TMI Blog2014 (6) TMI 941X X X X Extracts X X X X X X X X Extracts X X X X ..... t company.In the background of the aforesaid discussion, we agree with the Ld. CIT(A) that activities of the assessee in India constitute PE of the Assessee in terms of Article 5 of the Indo US DTAA. The activities carried out by the PE are the core activities of the assessee resulting in generation of income to the assessee and they cannot be considered to be preparatory and auxiliary and therefore, the contention of the assessee that it do not have PE in India is rejected. Profits arising to the assessee from supply of telecom hardware to Indian customers is attributable to the PE in India @50% as per CIT(A) - Held that:- We are in agreement with the AO that the accounts of the assessee furnished in the assessment proceedings have no sanctity. The same were not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reasons, that it has been designed as such to avoid taxation in India. Hence, we agree that for all purposes the accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Hence, AO’s reference to the global accounts of the Nortel and gross profit margin percentage as 42.6% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the initiation of the penalty proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 US DTAA, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quipment 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 installa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it could be seen that there are 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee but also at the same time acted as a sale outlet 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation and commissioning activities is only for giving a further reassurance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dologies in order to develop expertise in providing installation services to its customers. 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect the above position since the guarantor did not receive any compensation in lieu of providing such 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 contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the installation activities of Nortel India under Reliance contract constitute a PE of the appellant in India, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from supply of telecom hardware to Reliance cannot be taxed in India in the absence of any PE of Nortel Canada in India (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Canada from supply of telecom hardware to Reliance can be taxed in India. In view of above, Nortel Canada 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer to Optical Equipment Agreement and General Terms and Conditions Agreement which are the relevant agreements in respect of 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 fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been so if the property in vessel had already passed to the owner. The court further says that Article 15 which talks about passing 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 clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of business connection in its Grounds of Appeal; therefore, the Hon ble Tribunal is not required to adjudicate this issue. Without 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant in case of the assessee as title in goods passes in India. Otherwise, also the assessee is receiving a price for not only the Equipment but all 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st knows its agreement must have cited and informed the relevant provisions in the agreement as available on page 130 of the Paper Book to the Ld CIT(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 sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which its business is being carrying out. Accordingly, it has a permanent establishment as per the provisions of Article 5(1) of the DTAA. Further, fully equipped 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. Cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as dependent agent of the assessee. To respond to this claim, it is important to refer to paragraph 4 of Article 5 of the DTAA. The Assessee is indeed deemed to 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on behalf of the appellant should not result in constituting a PE in India since, Nortel India would not be considered as habitually exercising the authority to conclude 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated the same as commercial reason. The Ld AR also referred to commercial reason and not as a tax planning device. However, the pure motive to assign the contracts was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this statement from the Internal Revenue Service of the USA. Pages 9 to 12 of the assessment order highlights this issue. Ld CIT (A) has observed at page 5 of his order that none of these facts 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf supplies of more than 227 crore were made. The sale of such a valuable contract must have fetched a fortune but Nortel India gifted this contract to the assessee without asking and receiving any consideration. 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, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Tribunal).In that case the issue relating to title and risk is stated on paragraph 13 of the relevant contract. The Hon ble High Court decided the issue solely based on the fact of property in the Goods that 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 Networ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LO building pertaining to Canadian Company constitutes fixed place PE of the assessee. 8.7 We do not agree with the assesee s contention that sales were 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons cannot be definitely ascertained hence following the provisions of Rule 10, the financial statement of the assessee has to be recast to arrive at the correct percentage of profit that is likely to accrue to the assessee from its Indian operations. 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 ₹ 227,54,95,290 Profit therefrom @42.6% ₹ 96,93,60,993 Selling, general and marketing expenses (as discussed) ₹ 11,37,74,764 Adjusted total income ₹ 85,55,86,229 Total Income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble expenses to the PE. Ld. CIT(A) accepted that when profits are computed under Rule 10 after applying the profit rate, it is accepted that all the expenses relatable to the PE, have to be allowed deduction. Ld. CIT(A) noted in the preceding paragraph application of global gross profit margins of Nortel Canada to the assessee s Indian turnover has been upheld. Ld. CIT(A) further directed that after arriving at the figure of gross profit in the manner discussed above, AO 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on the judgment of the Hon ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd (288 ITR 408). Without prejudice to the above, even where it is held that some portion of the Appellant s income is taxable in India, the formula laid by Hon ble Special Bench of Delhi ITAT in case of Nokia Corporation(95 ITD 269) needs to be followed which is based on similar set of facts. The Hon ble Special Bench of the ITAT has attributed 10% of the profits towards signing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant before the Hon ble ITAT on this issue are complete and sufficient for the Hon ble Bench to adjudicate the issue of attribution of profits to the alleged PE on merits of the case. Hence, it is requested that the Hon ble Bench members decide the issue based on facts placed on record and merits of the case, and not remand back this issue to the learned assessing officer. 13. Ld. DR on the other hand made the following arguments:- The Revenue is thankful to the Hon ble Bench for asking us to file a written submission. This written submission also take into account the written submission filed by the assessee in regard to citing the cases of other assessee s to support its arguments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tle decides the place of accrual of income. In this case it is explicitly clear that title in goods passed in India therefore income accrued in India. The place of receipt of sale price is immaterial as for as taxability under Section 5(2) (b) is concerned. Further, receipt of payment by a non-resident outside India is immaterial (Performing Right Society Limited and Another Vs Commissioner of Income Tax and Others 106 ITR 11(SC). The claim of the assessee that all crucial functions performed overseas is factually wrong. Only manufacturing took place outside India. All the operations relating to sale and all other obligations stated in the Optical Equipment Contract and General Terms and Conditions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. Network was planned in India; contract was negotiated and signed in India. The assessee got contract assigned by Nortel India without incurring any cost. The assessee was obliged to establish a test bed laboratory, supply spare and replacement parts. Perform testing services Maintain a fully equipped service centre in Mumbai. Ensure a material management system Provide warranty services Purchase orders were received in India . Considering that all the significant operations in relation to sale and after sale services were to be performed by the assessee in India a high portion of the profits as attributed by the AO is fully justified. The operations in the case of Nokia were 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne by the AO in this case. 14. We have heard both the counsel and perused the records. 14.1 We are in agreement with the AO that the accounts of the assessee furnished in the assessment proceedings have no sanctity. The same were not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reasons, that it has been designed as such to avoid taxation in India. Hence, we agree that for all purposes the accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Hence, AO s reference to the global accounts of the Nortel and gross profit margin percentage as 42.6% is accepted. Now we come to the issue as to how much of the profit is attributable 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 pertainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice. 14.6 In our considered opinion and in the background of the aforesaid discussion and precedent, we hold that Ld. CIT(A) is justified in attributing 50% of the profit to the PE i.e. assessee. Accordingly, we do not find any infirmity in the order of Ld. CIT(A). Hence, we uphold the same. 15. Another issue raised for A.Y. 2004-05 by the assessee is that Ld. CIT(A) erred in upholding the levy of interest u/s. 234B of the I.T. Act. 15.1 On this issue assessee has submitted that as per the provisions of the Act only an assessee who is liable to pay advance tax as defined u/s. 208 of the Act, defaults in doing so, will the provision of section 234B be attracted. Further the liability to pay the advance tax does not arise where the income is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 liability on its Indian income would have served little purpose for the assessee. 15.4 Respectfully following the precedent, we do not find any infirmity in the order of the Ld. CIT(A). We find that assessee had always been holding the position that receipts are not taxable in India. In such circumstances, it cannot be absolved from the liability to pay tax u/s. 234B. Accordingly, we hold that provision of section 234B are attracted. 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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