No DAPE Attribution Where Indian AE is Arm's Length Remunerated: Bangalore ITAT Deletes Business Income Addition in Qliktech International AB Case
Overview of the Ruling
The Income Tax Appellate Tribunal, Bangalore Bench, delivered a significant ruling in the case of Qliktech International AB Vs DCIT (ITAT Bangalore) for Assessment Year 2023-24, holding that a foreign enterprise's Indian Associated Enterprise (AE) cannot be designated as a Dependent Agent Permanent Establishment (DAPE) when the AE has been remunerated at arm's length and the Transfer Pricing Officer (TPO) has raised no objections to the transfer pricing analysis. Consequently, no business income of the foreign entity can be attributed to India solely on the basis of such an arrangement.
The Tribunal further addressed a secondary issue concerning the taxability of interest on income tax refunds, directing the matter back to the Assessing Officer (AO) for fresh verification on account of both procedural irregularity and unresolved factual questions.
Background and Facts of the Case
Qliktech International AB, a foreign company, filed its return of income declaring nil income for Assessment Year 2023-24. The return was initially processed and an intimation under Section 143(1) of the Income Tax Act, 1961 was issued. However, the AO, upon reviewing Form 26AS, identified that the assessee had allegedly received interest income that was not disclosed in the return. Additionally, a sum of Rs. 38,86,16,927/- received from an Indian company was found to have not been offered to taxation.
The return was accordingly selected for scrutiny, and notice under Section 143(2) was issued. This was followed by notices under Section 142(1) and a show cause notice seeking relevant details. The AO also issued notice under Section 133(6) to the Indian company to independently verify the assessee's claims.
Nature of Business Operations
On examining the Master Distribution Agreement between the parties, the AO noted that the assessee was engaged in the development, marketing, and support of Data Analytics Software. The Indian company, in which the assessee held a 99% shareholding, had paid the amount of Rs. 38,86,16,927/- as consideration for software license sales for distribution within India and towards corporate cost recharges.
AO's Findings and Draft Assessment
After a detailed review of the contractual terms and the submissions made by the Indian company, the AO concluded that:
- The Indian company performed all its activities exclusively for the benefit of the assessee
- The Indian company therefore functioned as a Dependent Agent of the assessee
- As a DAPE of the foreign enterprise, the Indian company facilitated the earning of income in India by the assessee
On this basis, the AO estimated the business income at 30% of the consideration received from the Indian company on account of software product sales. A draft assessment order was issued, which the assessee challenged before the Dispute Resolution Panel (DRP). However, the DRP rejected the objections and upheld the draft assessment. The AO thereafter passed the final assessment order under Section 143(3) of the Income Tax Act, 1961, also including interest income as income from other sources.
Grounds Pressed Before the Tribunal
The assessee pressed Ground Nos. 3, 4, and 5 before the Tribunal. The remaining grounds were not pressed and were accordingly not adjudicated.
Grounds 3 & 4 — DAPE Classification and Business Income Attribution
The assessee's Authorised Representative (AR) advanced the following arguments: