TMI Blog2014 (4) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... o accrue and arise u/s 9 of the Act – Income of the Permanent Establishment – Held that:- The assessee was unable to controvert the finding recorded by the AO as well as DRP - the Assessing Officer has clearly recorded the finding that the business of the assessee in India is being conducted with active involvement of the employees of Huawei India - Such employees of Huawei India alongwith the employees of the assessee have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the assessee with its Indian customers - the employees of Huawei India form the sales team of the assessee - Such employees have habitually secured orders in India wholly or almost wholly for the assessee - Various documents found during the course of survey in the form of agreements, purchase orders, copies of contract prove the active involvement of employees of Indian company in the conclusion of contracts on behalf of the assessee - All the facts recorded by the AO and upheld by the DRP have not been controverted – this, there is no reason to interfere with the order of DRP – Decided against Assessee. Allocation of 30% of total supplies towards software - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;Hon'ble DRP') erred in passing directions under Section 144(C) of the Income-tax Act, 1961 (the 'Act') confirming the Draft Assessment order. On the facts and circumstances of the case and in law, the learned AO erred in assessing the income of the appellant at Rs.43,75,26,310 as against the returned income of Rs.82,69,535. 2. The learned AO erred in proposing and the Hon'ble DRP further erred in confirming the addition of Rs.42,92,56,775 to the appellant's returned income of Rs.82,69,535. 3. On the facts and circumstances of the case and in law, the learned AO and the Hon'ble DRP erred in making several allegations, observations and assertions based on mere conjectures and surmises, without any relevant material on record. Inter-alia the incorrect assumptions/inferences made by the Hon'ble DRP are as under: (a) The learned AO was justified in assuming jurisdiction under Section 147 of the Act by way of issue of notice under Section 148 of the Act. (b) The appellant has a Permanent Establishment ('PE') and Business Connection ('BC') in India in the form of Huawei Telecommunications (India) Co. Pvt.Ltd. ('Huawei Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment (PE) in India and the income that has accrued to the assessee from the supply of telecommunications network equipment during the previous year is taxable in India. In view of the above, the Assessing Officer issued notice under Section 148 of the Income-tax Act, 1961. In response to the notice under Section 148, the assessee filed the return of income on 30th July, 2009 disclosing total income of Rs. 82,69,535/-. That the disclosure of income by the assessee itself in response to notice under Section 148 clearly establishes that the assessee had a taxable income which it did not disclose voluntarily. In view of the above, the belief of the Assessing Officer, that income of the assessee had escaped assessment due to non-filing of the return by the assessee, is well-founded. We find that learned DRP rejected the assessee's ground against the initiation of proceedings under Section 148 with the following finding:- 5.1 The second objection raised by the assessee is that notice u/s 148 issued to the assessee is bad in law. It is contended that to assume jurisdiction u/s 148, it is necessary to come across some fresh facts or evidence forming basis of reason for belie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that existence of appellant's wholly owned subsidiary, Huawei India, creates a BC of the appellant under Section 9(1)(i) of the Act. 5.2 On the facts and circumstances of the case and in law, the learned AO erred in proposing and the Hon'ble DRP further erred in confirming that the income of the appellant is assessable to tax under the Tax Treaty on the ground that the appellant constitutes a PE in India, viz : a) Fixed place PE under Article 5(2)(c) read with Article 5(1) of the Tax Treaty; b) Installation PE under Article 5(2)(j) read with Article 5(1) of the Tax Treaty; c) Service PE under Article 5(2)(k) read with Article 5(1) of the Tax Treaty; d) Dependent Agent PE under Article 5(4) of the Tax Treaty. 6. On the facts and circumstances of the case and in law, the learned AO erred in proposing and the Hon'ble DRP further erred in confirming the action of learned AO of attributing income to the alleged PE of the appellant. 6.1 On the facts and circumstances of the case and in law, the learned AO as well as the Hon'ble DRO erred in not appreciating that since no part of activity relating to sale of network equipment was carried out in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place of business referred above forms the core of selling activities and cannot be termed as of the preparatory or auxiliary character. 8.3 The employees of Huawei India forms the sales teams of the assessee, such employees have habitually secured orders in India, wholly or almost wholly for the assessee. The various documents in the form of agreements/purchase orders/copies of contracts also proves the active involvement of the employees of Indian company in the conclusion of contracts on behalf of the assessee. Huawei India is economically, technically and financially all dependent upon Huawei China. Therefore, Huawei India also constitutes the agent other than an agent of independent status of Huawei China. This results into the creation of the dependent agent PE as per the provisions of the tax treaties and business connection as per the provisions of Explanation 2 to Section 9(1)(i) of the Income Tax Act, 1961. 9. The assessee raised the objection before the DRP. However, the DRP rejected the assessee's objection and held that the Assessing Officer is justified in holding that the assessee was having a PE as well as business connection in India. The relevant findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent Agent PE. The AO has also reproduced the relevant extracts from the statements of employees recorded during the survey, which amply prove the existence of assessee's PE in India. As such, the AO is justified in holding that the assessee has PE as well as business connection in India and its income is taxable both under the Act as well as the DTAA. 10. At the time of hearing before us, the learned counsel for the assessee was unable to controvert the finding recorded by the Assessing Officer as well as learned DRP. The Assessing Officer has clearly recorded the finding that the business of the assessee in India is being conducted with active involvement of the employees of Huawei India. Such employees of Huawei India alongwith the employees of the assessee have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the assessee with its Indian customers. He has also recorded the finding that the employees of Huawei India form the sales team of the assessee. Such employees have habitually secured orders in India wholly or almost wholly for the assessee. Various documents found during the course of survey in the form of agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 134 TTJ 257). 