TMI Blog2016 (5) TMI 373X X X X Extracts X X X X X X X X Extracts X X X X ..... lfilling its obligations of installation, commissioning, after sales service and warranty services. The ITAT also concurred with the view that since employees of group companies had visited India in connection with the project, the business of the Assessee was carried out by those employees from the business premises of Nortel India and Nortel LO. In this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm's Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee. In view of our conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 005-06. 3. ITA No. 689/2014 is directed against ITAT's order dated 13th June, 2014 passed in an appeal preferred by the Assessee against final order dated 17th August, 2011 passed by the AO under Section 144C of the Act in respect of AY 2008-09. 4. By an order dated 24th February, 2015, ITA Nos. 666/2014, 667/2014 and 673/2014 were admitted and the following questions of law were framed:- (i). Whether the Tribunal erred in concluding that the Appellant had a Permanent Establishment (PE) within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA? (iii). Whether the finding of the Tribunal that the Appellant had a PE in India is perverse and contrary to the facts and material on record? 5. ITA Nos. 671/2014, 672/2014 and 669/2014 were admitted on 24th February, 2015 and the following questions of law were framed:- (i). Whether the Tribunal erred in concluding that the Appellant had a Permanent Establishment (PE) within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA? (ii). Whether the Tribunal erred in affirming that the Appellant had a PE (fixed place P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessee is a step-down subsidiary of Nortel Networks Limited (Canada), a company incorporated in Canada (hereafter Nortel Canada ); it is wholly held by Nortel Networks Inc. which in turn is wholly owned subsidiary of Nortel Canada. Nortel Canada also has an indirect subsidiary in India, namely, Nortel Networks India Pvt. Ltd (hereafter Nortel India ). Nortel Canada also owns 99.99% of share capital of Nortel Networks (Luxemburg) SA which in turn holds the entire share capital of Nortel Networks International Finance Holdings BV (Nortel BV). Nortel BV holds 99.99% shares of Nortel Networks Mauritius Limited, a company incorporated in Mauritius, which in turn holds 99.99% of Nortel India. The above corporate structure of part of the Nortel Group can be better understood by the following diagram :- 9. The Nortel Canada also has a Liaison Office in India (hereafter called Nortel LO ). 10. Nortel India negotiated and entered into three contracts with Reliance Infocom Limited (hereafter Reliance ), namely, Optical Equipment Contract (hereafter the Equipment Contract ), Optical Services Contract (hereafter the Services Contract ) and the Software Contract (h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee is a resident, namely, Delaware, USA. Thereafter, on 18th December, 2006, the AO passed an assessment order under Section 143(3)/147 of the Act. Assessment Order dated 18th December, 2006 14. The AO observed that the Assessee had not booked any establishment cost, depreciation or any other indirect costs in its accounts. Further, the Assessee had also not showed any source of funds. The AO noted that the equipment stated to have been supplied by the Assessee to Reliance was purchased from other group companies, namely, Nortel Canada and Nortel Ireland and were supplied to Reliance at almost half the price of the said goods. On the aforesaid basis, the AO concluded that the Assessee did not have any financial or technical ability to perform the Equipment Contract. 15. The AO further concluded that Nortel India and Nortel LO were involved in pre-contract survey, pre-contract negotiation, finalization of documents and carrying out of installation activities and at ground level, there was no difference between the LO and Nortel India and both were operating from the same premises and were providing services to the group companies including the Assessee. The AO further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted profits and estimated the total taxable income of the Assessee at ₹ 81,28,06,917/-. CIT(A)'s Order dated 22nd December, 2009 20. The Assessee appealed against the aforesaid assessment order as also against similar assessment orders passed for AY 2004-05 and 2005- 06. These appeals were heard together and disposed of by the CIT(A) by an order dated 22nd December, 2009. The CIT(A) observed that: (a) that the Assessee was assigned the contract for supply of hardware to Reliance Infocom days after its incorporation; (b) this is the only business that appellant had done during the relevant period under consideration; (c) the Assessee did not have any financial or technical capability of its own; (d) the equipment supplied was manufactured by Nortel Canada and Nortel Ireland and shipped directly from Canada/Ireland; (e) that the Assessee had supplied the equipment at approximately half its purchase price, thus, incurring huge trading loss in the transaction. The CIT(A) held that the transactions were to be viewed as a whole and not merely in the form of the agreement. On the basis of the aforesaid findings, the CIT(A) upheld the conclusion of the AO that the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing after sales service and any other assistance as requested by the Assessee. 24. On the aforesaid basis, the CIT(A) held that Assessee had (a) a fixed place of business in terms of Article 5(1) of the Indo-US Double Taxation Avoidance Agreement (DTAA); (b) a fixed place of management in India and thus, a PE in terms of Article 5(2)(a) of the Indo-US DTAA; (c) a sales outlet and thus, a PE in terms of Article 5(2)(i) of the Indo-US DTAA; (d) an Installation PE in terms of Article 5(2)(k) of the Indo-US DTAA; (e) a Service PE in terms of Article 5(2)(l) of the Indo-US DTAA; and (f) a Dependent Agent PE in terms of Article 5(4) of the Indo-US DTAA. 25. Insofar as the attribution of income is concerned, the CIT(A) concurred with the AO that Rule 10 of the Income Tax Rules, 1962 was applicable. He further held that the accounts provided by the Assessee could not be accepted for computing the income as the transaction between the Assessee and Nortel Canada was not on an Arm's Length basis. However, the CIT(A) held that the expenses relatable to the PE were liable to be allowed as a deduction while estimating the profits attributable to the Assessee's PE in India and, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's PE in India, the ITAT concurred with the CIT(A)'s view that 50% of the estimated profits were attributable to the Assessee's PE in India. Accordingly, the appeals filed by the Revenue and the Assessee were dismissed. Submissions 29. Mr Chopra, learned counsel appearing for the Assessee submitted that the contract for supply of equipment was a separate contract and was performed by the Assessee independently. He submitted that the said contract could have been entered into directly but Reliance insisted on having an Indian company as a single point of contact and, therefore, the contract was initially entered into between Nortel India and Reliance and, subsequently, assigned to the Assessee. He emphasized that Reliance is a party to the assignment contract and such assignment was also contemplated under the Equipment Contract. He submitted that the purchase orders were placed directly by Reliance on the Assessee and the payments for the supply were also made directly by Reliance to the Assessee. Mr Chopra further referred to the definition of price list under the Equipment Contract and submitted that the prices for equipment as listed in Schedule A to the Eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities relating to installation, erection and commissioning. Since installation was not a part of scope of the works contracted to the Assessee, there was no question of the Assessee having any installation PE in India. 33. Mr N.P. Sahni, Senior Standing Counsel appearing on behalf of the Revenue supported the decision of the ITAT. Reasoning and Conclusion 34. The questions framed in ITA Nos.671/2014, 672/2014, 669/2014 and 689/2014 are similarly worded except in ITA No.689/2014 wherein an additional question regarding levy of interest under Section 234B of the Act is also framed. However, no contentions were advanced on either side with regard to levy of interest under Section 234B of the Act and consequently, the same is not being considered. 35. The first three questions framed in the aforesaid appeals relate to the dispute whether the Assessee has a PE in India and the fourth question relates to the issue of attribution of income to the Assessee s alleged PE in India. 36. The controversy whether the Assessee has a PE in India is interlinked to the finding that Nortel India had discharged some of the obligations of the Assessee under the Equipment Contract. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtel group as a whole cannot be faulted. 40. The Income Tax Authorities concluded that the Assessee was a shadow company of Nortel Canada and both the companies were essentially a singular entity. In other words, the Income Tax Authorities had disregarded the corporate structure of the Assessee and had proceeded on the basis that its identity is the same as Nortel Canada. It is now well settled that the corporate veil can be lifted only in exceptional and limited circumstances. Indisputably, in cases where it is found that the corporate structure has been devised only for evasion of taxes, the courts have permitted piercing of the corporate veil and this is a well accepted exception to the rule of a company being a juristic entity having a separate identity (see : In Re: Sir Dinshaw Maneckjee Petit: AIR 1927, Bombay, 371). However, piercing a corporate veil can be justified only in circumstances where it is found that a company has been incorporated only to evade taxes; the company has no real substance; and there is no commercial expediency for incorporating the company. In the present case, the Income Tax Authorities found the Assessee to be a mere paper company with no indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any asset or source of income in India, or through the transfer of a capital asset situate in India: [Explanation 1] For the purposes of this clause-(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; [Explanation 2-For the removal of doubts, it is hereby declared that business connection shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asification facility at Dahej in the State of Gujarat. The contract was a turnkey project and the role of each member/consortium of contractors was separately specified. The contract involved offshore supply, offshore services, onshore supply, onshore services and construction and erection of the facility. The contract price included consideration for offshore supplies and offshore services which was specified separately. The disputes arose as to liability to pay tax relating to consideration for offshore supplies and offshore services. Whereas the appellant (a member of the consortium of contractors) contended that the contract was a divisible one and it did not have any liability to pay tax in respect of consideration for offshore services and offshore supplies, the Revenue contended to the contrary. According to the Revenue, the contract in question was a composite one and could not be split up for the purposes of considering whether the income arising therefrom was taxable under the Act. The relevant extracts from the said judgment are reproduced below:- 30. The contract is a complex arrangement. Petronet and the Appellant are not the only parties thereto, there are other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstrued keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions. xxxx xxxx xxxx xxxx xxxx 98. We, therefore, hold as under: (A) Re: Offshore supply (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if the offshore services and the permanent establishment were connected. (7) Section 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non-resident company irrespective of where rendered, was utilized in India. (8) Article 7 of DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India. (9) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. (10) The location of the source of income within India would not render sufficient nexus to tax the income from that source. (11) If the test applied by the Authority for Advanced Rulings is to be adopted here too, then it would eliminate the difference between the connection between Indian and foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o supply of the equipment overseas but also included other obligations that were to be performed in India. He further held that the amounts received by the Assessee also included consideration for performance of certain activities in India. This is stoutly disputed by the Assessee. This dispute is pivotal for determining whether any part of the Assessee's income is chargeable to tax in India. 49. Section 3 of the Services Contract which provide for the scope of work and services to be performed under the Service Contract and the relevant extracts from the said section are reproduced below:- 3.1.1 The Vendor has to provide to Reliance the Services set forth in the relevant Purchase Order pursuant to and in accordance with this Optical Services Contract. All Services shall comply with the Specifications and the Standards. The Vendor shall coordinate its efforts hereunder with all Subcontractors, Third Party providers and the Other Contractors, to ensure compliance with any and all supply and transportation requirements and all Governmental Entities. All Services, requiring certification shall be certified by independent and appropriate professionals licensed or properly q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uneration for that is also included in the consideration . This dispute, as observed earlier, is at the heart of the controversy in this matter. 52. The equipment supplied by the Assessee is indisputably as per the terms of the obligations under the Equipment Contract. The recitals of the said contract reads as under:- A. Reliance desires to purchase from the Vendor certain Equipment appropriate for the efficient and effective installation, operation, management and maintenance of the Optical Reliance Network including the Initial Optical Reliance Network; and B. The Vendor, desires to provide to Reliance such Equipment and shall including, without limitation manufacture, supply and deliver such Equipment, in accordance with the terms and conditions set forth herein. 53. Paragraph 1.2 of the Equipment Contract indicates the objectives of the said contract and reads as under:- Reliance requires equipment that fully supports: (a) the Initial Optical Reliance Network and the Optical Reliance Network, including all cost, performance and functional requirements set forth in the relevant Documents; (b) Interoperability; and (c) Reliance s business requirements de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the carrier at the port of shipment/airport of departure which in the present case would be outside India. The said interpretation has not been disputed on behalf of the Revenue. 58. In terms of the Assignment Contract, the Assessee assumed all rights and obligations of Nortel India under the Equipment Contract to sell, supply and deliver the Equipment to the Purchaser under the Equipment Contract . Section 1 of the Assignment Contract is quoted below for ready reference:- Section 1. Assignment and Assumption. Assignor hereby assigns to the Assignee all the rights, entitlements, covenants and obligations of the Assignor under the Equipment Contract to sell, supply and deliver the Equipment to the Purchaser under the Equipment Contract and the Assignee hereby assumes, and agrees with all of the parties hereto, to perform, observe and be bound by each and all of the foregoing obligations and covenants of Assignor. Notwithstanding the foregoing assignment and assumption, except as set forth in the next sentence, as between Assignor and Purchaser, the parties agree that Assignor shall continue to be bound by all of the terms and conditions of the Equipment Contract and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has a PE in India is not material as it is not possible to hold that any part of the income of the Assessee could be apportioned to operations carried on in India. 62. Having stated the above, for the sake of completeness, we may also examine the controversy whether the Assessee has a PE in India and whether any part of the Assessee's income could be attributed to such PE. 63. Undisputedly, even if it is accepted that some portion of the obligations undertaken by the Assessee were performed in India, the Assessee's income arising from the performance of the Equipment Contract could be brought to tax only to the extent as permissible under the relevant DTAA - DTAA between India and USA or DTAA between India and Canada. 64. Both the OECD and US Model Conventions specify that only such portion of business profits that is attributable to the PE of a foreign enterprise would be taxable in the other contracting state. The UN Model Convention also provides for additionally bringing such business profits that could be attributed to the PE by force of attraction to a PE; that is, income from sale of goods and merchandise or through business activities carried on in a Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits derived from the assets and activities of the permanent establishment and shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt with separately in other Articles of the Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 7. For the purposes of the Convention, the term business profits means income derived from any trade or business including income from the furnishing of services other than included services as defined in Article 12 (Royalties and Fees for Included Services) and including income from the rental of tangible personal property other than property described in paragraph 3(b) of Article 12 (Royalties and Fees for Included Services). 66. India and Canada have also entered into a DTAA. Paragraph 1 of Article 7 of the Indo-Canada DTAA is slightly different from paragraph 1 of Article 7 of the Indo-US DTAA - which is similar to paragraph 1 of Article 7 of the UN model convention - in as much as other business activities carried on in the other State of the same or similar ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 1 of Article 9 (Associated Enterprises)]. 3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include any one or more of the following: (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggest that Nortel LO had acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf. Thus, it is not possible to accept that the offices of Nortel LO could be considered as a fixed place of business of the Assessee. In so far as Nortel India is concerned, there is also no evidence that the offices of Nortel India were at the disposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had acted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices of Nortel India constituted a fixed place business PE of the Assessee or Nortel Canada. Nortel India is an independent company and a separate taxable entity under the Act. There is no material on record which would indicate that its office was used as an office by the Assessee or Nortel Canada. Even if it is accepted that certain activities were carried on by Nortel India on behalf of the Assessee or Nortel Canada, unless the conditions of paragraph 5 of Article 7 of the Indo-US DTAA is satisfied, it cannot be held that Nortel India constituted a fixed place of business of the Assessee or Nortel Canada. 70. The AO has further al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm's Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee. 75. Thus, the first three questions framed in ITA 671/2014, 672/2014, 669/2014 and 689/2014 are answered in the affirmative, that is, in favour of the Assessee and against the Revenue. 76. In view of our conclusion that the Assessee's income from supply of equipment was not chargeable to tax in India, the question relating to attribution of any part of such income to activ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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