMANENT ESTABLISHMENT OF ASSESSEE IN INDIA AND PROFIT ATTRIBUTION TO THAT PERMANENT ESTABLISHMENT. 17. BEFORE US , L D . AUTHORIZED REPRESENTATIVE SUBMITTED THAT ASSESSEE DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA . HE FURTHER SUBMITTED THAT ASSESSEE DOES NOT HAVE ANY FIXED PLACE OF BUSINESS AT ITS DISPOSAL THROUGH WHICH IT IS CARRYING ON ITS BUSINESS WHOLLY OR PARTLY IN INDIA . HE FURTHER SUBMITTED THAT APPELLANT DOES NOT HAVE ANY EMPLOYEES IN INDIA NOR ITS PERSONNEL VISITS OR SECONDED TO INDIAN ENTITY . HE MADE A DISTINCTION BETWEEN THE BUSINESS CARRIED ON BY THE APPELLANT AND BUSINESS CARRIED ON BY THE INDIAN ENTERPRISE . HE SUBMITTED THAT INDIAN ENTITY IS MERELY A SERVICE PROVIDER TO THE ASSESSEE AND IT WOULD NOT BE APPROPRIATE TO CONCLUDE THAT WHERE A PERSON OBTAIN SERVICE IN RELATION TO BUSI NESS FROM ANOTHER PERSON , THE SERVICE PROVIDER IS HELD TO CARRY O N THE BUSINESS OF THE SERVICE RECIPIENT . HE FURTHER SUBMITTED THAT BOTH THE PARTIES ARE TWO SEPARATE LEGAL ENTITIES . HE FURTHER SUBMITTED THAT THAT APPELLANT DOES NOT HAVE ANY PERSONNEL TO CARRY ON ITS BUSINESS IN INDIA AND THE INDIAN ENTITY IS SEPARATE FROM ITS SHAREHOLDERS . HE FURTHER SUBMITTED THAT THE EMPLOYEES OF PAGE 13 OF 63 THE INDIAN ENTITY DO NOT WORK UNDER THE CONTROL AND SUPERVISION OF THE APPELLANT. IN NUTSHELL HE SUBMITTED THAT THE FUNC TION TEST TOGETHER WITH NOT HAV ING ANY FIXED PLACE OF BUSINESS SHOWS THAT APPELLANT DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA IN TERMS OF ARTICLE 5 (1) OF THE D OUBLE T AXATION A VOIDANCE A GREEMENT. HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN CASE OF MORGAN STANLEY & CO. INC 292 ITR 416 AND OF HONBLE DELHI HIGH COURT IN CASE OF DIT VS. E - FUNDS IT SOLUTIONS. HE FURTHER RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF ADOBE SYSTEMS INC ( WPS 2384/2013 & CM 4515/2013) . HE FURTHE R STRESSED HIS ARGUMENT BY DRAWING SUPPORT FROM OECD COMMENTARY ON ARTICLE 5 WHICH S UGGEST THAT CARRYING ON OF A BUSINESS TO A FIXED PLACE MEANS USUALLY THAT PERSON WHO, IN ONE WAY OR ANOTHER, ARE DEPENDENT ON THE ENTERPRISE CONDUCT THE BUSINESS OF THE EN TERPRISE IN THE STATE IN WHICH THE FIXED PLACE IS SITUATED . HE FURTHER SUBMITTED THAT ACTIVITIES PERFORMED BY THE INDIAN ENTITY ARE MOSTLY IN THE NATURE OF PREPARATORY AND AUXILIARY ACTIVITIES SUCH AS CONDUCTING MARKET S URVEY , DISTRIBUTING INFORMATION ON APPELLANTS PRODUCT, RESPONDING TO INQUIRIES, PROMOTIONAL ACTIVITY SUCH AS PRESENTATIONS ETC . IN NUTSHELL HE SUBMITTED THAT NO ACTIVITIES PERFORMED OR SERVICES RENDERED BY AN INDIAN ENTITY WHICH MEET THE THRESHOLD REQUIREMENT FOR CREATING A PERMANENT ESTA BLISHMENT UNDER ARTICLE 5 (1) OF THE D OUBLE T AXATION A VOIDANCE A GREEMENT . HE FURTHER SUBMITTED THAT APPELLANT DOES NOT HAVE A PLACE OF EFFECTIVE MANAGEMENT IN INDIA SINCE ALL SIGNIFICANT DECISIONS IN RELATION TO THE OPERATION AND MANAGEMENT OF THE APPELLANT ARE UNDERTAKEN OUTSIDE INDIA AND BOARD MEETINGS OF THE APPELLANT ARE HELD OUTSIDE INDIA. IN VIEW OF THIS, HE SUBMITTED THAT THERE IS NO FIXED PLACE PE OF ASSESSEE IN INDIA. 18. REGARDING THE AGENCY PE, HE SUBMITTED THAT SUCH AGENCY P E CAN BE CREATED ONLY WHEN THERE IS A DEPENDENT AGENT IN INDIA , WHO HAS AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE COMPANY OR MAINTAINS ANY STOCK OF GOODS O F THE COMPANY FOR DELIVERY ON BEHALF OF THE COMPANY. HE PAGE 14 OF 63 SUBMITTED THAT MAJORITY OF THE SALE IS MADE BY THE ASSESSEE COMPANY TO ITS DISTRIBUTORS IN INDIA ON PRINCIPAL - TO - PRINCIPAL BASIS AND NOT AS AN AGENT OF THE APPELLANT. HE FURTHER SUBMITTED THAT THE DIS TRIBUTORS ARE NOT LEGALLY OR ECONOMICALLY DEPENDENT ON THE APPELLANT. HE FURTHER STATED THAT INDIAN ENTITY DOES NOT HAVE AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE COMPANY AS WELL AS IT ALSO DOES NOT MAINTAIN ANY STOCK OF GOODS OF THE COMPANY FOR DELIVERY ON BEHALF OF THE COMPANY. HE FURTHER DREW DISTINCTION BETWEEN THE SALES CONCLUSION AND MARKETING SUPPORT SERVICES. HE SUBMITTED THAT THE INDIAN ENTITY IS PROVIDING MARKETING SUPPORT SERVICES AND NOT SALES CONCLUSIONS . REGARDING SALE OF THE PRODUC TS OF THE APPELLANT, HE SUBMITTED THAT IT IS MADE PRIMARILY TO THE DISTRIBUTORS IN INDIA WHO IDENTIFY THE CUSTOMERS, INITIATE NEGOTIATIONS WITH THEM AND CONCLUDE SALES PROCESS IN THEIR OWN NAME . THEREFORE, HIS ARGUMENT WAS THAT INDIAN ENTITY DOES NOT BIND THE ASSESSEE COMPANY IN ANY MANNER IN RELATION TO ITS CONTRACT FOR SALE. HE SUBMITTED THAT ALL IMPORTANT ELEMENT OF A CONTRACT FOR SALE SUCH AS PRICE AND CREDIT TERMS ARE DETERMINED AND DECIDED BY THE APPELLANT INCLUDING THE APPROVAL OF THE PURCHASE ORDERS . HE SUBMITTED THAT INDIAN ENTITY IS JUST PERFORMING THE ACTIVITY OF LIAISON , COMMUNICATION AND SUPPORT TO THE CUSTOMERS. WITH RESPECT TO THE GLOBAL SALES , IT WAS SUBMITTED THAT DIRECT SALES ARE MADE UNDER THE GLOBAL AGREEMENT OR FROM THE DISTRIBUTO R AND THE INDIAN ENTITY DOES NOT HAVE ANY ROLE TO PLAY WITH RESPECT TO SUCH SALES. THEREFORE, INDIAN ENTITY DOES NOT HAVE ANY ROLE TO PLAY WITH RESPECT TO CONCLUSION OF THE SALES OF THE APPELLANT. HE FURTHER TOOK US TO THE AGREEMENT ENTERED IN TO BY ASSESS EE WITH THE INDIAN ENTITY DEMONSTRAT ING THAT INDIAN ENTITY DOES NOT HAVE ANY AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE ASSESSEE. HE SUBMITTED THAT INDIAN ENTITY DOES NOT HABITUALLY CONCLUDE CONTRACTS ON BEHALF OF THE COMPANY BUT IT IS THE DISTRIBUTO RS IN INDIA WHO WILL CONCLUDE CONTRACTS WITH THE END - USERS, CUSTOMERS IN THEIR OWN NAME. PAGE 15 OF 63 19. REGARDING THE DEPENDENCY OF THE INDIAN ENTITY ON THE APPELLANT , HE SUBMITTED THAT REVENUE OF THE INDIAN ENTITY IS DERIVED FROM PROVIDING INFORMATION TECHNOLOGY SERVICE S AND IT ENABLED SERVICES AND NOT THE MARKETING AND SALES SUPPORT SERVICES, THEREFORE HIS ARGUMENT WAS THAT INDIAN ENTITY IS NOT SOLELY RELIANT ON THE APPELLANT IN RELATION TO ITS OPERATIONS AND UNDER ARTICLE 5 (6) OF THE TREATY THERE IS NO AGENCY PE OF TH E APPELLANT IN INDIA. 20. HE FURTHER SUBMITTED THAT MERELY BECAUSE THE DIRECTORS ARE COMMON OF THE APPELLANT AS WELL AS THE INDIAN ENTITY IT DOES NOT CREATE ANY PE. FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF COORDINATE BENCH IN ITO VERSUS M /S PUBMATIC INDIA PRIVATE LIMITED. HE FURTHER SUBMITTED THAT MERELY BECAUSE THERE IS A RELATIONSHIP OF HOLDING COMPANY AND SUBSIDIARY COMPANY BETWEEN THE PARTIES IT DOES NOT BECOME THE PERMANENT ESTABLISHMENT OF THE APPELLANT. 21. ON THE ISSUE OF ATTRIBUTION OF INCOME TO THE PERMANENT ESTABLISHMENT IN INDIA , HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN CASE OF MORGAN STANLEY WHERE IT IS HELD IN PRINCIPLE THAT , IF THE PERMANENT ESTABLISHMENT HAS BEEN COMPENSATED AT ARMS LENGTH PRICE TAKING INTO ACCOUNT ALL THE FUNCTIONS PERFORMED BY IT , THERE SHOULD NOT BE FURTHER ATTRIBUTION OF INCOME TO THE PERMANENT ESTABLISHMENT IN INDIA. HE FURTHER SUBMITTED THAT APPROACH OF THE LD. AO IN ATTRIBUTING 90% OF THE APPELLANTS PROFITS FROM THE SALE OF STORAGE PRODUCTS AND 100% OF RECEIPTS FROM SOFTWARE LICENSING, SUBSCRIPTION AND SERVICES TO THE ALLEGED PERMANENT ESTABLISHMENT IN INDIA IS CONTRARY TO THE INCOME ATTRIBUT ION PR INCIPAL LAID DOWN BY ARTICLE 7 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. HE SUBMITTED THAT EVEN IF THERE IS AN ATTRIBUTION OF INCOME IT SHALL BE DETERMINED ONLY BASED ON THE REMUNERATION, WHICH IS ATTRIBUTABLE TO THE ACTUAL ACTIVITY OF THE PERMANENT ESTA BLISHMENT FOR SUCH SALES, OR BUSINESSES AND IT CANNOT BE DETERMINED BASED ON THE TOTAL AMOUNT RECEIVED BY THE ENTERPRISE. THEREFORE, HE SUBMITTED THAT, ASSUMING WHILE DENYING , PAGE 16 OF 63 THE INCOME THAT CAN BE ATTRIBUTED TO THE INDIAN PE IS WHAT AN INDEPENDENT MARKE TING SUPPORT SERVICE PROVIDER IN INDIA WOULD IN UNCONTROLLED CONDITIONS EARN. HE FURTHER SUBMITTED THAT WHEN THE INDIAN ENTERPRISES HAVE BEEN COMPENSATED AT ARMS LENGTH PRICE AS PER THE ORDER OF THE FIRST APPELLATE AUTHORITY NO FURTHER ATTRIBUTION OF PRO FIT CAN BE MADE. 22. HE ALSO RAISED AN ARGUMENT THAT SINCE ARMS LENGTH COMPENSATION HAS BEEN PAID TO THE INDIAN ENTITY , NO ADDITIONAL AMOUNT CAN BE TAXABLE IN THE APPELLANTS HAND. FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF ADOBE SYSTEMS INCORPORATED (SUPRA) . 23. HE FURTHER SUBMITTED THE RISK MATRIX BETWEEN THE APPELLANT, DISTRIBUTORS AND NET APP INDIA TO SHOW THAT THE FUNCTIONS PERFORMED BY THESE PARTIES , MAJOR R ISK H AS BEEN TAKEN BY THE APPELLANT AND DISTRIBUTORS AND NO RISK RESTS ON THE INDIAN ENTITY . 24. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT AGREEMENT OF THE APPELLANT WITH T HE INDIAN ENTITY TITLED AS COMMISSION AGENT WAS ENTERED INTO ON 27/04/2002 , WHEREAS THE APPELLANT FILED ITS FIRST RETURN OF INCOME FOR ASSESSMENT YEAR 2008 2009 ON 31 /3/2010 I.E. AFTER 27 MONTHS OF THE DUE DATE TO CLAIM REFUND OF TAX DEDUCTED AT SOURCE. THIS PROVED THAT THE ASSESSEE WAS CARRYING ON ITS BUSINESS ACTIVITIES IN IND IA SINCE THEN. THEREFORE ACCORDING TO HIM THE ASSESSEE IS CARRYING BUSINESS ACTIVITIES IN EARLIER YEARS THEREFORE THERE IS WITHHOLDING TAX ON THE INCOME OF THE APPELLANT IN INDIA , HENCE ASSESSEE IS CLAIMING THE CREDIT OF TAX DEDUCTED IN INDIA AGAINST IT S TAX LIABILITY IN ITS COUNTRY OF RESIDENCE OF TAX DEDUCTED AT SOURCE IN INDIA. THE ASSESSEE HAS NEVER DISPUTED ITS TAX LIABILITY IN THE PAST AND AS THERE IS NO CHANGE IN THE DTAA NOW THERE IS NO DISPUTE ABOUT THE TAXABILITY OF THAT PARTICULAR INCOME ARISI NG IN THE HANDS OF THE ASSESSEE IN INDIA FOR THIS YEAR . HE FURTHER STRESSED THAT THAT APPELLANT HAS ENTERED INTO VARIOUS COMMISSION AGENT AGREEMENTS FOR SALE OF PRODUCTS AND TECHNICAL SUPPORT SERVICE. THE ASSESSEE HAS ENTERED IN TO A DISTRIBUTORSHIP AGRE EMENT WITH NAT APP HOLDING AND MANUFACTURING B.V., THE IMMEDIATE PAGE 17 OF 63 HOLDING COMPANY IN THE NETHERLANDS AND AS A RESULT OF THE DISTRIBUTORSHIP AGREEMENT , ASSESSEE COMPANY HAS BEEN CHARGED WITH COSTS RELATING TO PRODUCTS AND SERVICES. HE FURTHER SUBMITTED THAT THE APPELLANT COMPANY IN NETHERLAND PAYS ROYALTY TO THE SUBSIDIARY OF NETAPP INC. THEREFORE, HE POINTED OUT THAT A TRADING COMPANY, WHICH IS A RESELLER, IS PAYING THE ROYALTY AND THAT IS UNUSUAL. HE FURTHER REFERRED TO THE BUSINESS OF THE ASSESSEE IN IND IA AND SUBMITTED THAT VARIOUS CUSTOMERS OF THE APPELLANT HAS DEDUCTED TAX AT SOURCE ON INCOME PAID TO THE APPELLANT AND ACCORDING TO HIM TH ESE SERVICES FOR WHICH THE PAYMENT WAS RECEIVED BY THE APPELLANT DIRECTLY FOR GOODS DELIVERED TO THE CUSTOMERS B Y NETAPP INDIA. HE STATED THAT SERVICES TO THE CUSTOMERS OF THE APPELLANT WERE PROVIDED BY THE EMPLOYEES OF INDIAN ENTITY WHO WERE SCIENCE GRADUATES/ENGINEERS AND HE ALSO SUBMITTED THAT 20 EMPLOYEES OF INDIAN ENTITY PROVIDED TECHNICAL SERVICES, WHICH APPARENTLY INCLUDED T W O NON - INDIANS WHO MIGHT BE ON DEPUTATION FROM THE GROUP COMPANIES. HE FURTHER REFERRED TO THE BUSINESS OF THE APPELLANT IN INDIA AND BUSINESS OF THE INDIAN COMPANY, BASED ON THAT HE SUBMITTED THAT SERVICES ARE PROVIDED BY AN INDIAN ENTITY TO CUSTOMERS BUT THE CUSTOMERS INSTEAD OF PAYING TO THE INDIAN ENTITY ARE PAYING TO THE APPELLANT. HE FURTHER STRESSED THAT IT IS OBVIOUS THAT INDIAN EMPLOYEES ADVISE THE CUSTOMERS TO RAISE PURCHASE ORDERS AND MAKE PAYMENT TO APPELLANT THOUGH ALL TH E SERVICES ARE PROVIDED BY INDIAN ENTITY. HE FURTHER REFERRED TO THE AGREEMENT BETWEEN INDIAN ENTITY AND THE APPELLANT AND THEN SUBMITTED THAT THE AGREEMENT BETWEEN THE PARTIES IS PURPOSEFULLY SILENT ON THE ROLE OF INDIAN ENTITY IN THE PROCESS LEADING TO R ECEIPT OF THE ORDERS FROM THE CUSTOMERS, GIVING DISCOUNTS AND ADVISING ON TAXES TO THE CLIENT. HE FURTHER DREW THE REFERENCE TO THE RESELLER AGREEMENT OF THE ASSESSEE WITH OTHER RESELLERS AS WELL AS THE COMMISSION AGENTS AGREEMENT OF THE APPELLANT WITH IN DIAN ENTITY. HE DREW AN ANALOGY THAT INDIAN COMPANY IS MAKING SALES OF PRODUCTS IN INDIA. PAGE 18 OF 63 25. HE FURTHER REFERRED THAT CLAIM OF THE APPELLANT THAT INDIAN ENTITY IS AN INDEPENDENT CONTRACTOR IS DEVOID OF ANY MERIT REFERRING TO THE VARIOUS CLAUSES OF THE AGREEME NT WHERE ACCOUNTING AND REPORTING OF EXPENDITURE AND RECEIPT IS MENTIONED, PROVISION OF GENERAL ADMINISTRATIVE ASSISTANCE TO THE APPELLANT AND MAINTENANCE OF INVENTORY. HE THEREFORE SUBMITTED THAT THERE IS A COMPLETE CONTROL ON THE INDIAN ENTITY OF THE APP ELLANT AND HE FURTHER STATED THAT THE INDIAN ENTITY IS REMUNERATED ON COST PLUS BASIS AND NO INDEPENDENT PARTY WOULD AGREE FOR SUCH A KIND OF ARRANGEMENT OF REMUNERATION. IN NUTSHELL, HIS ARGUMENT WAS THAT INDIAN ENTITY IS FUNCTIONING EXCLUSIVELY FOR THE APPELLANT AND INDIAN ENTITIES PROHIBITED TO PERFORM SIMILAR SERVICES TO ANY OTHER ENTITY AND HENCE INDIAN ENTITY IS NOT AN AGENT OF INDEPENDEN T STATUS IN TERMS OF PARAGRAPH 5 AND 6 OF ARTICLE 5 OF THE DOUB LE TAXATION AVOIDANCE AGREEMENT BUT IS A DEPENDEN T AGENT. BASED ON THE ABOVE ARGUMENTS HE SUBMITTED THAT IT IS THE INDIAN ENTITY WHO IS SELLING THE PRODUCTS AND RENDERING THE SERVICES AND MUST BE ASKING THE CUSTOMERS TO MAKE PAYMENTS TO APPELLANT OUTSIDE INDIA. HE FURTHER REFUTED THE CLAIM OF THE ASSES SEE THAT INDIAN ENTITYS ROLE IS LIMITED TO MARKETING AND SALES SUPPORT SERVICES AND CLAIMED THAT IT IS A SELF - SERVING STATEMENT, WHICH IS CONTRARY TO THE REAL FACTS. HE ALSO REFUTED THE CLAIM OF THE APPELLANT THAT THE TERMS OF THE CONTRACTS ARE DECIDED BY THE APPELLANT OUTSIDE INDIA FOR THE REASON THAT WHEN THE EMPLOYEES OF THE INDIAN ENTITY DO NOT DISCUSS WITH THE CUSTOMERS ABOUT THE PRICES , THEN HOW THE PURCHASE ORDERS CAN BE ISSUED BY THE CUSTOMERS DIRECTLY TO THE APPELLANT, BASED ON THIS , HIS ARGUMENT WAS THAT ALL THESE FUNCTIONS ARE PERFORMED BY THE EMPLOYEES OF INDIAN ENTITY ON BEHALF OF APPELLANT. 26. HE FURTHER STATED THAT OFFICES OF INDIAN ENTITY ARE LOCAL SALES OFFICE OF THE APPELLANT AND THAT IS THE FIXED PLACE OF BUSINESS OF THE APPELL ANT IN INDIA. FOR THIS HE SUBMITTED THAT T BUSINESS WITH REGARD TO THE SALE OF PRODUCTS, LICENSING OF SOFTWARE AND AFTER SALE SERVICES ARE BEING CARRIED OUT THROUGH THE OFFICE OF THE INDIAN ENTITY BY INDIAN ENTITY AND IT ALSO PROVIDES PAGE 19 OF 63 REPLACEMENT OF PARTS , SPARES WITHIN LIMITED NUMBER HOURS OF RECEIPT OF THE COMPLAINT . HE THEREFORE SUBMITTED THAT INDIAN ENTITY OFFICES ARE SALES OUTLET OF THE APPELLANT. HE F URTHER STATED THAT AGREEMENTS EXPLICITLY REFERRED TO THE LOCAL SALES OFFICES AS LOCAL OFFICES OF NETA PP BV ( ASSESSEE) IN INDIA AND INDIAN ENTITY DOES NOT HAVE ANY BUSINESS OF PROVIDING SERVICES. BASED ON THE ABOVE ARGUMENTS, HE SUBMITTED THAT APPELLANT HAS FIXED PLACE OF BUSINESS AT ITS DISPOSAL AND THEREFORE THERE IS A PERMANENT ESTABLISHMENT OF THE AS SESSEE IN INDIA. 