Milestone Systems Vs ACIT (ITAT Delhi)
The Delhi ITAT held that income earned by a Denmark-based company from sale of licensed IP video management software in India was not taxable in India as the company did not have a Dependent Agent Permanent Establishment (DAPE) under the India–Denmark DTAA. The Assessing Officer had alleged that the company exercised control over distributors, reseller selection, and pricing, and that the software was customized, thereby creating a DAPE and attributing 50% of profits to India. The Dispute Resolution Panel upheld the existence of DAPE but reduced profit attribution to 25%. The Tribunal, however, found that the distributors operated on a principal-to-principal basis, purchasing and selling products in their own name, risk, and account, and were free to sell competing products. It also held that prescribing a maximum retail price does not amount to price control, and reseller certification merely ensured technical competence and service quality. As distributors neither concluded contracts nor secured orders on behalf of the foreign enterprise, the conditions of Article 5(4) of the DTAA were not satisfied. Accordingly, the Tribunal ruled that no PE existed and profit attribution in India was unwarranted.
Brief Facts:
1. The assessee is a company incorporated in Denmark and a tax resident of Denmark. It develops and sells IP video management software and surveillance-related products globally, including in India.
2. During AY 2022-23, the assessee earned ₹19.83 crore from sale of licensed software to Indian distributors. The assessee treated such receipts as business income not taxable in India under the India–Denmark DTAA, since it did not have a Permanent Establishment (PE) in India.
3. The Assessing Officer held that the software was customised for end users, not standard software. The assessee exercised control over distributors and resellers, including price fixation. Therefore, distributors constituted a Dependent Agent Permanent Establishment (DAPE) in India. The AO attributed 50% of profits to the alleged DAPE. The DRP upheld the existence of DAPE but reduced profit attribution to 25%.
Issue before the Tribunal:
