[Opinion] Commercial Reality Prevails Over Labels in Taxation

Gopal Nathani & Raji Nathani – [2026] 184 taxmann.com 322 (Article)

Can what was done in substance in India be neutralised by how it was drafted on paper abroad. In the notable case of Oracle Systems Corporation v. Addl. DIT [2026] 184 taxmann.com 34 (Delhi-Trib.) [02-03-2026], Oracle Systems Corporation (a US entity) entered into a Software Support Services Agreement with its 100% Indian subsidiary, Oracle India Pvt. Ltd. (OIPL). Under this agreement, the US entity received 56% of software revenue from OIPL, which it offered to tax at a 15% rate as “royalty” under the Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) initially sought to tax this income at 42.23% by treating OIPL as a Permanent Establishment (PE) of the US parent. However, the Income Tax Appellate Tribunal (ITAT) ruled there was no PE in India, citing a lack of evidence that the US company had disposal of, access to, or control over OIPL’s premises. Consequently, the tribunal held that no business profits could be attributed to a PE or taxed in India in the hands of the US Corporation.

1. The Revenue Structure

Despite the tribunal’s ruling, a factor that remains under-highlighted is the sheer scale of revenue transfer in this case. The US Corporation captures 56% of gross revenue as royalties, while simultaneously maintaining entitlement to 100% of profits via dividends. This leaves OIPL with only 44% of revenue, essentially to cover local infrastructure and operating expenses. This structure—combining 100% ownership with a 56% revenue transfer—suggests both a Sufficient Economic Connection (SEC) and a Significant Economic Presence (SEP) in India under Explanation 2A to Section 9(1).

2. SEP and POEM

The Income Tax Act provides two critical provisions for such scenarios under section 6(3) and section 9(1) Explanation 2A reading as under:

Explanation 2A. For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean:

(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

Provided that the transactions or activities shall constitute significant economic presence in India, whether or not,—

(i) the agreement for such transactions or activities is entered in India;

(ii) the non-resident has a residence or place of business in India; or

(iii) the non-resident renders services in India – Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.]