27. HE FURTHER STRESSED THAT INDIAN ENTITY IS NOT AN AGENT OF INDEPENDENT STATUS AND THEREFORE THERE IS AN AGENCY PERMANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA. TO SUPPORT HIS ARGUMENT, HE REFERRED TO THE RELEVANT TREATY PROVISIONS IN ARTIC LE 5 (5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT AND RAISE D THE ARGUMENT THAT INDIAN ENTITY HAS OBTAINED ORDERS FROM THE CUSTOMERS OF THE APPELLANT AND IN ABSENCE OF DIRECT PRESENCE OF PERSONS IN INDIA OF APPELLANT, THERE IS NO DOUBT THAT INDIAN ENTITY IS HABITUALLY FINALIZING ALL THE TERMS AND CONDITIONS OF SALES INCLUDING PRICING WITH THE CUSTOMERS IN INDIA. IN ABSENCE OF ANY DOCUMENTS TO PROVE, HE STATED, IT IS OBVIOUS THAT INDIAN ENTITY HAS EXERCISED IN PRACTICE AN AUTHORITY TO OBTAIN THE PURCHASE OR DERS IN THE NAME OF APPELLANT. HE FURTHER SUBMITTED THAT DURING THE COURSE OF HEARING APPELLANT WAS ASKED TO PROVE THE NEGATIVE THAT IT HAS NO PERMANENT ESTABLISHMENT IN INDIA AND HE SUBMITTED THAT THAT THE QUESTION HOW THE CONTRACT FOR SALE INCLUDING TERM S AND CONDITIONS, PRICES ETC ARE ARRIVED AT IN RESPECT OF INDIAN CUSTOMERS. HE FURTHER REFERRED TO THE DECISION OF THE COORDINATE BENCH IN CASE OF AMADEUS GLOBAL TRAVEL DISTRIBUTION SA (2008 TII 03 ITAT DEL INTL) WHICH HAS BEEN AFFIRMED BY HONB LE DELHI HIGH COURT. IN NUTSHELL, HE CONTENDED THAT INDIAN ENTITY IS NOT AN AGENT OF INDEPENDENT STATUS AND THEREFORE IN TERMS OF ARTICLE 5(5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT, ASSESSEE HAS A PERMANENT ESTABLISHMENT IN INDIA. PAGE 20 OF 63 28. HE FURTHER ASSAILE D THE ARGUMENT OF THE APPELLANT THAT TRANSACTIONS OF APPELLANT WITH INDIAN ENTITY ARE NOT AT ARMS LENGTH. FOR THIS HE REFERRED TO THE TRANSFER PRICING STUDY REPORT AND FUNCTIONAL ANALYSIS, WHICH SHOWED THAT INTERNATIONAL TRANSACTIONS OF THE INDIAN ENTITY IN PROVIDING MARKETING SUPPORT SERVICES. HE FURTHER REFERRED THAT THE LD. TRANSFER PRICING OFFICER HAS HELD THAT IT DID NOT RECEIVE COMPENSATION AT ARMS LENGTH AND MADE AN ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING OF RS. 184528940/ - . HE FURTHER SUBMITTED THAT THOUGH THE FUNCTIONAL ANALYSIS CARRIED OUT BY THE ASSESSEE IS NOT DISTURBED BY THE LD. TRANSFER PRICING OFFICER , BUT HE DID NOT TAKE INTO ACCOUNT SEVERAL FUNCTIONS, WHICH HAVE BEEN IDENTIFIED IN THE ASSESSMENT, ORDER AS WELL AS APPARENT FROM DOCUMENT SUBMITTED BY THE APPELLANT. HE MAINLY STATED THAT THE TRANSFE R PRICING ANALYSIS HAS NOT CONSIDER ED THE COST OF ASSETS PROVIDED FREE OF COST TO INDIAN ENTITY FOR PROVIDING THESE SERVICES WHICH ARE IN THE NATURE OF PROCESS, TECHNICAL DATA SOFTWARE, DEMONSTRATION EQUIPMENTS, MARKETING MATERIALS AND SPARE PARTS. HE FURTHER REFERRED TO THE CLAUSE ( 4 ) OF THE COMMISSION AGENT AGREEMENT A ND SAID THAT THE VARIOUS EXPENSES INCURRED IN INDIA BY THE INDIAN ENTITY FOR PERFORMING VALUE - ADDED ACTIVITIES ARE OBLIGATION OF THE APPELLANT IN INDIA AND FOR WHICH ATTRIBUTION OF PROFITS IS REQUIRED. HE FURTHER SUBMITTED THAT FUNCTIONAL ANALYSIS HAS NOT CONSIDERED THE FINANCIAL AND ADMINISTRATIVE ACTIVITIES PERFORMED BY INDIAN ENTITY FOR APPELLANT. HE ALLEGED THAT INDIAN ENTITIES OFFICES ACTED AS LOCAL SALES OFFICES AND EMPLOYEES OF INDIAN ENTITY ACTED AS LOCAL MANAGERS OF THE APPELLANT. HE FURTHER STATE D THAT INDIAN ENTITY HAS PROVIDED PRE SALES AND POST SALES SUPPORT SERVICES FROM VARIOUS OFFICES IN INDIA HOWEVER TO THE LEARNE D TPO , ASSESSEE SUBMITTED THAT IT HAS ONLY THREE OFFICES IN INDIA I.E. AT BANGALORE, DELHI AND MUMBAI. FURTHER, ACCORDING TO HIM FUNCTIONAL ANALYSIS DID NOT IDENTIFY ANY FUNCTIONS OF INDIAN ENTITY WITH REGARD TO SALES OF APPELLANTS PRODUCTS IN INDIA. HE FURTHER STATED THAT THE TRANSFER PRICING ANALYSIS WAS ALSO FAULTY FOR THE REASON THAT INTERNAL CUP IS NOT USED WHEN THE ASSESSEE HAS REPEATEDLY CLAIMED BEFORE THE ASSESSING OFFICER THAT PAGE 21 OF 63 SERVICES HAVE BEEN PROVIDED BY 3 RD PARTIES AND INDIAN ENTITY. THEREFORE, HE STATED THAT THE TRANSFER PRICING ANALYSIS CARRIED OUT IN THE CASE OF INDIAN ENTITY HAS NOT CONSIDERED MANY VITAL FUNCTIONS PERFORMED BY INDIAN ENTITY AND THE USE OF ASSETS OF APPELLANT BY THE INDIAN ENTITY. HE THEREFORE SUBMITTED THAT DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MORGAN STANLEY (292 ITR 416) ARE APPLICABLE IN THE CASE OF THE ASSESSEE WHEREIN IT HAS BEE N HELD THAT IF THE TRANSFER PRICING ANALYSIS DOES NOT ADEQUATELY REFLECT THE FUNCTIONS PERFORMED AND THE RISK ASSUMED BY THE ENTERPRISE IN SUCH A SITUATION THERE WOULD BE A NEED TO ATTRIBUTE PROFITS TO THE PERMANENT ESTABLISHMENT FOR THOSE FUNCTIONS AND RI SKS THAT HAVE BEEN CONSIDERED. 29. ON THE ISSUE OF ATTRIBUTION OF PROFIT TO THE PERMANENT ESTABLISHMENT HE SUBMITTED THAT THE LD. ASSESSING OFFICER HAS FOLLOWED THE METHOD ADOPTED BY THE COORDINATE BENCH DECISION WHICH HA S BEEN APPROVED BY HONBLE HIGH COURT I N CASE OF ROLLS - ROYCE PLC WHICH IS CONSISTENT WITH THE PRINCIPLES STATED IN ARTICLE 7 (2) OF THE DOUBLE TAXATION AVOIDANCE TREATY. REGARDING THE ADOPTION OF THE GLOBAL PROFIT RATE WHICH WAS OBJECTED BY THE LD. AUTHORIZED REPRESENTATIVE HE SUBMITTED THAT T HE CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE IS AGAINST THE METHODOLOGY DESCRIBED IN ARTICLE 7 (2) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. H E FURTHER STATED THAT APPELLANTS RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF BBC WORL DWIDE LTD IS NOT CORRECT BECAUSE IN THAT CASE 15% OF ALL RECEIPTS WERE PAID TO THE INDIAN COMPANY TOWARDS COMMISSION FOR SERVICES PROVIDED AS AN AGENT WERE ATTRIBUTABLE AND FURTHER AS PER THE PROTOCOL THE ATTRIBUTION CANNOT BE BASED ON THE TOTAL RECEIPT. 30. I N THE END , HE SUBMITTED THAT IF THE ARGUMENT OF REVENUE WITH RESPECT TO THE SALE OF SOFTWARE AND LICENSE SUBSCRIPTION INCOME THAT CONSIDERATION FOR THE SAME IS TAXABLE AS ROYALTY THEN REVENUE RELIES ON THE DECISION OF COORDINATE BENCH IN CASE OF ROLLS - ROY CE PLC, WHICH IS CONFIRMED BY THE HONBLE DELHI HIGH COURT. SIMILAR ARGUMENT WAS RAISED THAT IF THE INCOME PAGE 22 OF 63 FROM SERVICES IS NOT ACCEPTABLE AS FEES FOR TECHNICAL SERVICES THAN FULL PROFIT NEED TO BE ATTRIBUTABLE TO INDIA A S ALL SERVICES ARE PERFORMED IN IND IA AND NO OPERATIONS IN THIS REGARD ARE PERFORMED OUTSIDE INDIA. 31. DURING THE COURSE OF HEARING LD. DEPARTMENTAL REPRESENTATIVE FURTHER MADE AN APPLICATION FOR ADMISSION OF ADDITIONAL EVIDENCE UNDER RULE 29 OF INCOME TAX TRIBUNAL RULES, 1963 THAT ARE IN THE FORM OF INFORMATION AVAILABLE IN PUBLIC DOMAIN AND DOWNLOADED FROM THE WEBSITE OF THE APPELLANT. THIS INFORMATION IS RELATED TO STORAGE SYSTEMS AND SOFTWARE, HOW TO BUY IT AND THE PRESS RELEASE. HE THEREFORE SUBMITTED THAT THE SAME MAY BE ADMITTED AS ADDIT IONAL EVIDENCE TO THE PROCEEDINGS UNDER CONSIDERATION. 32. ON THE SUBSEQUENT DATE OF HEARING, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT EXISTENCE OF BUSINESS CONNECTION OF THE APPELLANT IN INDIA IS NOT UNDER CHALLENGE DESPITE SPECIFIC QUERY TO T HE ASSESSEE , IT DID NOT OBJECT TO INDIAN ASSOCIATED ENTERPRISE BEING CONSIDERED AS A BUSINESS CONNECTION OF THE ASSESSEE IN INDIA. HE FURTHER SUBMITTED THAT THE APPELLANT HAD TWO DIRECTORS WHO ARE ALSO ON THE BOARD OF THE INDIAN COMPANY WHICH FACT SHOULD BE T AKEN INTO ACCOUNT. HE FURTHER REFERRED TO THE COMMISSION A GENCY A GREEMENT OF ASSESSEE WITH INDIAN ASSOCIATED ENTERPRISE EFFECTIVE FROM 27/04/ 2002, WHICH PROVIDES MARKETING SALES TECHNICAL ACTIVITIES, WHICH ARE THE CORE ACTIVITIES FOR ASSESSEE SINCE IT IS A TRADING CONCERN. THE MAIN CONTENTION WAS THAT THESE ARE THE CRITICAL AND PIVOTAL ROLE OF INDIAN ENTITY TO THE ENTIRE BUSINESS OF ASSESSEE IN INDIA. HE FURTHER SUBMITTED THAT REVENUE IS NOT SAYING THAT PERMANENT ESTABLISHMENT OF THE ASSESSEE IS MERELY BECA USE INDIAN ASSOCIATED ENTERPRISE IS A SUBSIDIARY OR MERELY BECAUSE APPELLANT HAS SUBCONTRACTED CERTAIN SERVICES TO THE INDIAN ASSOCIATED ENTERPRISES BUT BECAUSE OF THIS SUM TOTAL OF ALL THE ABOVE CIRCUMSTANCES NARRATED IN THE ASSESSMENT PROCEEDINGS, IT IS SUBMITTED THAT ASSESSEE HAS A PERMANENT ESTABLISHMENT IN INDIA. HE SUBMITTED THAT ASSESSEES BUSINESS ACTIVITY TEST ALSO FULFILS, AS IT IS NOT PROVIDING MERE PAGE 23 OF 63 BACK - OFFICE SUPPORT SERVICES. HE FURTHER STATED THAT INDIAN ASSOCIATED ENTERPRISE IS NOT AN INDEPE NDENT ENTITY BUT IT IS A DEPENDENT AGENT BECAUSE REVENUE IS ONLY DERIVED FROM GROUP - ASSOCIATE ENTERPRISE, THE AUTHORITY TO CONCLUDE CONTRACTS, AND LEGAL AND ECONOMIC DEPENDENCE OF THE INDIAN ENTITY ALSO RESTS ON THE APPELLANT. ON THE ATTRIBUTION OF PROFITS , HE VEHEMENTLY CONCLUDED THAT PROFITS ATTRIBUTION HAS BEEN CORRECTLY APPLIED BY LD. ASSESSING OFFICER. 33. IN REJOINDER LD. AUTHORIZED REPRESENTATIVE SUBMITTED FURTHER DETAILED ARGUMENTS ON THE ISSUES RAISED BY THE LD. DEPARTMENTAL REPRESENTATIVE . O N THE ISS UE OF THE BASIC FACTS, HE SUBMITTED THAT THAT APPELLANT IS ENGAGED IN THE BUSINESS OF SELLING STORAGE EQUIPMENT AND PRODUCTS AND RENDERING OF CERTAIN SERVICES IN ASIA - PACIFIC REGION INCLUDING INDIA. THESE PRODUCTS ARE SOLD THROUGH THIRD PARTY DISTRIBUTORS WHO ARE APPOINTED ON A NON - EXCLUSIVE BASIS. SALES ARE MADE TO GLOBAL CUSTOMERS OUTSIDE INDIA THROUGH MASTER SERVICE AGREEMENTS AT PRE AGREED TERMS. THE COMPANY ALSO ENGAGES ITSELF IN DIRECT SALES CONTRACTS , WHERE THOUGH THE DISTRIBUTORS ARE RESPONSIBLE FO R THE SALE PROCESS , TITLE OF THE GOODS PASSES DIRECTLY TO THE CUSTOMERS TO ENABLE THEM CLAIM OF INDIRECT TAX EXEMPTIONS ON IMPORT OF GOODS. THE APPELLANT PROVIDES SERVICES TO THEIR CUSTOMERS THROUGH THIRD - PARTY SERVICE PROVIDERS AND INDIAN ENTITY BY VIRTUE OF SEPARATE AGREEMENTS ENTERED INTO WITH THEM BY THE APPELLANT. HE SUBMITTED THAT THAT THE FUNCTIONAL PROFILE OF INDIAN ENTITY IS ACCEPTED BY THE LD. THAT ASSESSING OFFICER OF THE APPELLANT AND ONLY OBSERVATION MADE BY THE ASSESSING OFFICER IS THAT INDIAN ENTITY ACTS AS SALES OUTLETS WHEN THERE IS NO ALLEGATION THAT INDIAN ENTITY IS DOING ANY FUNCTION OTHER THAN WHAT IS STATED IN THE AGREEMENT WITH APPELLANT. HE FURTHER REFERRED TO PAGE NO. 10 OF THE ASSESSMENT ORDER WHERE FUNCTIONAL PROFILE OF THE INDIAN ENTITY IS INCORPORATED AND THEREFORE HE SUBMITTED THAT THERE IS NO FINDING THAT INDIAN ENTITY IS ENGAGED IN ANY SALES TO THE CUSTOMERS IN INDIA. HE FURTHER REFERRED TO THE ASSESSMENT ORDER OF INDIAN ENTITY WHEREIN THE FUNCTIONAL PROF ILE OF PAGE 24 OF 63 THAT PARTICULAR ENTITY WAS EXAMINED. HE SUBMITTED THAT LD. TPO HAS COMPARED THE FUNCTION OF TH E INDIAN ENTITY WITH THAT OF A COMMISSION AGENT AND GOES ON TO OBSERVE THAT THE COMMISSION AGENT ALSO DOES NOT MAKE ANY SALES TO THE CUSTOMERS BUT ACTS O NLY AS A LINK BETWEEN THE BUYERS AND THE SELLER. THEREFORE, HE HELD THAT N ET APP INDIA IS NOT INVOLVED IN THE PROCESS OF CONCLUDING CONTRACTS OR NEGOTIATION OF PRICES. ON THE ISSUE OF TRANSACTION OF THE APPELLANT WITH INDIAN ENTITY AT ARMS LENGTH , HE SUBMI TTED THAT FIRST APPELLATE AUTHORITY IN THE CASE OF THE INDIAN ENTITY ADDITIONS SO MADE WERE DELETED ON ISSUE OF COMPARABILITY . HE THEREFORE SUBMITTED THAT PRICE CHARGED FROM THE APPELLANT BY THE INDIAN ENTITY WAS HELD TO BE AT ARMS LENGTH. THE REVENUE HAS CHALLENGED THIS APPEAL BEFORE THE BANGALORE BENCH OF THE ITAT FOR EXCLUSION OF THE COMPARABLES. HE SUBMITTED THAT THERE IS NO ALLEGATION IN THE TRANSFER PRICING ASSESSMENT THAT INDIAN ENTITY IS MAKING ANY SALES TO THE CUSTOMERS IN INDIA. IN NUTSHELL , H E SUBMITTED THAT IT IS NOT THE CASE OF THE REVENUE THAT INDIAN ENTITY IS MAKING SALES IN INDIA BUT PRIMARILY IS THAT THE FUNCTIONS UNDERTAKEN BY INDIAN ENTITY ARE VERY VITAL AND WITHOUT THIS CORE FUNCTIONS , APPELLANT WOULD NOT BE IN A POSITION TO MAKE SALE S IN INDIA. THEREFORE, ACCORDING TO HIM , REVENUE CONTENDS THAT BUSINESS FUNCTIONS OF ICO HAVE TO BE REGARDED AS ITS PERMANENT ESTABLISHMENT. HE SUBMITTED THAT THERE IS NO SUCH CLAUSE/PROVISION IN THE DOUBLE T AXATION A VOIDANCE A GREEMENT OF CONSIDERING CERTAIN FUNCTIONS AS PERMANENT ESTABLISHMENT OF THE APPELLANT. HE FURTHER SUBMITTED THAT LD . DEPARTMENTAL REPRESENTATIVE IS TRYING TO MAKE AN ALTOGETHER NEW CASE, WHICH IS SOLELY BASED ON MERE SURMISES AND CONJECTURES WITHOUT THERE BEING ANY TANGIBLE MATERIAL ON RECORD TO SUBSTANTIATE ANY OF SUCH ALLEGATIONS. THEREFORE, HE SUBMITTED THAT IT IS NOT OPEN TO THE REVENUE TO MAKE OUT A TOT ALLY NEW CASE AND THE ONLY OPTION AVAILABLE WITH THE REVENUE IS TO SUPPORT THE FINDINGS OF THE LD. AS SESSING OFFICER FROM THE FACTS EXISTING ON RECORD EVEN IF THEY ARE INCORPORATED OR PAGE 25 OF 63 NOT IN THE ASSESSMENT ORDER. DESPITE THIS, HE SUBMITTED THAT ALL SUCH ALLEGATIONS ARE UNSUBSTANTIATED AND THEY ARE REPUDIATED AS UNDER. A. ON THE ISSUE OF THE BUSINESS CONNECTI ON , IT WAS SUBMITTED THAT APPELLANT IS GOVERNED BY THE PROVISIONS OF THE INDIA - NETHERLANDS D OUBLE TAXATION A VOIDANCE AGREEMENT, AS THEY ARE MORE FAVORABLE TO THE APPELLANT COMPARED TO THE INDIAN TAX LAWS. HE FURTHER SUBMITTED THAT BUSINESS CONNECTION WOU LD NOT EXIST IN THE CONDITION PRESCRIBED UNDER THE DEFINITION IN THE I NCOME TAX A CT 1961 I.E. AUTHORITY TO CONCLUDE CONTRACTS MAINLY OR WHOLLY FOR APPELLANT ARE NOT SATISFIED. FOR THIS PROPOSITION HE RELIED UPON THE DECISION OF NATIONAL PETROLEUM CON STRU CTION COMPANY VERSUS DCIT, B LUE STAR E NGINEERING COMPANY VS. CIT 73 ITR 283 AND DCIT VS. ERICSSON A B 343 ITR 470. B. ON ALLEGATION THAT INDIAN ENTITY HAS AUTHORITY TO CONCLUDE CONTRACTS BY VIRTUE OF COMMON DIRECTORS HE SUBMITTED THAT DIRECTORS OF BOTH THE E NTITY ARE NOT IN ENGAGED IN DAY - TO - DAY ACTIVITIES OF THE APPELLANT OR IN NEGOTIATION OF ANY CONTRACTS OR PERFORMING THE MARKETING FUNCTIONS IN INDIA ON BEHALF OF THE APPELLANT. HE SUBMITTED THAT MERE COMMONALITY OF DIRECTORS IS NOT DETERMINATIVE OF WHETHER NETAPP INDIA ( ICO ) HA S AN AUTHORITY TO CONCLUDE CONTRACT OR NOT. FOR THIS, HE RELIED ON TH E DECISION OF ITO VS PUBMATIC INDIA PRIVATE LIMITED 7044 /M UM/2011. C. ON ALLEGATION OF THE DEPARTMENTAL REPRESENTATIVE THAT THE ACTIVITIES PERFORMED BY INDIAN ENTITY OF MARKETING SALES AND TECHNICAL SUPPORT ARE CORE AND VITAL ACTIVITIES OF THE APPELLANTS TRADING BUSINESS, HE SUBMITTED THAT INDIAN ENTITY IS CARRYING ON ITS OWN BUSINESS AS A SERVICE PROVIDER AND NOT THE BUSINESS OF THE APPELLANT. MERELY BECAUSE THERE ARE TRANSACTIONS BETWEEN THE INDIAN SUBSIDIARY AND THE FOREIGN COMPANY, IT DOES NOT MEAN THAT INDIAN SUBSIDIARY CONSTITUTES A PERMANENT ESTABLISHMENT FOR THE FO REIGN PARENT IN PAGE 26 OF 63 INDIA. HE FURTHER RELIED UPON THE ORDER OF THE LD. TPO IN CASE OF INDIAN ENTITY WHERE IT IS STATED THAT NETAPP INDIA DOES NOT CONCLUDE CONTRACTS FOR THE SALE OF NETAPP PRODUCTS IN INDIA. HE SUBMITTED THAT PERMANENT ESTABLISHMENT IS REQUIRED TO BE SEEN FROM THE PROVISIONS OF THE D OUBLE TAXATION AVOIDANCE A GREEMENT BETWEEN THE TWO COUNTRIES ON THE CRITERIA PRESCRIBED THEREIN SUCH AS CONSTITUTION OF A FIXED PLACE OF BUSINESS, DEPENDENT AGENCY. HE SUBMITTED THAT IN THE PRESENT CASE BOTH THESE CO NDITIONS AND DEFINITIONS ARE NOT SATISFIED. FOR THIS PROPOSITION, HE RELIED UPON THE DECISION OF CIT VERSUS MORGAN STANLEY & CO INC 292 ITR 416, DIT V E - FUNDS IT SOLUTIONS AND ADOBE SYSTEMS INC. D. ON THE ISSUE WHETHER THE INDIAN ENTITY CONSTITUTES A PLACE OF MANAGEMENT FOR APPELLANT HE SUBMITTED THAT LD. ASSESSING OFFICER HAS FAILED TO ESTABLISH THAT APPELLANT TAKES SIGNIFICANT OR STRATEGIC DECISIONS RELATING TO ITS GLOBAL BUSINE SS IN INDIA. HE SUBMITTED THAT BOARD MEETINGS OF THE APPELLANT ARE HELD OUTSID E INDIA AND FURTHER THE FIXED PLACE OF PERMANENT ESTABLISHMENT ARE ALSO NOT SATISFIED. FOR THIS PROPOSITION, HE REFERRED TO THE COMMENTARY ON DOUBLE TAXATION AVOIDANCE AGREEMENT OF PROF KL AUS VOGEL AND OECD COMMENTARY ON ARTICLE 5 AS WELL AS THE DECISION OF CIT VERSUS E - FUNDS IT SOLUTIONS. E. WITH RESPECT TO THE CONTENTION THAT APPELLANT HAS LOCAL SALES OFFICE IN INDIA HE SUBMITTED THAT THAT REVENUE HAS IGNORED THE FACT THAT DISTRIBUTOR UNDERTAKES THE SALES TO CUSTOMERS IN INDIA AND THE INDIAN ENTITYS OFFICE S ARE ONLY PROVIDING MARKETING SUPPORT FUNCTIONS AND NOT MAKING ANY SALES OF THE NET PRODUCTS. REGARDING THE ALLEGATION OF THE REVENUE, THAT APPELLANT HAS SALES OUTLETS HE SUBMITTED THAT THAT INDIAN ENTITY IS NOT A STORE THAT SELLS THE GOODS OF A PARTICU LAR MANUFACTURER OR WHOLESALER THEREFORE IT IS NOT FALLING WITHIN THE DEFINITION OF SALES OUTLET. HE FURTHER REFERRED THAT PROVISION S OF PAGE 27 OF 63 DTAA HAS CARVED OUT AN EXCLUSION FROM THE DEFINITION OF PERMANENT ESTABLISHMENT WHETHER THE PLACE OF BUSINESS FOR THE PURPOSE OF STORAGE DISPLAY OF GOODS OR THE SUPPLY OF INFORMATION DOES NOT CONSTITUTE A FIXED PLACE PERMANENT ESTABLISHMENT. F. WITH RESPECT TO THE ADDITIONAL EVIDENCES FILED BY THE LD. DEPARTMENTAL REPRESENTATIVE OF THE WEBSITE EXTRACT, HE SUBMITTED THAT THIS INFORMATION IS PROVIDED WITH RESPECT TO THE INFORMATION OF SERVICES THAT INDIAN ENTITY RENDERS TO ENABLE POTENTIAL CUSTOMERS TO REACH OUT TO NETAPP INDIA TO DISCUSS PRODUCT FEATURE, INFORMATION AND RESPOND TO QUERIES AS PART OF THE MARKETING SUPPORT FUNCT ION. HE FURTHER REFERRED TO THE WEBSITE PAGE WHERE THE ADDRESS OF THE RESELLERS AND SERVICE PROVIDERS WHO CONCLUDE THE SALES IS ALSO MENTIONED. THEREFORE HE SUBMITTED THAT THIS INFORMATION DOES NOT HAVE ANY RELATIONSHIP OR WITH EXISTENCES OR OTHERWISE OF P ERMANENT ESTABLISHMENT OF THE APPELLANT IN INDIA BY INDIAN ENTITY. G. WITH RESPECT TO THE ALLEGATION THAT SALES ARE NOT ON PRINCIPAL - TO - PRINCIPAL BASIS AND NET APP INDIA DOING FINANCIAL AND ADMINISTRATIVE FUNCTIONS, HE SUBMITTED THAT SUCH FINANCIAL AND ADMINISTRATIVE FUNCTIONS ARE ONLY IN RELATION TO THE MARKETING AND SUPPORT FUNCTIONS OF THE INDIAN ENTITY, WHICH DOES NOT SELL PRODUCTS. H. WITH RESPECT TO THE DENIAL OF LEARNED DEPARTMENTAL REPRESENTATIVE THAT ACTIVITIES OF INDIAN ENTITY ARE NOT PROPRIETARY AUXILIARY IN NATURE HE SUBMITTED THAT THE ACTIVITIES OF THE INDIAN ENTITY DOES NOT MEET THE THRESHOLD FOR CREATING A PERMANENT ESTABLISHMENT UNDER THE DOUBLE TAXATION AVOIDANCE A GREEMENT. HE SUBMITTED THAT WHER E THERE IS NO AUTHORITY TO CONCLUDE CONTRACTS NO PERMANENT ESTABLISHMENT IS CREATED OF THE APPELLANT IN INDIA. I. WITH RESPECT TO THE CONTENTION OF REVENUE, THAT NET APP INDIA IS NOT PROVIDING MERE BACK - OFFICE SUPPOR T SERVICES HE SUBMITTED THAT THE INDIAN ENTITY IS CARRYING ON ITS OWN BUSINESS AS A SERVICE PROVIDER PAGE 28 OF 63 AND NOT THE BUSINESS OF THE APPELLANT. HE SUBMITTED THAT BECAUSE THERE ARE CERTAIN TRANSACTIONS BETWEEN THE INDIAN SUBSIDIARIES IN THE FOREIGN PARENT IT DO ES NOT MEAN THAT THE INDIAN SUBSIDIARY CONSTITUTES A PERMANENT ESTABLISHMENT FOR THE FOREIGN PARENT IN INDIA. J. ON THE ISSUE WHETHER THE INDIAN ENTITY IS AN INDEPENDENT AGENT OR NOT AND THAT ALL THE SERVICES BEING PROVIDED BY INDIAN ENTITY ON BEHALF OF THE A PPELLANT, HE SUBMITTED THAT THAT INDIAN ENTITY IS LEGALLY AND ECONOMICALLY INDEPENDENT AS IT IS COMPENSATED ON AN ARMS LENGTH BASIS BY THE APPELLANT. HE FURTHER SUBMITTED THAT MAJORITY OF THE REVENUE OF THE APPELLANT IS DERIVED FROM IT/ITES SERVICES AND N OT THE MARKETING AND SALES SUPPORT SERVICES. FOR THIS REASON, HE SUBMITTED THAT INDIAN ENTITY IS NOT SOLELY RELIANT ON THE APPELLANT IN RELATION TO ITS OPERATION AND BEING AN INDEPENDENT AGENT, IT DOES NOT CREATE AN AGENCY PERMANENT ESTABLISHMENT IN INDIA OF THE APPELLANT. K. REGARDING THE TRANSFER PRICING ADJUSTMENT MADE IN THE CASE OF THE INDIAN ENTITY HE RELIED UPON THE DECISION OF ADOBE SYSTEMS INC HE SUBMITTED THAT EVEN IF THERE IS A DISPUTE IN RELATION TO THE TRANSFER PRICING ASSESSMENT OF THE INDIAN ENT ITY IT IS LIABLE TO BE RESOLVED IN PROCEEDINGS RELATING TO THAT INDIAN ENTITY AND IT DOES NOT MAKE ANY DIFFERENCE IN THE HANDS OF THE APPELLANT. HE SUBMITTED THAT EVEN OTHERWISE THE TRANSACTIONS BETWEEN THE APPELLANT AND INDIAN ENTITY ARE AT ARMS LENGTH. HE FURTHER SUBMITTED THAT THERE IS NO DISPUTE ON THE FUNCTIONAL PROFILE OF THE INDIAN ENTITY BETWEEN THAT PARTICULAR ENTITY AS WELL AS THE LD. TRANSFER PRICING OFFICER IN CASE OF INDIAN ENTITY. HE FURTHER SUBMITTED THAT DESPITE THE FACT THAT REVENUE HAS CH ALLENGED THE ORDER OF THE LD. FIRST APPELLATE AUTHORITY IN CASE OF THE INDIAN ENTITY BEFORE COORDINATE BENCH OF THE TRIBUNAL THERE IS NO PAGE 29 OF 63 BEARING ON THE DETERMINATION OF THE PERMANENT ESTABLISHMENT OF THE APPELLANT. L. WITH RESPECT TO CERTAIN ARGUMENTS OF THE LEARNE D DR STATING THAT INDIAN ENTITY DISCUSSES ALL TERMS WITH DISTRIBUTORS, IT NEGOTIATES DISCOUNTS TO RESELLERS, DECISION ON SALES ARE TAKEN BY INDIAN ENTITY, THE INDIAN ENTITY OBTAINS ORDERS FROM CUSTOMERS, THE PURCHASE ORDERS ARE ROOTED THROUGH INDIAN ENTITY, FROM THE PERSPECTIVE OF CUSTOMERS WHO MAKES NO DISTINCTION BETWEEN THE APPELLANT AND THE INDIAN ENTITY AND THAT NOT ALL THE FUNCTIONS ARE CAPTURED IN THE TRANSFER PRICING STUDY OF THE INDIAN ENTITY WHERE ASSETS GIVEN FREE OF COST IS NOT TAKEN INTO CONSIDERATION, THE DELAY OF 40 DAYS IN SIGNING THE AGREEMENT WITH THE RESELLERS, INCURRING OF EXPENSES ON FREIGHT SHIPPING AND TRANSPORTATION ETC BY THE INDIAN ENTITY, SALES OF PRODUCTS THAT CONSIST OF HARDWARE WITH SOFTWARE COMPONENT EMBEDDED IN IT, AND THE OBLIGATION ON THE INDIAN ENTITY FOR REPLACEMENT OF PART WITHIN A SHORT SPAN OF 4 HOURS, THAT INDIAN ENTITY HAS A CALL CENTRE AND IT ALSO MAKES FOR SALES FORECAST ON BEHALF OF APPELLANT, SERVICES PROVIDED BY THE EMPLOYEES OF NET TAP INDIA AND DEPUTATION OF 2 EMPLOYEES FOR RENDERING TECHNICAL SUPPORT SERVICES, HE SUBMITTED THAT THESE ARE THE PURE GUESSWORK AND THERE IS NO MATERIAL TO SUGGEST OR SUPPORT THE REVENUES ARGUMENT ON THESE ASPECTS. HE SUBMITTED THAT CUSTOMERS IN INDIA ARE CUSTOMERS OF THE DIS TRIBUTORS AND THE DISTRIBUTORS ENGAGE THEMSELVES INTO THE SALES PROCESS WITH THE CUSTOMERS AND INDIAN ENTITY ONLY PERFORMS A MARKETING SUPPORT ROLE TO THE DISTRIBUTORS WHO SELL TO THE END USER CUSTOMERS. REGARDING THE ISSUE OF OBTAINING ORDERS FROM THE CUS TOMERS AND PURCHASE ORDERS RO U TED THROUGH INDIAN ENTITY, HE SUBMITTED THAT INDIAN ENTITY DOES NOT SOLICIT OR ACCEPT THE PURCHASE ORDERS ON BEHALF OF APPELLANT. THE PURCHASE ORDERS ARE RAISED ON APPELLANT BY THE DISTRIBUTORS AND ROLE OF SUCH DISTRIBUTORS AR E PAGE 30 OF 63 IGNORED TO PERFORM FUNCTIONS OF GETTING PURCHASE ORDERS RAISED ON THE APPELLANT. HE SUBMITTED THAT MERE SECURING THE ORDERS EVEN OTHERWISE DOES NOT CONSTITUTE A PERMANENT ESTABLISHMENT WITH RESPECT TO THE DOUBLE TAXATION AVOIDANCE AGREEMENT. REGARDING NO T CAPTURING THE ALL THE FUNCTIONS OF THE INDIAN ENTITY HE SUBMITTED THAT TRANSFER PRICING STUDY REPORT HAS LISTED OUT ALL THE MARKETING AND SALES SUPPORT FUNCTIONS THAT INDIAN ENTITY IS PERFORMING. IT ALSO HIGHLIGHTS THE ROLE OF THE DISTRIBUTOR IN THE SALE S FUNCTION IN INDIA ON BEHALF OF THE APPELLANT. HE FURTHER SUBMITTED THAT USER OF ALL THE ASSETS SUCH AS LABOUR, EQUIPMENT, THE DATA, THE LITERATURE BROCHURES AND PROMOTIONAL MATERIALS WHICH ARE PROVIDED FREE OF COST HAS ALSO BEEN DISCLOSED IN THE TRANSFER PRICING STUDY REPORT. HE VEHEMENTLY RELIED ON THE HONBLE DELHI HIGH COURT DECISION IN THE CASE OF E - FUNDS IT SOLUTIONS WHEREIN IT HAS BEEN HELD THAT EVEN IF SOFTWARE OR INTANGIBLE DATA WAS PROVIDED FREE OF COST IT DOES NOT AUTOMATICALLY RESULT IN THE IN DIAN ENTITY CONSTITUTING A PERMANENT ESTABLISHMENT OF THE FOREIGN TAXPAYER IN INDIA. HE SUBMITTED THAT DELAY IN SIGNATURE OF CONTRACTS WITH THE RESELLER CANNOT BE INDICATIVE OF DETERMINATION OF PERMANENT ESTABLISHMENT OF THE APPELLANT. HE FURTHER SUBMITTED THAT ALL THE COSTS, WHICH ARE RELATED TO THE TRANSACTION WITH THE APPELLANT, ARE DULY ACCOUNTED FOR AND EVEN OTHERWISE, IT DOES NOT HAVE ANY IMPACT IN DETERMINATION OF THE P PERMANENT ESTABLISHMENT. HE FURTHER SUBMITTED THAT THAT SEPA RATE DISCLOSURE WITH RESPECT TO HARDWARE AND SOFTWARE COMPONENTS EMBEDDED IN IT IS ONLY BECAUSE OF THE DIFFERENT RATE STRUCTURE OF CUSTOM DUTY PAYABLE ON THESE PRODUCTS AND WHICH DOES NOT HAVE ANY BEARING ON THE DETERMINATION OF THE PERMANENT ESTABLISHMENT OF THE APPELLANT . ON THE ISSUE OF THE SPARE PARTS REQUIRED FOR PERFORMING CERTAIN SERVICES IN INDIA HE SUBMITTED THAT THEY ARE STALKED BY A THIRD - PARTY LOGISTICS AND WAREHOUSE SERVICE PROVIDERS IN INDIA AND INDIAN ENTITY DOES NOT PAGE 31 OF 63 DELIVER ON BEHALF OF APPE LLANT. HE FURTHER SUBMITTED THAT AS INDIAN ENTITY DOES NOT MAINTAIN ANY STOCK OF GOODS OF THE APPELLANT FOR DELIVERY ON BEHALF OF THE APPELLANT IT DOES NOT CONSTITUTE AN AGENCY PERMANENT ESTABLISHMENT. ON THE ISSUE OF MAINTENANCE OF CALL CENTERS OF INDIAN ENTITY HE SUBMITTED THAT IT IS BUT NATURAL FOR A MARKETING SUPPORT SERVICE PROVIDER TO HAVE THE CALL CENTRE FACILITIES. IN ANY WAY, HE SUBMITTED THAT SAME IS ALSO CAPTURED IN TP STUDY REPORT OF INDIAN ENTITY THAT IS CARRYING ON ITES SERVICES. HE FURTHER SU BMITTED THAT PREPARATION OF THE SALES FORECAST FOR THE APPELLANT IS ALSO PART OF THE MARKETING SUPPORT SERVICES AND CANNOT BE USED AGAINST THE ASSESSEE UNLESS IT PERFORMS A SALES FUNCTION, WHICH THE INDIAN ENTITY DOES NOT. WITH RESPECT TO THE ALLEGATION TH AT 2 EMPLOYEES DEBITED FOR RENDERING TECHNICAL SUPPORT SERVICES HE SUBMITTED THAT THERE ARE NO EMPLOYEES WHICH ARE SECONDED TO THE INDIAN ENTITY WHICH IS CONFIRMED BY INDIAN ENTITY AS PART OF REPLY TO INQUIRY UNDER SECTION 133 (6) OF THE ACT BY THE ASSESSI NG OFFICER. REGARDING THE PAYMENT OF ROYALTY, HE SUBMITTED THAT INDIAN ENTITY FROM TIME TO TIME PARTICIPATES IN TRADE FAIRS FOR DISSEMINATION OF INFORMATION ABOUT THE PRODUCTS AND PROMOTIONAL ACTIVITIES AND FOR THIS PURPOSE IT NEEDS TO HAVE THE RIGHT TO US E THE TRADE MARKS GIVEN THAT IT IS A SEPARATE LEGAL ENTITY DIFFERENT FROM THE APPELLANT. HE SUBMITTED THAT EVEN OTHERWISE THIS IS NOT A CONDITION FOR DETERMINATION OF THE PE OF THE APPELLANT. M. ON THE LAST ISSUE OF THE CLAIM OF TEXT DEDUCTED AT SOURCE HE SUB MITTED THAT TAX DEDUCTION AT SOURCE HAS BEEN MADE ON SERVICES AND SUBSCRIPTION PAYMENTS RECEIVED BY THE APPELLANT WHICH CAN BE VERIFIED FROM THE CERTIFICATES OF TAX DEDUCTION AT SOURCE. HE SUBMITTED THAT MERELY BECAUSE A TAX RETURN WAS FILED FOR THE FIRST TIME IN ASSESSMENT YEAR 2008 09 DOES NOT MEAN THAT APPELLANT HAS CONCEDED THE TAX LIABILITY IN THE EARLIER YEARS. HE SUBMITTED THAT PAGE 32 OF 63 EVEN OTHERWISE THIS CANNOT BE A FACTOR WHICH AFFECTS THE CRITERIA OF PERMANENT ESTABLISHMENT IN INDIA. N. H E RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF DIT V M ORGAN STANLEY & CO 292 ITR 416 AND OF HONBLE DELHI HIGH COURT IN CASE OF DIT VERSUS E - FUNDS IT SOLUTIONS, AND ADOBE SYSTEMS INC, NATIONAL PETROLEUM CONSTRUCTION COMPANY VERSUS DIT. IN SUBSTANCE, HIS ARGU MENT WAS THAT APPELLANT DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA IN ABSENCE OF A FIXED PLACE PE OR AN AGENCY PE AND THEREFORE THE INCOME IS NOT CHARGEABLE TO TAX IN INDIA. 34. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE FACTS ARE UNDISPUTED THAT ASSESSEE IS A NON - RESIDENT COMPANY WHO IS RESIDENT OF NETHERLANDS AND H POSSESS TAX RESIDENCY CERTIFICATE O F THAT COUNTRY . IN THIS BACKGROUND, IT IS ALSO UNDISPUTED THAT ASSESSEES INCOME FIRST REQUIRED TO BE TESTED WHETHER IT IS CHARGEABLE TO TAX ACCORDING TO THE INCOME TAX ACT 1961 . IF THE ANSWER IS YES THEN IT IS FURTHER REQUIRED TO BE TESTED WITHER IT IS ELIGIBLE FOR THE BENEFIT OF DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN THE TWO COUNTRIES OR NOT . IF THE ANSWER TO THAT IS ALSO POSITIVE THEN IT IS REQUIRED TO BE SEEN WHAT IS MORE BENEFICIAL TO THE ASSESSEE, A PPLICABILITY OF DTAA OR THE INCOME TAX ACT AND WHATEVER IS MORE BENEFICIAL SHALL BE APPLIED TO THE ASSESSEE . 