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ZTE Corporation Versus Addl. Director of Income-tax And Vice-Versa

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 - Measurement of profit - AO had invoked Rule 10(ii) and attributed 20% of net global profits arising out of revenues realized from India - CIT(A) attributed 2.5% of entire sales revenue as per Rule 10(i) Held that:- In the present case we have earlier reproduced paras 6.2.2 and 7.2.3 from ld. CIT(A)'s order and a .....

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in India

We find that the level of operations carried out by assessee through its PE in 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 publis .....

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ghted 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 out that all the sums paid for market support service are for pre sale activities and, therefore, for post sale activities performed by ZTE India, which surfaced on account of survey operations .....

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enterprise in light of the decision in the case of Morgan Stanley (2007 (7) TMI 201 - SUPREME Court ), cannot be accepted because in that decision itself Hon'ble Supreme Court has, inter alia, observed that if the TP analysis does not adequately respect the functions performed and risk assumed by the enterprise then in such a case there would be need to attribute profit to the PE for those functions/ risks that have not been considered.- Decided in favour of assessee

Income from suppl .....

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are 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 PE of assessee in India, Article 12(5) of the DTAA would cease to apply and the provision of Article 7 would be applicable and, therefore, the income from software is to be taxed as business income.- Decided in favour of assessee

Levy of interest u/s 234B - Held that:- W .....

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4, 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 thes .....

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also engaged in supply of mobile hand set to various customers in India. The assessee did not file its return of income as per the provisions of section 139 of the I.T. Act on the ground that it had no PE in India under the provisions of Article 5 of the Indo-China DTAA. On 6.10.2009 a survey u/s 133A was undertaken at the office premises of ZTE Telecom India Pvt. Ltd. at 6th Floor, Tower B, Building No. 10, Phase II, Gurgaon and New Mumbai, Thane. AO has observed that during the course of surve .....

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iness had been carried through its PE in India and further income had accrued to the assessee during the relevant year from such business. Accordingly, notice u/s 148 was issued on 23.10.2009 requiring the assessee to file its return of income. The assessee filed its return declaring Nil income in pursuance to the notice u/s 148. Assessee in notes to the "statement showing computation of income" had stated that since it did not have PE in India, accordingly, the revenues were not taxab .....

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the supplies were not at arm's length price. The AO after examining various statements, which established the operations being carried on in India and various documents, found in course of survey, concluded that the assessee was carrying on business in India through fixed base for sufficiently long period 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, t .....

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he 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 referre .....

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from April to March. In view of this, weighted average net operating profit has been applied to the sales revenues to arrive at the profits made by the assessee from telecorn equipment and mobile phone handsets to Indian customers. 20% of such profits are considered attributable to the PE of the assessee in accordance with the provisions of v Article 7 read with Article 5 of the India-China DTAA. 10. In view of the same, computation of income in the present case in respect of the hardware and mo .....

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5% 2007-08 15.92% The average percentage of the software component in the telecom equipment works out to 43.86%, which has been taken for the relevant year. Therefore, the hardware component of the telecom equipment works out to 56.14%). The total sales made in India in the relevant year is ₹ 1,24,00,254/-. (I+II) As per the global financial statements of ZTE China, the net operating profit of the assessee for the calendar year 2003 is 7.32% and for 'the calendar year 2004 is 6.36%. Fo .....

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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 treated as r .....

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nning of the said equipment. - The subject software has no independent value of its own. - No copyrights in the software are transferred to the customers. - No access to the "source cosies" in the software is granted to the customer. - The payment for software is not related to the productivity, use or number of subscribers. - The customers do not have the right to commercially exploit the software. - The supply of software is in the nature of transfer of copyrighted article" and .....

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sion of Delhi Special Bench in the case of Motorola India vs DCIT (95 ITD 269). The assessee has further gone on to rely on a host of judicial pronouncement and also on the relevant part of the OECD commentary and commentary of Phillip Baker. 5. The AO also referred to the decision of the Authorities for Advance Ruling in the case of Worley Parsons Pty. Ltd. relied for the proposition that the payments for software should be taxed on case basis, since the same were not effectively connected to t .....

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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 c .....

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pyright Act. The assessee has assigned the customers "the right to use the software" . The assignment of such rights does indicate that the customers have been given the "right to use the copyrighted right in the software". " - The risk and title passed to the customer in the case of hardware but not in the case of software. As per the terms of the contract between the assessee and the customers, the buyer has no title or ownership rights. Buyer can neither license nor s .....

