TMI Blog2017 (10) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... in agreement with the submission made on behalf of the assessee that the embedded software is not royalty and the receipts on account of sale of embedded software cannot be separately brought to tax. Levy of interest under section 234B - Held that:- In view of the finding of the Hon’ble High Court in assessee’s own case reported in (2016 (5) TMI 373 - DELHI HIGH COURT) that no portion of the profits from off shore supplies was taxable in India, levy of interest becomes academic given the absence of any taxable income in India. Non-taxability under the provisions of Domestic Law itself - Held that:- Having regard to the facts and circumstances of the case in the light of the fact that for the earlier assessment years a specific finding was given by the High Court as to the non-taxability of the Assessee under the provisions of the Income Tax Act and the revenue had filed a Special Leave Petition before the Hon’ble Supreme Court which stood admitted involving similar questions, the questions relating to the limiting of benefits is only academic and does not required to be adjudicated specifically. We, therefore, find that the cross objections preferred by the Revenue are liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the payments for equipment supplied directly to the assessee. 3. Original assessment in respect of the AY 2006-07 and 2007- 08 was complete, however, placing reliance upon the earlier years proceedings the matters were reopened the assessments in respect of those years and assessment u/s 143(3) was done in respect of other two years. For all these Assessment years under consideration and held that the assessee company is having business connection in India in the form of Nortel Network India Private Limited (Nortel India) and the L.O. of M/s Nortel Network Ltd. AO observed that the contract in this regard is a turnkey contract, indivisible contract for supply, installation, testing, commissioning etc. Yet the contract for installation and commissioning were assigned to Nortel India. The entire responsibility of the execution of turn key contract remained with the Guarantor. AO observed that this arrangement shows that assessee is getting its work executed through Nortel India. The responsibilities of the assessee have been assigned to the Indian company without any consideration. That Nortel India has undertaken the responsibility for negotiating and securing the contracts. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the activities being carried out by the PE are the core activities of the assessee resulting in generation of income to the assessee, and thus they cannot be considered to be a preparatory and auxiliary. On this premise he confirmed the Assessment orders in appeals. Hence the assessee is in these appeals before us. 5. In respect of all the years, assessee raised almost common grounds questioning the findings of the authorities below in respect of the existence of PE and the consequent taxability of the income of assessee and in respect of the AY 2006-07, the assessee also raised the issue relating to the AO bringing the receipts on account of sale of embedded software as royalty. 6. The common ground raised by the Revenue in Cross objections is as follows: Whether the assessee is entitled to the benefits of India-USA Double Taxation Avoidance Convention (DTAC) in view of the provisions of Article 24 of the DTAC which restricts the benefits of the treaty to companies in which more than 50% of beneficial interest /shares is /are owned, directly or indirectly, by one or more individual residents of one of the Contracting States, considering the fact that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s about cause of delay. Unless the cause of delay is known, which is quite different from inference about the cause of delay, it is not even possible to come to the conclusion whether such a cause is a reasonable cause or not. In the present case, therefore, there is no occasion to even examine reasonableness of the cause of delay, and as such it is not possible to condone the delay. In our considered view, the apprehensions, howsoever justified, about the impact of non filing of appeals for one year, on the fate of similar appeals in the subsequent years, cannot be reason enough to condone the delay in filing of appeal after almost eight years. That cannot, by any stretch of logic, be the cause of delay; that can at best be the impact and consequences of delay, but then, at the cost of repetition, consequences of delay, howsoever material, cannot be reason enough to condone the delay itself. In view of these discussions, in our considered view, the condonation petition does not deserve to be accepted. We reject the same. The appeal is dismissed as time barred. Per contra, Ld. Departmental Representative pleaded that this is a pure legal issue and the Revenue may be allowed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and since the matter is pending before the Hon ble Apex Court the issue cannot be said to have been decided finally. On this premise, he urged to uphold the decisions of the authorities below. 11. At the outset, a perusal of the judgement of the Hon ble Jurisdictional High Court in assessee s own case in Nortel Networks India International Inc. Vs. DCIT (2016) 386 ITR 353 reveals that inasmuch as the present batch of Appeals relate to Assessment Years 2006-07, 2007-08, 2009-10 2010-11, similar issues had arisen in the Assessee s own case for Assessment Years 2003-04, 2004-05, 2005-06 2008-09; when the matter had travelled upto the jurisdictional High Court, all the issues involved in this matter including the question relating to whether there existed a permanent establishment of the Assessee in India, were considered by the jurisdictional High Court for the above mentioned Assessment Years, and having considered the facts and circumstances of the case and the legal position, the jurisdictional High Court held that there did not exist any permanent establishment of the Assessee in India and consequently no portion of the income arising from offshore supplies was liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. [1965] 56 ITR 20 (SC), the Supreme Court observed that business connection would mean a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business . However, by virtue of Explanation 1 to Section 9(1) of the Act, only such part of the income which is reasonably attributable to operations carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of Assessee's income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India. 