35. ON EXAMINING THE CONTENTION OF THE ASSESSEE WI TH RESPECT TO THE SERVICES PROVIDED BY THE INDIAN COMPANY TO THE APPELLANT WHICH ARE IN THE NATURE OF ORDER PROCESSING FUNCTION, PROVIDING MARKETING STRATEGIES SUCH AS PROVIDING OF MARKETING INFORMATION ANALYSIS AND PRE - SALES SUPPORT TO EDUCATE CUSTOMERS O R PRODUCTS, ADVERTISEMENT AND SALES PROMOTION, IDENTIFICATION OF THE POTENTIAL BUSINESS OPPORTUNITIES AND CUSTOMERS FOR APPELLANT, DISTRIBUTION AND DISSEMINATION OF INFORMATION OF SUCH PRODUCTS AND SERVICES, RESPONSE TO THE ENQUIRIES FOR SUCH PRODUCTS, MAR KETING STRATEGIES AND LOCAL MARKET CONDITIONS ADVISORY SERVICES, INFORMATION ON PAGE 3 3 OF 63 MARKETING TRENDS AND PROVIDING TECHNICAL SUPPORT SERVICES FOR THE PRODUCTS INCLUDING WARRANTY OBLIGATIONS, MAINTENANCE SERVICE FOR CUSTOMERS ETC IT IS APPARENT THAT ASSESSEE HA S BUSINESS CONNECTION IN INDIA AND, THEREFORE THE INCOME OF ASSESSEE IS CHARGEABLE TO TAX UNDER THE PROVISIONS OF SECTION 9 OF THE INCOME TAX ACT . HONOURABLE DELHI HIGH COURT IN CASE OF DAT VERSUS M/S E FUNDS IT SOLUTION (364 ITR 256) (DELHI) HAS HELD AS U NDER: - 72. NO ARGUMENTS HAVE BEEN ADDRESSED BEFORE US ON THE ASPECT OF LEGAL CONNECTION WHICH JUSTIFIES TAXATION OF A NON - RESIDENT UNDER SECTION 9(1)(I) OF THE ACT ON INCOME WHICH IS DEEMED TO BE ACCRUE OR ARISE IN INDIA. THE TRIBUNAL IN THE IMPUGNED ORDER HAS HELD THAT THE ASSESSEES HAD BUSINESS CONNECTION IN INDIA FOR THE POINTS NOTED IN PARAGRAPH 18.3. THOUGH THE REASONS STATED IN PARAGRAPH 18.3 DO APPEAR TO BE WIDELY AND BROADLY STATED, BUT KEEPING IN VIEW THE MANDATE AND THE RATIO OF THE DECISIONS OF THE SUPREME COURT IN CIT V. R.D. AGGARWAL & CO. [1965] 56 ITR 20 , CIT V. TOSHOKU LTD. [1980] 125 ITR 525 (SC) , ISHIKAWAJMA - HARIMA HEAVY INDUSTRIES LTD. V . DIT [2007] 288 ITR 408/158 TAXMAN 259 (SC) AND THE AMENDMENTS INCORPORATED AND MADE TO SECTION 9 (1)(I) , IT HAS TO BE HELD THAT BUSINESS CONNECTION DID EXIST, NOT BECAUSE THE ASSESSEES WERE ASSOCIATED ENTERPRISE OR HAD A SUBSIDIARY IN INDIA, BUT BECAUSE THE E - FUNDS INDIA WAS PROVIDING INFORMATION AND DETAILS TO THE ASSESSEES IN USA FOR THE PURPOSE OF ENTERI NG INTO CONTRACTS WITH THIRD PARTIES AND SUBSEQUENTLY THE SAID CONTRACTS WERE PERFORMED FULLY OR PARTLY BY E - FUNDS INDIA AS AN ASSIGNEE OR SUB - CONTRACTEE AND LOOKING AT THE NATURE OF THE SAID TRANSACTIONS AND THE MANNER IN WHICH CONTRACTS WERE EXECUTED AND WHERE THE ASSESSEE HAD ASSUMED AND AGREED TO THIRD PARTY CLAIMS AND RISKS; BUSINESS CONNECTION IS ESTABLISHED. 36. ON THIS BACKGROUND, IT IS UNDISPUTED THAT THE ASSESSEES INCOME SHALL BE CHARGEABLE TO TAX IN INDIA AS ASSESSEE HAS BUSINESS CONNECTION IN TERMS OF SECTION 9 OF THE INCOME TAX ACT AND THEREFORE THE INCOME OF THE ASSESSEE IS CHARGEABLE TO TAX IN VIEW OF THE PROVISION OF SECTION 4, 5 AND 9 OF THE INCOME TAX ACT. 37. AS IT IS CONCLUSIVELY HELD THAT INCOME OF ASSESSEE IS C HARGEABLE TO TAX IN INDIA ACCORDING TO THE PROVISION OF THE INCOME TAX ACT 1961, NOW IF THE PROVISIONS OF DTAA ARE MORE BENEFICIAL TO THE ASSESSEE, SAME SHALL BE APPLIED . ACCORDING TO THE PROVISION OF THE DTAA , IT IS REQUIRED TO BE SEEN THAT WHETHER INC OME EARNED IN INDIA BY THE ASSESSEE ARE FALLING PAGE 34 OF 63 WITHIN THE DEFINITION OF ROYALTY OR FEES FOR TECHNICAL SERVICES OR BUSINESS INCOME. BASED ON THESE CHARACTERIZATIONS THE INCOME SHALL BE DETERMINED FOR CHARGEABILITY UNDER RESPECTIVE ARTICLES OF DTAA. THE MAIN INCOME STREAM OF THE ASSESSEE IS RS . 631007453/ - AS HARDWARE INCOME, SOFTWARE AND SUBSCRIPTION INCOME OF RS. 339284582/ - AND SERVICE INCOME OF RS 223963915/ - . FOR TAXATION OF BUSINESS INCOME, THE LD A O HAS HELD THAT IN VIEW OF THE PERMANENT EST ABLISHMENT OF THE ASSESSEE IN THE FORM OF FIXED PLACE OF BUSINESS AVAILABLE OF THE NET APP INDIA ( ICO ) TO ASSESSEE AND NET APP HAS DEPENDENT AGENT THE HARDWARE INCOME SHALL BE CHARGEABLE TO TAX IN TERMS OF ARTICLE 5 AND ARTICLE 7 OF THE DTAA. WITH RESPECT TO THE SOFTWARE AND SUBSCRIPTION INCOME IT HAS BEEN HELD THAT IT IS CHARGEABLE TO TAX AS ROYALTY INCO ME IN TERMS OF ARTICLE 12 OF T HE DTAA AND AS IT IS EFFECTIVELY CONNECTED WITH THE PE, IT SHALL ALSO BE CHARGEABLE TO TAX AS BUSINESS INCOME . SERVICE FEES INCOME OF THE ASSESSEE OF RS 223963915/ - FOR INSTALLATION, WARRANTY AND PROFESSIONAL SERVICES WAS ALSO CONSIDERED AS ROYALTY OR FTS AND AS HELD TO BE EFFECTIVELY CONNECTE D WITH THE PERMANENT ESTABLISHMENT WAS CHARGED TO TAX AS BUSINESS INCOME APPLYING PROVISION OF ARTICLE 12 (7) AND ARTICLE 7 OF DTAA. 38. THE MAIN THRUSTS OF THE ARGUMENT OF THE REVENUE ARE LISTED IN PARAGRAPH NO. 5 OF THE FINAL ASSESSMENT ORDER PASSED BY THE LD. ASSESSING OFFICER ON 25/06/2013. ACCORDING TO HIM ARTICLE 5 (2) LIST OUT PLACES WHICH PRIMA FACIE CON STITUTE A PERMANENT ESTABLISHMENT AND THAT IS THE PLACE OF MANAGEMENT . A CCORDING TO THE LD. ASSESSING OFFICER THE ASSESSEE HAS PRESENCE IN INDIA IN THE FORM OF NET APP INDIA LTD, WHICH HAS BEEN APPOINTED TO PERFORM MARKETING SUPPORT SERVICES ATTACHED TO THE SALES IN INDIA FOR THE SOLE BENEFIT OF N ET APP BV. ACCORDING TO HIM TH E INDIAN COMPANY IS A SUBSIDIARY OF THE NET APP GROUP WHICH HAS BEEN FORMED FOR PERFORMING MARKETING AND OTHER SERVICES WHICH ARE ATTACHED TO THE SALE OF NET PRODUCTS . ACCORDING TO THE ASSESSING OFFICER THE SUBSIDIARY COMPANY PAGE 35 OF 63 IS PERFORMING THE MARKETING A ND PROMOTION ACTIVITIES AND WITHOUT SUCH ACTIVITY NO SALE/SUPPLY/LICENSING CAN HAPPEN . THEREFORE, WITHOUT THE A SSOCIATION OF N ET A PP INDIA THE BUSINESS OF N ET A PP (APPELLANT) AS REGARDS SUPPLY/LICENSE TO INDIA CANNOT BE P ERFORMED. ACCORDING TO HIM THE N E T APP INDIA HAS MANY SALES OFFICES IN INDIA TO CATER TO THE SALES ENQUIRIES TO THE POTENTIAL AND EXISTING CUSTOMERS AND FOR THIS HE RELIED UPON THE CONTACT US LINK OF THE NET APP WEBSITE WHERE AS MANY AS 9 INDIAN ADDRESSES ARE MENTIONED. THEREFORE ACCORD ING TO HIM T HESE ARE THE OUTLETS WHICH ALSO ACT AS SALES OUTLETS FOR INDIAN CUSTOMERS. HE F URTHER REACHED CONCLUSION THAT INDIAN ENTITYS ROLE IS CENTRAL AND CORE TO THE COMMERCIAL BUSINESS OF APPELLANT. WITH RES PECT TO PREPARATORY OR AUXILIARY SERVI CES , H E HELD THAT AS APPELLANT IS A TRADING CONCERN SUCH ACTIVITIES CANNOT BE REGARDED AS AUXILIARY AND PREPARATORY SERVICES BUT ARE CORE SERVICES. THE INDIAN COMPANY IN TERMS OF THE COMMISSION AGREEMENT ALSO PERFORMS THE ACTIVITY OF EDUCATING THE POTENTIAL AS WELL AS EXISTING CUSTOMERS AND IMPARTS TRAINING TO THEM . IN NUTSHELL, THE INDIAN COMPANY LOOKS FOR POTENTIAL CUSTOMERS IN INDIA, HOLDS PROMOTIONAL AND MARKETING ACTIVITIES, ACTS AS SALES AND/OR ANY OTHER ENQUIRY OFFICE FOR CUSTOMERS IN INDIA, COMMUNICATE SUCH ENQUIRIES TO THE HEAD OFFICE AND ALSO ASSIST THE COMPANY IN OTHER ACTIVITIES ATTACHED TO SALES IN INDIA AND, THEREFORE NET APP INDIA IS A PERMANENT ESTABLISHMENT OF ASSESSEE IN INDIA. HE FURTHER HELD THAT THAT THE CONTRACT DOES NOT NECES SARILY MEAN WRITTEN OR FORMAL CONTRACT BUT IT CAN ALSO BE ORAL OR VERBAL AS WELL AS IMPLIED. HE FURTHER STATED THAT ACTUAL CONCLUSION/SIGNING OF CONTRACT IS NOT MATERIAL AND BY VIRTUE OF COMMON DIRECTOR S, THEY WERE ELIGIBLE TO SIGN CONTRACTS FOR FOREIGN CO MPANY AS WELL AS FOR INDIAN AGENT ESTABLISHES THAT AGENT DO HAVE POWERS TO CONCLUDE CONTRACT. HE FURTHER HELD THAT APPELLANT HAS THE SOLE RESPONSIBILITY OF PROVIDING TECHNICAL/MAINTENANCE ASSISTANCE TO ITS CUSTOMERS AND THIS ACTIVITY IS DONE WITH THE HELP OF THE INDIAN COMPANY. HE HELD THAT WHEN INDIAN COMPANY PERSONNEL ARE PROVIDING SUCH SERVICES PAGE 36 OF 63 OR IMPARTING SUCH INFORMATION AS REQUIRED UNDER THE AGREEMENT TO A 3 RD PARTY I T REPRESENTS THE FOREIGN COMPANY IN INDIA. HE THEREFORE HELD THAT THE FOREIGN COMPA NY CANNOT DISOWN THE RESPONSIBILITY TOWARDS THE THIRD PARTY WHILE IMPLEMENTATION OF THE SERVICES BY INDIAN COMPANY. THEREFORE, FOR ITS CONDUCT THE INDIAN AGENT DOES BIND THE FOREIGN COMPANY. HE HELD THAT THE TITLE AND RISK PASSES OUTSIDE INDIA IS IMMATERIA L BECAUSE SOME INTEGRAL PART OF THE ENTIRE BUSINESS OPERATIONS ARE BEING CARRIED OUT IN INDIA. ACCORDING TO HIM AS THE INSTALLATION ACTIVITIES HAPPEN IN INDIA, WHICH LAST FOR 1 TO 2 DAYS THE CONTRACT FOR SUPPLY OF GOODS IS NOT COMPLETED ON MERE DELIVERY OF GOODS BUT BY ACCEPTANCE OF THE GOODS BY THE BUYER. HE FURTHER HELD THAT THE INDIAN COMPANY IS A DEPENDENT AGENT OF THE FOREIGN COMPANY AS THE INDEPENDENCE OF AGENT MUST EXIST IN BOTH LEGAL AND ECONOMIC RESPECTS. HE FURTHER STATED THAT THE ECONOMIC RELA TION BETWEEN THE ASSESSEE AND THE INDIAN AGENT I.E. INDIAN COMPANY ARE NOT AT ARMS LENGTH AND DEPENDENCE IS REFLECTED BY THE FACTS OF ARRANGEMENT OR AGREEMENT BETWEEN THE FOREIGN ENTERPRISE AND THE AGENT. THE DIRECTORS ON THE BOARD OF THE AGENT COMPANY AR E ON THE PAYROLLS OF THE GROUP ENTITY AND THE PRINCIP A L IS ABLE TO EXERCISE AT LEAST PERSUASIVE AUTHORITY OVER THE AGENT AND THEREFORE THE INDIAN ENTITY IS A DEPENDENT AGENT OF THE ASSESSEE. IN THE END HE HELD THAT APPELLANT HAS A PERMANENT ESTABLISHMENT I N INDIA IN THE FORM OF THE BUSINESS PREMISES OF NET APP INDIA AND ALSO NET APP INDIA IS A DEPENDENT AGENT OF THE FOREIGN ENTITY WITHIN THE MEANING OF ARTICLES 5 (1), 5 (2) AND 5 (5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. 39. THEREFORE NOW WE FIRST LOOK AT ARTICLE 5 OF INDIA - NETHERLAND TREATY WHICH DEALS WITH THE ISSUE OF PERMANENT ESTABLISHMENT. ARTICLE 5 PERMANENT ESTABLISHMENT 1. FOR THE PURPOSES OF THIS CONVENTION, THE TERM 'PERMANENT ESTABLISHMENT' MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. 2. THE TERM 'PERMANENT ESTABLISHMENT' INCLUDES ESPECIALLY : PAGE 37 OF 63 ( A ) A PLACE OF MANAGEMENT ; ( B ) A BRANCH ; ( C ) AN OFFICE ; ( D ) A FACTORY ; ( E ) A WORKSHOP ; ( F ) A MINE, AN OIL OR GAS WELL, A QUARRY OR ANY OTHER PLACE OF EXTRACTION OF NATURAL RESOURCES ; ( G ) A WAREHOUSE IN RELATION TO A PERSON PROVIDING STORAGE FACILITIES FOR OTHERS ; ( H ) A PREMISES USED AS A SALES OUTLET ; ( I ) AN INSTALLATION OR STRUCTURE USED FOR THE EXPLORATION OF NATURAL RESOURCES PROVIDED THAT THE ACTIVITIES CONTINUE FOR MORE THAN 183 DAYS. 3. A BUILDING SITE OR CONSTRUCTION, INSTALLATION OR ASSEMBLY PROJECT CONSTITUTES A PERMANENT ESTABLISHMENT ONLY WHERE SUCH SITE OR PROJECT CONTINUES FOR A PERIOD OF MORE THAN SIX MONTHS. 4. NOTWITHSTANDING THE PRECEDING PROVISIONS OF THIS ARTICLE, THE TERM ' PERMANENT ESTABLISHMENT' SHALL BE DEEMED NOT TO INCLUDE : ( A ) THE USE OF FACILITIES SOLELY FOR THE PURPOSE OF STORAGE OR DISPLAY OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE ; ( B ) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF STORAGE OF DISPLAY ; ( C ) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF PROCESSING BY ANOTHER ENTERPRISE ; ( D ) THE MAINTENANCE OF FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF PURCHASING GOODS OR MERCHANDISE, OR OF COLLECTING INFORMATION, FOR THE ENTERPRISE ; ( E ) THE MAINTENANCE OF FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF ADVERTISING, FOR THE SUPPLY OF INFORMATION, FOR SCIENTIFIC RE SEARCH, OR FOR OTHER ACTIVITIES WHICH HAD PREPARATORY OR AUXILIARY CHARACTER, FOR THE ENTERPRISE ; ( F ) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR ANY COMBINATION OF ACTIVITIES MENTIONED IN SUB - PARAGRAPHS ( A ) TO ( E ), PROVIDED THAT THE OVERAL L ACTIVITY OF THE FIXED PLACE OF BUSINESS RESULTING FROM THIS COMBINATION IS OF A PREPARATORY OR AUXILIARY CHARACTER. 5. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPHS 1 AND 2, WHERE A PERSON - OTHER THAN AN AGENT OF AN INDEPENDENT STATUS TO WHOM PARAGRAPH 6 APPLIES - IS ACTING IN ONE OF THE STATES, ON BEHALF OF AN ENTERPRISE OF THE OTHER STATE, THAT ENTERPRISE SHALL BE DEEME D TO HAVE A PERMANENT ESTABLISHMENT IN THE FIRST - MENTIONED STATE, IF ( A ) HE HAS AND HABITUALLY EXERCISES IN THAT STATE AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE ENTERPRISE, UNLESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHAND ISE FOR THE ENTERPRISE ; OR ( B ) HE HAS NO SUCH AUTHORITY, BUT HABITUALLY MAINTAINS IN THE FIRST - MENTIONED STATE A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGULARLY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE ENTERPRISE ; 6. AN ENTERPRISE OF ONE OF THE STATES SHALL NOT BE DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE OTHER STATE MERELY BECAUSE IT CARRIES ON BUSINESS IN THAT OTHER STATE THROUGH A BROKER, A GENERAL COMMISSION AGENT OR ANY OTHER AGENT OF AN INDEPENDENT STATUS, PROVIDED THAT SUCH PE RSONS ARE ACTING IN THE ORDINARY COURSE OF THEIR BUSINESS. HOWEVER, WHEN THE ACTIVITIES OF SUCH AN AGENT ARE DEVOTED WHOLLY OR ALMOST WHOLLY ON BEHALF OF THAT ENTERPRISE, HE WILL NOT BE CONSIDERED AN AGENT OF AN INDEPENDENT STATUS WITHIN THE MEANING OF THI S PARAGRAPH IF IT IS SHOWN THAT THE PAGE 38 OF 63 TRANSACTION BETWEEN THE AGENT AND THE ENTERPRISE WERE NOT MADE UNDER ARM'S LENGTH CONDITIONS. 7. THE FACT THAT A COMPANY WHICH IS A RESIDENT OF ONE OF THE STATES CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER STATE, OR WHICH CARRIES ON BUSINESS IN THAT OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHERWISE), SHALL NOT OF ITSELF CONSTITUTE EITHER COMPANY A PERMANENT ESTABLISHMENT OR THE OTHER . 40. ACCORDING TO THE ARTICLE 5 (1) OF DTAA PERMANENT ESTABLISHMENT MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. THEREFORE, THE REQUIREMENTS ARE THAT A. THERE HAS TO BE A FIXED PLACE OF BUSINESS AND B. THROUGH THAT , BUSINESS OF THE FOREIGN ENTERPRISE SHOULD BE WHOLLY OR PARTLY CARRIED ON. 41. IN THE PRESENT CASE THE APPELLANT HAS A GROUP SUBSIDIARY IN INDIA, WHICH HAS SOME OFFICES. IT IS REQUIRED TO BE EXAMINED WHETHER THE INDIAN COMPANY, BEING A GROUP SUBSIDIARY WOULD ITSELF BECOME A PE RMANENT ESTABLISHMENT OF THE APPELLANT OR NOT. IT IS IMPORTANT TO LOOK AT CLAUSE 5 (7) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN THE COUNTRIES. ACCORDING TO THAT CLAUSE THE FACT THAT A COMPANY WHICH IS A RESIDENT OF ONE OF THE STATE CONTROLS IS CO NTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER STATE, OR WHICH CARRIES ON BUSINESS IN THE OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHERWISE), SHALL NOT OF ITSELF CONSTITUTE ANOTHER COMPANY A PERMANENT ESTABLISHMENT OF THE OTHER. O N LOOKING AT THE ABOVE CLAUSE IT IS APPARENT THAT HOLDING OR A SUBSIDIARY COMPANY BY THEMSELVES WOULD NOT BECOME PERMANENT ESTABLISHMENT OF EACH OTHER. THE WORDS USED IN THE SAID PARAGRAPH ARE EQUALLY IMPORTANT BECAUSE THE TERM HOLDING OR PARENT COMPANY OR A SUBSIDIARY COMPANY IS NOT USED IN THE ABOVE CLAUSE BUT IT USES THE CLAUSE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER CONTRACTING STATE. THE ABOVE ISSUE IS ALSO CONSIDERED BY THE HONBLE DELHI HIGH COURT IN CASE OF THE DIT VERSUS M/S E - FUNDS IT SOLUTIONS (SUPRA) AS UNDER: - 9. BEFORE WE EXAMINE WHETHER E - FUND INDIA AND ITS ACTIVITIES CONSTITUTE PE OF THE FOREIGN ASSESSEES AS UNDER THE APPLICABLE DOUBLE TAXATION AVOIDANCE PAGE 39 OF 63 AGREEMENT BETWEEN INDIA AND USA, (THE AGREEMENT FOR T HE SAKE OF CONVENIENCE IS BEING REFERRED TO AS DTAA), IT WOULD BE APPROPRIATE, AT THE OUTSET, DISPEL ANY DOUBT OR CONTENTION THAT ESTABLISHING A SUBSIDIARY IN THE OTHER TREATY COUNTRY WOULD RESULT IN CREATING OR ESTABLISHING A PE OF A FOREIGN HOLDING COMPA NY IN THE SAID THIRD COUNTRY. AGAIN TO BE FAIR TO THE REVENUE, NO SUCH CONTENTION HAS BEEN RAISED AND THE SAID LEGAL POSITION IS CLEAR AND LUMINESCENT FROM PARAGRAPH 6 TO ARTICLE 5 OF THE DTAA. THE SAID PARAGRAPH READS: '6. THE FACT THAT A COMPANY WHICH I S A RESIDENT OF A CONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER CONTRACTING STATE, OR WHICH CARRIES ON BUSINESS IN THAT OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHERWISE), SHALL NOT OF ITSELF CO NSTITUTE EITHER COMPANY A PERMANENT ESTABLISHMENT OF THE OTHER.' 10. THE AFORESAID PARAGRAPH IN CATEGORICAL TERMS STATES THAT A HOLDING OR A SUBSIDIARY COMPANY BY THEMSELVES WOULD NOT BECOME PE OF EACH OTHER. THE WORDS USED IN THE SAID PARAGRAPH ARE EQUALL Y IMPORTANT BECAUSE THE TERM 'HOLDING' OR 'PARENT COMPANY' OR A 'SUBSIDIARY COMPANY' IS NOT USED. THE SAID PARAGRAPH USES THE EXPRESSION 'CONTROLS OR IS CONTROLLED BY A COMPANY', WHICH IS RESIDENT OF THE OTHER CONTRACTING STATE. USE OF THE WORD 'CONTROLS' OR 'CONTROLLED' IS SIGNIFICANT AND DEFINES THE SCOPE AND AMBIT OF THE SAID CLAUSE. PARAGRAPH 6 STATES THAT THE COMPANY, WHICH CONTROLS OR IS CONTROLLED AND CARRIES ON BUSINESS IN THE OTHER STATE, WOULD BY ITSELF NOT CONSTITUTE PE OF THE OTHER COMPANY. THER EFORE, EVEN CARRYING ON BUSINESS IN THE OTHER COUNTRY BY EITHER THE 'CONTROLLED COMPANY' OR THE 'CONTROLLING COMPANY', BUT AND THOUGH THE OTHER COMPANY WOULD NOT MAKE THEM, I.E. THE TWO COMPANIES, A PE OF EACH OTHER. HOWEVER, THIS DOES NOT MEAN THAT A SUBS IDIARY CAN NEVER BE A PE OF THE HOLDING COMPANY, THOUGH THERE IS OPINION THAT THE HOLDING COMPANY OR THE CONTROLLING COMPANY POSSIBLY MAY NOT BE A PE OF A SUBSIDIARY (THE LATER QUESTION IS NOT SUBJECT - MATTER OF THE PRESENT DECISION AND WE EXPRESS NO OPINIO N ON THE SAID QUESTION THOUGH IT MAY BE A RELEVANT ASPECT, WHICH THE TAX ADJUDICATORS, POLICY MAKERS AND THE LEGAL DRAFTSMEN IN INDIA AND ABROAD MAY HAVE TO DEAL WITH). INDEED IF THIS PRINCIPLE IS NOT APPLICABLE IT COULD BE ARGUED THAT THE INDIAN SUBSIDIAR Y, I.E., E - FUND INDIA'S INCOME COULD BE TAXED IN THE COUNTRY FROM WHERE IT IS CONTROLLED OR MANAGED. A SUBSIDIARY CAN BECOME A PE OF THE HOLDING/CONTROLLING COMPANY OR THE RELATED COMPANY, IF IT SATISFIES THE POSTULATES AND REQUIREMENTS OF OTHER PARAGRAPHS OF ARTICLE 5, NOTWITHSTANDING AND NEGATING THE PROTECTION PROVIDED UNDER PARAGRAPH 6 OF ARTICLE 5, WHICH RECOGNIZES LEGAL INDEPENDENCE OF THE TWO ENTITIES FOR TAX PURPOSES. THIS LEGAL PRINCIPLE THAT THE HOLDING OR CONTRACTING COMPANY AND THE SUBSIDIARY OR THE CONTROLLED COMPANY ARE TWO SEPARATE AND INDEPENDENT TAX ENTITIES AND MUST BE SO TREATED PERMEATES AND PERVADES BUT WILL GIVE WAY TO THE EXCEPTIONS CARVED OUT AND STATED IN THE DTAA. THE LEGAL PRINCIPLE IS SIMPLE, A SUBSIDIARY BEING A RESIDENT OF THE S TATE IN WHICH IT IS INCORPORATED AND FUNCTIONING IS TAXED FOR ITS INCOME. SUBSIDIARY'S INCOME IS SEPARATELY ALLOCATED AND BROUGHT TO TAX IN THE COUNTRY WHERE IT IS SITUATED OR IS A RESIDENT OF. THIS CLEARLY DISTINGUISHES A SUBSIDIARY FORM A FOREIGN ASSESSE E, WHICH IS DIRECTLY CARRYING ON BUSINESS AND HAS RESIDENCE IN ANOTHER COUNTRY THROUGH THEIR OWN BRANCHES/OFFICES, PERSONNEL, ETC. 11. KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS , THIRD EDITION, STATES THE FOLLOWING PRINCIPLE: PAGE 40 OF 63 '40. [PRINCIPLE] IT IS GENERALLY ACCEPTED THAT THE EXISTENCE OF A SUBSIDIARY COMPANY DOES NOT, OF ITSELF, CONSTITUTE THAT SUBSIDIARY COMPANY A PERMANENT ESTABLISHMENT OF ITS PARENT COMPANY. THIS FOLLOWS FROM THE PRINCIPLE THAT, FOR THE PURPOSE OF TAXATION, SUCH A SUBSIDIARY COMP ANY CONSTITUTES AN INDEPENDENT LEGAL ENTITY. EVEN THE FACT THAT THE TRADE OR BUSINESS CARRIED ON BY THE SUBSIDIARY COMPANY IS MANAGED BY THE PARENT COMPANY DOES NOT CONSTITUTE THE SUBSIDIARY COMPANY A PERMANENT ESTABLISHMENT OF THE PARENT COMPANY.' 12. SIM ILARLY, IN ARVID A. SKAAR IN PERMANENT ESTABLISHMENT, EROSION OF TAX TREATY PRINCIPLE, SECOND INDIAN, REPRINT, 2008 HAS SUCCINCTLY EXPLAINED THE LEGAL POSITION AT PAGE 540 PARAGRAPH 36.2.1 AS UNDER: 'THE TREATY - BASED PROTECTION OF RELATED COMPANIES RECOG NISES THE LEGAL INDEPENDENCE OF RELATED COMPANIES FOR TAX PURPOSES AS A MATERIAL REALITY UNTIL THE OPPOSITE IS PROVED. THIS AFFECTS BOTH THE CONSTITUTION OF PE, AND THE ALLOCATION OF INCOME TO A SEPARATE ENTITY.' 13. IT IS FURTHER CLARIFIED AND ELUCIDATED AT PAGES 541 - 42 PARAGRAPH 36.2.3 AS : '36.2.3 POLICY CONSIDERATIONS A NEUTRAL TAX SYSTEM WOULD ALLOW A SUBSIDIARY PE TO BE CONSTITUTED IN ALL CASES WHERE THE SAME CONCLUSION WOULD BE REACHED FOR UNRELATED COMPANIES. THIS SOLUTION IS EXPRESSLY STATED FOR A SUBSIDIARY PE UNDER THE AGENCY CLAUSE. CONSEQUENTLY, THE POSITION OF SOME OLDER PRE - OECD AUTHORS, THAT A SUBSIDIARY CAN NEVER CONSTITUTE A PE FOR THE PARENT, HAS NOT BEEN SUSTAINED. THE CONVENTIONAL POSITION OF THE OECD - BASED TAX TREATY DOCTRINE IS THAT A SUBSIDIARY PE CAN ONLY BE BASED ON THE AGENCY CLAUSE. HOWEVER, THE TAX TREATIES AIM AT ALLOWING THE SOURCE STATE TO TAX BUSINESS PROFITS WITH A CERTAIN ECONOMIC ALLEGIANCE TO THE COUNTRY EXPRESSED THROUGH THE ENTERPRISE'S PE. THIS INTENTION MUST ALSO APPL Y WHEN THE PARENT COMPANY'S BUSINESS INCOME IS EARNED BY THE INTERMEDIATION OF A SUBSIDIARY. THUS, FROM A DE LEGE FERENDA POINT OF VIEW, PE TAXATION OF THE PARENT COMPANY IS JUSTIFIED IN CASES WHERE RESIDENCE STATE TAXATION OF THE SUBSIDIARY DOES NOT ADEQU ATELY ATTRIBUTE TAXING JURISDICTION TO THE SOURCE STATE. THE COMMENTARIES TO THE OECD MODEL TREATY DO NOT DE LEGE LATA GIVE CONCLUSIVE REASONS FOR THE CONVENTIONAL WISDOM WITH REGARD TO THIS QUESTION.' A PART OF THE ABOVE OBSERVATIONS ARE IN THE NATURE OF JUSTIFICATION OF RIGHT OF TAXATION IN SOURCE STATE AND RELATE TO THE DOMAIN OF PE PRINCIPLE AND INTER STATE NEUTRALITY AS A THEORY. ISSUE OF SOURCE STATE IN THE PRESENT FACTUAL MATRIX HAS BEEN TOUCHED BELOW. 14. THE AFORESAID PRINCIPLE IS NO LONGER RES INT EGRA AND HAS BEEN LUCIDLY ELUCIDATED BY THE SUPREME COURT IN DIT (INTERNATIONAL TAXATION) V. MORGAN STANLEY & CO. INC. [2007] 292 ITR 416/62 TAXMAN 165 (SC) IN THE FOLLOWIN G WORDS: '32. 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 FO REIGN ENTERPRISE IS LIABLE TO BE TAXED IN INDIA ON SO MUCH OF ITS BUSINESS PROFIT AS IS ATTRIBUTABLE TO THE PE IN INDIA. THE QUANTUM OF TAXABLE INCOME IS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF I.T. ACT. ALL PAGE 41 OF 63 PROVISIONS OF I.T. ACT ARE APPLICA BLE, INCLUDING PROVISIONS RELATING TO DEPRECIATION, INVESTMENT LOSSES, DEDUCTIBLE EXPENSES, CARRY - FORWARD AND SET - OFF LOSSES ETC. HOWEVER, DEVIATIONS ARE MADE BY DTAA IN CASES OF ROYALTY, INTEREST ETC. SUCH DEVIATIONS ARE ALSO MADE UNDER THE I.T. ACT (FOR EXAMPLE: SECTIONS 44BB, 44BBA ETC.). UNDER THE IMPUGNED RULING DELIVERED BY THE 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 E QUATES 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 ENT ERPRISE, THAT ALSO CONSTITUTES A PE, HAS BEEN REMUNERATED ON AN ARM'S LENGTH BASIS TAKING INTO ACCOUNT ALL THE RISK - TAKING FUNCTIONS OF THE ENTERPRISE. IN SUCH CASES NOTHING FURTHER WOULD BE LEFT TO BE ATTRIBUTED TO THE 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 THE PE FOR THOSE FUNCTIONS/RISKS THAT HAVE NOT BEEN CONSIDERED. TH EREFORE, 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 UNDERTAKE N IN EACH CASE. LASTLY, IT MAY BE ADDED THAT TAXING CORPORATE ON THE BASIS OF THE CONCEPT OF ECONOMIC NEXUS IS AN IMPORTANT FEATURE OF ATTRIBUTABLE PROFITS (PROFITS ATTRIBUTABLE TO THE PE).' (EMPHASIS SUPPLIED) 15. ECONOMIC AND SOCIAL COUNCIL IN THEIR REPORT DATED 17.10.2008 HAVE STATED; '38.1 IN RELATION TO THE TEST OF LEGAL DEPENDENCE, IT SHOULD BE NOTED THAT THE CONTROL WHICH A PARENT COMPANY EXERCISES OVER ITS SUBSIDIARY IN ITS CAPACITY AS SHAREHOLDER IS NOT RE LEVANT IN A CONSIDERATION OF THE DEPENDENCE OR OTHERWISE OF THE SUBSIDIARY IN ITS CAPACITY AS AN AGENT FOR THE PARENT. THIS IS CONSISTENT WITH THE RULE IN PARAGRAPH 7 OF ARTICLE 5. BUT, AS PARAGRAPH 41 OF THE COMMENTARY INDICATES, THE SUBSIDIARY MAY BE CON SIDERED A DEPENDENT AGENT OF ITS PARENT BY APPLICATION OF THE SAME TESTS WHICH ARE APPLIED TO UNRELATED COMPANIES.' 16. IT HAS BEEN OBSERVED BELOW, THAT SUBSIDIARY CAN CONSTITUTE PE, OTHER THAN DEPENDENT AGENT PE. A WRITE - UP IN BULLETIN FOR INTERNATIONAL T AXATION, FEBRUARY 2011 TITLED 'THE SUBSIDIARY AS A PERMANENT ESTABLISHMENT' HAS SUMMARISED THE TRUE AND CORRECT LEGAL POSITION IN THE FOLLOWING WORDS; 'A PE IS, HOWEVER, NOT ALWAYS EASY TO IDENTIFY. THIS IS PARTICULARLY TRUE WHERE A PE IS HIDDEN BEHIND A DEPENDENT OPERATING COMPANY, I.E. IF AN OPERATING COMPANY IN ADDITION TO ITS OWN BUSINESS ALSO CARRIES ON ANOTHER COMPANY'S BUSINESS AS A PE OF THE LATTER. IN THIS REGARD, THE 2010 OECD MODEL TAX CONVENTION (THE 'OECD MODEL') STATES IN ART. 5(7) THAT: [T]H E FACT THAT A COMPANY WHICH IS A RESIDENT OF A CONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER CONTRACTING STATE, OR WHICH CARRIES ON BUSINESS IN THAT OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHER WISE), SHALL NOT OF ITSELF CONSTITUTE EITHER COMPANY A PERMANENT ESTABLISHMENT OF THE OTHER (EMPHASIS ADDED) PAGE 42 OF 63 THIS FOLLOWS FROM THE PRINCIPLE THAT, FOR THE PURPOSE OF TAXATION, SUCH A SUBSIDIARY CONSTITUTES AN INDEPENDENT LEGAL ENTITY.7 ACCORDINGLY, BOTH CO MPANIES ARE SUBJECT TO UNLIMITED TAX LIABILITY IN THE STATE IN WHICH THEY ARE RESIDENT OR WHERE THEIR PLACE OF MANAGEMENT IS LOCATED. HOWEVER, BY USING THE WORDING 'NOT OF ITSELF', THE PROVISION CLARIFIES THAT A PARENT COMPANY (PARENT) CAN HAVE AN (AGENT) PE IN ITS SUBSIDIARY'S STATE OF RESIDENCE IF THE GENERAL REQUIREMENTS FOR A PE SET OUT IN ART. 5(1) TO (5) OF THE OECD MODEL ARE MET. ACCORDINGLY, ANY SPACE OR PREMISES BELONGING TO THE SUBSIDIARY THAT IS AT THE DISPOSAL OF THE PARENT (THE 'RIGHT - TO - USE TE ST') AND THAT CONSTITUTES A FIXED PLACE OF BUSINESS (THE 'LOCATION TEST' AND THE 'DURATION TEST') THROUGH WHICH THE PARENT CARRIES ON ITS OWN BUSINESS (THE 'BUSINESS ACTIVITY TEST'), GIVES RISE TO A PE OF THE PARENT UNDER ART. 5(1), SUBJECT TO ART. 5(3) AN D (4), OF THE OECD MODEL. IN ADDITION, UNDER ART. 5(5) OF THE OECD MODEL, A SUBSIDIARY CONSTITUTES AN AGENCY PE OF ITS PARENT IF THE SUBSIDIARY HAS THE AUTHORITY TO CONCLUDE CONTRACTS IN THE NAME OF ITS PARENT AND HABITUALLY EXERCISES THIS AUTHORITY, UNLES S THESE ACTIVITIES ARE LIMITED TO THOSE REFERRED TO IN ART. 5(4) OR UNLESS THE SUBSIDIARY DOES NOT ACT IN THE ORDINARY COURSE OF ITS BUSINESS AS AN INDEPENDENT AGENT WITHIN THE MEANING OF ART. 5(6) ... ON THE BASIS OF ABOVE GUIDING PRINCIPLES LAID DOWN B Y THE HONBLE HIGH COURT IT IS APPARENT THAT ASSESSEE HAS NOT DEPUTED ANY OF ITS PERSON NEL IN INDIA AND ALSO THE DIRECTORS OF THE INDIAN COMPANY HAVE NOT FUNCTIONED FOR THE BUSINESS OF THE APPELLANT COMPANY . FURTHER, THE CONTROL OVER THE FINANCIAL AND ADMINISTRATIVE ACTIVITIES OF INDIAN COMPANY BY THE APPELLANT BY VIRTUE OF CLAUSE 2 (B) OF THE AGREEMENT WHEREIN THAT THE INDIAN COMPANY SHALL ACCOUNT FOR EXPENDITURE AND RECEIPTS, AND SHALL ALSO REPORT AND PROVIDE GENERAL ADMINISTRATIVE SERVICES TO THE APP ELLANT ARE ALSO FOR THE REASON OF THE CONTROL OVER THE COMMISSION AGENT ITSELF AND CANNOT BE SAID THAT SUCH REPORTING OF EXPENDITURE AND RECEIPTS RESULTS INTO THE CONTROL OVER THE INDIAN ENTITY BY THE APPELLANT RESULTING IN TO PE. THEREFORE IT CANNOT BE S AID THAT APPELLANT CONTROLS OR IS CONTROLLED BY THE INDIAN COMPANY OR VICE A VERSA. THEREFORE, ON THE BASIS OF THE ABOVE, IT IS APPARENT THAT A GROUP SUBSIDIARY CAN B E PERMANENT ESTABLISHMENT OF THE HOLDING COMPANY IF IT SATISFIES THE REQUIREMENT OF THE O THER PARAGRAPHS OF ARTICLE 5 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. IN VIEW OF THIS, WE REJECT THE CONTENTION OF THE REVENUE THAT MERELY BECAUSE IT IS A GROUP SUBSIDIARY IN INDIA OF THE NET APP GROUP, IT BECOMES A PERMANENT ESTABLISHMENT OF APPELLANT. PAGE 43 OF 63 42. NOW WE PROCEED TO EXAMINE WHETHER THE ASSESSEE HAS A PERMANENT ESTABLISHMENT IN INDIA WITH RESPECT TO ARTICLE 5 (1) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. THE FACT REMAINS THAT APPELLANT NEITHER HAS ANY EMPLOYEES IN INDIAN NOR DOES ITS PERSONAL OR EMPLOYEES VISIT OR IS SECONDED TO INDIA. THE ONLY REASON WHY IT HAS BEEN HELD BY THE LD. ASSESSING OFFICER THAT ASSESSEE HAS A FIXED PLACE PERMANENT ESTABLISHMENT IN INDIA IS MERELY BECAUSE THE EXISTENCE OF A SUBSIDIARY IN INDIA WHICH IS CARRYING ON ITS OW N BUSINESS AS COMMISSION AGENT OF THE APPELLANT. WE ARE OF THE VIEW THAT THERE NEEDS TO BE A CLEAR - CUT DISTINCTION BETWEEN THE BUSINESS OF THE APPELLANT AS WELL AS THE BUSINESS CARRIED ON BY THE INDIAN COMPANY ITSELF FOR ITS OWN PURPOSES. THE INDIAN COMPA NY IS MERELY A SERVICE PROVIDER TO THE APPELLANT AND IT WOULD NOT BE APPROPRIATE HERE TO SAY THAT WHERE A PERSON OPT IN SERVICE IN RELATION TO HIS BUSINESS FROM ANOTHER PERSON. THEN THE SERVICE PROVIDER CARRIES ON THE BUSINESS OF THE SERVICES RECIPIENT. A S IT IS STATED THAT THERE IS AN AGREEMENT BETWEEN APPELLANT AND THE INDIAN COMPANY FOR PROVISION OF CERTAIN SERVICES WHICH ARE LISTED IN PARAGRAPH 3 OF THE COMMISSION AGENT AGREEMENT DATED 27/04/2002. ACCORDING TO THAT AGREEMENT THE INDIAN COMPANY SHALL INFORM APPELLANT OF ALL THE ORDERS PLACED BY THE CUSTOMERS IMMEDIATELY UPON RECEIPT AND SUCH ORDER SHALL BE ACCEPTED OR REJECTED AT THE SOLE DISCRETION OF THE APPELLANT. IT IS FURTHER SUBMITTED IN THE AGREEMENT ITSELF THAT INDIAN COMPANY SHALL NOT HAVE ANY AUTHORITY WHATSOEVER TO BIND APPELLANT WITH RESPECT TO ANY OF THE ORDERS RECEIVED. IT WAS ALSO THE OBLIGATION OF THE INDIAN COMPANY THAT IT WILL MAINTAIN A COMPETENT AND FULLY TRAINED ORGANIZATION OF ITSELF. IT WILL PROVIDE A MONTHLY SALES FORECAST TO THE APPELLANT. AS ASSESSEE IS ENGAGED IN SALE OF SUCH PRODUCTS AND THE INDIAN ENTITY IS A COMMISSION AGENT OF THE APPELLANT THE INDIAN COMPANY SHALL MAINTAIN A REPRESENTATIVE SET OF PRODUCTS FOR DEMONSTRATION PURPOSES ONLY. THE INDIAN COMPANY IS ALSO RESPONSI BLE TO MAINTAIN A RESPONSE MECHANISM PAGE 44 OF 63 PROBABLY TO ALL THE ENQUIRIES AND REQUEST BY THE CUSTOMER OR POTENTIAL CUSTOMERS RELATING TO THE SALE OF PRODUCTS BY THE APPELLANT. FOR THE SERVICES THE INDIAN COMPANY WILL BE REMUNERATED A SERVICE FEE AS STATED IN PARA GRAPH NO. 5 OF THAT AGREEMENT. THEREFORE, ON READING OF THE AGREEMENT IT IS APPARENT THAT INDIAN COMPANY IS A SERVICE PROVIDER TO THE APPELLANT AND IT DOES NOT HAVE ANY AUTHORITY TO CONCLU DE ANY CONTRACTS ON BEHALF OF THE APPELLANT. THE INDIAN COMPANY IS A SEPARATE LEGAL ENTITY UNDENIABLY, WHICH HAS ITS OWN BOARD OF DIRECTORS PREMISES EMPLOYEES CONTRACTS ETC AND THE EMPLOYEES OF INDIAN COMPANY WORK UNDER THE CONTROL AND SUPERVISION OF INDIAN COMPANY ONLY AND NOT THE APPELLANT FOR PROVISION OF ITS SERVICES T O THE APPELLANT. THE LD. ASSESSING OFFICER HA S STATED THAT THE SERVICES PROVIDED BY THE INDIAN COMPANY TO THE APPELLANTS CENTRAL AND CORE ACTIVITIES TO HOLD THAT INDIAN ENTITY IS A PERMANENT ESTABLISHMENT OF THE APPELLANT. THE LD. ASSESSING OFFICER HAS A LSO NOT PUT FORTH ANY EVIDENCE WHICH LEADS TO THE FACT THAT IT IS NOT THE BUSINESS OF THE INDIAN COMPANY THAT IS BEING CARRIED OUT IN INDIA , B UT IT IS THE BUSINESS OF THE APPELLANT BEING CARRIED OUT IN INDIA THROUGH THE INDIAN ENTITY SUCH AS DEPLOYMENT OF THE STAFF BY APPELLANT TO THE INDIAN COMPANY AND WORKING IN TANDEM WITH THE EMPLOYEES OF THE INDIAN ENTITY FOR EFFECTING SALES IN INDIA . F URTHER THE INDIAN COMPANY IS ALSO REMUNERATED BY THE APPELLANT ON COST PLUS BASIS. IDENTICAL ISSUE HAS BEEN DECIDED BY THE HONBLE DELHI HIGH COURT IN CASE OF ADOBE SYSTEMS INC. VERSUS ADIT (2016) (69 TAXMANN.COM 228) (DELHI), WHEREIN IT WAS ALSO ALLEGED BY REVENUE THAT THE INDIAN COMPANY IS FUNCTIONING CORE ACTIVITIES OF ADOBE SYSTEMS INCORPORATION, INDIAN COMPANY IS REMUNERATED ON COST PLUS BASIS AND TRANSACTION IS UNDERTAKEN AT ARMS LENGTH, IT HAS BEEN HELD AS UNDER: - 32. PARA (1) OF ARTICLE 5 DEFINES A PE TO MEAN A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPR ISE IS WHOLLY OR PARTLY CARRIED ON. THE TERM 'FIXED PLACE OF BUSINESS' INCLUDES PREMISES, FACILITIES, OFFICES WHICH ARE USED BY AN ENTERPRISE FOR CARRYING ON ITS BUSINESS. THE FIXED PLACE MUST BE AT THE DISPOSAL OF AN ENTERPRISE THROUGH WHICH IT CARRIES ON ITS BUSINESS PAGE 45 OF 63 WHOLLY OR PARTLY. ALTHOUGH, THE WORD 'THROUGH' HAS BEEN INTERPRETED LIBERALLY BUT THE VERY LEAST, IT INDICATES THAT THE PARTICULAR LOCATION SHOULD BE AT THE DISPOSAL OF AN ASSESSEE FOR IT TO CARRY ON ITS BUSINESS THROUGH IT. THESE ATTRIBUTES OF A PE UNDER ARTICLE 5(1) OF THE INDO - US DTAA WERE ELUCIDATED BY THE SUPREME COURT IN MORGAN STANLEY & CO. LTD. ( SUPRA ). IN A RECENT DECISION, A DIVISION BENCH OF THIS COURT IN DIT V. E - FUNDS IT SOLUTION [2014] 364 ITR 256/226 TAXMAN 44/42 TAXMANN.COM 50 (DELHI) REITERATED THE ABOVE - STATED ATTRIBUTES; AFTER QUOTING FROM VARIOUS AUTHORS, THIS COURT HELD THAT 'THE TERM 'THROUGH' POSTULATES THAT THE TAXPAYER SHOULD HAVE THE POWER OR LIBERTY TO CONT ROL THE PLACE AND, HENCE, THE RIGHT TO DETERMINE THE CONDITIONS ACCORDING TO ITS NEEDS'. IN THE PRESENT CASE, THERE IS NO ALLEGATION THAT THE ASSESSEE HAS ANY BRANCH OFFICE OR ANY OTHER OFFICE OR ESTABLISHMENT THROUGH WHICH IT IS CARRYING ON ANY BUSINESS O THER THAN SIMPLY STATING THAT ADOBE INDIA'S CONSTITUTES THE ASSESSEE'S PE. THERE IS NO EVIDENCE THAT THE ASSESSEE HAS ANY RIGHT TO USE THE PREMISES OR ANY FIXED PLACE AT ITS DISPOSAL. THE AO HAS SIMPLY PROCEEDED ON THE BASIS THAT THE R&D SERVICES PERFORMED BY ADOBE INDIA ARE AN INTEGRAL PART OF THE BUSINESS OF THE ASSESSEE AND THEREFORE, THE OFFICES OF ADOBE INDIA REPRESENT THE ASSESSEE'S FIXED PLACE OF BUSINESS. THUS, CLEARLY THE RIGHT TO USE TEST OR THE DISPOSAL TEST IS NOT SATISFIED FOR HOLDING THAT THE ASSESSEE HAS A PE IN INDIA IN TERMS OF ARTICLE 5(1) OF THE INDO - US DTAA. 33. IN E - FUNDS IT SOLUTION ( SUPRA ), THIS COURT HAD EXPRESSLY NEGATED THAT AN ASSIGNMENT OR A SUB - CONTRACT OF ANY WORK TO A SUBSIDIARY IN INDIA COULD BE A FACTOR FOR DETERMINING THE AP PLICABILITY OF ARTICLE 5(1) OF THE INDO - US DTAA. THE COURT HAD FURTHER EXPRESSLY HELD THAT: 'EVEN IF THE FOREIGN ENTITIES HAVE SAVED AND REDUCED THEIR EXPENDITURE BY TRANSFERRING BUSINESS OR BACK OFFICE OPERATIONS TO THE INDIAN SUBSIDIARY, IT WOULD NOT BY ITSELF CREATE A FIXED PLACE OR LOCATION PERMANENT ESTABLISHMENT. THE MANNER AND MODE OF THE PAYMENT OF ROYALTY OR ASSOCIATED TRANSACTIONS IS NOT A TEST WHICH CAN BE APPLIED TO DETERMINE, WHETHER FIXED PLACE PERMANENT ESTABLISHMENT EXISTS. REFERENCE TO CORE OF AUXILIARY OR PRELIMINARY ACTIVITY IS RELEVANT WHEN WE APPLY PARAGRAPH 3 OF ARTICLE 5 OR WHEN SUB - CLAUSE (A) TO PARAGRAPH 4 TO ARTICLE 5 IS UNDER CONSIDERATION. THE FACT THAT THE SUBSIDIARY COMPANY WAS CARRYING ON CORE ACTIVITIES AS PERFORMED BY THE FOR EIGN ASSESSEE DOES NOT CREATE A FIXED PLACE PERMANENT ESTABLISHMENT.' 34. THUS, THE AO'S VIEW THAT ADOBE INDIA CONSTITUTED THE ASSESSEE'S PE IN TERMS OF PARAGRAPH 1 OF ARTICLE 5 OF THE INDO - US DTAA IS PALPABLY ERRONEOUS AND NOT SUSTAINABLE ON THE BASIS OF THE FACTS AS RECORDED BY HIM. PAGE 46 OF 63 IN THE PRESENT CASE, IT IS BEEN ALLEGED THAT THE TRANSFER PRICING OFFICER OF THE INDIAN ENTITY HAD MADE AN ADJUSTMENT TO THE MARKETING AND SALES SUPPORT FUNCTION AND APPEAL OF THE INDIAN ENTITY BY THE 1 ST APPELLATE AUTHORITY HAS DECIDED AGAINST THE INDIAN ENTITY. THEREFORE IT WAS CONTENDED THAT THE TRANSACTION BETWEEN THE INDIAN ENTITY AND THE APPELLANT ARE NOT AT ARMS LENGTH. THE CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE WAS THAT NOTWITHSTANDING T HE FACT THAT THE LD. 1 ST APPELLATE AUTHORITY HAS HELD THAT THE PAYMENTS MADE TO N ET AP P INDIA ARE NOT AT ARMS LENGTH, TH EY ARE LIABLE TO BE RESOLVED IN PROCEEDINGS OF THE INDIAN ENTITY AND NOT IN THE PROCEEDINGS OF THE APPELLANT . HE THEREFORE RELIED ON T HE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF ADOBE SYSTEMS INC (SUPRA ) WHEREIN IT HAS BEEN HELD THAT EVEN IF THERE IS A DISPUTE IN RELATION TO THIS, IT IS LIABLE TO BE RESOLVED IN PROCEEDINGS RELATING TO THE INDIAN ENTITY. W E ARE OF THE OPINION T HAT TRANSFER - PRICING DISPUTE IN THE ASSESSMENT PROCEEDINGS OF THE INDIAN ENTITY DOES NOT HAVE ANY BEARING ON DETERMINATION OF PERMANENT ESTABLISHMENT OF APPELLANT IN INDIA. INDEED, IT IS A MATTER OF DISPUTE BETWEEN INDIAN REVENUE AUTHORITIES AND THE INDIAN ENTITY ONLY. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN ADOBE SYSTEM INCORPORATED ( SUPRA) , WE REJECT THE CONTENTION OF THE REVENUE THAT THERE IS A PERMANENT ESTABLISHMENT OF THE APPELLANT IN TERMS OF ARTICLE 5 (1) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. 43. NOW WE COME TO THE AGENCY PE AND OTHER ASPECTS OF PERMANENT ESTABLISHMENT OF THE APPELLANT. THE MAIN ALLEGATION OF THE LD. ASSESSING OFFICER IS THAT INDIAN ENTITY HAS THE AUTHORITY TO CONCLUDE CONTRACTS BY VIRT UE OF COMMON DIRECTORS WHO ARE ELIGIBLE TO SIGN CONTRACTS ON BEHALF OF FOREIGN COMPANY AS WELL AS INDIAN AGENT . ON THESE FACTS, IT WAS ALSO CONTENDED BY REVENUE THAT IT CONSTITUTES A PLACE OF MANAGEMENT FOR THE APPELLANT. IT IS FURTHER CONTENDED THAT INDIA N ENTITY HAS LOCAL SALES OFFICES IN INDIA. FURTHER, THE WEBSITE OF THE NET GROUP MENTIONS THE INDIAN ENTITY SALES REPRESENTATIVE IN THE SECTIONS WHICH MENTIONS THE OFFICES OF INDIAN PAGE 47 OF 63 ENTITY. IT IS FURTHER CONTENDED THAT NET APP INDIA IS NOT PROVIDING MERE B ACK - OFFICE SUPPORT SERVICES, BUT IT IS ENGAGED IN THE CAPACITY BUILDING OF THE GROUP AND APPELLANT. WE ARE OF THE OPINION THAT COMMON DIRECTORS OF THE APPELLANT AND NET APP INDIA. THEY ARE NOT ENGAGED IN THE DAY - TO - DAY ACTIVITIES OF THE APPELLANT RENEGOTIA TION OF ANY CONTRACTS OR PERFORMING ANY MARKETING FUNCTIONS IN INDIA ON BEHALF OF THE APPELLANT. MERELY BECAUSE THERE ARE COMMON DIRECTORS IS NOT DETERMINATIVE FACTOR WHETHER THE NET APP INDIA AS AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF APPELLANT. T HE RELIANCE IS APTLY PLACED ON THE DECISION OF THE COORDINATE BENCH IN ITO VERSUS PUBMATIC INDIA (P.) LTD. (158 TTJ 398 ) (MUM) WHEREIN IT HAS BEEN HELD THAT MERELY BECAUSE ONE OF THE DIRECTORS IS COMMON IN BOTH THE COMPANIES DOES NOT CONSTITUTE THE ASSESSEE AS PE. EVEN OTHERWISE THE COMMON DIRECTOR AND HOLDING OF THE COMPANY BY ITSELF DOES NOT CONSTITUTE EITHER COMPANY AS A PERMANENT ESTABLISHMENT OF THE OTHER AS PER PARA 6 OF ARTICLE 5 OF INDO - US DTAA. WE ALSO DO NOT SEE ANY SUCH PROVISION IN THE DOUBLE TAXATION AVOIDANCE AGREEMENT APPLICABLE IN THIS CASE. THEREFORE, WE REJECT THAT CONTENTION OF THE REVENUE. THERE IS NO EVIDENCE FOUND BY THE LD. ASSESSING OFFI CER DURING THE YEAR THAT INDIAN COMPANY HAS CONCLUDED ANY CONTRACTS ON BEHALF OF APPELLANT. FOR HOLDING PERMANENT ESTABLISHMENT IN TERMS OF ARTICLE 5 (5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT, IT IS IMPERATIVE THAT THE AGENT HAS AND IS HABITUALLY EXER CISING THAT AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF APPELLANT . ACCORDING TO US , REVENUE HAS FAILED TO ESTABLISH WITH CREDIBLE EVIDENCE THAT SUCH AUTHORITY IS VESTED IN INDIAN COMPANY AND INDIAN COMPANY HABITUALLY EXERCISES THAT AUTHORITY . THE CONTR ACT PLACED BEFORE US EMPHATICALLY DENIES ANY SUCH AUTHORITY WITH THE AGENT AND FURTHER IN ABSENCE OF ANY EVIDENCE PLACED BEFORE US BY REVENUE, THIS ARGUMENT OF REVENUE DOES NOT FIND SUPPORT FROM US. THEREFORE WE ARE OF THE OPINION THAT ACCORDING TO ARTICL E 5 (5) OF DOUBLE TAXATION AVOIDANCE AGREEMENT, ASSESSEE DOES NOT HAVE PERMANENT ESTABLISHMENT IN INDIA. REGARDING REFERENCE TO THE PAGE 48 OF 63 WEBSITE OF THE NET APP GROUP THE REFERENCES WITH RESPECT TO HOW TO BUY AND CONTACT US SECTION WHICH ARE VERY COMMON LOOKIN G TO THE SERVICES THAT HAS BEEN RENDERED BY INDIAN ENTITY TO ITS POTENTIAL CUSTOMERS TO REACH OUT TO THE INDIAN ENTITY TO DISCUSS PRODUCT FEATURES INFORMATION AND RESPONSE TO THE CANARIES AS PART OF THE MARKETING SUPPORT FUNCTION ONLY. IT IS PERTINENT TO N OTE HERE THAT THE WEBSITE PAGES UNDER THIS SECTION ALSO REFERRED TO THE LIST OF THE ADDRESSES OF OTHER RESELLERS AND SERVICE PROVIDERS WERE THE PARTIES WHO CONDUCTED SALES PROCESS AND PERFORM SALES IN INDIA. THEREFORE THIS ARGUMENT OF THE REVENUE ALSO DOES NOT FIND FAVOUR WITH US. ON THE CONTENTION OF THAT INDIAN ENTITY CONSTITUTES A PLACE OF MANAGEMENT FOR APPELLANT IS DEVOID OF ANY MERIT AS THE LD. AND ASSESSING OFFICER HAS NOT LED TO ANY EVIDENCE TO ESTABLISH THAT THE APPELLANT DOES TAKE SIGNIFICANT AND STRATEGIC DECISIONS RELATING TO ITS GLOBAL BUSINESS IN INDIA. IN FACT IT WAS CONTENDED THAT THE BOARD MEETINGS OF THE APPELLANT COMPANY IS HELD OUTSIDE INDIA AND, THEREFORE, THERE CANNOT BE ANY FIXED PLACE OF PERMANENT ESTABLISHMENT IN INDIA. THE SUPPORT F OR THIS CONTENTION HAS BEEN CORRECTLY DRAWN BY THE ASSESSEE FROM THE COMMENTARY OF PROF KLAUS VOGEL AND PARAGRAPH NO. 12 OF THE OECD COMMENTARY ON ARTICLE 5 OF DOUBLE TAXATION AVOIDANCE AGREEMENT. THE ALLEGATION OF REVENUE THAT THE LOCAL SALES OFFICES IN INDIA OF INDIAN ENTITY ARE BEING USED BY THE APPELLANT AND THEREFORE THERE ARE SALES OUTLETS IN INDIA WHICH FALLS UNDER THE ARTICLE 5 (2) (H) HAS PERMANENT ESTABLISHMENT. THE TERM SALES OUTLET IS NOT DEFINED IN ANY LEGISLATION. HOWEVER, THE GENERAL MEANING OF THE TERM IS A PLACE OF BUSINESS FOR RETAILING OF THE GOODS AND TOM OUTLET IN PARTICULAR IS GENERALLY DEFINED AS A STORE THAT SELLS THE GOODS OF A PARTICULAR MANUFACTURER OR WHOLESALER. THEREF ORE SALES OUTLETS ARE GENERALLY UNDERSTOOD AS A PLACE OF BUSINESS FOR RETAILING OF THE GOODS , FROM WHERE THE GOODS ARE SOLD AND DELIVERED TO THE CUSTOMERS . NO DOUBT THE INDIAN ENTITY HAS SEVERAL LOCAL OFFICES IN INDIA BUT THESE OFFICES AS STATED BY THE LD. AUTHORIZED REPRESENTATIVE ARE WITH REGARD TO THE MARKETING SUPPORT PAGE 49 OF 63 FUNCTION THAT NET APP INDIA IS REQUIRED TO PROVIDE UNDER THE TERMS OF THE COMMISSION AGENT AGREEMENT WITH THE APPELLANT. ACCORDING TO HIM THE DISTRIBUTORS UNDERTAKES THE SALES TO THE CUSTO MERS, IN THE LOCAL OFFICES OF THE INDIAN ENTITY ARE ONLY PROVIDING MARKETING SUPPORT FUNCTION AND NOT MAKING SALES OF THE NET APP PRODUCTS. IN THE WEBSITE OF THE GROUP ALSO THESE ARE THE CONTACT US PLACES THEREFORE THEY ARE ONLY CONTACT POINTS FOR THE CUST OMERS FOR ENQUIRING ABOUT THE GOODS OF APPELLANT. THEREFORE, THE ACTIVITIES OF INDIAN ENTITY ARE ONLY PART OF ITS MARKETING SUPPORT SERVICES AND ARE FOR THE BUSINESS OF THE INDIAN ENTITY AND CANNOT BE SAID THAT THEY ARE MADE FOR SALES IN INDIA BY THE APPEL LANT THROUGH INDIAN ENTITY. WITH REFERENCE TO THE STORAGE OF THE GOODS FOR THE PURPOSE OF DEMONSTRATION ARTICLE 5 (4) (A) CLEARLY EXCLUDES THAT USE OF FACILITIES SOLELY FOR THE PURPOSE OF STORAGE DISPLAY OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE SHALL NOT CONSTITUTE AS PERMANENT ESTABLISHMENT. THEREFORE STORING OF THE GOODS FALLS INTO THE EXCLUSIONARY CLAUSE OF PERMANENT ESTABLISHMENT. EVEN OTHERWISE, WE DID NOT FIND ANY INSTANCES BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE OR IN THE ORDERS OF THE LOWER AUTHORITY WHEN SALES HAS TAKEN PLACE FROM THESE OUTLETS. IN VIEW OF THIS WE DO NOT AGREE WITH THE VIEWS OF THE REVENUE THAT THE LOCAL OFFICES OF THE ASSESSEE ARE SALES OUTLET CONSTITUTING PERMANENT ESTABLISHMENT OF THE APPELLANT. WI TH RESPECT TO THE ALLEGATION THAT INDIAN ENTITY IS NOT PROVIDING MERE BACKUP OFFICE SUPPORT SERVICES, BUT ENGAGED IN THE CAPACITY BUILDING OF THE NET APP INDIA GROUP, WE ARE OF THE OPINION THAT INDIAN ENTITY IS CARRYING ON ITS OWN BUSINESS AS A SERVICE PRO VIDER AND NOT THE BUSINESS OF THE APPELLANT IS BEING CARRIED OUT BY THE INDIAN ENTITY. MERELY BECAUSE THERE ARE CERTAIN TRANSACTIONS BETWEEN THE INDIAN SUBSIDIARY AND THE FOREIGN PARENT, GROUP IT DOES NOT MEAN THAT THE INDIAN SUBSIDIARY CONSTITUTES