TMI Blog2021 (11) TMI 585X X X X Extracts X X X X X X X X Extracts X X X X ..... NDHRA PRADESH HIGH COURT ] The ratio laid down by the Hon'ble Supreme Court in the case of Ishibkawajima-Harima Heavy Industries Ltd [ 2007 (1) TMI 91 - SUPREME COURT ] squarely apply on the facts of the case wherein the Hon'ble Supreme Court has held that the fact that the contract was signed in India is of no material consequence since all the activities in connection with off shore supplies were carried outside India. We are therefore, of the view that the decision in the case of Ishibkawajima-Harima Heavy Industries Ltd [supra] covers the issue as to whether any part of the profit arising from supply of equipment by the assessee is chargeable to tax. We do not find any merits in the findings of the ld. CIT(A) in respect of addition sustained by him. We are of the considered view that the appellant has no business connection in India in respect of supply of GSM System by the appellant to cellular operators in India and further, there is no PE in any form in India in the captioned Assessment Years and therefore, the question of attribution of profit does not arise at all. DR has placed strong reliance on the decision of this Tribunal in the case of Huawei Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... har Panda, CIT- DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER: The above captioned appeals by the assessee and revenue are preferred against the very same order of the ld. CIT(A) - 42, New Delhi dated 29.12.2017. Since common issues are involved in all the above appeals pertaining to same assessee and were heard together, these are being disposed off by this common order for the sake of convenience and brevity. 2. The assessee is in appeal against that part of the order of the ld. CIT(A) which has been decided against it and the Revenue is in appeal in respect of the other part of the order of the ld. CIT(A) which has been decided against it. 3. The brief history of the captioned appeals are that in the first round of litigation, vide order dated 12.03.2004, the Assessing Officer in Assessment Year 1999-2000, has made the additions as under: S. No. Income Head Goss income amount (Rs) Net taxable amount (Rs) Tax rate Tax amount (Rs) 1. Sale of hardware 1,003,309,774 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Ys 1997-98 and 1998-99 which order has been upheld by the Hon'ble High Court of Delhi in ITA No. 504, 507, 508, 511 of 2007 by judgement dated 23.12.20011. The Tribunal was convinced with the contentions of the assessee and decided the appeal in favour of the assessee and against the Revenue following the orders of the Special Bench in A.Ys 1997-98 and 1998-99. 7. The Revenue appealed before the Hon'ble High Court of Delhi and the Hon'ble High Court was pleased to set aside the order of the Tribunal and the ld. CIT(A) and remitted the matter back to the file of the ld. CIT(A). The findings of the Hon'ble High Court of Delhi read as under: 7. This Court has considered the submissions of the parties. Para 3.2 and 3.3 of the order of CIT (Appeals) points to the inferences drawn by the authority. Given that the CIT (Appeals) is vested with adjudicatory powers including power to appreciate the facts subject to the condition that reasonable opportunity is to be afforded to the assessee, the ITAT was correct in holding that such fact determination to the detriment of the assessee was unwarranted in the circumstances of the case. However, the problem is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporated in Sweden and is a tax resident of Sweden. It is a wholly owned subsidiary of Telefonaktiebolaget LM Ericcson, Sweden. The main business of the assessee is supply of GSM Mobile Telecommunication System comprising of hardware and software to various cellular companies operating in India. 11. Ericcson India Pvt Ltd [EIL] is also a wholly owned subsidiary of LME Sweden. 12. The common grievance in the captioned appeals relates to whether the appellant company has business connection and exposure to Permanent Establishment [PE]. 13. The appellant s claim is that it had supplied the equipment at Port in Sweden and their income is not liable to tax in India as per provisions of the Act and also the Indo-Swedish DTAA. Further contention of the assessee is that the receipts are not in the nature of Royalty as per the India Sweden DTAA. 14. In so far as the supply of hardware is concerned, the Assessing Officer/ld. CIT(A) held that the assessee had fixed place of business in India as well as it is dependent agents in India by virtue of which PE of the assessee was constituted in India within the meaning of Article 5 of the DTAA. 15. The views taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.25 Further, para no. 19.11 of the Bharti Contract deals with replacement of faulty equipment and reads as under: If System Part of System, before Acceptance as per Article 19, fails to meet the Specifications per Annex 3, it shall be replaced by Supplier on priority at no cost to Buyer or Buyer Affiliate. Replacement of faulty equipment will be made within 2-4 weeks, however standby will be made available using spares immediately using spates immediately for emergency scenario. 