44. There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Cana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to liability to pay tax relating to consideration for offshore supplies and offshore services. Whereas the appellant (a member of the consortium of contractors) contended that the contract was a divisible one and it did not have any liability to pay tax in respect of consideration for offshore services and offshore supplies, the Revenue contended to the contrary. According to the Revenue, the contract in question was a composite one and could not be split up for the purposes of considering whether the income arising therefrom was taxable under the Act. The relevant extracts from the said judgment are reproduced below:- 30. The contract is a complex arrangement. Petronet and the Appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. ( 3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed. ( 4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. ( 5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will Page | 16 have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act. ( 6) Clause (a) of Explanation 1 to Section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India. ( 9) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. ( 10) The location of the source of income within India would not render sufficient nexus to tax the income from that source. ( 11) If the test applied by the Authority for Advanced Rulings is to be adopted here too, then it would eliminate the difference between the connection between Indian and foreign operations, and the apportionment of income accordingly. ( 12) The services are inextricably linked to the supply of goods, and it must be considered in the same manner. 46. It is clear from the above that even in cases of a turnkey contract, it is not necessary that for the purposes of taxability, the entire contract be considered as an integrated one. And, it does not follow that the amount payable for supply of goods overseas would be chargeable to tax under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f work and services to be performed under the Service Contract and the relevant extracts from the said section are reproduced below:- 3.1.1 The Vendor has to provide to Reliance the Services set forth in the relevant Purchase Order pursuant to and in accordance with this Optical Services Contract. All Services shall comply with the Specifications and the Standards. The Vendor shall coordinate its efforts hereunder with all Subcontractors, Third Party providers and the Other Contractors, to ensure compliance with any and all supply and transportation requirements and all Governmental Entities. All Services, requiring certification shall be certified by independent and appropriate professionals licensed or properly qualified to perform such certification in an appropriate jurisdictions, reasonably acceptable and at no cost to Reliance, if such certification is required by Applicable Law or the Specifications. Vendor shall provide to Reliance, necessary installation Certificates, as per EPCG regulations for which the Parties will mutually agree on a format and procedure and for which Reliance shall reimburse Vendor for reasonable actual fees paid to any chartered engineers pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and Canada. . 69. The AO, CIT(A) and ITAT have held that the office of Nortel India and Nortel LO constituted a fixed place of business of the Assessee. As pointed out earlier, we find no material on record that would even remotely suggest that Nortel LO had acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf. Thus, it is not possible to accept that the offices of Nortel LO could be considered as a fixed place of business of the Assessee. Insofar as Nortel India is concerned, there is also no evidence that the offices of Nortel India were at the disposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had acted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices of Nortel India constituted a fixed place business PE of the Assessee or Nortel Canada. Nortel India is an independent company and a separate taxable entity under the Act. There is no material on record which would indicate that its office was used as an office by the Assessee or Nortel Canada. Even if it is accepted that certain activities were carried on by Nortel India on behalf o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d warranty services. The ITAT also concurred with the view that since employees of group companies had visited India in connection with the project, the business of the Assessee was carried out by those employees from the business premises of Nortel India and Nortel LO. In this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm's Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee. 17. The Hon ble High Court, therefore, categorically found that i. that the Assessee does not have a PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities below. 20. In CIT Vs. ZTE Corporation (2017) 392 ITR page 80 (Del.) it is held as follows: 21. The reference to clauses (a) and (b) means that all the rights which are in literary works i.e. (i) to reproduce the work in any material form including the storing of it in any medium by electronic means;(ii) to issue copies of the work to the public not being copies already in circulation;(iii) to perform the work in public, or communicate it to the public;(iv) to make any cinematograph film or sound recording in respect of the work;(v) to make any translation of the work;(vi) to make any adaptation of the work;(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (I) to (vi) inhere in the owner of copyright of a computer programme. Therefore, the copyright owner's rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable in India, levy of interest becomes academic given the absence of any taxable income in India. 23. As regards the cross objections raised by the revenue, it is contended by the Ld. AR that firstly, the cross objections were barred by limitation, secondly given the finding of the High Court of non-taxability under the provisions of Domestic Law itself, the same were rendered academic, thirdly there was no question of any benefit having taken by the Assessee under the provisions of the India USA DTAA since the treaty had been resorted to by the Assessing Officer for the creation of a permanent establishment of the Assessee in India and that was not a benefit provided by the treaty. 24. Having regard to the facts and circumstances of the case in the light of the fact that for the earlier assessment years a specific finding was given by the High Court as to the non-taxability of the Assessee under the provisions of the Income Tax Act and the revenue had filed a Special Leave Petition before the Hon ble Supreme Court which stood admitted involving similar questions, the questions relating to the limiting of benefits is only academic and does not required to be adjudicated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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