TMI Blog2019 (2) TMI 1942X X X X Extracts X X X X X X X X Extracts X X X X ..... to Indian customers. At this juncture we may point out that while deciding the department's appeal in subsequent part of this order, we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. Taxability of software as royalty - HELD THAT:- As decided in own case [ 2016 (6) TMI 329 - ITAT DELHI] 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. In view of the decision of Hon'ble Delhi High Court in the case of DIT v. Nokia India [ 2012 (9) TMI 409 - DELHI HIGH COURT] software supplies could not be taxed even under the amended law - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Huang Dabin Q-4 (AO-9) Time to time clarifications and communicating with the assessee ZTE India (AO-4) Huang Dabin Q-2 (AO-9) Identifying business opportunities ZTE India (AO-4) Act as interface with Indian customers ZTE India (AO-4) Contracts with Indian customers were negotiated through electronic means or through short visits of assessee's personnel at the customers locations in India ZTE China (AO-4) ZTE China sometimes seek clarifications from customers through ZTE India (Huang Dabin Q- 47 AO-10) Contracts were accepted and concluded outside India ZTE China (AO-4) No fixed Place employees visiting India didn't have access to ZTE India premises without its approval ZTE China (AO-4) S P. 21 of Annex-7 (not available) of survey documents shows office address as 804-808, Tower B, Global Business Park, Gurgaon and contact person i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India Office) shown as 804-808, Tower-B, Global Business Park, Gurgaon India and Rajesh Singh shown as contact person (p.21 Annex-7 as per Q. 25 to Huang Dabin p.91 Annex-1) C. ITAT Order dt.30.05.2016 S.No Findings Observations of Hon'ble ITAT Ref. Para No Challenged 1 Business Connection (not a GOA before ITAT) 2 Existence of PE under Art-5(1), 5(2)(c), 5(2)(u) 5(4) not pressed 13 No 3 Level of PE's participation /Functions carried out by PE 46, 50 No 4 Attribution of Profits to PE 50 Yes (194,195,196,227, 228) 5 Whether activities are preparatory auxiliary in character (not a GOA before ITAT) 28 r.w. 46 No. In p.187, 194,196,228, it profitability of activities are highlighted. Para-18 We have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and practices followed by the assessee; Assessee vide its submission dt. 15.3.13 submitted that there was no change in the facts and circumstances from earlier years in respect of business model, revenue streams and their taxability in India. (AO-09-10) No evidence produced to controvert the finding of facts recorded by Hon'ble ITAT in para-46 of its order relating to the functions and operations carried out by the assessee in India through its PE. The findings of the Hon'ble ITAT on the role and functions of the PE and the activities operations carried out by such PE has not been challenged before the Hon'ble High Court. The questions of law raised before the Hon'ble ITAT relate only to the attribution of income to such PE. It was claimed that marketing, negotiation and conclusion of contracts are not revenue generating activities (as distinct from preparatory and auxiliary activities) and consequently no income should be attributed to the PE (Ref. p.196 228 of Common Paper Book) Once the existence of Fixed Place PE is established by the Revenue during earlier years, the onus is on the assessee to establish and prove that such a PE has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Art. 5(5) OECD and UN MC. respectively) has dropped out. Insignificant interruption of the business activity are not taken into account. Apart from such short-term interruptions, the leasing out of an enterprise or a PE by the taxpayer will usually bring the PE of the lessor taxpayer to an end. Likewise, a PE ceases to exist as soon as one of the negative elements contained in Art-5(4) or (6) OECD and UN MC occurs. It is important to note, however, that the determination of the beginning and end of a PE is relevant for capital taxation only. By contrast, it need not be considered for income tax purposes. This is particularly true with regard to Art 7(1) (2).... as the rules on attribution of profits to a PE allow an attribution of earnings and expenses to the PE even if they have accrued at a time when the PE had not subsisted yet - or vice versa, after the PE ceased to exist. (pp.348-349) E. Analysis of Documents relating to assessee found during Survey- Description Reference Non-Disclosure Agreement dt. 6/3/07 between assessee and Dishnet. -Address of the assessee given at 8th Floor, Tower B, Glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Yi Chen, Mobile Project Manager, ZTE China, Gurgaon p.333-334, Survey Doc, Certificates from Aircel certifying that ZTE Corpn has successfully 'supplied' and 'installed' the trial system p.330, Survey Doc, Vol.Ill Confidential Non-disclosure Agreement between ZTE Corp Teracom signed by Mr. D.Bhattachraya for ZTE Corp who is an employee of ZTE India (refer to p. 1215 of Survey Doc, Vol-X) p.649-652, Survey Doc, Vol.VII MOU for Business Alliance Partnership between ZTE Corp Teracom CLIP phones (signed by Mr. D.Bhattachraya for ZTE Corp who is an employee of ZTE India (refer to p. 1215 of Survey Doc, Vol-X) p.676-683, Survey Doc, Details of Legal advice sought fees paid. It may be noted that the law farm Fox Mandal Co discussed various issues including the following which proves that ZTE Corp had its own employees working in India as well as seconded employees to ZTE India who were working for it - Termination of employment of Rajan Kalsi Finalization of secondment agreements with ZTE India Discussion