Past Group Entity Assessments Cannot Bind Current Assessee on PE Determination: ITAT Mumbai Remands Cornerstone Ondemand Matter

1. Background and Procedural Overview

The Mumbai Bench "I" of the Income Tax Appellate Tribunal took up three consolidated appeals filed by Cornerstone Ondemand International Limited against final assessment orders passed under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 for Assessment Years 2020-21, 2021-22 and 2022-23. The orders were dated 13/07/2023, 16/10/2023 and 14/01/2025 respectively. Since the substantive issues and the underlying factual matrix were common across all three years, the Tribunal heard them together and disposed of them through a single common order, treating AY 2020-21 as the lead year for setting out the facts and figures.

The assessee, a company incorporated and registered in the United Kingdom, is engaged in developing cloud-based learning and talent-management software products. Its Indian group company, Cornerstone Ondemand Services India Private Limited ("CSOD India"), is described as a sister concern and operates in two capacities: first, it renders software development support services — encompassing coding, quality testing and research — and is compensated on a cost-plus-17% basis; second, it acts as a distributor and reseller of the assessee's software products to Indian customers under an agreement dated 01/04/2017, earning a 5% margin on such sales.

2. Structure of Agreements Between the Assessee and CSOD India

Under the customer-facing arrangement, the assessee itself enters into agreements with Indian customers governing licence grants, pricing, payment schedules, implementation and post-sale technical support. CSOD India is also a signatory to these agreements, but only for the limited purpose set out in clause 6 thereof. In operational terms, CSOD India receives purchase orders from Indian customers, raises invoices in its own name and collects the corresponding payments, recording these transactions in its books as purchases from the assessee and sales to customers. Clause 10.3 of the inter-company agreement explicitly states that the parties remain independent contractors and that neither is authorised to enter into any contract or binding obligation on behalf of the other. Clause 15(m) similarly provides that neither party has authority to make or accept offers or representations on behalf of the other.

3. Return Filed and the Course of Assessment Proceedings

For AY 2020-21, the assessee filed its return of income declaring nil income chargeable to tax in India. The return was selected for scrutiny. On 01/09/2022, the Assessing Officer issued a show-cause notice proposing to treat CSOD India as a Dependent Agent Permanent Establishment ("DAPE") of the assessee under Article 5(4) of the India-UK DTAA and to attribute 30% of the Indian software receipts to such a DAPE. The assessee opposed this proposal vide letter dated 08/09/2022, asserting that CSOD India lacked authority to conclude contracts on the assessee's behalf and did not habitually secure orders for it. Without prejudice, the assessee also argued that CSOD India had already been remunerated at arm's length with no transfer pricing adjustment raised by the department, and therefore no further attribution could arise.

4. Draft Assessment Order and the DRP Directions

The Assessing Officer, in the draft assessment order, treated CSOD India as a DAPE. A significant plank of the Assessing Officer's reasoning was that in an earlier assessment year, another group company — Cornerstone Ondemand Limited — had been subjected to the same treatment, with CSOD India being held to be its DAPE and 30% of Indian receipts being attributed to that PE. That earlier determination had been upheld by the Dispute Resolution Panel and the group company had not appealed further. The Assessing Officer drew from this that the relationship between the assessee and CSOD India was one of principal and agent, with CSOD India having authority to conclude contracts and habitually securing orders for the assessee. A tripartite agreement was noted through which agreements to which the earlier group entity was a party were transitioned to the present assessee. On this basis, the Assessing Officer attributed 30% of software sales receipts of Rs. 7,57,35,200, amounting to Rs. 2,27,20,560, to the alleged DAPE, resulting in a total income of Rs. 2,27,20,560 as against nil income returned.

The DRP, upon considering the assessee's objections, sustained the DAPE finding and the 30% attribution. It went further than the Assessing Officer on two additional PE theories. First, it found a fixed place PE under Article 5(2)(f) of the India-UK DTAA, reasoning that since CSOD India purchased software, recorded purchases and sales in its books, paid indirect taxes, raised invoices and collected payments, its premises consequently functioned as a selling place or sales outlet of the assessee. Second, it found a service PE under Article 5(2)(k), holding that the employees of CSOD India undertook sales, collection, remittance and related operations for the assessee in India. The DRP also referenced the Multilateral Instrument ("MLI"), observing that while its provisions were not applicable to AY 2020-21, the "spirit" of the MLI supported its conclusions. The final assessment order for AY 2020-21 was thereafter passed on 13/07/2023 in terms of the DRP directions, determining total income at Rs. 2,27,20,560.

5. Arguments Advanced Before the Tribunal

(i) Assessee's Position on DAPE

The assessee's representative pressed multiple factual and legal arguments. On the DAPE question, reference was made to clauses 10.3 and 15(m) of the agreement to demonstrate that neither party was authorised to bind the other. The accounting treatment in CSOD India's books — recording transactions as purchases from the assessee and sales to customers — was cited as consistent with a principal-to-principal reseller model. It was also pointed out that CSOD India had no sales or marketing department or employees engaged in sales or marketing functions for the assessee; the employee list furnished during assessment proceedings showed that CSOD India's personnel were engaged in support-service activities.