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2016 (5) TMI 373 - DELHI HIGH COURT

2016 (5) TMI 373 - DELHI HIGH COURT - [2016] 386 ITR 353 - Business income attributable to PE in India - whether the Assessee, a tax resident of United States of America (USA), has a Permanent Establishment (hereafter 'PE') in India? - Held that:- The AO has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Compa .....

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T(A) as well as the ITAT has proceeded on the basis that the Assessee had employed the services of Nortel India for fulfilling 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 t .....

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ome 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 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 activities in India does not aris .....

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Nitin Gulati, Advocate JUDGMENT Vibhu Bakhru, J. 1. Nortel Networks India International Inc. (hereafter the Assessee ) has preferred the present appeals under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) against orders passed by the Income Tax Appellate Tribunal (hereafter ITAT ). ITA Nos. 669/2014, 671/2014 and 672/2014 are appeals preferred by the Assessee against a common order dated 13th June, 2014 passed by the ITAT in ITA Nos. 1119, 1120 and 1121/Del/2010, which were appea .....

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3(3) of the Act in respect of the AYs 2003-04 and 2004-05 as well as an assessment order dated 31st December, 2007 passed by the AO in respect of assessment year 2005-06. 2. ITA Nos. 666/2014, 667/2014 and 673/2014 impugn a common order dated 13th June, 2014 passed by the ITAT in ITA Nos. 2177, 2178 and 2179/Del/2011 which were appeals preferred by the Assessee against a common order dated 20th January, 2011 passed by CIT(A) in appeals no.78, 79 and 77/2009-10. These appeals were preferred by th .....

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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 .....

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te Ltd" (being installation and service PE)? (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? (iv). Whether, without prejudice, the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Appellant in India and whether such approach and quantification was inconsistent with Article 7 of the DTAA? 6. Similarly, ITA No. 689/2014 was also admitted on 24th February, 2015 and the .....

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tion and service PE)? (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? (iv). Whether, without prejudice, the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Appellant in India and whether such approach and quantification was inconsistent with Article 7 of the DTAA? (v). Whether Tribunal erred in confirming the levy of interest under section 234B of the Act? 7. The princi .....

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licable in the State of Delaware, USA and is a tax resident of USA. The Assessee is a part of Nortel Group which is stated to be a leading supplier of hardware and software for GSM Cellular Radio Telephone Systems. 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 i .....

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stood 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 (hereafter 'the Software Contract') on 8th June 2002. On the same date, Nortel India entered into .....

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the equipment supplied directly to the Assessee. 11. The equipments supplied to Reliance were manufactured by Nortel Canada and another Nortel group entity in Ireland (Nortel Ireland). The same was invoiced by the Assessee directly to Reliance and consideration for the same was also received directly by the Assessee. It is asserted by the AO that the equipment supplied to Reliance was sourced from Nortel Canada and Nortel Ireland at a much higher price than the price charged to Reliance and this .....

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the sake of brevity only the facts as obtained for AY 2003- 04 (ITA 671/2014) are referred to herein. 13. On 27th March, 2006, the AO issued a notice under Section 148 of the Act calling upon the Assessee to file its return of income for the AY 2003-04. In response to the aforesaid notice, the Assessee filed its return of income on 16th May, 2006 disclosing its taxable income as Nil . Thereafter, the AO issued notice under Section 143(2) of the Act. In response to the aforesaid notices, the Ass .....

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d 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 an .....

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with Reliance constituted a single turnkey contract which had been artificially divided into three separate contracts. The AO further held that Nortel India also did not have the capacity to undertake the contracts entered into with Reliance and consequently, the same was transferred to other Nortel Group Companies including the Assessee. 16. The AO was of the view that the Assessee had been incorporated solely with the sole motive to evade the taxes arising out of supply contract in India and .....

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er the Services Contract and the expatriate employees of the Assessee had remained in India for a long period and had rendered services for Nortel India for a period of more than 30 days in a fiscal year and the Assessee had reimbursed large amount of expenses incurred by Nortel India on these expatriate employees. 17. According to the AO, the Assessee was a shadow company of Nortel Group. 18. On the basis of its findings, the Assessee concluded that Nortel India and Nortel LO constituted the As .....

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p. The AO noticed that the global accounts of the Nortel Group disclosed a gross profit margin of 42.6%. He held that average selling, general and marketing expenses of other similarly placed non-resident companies was 5% of the turnover and, therefore, made an allowance of 5% of such expenses. He also made a further allowance for Head office expenses at 5% of the adjusted profits and estimated the total taxable income of the Assessee at ₹ 81,28,06,917/-. CIT(A)'s Order dated 22nd Dece .....

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tion; (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 findi .....

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the business model which could be considered to be Assessee's fixed place of business - (i) the location of Nortel India to which employees of Nortel Group were sent on secondment basis to assist in the execution of the project; and (ii) the place of installation of equipment. Further, the CIT(A) also held that office of Nortel LO and Nortel India would also constitute a fixed PE of the Assessee in India as the Assessee and Nortel Canada were one and the same entity. 22. The CIT(A) held that .....

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Nortel Group companies visited India in connection with the project, they had performed business of the Assessee through the premises of Nortel India or the LO of Nortel Canada. 23. The CIT(A) referred to clause 6.1.2 of the Equipment Contract which provided for rendering of certain services in relation to the equipment supplied and held that the Equipment Contract did not end with loading of equipment on vessels but also included a number of activities to be carried out in India, the compensat .....

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ther 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 i .....

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t 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, accordingly, directed the AO to do so. The CIT(A) further held that keeping in view the facts of the case, 50% of the profits of the Assessee's estimated profits could be attributed to the PE in India. Proceedings before the ITAT 26. Both, the Assessee and the Revenue preferred appeals against the order dated 22nd December, 2009. The Ass .....

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iance Infocom were a part of a 'turnkey contract' which had been artificially split up into three separate contracts. The ITAT further upheld the conclusion that the Assessee was only a shadow company of Nortel Group and was getting its work inter alia executed through Nortel India. The contracts were pre-negotiated by Nortel India and in view of the above, the ITAT concurred with the AO and the CIT(A) that Nortel India constituted a fixed place of business and a dependent agent PE of th .....

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contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted. The equipment remained in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done." 28. The ITAT also held that the employees of the group companies visited India in connection with the project and this indicated that the employees of the Nortel Group carried on the business of the Assessee through the premises of Nortel India or .....

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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 .....

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ial Completion" and this meant that the Vendor was liable to deliver the equipment to the carrier at the port of shipment. He contended that in the circumstances, the Equipment Contract only obliged the Assessee to deliver the equipment overseas and no part of the Assessee's activities were to be performed in India. 30. Next, Mr Chopra contended that Nortel India was an independent Assessee and any income attributable to Nortel India was liable to be assessed in its hands and not in the .....

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quipment Contract since the equipment was manufactured and supplied from overseas and there was no requirement to depute personnel to India. 31. Mr Chopra submitted that there was no material or evidence on record which would suggest that any fixed place in India had been made available to the Assessee for execution of its activities. Therefore, the AO's conclusion that Assessee had a fixed place PE in India is palpably erroneous. He further submitted that it was Nortel India who had negotia .....

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oneous. 32. Insofar as the existence of an installation PE is concerned, Mr Chopra argued that in terms of the services agreement, Nortel India was to carry out all 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 ITA .....

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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. Whilst, the Income Tax Authorities have held that the contracts entered into with Reliance - the Equipment Contact, Software Contract and Services Contr .....

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ed by the Assessee. 37. It is not disputed - on the contrary it has been expressly admitted - that the contracts entered into with Reliance were negotiated by Nortel India and neither Nortel LO nor the Assessee were involved in negotiations with Reliance. There is also no material on record which would indicate that Nortel LO or the Assessee had participated in any negotiation with Reliance. The facts on record indicate that Nortel India had negotiated the contracts with Reliance, and Nortel Can .....

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between Nortel India and Reliance, with Nortel Canada as a surety. 39. Thus, it is an admitted position that Nortel India had negotiated for the contracts and had entered into agreements that were to be performed not by Nortel India but by other entities of the Nortel group. According to the Assessee, the only reason for Nortel India executing the contracts was the insistence on the part of Reliance to have an entity in India responsible for the contracts. In this view, the contention advanced .....

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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 i .....

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out any other activity except supplying equipment pursuant to the contracts negotiated by Nortel India with Reliance and, in a later year, with BSNL. The Assessee has neither produced any material nor advanced any commercial reason for incorporation of the Assessee. Significantly, the Assessee was incorporated a day prior to execution of the agreements and, clearly, when the award of contract from Reliance was a certainty. Admittedly, the equipment supplied to Reliance was manufactured by Nortel .....

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anada - as has been held by the AO and CIT(A) and concurred with by the ITAT - and on that footing, it is to be examined whether any income from supply of equipment could be taxed under the Act. 42. Section 4 of Act is a charging section and provides for levy of income tax in respect of total income of the previous year of every person. Section 5 of the Act outlines the scope of total income and provides that the total income of a person who is a non-resident in any previous year includes income .....

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nd Explanation 3 to Section 9(1)(i) which are quoted below:- "Section 9 (1)The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from 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 bus .....

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hority 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, or su .....

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emed to accrue or arise in India. In CIT v. R.D. Aggarwal & Co.: (1965) 56 ITR 20 (SC), the Supreme Court observed that business connection would mean a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business . However, by virtue of Explanation 1 to Section 9(1) of the Act, only such part of the income which is reasonably attributable to operations ca .....

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to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1)(i) of the Act, no part of Assessee s income could be brought to tax under the Act. It is only when a non-resident Assessee s income is taxable under the Act that the quest .....

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er/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) conten .....

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t. Petronet and the Appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be co .....

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ices in each of the segment are also different. 31. The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different. 32. The contract indisputably was executed in India. By entering into a contract in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxa .....

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to each of the territories or not. 40. Income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income accrues or arises in each of the jurisdiction. …… xxxx xxxx xxxx xxxx xxxx 76. In construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the part .....

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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 betw .....

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tion 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient business connection , and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing of entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connect .....

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attributable to the operations in India viz. the place of execution of the contract, assuming the offshore elements form an integral part of the contract. (3) Section 9(1)(vii) of the Act read with Memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of non-resident taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in international law also, is that of the taxpay .....

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onnected. (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 establishmen .....

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opted here too, then it would eliminate the difference between the connection between Indian and foreign operations, and the apportionment of income accordingly. (12) The services are inextricably linked to the supply of goods, and it must be considered in the same manner. 46. It is clear from the above that even in cases of a turnkey contract, it is not necessary that for the purposes of taxability, the entire contract be considered as an integrated one. And, it does not follow that the amount .....

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ossession of Nortel India till the final acceptance by Reliance, the same would not imply that the Assessee s income from supply of equipment could be taxed under the Act. Clause (a) of Explanation 1 to Section 9(1)(i) of the Act postulates the principle of apportionment and only such income that can be reasonably attributed to operations in India would be chargeable to tax under the Act. The position in Ishikawajima-Harima Heavy Industries (supra) was also similar. There too, the equipments wer .....

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equirements and Procedures). Contractor shall, however, retain case, custody, and control of such equipment and materials and exercise due care thereof until (a) provisional acceptance of the work, or (b) termination of this contract, whichever shall first occur. Such transfer of title shall in no way affect the owner s rights under any other provision of this contract. 48. In the present case, the CIT(A) had concluded that Assessee s obligations were not limited to supply of the equipment overs .....

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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 require .....

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format and procedure and for which Reliance shall reimburse Vendor for reasonable actual fees paid to any chartered engineers providing such certification. xxxx xxxx xxxx xxxx xxxx 3.2.1 Vendor shall provide all Services purchased under a Purchase Order and in accordance with the relevant Specifications on an end-to-end basis to ensure successful completion of the Work (provided, however, that installation and commissioning Services shall be limited to the Services requested ordered in the appli .....

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hundred (200) expatriates, with the approval of Reliance, as required, including subject matter experts (Subject to the experience requirements set forth in Section 3.10 below). 50. A bare perusal of the Services Contract clearly indicates that the task of installation, commissioning and testing was contracted to Nortel India and thus, the operations pertaining to installation and commissioning were not performed by Nortel India on behalf of the Assessee or Nortel Canada but on its own behalf. T .....

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tories and compensation/remuneration 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 a .....

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ce 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 described in the Documents (collectively, the objectives ) The Vendor represents warrants and covenants that the Equipment shall be fully compatible with and fully supports ,the Objectives as shall be demonstrated to Reliance, in part, in the Acceptance Tests. 54. Article 3 of the Equipment Con .....

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l assistance centres. The vendor was also obliged to provide equipment for a Test Bed Laboratory at no extra cost to Reliance. However, there is no material to indicate that any of the obligations other than supply of equipment was performed by the Assessee or on its behalf in consideration of the amounts received by the Assessee. According to the Assessee, it had supplied the subject equipment and received the consideration for the same. 55. Article 5 of the Equipment Contract contains provisio .....

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s for exportation procedures from the country/ies of export and insurance from the Vendor's warehouse up to Substantial Completion) applicable to Equipment supplied by Vendor to Reliance as amended from time to time as set forth herein. The Price List as of the Effective Date is set forth in Exhibit A. 57. The Assessee has consistently asserted that FCA, relevant international airport basis, INCOTERM 2000, from the country/ies of export and insurance from Vendor s warehouse to Substantial Co .....

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nt 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. No .....

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lace all Purchase Orders and Change Orders for the supply of Equipment directly with Assignee and Assignor shall have no liability or obligations under this Assignment with respect to such Purchase Orders and Change Orders (the "Liability Exception"). 59. It is apparent from the above that the Assessee only assumed the obligation to sell, supply and deliver equipment in terms of the Equipment Contract and was paid in terms of the pricing mechanism as agreed to under the Equipment Contr .....

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AO to contradict the same. There is no material to indicate that equipment for Test Bed Laboratory, which was to be supplied at no additional cost to Reliance had been procured by Nortel India at additional cost or that Nortel India was not remunerated for all the services rendered by it to Reliance. In terms of the Equipment Contract, adequate stock of spares was required to be maintained in India, however, there is no material to indicate that such stock was maintained in India by the Assessee .....

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he AO was required to make an appropriate transfer pricing adjustment in the hands of Nortel India. 61. Thus, in our view, the question whether the Assessee 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 in .....

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butable 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 State which are similar to goods and merchandise sold through the PE or activities carried on through a PE would also be subject to tax in the contracting sta .....

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with the provisions of paragraph 2 may be taxed in that other State. UN MC Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent e .....

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hrough a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." 65. Article 7 of the Indo-USA DTAA reads as under: 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establis .....

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. 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 ent .....

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ll be in accordance with the principles contained in this Article. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which incl .....

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r similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than toward reimbursement of actual expenses), by the permanent establishment to .....

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purchase by that permanent establishment of goods or merchandise for the enterprise. 5. For the purposes of this Convention, the profits to be attributed to the permanent establishment as provided in paragraph 1(a) of this Article shall include only 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 .....

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an 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 kind as those effected through the permanent establishment a .....

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tivities in India. 68. Article 5 of the Indo-US DTAA defines PE as under:- Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry, .....

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or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period; (l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if .....

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y 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 .....

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rprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if: (a) he has and habitually exercises in the first mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; .....

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e deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's-l .....

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le 5 of the DTAA between India and Canada is also similar. 69. The AO, CIT(A) and ITAT have held that the office of Nortel India and Nortel LO constituted a fixed place of business of the Assessee. As pointed out earlier, we find no material on record that would even remotely suggest 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 .....

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r 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 alleged that the offices of .....

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on that there is an installation PE in India, is also without any merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee or Nortel Canada. Undisputedly, Nortel India was also received the agreed consideration for performance of the Services Contract directly by Reliance. 72. The finding that Nortel India is a .....

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lly exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained. 74. The CIT(A) as well as the ITAT has proceeded on the basis that the Assessee had employed the services of Nortel .....

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