an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suring supply of equipments. It may be noted that the address of ZTE India given as 8th Floor, Tower B, Global Business Park, Gurgaon which happens to be the Indian office of ZTE Corpn. (Similar letters may be found in pages-167- p.714-715, Survey Doc, Vol.VIII Letter from Huang Zuwei, CMD Assistant ZTE Corp. (India) on ZTE Corp letterhead with Gurgaon address(also at p.759-760,756) p.716-720, Survey Doc, Vol.VIII Minutes of meeting between ITI ZTE Corpn represented by Huang Zuwei, MD P.P.Singhal, VP on terms of BSNL Contract p.722-723; 794- 796, Survey Doc, Letter addressed to Mr. Huang Zuwei, MD, ZTE Corpn, as 8th Floor, Tower B, Global Business Park, Gurgaon p.724, 834 Survey Doc, Vol.VIII Letter to ITI from ZTE Corpn signed by Huang Zuwei, Assistant to CMD ZTE lndia(also at p.751,754,755,806-815) p.725-726, Survey Doc, Vol.VIII Letter to BSNL/ITI from ZTE Corpn showing offices at Bangalore 8i New Delhi too signed by Huang Zuwei, MD p.727-730,802 820-821,824,828, Survey Do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ZTE China p.831-833,836- 838, Survey Doc, Licensing agreement between ZTE China ITI dt. 5/8/03 signed by MD, India of ZTE (although ZTE Telecom India was not incorporated as on this date) p.840-853, Survey Doc, Vol.VIII Authorisation Letter in favor of Liu Ren dt. 19/12/08 to enter contracts p.871, Survey Doc, Vol.VIII Letter for reclassification of software as 'packaged software' and not as 'customised software'. Refer to Statement before customs in p.1140-1143 p.892, Survey Doc, Vol.VIII Liu Ren signing MOU dt. 25/5/06 with Samsung as MD, ZTE Telecom India p.922, Survey Doc, Vol.VIII Letter from United Telecoms to ZTE China showing India office address at Gurgaon p.931, Survey Doc, Vol.VIII Pre-bid agreement dt. 7.5.05 between ITI ZTE China signed by Liu Ren p.938, Survey Doc, Vol.VIII Letters between ITI ZTE Corporation (India) with Liu Ren as MD having office at Gurgaon p.941, Sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the activities carried ITA 5870/Del/12 ors. - ZTE Corporation out in India. This is evident from Article 7 of DTAA and Explanation 1 to clause (i) of section 9(1). Facts in two cases cannot be identical. The AO had attributed only 20% (from AYs. 2004-05 to 2008-09) of the operating profit as per the global financial statement submitted by the assessee. This implies that 20% of the profits were generated on account of involvement of PE in the revenue generating structure and the 80% profit accrued in the resident state. However, for AY 2009-10, the AO has attributed 45% of the operating profit. Considering the different modes adopted by AO and ld. CIT(A), it becomes necessary to examine the level of operation carried out by PE in India so as to arrive at reasonable percentage of profit to be attributed to PE in India. XXXXX 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this decision ld. CIT(A) himself noted that assessee had accepted and not contested in appeal attribution @ 2.5% of total sales revenue. Therefore, this decision, considered by ld. CIT(A), cannot be the basis for arriving at the conclusion that 2.5% of entire sales revenue should be attributable to Indian PE, which is primarily as per Rule 10(1) methodology 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 ITA 5870/Del/12 ors. - ZTE Corporation significance because it only considers the involvement of assessee's representatives in negotiations. We have to consider the overall operations carried out by PE in India. Mere involvement of expatriates in the activities of PE for assisting the Indian team cannot substantially affect the revenue generating capacity of PE. 49. The decision in the case of M/s Nortel Networks India International Inc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-ordinate bench, we hold accordingly. 9. Third grievance relates to taxability of software as royalty [In revenue s appeal]. 10. This dispute has also been considered and decided by the Tribunal in earlier assessment years 2004-05 in ITA No. 5870/DEL/2012 and others [supra]. The relevant findings given by the Tribunal read as under: 71. Ld. counsel for the assessee submitted that this issue stands settled by the Hon'ble Delhi High Court in the cases of DIT Vs. Ericsson AB 343 ITR 470 (Del.); DIT Vs. 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 ITA 5870/Del/12 ors. - ZTE Corporation supply of hardware and, therefore, AO was not right in taxing such receipts as royalty. He submitted that ld. CIT(A) has rightly held that receipts from supply of software could not be taxed as royalty, relying on various decisions. He further pointed out that ld. CIT(A) also held that in view of the decision of Hon'ble Delhi High Court in the case of DIT Vs. Nokia India (supra), software supplies could not be taxed even under the amended law. Further, as per the provisions of Article 12(5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 covered by the decision of Hon'ble ITA 5870/Del/12 ors. - ZTE Corporation Jurisdictional High Court in the case of the assessee as well as in the case of Ericsson A.B. (supra). respectfully following the same, we uphold the order of learned CIT(A) in this regard and reject ground No.2 of the Revenue's appeal. 74. Respectfully following the decision of Hon'ble Jurisdictional High Court, as noted by Tribunal, ground nos. 2 3 are rejected. 11. This quarrel travelled upto the Hon'ble High Court and the Hon'ble High Court in ITA No. 904 to 909 of 2016 has held as under: 22. In the present case, the facts are closely similar to Ericson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separ ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