12. At the time of hearing before us, it is submitted by the learned counsel that the assessee derives income from supply of telecommunication network equipment. That there was one consolidated price for supply of the network equipment. That the Assessing Officer artificially allocated the revenue from the supply of equipment between two portions i.e., the hardware/equipment supplied and the software which is embedded with the hardware/equipment. That the Assessing Officer allocated the receipt from supply of equipment between hardware and software in the ratio of 70% for hardware and 30% for software. In respect of supply of hardware, the Assessing Officer estimated operating profit and then attributed 20% towards the PE in India. However, in respect of the alleged software portion, he treated the receipt from software as income from royalty and held that as per India-China Tax Treaty, the income from royalty is to be charged to tax at the rate of 10%. It is contended by the learned counsel that there was no separate supply of software. Software is embedded with the hardware/equipment and is necessary for the operation of the equipment. The assessee has charged a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also that separate specification of hardware and software supplied was necessary because of the differential customs duty payable. The learned counsel referred to the agreement between the assessee and the buyer of the equipment and pointed out that there was lump sum consideration for the contract of supply of equipment and bifurcation is only in the schedule, that too, for the purpose of payment of customs duty. He also referred to paragraph 25.8 of the contract between the assessee and Sterlite Optical Technologies Ltd. so as to point out that in respect of software, the buyer is granted only non-exclusive, non- transferable and non-sub licensable license to use the software. He, therefore, submitted that the decision of Hon'ble Jurisdictional High Court in the case of Ericsson A.B., New Delhi (supra) and also in the case of DIT Vs. Infrasoft Ltd., vide order dated 22nd November, 2013 in ITA No.1034/2009, would be squarely applicable. 15. We have carefully considered the submissions of both the sides and perused relevant material placed before us. After considering the facts of the case and the arguments of both the sides, we are of the opinion that the issue is squarely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the revenue that any right contemplated under section 14 of the Copyright Act,1957 stood vested in this cellular operator as a consequence of the supply contract. Distinction has to be made between the acquisition of a 'copyright right' and a 'copyrighted article'. 16. Similar view is expressed by Hon'ble Jurisdictional High Court in the case of Infrasoft Ltd. (supra), wherein their Lordships held as under:- 86. The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft‟s copyright and other proprietary notices. All copies of the Softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for control, operation and performance of the equipment. As per page 12 paragraph 5.1, the total contract price of supply of equipments for Phase I by the supplier is USD 15,749,438.97. Thus, there is a consolidated price for the supply of equipment which consists of hardware and software both. Page 14 of the agreement paragraph 5.8.4.3 and 5.8.4.4 provide for the payment schedule which reads as under:- 5.8.4.3 Second payment of 20% of the cost of equipment (hardware) and 50% of the cost of equipment (software) on 60th day from presentation of following documents after completion of validation by MTNL Testing team. Following document will be attached for negotiation of this payment. (i) Validation Test Certificate issued by MTNL. In case of deduction of Liquidated damages by MTNL, the buyer will submit the documentary proof issued by MTNL of such deduction to Bank and the same will be adjusted from the second payment. Second payment shall be made only after first payment is released to Supplier. 5.8.4.4 Third Payment of 10% of cost of Equipment (Hardware) and 30% of Equipment (Software) shall be paid on 60th day from submission of following documents - i) Accepta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only one contract for supply of equipment which included hardware and software both and, therefore, the income from supply of the equipment is to be assessed as business income arising from the assessee's business connection/PE in India. We, therefore, direct the Assessing Officer to rework out the assessee's income accordingly. 23. Ground No.8 of the assessee's appeal reads as under:- 8. On the facts and circumstances of the case and in law, the learned AO erred in levying interest under Section 234A and 234B of the Act. 8.1 On the facts and circumstances of the case and in law, the learned AO has erred in not following the decision of Hon'ble Delhi High Court in the case of Jacobs Civil Incorporated (2010) ITA No.491.2008(Del). The learned AO has erred in levying interest under Section 234B of the Act on the appellant. 24. At the time of hearing before us, the learned counsel argued only with regard to interest under Section 234B and no argument was advanced against the chargeability of interest under Section 234A. So far as interest under Section 234B is concerned, it is submitted by the learned counsel that the assessee is a non-resident and from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia so as to be liable for tax on its Indian income. If this was the stand of the assessee, it is not impermissible or unreasonable to visualise a situation where, the assessee would have represented to its Indian telecom dealers not to deduct tax from the remittances made to it. On the contrary it would be surprising if the assessee did not make any such representation; such a representation would only be consistent with the assessee's stand regarding its tax liability in India. Moreover, no purpose would have been served by the assessee taking such a categorical stand regarding its tax liability in India and at the same time suffering tax deduction under Section 195(1). Therefore, in our opinion, even though there may not be any positive or direct evidence to show that the assessee did make a representation to its Indian telecom dealers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed. The Tribunal ought to have accorded due weightage to the strong possibility or probability of such a request having been made by the assessee to the Indian payers since otherwise the denial of its tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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