TMI Blog2020 (12) TMI 857X X X X Extracts X X X X X X X X Extracts X X X X ..... to take a stand that the office of HI in India was engaged in carrying out the business activities of HC. Moreover, in the case in hand, income has not been determined on the basis of any banal declaration by any witness but after analysing in detail the activities of the PE in India since its inception Assessee has repeatedly referred to various clauses of contracts/agreements entered into with Indian buyers for purchase/sale of telecommunication network equipment. The contracts are contractual obligations between the parties, inter se, but who could be in a better position than the key employees of HI to tell how the transactions were actually undertaken, which is the ground reality. Income attribution - As decided in own case [ 2014 (4) TMI 770 - ITAT DELHI] equipment, i.e., the hardware supplied by the assessee contained the software and the software was not separately supplied. The only ground stressed upon by the learned DR was to point out the bifurcation of the contract price between the hardware and software. We find that the facts were identical before the Hon'ble Jurisdictional High Court in the case of Ericsson A.B., New Delhi [ 2011 (12) TMI 91 - DELHI HIG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the impugned order passed by the Assessing Officer is barred by limitation and therefore, is liable to be quashed. 3. An identical additional ground was raised in the case of Reliance Capital Markets Ltd. in ITA No. 1881/DEL/2014, 1583/DEL/2015, 753/DEL/2016 and 1763/DEL/2017 for A.Ys 2009-10 to 2012-13. The additional ground raised was dismissed by the coordinate bench in the impugned appeals. Respectfully following the decision of the co-ordinate bench [supra], the additional ground raised by the assessee in all the captioned appeals are dismissed. 4. The common grievances in all these appeals read as under: 1. That the Learned Assessing Officer ('AO') erred in passing the impugned draft assessment order dated March 28, 2013 (the 'Draft Assessment Older') and the Hon'ble Dispute Resolution Panel ('Hon'ble DRP') erred in passing directions under Section 114C of the Income-tax Act 1961 (the Act') partially confirming the Draft Assessment Order, in summary, the Learned AO erred in assessing the income of the Appellant at ₹ 9,30,98,73,816 as against the returned income of ₹ 5,39,58,286 reported by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have accrued/arisen in India under Section 9 of the Act; and (c) was not taxable in India under the provisions of the Act and/or Tax Treaty. 4. On the facts and circumstances of the case, the Learned AO and Hon'ble DRP erred in holding that existence of Appellant's wholly owned subsidiary, Huawei India, creates BC in India under Section 9(1)(i) of the Act. 5. On the facts and in the circumstances of the case and in law, the Learned AO has erred in proposing and the Hon'ble DRP further erred in confirming that the income of the Appellant is assessable to tax under the Tax Treaty on the ground that the Appellant constitutes a PE in India, viz. (a) Fixed Place PE under Article 5(2) read with Article 5(1) of the Tax Treaty; (b) Installation PE under Article 5(2) read with Article 5(1) of the Tax Treaty; (c) Service PE-under Article-5(2)(k) read with Article 5(1) of the Tax Treaty; and (d) Dependent Agent PE under Article 500 of the Tax Treaty. 6.1 On the facts and circumstances of the case and in law, the AO as well as the Hon'ble DRP erred in not appreciating that that since no part of activity relating to sale of netwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the revenues from supply of software can at best be subjected to lax as 'Business Profits' under the Article 7 read with Article 5 of the Tax Treaty (i.e. in the event it is held that the Appellant constitutes a PE in India). 7.4 On the facts and circumstances of the case and in law, the Learned AO as well as the Hon'ble DRP erred in not following the decision of Jurisdictional Hon'ble Delhi High Court in case of Nokia Networks OY (253 CTR 417) and Ericsson A.B. (19 ITR (Trib) 341) and various other judicial precedents, supporting Appellant's above contentions 8. On the facts and circumstances of the case and in law, the Learned AO erred in. levying interest tinder Section 234B of the Act. 5. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also considered the judicial decisions relied upon by both the sides. 6. At the very outset, in our considered opinion, there cannot be any decision, which would be factually identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded by the TPO. 11. On 17.02.2009, survey operation u/s. 133A of the Act was conducted in the office premises of HI. During the course of survey, several incriminating documents were found, copies of which were obtained and inventorized. Statements of various senior executives were also recorded. 12. During the course of assessment proceedings, the assessee was confronted with the impounded documents and explanation was sought. The assessee was specifically asked to explain as to why revenue from supply and installation of equipment should not be taxed. 13. In its reply, the assessee stated that, it being a tax resident of China, has opted to be taxed in India, as per tax treaty entered into between India and China. It was explained that the income derived by HC from supply of telecommunication equipment to Indian customers qualifies as business profits and, accordingly, taxability of such income is governed by the provisions of Article 7 of India China tax treaty. It was explained that as per Article 7(1) of the India China tax treaty, business profits earned by a Chinese tax resident are taxable in India only if that Chinese resident carries on business in India through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Finance Act, 2003 with effect from 1st April, 2004 has inserted two new Explanations to Clause (i) of Section 9(1) clarifying that the expression 'business connection' will include a person acting on behalf of non-resident and who carried on certain activities. 