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TMI Blog2014 (7) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... e the core activities of the assessee resulting in generation of income to the assessee and they cannot be considered to be preparatory and auxiliary - the contention of the assessee that it do not have PE in India is rejected. Attribution of profits - How much of the profits arising to the assessee from supply of telecom hardware to Indian customers is attributable to the PE in India – Held that:- The decision in assessee’s own case for the earlier year has been followed that CIT(A) has held that AO was justified in resorting to Rule 10 - when profits are computed under Rule 10 after applying the profit rate, the expenses pertaining to the PE have to be allowed as deduction - CIT(A) has held that income of the PE has to be computed on the facts of each case – CIT(A) has held that he was of the view that an attribution of 50% of the profits to the activities of PE in India would be a reasonable attribution. Hardware supply contract was a part of the turnkey contract which involved supply, installation, testing and commissioning etc. - Activities of M/s Nortel India and that of LO of Nortel Canada and services of expatriate workers have also been taken as part of the executio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (hereinafter referred to as 'PE') in India. c) holding that Research and Development(hereinafter referred to as 'R D') expenses are not allowable as deduction while applying profit margins of Nortel Networks Limited., while computing taxable income of the alleged PE in India. 2. The learned AO has erred on facts and circumstances of the case and in law in initiating penalty proceedings under section 271 (1)( c) of the Act against the Appellant. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case. 3. The assessee M/s Nortel Networks India International Inc. is a company incorporated in USA. It is a group concern of M/s Nortel Group, which is a leading supplier of hardware and software products for GSM Cellular Radio Telephones System. M/s Nortel Networks India Pvt. Ltd., a group company entered into contract for supply of optical hardware and relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to the taxability of receipts against the supply of hardware on net income basis. He noted that the assessee has submitted that Research and Development expenses be allowed on proportionate basis. AO noted that assessee could not furnish any evidence that expenses incurred under the head Research and Development can be specifically linked to the hardware supplied to the Indian customers. Hence, AO held that assessee s submissions was mere bald assertion without any supporting evidence to substantiate its claim of allowability of such expenses. AO further observed that Research and Development is mainly and mostly on the development of software. Telecom equipments are actually the carriers of advanced cutting edge software which is the core or the heart of Telecom Industry. That assessee could not produce any evidence to prove whether any R D expense has been incurred on the hardware component and the quantum of expenditure if any. The AO noted that despite given opportunity assessee could not furnish the relevant documents. Without prejudice to the above, AO held that R D expenditure are in capital in nature and must be capitalised. Hence, AO held that in his view claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and Development expenditure the Department was in appeal before the ITAT. The DRP chose to confirm the disallowance of Research and Development expenses. 4. Now against the above order the assessee appealed before us. 5. We have heard both the counsel and perused the records. 6. We find that assessment in this case has been framed by referring to the assessment of earlier years. Both the counsel have also agreed that the ratio of the earlier decision may be applied here also. We find that in assessee s own case for asstt. year 2003-04, 2004-05 and 2005-06 vide Order dated 13.6.2014 in ITA Nos. 1119, 1120 1121/DEL/2010 and I.T.A. Nos. 1153, 1154 1155/DEL/2010 for A.Yrs. : 2003-04, 2004-05 2005-06, we have considered the identical issue. Since the facts are identical, we do not find any reason to differ from earlier conclusions. Our conclusion as regards the issue dealt in the said order are as under:- (i) Whether the assessee constitutes a Permanent Establishment in India:- 8.2 The assessee Nortel Network International Inc. Corporation Ltd. is a company incorporated in the USA. It is a group concern of M/s Nortel Group, which is a leading supplier of har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere completed overseas and installation was done under a separate contract. The assessee through Nortel India and LO approached the customer, negotiated the contract, bagged the contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted. The equipment remain in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done. 8.8 It is also an admitted fact that employees of group companies did visit in India in connection with Project in India. Thus, this indicates the employees of the group companies did carry out business of the assessee through the premise of LO or the premise of the subsidiary. Thus, the entire business enterprise activities of the assessee is managed by the subsidiary in India and the requisite supply is made from abroad. The contract does not only need loading of the equipments in the ship, but includes number of activities which are carried out in the Indian territory and the compensation / remuneration for that is also included in consideration. We agree with the Ld. CIT(A) that the compensation which has been represented to a sale consideration for the equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that when profits are computed under Rule 10 after applying the profit rate, the expenses pertaining to the PE have to be allowed as deduction. Assessee has contended before the Ld. CIT(A) that in other cases attributed profits was determined @ 20% in the case of Nokia and 35% in the Rolls Royce. In this regard, Ld. CIT(A) has held that income of the PE has to be computed on the facts of each case. Ld. CIT(A) has held that he was of the view that an attribution of 50% of the profits to the activities of PE in India would be a reasonable attribution. 14.3 In this regard, we note that assessee has also contended in the written submissions that Income Tax Department in case of several non-resident, assessee engaged in the same line of business on the ground that non-residents have PE in India, has attributed much lower profit. In such cases attributed profit has been limited to 20% to 35%. In this regard, instances of ZTE Corporation and Huawei Technologies Co. Ltd. have been cited. Ld. DR in this regard has argued that they were on the facts of these cases. He also submitted that the submission of Ld. Counsel of the assessee in this regard remains to be properly corroborated. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for all expenses which is relatable to the PE of the assessee. Now before the AO in this regard assessee has claimed selling and administrative expenses and R D expenses. The selling and administrative expenses were allowed by the AO. However, R D were not allowed by the AO. No discussion in this regard was also made in the order of the AO. Ld. CIT(A) found that this is not proper approach. He observed that AO has not passed a reasoned order and AO has not given proper opportunity to the assessee. Ld. CIT(A) therefore, allowed the R D expenses. We find that it is admitted that AO in this case has not verified the allowability of the expenditure. He has specifically asked the Ld. CIT(A) that the same will be done if directed by him. It is not a case that the Ld. CIT(A) has himself examined the nature of these expenses and examined the allowability of these expenses as to whether the same were incurred wholly or exclusively for the purpose of business. As a matter of fact that Ld. CIT(A) has not even mentioned about the quantum of R D expenses in his appellate order. There is no mention about the examination about nature of expenses. In these circumstances, in our considered opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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