A PERMA NENT ESTABLISHMENT FOR THE FOREIGN PARENT IN INDIA. THIS HAS BEEN CONCLUSIVELY HELD BY THE HONBLE DELHI HIGH COURT IN D IT VERSUS E FUNDS IT SOLUTIONS (SUPRA). PAGE 50 OF 63 44. WITH RESPECT TO THE AGENCY PE , IT IS ALLEGED BY REVENUE THAT ACTIVITIES OF INDIAN ENTITY ARE NOT ON PRINCIPLE - TO - PRINCIPLE BASIS AS IT IS ALSO DOING FINANCIAL AND ADMINISTRATIVE FUNCTIONS, ALSO REPORTS OF EXPENDITURE INCURRED TO THE APPELLANT ACCORDING TO THE TERMS OF THE COMMISSION AGREEMENT . HOWEVER, WE DO NOT FIND ANY EVIDENCE ON RECORD TO SUPPORT THE ABOVE CONTENTION A S NO EVIDENCE HAS BEEN DRAWN TO OUR ATTENTION THAT THESE FUNCTIONS ARE WITH RESPECT TO THE SALE OF PRODUCTS OR SERVICES OF THE APPELL ANT. ACCORDING TO THE AGREEMENT, T HESE FUNCTIONS ARE WITH RESPECT TO THE MARKETING AND SUPPORT SALES FUNCTION CARRIED ON BY THE INDIAN ENTITY. FURTHER, THE HONBLE DELHI HIGH COURT IN CASE OF ADOBE SYSTEM INCORPORATION (SUPRA) HAS ALSO HELD THAT A PERMANENT ESTABLISHMENT CANNOT BE CONSTIT UTED IN INDIA ONLY ON ACCOUNT OF THE FACT THAT APPELLANT HAS A RIGHT TO ASK FOR THE EXPENDITURE AND INCOME IN TERMS OF THE AGREEMENT BETWEEN THE PARTIES . THERE MAY BE REASONS FOR DOING SO BECAUSE OF THE COMMERCIAL ASPECT FOR THE PROVISION OF SPECIFICATION S, ASSISTANCE, AND SUPERVISION ETC HOWEVER IT CANNOT LEAD TO AN INFERENCE THAT THE APPELLANT BY EXERCISING THE ABOVE RIGHTS CREATES ITS PERMANENT ESTABLISHMENT IN INDIA . FOR AN AGENT TO BE OF AN INDEPENDENT STATUS, (1) THE AGENT MUST BE LEGALLY INDEPENDEN T OF THE PRINCIPAL, (2) THE AGENT MUST BE ECONOMICALLY INDEPENDENT OF THE PRINCIPAL; AND (3) THE AGENT MUST REPRESENT THE PRINCIPAL IN THE ORDINARY COURSE OF BUSINESS . LEGAL INDEPENDENCE OF THE AGENT MUST BE TESTED ON THE LINE OF AGENTS OBLIGATION. IN T HE PRESENT CASE, THE APPELLANT HAS NOT BROUGHT IT ON RECORD THAT THE ACTIVITIES OF THE AGENTS ARE SUBJECT TO DETAILED INSTRUCTIONS OR COMPREHENSIVE CONTROL . THE ONLY REASON IS THAT THE COMPANY IS MANAGED BY COMMON DIRECTORS. FURTHER MERE PERSUASIVE CONTR OL IS NOT ENOUGH. THIS SOLE FACT IN ABSENCE OF OTHER VITAL FACTS, WHICH MAY DEPEND ON THE FACTS OF THE EACH CASE, REVENUE SHOULD ESTABLISH THE COMPREHENSIVE CONTROL OVER THE ENTITY. FURTHER THE INCOME STREAM OF THE ICO ITSELF SUGGESTS THAT ITS REVENUE IS NOT WHOLLY OR SUBSTANTIALLY DERIVED FROM THE PAGE 51 OF 63 ACTIVITIES OF THE APPELLANT BUT FROM OTHER AES ALSO. IT WAS SUBMITTED THAT 85% TO 90 % OF THE REVENUE FOR THE YEAR OF ICO IS FROM IT/ ITES SERVICES AND NOT FROM MARKETING SUPPORT SERVICES. FURTHER THE R ISK MATRIX OF THE ICO IS ALSO NOT BROUGHT ON RECORD BY THE LD AO . FURTHER, IT IS NOT THE CASE OF THE REVENUE THAT ICO IS PERFORMING WHOLLY AND EXCLUSIVELY FOR THE ASSESSEE. THEREFORE, IN ABSENCE OF ANY EVIDENCE OF ECONOMIC AND LEGAL DEPENDENCE OF THE AGENT THE ARGUMENT OF REVENUE CANNOT BE SUSTAINED . THE INDIAN ENTITY IS LEGALLY AND ECONOMICALLY INDEPENDENT AND IS COMPENSATED AT ARMS - LENGTH BASIS BY THE APPELLANT IN TERMS OF THE AGREEMENT ENTERED INTO BETWEEN THEM . IT WAS SUBMITTED BEFORE US THAT T HE 85% OF THE REVENUE OF THE INDIAN ENTITY IS DERIVED FROM IT, ITES SERVICES, AND NOT THE MARKETING AND SALES SUPPORT SERVICES . THEREFORE, IT WAS CONTENDED THAT INDIAN ENTITY IS NOT SOLELY RELIANT ON THE APPELLANT IN RELATION TO ITS OPERATION AND IT IS AN INDEPENDENT AGENT AND THEREFORE IT WOULD NOT CREATE AN AGENCY PE IN INDIA OF THE APPELLANT . THESE FACTS REMAIN UNCONTROVERTED . FURTHERMO RE, MERELY BECAUSE THE INDIAN ENTITY PROVIDES SERVICES TO THE NET APP GROUP INCLUDING THE APPELLANT, IT CANNOT BE SAID THAT PERMANENT ESTABLISHMENT OF THE APPELLANT IS IN INDIA BECAUSE THE PERMANENT ESTABLISHMENT IS REQUIRED TO BE ESTABLISHED WITH RESPECT TO THE APPELLANT AND NOT TO THE GROUP . LD. DEPARTMENTAL REPRESENTATIVE COULD NOT DRAW OUR ATTENTION TO ANY SUCH PROVISION IN DOUBLE TAXATION AVOIDANCE AGREEMENT . FURTHER, THE CONTENTION OF THE REVENUE THAT INDIAN ENTITY DISCUSSES ALL TERMS WITH THE DISTR IBUTORS, DISCOUNT TO RESELLERS ARE NEGOTIATED BY NET APP INDIA, DECISION ON SALES ARE ALSO TAKEN BY INDIAN ENTITY IN INDIA, THE INDIAN ENTITY OBTAINS ORDERS FROM CUSTOMERS, PURCHASE ORDERS ARE ROOTED THROUGH INDIAN ENTITY, CUSTOMERS DO NOT MAKE ANY DISTINC TION BETWEEN INDIAN ENTITY AND THE APPELLANT AND FURTHER THAT ALL FUNCTIONS OF THE INDIAN ENTITY ARE NOT CAPTURED IN TRANSFER PRICING DOCUMENTATION PREPARED BY INDIAN ENTITY WHICH DID NOT INCLUDE ASSETS GIVEN FREE OF COST TO THE INDIAN ENTITY. IT IS FURTHE R CONTENDED THAT THE PAGE 52 OF 63 AGREEMENT WITH THE RESELLERS ARE SIGNED AFTER 40 DAYS AND NET APP INDIA HAS INCURRED EXPENSES ON FREIGHT , SHIPPING AND TRANSPORTATION OF THE GOODS AND THEREFORE IT IS ENGAGED IN DELIVERY OF GOODS AND PERFORMING FUNCTIONS OF SALE ON BEH ALF OF APPELLANT . IT IS FURTHER ALLEGED THAT STORAGE SYSTEMS SOLD BY THE APPELLANT ON BEING REPLACEMENT WARRANTY THE PARTS ARE REPLACED IN MERELY 4 HOURS . THEREFORE, THE INVENTORY IS MAINTAINED BY APPELLANT IN INDIA AND INDIAN ENTITY IS PERFORMING FUNCTI ONS OF MAINTAINING STOCK OF SUCH GOODS FOR SALE . IT WAS FURTHER ALLEGED BY REVENUE THAT INDIAN ENTITY HAS THE RIGHT TO USE THE TRADEMARKS ETC OF THE APPELLANT AND THEREFORE IS PAYING ROYALTY AND HENCE IT MAKES SALES IN INDIA . WE HAVE CAREFULLY ANALYZED A LL THE CONTENTIONS OF THE LD. DEPARTMENTAL REPRESENTATIVE MADE BEFORE US, HOWEVER, WE DO NOT AGREE WITH ANY OF THEM AS NO EVIDENCE HAS BEEN LAID BEFORE US WHICH EVEN REMOTELY SUGGEST THAT INDIAN ENTITY DISCUSSES ALL TERMS WITH THE DISTRIBUTORS, NEGOTIATES DISCOUNTS TO THE RESELLERS AND DECISION ON SALE IS TAKEN BY THE INDIAN ENTITY IN INDIA . WITH RESPECT TO THE PURCHASE ORDERS THE INDIAN ENTITY DO NOT SOLICIT OR ACCEPT PURCHASE ORDERS ON BEHALF OF THE APPELLANT BUT THE PURCHASE ORDERS RAISED ON THE APPELLA NT ARE THROUGH DISTRIBUTORS . THE RECEIPT OF THE PURCHASE ORDERS BY THE INDIAN ENTITY IS ONLY FOR FACILITATION FOR ONWARD TRANSMISSION TO THE APPELLANT . IN THIS ASPECT, THE REVENUE HAS TOTALLY IGNORED THE FUNCTIONS PERFORMED FOR GETTING PURCHASE ORDERS BY THE DISTRIBUTORS . EVEN OTHERWISE THIS FUNCTION ALONE DO NOT CONSTITUTE PERMANENT ESTABLISHMENT UNDER THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT . WITH RESPECT TO THE ALLEGATION THAT ALL THE FUNCTIONS OF INDIAN ENTITY ARE NOT CAPTURED IN TH E TRANSFER PRICING DOCUMENTATION AND ASSETS GIVEN FREE OF COST ARE NOT RECORDED THEREIN, WE ARE OF THE OPINION THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF E FUNDS IT SOLUTIONS (SU PRA) WHEREIN IT HAS BEEN HELD THAT EVEN IF THE SOFTWARE OR INTANGIBLE DATA WAS PROVIDED FREE OF COST OR OTHERWISE BY THE APPELLANT TO AN INDIAN ENTITY, IT DOES NOT PAGE 53 OF 63 AUTOMATICALLY RESULT IN THE INDIAN ENTITY CONSTITUTING A PERMANENT ESTABLISHMENT OF THE APPE LLANT IN INDIA. THEREFORE, WE REJECT THE CONTENTION OF THE REVENUE ON THIS COUNT. WITH RESPECT TO THE INCURRING OF THE FREIGHT AND TRANSPORTATION COST INCURRED BY THE INDIAN ENTITY. IT WAS SUBMITTED THAT THESE COSTS ARE INCURRED BY INDIAN ENTITY FOR THE PU RPOSE OF TRANSPORTATION OF DEMO PRODUCTS AND SAMPLES AND OTHER ASSETS OF NET APP INDIA ONLY AND FURTHER THE TRANSPORTATION COST OF RS. 12 LAKHS PERTAINS TO TRAVELLING AND CONVEYANCE EXPENDITURE. THIS FACT HAS NOT BEEN CONTROVERTED BY THE REVENUE BEFORE US AND EVEN OTHERWISE; THIS ASPECT ON STANDALONE BASIS DOES NOT GIVE ANY INDICATION THAT THE APPELLANT HAS A PERMANENT ESTABLISHMENT IN INDIA. NO EVIDENCE HAS BEEN BROUGHT ON RECORD BY REVENUE TO SUGGEST THAT THIS EXPENDITURE IS INCURRED ON IMPORT OF GOODS, W HICH ARE SOLD BY THE APPELLANT. WITH RESPECT TO THE ALLEGATION THAT THE PARTS ARE REPLACED IN 4 HOURS AND THEREFORE INVENTORY IS MAINTAINED BY INDIAN ENTITY FOR THE PURPOSE OF SALE . IT WAS SUBMITTED THATS REQUIRED FOR PERFORMING CERTAIN SERVICES IN INDIA ARE WAREHOUSED BY THIRD - PARTY WAREHOUSING SERVICE PROVIDER IN INDIA AND INDIAN ENTITY DOES NOT DELIVER SPARES ON BEHALF OF APPELLANT. IT WAS FURTHER SUBMITTED THAT SUCH THIRD - PARTY SERVICE PROVIDER ARE NOT AT THE DISPOSAL OF INDIAN ENTITY OR OF THE APPELLANT AND ARE INDEPENDENT PARTIES AND THEREFORE THIS FACT CANNOT LEAD TO ANY INDICATION OF THE PERMANENT ESTABLISHMENT OF THE APPELLANT. WE DO NOT FIND ANY SUCH PROVISION IN THE DOUBLE TAXATION AVOIDANCE AGRE EMENT EXCEPT WHERE THE PREMISES ARE USED AS SALES OUTLET. IN ANY CASE, NO EVIDENCES OR INSTANCES HAVE BEEN LED THAT THE INDIAN ENTITY IS MAINTAINING ANY STOCK OF GOODS OF THE APPELLANT FOR DELIVERY ON BEHALF OF THE APPELLANT. WITH RESPECT TO THE ALLEGATION THAT INDIAN ENTITY HAS A CALL CENTRE , IT WAS SUBMITTED THAT THE NET APP GROUP OPERATED CALL CENTERS IN FOUR LOCATIONS ACROSS THE WORLD INCLUDING INDIA AND THE POST SALES SUPPORT SERVICES ARE PROVIDED THROUGH ITS CALL CENTRE TO THE CUSTOMERS THROUGHOUT THE WORLD. INCOME FROM SUCH CALL CENTRE OPERATIONS ARE PART OF ITES SEGMENT AND ARE PAGE 54 OF 63 CONSIDERED IN THE TRANSFER PRICING DOCUMENTATION OF THE INDIAN ENTITY. IT WAS FURTHER CONTENDED THAT WITH RESPECT TO THE SERVICES PROVIDED BY THE EMPLOYEES OF INDIAN ENTITY TH AT SUCH SERVICES ARE ALSO PROVIDED BY OTHER THIRD - PARTY SERVICE PROVIDERS IN INDIA, WHICH ARE ALSO LISTED ON THE WEBSITE OF THE NET APP GROUP. IT WAS FURTHER STATED THAT NET APP INDIA PROVIDE SUCH SERVICES TO THE APPELLANTS CUSTOMERS IN INDIA AS PART OF I TS OWN BUSINESS FUNCTIONS IN THE COURSE OF CARRYING ON ITS OWN BUSINESS IN INDIA AND FOR THIS, THE INDIAN ENTITY IS REMUNERATED FOR SUCH SERVICES WHICH ARE ALREADY BEEN CAPTURED IN THE TRANSFER PRICING DOCUMENTATION. IT WAS ALSO VEHEMENTLY CONTENDED THAT T HE ALLEGATION OF THE REVENUE ABOUT DEPUTATION OF TWO EMPLOYEES FOR RENDERING TECHNICAL SUPPORT SERVICES IS DEVOID OF ANY MERIT AS THIS FACT WAS DENIED IN THE ASSESSMENT PROCEEDINGS WHERE ENQUIRIES WERE CONDUCTED UNDER SECTION 133 (6 )OF THE INCOME TAX ACT . THE LD DR ALSO COULD NOT SUBSTANTIATE THE ALLEGATION OF DEP UTATION OF ANY EMPLOYEES FOR RENDERING TECHNICAL SUPPORT SERVICES, IN VIEW OF THIS WE DO NOT AGREE WITH THE REVENUE THAT SERVICES ARE RENDERED IN INDIA BY DEPUTATION OF EMPLOYEES IN INDIA BY THE APPELLANT. WITH RESPECT TO THE PAYMENT OF ROYALTY , IT WAS SUBMITTED THAT INDIAN ENTITY FROM TIME TO TIME PARTICIPATES IN VARIOUS TRADE FAIRS AND DISSEMINATE INFORMATION ABOUT THE PRODUCTS AND ENGAGED IN PROMOTIONAL ACTIVITY AND FOR THIS PURPOSE, IT HAS RIGHT TO USE THE TRADEMARK WHICH IS NOT HELD BY THE APPELLANT BUT DIFFERENT ENTITY. AS THIS TRANSACTION IS NOT BETWEEN THE APPELLANT AND THE INDIAN ENTITY WHERE IT IS UNDISPUTED THAT THE TRADEMARKS ARE NOT OWNED BY THE APPELLANT BUT BY DIFFERENT ENTITY, TH ESE FACTS DOES NOT LEAD TO CREATION OF A PERMANENT ESTABLISHMENT IN INDIA OF APPELLANT. 45. WE WOULD LIKE TO MENTION HERE THAT IN THE PRESENT CASE THE ICO HAS PERFORMED MANY FUNCTIONS BUT HAS NOT REACHED AT THE THRESHOLD OF BECOMING A PERMANENT ESTABLISHMENT OF THE APPELLANT ACCORDING TO ARTICLE 5 OF THE DTAA . IN THE PRESENT CASE THE LD AO HAS MERELY EXAMINED THE DOCUMENTS SUBMITTED BY THE APPELLANT AND HAS NOT CARRIED OUT DETAILED PAGE 55 OF 63 EXERCISE TO ARRIVE AT THE FACTS AND UNLESS THAT EXERCISE IS CARRIED OUT IT IS DIFFICULT TO DEMONSTRATE EXISTENCE OF FIXED PLACE PE AND AGENCY PE. TO CARRY OUT THIS EXERCISE THE LD AO IS EMPOWERED IN MANY WAYS BY THE INCOME TAX ACT SUCH AS SURVEY U/S 133 A AND EXAMINATION OF THE EMPLOYEES AND CUST OMERS OF THE COMPANY TO DETERMINE THE ACTUAL ACTIVITIES CARRIED OUT BY THE ICO IN INDIA. FURTHER BEPS ACTION POINT 7 IS ALSO ON THE ISSUE TO ADDRESS THE TAX EXPERIENCE THAT THE FOREIGN ENTERPRISE IS ABLE TO AVOID THE APPLICATION OF ARTICLE 5(5) OF THE OEC D MODEL TAX CONVENTION, TO THE EXTENT THAT THE CONTRACTS CONCLUDED BY THE PERSON ACTING AS A COMMISSIONAIRE ARE NOT BINDING ON THE FOREIGN ENTERPRISE. SINCE ARTICLE 5(5) RELIES ON THE FORMAL CONCLUSION OF CONTRACTS IN THE NAME OF THE FOREIGN ENTERPRISE, I T IS POSSIBLE TO AVOID THE APPLICATION OF THAT RULE BY CHANGING THE TERMS OF CONTRACTS WITHOUT MATERIAL CHANGES IN THE FUNCTIONS PERFORMED IN A STATE. COMMISSIONAIRE ARRANGEMENTS AS IT IS IN THE PRESENT CASE HAVE BEEN MAJOR PRE - OCCUPATIONS OF TAX. IN MO ST OF THE CASES THAT WENT TO COURT, THE TAX ADMINISTRATION'S ARGUMENTS WERE REJECTED . THE ONLY ANSWER TO THAT WOULD BE FACTUALLY ESTABLISHING THE ROLE OF THE ICOS REGARDING THEIR ACTUAL AUTHORITY OF CONCLUDING THE CONTRACTS. THEREFORE WHILE DECIDING THE APPEALS BEFORE US; WE WERE LED BY THE FACTS FOR THE YEAR UNDER APPEALS ONLY. 46. IN VIEW OF OUR ABOVE FINDINGS, WE HOLD THAT THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA UNDER THE PROVISIONS OF DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN I NDIA AND NETHERLAND. IN VIEW OF THIS GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 47. CONSEQUENTLY, GROUND NO. 2, GROUND NO. 6, 7, 8 AND 9 OF THE APPEAL OF THE ASSESSEE ARE NOT REQUIRED TO BE ADJUDICATED FURTHER, HENCE THEY ARE DISMISSED. 