17. Referring to the decision of the Hon'ble Supreme Court in the case of CIT Vs. R.D. Agarwal and Co. 56 ITR 20 and the Hon'ble Bombay High Court in the case of Blue Star Engineering Co. versus CIT 73 ITR 283, the Assessing Officer came to the conclusion that the assessee has business connection in India u/s. 9(1)(i) of the Act. 18. Referring to the decision of the Tribunal in the case of Nokia Networks OY vs. JCIT 94 taxmann.com 111 (Del), the ld. counsel for the assessee stated that the ratio decidendi emanating from the aforesaid decisions is that the following conditions should exist to constitute 'Business Connection' in India: A real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities in India The relation contributes directly and indirectly to the earnings of income by the non-resident in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with the requirement of telecommunication service provider. In other words, the Indian buyers business purpose would not conclude merely on purchasing of equipment from HC, the same has to be customised and commissioned to the satisfaction of the Indian telecom service providers. Thus, the dominant purpose is to set up the equipment as per requirement of the telecom service providers. 23. The Supreme Court in the case of BSNL [2006] 3 STT 245 has explained the dominant nature of an equipment. The relevant portion of the same is as under: The reason why these services do not involve a sale for the purposes of Entry 54 of List - II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a with the help of their employees who regularly work from the premises in India belonging to HI and thereby creating a fixed place PE under Article 5(1) of the DTAA. 31. The Assessing Officer further observed that the employees of the assessee have visited India to perform activities relating to the installation projects, which have lasted for more than 183 days thereby creating 'installation PE' of the assessee in India under Article 5(2)(j). The Assessing Officer further observed that the employees of the assessee have rendered services in India other than in the nature of technical services and that such services have continued in India for more than 183 days thereby creating 'service PE' in India under Article 5(2)(K). Assessing officer further observed that the process of joint bidding done by the assessee and HI does result into 'dependent agency PE' under article 5(4) of the tax treaty. 32. Before us, the learned counsel for the assessee vehemently stated that the products in which the assessee deals are technically complex advanced products and it is the technology and manufacturing efforts which play an important role in product selling. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eject the entire shipment/goods or part thereof. 37. Article 6.3 reads as under: Risk of loss of goods shall pass from seller to owner upon acceptance of the goods. In the event any short/incorrect/damaged shipment [and or goods contained therein or damaged] owner shall have the right to reject the entire shipment/goods or part thereof. In such an event, without in any way limiting any rights and remedies of owner under this agreement or applicable law in respect of such a rejected shipment/goods, the seller shall, at its own cost/expense, replace such a rejected shipment and/or the damaged/incorrect goods and supply the undelivered part of the short shipped within a period of 20 days from the date of notification by the owner of its rejection. 38. A similar clause is provided in the contract with HTL wherein under Article 7.3, it is provided: The seller shall, at its own cost and expense replace all or any equipment which are defective. 39. Similarly, in the contract with Sterlite Optical Technologies Ltd. at clause 10.5.5, it is provided as under Any equipment rejected due to defect in quality arising during inspection by the buyer or by customer will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n contracts) also contemplate a certification after erection; by virtue of the said clause, the owner certifies as to the successful operation of the facility; the said certification is given after the owner inspects the facility, and finds that all the units and components, which have been supplied, are working; the scope of certification extends not only to the civil work, but also to the goods supplied under the supply contract; in all the contracts, the supplier becomes entitled to full payment only upon receipt of such certification; the payment is linked to successful inspection and certification; if the contract has an inspection or a certification clause, title does not pass till the inspection and certification are successful, and the buyer/owner has indicated his approval; the Supreme Court, in Usha Belltron 158, held that title passes only upon certification; and the petitioners contention that the taking over certificate was merely for ensuring proper quality of goods supplied, and does not relate to passing of property in the goods, is not tenable. 96. In Usha Beltron Ltd. 158, the petitioner contended that the property in the goods had passed to the Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation clauses in the contract would fall within the ambit of the phrase other similar terms in Section 24. The presence of an inspection and certification clause in the supply contract defers passing of title till the owner has expressed its assent. Such assent is given only after inspection and certification. 99. Section 26 stipulates that risk, prima-facie, passes with the property and, thereunder, unless otherwise agreed, the goods remain at the sellers risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyers risk whether delivery has been made or not. Section 26 is not attracted where the contract provides otherwise. While the question, as to when title to the goods is transferred from the seller to the buyer, must be determined from the conditions stipulated in the subject contracts, if the parties have agreed that the responsibility for risk of loss and damage to the goods would be that of the supplier till erection of the plant is completed, it is evident that transfer of title to the goods was intended to pass only on erection, and not prior thereto. 100. Section 41(2) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns with customers in India. Representatives of HC were allowed to use the premises of HI. 49. One of the arguments of the ld. counsel for the assessee is that HC was not involved in installation or commission of telecom network equipment in India which was being done by HI under independent contracts with Indian customers/telecom operators. HC had merely supplied telecom network equipment to Indian customers/telecom operation who had no role to play in installation/commissioning of telecom network supply to Indian customers/telecom network operators. 50. Huawei India had executed independent contracts with telecom operators under which responsibility for installation, erection and commissioning of the telecom network equipment rested with HI. It is the say of the ld. counsel for the assessee that HI is fully equipped to perform installation activities independently and has necessary technical and operational capabilities at its disposal to render such services independently. Installation, testing and commissioning activities were undertaken by HI in its independent capacity under separate contracts with Indian customers/telecom operators. Invoices for installation, testing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll equipment supplied by HC and, therefore, the act of installation has been performed only with the supervision of HC resources which means that supply and its installation are integral. 57. Therefore, the activity of supervision in connection with installation does constitute 'installation PE' as per Article 5(2)(j) of India China DTAA which provides that a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site project or activities continue for a period of more than 183 days. 58. Another contention of the ld. counsel for the assessee is that mere presence of an independent agent does not result in PE provided the agent is acting in the ordinary course of his business. It is the say of the learned counsel that the dependent agency PE can be said to result only where it can be established that such agent has or habitually exercised authority to conclude contracts in India on its behalf. The ld. counsel for the assessee vehemently stated that HI does not constitute Dependent Agent PE, as all strategy/policy and decision making functions reside with HC outside India and role of Huawei India was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracts etc, during their visits depending upon the circumstances operate from their hotel, our office in Gurgaon or the premises provided by the client. 61. Facts on record show that Mr. Horan Deng and Mr. Cheingwelhua visited to India to closely monitor the progress in project at various stages starting from bidding stage to final implementation phase. Facts on record also reveal that Chinese resources have been seconded to HI for advancement of business of HC in India. 62. As mentioned elsewhere, the claim of the assessee is that HI responsible only for preparatory work. If that be so, then where is the need for secondment of foreign expats with Indian entity. 63. The Hon'ble Supreme Court in the case of Formula One World Championship Ltd. 80 Taxmann 347 has raised the question as to whether the fixed place was put at the disposal of the appellant entity. The Hon'ble Supreme Court observed that this question can be answered only after analysing various agreements relevant to the event in wholesome manner in order to understand the entire arrangement between FOWC and its associates. Thus, the principle laid down by the Hon'ble Supreme Court is that all relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onduct of this event in India. Thus, commercial rights are with FOWC which are exploited with actual conduct of race in India. Even the physical control of the circuit was with FOWC and its affiliates from the inception, i.e. inclusion of event in a circuit till the conclusion of the event. Omnipresence of FOWC and its stamp over the event is loud, clear and firm. Mr. Rohatgi is right in his submission that the undisputed facts were that race was physically conducted in India and from this race income was generated in India. Therefore, a commonsense and plain thinking of the entire situation would lead to the conclusion that FOWC had made their earning in India through the said track over which they had complete control during the period of race. The appellants are trying to trivialize the issue by harping on the fact that duration of the event was three days and, therefore, control, if at all, would be for that period only. His reply was that the duration of the agreement was five years, which was extendable to another five years. The question of the PE has to be examined keeping in mind that the aforesaid race was to be conducted only for three days in a year and for the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the foreign entity. Frequent visits of the expats from HC exert the control to carry out various business activities of the appellant. 69. In its written submissions, the ld. counsel for the assessee further contended as follows: The following principles have been enunciated in various commentaries in respect of economic independence for an agent: - The agent's business can stand on its own and does not look to the principal for its economic viability; - The agent bears risk of loss from its own activities; and - The agent is not dependent wholly and exclusively on one principal. The number of principals represented by an agent is also determinative of economic independence of the agent. 70. As mentioned elsewhere, the Indian resources were involved in deal negotiations on behalf of the assessee. Reference is made to the email offer dated 30.01.2009 of Shri Arundeep Kakkar. Further, joint bidding shows the business activity including signing of bid documents from the office premises of HI and there is no denial that HI is participating in negotiations of deal with Indian clients on behalf of HC. 71. Facts on record clearly establish that HI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mence the process of marketing its product, understanding the needs of Indian clients, giving them options about available technology, address queries and concerns with respect to technical viability and cost efficacy of the products concerned and wherever necessary indicate how and to what extent it could adapt its known products, or design parameters, to suit Indian conditions as well as Indian local regulations. This process was time consuming and involved a series of consultations between the client, its technical and financial experts and also its headquarters. Oftentimes the headquarters too had to be consulted on technical matters. After this consultative process ended and the terms of supply were agreed to, the final affirmative to the offer, to be made by the Indian customer, would be indicated by GEs headquarters. 75. As in the present case it is not a supply of standard product but product based on specific requirements of the customer. 76. Considering the facts in totality, in light of the judicial decisions discussed hereinabove, and considering from all possible angles, we have no hesitation to hold that HI not only constitutes dependent agent PE of HC but als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR. Our findings are totally on the peculiar facts of the case in hand as discussed hereinabove. 82. In so far as the attribution is concerned, the findings of the Tribunal given in A.Y. 2005-06 to 2008-09 [supra] are taken as it is. The relevant findings of the Tribunal read as under: 15. We have carefully considered the submissions of both the sides and perused relevant material placed before us. After considering the facts of the case and the arguments of both the sides, we are of the opinion that the issue is squarely covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court. That in the case of Ericsson A.B., New Delhi (supra), Hon'ble Jurisdictional High Court held as under:- Once one proceeds on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Act or under the DTAA. It is apparent that what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the revenue to assess the same under two differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein their Lordships held as under:- 86. The Licensing Agreement shows that the license is nonexclusive, non-transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse engineer the Software without Infrasoft's written consent. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gotiation of this payment. (i) Validation Test Certificate issued by MTNL. In case of deduction of Liquidated damages by MTNL, the buyer will submit the documentary proof issued by MTNL of such deduction to Bank and the same will be adjusted from the second payment. Second payment shall be made only after first payment is released to Supplier. 5.8.4.4 Third Payment of 10% of cost of Equipment (Hardware) and 30% of Equipment (Software) shall be paid on 60th day from submission of following documents - i) Acceptance Test Certificate issued by MTNL for entire city of Delhi/Mumbai. ii) Certificate issued by MTNL for Compliance of 30% Value addition as per the tender condition. In case of deduction of Liquidated damages by MTNL on installation and commissioning, the buyer will submit such documentary proof issued by MTNL of such deduction to Bank and the same will be adjusted from the third payment. Any LD on account of Buyer that is deducted from the supplier's second payment will be settled duly paid to supplier in the third payment. 21. Learned DR, with reference to above paragraphs as well as the schedule to the agreement, pointed out that there is a separate price as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 234B of the Act, an assessee who is liable to pay advance tax under section 208 will be liable to interest under section 234B of the Act, if he fails to pay such tax, or the advance tax paid by him falls short of 90 percent of the assessed tax. In our understanding of the law, an assessee must first be liable to pay advance tax under the provisions of section 208 of the Act. As per the provisions of section 208 read with section 209(1)(d) of the Act, advance tax payable has to be computed after reducing from the estimated tax liability the amount of tax deductible/collectible at source on income which is included in computing the estimated tax liability. 86. Under section 195 of the Act, tax is deductible at source from payments made to non-residents. Appellant is a non-resident and thus, tax is deductible at source from the payments made to it under section 195 of the Act. Since tax was deductible at source on all the payments made to Appellant, no advance tax was payable as per the provisions of the Act. 87. The Hon'ble Delhi High Court in the case of DIT v. GE Packaged Power Inc. 373 ITR 65 wherein the High Court held that no interest under section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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