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ade for the right to use the software was royalty as per clause (i), (iii) and (v) to Explanation to section 9(1)(vi). He pointed out that the software is a secret formula or process for the purpose of clause (i) and (iii) of Explanation 2 and was also a copy right as per clause (v) of Explanation 2. Further, such payments were also royalty under Article 12(3) of the DTAA between India and China. 7. As regards the assessee's plea, relying on the decision of ITAT Delhi Special Bench in the ca .....

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the nature of royalty u/s 9(1)(vi) of the Act and also under Article 12(3) of India-China Tax Treaty. 8. As regards the assessee's submission that if the payments for the software was considered as royalty then since such royalty was effectively connected with the PE of the assessee in India and, therefore, could not be taxed on gross basis as per Article 12(5) of the DTAA between India and China, tThe AO pointed out that assessee had failed to establish that the rights, property or the cont .....

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ing 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 o .....

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of total sales made by foreign company in India was to be attributed as business profits of PE (including the value of software). (iv) Ld. CIT(A) also directed the AO to delete the interest levied u/s 234B. 10. Being aggrieved with the order of ld. CIT(A), both the assessee and department are in appeal before us. 11. First we take up the assessee's appeals: 12. Common grounds raised by the assessee for AY 2004-05 to 2008-09 are as under: "1. That on facts and in law, the Learned CIT(A) .....

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nces of the case and in law, the Learned CIT (A) has erred in holding that the income earned by the Appellant from supply of telecommunication equipment (comprising of hardware and software) to Indian telecom operators/ customers is taxable in India on the basis that the Appellant has a Permanent Establishment ('PE') in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement between India and China ("India-China DTAA"). 4. Based on facts and circumsta .....

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facts and circumstances 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 activit .....

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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-3, International Taxation, New Delhi (hereinafter referred to as "Ld. AO") under Section 143(3) read with Section 144C(1) of the Act pursuant to the directions issued by the Hon'ble Dispute Resolution Panel ("Hon'ble DRP"), New Delhi, on the following grounds: 1. T .....

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.1 Based on facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has erred in holding that the income earned by the Appellant from supply of telecommunication equipment (comprising of hardware) to Indian telecom operators/ customers is taxable in India on the basis that the Appellant has a PE in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement between India and China ("India-China DT AA"). 3.2.1 Based on the facts and circumstance .....

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3.3 Based on the facts and circumstances of the case and 111 law, the Ld. AO/Hon'ble DRP 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. 3.4 Based on the facts and circumstances of the case and 111 law, the Ld. AO/Hon'ble DRP has grossly erred in holding that ZTE India constitutes an 'Installation PE' of the Appellant in terms of Article 5(2)U) read with Article 5( 1) of the India-Chi .....

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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' .....

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usiness connection/PE in India, we wish to submit: 5.1 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in attributing45 percent of the net profit to the alleged PE of the Appellant in India which is excessive and unreasonable. 5.2 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in not appreciating the decision of Hon'ble Commissioner of Income Tax (Appeals) in appellant's o .....

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llant. 6. Arbitrary profit margin of 7.5 percent considered Without prejudice to our contention that the Appellant does not have a business connection/PE in India and ground 5 above, we wish to submit: 6.1 Based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred in not applying Rule 10 of the Income-tax Rules, 1962 for determining the profits attributable to the alleged PE of the Appellant. 6.2 Based on the facts and circumstances of the case and .....

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e supply of software is not royalty based on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has grossly erred 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 o .....

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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 initiating the penalty proceedings under Section 271(1)(c) of the Act, holding that the Appellant has furnished inaccurate particulars and has concealed the particulars of its income. 13. At the tim .....

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CIT(A) is highly excessive. He pointed out that the attribution done by AO by applying 20% of the net global profit is reasonable. He pointed out that in AYs 2006-07 to 2008-09 assessee has paid market support separate fee to Indian AE which is at arm's length and, therefore, the profits earned by PE got subsumed in the same and, hence, no further attribution of profits is required. 15. Ld. CIT(DR) Shri Sanjeev Sharma submitted that considering the level of operations carried out by PE in re .....

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herefore, not part of attribution. 17. Ld. CIT(DR) submitted that in the case of Rolls Royce 35% profits have been attributed and in the case of M/s Nortel Networks India International Inc. 50% of the profits had been attributed. 18. We have considered the submissions of both the parties and have perused the record of the case. We have noted earlier that assessee had agreed for attribution of profits to PE without prejudice to his claim that there was no PE in India. Ld counsel has pointed out t .....

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f 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 pa .....

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uot;, there cannot be exact synchronization of the amount of profits of a PE i.e. taxable in country "R" with that of the same PE operating in country "S". Consequently, the ordinary credit given by country "R" for tax paid by its resident to country "S", on the resident's income (as determined under the domestic case law of country "S"), will not be in respect of exactly the same amount of income that country "R" measures for the p .....

