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2014 (6) TMI 941

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....to as the 'learned AO') in taxing income from supply of telecom equipment to Reliance Infocomm Limited ('Reliance'). 1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the finding of the learned AO that the Appellant constitutes a Permanent Establishment (hereinafter referred to as 'PE') in India in terms of Article 5 of the Double Taxation A voidance Agreement between India and the United States of America ('USA') (hereinafter referred to as the 'tax treaty'). 1.2 Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that 50% of the profits arising to the Appellant from supply of telecom hardware to Indian customers are attributable to the alleged PE in India. 2. Without prejudice and in addition, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the levy of interest under section 234B of the Act. 3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not adjudicating on the ground of the Appellant against....

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....ation of $ 39.88 million and $ 22.76 million respectively incurring a gross loss of 65% and 48% respectively for two years. Very few selling, general and administrative expenses have been shown in P&L a/c amounting to $ 8671 and $ 13331 for two respective years. From these facts the AO concluded that the appellant does not have any manufacturing or trading infrastructure. It does not have any financial or technological capability of its own. Under such circumstances, the AO asked the appellant as to how it procured such a huge order in the absence of any trading infrastructure to which it was replied that the Indian buyer agreed to the assignment of the contract to the appellant on the parent's guarantee. In view of this analysis the AO reached a conclusion that the appellant is only a paper company incorporated for the sole purpose of evading taxes in India accruing to the present company from the supply contract. 4.2 The assessee in its submissions dated 15.12.2006 with regard to its taxability argued the following points:- "A. The assessee opted to be taxed under the DTAA. B. The assessee contended that it does not have any PE within the meaning of Article 5 of the Indo U....

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....ment is accepted only after acceptance test is done. This test is done by the Nortel India on behalf of the assessee. The equipment remain in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done. 4.6 In the background of the aforesaid, AO concluded as under:- "The assessee company is having business connection in India in the form of Nortel Network India Private Limited (Nortel India) and the L.O. of M/s Nortel Network Ltd. The assessee company is having permanent establishment in India in the following form. a) Fixed place of the business permanent establishment in the form of Nortel India and the LO of Nortel Network under Article 5(1) of the Treaty. b) Under Article 5(2)(i) as the premises of Nortel India is used as a sales outlet or for soliciting and receiving the orders. This is evident from the service agreement itself that the premises of Nortel India are used as a sales outlet and for soliciting and for receiving the orders for the entire Nortel group and thus including the assessee. c) Installation P.E. d) Under Article 5(2)(k) as the expatriates supervises the project of installation in India in terms ....

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....two places in the whole business model which could be considered to be fixed. (i) the location of the subsidiary (Nortel India) and (ii) the fixed place where the equipment was assembled and installed. That since the assessee and Nortel Canada are one and the same. The LO building pertaining to Canadian Company constitutes fixed place PE of the assessee. Similarly, Nortel India will also represent PE as the business of the assessee is partly or wholly carried on through the premises of Nortel India Ltd. Ld. CIT(A) rejected the assessee's contention that neither LO (Nortel Networks Canada) nor Nortel India, a subsidiary of Nortel Network were at the disposal of the assessee. That this is an admitted fact that LO was opened for carrying out various activities after obtaining the approval of the RBI. Similarly, Nortel India, the subsidiary is a fixed place of business which carried out the following activities in relation to this project:- - The Indian entity is engaged in installation and commissioning of Nortel Nework's equipment and - The appellant has employed the services of the subsidiary only and nobody else for fulfilling its obligation of installation, commissio....

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....t cooperating with after sale service and also providing any assistance or service requested by the assessee. 5.3 Ld. CIT(A) further referred to the assignment agreement between Indian subsidiary (assignor), the assessee company (assignee), the parent company, Nortel Network Canada (the guarantor) and Reliance Infocom (the Purchaser). By referring to these assignment agreement, Ld. CIT(A) observed that it indicates that the contract initially signed by the Indian Companies gets assigned by the Indian Subsidiary to the parent (in Canada) and all the risks and responsibility are assumed by the parent company. That accordingly, the subsidiary will be considered to be a dependent of the assessee in terms of Article 5(4) of the Indio US DTAA, as the entire risks of the business are being borne by the assessee and, therefore, the subsidiary cannot be considered to be an agent of independent status. Ld. CIT(A) further rejected the assessee's reliance on the case of Motorola. Ld. CIT(A) concluded as under:- "In view of the above analysis, it is clear that the activities of the appellant in India constituted PE of the assessee under Article 5(1) fixed place PE, 5(2)(a) a place of manage....