48. GROUND NO. 3 AND 4 OF THE APPEAL OF THE ASSESSEE ARE AGAINST THE ORDER OF THE LD. ASSESSING OFFICER IN HOLDING THAT INCOME FROM SALE OF SOFTWARE AND INCOME FROM SALE OF SUBSCRIPTIONS IS ROYALTY INCOME UNDER ARTICLE 12 (3) OF PAGE 56 OF 63 THE TREATY AND CONSEQUENTLY LIABLE TO TAX IN INDIA. LD. ASSESSING OFFICER HAS DISCUSSED THE WHOLE GAMUT OF THE TAXATION OF THE SOFTWARE TAXABLE AS ROYALTY IN PARAGRAPH NO. 6 OF HIS ORDER. BEFORE US, LD . AUTHORISED REPRESENTATIVE SUBMITTED THAT NOW THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE AS SESSEE I N VIEW OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF DIRECTOR OF INCOME TAX VERSUS I NFRASOFT LTD 264 CTR 329 (DELHI). HE ALSO SUBMITTED A CHART DURING THE COURSE OF HEARING THAT COMPARES THE SOFTWARE CONSIDERED BY HONBLE DELHI HIGH CO URT AND THE FEATURES OF THE SOFTWARE LICENSING AGREEMENT IN THE PRESENT CASE. HE HAS DEMONSTRATED THAT THE ISSUE INVOLVED IS SIMILAR STATING VARIOUS ASPECTS OF SOFTWARE LICENSING AGREEMENT AS UNDER: - INFRA SOFT LIMITED ASSESSEE CLAUSE 2(A) OF THE INFRASOFT LICENSE AGREEMENT: (A) INFRASOFT GRANTS LICENSEE A NON - EXCLUSIVE, NON - TRANSFERABLE LICENSE TO USE THE SOFTWARE IN ACCORDANCE WITH THIS AGREEMENT AND THE INFRASOFT LICENSE SCHEDULE. CLAUSE 2(D) OF THE INFRASOFT LICENSE AGRE EMENT: (D) LICENSEE MAY MAKE ONE COPY OF THE SOFTWARE AND ASSOCIATED SUPPORT INFORMATION FOR BACKUP PURPOSES , PROVIDED THAT THE COPY SHALL INCLUDE INFRASOFTS COPYRIGHT AND OTHER PROPRIETARYNOTICES. ALL COPIES OF THE SOFTWARE SHALL BE THE EXCLUSIVE PROPE RTY OF INFRASOFT CLAUSE 2(H) OF INFRASOFT LICENSE AGREEMENT: (H) LICENSEE MAY NOT COPY, DECOMPILE, DISASSEMBLE OR REVERSE - ENGINEER THE SOFTWARE WITHOUT INFRASOFTS WRITTEN CONSENT. THE LICENSEES RIGHTS SHALL NOT BE RESTRICTED BY THIS CLAUSE 2(H) TO THE EXTENT THAT LOCAL LAW GRANTS LICENSEE A RIGHT TO DO SO FOR THE PURPOSE OF ACHIEVING INTEROPERABILITY WITH OTHER SOFTWARE AND IN ADDITION THERETO INFRASOFT UNDERTAKES TO MAKE INFORMATION RELATING TO INTEROPERABILITY AVAILABLE TO LICENSEE SUBJECT TO SUCH REASONABLE CONDITIONS AS INFRASOFT MAY FROM TIME TO TIME IMPOSE INCLUDING A REASONABLE FEE FOR DOING SO. TO ENSURE LICENSEE RECEIVES THE APPROPRIATE INFORMATION, LICENSEE MUST FIRST GIVE INFRASOFT SUFFICIENT DETAILS OF ITS OBJECTIVES AND THE OTHER SOFTWAR E CONCERNED. REQUESTS FOR THE APPROPRIATE INFORMATION SHOULD BE CLAUSE 1 OF SOFTWARE LICENSE: SUPPLIER GRANTS TO BUYER A NON - EXCLUSIVE LICENSE TO USE THE ACCOMPANYING SOFTWARE IN MACHINE - READABLE FORM (SOFTWARE), TOGETHER WITH THE ACCOMPANYING DOCUMENTATION. CLAUSE 2 OF END USER SOFTWARE LICENSE: NETAPP SHALL RETAIN TITLE TO THE SOFTWARE AND THE ACCOMPANYING DOCUMENTATION AND ALL COPIES AND ANY DERIVATIVE WORKS THEREOF. CUSTOMER SHALL NOT MAKE ANY COPIES OF THE SOFTWARE EXCEPT AS REASONABLY REQUIRED FOR BACKUP PURPOSES. CLAUSE 2 OF SOFTWARE LICENSE: BUYER MUST NOT MAKE ANY COPIES OF THE SOFTWARE EXCEPT AS REASONABLY NECESSARY FOR BACKUPS. NEITHER BUYER NOR ANY THIRD PARTY MAY: (A) REVERSE ENGINEER OR TRY TO RECONSTRUCT OR DISCOVER ANY SOURCE CODE OR UNDERLYING IDEAS USED IN THE SOFTWARE; OR (B) REMOVE OR CONCEAL ANY PRODUCT IDENTIFICATION OR PROPRIETARY NOTICES CONTAINED IN OR ON THE SOFTWARE OR PRODUCTS; OR (C) EXCEPT AS ALLOWED IN SUPPLIERS USER DOCUMENTATION, MODIFY OR CREATE A DERI VATIVE WORK OF ANY PART OF THE SOFTWARE. PAGE 57 OF 63 DIRECTED TO THE VICE PRESIDENT TECHNICAL OF INFRASOFT . CLAUSE 2(F) OF THE INFRASOFT LICENSE AGREEMENT IS QUOTED AS BELOW: (F) THE SOFTWARE SHALL BE USED ONLY FOR LICENSEES OWN BUSINESS AS DEFINED WITHIN THE INFRASOFTLICENCE SCHEDULE AND SHALL NOT, WITHOUT PRIOR WRITTEN CONSENT FROM INFRASOFT: (I) BE LOANED, RENTED, SOLD, SUBLICENSED OR TRANSFERRED TO ANY THIRD PARTY (II) USED BY ANY PARENT, SUBSIDIARY OR AFFILIATED ENTITY OF LICENSEE (I II) USED FOR THE OPERATION OF A SERVICE BUREAU OR FOR DATA PROCESSING. BUYER MUST NOT PUBLISH OR PROVIDE ANY RESULTS OF BENCHMARK TESTS RUN ON THE SOFTWARE TO A THIRD PARTY WITHOUT SUPPLIERS PRIOR WRITTEN CONSENT. THE SOFTWARE IS SUPPLIERS CONFIDENTIAL PROPERTY AND IS PROTECTED BY COPYRIGHTS AND BY ONE OR MORE U.S. PATENTS ISSUED OR PENDING. BUYER MUST TAKE ADEQUATE STEPS TO PROTECT THE SOFTWARE FROM UNAUTHORIZED USE OR DISCLOSURE. CLAUSE 2 OF END USER SOFTWARE LICENSE: CUSTOMER SHALL NOT, NOR SHALL CUSTOMER ALLOW ANY THIRD PART Y TO: (I)DECOMPILE, DISASSEMBLE, DECRYPT, EXTRACT, OR OTHERWISE REVERSE ENGINEER OR ATTEMPT TO RECONSTRUCT OR DISCOVER ANY SOURCE CODE OR UNDERLYING IDEAS, ALGORITHMS, OR FILE FORMATS OF, OR OF ANY COMPONENTS USED IN THE SOFTWARE BY ANY MEANS WHATEVER; OR (II)REMOVE OR CONCEAL ANY PRODUCT IDENTIFICATION, COPYRIGHT, PATENT OR OTHER NOTICES CONTAINED IN OR ON THE SOFTWARE OR ACCOMPANYING DOCUMENTS; OR (III) MODIFY THE SOFTWARE, INCORPORATE IT INTO OR WITH ANOTHER SOFTWARE, OR CREATE A DERIVATIVE WORK OF ANY P ART OF THE SOFTWARE. CUSTOMER MUST NOT PUBLISH OR PROVIDE ANY RESULTS OF BENCHMARK TESTS RUN ON THE SOFTWARE TO A THIRD PARTY WITHOUT NETAPPS PRIOR WRITTEN CONSENT. CLAUSE 7 OF END USER SOFTWARE LICENSE: THIS LICENSE IS PERSONAL TO CUSTOMER. CUSTOMER SHALL NOT ASSIGN, SUBLICENSE OR TRANSFER THE LICENSE OR AGREEMENT WITHOUT NETAPPS PRIOR WRITTEN APPROVAL; ANY ATTEMPT TO DO SO SHALL BE VOID. 49. THE REVENUE IS ALSO NOT SERIOUSLY DISPUTED BEFORE US THAT THE ISSUE IS NOT COVERED BY THE DECISION OF THE HONBLE DELHI HIGH COURT. HOWEVER THE ISSUE NEEDS TO BE VERIFIED BY THE LD. ASSESSING OFFICER WHETHER THE LICENSING AGREEMENT INVOLVED IN THE PRESENT APPEAL IS SIMILAR TO THE ISSUE PAGE 58 OF 63 DECIDED BY THE HONBLE DELHI HIGH COURT. THEREFORE WE SET ASIDE GROUND 34 OF THE APPEAL OF THE ASSESSEE BACK TO THE FILE OF THE LD. ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH CONSIDERING THE DECISION OF THE HONBLE DELHI HIGH COURT. IN THE RESULT GROUND NO. 3 AND 4 OF THE APPEAL OF THE ASSESSEE IS ALLOWED WITH ABOVE DIRECTION. 50. THE GROUND NO. 5 OF THE APPEAL OF THE ASSESSEE IS WITH RESPECT TO THE TREATMENT GIVEN BY THE LD. ASSESSING OFFICER TO THE SERVICE INCOME AS ROYALTY INCOME AND FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12 (4) OF THE TREATY AND CONSEQUENTLY LIABLE TO BE TAX IN INDIA. THE LD. ASSESSING OFFICER HAS DEALT WITH THIS ISSUE IN PARA NO. 7 OF ASSESSMENT ORDER. DURING THE YEAR THE ASSESSEE HAS RECEIVED A PAYMENT. IN VIEW OF SERVICES RENDERED TO ITS INDIAN CUSTOMERS AMOUNTING TO RS. 2 2396 3915/ . THE ABOVE PAYMENT HAS BEEN RECEIVED FOR THE INSTALLATION SERVICES WARRANTY SERVICES AND PROFESSIONAL SERVICES RENDERED BY THE ASSESSEE TO ITS CUSTOMER WITH THIRD - PARTY SERVICE PROVIDERS IN INDIA. THE CUSTOMERS OF DEDUCTED TAX AT SOURCE ON THESE PAYMENTS UNDER THE FEES FOR TECHNICAL SERVICES. ACCORDING TO THE ASSESSEE THE ABOVE INCOME IS NOT CHARGEABLE TO TAX IN IN DIA, AS INDIAN CUSTOMERS OR DISTRIBUTORS DOES NOT ENVISAGE THE USE OF ANY RIGHT, PROPERTY OR INFORMATION FOR WHICH ARE ROYALTY UNDER ARTICLE 12 (4) OF THE TAX TREATY. FURTHER, IT IS STATED THAT THE THESE SERVICES WOULD NOT ALSO BE REGARDED AS FEES FOR TECH NICAL SERVICES AS THEY DO NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE ETC TO THE SERVICE RECIPIENT. THEREFORE ACCORDING TO THE ASSESSEE. IT WAS NOT SERVICES THAT MAKE AVAILABLE TECHNICAL KNOWLEDGE, SKILL ETC TO INDIAN CUSTOMERS AND IT IS NOT THE SER VICES THAT INVOLVE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLANNER DESIGNED TO INDIAN CUSTOMERS. HOWEVER, THE LD. ASSESSING OFFICER HAS HELD THAT THE PAYMENTS ARE RECEIVED BY THE ASSESSEE ARE DEFINITELY FALLING UNDER THE DEFINITION OF ROYALTY. THE LD. ASSE SSING OFFICER HAS FURTHER HELD THAT THE NATURE OF THE SERVICES IS PREDOMINANTLY TECHNICAL IN NATURE AND THESE SERVICES ENABLE THE PAGE 59 OF 63 USERS TO ENJOY THE BENEFITS OF THE HARDWARE AND SOFTWARE IN A BETTER MANNER. 51. LD. AUTHORIZED REPRESENTATIVE SUBMITTED BEFORE US THAT PAYMENTS FOR PROVISION OF INSTALLATION, WARRANTY AND PROFESSIONAL SERVICES ARE NOT FTS AS THEY ARE NOT ANCILLARY AND SUBSIDIARY TO A ROYALTY TRANSACTION. FURTHER, THESE SERVICES DO NOT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, ETC., NOR INV OLVE IMPARTING OF INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE TO INDIAN CUSTOMERS, IN TERMS OF ARTICLE 12 OF THE TAX TREATY READ WITH NOTIFICATION NO. S.O., 693E DATED AUGUST 30, 1999 .HE FURTHER PLACED RELIANCE ON THE DECISION OF THE HONBLE DELHI H C IN THE CASE OF DIT VS. GUY CARPENTER (346 ITR 504) AND DIT V. SHERATON INTERNATIONAL INC. (221 CTR 752) . IN VIEW OF THIS HE SUBMITTED THAT THESE INCOMES ARE NOT CHARGEABLE TO TAX IN INDIA IN TERMS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. 52. WE HAVE CAR EFULLY CONSIDERED THE RIVAL CONTENTIONS. THE COMPANY PROVIDES INSTALLATION, INTEGRATION AND TRAINING ASSISTANCE TO THE INDIAN CUSTOMER IN RELATION TO THE PRODUCTS SOLD BY IT. THE COMPANY ALSO PROVIDES WARRANTY SERVICES FOR THE PRODUCTS PURCHASED BY THE CUS TOMERS IN INDIA. FOR A PERIOD OF 3 YEARS AND THE WARRANTIES UNDERTAKEN WITHOUT ANY ADDITIONAL COST TO THE CUSTOMER AS THE PRIZE OF THE WARRANTIES ALREADY INCLUDED IN THE SALE PRICES. THE COMPANY ALSO OFFERS SUPPLEMENTARY OR AND HENCE WARRANTY PACKAGES FOR A SEPARATE CHARGE. THE WARRANTIES ALSO EXTENDABLE PAYMENT OF APPELLATE JUDGES BY THE CUSTOMERS. OVER AND ABOVE THIS, IT ALSO PROVIDES PROFESSIONAL SERVICES TO THE CUSTOMERS WHO CAN AVAIL SUCH SERVICES SUCH AS DATA MIGRATION, INTEGRATION, DISASTER RECOVERY OR BACKUP CONFIGURATION ETC. FOR RENDITION OF THE SERVICES. THE COMPANY HAS ENTERED INTO TECHNICAL SUPPORT SERVICES ARRANGEMENT WITH THIRD - PARTY SERVICE PROVIDERS IN INDIA AND HAS SIMILAR TECHNICAL SUPPORT ARRANGEMENT WITH INDIAN COMPANY THROUGH THE SALES SUPPORT AGREEMENT. THE LD. PAGE 60 OF 63 ASSESSING OFFICER HAS HELD THAT THE SERVICES ARE PREDOMINATELY - TECHNICAL SERVICES IN THE NATURE AND HAS CONCLUDED THAT IT IS ANCILLARY TO THE ROYALTY AND HENCE ROYALTY AS DEFINED IN THE ACT AS WELL AS THE DOUBLE TAXATION AVOIDANC E AGREEMENT AND THEREFORE IT IS CHARGEABLE TO TAX IN INDIA. THE LD. ASSESSING OFFICER HAS FURTHER HELD THAT AS THE ASSESSEE IS RENDERING SERVICE THROUGH QUALIFIED PERSONNEL OF NET APP INDIA OR THIRD - PARTY SERVICE PROVIDERS IT IS BEING MADE AVAILABLE TO THE INDIAN CUSTOMERS. WE ALSO CAREFULLY CONSIDERED THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF DIT VERSUS GUY CARPENTER 346 ITR 504 (DELHI), WHEREIN THE HONBLE DELHI HIGH COURT HAS DEALT WITH THE CONCEPT OF MAKE AVAILABLE AS MENTIONED IN THE DO UBLE TAXATION AVOIDANCE AGREEMENT. AS THE SERVICES RENDERED BY THE ASSESSEE ARE INSTALLATION SERVICES, WARRANTY SERVICES AND PROFESSIONAL SERVICES. IT CANNOT BE SAID THAT THEY ARE MADE AVAILABLE TO THE CUSTOMERS USING NET APP BV PRODUCTS. IN FACT, THE WARR ANTY SERVICE IS TAKEN BY THE BUYER OF THE PRODUCT TO KEEP THE GOODS PURCHASED IN GOOD CONDITION FOR ITS LIFESPAN. WE SIMPLY FAILED TO UNDERSTAND THAT HOW THE INSTALLATION AND WARRANTY SERVICES AT LEAST CAN BE SAID TO BE MAKE AVAILABLE TO THE BUYER. IN VIEW OF THIS WE REJECT THE ARGUMENT OF THE REVENUE THAT SUCH SERVICES FEES ARE CHARGEABLE TO TAX AS FEES FOR TECHNICAL SERVICES. IN THE RESULT GROUND NO. 5 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 53. THE GROUND NO. 10 OF THE APPEAL OF THE ASSESSEE IS WITH RESPE CT TO THE PROVIDING CREDIT FOR TAXES DEDUCTED AT SOURCE AMOUNTING TO RS. 3 059 1767/ . BOTH THE PARTIES AGREED THAT THE CREDITS FOR SUCH TAXES ARE LIABLE TO THE ASSESSEE, IF THE TAX DEDUCTIONS AT SOURCE CERTIFICATES PROVIDED BY THE APPELLANT ARE IN ORDER. THEREFORE WE SET ASIDE GROUND NO. 10 OF THE APPEAL OF THE ASSESSEE TO THE FILE OF THE LD. ASSESSING OFFICER TO GRANT CREDIT OF THE ABOUT TAX DEDUCTION AT SOURCE AFTER VERIFICATION OF THE TAX DEDUCTION AT SOURCE CERTIFICATES PROVIDED BY THE APPELLANT. IN TH E RESULT GROUND NO. 10 OF THE APPEAL OF THE ASSESSEE IS ALLOWED ACCORDINGLY. PAGE 61 OF 63 54. GROUND NO. 11 OF THE APPEAL OF THE ASSESSEE IS AGAINST LEVY INTEREST UNDER SECTION 234A OF THE INCOME TAX ACT FOR THE PERIOD OF EXCESS OF THE ACTUAL DELAY OF 18 MONTHS IN FILING T HE RETURN OF INCOME FOR ASSESSMENT YEAR 2008 2009 AND COMPUTING SUCH INTEREST WITHOUT CONSIDERING CREDIT FOR TAX DEDUCTED AT SOURCE OF RS. 3 059 1767/ . AS ALREADY HELD IN GROUND NO. 10 BY US THAT THE ASSESSEE SHOULD BE GRANTED CREDIT FOR THE TAX DEDUCTED AT SOURCE, THEREFORE, WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE INTEREST UNDER SECTION 234A OF THE INCOME TAX ACT IF THERE IS ANY TAX LIABILITY AFTER GRANTING CREDIT OF SUCH TDS. IN THE RESULT GROUND NO. 11 OF THE APPEAL OF THE ASSESSEE IS ALLOWED ACC ORDINGLY . 55. GROUND NO. 12 OF THE APPEAL OF THE ASSESSEE WAS WITH RESPECT TO THE LEVY OF INTEREST UNDER SECTION 234B OF THE INCOME TAX ACT, DESPITE THE ENTIRE INCOME OF APPELLANT IS SUBJECT TO WITHHOLDING TAXES IN INDIA AND, THEREFORE, NO SUCH ADVANCE TAX WAS PAYABLE BY THE ASSESSEE. THIS GROUND OF APPEAL IS ALSO SET ASIDE TO THE FILE OF THE LD. ASSESSING OFFICER WITH A DIRECTION THAT IF THE INCOME OF THE APPELLANT IS CHARGEABLE TO TAX IN INDIA AND, IF IT IS SUBJECT TO TAX WITHHOLDING THE NO INTEREST UNDER SEC TION 234B OF THE INCOME TAX ACT IS CHARGEABLE. IN THE RESULT GROUND NO. 12 OF THE APPEAL OF THE ASSESSEE IS ALSO ALLOWED. 56. GROUND NO. 13 OF THE APPEAL OF THE ASSESSEE IS AGAINST INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1) OF THE ACT, SINCE THE AP PELLANT IS NOT LIABLE TO TAX IN INDIA. THIS GROUND IS PREMATURE AND THEREFORE SAME IS DISMISSED 57. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED WITH ABOVE DIRECTION. 58. COMING TO THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2010 - 2011 THAT IS ON THE SIMILAR FACTS AS AGREED BY THE PARTIES. IN VIEW OF OUR DECISION FOR THE ASSESSMENT YEAR 2008 - 2009, WE SIMILARLY HOLD FOR ASSESSMENT YEAR 2010 2011 AS UNDER: - PAGE 62 OF 63 A) AS ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA. THEREFORE, THE INCOME OF THE ASSE SSEE IS NOT CHARGEABLE TO TAX WITH RESPECT TO SALE OF THE HARDWARE PRODUCTS IN INDIA. B) INCOME ARISING TO THE ASSESSEE FROM SALE OF SOFTWARE AND SALE OF SUBSCRIPTION IS SET ASIDE TO THE FILE OF THE LD. ASSESSING OFFICER TO DECIDE THE ISSUE IN VIEW OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF CIT VERSUS INFRA SOFT LTD (SUPRA). C) INCOME FROM THE PROVISION OF THE SERVICES SUCH AS INSTALLATION, WARRANTY SERVICES AND PROFESSIONAL FEES ARE NOT FEES FOR TECHNICAL SERVICES IN TERMS OF ARTICLE 12 (4) OF THE TREATY AND THEREFORE IT IS NOT CHARGEABLE TO TAX IN INDIA. D) THE LD. ASSESSING OFFICER IS DIRECTED TO GRANT CREDIT OF THE TAX DEDUCTED AT SOURCE OF WITHHOLDING TAX CERTIFICATE PRODUCED BY THE ASSESSEE, IF THEY ARE FOUND IN ORDER. E) THE LD. ASSESSING OFFIC ER IS FURTHER DIRECTED TO RE - COMPUTE THE INTEREST CHARGEABLE UNDER SECTION 234A OF THE INCOME TAX ACT AFTER GRANTING CREDIT OF TAX DEDUCTION AT SOURCE CLAIMED BY THE ASSESSEE, IF FOUND IN ORDER. F) THE LD. AND ASSESSING OFFICER IS FURTHER DIRECTED TO NOT TO C HARGE INTEREST UNDER SECTION 234B OF THE INCOME TAX ACT ON THE INCOME OF THE ASSESSEE WHICH IS SUBJECT TO WITHHOLDING TAX. 59. IN THE RESULT APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2010 11 IS ALSO PARTLY ALLOWED WITH ABOVE DIRECTION. 60. O RDER PRONOUNCED IN T HE OPEN COURT ON 16/01/2007 . SD/ - SD/ - ( I.C.SUDHIR ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 16/01/2007 PAGE 63 OF 63 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI