ITAT Remands PE Dispute Involving UK Software Company to AO:

Cornerstone Ondemand International Limited is a company incorporated in the United Kingdom which is engaged in developing cloud-based learning and talent-management software. Its Indian group entity, Cornerstone Ondemand Services India Private Limited (CSOD India), provides software-related support services and also acts as a reseller of software products to Indian customers.

For Assessment Year 2020-21, the assessee filed its return declaring nil income taxable in India. However, the AO treated CSOD India as the assessee’s dependent agent permanent establishment (DAPE) and attributed 30% of software sales amounting to Rs. 7,57,35,200, resulting in an addition of Rs. 2,27,20,560. The DRP upheld the proposed attribution and additionally held that the Indian entity constituted a fixed place PE and a service PE.

The AO subsequently passed final assessment orders 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 Tribunal observed that the authorities below had not adequately examined the actual contractual arrangements and the functions performed by CSOD India during the relevant assessment years. It emphasised that the existence of a PE must be determined by examining the substance of the arrangement and the actual conduct of the parties, rather than relying merely on contractual descriptions or accounting entries.

The Tribunal held that the AO must examine the relevant customer agreements and determine who fixes the prices charged to customers, bears the credit risk, assumes contractual obligations and remains responsible for performing those obligations. It also directed verification of the customer details furnished by CSOD India, including the assessee’s contention that no new customers were acquired during the relevant year and that the agreement with Yes Bank had been entered into in an earlier financial year.

The Tribunal remitted the issue of PE existence and profit attribution to the AO for fresh examination in accordance with law.