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an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries 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 Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. The provisions of this paragraph shall, however, not apply if the e .....

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ct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. Insofar as the tax law of a Contracting State provides with respect to a specific business activity that the profits to be attributed to a permanent establishment are to be determined on the basis of a deemed profit, nothing in paragraph 2 shall preclude that Contracting State from applying thos .....

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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 o .....

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non-resident person 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 or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained the amount of such income for the purposes of assessment to income-tax may be calculated:- (i) At such percentage of the turnover so accruing or arising as the Assessing Officer m .....

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, AO had invoked Rule 10(ii) and attributed 20% of net global profits arising out of revenues realized from India. However, ld. CIT(A) attributed 2.5% of entire sales revenue as per Rule 10(i) primarily relying on the decision in the case of Alkatel Lucent, France, inter alia, observing that Alkatel Lucent France, which was in the same line of business as assessee had accepted the same and did not contest in appeal. 24. The issue of attribution of profits depends on the facts in particular case .....

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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 .....

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uipments and mobile handsets are taxable in India as 'business profits', It is imperative to determine the profits that should be attributed to the I assessee's PE in India. The taxation of the "software" either embedded in the telecom equipment or provided to the customers separately has been discussed later in this order. Hence, it is clarified that the attribution of profits to the PE in India is ill respect of the "hardware component" of the telecom equipments .....

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ermanent establishment. In this context the assessee vide order sheet notings dated. 22.03.2013 was asked to explain that based upon the facts and circumstances of the case why the appropriate profit is not attributed to the PE in India. The assessees vide its letter dated. 25.03.2013 has submitted that; Assessee does not have a business connection or permanent establishment in India. Article 7 of the India- China tax treaty provides for allocation of taxation rights between Contracting States r .....

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ble to a PE, it is necessary to determine the allocation of functions, risks and assets to the PE and the attribution of income to the PE under arm's length conditions, The principle that if a correct arm's length price is applied and an agent is compensated accordingly, then nothing further would be left to be taxed in the hands of the foreign enterprise, has been laid down by the Apex Court of India, in the case of Morgan Stanley & Co. Inc. v. DIT The same principle has been follow .....

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E 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 establishme .....

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lowing transactions were referred to the TPO for benchmarking. Description of transaction Amount (In Rs.) Sale of telecom equipment, spares, components & handsets 42,14,73,291.00 Logistic support services 34,94,21,178.00 repairs & maintenance services 6,33,31,168.00 Administrative support services 15,40,63,637.00 Total 98,82,89,274.00 These transactions do not constitute the part of crucial key functions performed by the Fixed PE, Installation PE, Service PE and DAPE. It is reiterated th .....

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TP analysis before the TPO. Since, all the functions were not the part of TP Study, the assessee's contention, that if a correct arm's length price is applied then nothing further would be left to be taxed in the hands of the foreign enterprise in light of the decision of Hon'ble Apex Court of India in the case of Morgan Stanley & Co. Inc. v. DIT, is misplaced. The Hon'ble Supreme Court in this case has ruled that: "As regards attribution of further profits to the PE of .....

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formed 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 .....

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ding. It is reiterated that ZTE China has not maintained any TP Documentation. However, the analysis is being done on the basis of documentation of Indian Subsidiary. These are discussed as under: Functions performed for Distribution of Telecom Equipments and Mobile Handset as per TP Documentations of ZTE India submitted by the assessee Summary of functions performed by ZTE India as per TP Documentations Trading of Telecom equipment Procuring equipment from ZTE China Sale to the Indian customers .....

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ecision in strategic marketing activities. Tendering process ZTE China to actively participate to provide technical, marketing & commercial guidance and support in tendering process. ZTE China to review and approve the final contracts entered into by ZTE India Procurement Only upon securing orders from BSNL and TAT A Telecom Products are sold from ZTE China to ZTE India on CIF Basis ZTE India to deliver goods to customers site Cost borne on logistics in India Minor incidental local procureme .....

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ve 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 .....

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- Contract negotiations with customers in India including PSUs/ Government. - Preparation of Draft agreements and MOUs for ZTE China - Signing of agreements in India - Concluding agreements and MOUs on behalf of ZTE China - Sale of equipments and handsets in India - Sale of Mobile Handsets to all other customers in India - Sale of equipments to Indian subsidiary on CIF Basis - Technical Support Services - Supervision of Installation, commissioning and testing. - Shipment of equipments etc of sup .....

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ofit - During the course of assessment proceedings, assessee submitted that it does not maintain any separate books of accounts for Indian operations. In absence of any books of accounts in respect to India operations, Rule 10 of the Income Tax Rules, 1962 is invoked for determining the income of the assessee. - The assessee has submitted copy of the Global Accounts which shows consolidated accounts of - various countries. In China, the financial year is from January to December. As per the Glob .....

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ed that it cannot be said that the assessee earns 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 t .....

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ty 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 from low income group of the country is using mobile phones in a big way since the last decade. - Cost of the Chinese Equipmentsl Mobile Handsets are lowest in world. - Cost of skilled and unskilled Jabor in India is very low in comparison to other countries. - Cost of Management and .....

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mature and emerging sectors. While the Banking, Financial Services and Insurance Segments remains the biggest sector with over 41% of Total Revenues, verticals like HI-Tech/Telecom Manufacturing and Retail are increasingly gaining share. - The Indian IT-BPO Industry has displayed resilience and tenacity in encountering the unpredictable conditions during these years and reiterating the viability of India's fundamental value proposition. - According to NASSCOM Factsheet-Indian IT-BPO Industr .....

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considered attributable to the PE of the assessee in accordance with the provisions of Article 7 read with Article 5 of the India-China DTAA. This profit is applied to the sales revenues (excluding collection of revenue on account of software) to arrive at the profits taxable on account of sale of telecom equipment and mobile phone handsets to Indian customers: The assessee' has not submitted the breakdown of the revenue earned on account of sale of equipments/ handsets and software. However .....

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88.83 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 6 45% of 5 above, being profit attributable to the PE 22,42,94,870.06 Therefore, the income of the assessee from sale of hardware component of the telecom equipments/ handsets, which is attributable to the PE in India .....

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o PE of sale of Hardware component of telephone equipment/Handsets. It is observed from the preceding paragraphs I satisfied that that the assessee has concealed particulars of his income and also has furnished inaccurate particulars of his income. In view of this penalty proceedings u/s 271 (1) ( c) is initiated separately. 27. Ld. CIT(A) has confirmed the findings of AO in regard to fixed PE in India and dependent agency in India but has not concurred with the findings of AO in regard to insta .....

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ates from ZTE China come to India to provide technical support services to ZTE India. All these activities go on to establish that the appellant has business connection in India within the meaning of section 9(1)(i) of the Act. The non- resident appellant is doing business activities in India which are not isolated instances, rather these represent real and intimate relationship between activities of the appellant done outside India and those done inside India. The business operations being done .....

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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 o .....

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mployees also conduct in India direct meetings with Indian customers (Q.47 in statement of Sh. Huang Dabin). These employees provide all kinds of technical support to ZTE India be it tendering support, product support, post sales support etc. ( Q.49 in statement of Sh. Huang Dabin, Q.8 & 9 in statement of Mr. Rocky, Q.6 & 7 in statement of Dr. Dalip Ghosh). All these employees work for ZTE Corporation China from following addresses in India (Q. 10 in statement of Mr. Rocky): A. 6th floor .....

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bined reading of these two clauses of Article 5 shows that Indian entity should be other than an agent of independent status and it should habitually exercise authority to sign contract on behalf of non-resident provided its activities are not of ancillary or auxiliary nature. In present case, ZTE India is performing installation activities in respect of telecom equipments supplied by ZTE Corporation to customers in India. It is not the case of the appellant that ZTE India is performing similar .....

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ZTE India needs legs of the appellant to stand. It goes on to prove that ZTE India is not an agent of independent status. 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 stateme .....

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ivities 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 contract is formally signed by the appellant after ZTE India has made it ripe, it does not change the ground reality. For this proposition, strength is derived from OEeD commentary on Art .....

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mains regularly informed about the status and terms of negotiation. Therefore, subsequent signing remains a pure formality especially in view of the facts that terms and conditions mentioned in contract document are more or less standard one. Further, place of signing of contract is irrelevant for constitution of agency PE. Only requirement is that business activity of agent should be pursued in the state where agency PE is to be constituted. 29. Before arriving at any conclusion on the basis of .....

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iations in connection with the sale of equipment; and (c) The signing of the supply and installation contracts. 31. Tribunal further noticed the decision of Hon'ble Supreme Court in the case of CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC) (para 19), wherein the Hon'ble Supreme Court held that the income attributable to the manufacturing activity should be more than the income attributable to the activity of sale. 32. Tribunal further referred to the decision of Hon'ble .....

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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 .....

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. Taking all these into consideration, we consider it fair and reasonable to attribute 20 Qi the net profit in respect of the Indian sales as the income attributable to the PE. The following steps are involved in computing the income attributable to the PE." 33. The second decision on this issue is in the case of Huawei Technologies Co. Ltd. v. ADIT (International taxation)[2014] 149 ITD 323 (Del.), wherein the Tribunal in para 12 took note of the fact that AO estimated operating profit and .....

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ibunal upheld the ld. CIT(A)'s contention after considering the decision in the case of Motorola Inc. (supra). Tribunal, inter alia, observed that since PE was merely doing the job business of negotiation, therefore, 8% profits attributable to PE were in line with the requirement of Rule 10(2) of the IT Rules. 35. Ld. CIT(DR) referred to the assessment order passed in the case of Alcatel Lucent, France for AY 2006-07 and referred to para 6.6 at page 78 of the said order, which is reproduced .....

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assessee group is growing at the fastest pace in India and Indian market has been a profitable market for the group; these are also supported by the continuous increase in efforts in India & the presence in India. The global profitability II does not reflect. the right perspective vis-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 ea .....

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s. 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 calculating income of th .....

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f 0.88% of sales in India has been made to ALIL on account of marketing support services. Further, if, out of 3.37% a deduction is allowed for payments made to ALIL, a figure of 2.49% will be arrived at. Considering the Rule 10 of the Income Tax Rules 1962 and the Article 7 of the DTAA in view of the discussion in this order and taking guidance from the pre-paragraphs, it is estimated that, on a net basis i.e. after reducing the payment made to Indian company for marketing support; 'an objec .....

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Lucent France and referred to para 5.8 of ld. CIT(A)'s order wherein ld. CIT(A) has, inter alia, observed as under: "…. As mentioned in para 3.3 above, in respect of hardware sales, the Ld. AO has estimated net profit chargeable to tax as attributable to PE in India @ 2.5% of the hardware sales made by appellant in India and the appellant has not disputed the findings of the ld. AO on taxability of hardware sales." 37. This remained the basis for assessment years 2004-05 an .....

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ndian 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 .....

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sale of hardware and software a;:d total tax effect in that case is more than what will be after giving effect to this appeal order. Therefore, this methodology does not amount to enhancement and hence no separate notice for that was given to the appellant. The ground of appeal is accordingly partly allowed. With reference to aforementioned findings of ld. CIT(A), ld. CIT(DR) submitted that since M/s Alcatel Lucent, France is carrying out similar activities as the assessee and is engaged in the .....

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/Del/2010 (department's appeal). The Tribunal has observed that M/s Nortel Networks India International Inc., a company incorporated in USA, was a group concern of M/s Nortel group, which is a leading supplier of hardware and software products for GSM Cellular Radio Telephones System. During the year under consideration the assessee had supplied telecommunication hardware to Reliance Infocom. Tribunal, after rejecting the assessee's plea that there was no PE in India, considered the issu .....

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se of Rolls Royce PLC Vs. DIT International taxation 339 ITR 147 (Del), wherein the Hon'ble Delhi High Court approved 35% profits attributable to PE on account of marketing activities in India. The Hon'ble Delhi High Court observed as under: "While restricting the attribution to 35 per cent, the reason given by the Tribunal was that profit attributed to manufacturing activity and R&D activities i. e. 50 per cent and 15 per cent respectively had to be excluded. Thus the expenses .....

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estion 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 aforesai .....

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ss connection in India, the Tribunal adverted to the question as to whether there was any PE in India within the meaning of art. 5 of the Indo-UK DTAA. The Tribunal extracted the provisions of art. 5 and stated the legal position that emerged therefrom. Thereafter, it referred to various documents and narrated its effect in detail. There is a detailed discussion after taking into consideration all the relevant aspects while holding that RRIL constituted PE of the assessee in India. While underta .....

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08] 113 IT) (Del) 446 : (2008) 1 DTR (Del) 394 and Rolls Royce PIc v Dy. Director of IT [2009] 122 IT) (Del) 359 : [2009] 20 DTR (Del) 140 affirmed." 41. Ld. CIT(DR), therefore, submitted that there is no thumb rule that only 20% of the profits are to be attributed and it depends on facts of each case as to what is the level of operation which is quite extensive in the present case as is evident from the findings of AO in AY 2009-10 and ld. CIT(A)'s findings. 42. Ld. counsel has filed a .....

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xable in such contracting state where the PE is situated. Tribunal further noted that in 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 at .....

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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 the event PE coming into existence what was the profit which was required to be attributed in the facts of the case. He pointed out that Tribunal concluded that the correct attribution of profit to its PE would be to the .....

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rom the offshore supply could be brought to tax in India. 46. From the aforementioned discussion it is evident that each case has to be considered on its own merits, depending upon the level of operations carried out by PE in India. In the present case we have earlier reproduced paras 6.2.2 and 7.2.3 from ld. CIT(A)'s order and also findings from AO's order for AY 2009-10 which give a clear picture of the level operations carried out by ZTE India, the assessee's PE. Ld. CIT(A) has po .....

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cts in India by MD of ZTE India - Meetings at Tendering/ Pre Bid stage in India - Preparation of Bidding Documents in India - Signing and submissions of bids in India - Price and contract negotiations in India - Preparation of draft agreements and MOUs in India - Signing of agreement in India - Entering contracts in India - Obtaining Purchase Orders/ other supply orders on behalf of ZTE China - LC opening and supply of equipments/ handsets - Shipment of equipments/ handsets - Customs clearances .....

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E 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 accru .....

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dology provided. We are not inclined to accept this plea of ld. CIT(DR). Therefore, in our opinion, attribution is to be done as per Rule 10(2) of the IT Rules. 48. Ld. counsel has endeavoured to distinguish the decision in the case of Rolls Royce PLC by referring to absence of identical Article 7(3) of India UK DTAA being present in India China DTAA. In our opinion, this is not of much significance because it only considers the involvement of assessee's representatives in negotiations. We h .....

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t which involved supply, installation, testing aand commissioning etc. as is in the present case. Activities of M/s Nortel India and that of LO of Nortel Canada and services of expatriate workers had also been taken as part of the execution of the work by the PE. Thus, the level of operation carried out in India were extensive and under such circumstances Tribunal had attributed 50% of the net profit arising out of Indian transactions as assessee's income. 50. Having discussed the entire cas .....

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e 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 roya .....

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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, therefore, no attribution should be made. The submission is that TPO in the case of WebT India has accepted that the payment for market support service is at arm's lengt .....

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e are for pre sale activities and, therefore, for post sale activities performed by ZTE India, which surfaced on account of survey operations, profits have to be attributed. The AO in his findings for AY 2009-10, as reproduced earlier, very rightly pointed out that the functions performed in respect of transactions on account of supply of equipments and handsets with customers in India were not the subject matter of TP analysis before the TPO. Since all the functions were not the part of TP stud .....

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the PE for those functions/ risks that have not been considered. 53. In the result assessee's appeals stand partly allowed. Department's appeals: 54. Revised grounds, common in all the appeals, raised by the revenue are as under: "1. On the fads and in the circumstances of the case, the Ld CIT(A) has erred in characterizing the nature of consideration received by assessee for supply of software as consideration received for supply of goods and therefore treating the income from sup .....

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h 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 .....

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royalty considered by the AO. The second issue on which department is aggrieved is in regard to finding of ld. CIT(A) in directing the AO to withdraw interest u/s 234B by relying upon the decision of Hon'ble Delhi High Court in the case of DIT v. JaCOBS Civil Incorporation . 56. As regards the first issue, ld. CIT(DR) at the outset fairly conceded that though this issue is covered against the department by the decisions in the cases of Motrola and Alcatel Lucent, but the ground has been rai .....

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this 21st day of November, 2006 BETWEEN Spice Mobile Pvt. Ltd, a company incorporated in India and having its principal/ registered office at Viii. Billanwalla labana, P.O. Baddi, Tehsil Nalagarh, Dist Solan- 173001 (H.P.) (hereinafter referred to as "Purchaser'? or sometimes also referred to as "Customer'? of the one part, AND ZTE Corporation, a company incorporated under the laws of P.R. China having its registered office at ZTE Plaza, Keji Road South, Hi-Tech Industrial Park .....

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ns equipment for infrastructure services and also has the experience and skilled personnel for supply, installation, commissioning and test such telecommunications equipments on a turn-key basis and to ensure that such telecommunications equipments maintain high quality 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 .....

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code 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 use the software delivered with the equ .....

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condition and till the full price of the equipment to the contractor, the purchaser shall not itself (or through any holding, subsidiary or associated purchaser, agent or third party to) (ii) modify, vary, enhance, copy or duplicate, any part of the software, or (ii) create or attempt to create, or permit others to create or attempt to create, by adapt, dissemble, decompile, reassemble, translate, reverse engineering, or otherwise, the source programs or any part thereof from the object program .....

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ors-in-interest and permitted assigns of the one part. AND ZTE Corporation, China a company incorporated under the China Laws, having its registe.red office at 3/F, A Wing, ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, P.R. China hereinafter called the "supplier' which expression shall unless repugnant to the context or meaning thereof include its affiliates, successors and permitted assigns of the other part. Buyer and supplier are hereinafter called .....

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ackage 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 t .....

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phases and the purchase value for the first PO is USD 46,756,935 (US Dollars Forty Six Million Seven hundred and Fifty Six thousand Nine hundred Thirty Five only). The contract price shall be established for the full term of the contract and it represents a sum in the limits of which the buyer shall place orders for the delivery of equipment and the delivery of software products under this contract. The contract price may be changed by mutual written agreement between the parties. Equipment pri .....

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are under this contract. 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 (IISoftware 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 ma .....

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are licensed under a purchase order may be delivered in an inseparable package also containing software programs and features other than the software. Buyer may use such other software programs and features unless expressly provided otherwise in the purchase order. 34.5 The obligations of buyer under this article, shall survive the termination or expiration of this contract for any reason." 58. ld. CIT(DR) submitted that from article 16 granting software license it is clear that the assesse .....

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.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 deliv .....

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tware 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." 62. .....

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s days after receipt of a copy of the Purchase Order signed by the Buyer shall either sign the Purchase Order and send it to the Buyer or inform the Buyer in writing about its non acceptance. In case the Supplier fails to sign the Purchase Order or fails to send any intimation in token of its acceptance within the allowed three (3) days time, in that event, the purchase Order shall deemed to be considered as accepted by the Supplier. However, in case of any clarification needed by Supplier, the .....

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ences 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 p .....

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er 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, disassemble or create derivative works from the Software. 34.3 Buyer may assign the right to use the Software License to a third party in India for the purpose of operations and maintenance of the Buyer's Network , provided that any such third party agrees in writing to abide by all of the terms and c .....

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rticle 34, limitations have been prescribed for use of software. The proprietary right remained with assessee as is evident from the restriction imposed while granting license. 67 To further buttress his submission that software was separately ordered and invoices separately raised, ld. CIT(DR) referred to Annexure XI of department's paper book page 109 PB wherein the invoices raised by assessee on M/s Sistema Shyam Teleservices Ltd. is contained in which the item description is as under: 1. .....

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Tribunal's order dated 4.4.2010 in the case of Alcatel Lucent, France v. ACIT, rendered in ITA no. 4866/Del/2010 & 2519/Del/2010 & others. The same are reproduced below: "11. Learned DR, on the other hand, relied upon the order of the Assessing Officer and he also furnished the written submissions which reads as under:- "This brief written submission is a summary of arguments of the Revenue on the issue of taxation of software payment as royalty. Brief facts 2. A survey un .....

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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 .....

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of income from licensing of software as royalties. The assessee has taken this of taxation in appeal. 5. The 1d.C/T(A) has discussed the issue of taxation of income from licensing of software In paragraphs 3.4 to 5.8 of his order. The ld. CIT(A) by following the judgment of the Hon'ble Delhi High Court in the cases of Ericsson AS and M/s Nokia Networks has allowed the appeal of the assessee. However, in paragraph 5.8 of the order, the Id.CIT(A) has directed the AD to tax profit worked out @ .....

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Further, title in the software has not been transferred. Only partial rights permitting the use of software have been granted. 8. The Revenue relies on the decision of the Hon'ble High Court in the case of Infrasoft Ltd (Order dated 22.11.2013 in ITA No. 1 034/2009) to the extent that the assessee has not contested the taxability of income from software as royalty under the provisions of the Income Tax 4ct. The Hon'ble, High Court in the case of DIT v. Nokia Networks OY [2013] 212 Taxman .....

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applicable treaties in the present case provides that "As regards the application of the Convention by a Contracting 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 inc .....

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ax 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 recent years. The court then observed that paragraph 13.1 of the OECD Model commentary 2000 on Article 12 recognizes that there may be difficulties in applying the copyright provisi .....

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2004), the Administrative Court concluded that payments derived from the use of computer software should not be regarded as literary or scientific work and therefore, such royalties should be taxed as other royalties at a higher rate of 10% and not at 5% as applicable to literary or scientific work. Copy of summary of this decision is submitted. 11. Relevant portion of Article 12 of Spain-USA treaty is also attached. The issue of taxation of income from software as royalty was never in doubt and .....

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es 132 and 133 of the assessment order). It is mentioned that under Section 90 of the Act, the Parliament has delegated the authority to the Central Government to negotiate the tax treaties with other countries. Tax treaties signed by the Government has full force of law and do not require any further ratification by the parliament ' Therefore, any stated- position of the Government Is fully effective and has equal force of law as the tax treaties. The position of India on taxation of income .....

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l 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, .....

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rticle 7 would be applicable and, therefore, the income from software is to be taxed as business income. 72. Ld. counsel relied upon following decisions: - DIT v. Ericsson AB [2012] 343 ITR 470 (Del.); - DIT v. Infrasoft Ltd. [2013] 39 Taxmann.com 88 (Del.) - Aspect Software Inc. v. ADIT [2015] 61 Taxmann.com 36 (Del.) 73. We have considered the submissions of both the parties and have perused the record of the case. We find that in the case of Alcatel Lucent, France Tribunal in para 12,13 & .....

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ision of ITAT of Special Bench in the case of Motorola Inc. (supra) in the case of DIT v. Ericsson A.B. (supra). In the appeal by the Revenue, question No.3 pre posed before the Hon'ble Jurisdictional High Court and admitted by their Lordships reads as under.- "Whether in law, the learned De/hi Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and, hence, was not assessable both under section 9(l)(vi) of the Double Taxat .....

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question NO.3 proposed by the Revenue and admitted by their Lordships reads as under:- "Whether any part of the consideration for supply of software stated by the respondent to be integral to the equipment is taxable as 'royalty' either under section (1)(110 or the relevant provisions 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 cover .....

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bmitted 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 obli .....

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the payer in deducting tax at source from the payments made to the assessee. The relevant part of the judgment is quoted below: 8 This clause categorically uses the expression" deductible or collectible at source" and it is this clause which is incorporated by the Uttaranchal High Court in the said judgment (supra) in the manner already pointed above. The scheme of the Act in respect of non-residents is clear. Section 195 of the Act puts an obligation on the payer, i.e., any person re .....

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to deduct at source from the payments made to a nonresident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of section 201 of the Income-tax Act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at so .....

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;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 .....

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se of the present case it would not make any difference, on account of the peculiar facts of the present case. It may be recalled that the argument put forth by the revenue before the Income Tax Appellate Tribunal was that a the time of the receipt of monies from India, the assessee took the plea that it did not have any PE in India and, therefore, the payment was not chargeable to tax in India, with the consequence that Section 195(1) was not applicable, whereas in the appeals before the CI A p .....

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assessee, merely because at the first appeal stage it chose not to contest the assessment of the income attributable to the Indian PE, to turn around and say that since it has now accepted its liability to pay tax on the Indian income, it was for the Indian payers to have deducted the tax and if they had not done so the assessee cannot be held liable for the interest. This argument of the revenue was rejected by the Tribunal on the ground that there was no material in support of the lea that th .....

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further stated that the telecom equipments were sold outside India and the payments were also received outside India and thus the assessee did not have any taxable presence in India so as to be liable for tax on its Indian income. If this was the stand of the assessee, it is not impermissible or unreasonable to visualise a situation where, the assessee would have represented to its Indian dealers not to deduct tax from the remittances made to it. On the contrary it would be surprising if the ass .....

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ts 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 .....

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7. From the above, it is evident that what was the stand of the assessee in the return of income filed by it would be relevant for deciding the liability to interest under Section 2348. We find that this aspect has not been considered either by the Assessing Officer or by the learned DRP. In fact, the decision of Hon'ble Jurisdictional High Court in the case of Alcatel Lucent USA, Inc. (supra) is dated 7th November, 2013, therefore, this decision was not available' at the time when eithe .....

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t and direct the Assessing Officer to allow adequate opportunity of being heard to the assessee. Thereafter, he will readjudicate the issue in the light of the ratio of the decisions of Hon'ble Jurisdictional High Court in the case of Jacabs Civil Incorporated (supra) and Alcatel Lucent USA, Inc. (supra). With regard to interest charged under Section 234A, no specific argument was advanced at the time of hearing before us. We, therefore, direct the Assessing Officer to rework out the same in .....

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in the case of DIT, International Taxation v. GE Packaged Power Inc. 373 ITR 65, wherein Hon'ble Delhi High 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 Inc .....

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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, of its remittance to the assessee, is liable to be deducted at source towards tax. The anomaly of an assessee denying tax liability (whether under a bona fide mistake or by deceit), the .....

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234B, even though they filed returns declaring nil income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under section 195(1), and to what extent, by recourse to the mechanism provided in section 195(2) of the Act. The failure of the payers to do so did not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under section 201, and the consequences delineated in that provision would visit the payer. DIT v. .....

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Hon'ble Delhi High Court has also, inter alia, referred to the decision in the case of Anjum M.H. Ghaswala 252 ITR 1 (SC). The facts in that case were that General Electric group was manufacturing equipments relating to oil and gas, energy, transportation and aviation for supply to customers in India. After a survey u/s 133A at the premises of General Electric International Operations Co. Inc., liaison office, reassessment proceedings were initiated against several entities of the GE group. .....

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