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.... to the customer that the equipment is fault free and fully functional. However, this fact does not result in a delay in transfer of title of equipment and such tests are not indicative of the conclusion of sale in India. Reliance in this regard is placed on the decision of Hon'ble Delhi High Court in the case of Ericsson Radio Systems A.B. (343 ITR 470), wherein the Hon'ble Delhi High Court held that the performance of acceptance tests in India is not relevant to transfer of title in the equipment. This principle has also been upheld in the recent decision of the Hon'ble High Court in the case of Nokia Networks OY (dated September 7, 2012) (ITA Nos 359 of 2005, 1137 and 1138 of 2006, 503, 505, 506 512 and 1324 of 2007 and 30 of 2008), wherein it was observed that acceptance test is not a material event for passing of the title and risk in the equipment supplied. Additionally, it is evident from the terms of arrangement entered between the parties for delivery of the equipment under each contract, that title and risk in the telecom equipment passed to the Indian telecom operators outside India. The details of the Incoterms used in the contracts have already been submitted with the ....

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.... Further, revenues arising under such contracts have been earned by Nortel India and duly offered to tax its corporate tax returns; and  The mere presence of the word Nortel itself gives Nortel India the requisite standing in domestic and international markets to independently pursue business opportunities in the telecommunication arena. To substantiate, Bharat Sanchar Nigam Limited ('BSNL') has awarded approximately USD 500 million worth project to Nortel India for supply of telecom equipment and related installation services. Had Nortel India not been financially and technically capable of undertaking contracts in its independent capacity, BSNL would not have awarded such a huge contract to Nortel India directly. * Further, no evidence has been brought on record to substantiate the allegations made by the learned assessing officer. Even assuming arguendo that Nortel India is a dependent agent of the appellant in India, it still cannot be construed as a PE of the appellant in India since it: * has not exercised any authority to conclude any contracts on behalf of the appellant in India. Since Nortel India entered into the contract with Reliance as a separate, independent e....

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....uch guarantees to the Indian customers. The guarantees were provided merely to provide comfort to the Indian customers. This contention is also supported by the decision of the Honorable Special Bench of Delhi ITAT in case of Motorola Inc, Ericsson AB and Nokia Corporation. Given the above, on same set of facts, the Hon'ble High Court in the case of Ericsson Radio Systems A.B. ('Taxpayer') (343 ITR 470)has held that since the sale of the telecommunication equipment took place outside India and title in goods also passed outside India, the Taxpayer did not have a business connection in India. The same has been discussed in detail in Annexure 1. Nothwithstanding the above, even if it is assumed that Nortel India had the authority to conclude contracts on behalf of the appellant in India and the Reliance contract (being the only contract) was indeed concluded by Nortel India, then merely concluding one contract on behalf of the appellant should not result in constitution of a PE in India since, Nortel India would not be considered as habitually exercising the authority to conclude contracts in India. LO does not constitute a dependent agent PE of the appellant in India since: * The L....

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...., the same cannot result in taxation of income from supply of equipment since equipment supply (i.e. the taxable activity) was completed before the installation activities (i.e. the activity resulting in a PE) were commenced. This contention is supported by the decisions of Hon'ble Supreme Court in case of Hyundai Heavy Industries Co Ltd andIshikawajma Harima Heavy Industries Limited ('IHI ruling'). The appellant does not constitute a service PE in India since: Our arguments: We wish to highlight that the learned assessing officer/ learned CIT(A) has grossly erred in making the aforesaid allegation since the appellant did not constitute a service PE in India as it did not have any employees based in India. Further, the appellant was purely engaged in supply of telecom equipment to Reliance from outside India. Installation and other related services were undertaken by Nortel India under a separate contract arrangement with Reliance. Therefore, by no stretch of imagination the appellant can be considered to be rendering services in India. Hence, there was no requirement for any employee to visit India for the purpose of rendering any service in India. Hence, the said allegation is fa....

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....ia (as explained earlier in detail). Therefore, even if the contract had been assigned to Nortel Canada instead of the appellant, the position of taxability of revenues from supply of telecom hardware to Reliance would have remained the same. Notwithstanding the appellant's contention of being an independent and distinct entity from Nortel Canada, assuming arguendo, even if it is construed as a shadow company of Nortel Canada, the revenues arising from supply of equipment in India cannot be taxed in India in absence of Nortel Canada's PE in India. The same has been discussed as under: * Nortel Canada did not constitute a 'Fixed Base PE' in India on the following grounds:   Nortel Canada did not maintain any fixed place of business in India. Although the liaison office in India was set-up by Nortel Canada, we understand that the role of the liaison office was limited to carrying out representation activities on behalf of Nortel Canada, which are well within its permissible scope of activities; * Nortel Canada did not constitute a 'Service PE' in India on the following grounds:  Nortel Canada was not engaged in provision any kind of services and undertook only liaison ....

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....cannot be construed to have a PE in India. Hence, even if assuming that Nortel Canada and the appellant are one and the same entities, income arising from supply of telecom hardware to Reliance cannot be taxed in India in absence of any PE of Nortel Canada in India." 7. Ld. DR on the other hand made the elaborate arguments as under:- ARGUMENTS OF THE Ld AR BEOFRE THE HON'BLE TRIBUNAL * Assessee has contested the decision of the Ld CIT (A) upholding the findings of the Assessing Officer with regard to assessee having permanent establishment as per the provisions of Article 5 of the DTAA between India and the USA. * Pages 5 to 16 of the assessment order and 8 to 21 of the Ld CIT (A) order deals with the issue of permanent establishment of the assessee. * Arguments of the Ld AR are basically same as were made by the assessee before the Assessing Officer and the Ld. CIT (A). I fully rely on the assessment order and the order of Ld CIT (A). Further, on some of the issues my additional arguments are noted below. * Appellant has made a written submission before the Hon'ble Bench and the Ld AR's arguments in support of assessee's appeal were centered on this written submission. GENER....

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.... Equipments. It is the Vendor who shall provide to reliance the Equipment set forth in the BOQ. The Vendor obligation is to manufacture, supply (including inspection and expediting) and deliver the Equipment in and within the Optical Reliance Network as designated by Reliance in accordance with the Optical Equipment Contract. The Vendor was required to coordinate its efforts with all Subcontractors etc, to ensure compliance with any and all supply and logistics requirements. (Reference: paragraph 3.1.1 on page 7 of the PB). Therefore, it is not a case of import by Reliance but supply and delivery to Reliance. This is one of the many obligations which the assessee was required to perform but, in practice obligations have been undertaken by Nortel India and the assessee seems to be unaware of its obligations to deliver the Equipments at Reliance locations. Not only this, the Vendor was to supply and install at no cost or expenses to reliance the Test Bed Laboratory (Reference: paragraph 3.3.3 on page 9 of the PB). The assessee did not install this but got full payment for Equipments. The question is: who had set up the Test Bed Laboratory? It is Nortel India who did so and claimed co....

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....of property in vessel on payment of first installment is a piece of artistic drafting. The fact that title of equipment has passed in the case of the assessee in India, therefore, there is no doubt that income has accrued or arisen in India. Otherwise also, factual matrix of assessee's case is similar to the case of Hindustan Shipyard, therefore , also the revenue strongly claims that sale is completed only after the Link is ready for its intended use "deployed" (Reference paragraph 5.3 on pages 11 and 12 of the PB). * On page 2 of the written submission it has been claimed that it supplied hardware to Reliance on Principal to Principal Basis and title in hardware (all risks and rewards of ownership) was transferred outside India, i.e. before the hardware reached India. These claims are contrary to facts of the assessee's case. Firstly, the agreement does not refer to the terms like "Principal to Principal". The provisions dealing with these issues are given in General Terms and Conditions Agreement. The relevant provision says that, " Free and clear title to each product shall pass to Reliance (without any liens, encumbrances or security interests, including purchase money securi....

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.... prejudice to the above stand of the Revenue, it is submitted that, on page 4 of the written submission, the Ld AR has contended that as the assessee has opted to be taxed in India under the provisions of the DTAA and therefore, whether or not the appellant has a "business connection" in India is not relevant as regards taxation of income earned by it from supply of telecom hardware is concerned. It is noted that the assessee has not challenged the decision of the Ld CIT (A) upholding the finding of the assessing officer in relation to business connection of the assessee in India. Therefore, the issue of assessee having a business connection in India is not in dispute in the present appeal. Otherwise, also considering the facts and circumstances of the case and business activities of the assessee in India with regard to Equipment contract, the assessee not only has "business connection" in India but actually income accrues or arises to the assessee in India and such income is taxable as the provisions of Section 5(2) (b) read with section 4. Section 9 of the ITA deal with income deemed to accrue or arise in India, as in this case the income accrues or arises in India there is no ne....

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....ll for all the related services which are part of the Equipment supply. It is not a case of plain sale of readymade equipments but equipments made to order. Reliance is again placed on the decision of the Hon'ble Supreme Court in the case of Hindustan Shipyard. The consideration does not accrue or arise due to bare supply (though title passes in India) but due to each and every obligation stipulated in the contract. For this reason the milestones are stated in the contract and invoicing and payments are in installments (Reference: Paragraph 5 on page 10 of the PB). If the sale gets completed at one stroke then why the assessee cannot invoice and receive the payments immediately. The invoicing and payments were in installments as the Vendor was obliged to perform various operations timely in India in relation to Equipment supply. It is another matter that the assessee kept invoicing Reliance as per various milestones without doing anything in India as Nortel India was working for the assessee free of cost. Title in the Equipment, where was it transferred to Reliance? : The Ld AR has relied on page 5 of the written submission to support assessee's claim that title and risk in the te....

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....A). There are explicit provisions in the agreement dealing with TITLE AND RISK OF LOSS. The finding, if any, of the Ld CIT(A) on the issue of passing of title as referred by the assessee needs to be ignored/corrected in view of the correct fact as pointed above which were not considered by the Ld CIT(A), as the assessee did not point out the relevant terms to Ld CIT(A). * Payment for supplies is received outside India. The assessee has admitted that it received only substantial and not all payments before the acceptance tests. The agreements provide for payments in installments based on achieving the mile stones. * The Ld AR has contended that the Appellant's responsibility was limited to supply of equipment to Reliance and it had no role to play in installation, erection and commissioning of the equipment. Nortel India was responsible for the services under the Supply contract and not under the Optical Equipment Contract. The role in supply is not disputed by the Revenue but there were number of obligations of the Equipment supplier as per Optical Equipment Contract and General Terms and Conditions Agreement (which also equally apply to Equipment Contract and were made part of A....

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....uipped service centre in Mumbai (page 9 of the PB) and Test Bed (page 9 of the PB), Vendors Indian technical assistance centre (paragraph 6.1 on page 17 of the PB) and office of the Nortel India also constitutes PE as per paragraph 2 of Article 5 of the DTAA. Ld CIT (A) on page 15 of the order gave a finding that " all the presupply activities like feasibility survey, negotiation of term and conditions of supply, finalization of the documents and signing of the contract have been undertaken by Nortel India." Ld CIT (A) has further observed on paragraph 2 of page 15 of his order that, " this is an admitted fact that employees of group companies......are fulfilled". Therefore, office of Nortel India has been used for the business of the assessee. It is also mentioned that these offices as well as facilities continued for a sufficient period of time as the contract is of 10 years duration. Therefore, the assessee has a permanent establishment in the form of a fixed place through which its business in India is being carried on. * Claim, regarding Liaison Office as not being PE because of the approval by the RBI, is misplaced because the test is not a nomenclature based, as LO or no LO....

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....have a dependent agent permanent establishment in India for the following reasons: Nortel India is acting for the assessee in India and carrying out all the obligations as required to be performed in India under the Optical Equipment Contract and related General Terms and Conditions. Nortel India negotiated and finalized the contract. It has exercised authority to conclude a contract for the assessee. This fact in not disputed. It signed a contract on 8.6.2002 for the Optical Equipment Supply and on the same day assigned that to the assessee. There is no written agreement between the assessee and Nortel India (as far as the Revenue records are concerned) so their relationship of Principal and agent requires to be tested on the basis of known facts, circumstances and their behavior during the execution of the contract. Their relationship of principal and agent is implied. Nortel India could not have concluded a contract without an authority from the assessee to act on its behalf. It is a 10 year contract and the assessee has already made sales of about INR 1000 crores. Further, Nortel India is not an agent of independent status as Nortel India did not sign the contract in the ordina....

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....onclude contracts in India. This is inappropriate claim considering that it was a very big contract having an initial duration of 10 years. Such contracts are not negotiated daily. Whether concluding one contract or a number of contracts would result into creation of a PE depend on the commercial realities and also effects of such a contract. For example, the contracts are for sale of readymade items of smaller values and sale of such items on a regular basis would amount to carrying on a business then indeed number of contracts may be needed. But when a single contract is a long duration contract and involve regular supplies of items for a long duration for prices fixed in advance or varying with time then even a single contract would suffice the requirement. In the present case, the contract led to business proper of the assessee involving supply of equipments to Reliance for a period of 10 years and such supplies are based on the contract negotiated and concluded by Nortel India. There has been no other business of the assessee. Because of single contract Nortel US is carrying on its business in India since 2002 and for about 10 years. This single contract is the only source of ....

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.... a tax reason so as to avoid tax liability in the hands of Nortel India and shift all the payments out of India against which no expenses other than purchases are debited. This issue is explained in detail later. * In this case, Nortel India not only negotiated and concluded contract with Reliance but performed all activities in India which were the obligations of the assessee and in such a case permanent establishment exists in respect of all activities performed by Nortel India. In this regard it is worth noting a reference to paragraph 34 of the commentary on Article 5 to the OECD Model Convention which reads as "where the requirements set in paragraph 5 are met, a permanent establishment of the enterprise exists to the extent that the person acts for the latter, i.e. not only to the extent that such a person exercises the authority to conclude contracts in the name of the enterprise." * In the written submission, it has been claimed that Nortel India does not carry any activity on behalf of the appellant in India. This statement is factually incorrect for various facts narrated in this submission. * The assessee has also claimed that it neither had nor exercised any control ....

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....acts have been denied by the appellant during the course of appellate proceedings. The Ld CIT (A) has analyzed the facts further. Nortel Networks RIHC Inc was incorporated in Delaware on 7.6.2002. It got assigned a contract next day of its incorporation (resulting into supplies of about INR 1000 crores in seven years (duration of contract is 10 years)) courtesy Nortel Network Limited , Canada and Nortel India. It accounted sales in all these years without having any capital, infrastructure and human resources. For example during accounting years ending 31.12.2002 and 31.12.2003, its operating expenses other than purchases were USD 8,671 and USD 133,331 respectively. It apparently does not have any employee and its accounts (single page) were signed by employees of Nortel Network Singapore Pte Limited, another Nortel Group company. Under the Optical Equipment Contract with Reliance, it was obliged to fulfill several obligations but all were completed without even sending any employees to India or legally entering into a service agreement with Nortel India. All activities on its behalf were performed by Nortel India and for free. If we see 10 years activities of the assessee it remai....

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....ideration. It not only gifted contract but provided various services in respect of Equipment supply and fulfilled several obligations in respect of Equipment Contract but did not ask and got any compensation for the same. It was an international transaction as per the provisions of section 92B of the ITA. However, the assessee neither filed any return of income nor any transfer pricing report, as required under Section 92E of the ITA. Further, Nortel India also in complete disregard of Indian TP provisions, neither recognized assessee as its associated enterprise nor reflected the assignment transaction nor other transactions in the Form No.3CEB which was filed with the Income Tax Department. Additionally, as is discussed above in this written submission, Nortel India performed various obligations/activities in regard to optical purchase agreement but these transactions were not identified and no compensation was claimed and received. In absence of reporting of these transactions, which is statutorily required, the Hon'ble Bench is requested to take note of these issues and appreciate the difficulties of the tax department to identify and take necessary action in respect of such tr....

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....hat passed on the high seas.(Reference paragraph 44 on page 359 of the Paper Book 2 filed by the assessee). On the issue of permanent establishment, the revenue relies on the decision of the Hon'ble ITAT Delhi Bench in the case of National Petroleum Construction Company Ltd(ITA/ 5168/Del/2010) and Rolls Royce Plc(2011-TII-HC-DEL-INTL) 8. We have carefully considered the submissions and perused the records. 8.1 We find that as per the ground of appeal raised in this case, two effective issues arise (i) whether the assessee constitutes a Permanent Establishment in India in terms of Article 5 of the DTAA between India and the USA and (ii) if the answer of the above is in affirmative whether CIT(A) erred in holding that 50% of the profits arising to the assessee from supply of telephone hardware to Indian customers are attributable to the alleged PE in India. (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 hardware and software products for GSM Cellular Radio Telephones System. D....

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....ssessee 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 equipment represent the payment for works contract where entire installation and customis....

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..... That as per the global account of Nortel, the gross profit margin percentage of the assessee for the year 2003 is 42.6%. That specific deduction is to be allowed for other general and marketing expenses on reasonable basis. That 5% of the turnover was considered as the average rate of expenses incurred under this head. As regards other general and administrative expenses, AO held that the same was taken care by the specific deduction allowed u/s. 44C of the I.T. Act. Accordingly, AO computed the income as under:- Total supplies of hardware made to the Indian customers Rs. 227,54,95,290 Profit therefrom @42.6% Rs. 96,93,60,993 Selling, general and marketing expenses (as discussed) Rs. 11,37,74,764 Adjusted total income Rs. 85,55,86,229 Total Income after allowing HO Expenses u/s. 44C (5% of net adjusted income) Rs. 81,28,06,917     10.2 Upon assessee's appeal Ld. CIT(A) referred to the provisions of Indo-US DTAA. He observed that profit attributable to the PE has to be calculated in accordance with domestic law. He referred to Article 7(2) which provides that wherever correct profits attributable to the PE are incapable of determination or the determination ....

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.... is directed to allow expenses relatable to the PE from this figure in the same proportion which the total of such expenses bears to the revenues of Nortel Canada i.e. total amount of such allowable expenses divided by total revenues of Nortel Canada multiplied by Indian turnover. He held that Net operating margins of Nortel Canada adjusted for the allowable expenses as indicated above would be the correct profit margin for arriving at the taxable profits. 10.6 Ld. CIT(A) further referred to the assessee's reference to the other cases where the attributed profits were determined 20% in the case of Nokia and 35% in the case of Rolls Royce. However, CIT(A) held that the income of the PE have to be computed in the facts of each case. In this regard, ld. CIT(A) concluded as under:- "In the appellant's case it is seen that the equipment has been supplied from overseas. Thus except for manufacturing and shipment of the equipment from overseas all the other activities i.e. pre supply and post supply activities of feasibility studies, sight preparation, negotiations, signing of the contract, installation, testing, and making the equipment ready for its intended use have been carried out ....

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....ing of the supply and installation contracts in India and an additional 10% of the profits have been attributed towards network planning and contract negotiations.Hence, following the Hon'ble Special Bench's ruling, maximum of 20% attribution can be upheld in the instant case. * Without prejudice to the above, we wish to highlight the position being taken by the income tax department in case of a number of non-resident assessees engaged in same line of business as the Appellant. While alleging that such nonresidents have a PE in India on a similar basis as in case of the Appellant, the income tax department has attributed much lower percentage of profits to the alleged PE. The attribution of profits in such cases has been limited to 20%-35% as stated in the table below. We wish to submit that once the department has agreed on a particular position in the case of some assessees, it cannot take a different position, which is unfavourable to the other assessees engaged in the same line of business where a similar allegation has been made in alleging a PE. Name of the non-resident assessee Attribution percentage as per assessment order Observation of assessing officer as per assess....

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....s that only 20% of the profits earned by the assessee can be attributed. The Revenue has received a copy of the written submission file by the assessee on 28.02.2014. The Revenue has filed a detailed written submission as appearing on pages 126 to 147 of the Paper Book filed by the Revenue during the course of the hearing. This written submission has clearly brought out various operations/activities that the assessee was obliged to undertake in India in respect of the supply of equipments. It has been submitted that for performing these obligations the assessee was to incur various costs of which consideration was included in the price of equipments. All these costs have been incurred by Nortel India (Indian company) and the assessee has not paid any remuneration to Nortel India in this regard. This has resulted into super profits to the assessee without incurring any cost and at the same time these expenses have been claimed by Nortel India. The assessee, unfortunately, continues to claim that title of equipments was passed outside India. This is factually wrong. In this regard kind reference is invited to pages 7, 8, 13 and 14 of the Revenue Submission (pages 133,134, 138 and 1....

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....itions Contract were performed in India. These are stated in detail in the earlier written submission filed by the Revenue. As the title got transferred in India, the sale took place in India and profits in regard to sale are taxable in India (CIT Vs Ahmedbhai Umarbhai and Co [1950] 18 ITR 472 (SC). The claim of the assessee that the Optical Equipment Assignment and Assumption agreement required assessee to make only sales and all other activities were to be performed by Nortel India and they have been paid separately. This is factually wrong claim and contrary to facts. All the obligations under these agreements were assigned to the assessee and this has been explained in the earlier written submission filed by the Revenue. It has been explained in detail in the written submission and oral arguments that all these obligations were to be performed by the assessee and the consideration for the same is included in the sale price. Accordingly, the profit embedded in the sale price is required to be attributed to all the operations that were carried out in India. It is the case of the lower authorities and explained in detail in the written submission filed by the Revenue that the as....

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....re minimal in comparison to case of the assessee. The assessee has claimed that none of its employees ever visited India and no employees are based in India, which means that all the obligations were performed by Indian company (Nortel India). The assessee has not remunerated Nortel India. It has not carried out any transfer pricing analysis of its transactions with Nortel India and therefore as held by the Hon'ble Supreme Court in the case of Morgan Stanley and Co. 292 ITR 416 (SC) entire profits are attributable to PE are taxable in India. There is no transfer pricing analysis done by the assessee in the present case. The assessee received the contract free of cost just two days after its incorporation. The Hon'ble ITAT in the case of Rolls Royce Plc (ITA No.493/2008) had attributed 35% of global profits to PE. This order of the tribunal is confirmed by the Hon'ble High Court (339 ITR 147 (Delhi). It is not out of place to mention that in case of Rolls Royce also there were minimal activities in India and also title in goods passed outside India. The Ld AR made a statement at the Bar that the Hon'ble High Court has set aside the order in case of Rolls Royce, this statement is fac....

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....e to the PE. The AO in this regard has only allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. 14.2 We find that Ld. CIT(A) has held that AO was justified in resorting to Rule 10 as stated hereinabove. We have already concurred with the same. We find ourselves in agreement that the CIT(A)'s proposition 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 c....

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....subject to deduction of tax at source. In this regard, ld. Counsel of the assessee has inter-alia relied upon the following case law of the Hon'ble High Court:- - DIT vs. Jacabs Civil Incorporated; Mitusibishi Corpn and Ors. 330 ITR 578 15.2 Per contra Ld. DR submitted that Hon'ble Delhi High Court in the case of Jacabs Civil Incorporated (Supra) in paragraph 6 of the decision has held that interest u/s. 234B is not chargeable after establishing the response to a query, that the payee has no role in such a lower or no deduction tax. That in the present case, assessee has full role in no deduction of tax, as its position has always been that receipts are not taxable in India. Ld. DR further stated that facts in the present case are similar to latest decision of Hon'ble Delhi High Court in the case DIT vs. Alcatel Lucent Inc. vide ITA No. 327/12 and others vide order dated 7.11.2013. In rebuttal Ld. Counsel of the assessee submitted that assessee case is more related to facts in the case of Jacabs (Supra) and not Alcatel Lucent (Supra). He further submitted that decision in a case has to be read with the facts of the facts. 15.3 We have considered the submissions and perused the r....

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....cted. 16. During the course of hearing, Revenue has also raised following addition ground which reads as under:- "Whether the assessee is entitled to the benefits of India-USA Double Taxation Avoidance Convention (DTAC) in view of the provisions of Article 24 of the DTAC which restricts the benefits of the treaty to companies in which more than 50% of beneficial interest / shares is /are owned, directly or indirectly, by one or more individual residents of one of the Contracting States, considering the fact that the assessee is a 100% subsidiary of M/s Nortel Networks Inc. which in turn is a 100% subsidiary owned by Nortel Networks Ltd., Canada, and hence effectively more than 50% of beneficial interest / shares in the assessee is / are indirectly owned by M/s Nortel Networks, Canada, a company incorporated in Canada and not a resident of USA." 17. The Ld. Departmental Representative pleaded that this is a pure legal issue and the Revenue may be allowed to raise this ground as no new facts are to be brought on record. 18. The Ld. Counsel of the assessee on the other hand strongly opposed the admission of the additional ground. He submitted that revenue has raised this ground wh....