DAPE Under India-Denmark DTAA: Delhi ITAT Rules Principal-to-Principal Distributor Arrangement Does Not Create Dependent Agent Permanent Establishment

Case Overview: Milestone Systems Vs ACIT (ITAT Delhi)

The Delhi bench of the Income Tax Appellate Tribunal delivered a significant ruling in Milestone Systems Vs ACIT, holding that a Denmark-incorporated company selling licensed IP video management software to Indian distributors did not have a Dependent Agent Permanent Establishment (DAPE) in India under the India–Denmark Double Taxation Avoidance Agreement (DTAA). The Tribunal set aside profit attribution made by the Assessing Officer and subsequently reduced by the Dispute Resolution Panel, concluding that no taxable presence of the assessee existed in India.

Background and Facts of the Case

The assessee is a company incorporated and tax resident in Denmark, engaged in developing and distributing IP video management software and related video surveillance solutions across global markets, including India. During the assessment year AY 2022-23, the assessee received revenue of ₹19,83,35,342/- from the sale of licensed software to its distributors based in India.

The assessee filed its return of income for AY 2022-23 declaring income of ₹18,94,08,000/- and claimed a refund of ₹2,14,64,110/-. The assessee's position was that the software sale proceeds constituted business income and, since it had no Permanent Establishment (PE) in India within the meaning of Article 5 of the India–Denmark DTAA, no tax liability arose in India on such income.

The Assessing Officer's Position

The Assessing Officer took a contrary stance, raising the following objections:

  • The software sold was not standard off-the-shelf software but was customised to meet the specific needs of end users.
  • The assessee exercised comprehensive operational control over its Indian distributors, including the fixation of prices at which products were sold.
  • Distributors in India lacked the freedom to independently select or appoint resellers, as reseller participation was controlled through the assessee's own certification programme.
  • Consequently, the Indian distributors constituted a DAPE of the assessee under the India–Denmark DTAA, making the software revenues chargeable to tax in India.

Based on these findings, the AO attributed 50% of profits earned through Indian operations to the alleged DAPE.

Dispute Resolution Panel's Ruling

The assessee challenged the Draft Assessment Order before the Dispute Resolution Panel (DRP). The DRP upheld the AO's conclusion regarding the existence of a DAPE in India; however, it reduced the profit attribution rate from 50% to 25%. The Final Assessment Order was passed accordingly, giving rise to the present appeal before the ITAT.

Whether the Indian distributors of the assessee constituted a Dependent Agent Permanent Establishment (DAPE) under Article 5(4) of the India–Denmark DTAA, thereby rendering the software license revenue taxable in India?

Relevant Legal Framework: Article 5(4) of the India–Denmark DTAA

The entire dispute revolved around the conditions prescribed under Article 5(4) of the India–Denmark DTAA for the creation of a DAPE. The provision reads as follows: