Employees visit for stewardship activity not core business, does not amount to ‘fixed place PE’ and hence not chargeable in India

While opining that there is nothing to demonstrate that the Assessee has carried out any activity, either wholly or partly in relation to sale of software licence through the alleged PE in India s to satisfy the conditions of Article 5(1) read with Article 5(2) of the tax treaty, the Delhi ITAT holds software supply not taxable in India.

The Division Bench comprising G.S. Pannu, President and Saktijit Dey, Vice President observed that the test to be satisfied for constituting a fixed place PE is that “the non-resident is free to use the place of business at any time of his own choice and has free access, it can carry on work relating to more than one customer, it can use the place of business for internal administrative and bureaucratic work”.

The Bench remarks that it is trite law that the burden of proving the existence of fixed place PE is on the Revenue which it has failed to discharge in the instant case.

Further, the ITAT declined to admit additional ground on non-taxability of software related services, offered to tax in the return as fee for technical services (FTS), holding that “it does not fall in the category of pure legal issue, but a mixed question of fact and law, and would require fresh investigation into the facts, which is not permissible at this stage”.

Advocate Damodar Vaidya appeared for the Assessee while the Revenue was represented by Gangadhar Panda, CIT(DR).

Briefly, the Assessee, a US tax-resident, is a developer, marketer, seller of Robotic Process Automation (RPA) and related products and services. It develops and sells RPA software and digital workforce platform (DWP) which enables the customers to automate business process through use of configurable software bots. During relevant year, the Assessee earns revenue from two streams in India. The first one is fee from software license which was not offered to tax, in the absence of PE, considering it as business income, whereas, the second one is fee from rendering of services which was offered to tax as fee for technical services.

The AO believed during the subject year, 30 employees visited India for a period of 459 days and rendered services, did business and economic activities and had free access to the premises of the Indian AE and were carrying on the business of the Assessee and also selling the RPA software through such premise, thus, tests of permanence, disposal, duration and functional test stand satisfied. Accordingly, the AO held that Assessee has fixed place PE in India and attributed 25% of revenue earned from sale of software licences as profit attributable to the PE.

After considering the submission, the ITAT noted from the record as well as email dump, that none of the employees came for the purpose of either development or sale of or any activity related to development and sale of RPA software platform, neither carried on any activity regarding sale of licence.

The ITAT further opined that employees’ visits are for shareholder’s activity, stewardship activity, marketing events, for receiving training, and nothing on record could even remotely suggest that Assessee’s employees were carrying out core business activities, either wholly or partly from the premises of Indian AE.

The Bench further found that employees had access to Indian AE premises only with prior permission, were given temporary space for meeting with employees of Indian AE and could not directly undertake client meeting in its premises which are organised by Indian AE only.

The Bench noted that the visiting of high officials like, CEO, CFO, Chief HR etc. is only for meeting officers of Indian AE for owners/shareholders’ interests in the subsidiary and some employees visited for receiving training for stewardship activity.

The Bench also observed that the Assessee entered into a separate cost plus 18% agreement with Indian AE, remunerating it for RPA related software development and related services such as limitation, coding, testing, financial modelling, customers support, etc, and part of services provided by the Assessee to its customer was outsourced to the India AE which has been offered for tax as FTS and accepted by the Revenue.

The ITAT therefore opined that the Revenue has failed to establish on record through credible evidence that the Assessee has a fixed placed PE in India through which it earned income relating to sale of software licence.

Thus, the ITAT concluded that no part of such income can be attributed to the PE.

Cause Title: Automation Anywhere Inc. vs. DCIT [ITA No.2147/Del/2022 / 2023-Enterslice-12-ITAT-Del]

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