TMI Blog2016 (6) TMI 329X X X X Extracts X X X X X X X X Extracts X X X X ..... India are considerable enough to conclude that almost entire sales functions including marketing, banking and after sales were carried out by PE in India and, therefore, keeping in view the decision of Hon'ble Supreme Court in the case of Ahmedbhai Umarbhai & Co. (1950 (5) TMI 1 - SUPREME Court) we are of the opinion that it would meet the ends of justice if 35% of net global profits as per published accounts out of transactions of assessee with India are attributed to PE in India in respect of both hardware and software supplied by assessee to Indian customers. At this juncture we may point out that while deciding the department's appeal in subsequent part of this order, we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. We are not inclined to accept this mode of computation resorted by AO, particularly in view of Rule 10 of the IT Rules, which mandates the AO to go by the published accounts of assessee. CIT(DR) has very rightly pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, respectfully following the decision of Hon'ble Delhi High Court, we hold that assessee was not liable to pay interest u/s 234B.- Decided in favour of assessee - ITA nos. 5870/Del/2012, 5871/Del/2012, 5872/Del/2012, 5873/Del/2012, 5874/Del/2012, 1109/Del/2014, 5974/Del/2012, 5975/Del/2012, 5976/Del/2012, 5977/Del/2012 & 5978/Del/2012 - - - Dated:- 30-5-2016 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI: JUDICIAL MEMBER For the Petitioner : Shri Deepak Chopra Adv. And Shri Harpreet Ajmani Adv. And Shri Rohan Khare Adv. For the Respondent : Shri Sanjeev Sharma CIT(DR) ORDER PER BENCH: The assessee as well as the revenue are in cross appeals for A.Ys. 2004-05 to 2008-09. The assessee has also preferred appeal for AY 2009-10. Since these appeals involve identical issues for adjudication, therefore, all these appeals were heard together and are being disposed of by a composite order for the sake of convenience. 2. Brief facts of the case are that the assessee is a tax resident of Republic of China and is engaged in the business of providing telecom equipments. During the previous year, relevant to the subject assessment year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, these fixed places had become permanent in nature. The AO finally concluded that assessee had fixed place PE, installation PE, dependent agency PE in India and, therefore, the revenues from the supply of telecom equipment and mobile hand sets were to be taxed in India as business profits. He, therefore, proceeded to determine the profits attributable to the assessee's PE in India. Before computing the profits he pointed out that the profits to the PE in India have to be computed separately in respect of hardware and software components of the telecom equipments and the mobile handsets. As regards the taxation of the revenues from software, he pointed out that the same was taxable as royalty. 3. As regards the attribution of profits to the PE in India in respect of hardware components of the telecom equipments and the mobile handsets as business profits under article 7 of the Indo-China DTAA, the AO observed that in course of assessment proceedings assessee submitted that it does not maintain any separate books of a/c for Indian operations. He, therefore, invoked Rule 10 of the Income-tax Rules for determining the income of the assessee. The AO referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Year 2003-04, applying the above basis, the net operating profit (by taking weighted average of the net profits of the two calendar years) is computed as follows: (7.32*9+6.36*3)/12 = 7.08% Revenues earned from Indian operations is - ₹ 1,24,00,254 Operating profit @7.08% as per the global Financial statement submitted by the assessee ₹ 8,77,938 Attribution rate applied 20% Profits attributed to assessee's PE in India ₹ 1,75,588 Therefore, the income of the assessee from sale of hardware component of the telecom equipments and handsets, which is attributable to the PE in India is ₹ 1,75,588/-. 4. As regards taxation of the software embedded in the telecom equipment or provided to the customers separately, the AO had show caused the assessee as to why the payments received or attributed for the supply of software emedded in the telecom equipment or software supplied to the various customers in India should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicant was not able to demonstrate 'effective connection' between the B P revenue and PE under the PMS contract. However, in the case of assessee software was integral and essential part of the telecom equipment that was supplied under the terms of consolidated offshore supply contract. The AO, however, did not accept the assessee's contention. He examined the various terms and conditions of agreement between the assessee and Spice Mobile Pvt. Ltd. and concluded as under: From the above agreements the following crucial facts emerge: - The software has not been sold but licensed to the customers. - There is separate consideration for the software . .This is the reason why the assessee could submit details of payments received in lieu of supply of software for F.Ys. 2006-07, 2007-08, 2008-09 and 2009-10. - The software is sometimes independently supplied to the customers. - The customer has been given the right to use the software for the purpose of its business thereby assigning the user the right to commercially exploit the software. - The term copyrighted article is not defined in the Indian Copyright Act. The assessee has assigned the cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablish that the rights, property or the contract in respect of which the royalty was payable, was effectively connected to the PE of the assessee in India. He, therefore, concluded that royalty was not effectively connected with the PE and, therefore, was not covered under Article 12(5) of the DTAA between India and china. The AO computed the income from supply of software at ₹ 58,40,406/- as under: 13. As per the details submitted by the assessee, it has received an amount of ₹ 58,40,406/- [Rs.1 ,33, 16,020/- (representing total value of telecom equipment) - ₹ 74,75,614/-(representing hardware component of the telecom equipment)] for supply of software from customers in India. This amount of ₹ 58,40,406/- is treated as royalty under the Act and also under the Indo-China DTAA. As per Article 12(2) of the IndoChina tax treaty read with Section 90(2) of the Act, 10% of this amount i.e. ₹ 5,84,040/- is the tax, which the assessee has to pay in India. 9. Being aggrieved with the assessment order, the assessee preferred appeal before ld. CIT(A), who after elaborate discussions has primarily held that: (i) Assessee had fixed place PE and depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case and in law, the Learned CIT(A) has grossly erred in holding that ZTE India constitutes a dependent agent PE of the Appellant in terms of Article 5(4) of the India-China DTAA. 7. Without prejudice to Grounds No I to 6 above, on facts and circumstances of the case and in law, the learned CIT (A) has erred in attributing 2.5% of the total sales revenue (both hardware and software) to PE of the Appellant which is excessive and unreasonable considering the activities performed by the Appellant in India. 8. That on the facts and circumstances of the case and in law, the Learned CIT(A) has erred in not adjudicating the ground of the Appellant against the initiation of penalty proceedings under section 271 (1 )( c) of the Act. 12.1 In A.Y. 2009-10 grounds of appeal raised by the assessee, assailing the assessment order passed by the AO, in pursuance to DRP directions, are as under: Based on the facts and circumstances of the case and in law, the Appellant, respectfully craves leave to prefer an appeal under Section 253 of the Income tax Act, 1961 ( Act ) against the order dated Decemberl9, 2013, passed by the Additional Director of Income-tax, Range- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and circumstances of the case and 111 law, the Ld. AO/Hon'ble DRP has grossly erred in taxing the revenue earned by Appellant from supply of software as royalty under Article 12 of the India-China tax treaty and also under section 9(1)(vi) of the Act. 4.2 Based on the facts and circumstances of the case and in law, the Ld. AO/ Hon'ble DRP has grossly erred by not appreciating the fact that the predominant character of supply transaction in respect to network equipment is sale of telecom network equipment along with software and therefore revenues from supply of software along with telecom network equipment shall not constitute 'Royalty' 4.3 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has erred in alleging that the handsets includes the portion of software and such supply of software shall constitute 'Royalty', without appreciating the facts that the customer import handsets in entirety and no portion is towards software. 4.4 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in proposing to hold that payments for supply of softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that income from supply of software is not effectively connected with the alleged PE. 8. Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in not following the consistency with the earlier year assessment orders passed by his predecessors in terms of attribution of profits from the supply of hardware to the alleged PE of the Appellant. 9. Levy of Interest Based on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in charging interest under Section 234B of the Act. 10. Applicability of Transfer Pricing provisions to the Appellant Based on the facts and circumstances of the case and in law, the Ld. AO/ Hon 'ble DRP has grossly erred in not appreciating that transfer pricing provisions are not applicable in the instant case and therefore, has erred in initiating penalty proceedings under Section 27lBA of the Act for not furnishing the Accountant's Report in Form 3CEB under Section 92E of the Act. 11. Initiation of Penalty Proceedings Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in initiatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tum of attribution of profits to PE. 19. The fundamental principle governing the attribution of profits is that once the domestic case law has determined that business income has a source in the country, the mechanics of law then apply to calculate the amount of taxable profit. This involves determination of gross assessable income derived from the country, from which allowable expenses and past years losses carried forward are deducted to arrive at the net amount of income. This is a direct method for attribution of profit to PE. But, admittedly, assessee has not maintained any books of a/c relating to PE in India and, therefore, we have to resort to indirect method as prescribed in Rule 10 of the I.T. Rules for attribution of profits. 20. Measurement of profit is not an exact sign and this is particularly evident in the case of PEs because the taxing structure of resident state and the source state are never same. For the purpose of attribution of profits to PE, the most important aspect to be kept in mind is the level of PE's participation in the economic life of source country. It is primarily nexus between source country and the PE's activities which produce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment are to be determined on the basis of a deemed profit, nothing in paragraph 2 shall preclude that Contracting State from applying those provisions of its law, provided that the result is in accordance with the principles contained in this Article. 4. In determining the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere in accordance with the provisions of tax law of that Contracting State. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of paragraphs 1 to 5, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its were generated on account of involvement of PE in the revenue generating structure and the 80% profit accrued in the resident state. However, for AY 2009-10, the AO has attributed 45% of the operating profit. Considering the different modes adopted by AO and ld. CIT(A), it becomes necessary to examine the level of operation carried out by PE in India so as to arrive at reasonable percentage of profit to be attributed to PE in India. 25. We have pointed out earlier that AO had held that there was fixed PE in India, dependent agency PE in India and installation PE in India. These findings were recorded on the basis of operations carried out in India which came to light after the survey was carried out. The detailed findings, as recorded by AO in AY 2009-10 primarily gives an indication of the level of operations carried out in India. 26. We, therefore, reproduce the findings of AO in AY 2009-10, which will give clear indication of the level of operations carried out by PE in India. : Profit attributable to the l'frmanent Establishment Since, revenues from supply of telecom equipments and mobile handsets are taxable in India as 'business profits', It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same principle has been followed by the Hon'ble Bombay High Court in the case of SET Satellite (Singapore) Pte Limited ('SET') (307 ITR 205) . The authorized OECD approach is to apply the arm's length principle of Article 9, as articulated in the Guidelines, to the attribution of profit to a PE using the arm s length principle under Article 7(2).In the instant case, it is evidenced that the transfer pricing analysis of ZTE India for FY 2008-09 duly reflects the functions performed and risks assumed by ZTE India which is duly accepted by the transfer pricing officer. In view of the provisions of the Article 7(2) of the India- China tax treaty and the aforesaid judicial precedents, it can be inferred that as long as the PE is being remunerated at arms' length price, nothing further may be attributed to the operations activities carried on by the PE of the foreign enterprise in India. Without prejudice to the belief that the assessee does not have a business connection or permanent establishment in India, it has submitted that the Act does not prescribe any specific methodology for attribution of income. Since the assessee is earning revenue in China fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered . The Hon'ble SC has clearly ruled that if TP analysis does not adequately reflect all the functions performed, further attribution should be done for those functional risks that have not been considered. In view of above, it is clear that the observations of Hon'ble SC in the case of Morgan Stanley are in respect of only those transactions/ functions which have been examined by the TPO for determination of Arm's Length price. Therefore, contention of the assessee that no further attribution can be done is misplaced and not acceptable. Hence, it is imperative to analyze the functions performed [which do not form the part of TP documentation of ZTE India] by different forms of PE in India, which has emerged from survey findings, contract agreements and details submitted durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ZTE India's responsibility Logistic Support Logistic Support Services The functions mentioned above are as per the TP Documentation of Indian subsidiary submitted by the assessee before the TPO. However, during survey various facts contrary to the submissions of the assessee have been found. The survey findings give actual state of affairs. Therefore, all other functions which have been proved (supra) are not the part of TP Documentation or undertaken by ZTE India in contrary to the above mentioned functions. Hence, it can be easily concluded that that most of the functions attributable to the PE have not been considered in TP Study/ TP Analysis. Summary of functions performed by PEs which are not the part of TP /Documentation On the basis of analysis of statements of employees, survey documents, contract agreements and the Transfer Pricing documentations as discussed above, following functions of PEs are held to be not the part of TP analysis/ TP Documentations - Supervision and control of projects in India - Meeting with top decision making bodies of customers in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher profit margin from the sale of - Telecom equipments to Indian customers due to following factors, - The assessee faces long delay in collection of receivables which affects cash liquidity and profitability - The sale price in India is lower - Indian customers typically offer contracts on the basis of tenders/ lowest bidders. Hence, the companies have to compensate with the lowest price which leads to low profitability. - Reasons cited by the AR of the assessee are generalized without any supporting facts and figures from the accounts. The reasons cited by him hardly affect the profitability because at no where the people want to pay more for less utility. Sale price largely depends upon the demand and supply. Delays in payments or cash liquidity are not the issues in the companies like ZTE, who has expansion of business across the globe in many countries. On the other hand, there are various factors which support high profitability in India. Some of them are discussed as under: - Population of the India is highest after China having wide market for mobile phones and cellular phone operators. - Population of. all categories including people ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the telecom equipment is at 40% of the Revenue earned on account of Equipments. In other words the percentage of revenue on hardware component of telecom equipment/ handsets is 60%. On the basis of the submission of the assessee, the profit attributable to the PE is calculated as under S. No. Particulars Amount in USD Amount in INR @ of 50.53) as per IT Act 1961) 1 Sales of Telecom equipment 11,14,96,981.77 563,39,42,488.83 2 Sales of Terminal equipment 10,77,05,271.94 544,23,47,391.12 3 Total 21,92,02,253.71 1107,62,89,879.95 4 60% of 3 above being estimated portion attributed to supply of Hardware 664,57,73,928.00 5 7.5% of 4 above, being profit on account of supply of Hardware 49,84,33,044.59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to earn the contract and to meet with contractual obligations. Therefore, all the parameters of business connection as prescribed by various judicial authorities as mentioned supra are satisfied. Even the appellant has not taken any contention before AO during assessment stage that it does not have business connection in India. This fact has been mentioned in the assessment order itself by the AO. 5.2.5 In view of discussion supra, I hold that the appellant has business connection in India within the meaning of section 9(1)(i) of the Act The ground of appeal is therefore dismissed. ** ** ** 6.2.2 To decide the issue involved, it is pertinent to go through contents of various statements reproduced supra which were recorded during the course of survey proceedings. The business model of the appellant is that it is supplying telecom equipments to customers in India and ZTE India which is a subsidiary of the appellant in India, is carrying out installation /commissioning of the telecom equipments supplied by the appellant. Analysis of various statements reproduced supra reveals that employees of the appellant come to India. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7.2.3 Further, from perusal of various statements recorded during the course of survey proceedings, it is evident that negotiation of contract and is signing is done jointly by the team comprising persons from ZTE Corporation China and ZTE India. Reply to Q. 3 in statement of Sh. Hemant Kamboj reproduced supra is particularly relevant in this regard. Reply to Q. 7 in statement of Mr. Rocky clearly points out that even price negotiation is done -oy the employees of ZTE India on behalf of the appellant. Reply (c) to Q. 47 in statement of Mr. Huang Dabin shows that even bid documents in respect of equipment supply are prepared by ZTE India and the appellant provides support only. Therefore, it can safely be inferred that ZTE India is doing preparatory work, negotiating the contract and price and satisfying queries of the customers on behalf of the appellant. These activities being done by ZTE India are not in nature of ancillary or auxiliary activities as these are vital functions which are revenue generating. In such a situation, it becomes clear that ZTE India is habitually using its authority to negotiate and conclude contract on behalf of the appellant. Now, even if the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be attributed to the signing of the contracts in India. Further, Tribunal referred to the decision of Hon'ble Calcutta High Court in the case of CIT v. Bertams Scott Ltd. [1987] 31 Taxman 144 (Cal.) (para 197) We have kept the principles laid down in these judgments in mind. In the present case, as already noted, in addition to the signing of the contracts in India, the preliminary negotiations for the contracts and the network planning were carried out through the PE. We may clarify here that the network planning activity is different from the activities which are of a preparatory or auxiliary character. In respect of signing of contracts, alone, the income attributed is 10%, in the decisions cited above. Two more activities have been carried out by the PE in India and, therefore, we have to attribute a higher income than what was attributed in the decided cases. The negotiations which ultimately lead to the signing of the contracts may involve more effort on the part of the PE and the signing of the contracts is only the fructification of those efforts. Obviously, therefore, the income attributable to the negotiations part should be more and in addition to the income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is-a-vis profitability of sales made in India. Further, for the purpose of attributing profits to the PE, some comparable entities were identified for benchmarking how much a full risk distributor is likely to earn. Based on same, a trading margin of 3.87% is found out, in this regard reference is made to point 2.6(a) of the show cause notice dated 8.3.10. Assessee has not objected to the same except has claimed that on the group basis a payment of 0.88% of sales in India has been made to ALIL on account of marketing support services; which is arrived by taking into account the payments made to Indian entity, divided by total turnover by all the entities from FY. 2001- 02 to FY . After that 2.99% remains. It has also been contended that the agent in India is performing minimal functions and taking minimal risks i.e is a limited risk distributor and therefore a deduction is to be allowed relating to the risks not undertaken by ALIL on account of marketing, etc. After considering the reduction on these two accounts above; net income chargeable to tax, as attributable to the PE, is worked out @ 2.50% of the sale price. Similar reasoning has been followed by this office in calculat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, the AO has made no attempt to find out comparable cases so as to arrive at % of profit attributable to Indian PE. It has been found that in another case namely M/s Alcatel Lucent France, facts were similar. That entity is also engaged in same line of business as that of the appellant and is supplying telecom equipments to customers in India. The equipments so supplied were installed by its Indian subsidiary. A survey operation U/S 133A was also carried out in that case. MIs Alcatel Lucent France has accepted and not contested in appeal that 2.5% of total sale revenue is attributable to PE in India as net profit subject to tax as business income. In my view, it shall be fair to adopt the same method in case under consideration. I have held in subsequent paras that revenue from sale of software is also to be taxed as business income in same manner as revenue from sale of hardware. Therefore, I hold that 2.5% of entire sale revenue (including hardware and software) is attributable to Indian PE as net profit to be taxed as business income. The AO has given different treatment to revenue from sale of hardware and software a;:d total tax effect in that case is more than what will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es on R D were already taken care of when remuneration @ 35 per cent was attributed to marketing activities in India on which global profits was apportioned and there was no question of setting off the R D expenses again in respect of marketing activities. For sufficient and adequate reasons, the authorities below have held that RRIL to be the PE of the assessee in India and in the process, the objections of the assessee are duly met with and answered. The Tribunal first considered the question of business connection. After taking note of the relevant provisions which existed at that time as well as the case law, the Tribunal took note of the fact that an agreement was entered into by the assessee with RRIL whereby RRIL was to render certain services to the assessee. From the extent and scope of these services, the Tribunal held that the assessee had a business connection in India within the meaning of s. 9(1)(i). It would be relevant to point out at this stage that the aforesaid conclusion of the Tribunal was not rested solely on the agreement with RRIL. It also took into consideration and analysed various papers which were found during the course of the survey and which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the provisions of Article 7(3), the direct as well as indirect income attributable to the PE was chargeable to tax. Tribunal further took note of the fact that for the purpose of that case it was immaterial as to whether in negotiating the contracts, representatives of the assessee (i.e. Rolls Royce PLC) were also present. 43. It was in these peculiar circumstances and provisions that the Tribunal attributed 35% of the profits to the PE in India for negotiating contract and marketing activities by the PE in India. He pointed out that there is no such Article in Double tax Treaty between India and China. Therefore, where the employees of both China and India were present and carried out the activity of negotiation of contract, the entire profit on such account could not be attributable to the PE in India. 44. Ld. counsel further clarified that before Hon'ble Delhi High Court assessee did not challenge the attribution of 35% of the gross profits to the activities carried out in India. Ld. counsel pointed out that decision in the case of Rolls Royce Singapoe v. ADIT, wherein Tribunal had the occasion to examine whether the foreign company had a PE in India and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioning - Technical support services - Quality assurances - After sales services and replacement - Concluding agreements and MOUs on behalf of ZTE China - Performance Guarantee of the . company- ZTE - Coordination with Government Departments - negotiation at Government level - Decisions regarding partnership with other concerns/ marketing. - Foreign Investments in India - Taxation matters of ZTE China - Marketing Functions - Banking Functions - Visiting customers and vendors 47. In the case of Motorola (supra), Tribunal has referred to the decision in the case of Ahmadbhai Umarbhai (supra), wherein it has been held that income attributable to the manufacturing activity should be more than the income attributable to the activity of sale. Therefore, out of the total global income of assessee relatable to the supplies made to India more income is to be attributed to the assessee as accruing in China and from sale activity, it is not to that extent. We find that ld. CIT(A) has adopted the reasoning in the case of Alcatel Lucent. In this decision ld. CIT(A) himself noted that assessee had accepted and not contested in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of assessee with India are attributed to PE in India in respect of both hardware and software supplied by assessee to Indian customers. At this juncture we may point out that while deciding the department's appeal in subsequent part of this order, we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. We are not inclined to accept this mode of computation resorted by AO, particularly in view of Rule 10 of the IT Rules, which mandates the AO to go by the published accounts of assessee. In the result assessee's ground no. 6 in AY 2009-10 stands allowed. We may further clarify that our decision does not amount to enhancement of income because overall tax effect will be less as compared to tax computed by AO/CIT(A). 51. Now we proceed to decide the assessee's submission that since for AY 2006-07 (Rs. 20,56,87,472/-), 2007-08 )Rs. 17,10,23,750/-)and for AY 2008-09 (Rs. 2,38,84,545), the assessee had paid marketing support services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income from supply of software as royalty, without considering that the additions made by the AO were based on detailed analysis of information gathered during survey u/s 133A and the case was therefore distinguishable from the case of DIT Vs Ericsson AB decided by the Hon'ble Delhi High Court in ITA no 504/2007 dated 23-12-2011 and in the case of Nokia Network dated 07-09-2012. 3. On the facts and in the circumstance of the case, the Ld CIT(A) has erred in not considering the applicability of retrospective clarificatory amendments through insertion of explanation 5 6 to Section 9(1) (vi) of the Act vide Finance Act, 2012, which helps in defining the term royalty income more clearly. 4. The Ld CIT(A) erred in directing the AO to withdraw interest u/s 234B by relying upon the decision of Hon'ble Delhi High Court dated 30-08-2010 in the case of DIT Vs Jacobs Civil Incorporated, without appreciating that the levy of interest u/s 234B is mandatory as held in the case of CIT v. Anjum M. Ghaswala others 252 ITR 1 (SC). 55. In the revised grounds of appeal raised by department there are primarily 2 issues. Firstly, the department is aggrieved by the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performance levels. 1.12. Equipment means the physical items and their corresponding software also ins;1uding the services and to ensure that such telecommunications equipments maintain high quality performance levels of such item to be provided by the contractor under the contract as required for the satisfactory implementation of the works or as specifically provided for in the contract. 1.24 IISqftware me~ns the software bundle'! with, embedded, or supplied by the contractor. along with the Equipment(s) which is described in the specifications, or any improvements and/ or enhancements thereof, including: (i) man-machine executable object code version of the user loadable programs, (ii) the microcode embedded in the equipment, (Hi) any updated or revision of these programs or the microcode delivered to the purchaser and (iv) any further programs and microcodes necessary for integration of the equipments with the equipments of other vendors/ suppliers of the purchaser. ARTICLE 16: SOFTWARE LICENSE 16.1 Subject to the terms and conditions of this contract, the contractor grants to the purchaser and end-user the nonexclusive and transferable right to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircles in India; Supplier has agreed to provide the system to buyer. Software means computer application program, software application module or package or any part thereof in binary code from licensed to buyer under this contract and listed in Annexure 8 of this contract which are required for the purpose specified in this contract. Soitwer Updates shall mean latest release of software version applicable to the system or part thereof with all available features and functionalities as per scope of this contract with respect to software and corrections of the software faults that may or may not be reported by the buyer to the supplier, which are issued as software updates by the supplier to the buyer. The software update shall contain the appropriate load file, implementation instructions and user documentation. ARTICLE: 5: CONTRACT PRICE 5.1 The total tentative Contract Price (CIF DELHI) is USD 556,000,000 (US Dollars Five Hundred and Fifty-six Million only) which shall be subject to change as per the mutual agreement between the parties based on the final configuration of the bill of material of all the three phases and the purchase value for the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(DR) submitted that from article 16 granting software license it is clear that the assessee was granted non-exclusive transferable rights. Thus, the transferable rights of licensee was subject to the assessee's permission. The ownership rights of software remained with assessee only and only user rights were given. 59. ld. CIT(DR) referred to annexure XII of department's paper book and referred to page 75 wherein the addendum to the supply contract for the telecom equipment dated 5.9.2008 is contained. He referred to page 72 of PB wherein the original supply agreement dated 5.9.2008 between assessee and Shyam Telelink Ltd. is contained. He pointed out that this agreement was found during survey operation. 60. ld. CIT(DR) referred to Article 1 of the aforementioned agreement dealing with definition and interpretation of various words and phrases of agreement and pointed out that BSS Software means software related to BSS equipment. He further pointed out that equipment has been defined to mean the hardware, software, material, components and documentation to be delivered under this contract. Thus, he pointed out that software has separate independent identity. He fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and certificates which apply to the Supplier in this Contract, all taxes and fees charged outside India, as well as the cost of freight, insurance and shipment in accordance with the delivery term CIF (INCOTERMS 2000) as per Article 16 of the Contract. Prices for Software specified in individual Orders for the delivery of Software shall include all taxes and fees charged outside India and the cost of warranty services for Software under this Contract. 65. Thus, he submitted that software prices also have separately been mentioned in the contract itself. ARTICLE 34 LICENSE 34.1 Subject to this Article, Buyer is hereby granted a limited, non- transferable , perpetual, non-exclusive license to use the Software and Documentation provided pursuant to the Contract ( Software License ). Buyer agrees that the copyright in the Software and Documentation licensed to it by Supplier including any renewals, extensions, or expansions thereof, shall be treated as proprietary of Supplier or its sub-suppliers. 34.2 Buyer shall not make any copies of Software or Documentation, except for archival back up purposes. Buyer shall not translate, reverse engineer, modify, decompile, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Alcatel Lucent India on 27.02.2009. During the course of survey proceedings photo copy of various documents was obtained and statements of senior employees involved in administration, sales and marketing were recorded. Some expatriate persons who were employees of Alcatel Group were also functioning from these offices. On the basis of information obtained during survey and post survey inquiries, notices under section 148 of the Act were issued to all Alcatel Group entities which had carried out business in India. Alcatel Group is has supplied telecommunication equipments and software to various Indian customers. 3. In the assessment orders it was held that various Alcatel Group entities have business connection as well as a permanent establishment in the form of fixed place PE, dependent agent PE and installation PE. A profit based on the sales of equipments made in India was attributed to these permanent establishments. Indian permanent establishment was also involved in making sales in some South Asian countries. A profit on account of these sales was also attributed to Indian permanent establishment. The assessee has not disputed the issue of the permanent establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that Contracting State concerning the taxes to which the Convention applies . Therefore, taking into account the rules of treaty interpretation it is explicitly clear that for finding out the meaning of a term reference can only be made to income tax Act and ' under no circumstances the assistant of Copyright Act or any other Act like Sales Tax Act can be taken in this regard. 10. The Revenue strongly relies on the decision of Central Economic-Administrative Court of Spain in case number 3604/2006 wherein the issue of taxation of income from software under the tax treaty between Spain and the USA has been adjudicated. In this case the taxpayers had claimed that the computer software had to be regarded as literary work under the tax treaty between Spain and the USA. The Spanish Court gave decision in the favour of the Spanish tax authorities and against the taxpayer. The Court observed that computer software is not expressly included in the definition of royalty in Article 12(3) of the treaty due to rapid development of computer technology in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r respective tax treaty with Finland. Copy of a summary of decision of the Supreme Administrative Court of Finland in case number KHO 2011 : 101 dated 12 December 2011 is enclosed. 70. As regards ground no. 3 also, he relied on the written submissions reproduced above. 71. Ld. counsel for the assessee submitted that this issue stands settled by the Hon'ble Delhi High Court in the cases of DIT v. Ericsson AB 343 ITR 470 (Del.); DIT v. Nokia Networks OY 58 ITR 259 and 358 ITR 259. He submitted that receipts on account of supply of software were integrally connected to the supply of hardware and, therefore, AO was not right in taxing such receipts as royalty. He submitted that ld. CIT(A) has rightly held that receipts from supply of software could not be taxed as royalty, relying on various decisions. He further pointed out that ld. CIT(A) also held that in view of the decision of Hon'ble Delhi High Court in the case of DIT v. Nokia India (supra), software supplies could not be taxed even under the amended law. Further, as per the provisions of Article 12(5) of the DTAA the supply of software being integral to the supply of hardware and the finding of existence of a P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Double Taxation A voidance Agreement? After detailed discussion, their Lordships answered the question in favour of the assessee and against the Revenue. Since the issue is squarely covered by the decision of Hon'ble Jurisdictional High Court in the case of the assessee as well as in the case of Ericsson A.B. (supra). respectfully following the same, we uphold the order of learned CIT(A) in this regard and reject ground No.2 of the Revenue's appeal. 74. Respectfully following the decision of Hon'ble Jurisdictional High Court, as noted by Tribunal, ground nos. 2 3 are rejected. 75. Apropos ground no. 4, relating to levy of interest u/s 234B, ld. CIT(DR) submitted that ld. CIT(A) was not correct in withdrawing interest u/s 234B by relying on the decision of Hon'ble Delhi High Court in the case of DIT v. Jacobs Civil Incorporation 330 ITR 578. He submitted that levy of interest u/s 234B is mandatory in view of the decision of Hon'ble Supreme Court of in the case of CIT v. Anjum M. Ghaswala others 252 ITR 1(SC). 76. Ld. DR pointed out that Hon'ble Delhi High court in the case of Jacobs (supra) has held that section 195 puts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 234B of the Act. 77. Ld. CIT(DR) thereafter referred to the decision of Hon'ble Delhi High Court in the case of DIT v. Alcatel Lucent USA [2014] 45 Taxmann.com 422 (Del)wherein it has been, inter alia, held that it is open to the assessee to deny its liability to tax in India on whatever grounds it thinks fit and property. Having denied its tax liability, it seems unfair on the part of the assessee to expect the Indian payer to deduct tax from the remittances. It is also open to the assessee to change its stand at the first appellate stage and submit to the assessment of the income. When it does so all consequences under the Act follow including its liability to pay interest u/s 234B, since it would not have paid any advance tax. In this regard he referred to para 20 21 of the Alcatel order which are reproduced hereunder: 20. The other argument on behalf of the assessee that the liability of the payer under Section 20 I is absolutely different from the liability of the non-resident assessee under Section 234B need not be examined and for the purpose of the present case it would not make any difference, on account of the peculiar facts of the present case. It may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot make any such representation; such a representation would only be consistent with the assessee's stand regarding its tax liability In India. Moreover, no purpose would have been served by the assessee taking such a categorical stand regarding its tax liability in India and at the same time suffering tax deduction under Section 195( 1). Therefore, in our opinion, even though there may not be any positive or direct evidence to show that the assessee did make a representation to its Indian telecom dealers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed. The Tribunal ought to have accorded due weightage to the strong possibility or probability of such a request having been made by the assessee to the Indian payers since otherwise the denial of its tax liability on its Indian income would have served little purpose for the assessee. 78. Ld. CIT(DR), therefore, submitted that the decision in the case of Jacabs (supra), has been clarified by Hon'ble Delhi High Court in the case of Alcatel Lucent (supra). He submitted that facts in the present case are similar to that of the Alcate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court vide its decision dated 80. 12.1.2015 applied the decision in the case of DIT v. Jacabs Civil Incorporated (supra) and distinguished the decision in the case of Alcatel Lucent USA. He referred to the head note of the said decision, which is reproduced hereunder: The implication of an absolute obligation upon the payer to deduct tax at source under section 195(1) of the Income-tax Act, 1961, is that it becomes the responsibility of the payer to determine the amount it ought to deduct from the remittance to be paid to the assessee, towards tax. This determination would depend directly on the income of the assessee that is taxable in India on account of being attributable to its permanent establishment in India. That this determination is the responsibility of the payer is provided for, in the statute, in section 195(2). Thus the assessee's liability to tax does not depend on its own view of its permanent establishment status, or its admission or denial of tax liability. I[an assessee files nil returns at the stage of assessment, and maintains that it is not liable to tax In India, the payer is obliged to apply to the Assessing Officer to determine what portion, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE and interest u/s 234A 234B was levied. Hon'ble Delhi High Court, after considering the entire case laws on this issue, inter alia, held that there was absolute obligation upon the payer to deduct tax at source u/s 195(1). It was held that the assessee's liability to tax does not depend on its own view of its PE status, or its admission or denial to tax liability. Under such circumstances, the payer would be treated as the assessee in default under section 201. Hon'ble Delhi High court pointed out that the anomaly of an assessee denying tax liability (whether under a bona fide mistake or by deceit), thereby not suffering a tax deduction at source, and still being permitted a tax credit for the tax deductible was remedied after the Finance Act, 2012. The Hon'ble High Court held that no interest was leviable on the assessee u/s 234B, even though they filed returns declaring nil income at the stage of reassessment. 83. In the present case also we find that the facts are almost identical to the facts as obtaining in the case of GE Packaged Power Inc. (supra) which is the latest decision of Hon'ble Jurisdictional High Court on this issue and, therefore, respe ..... 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