5.26 Furthermore, para no. 23.l(iv) of Bharti Contract provides that if such remedies are not reasonably or economically feasible, Supplier may request Buyer and Buyer Affiliate to return the System and refund to Buyer or Buyer Affiliate, the purchase price less a reasonable amount for depreciation as reflected on the books of Buyer or Buyer Affiliate, provided always. 5.27 Therefore, in view of the above discussion, there is a difference in the contract with Bharti with reference to the 'rejection clause'. Therefore, it is an important finding that the facts of the case for the years in question are distinguishable from the AY 1997-98 and 1998-99 in the case of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm, or II. replace or modify the System so that it no longer infringes any such rights, or III. settle or defend any further claim, suit or proceeding against JT MOBILES arising out of such continued use, provided always a) that JT MOBILES without delay informs Contractor in writing of any claim made by reason of alleged infringement as aforesaid and refrains from taking action on account of such claims without previous approval of Contractor; b) that JT MOBILES without delay informs Contractor in writing if legal action is taken on account of such claim and that Contractor shall have full authority to defend or settle the same through its counsel; c) that Contractor is informed of all circumstances which may be of relevance in the legal action taken and JT MOBILES refrains from all steps in any legal action which may prejudice Contractor; d) that in case Contractor fails to act against such claims or actions JT MOBILES shall have the right to take appropriate legal action and shall be repaid any expenses in so doing; and e) that the infringement or alleged infringement is not arising out of the use of the System in combination or conjunction wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from his obligation to remedy said deviations without undue delay. 19.6 If Supplier has not received the said written notice from Buyer or Buyer Affiliate in terms of Article 19.5 above, stating whether or not the System or Part of System is accepted, within fifteen (15) days from completion of the Acceptance Test, the System or Part of System shall be deemed accepted as of the sixteenth (16th) day. 19.7 If Buyer or Buyer Affiliate should commercially use the System or Part of System prior to or without the above-mentioned Acceptance Test, such use shall be deemed as Acceptance of the System or Part of System. 19.8 When according to the above, the System or Part of System is accepted or deemed accepted, such acceptance shall be confirmed by the issuance by Buyer or Buyer Affiliate of an Acceptance Certificate. Buyer or Buyer Affiliate shall notify Supplier, the names of persons authorised to issues an Acceptance Certificate. The Acceptance Certificate shall be issued promptly and at the latest three (3) days after Supplier's written request. Such Acceptance Certificate shall be conclusive evidence of the acceptance of the System and the date on such certificate s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uyer Affiliate shall have the right to take appropriate legal action and shall be repaid any expenses in so doing; and e) that the alleged infringement is not arising out of the use of the System in combination or conjunction with any other item or the use thereof not supplied or manufactured by Supplier. This Article 23, Infringements, provides Supplier's sole liability and Buyer's and Buyer Affiliate s sole remedy for claims of alleged infringements of intellectual property rights brought by a third party by reason of the proper use of the System. 34. A perusal of the above relevant clauses of the two contracts shows that there is no basis for the findings of the ld. CIT(A) about the rejection of the goods. The allegations of the ld. CIT(A) have been duly considered by the Hon'ble High Court of Delhi in assessee s own case in A.Ys 1997-98 and 1998-99 [supra]. The relevant findings of the Hon'ble High Court of Delhi read as under: Article 15 of the Installation Agreement deals with acceptance test made by the Installation contractor which includes the integrity of whole system and certificate binds the assessee . Article 17 provides warranti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment of the obligations under the contract will determine to what extent the transfer of property is subject to a condition or if the property passes conditionally whether the ownership left in the seller is the reversionary interest in the property in the event of the conditions subsequent operating to restore it to him. In any case where the performance of some condition is imposed upon the buyer but is not made a condition of the transfer of the property, the property once passed is not revested in the seller by the buyer's subsequent default. 36. It is the say of Shri Pardiwala that in the case of Mahavir Commercial Company [supra], the court has explained the observations made by the Hon'ble High Court of Delhi lucidly. 37. The second step taken by the ld. CIT(A) was confronting the evidences collected during survey and called for specific comments of the assessee. This has been extracted by the ld. CIT(A) at pages 27 to 37 of his order which have been summarised as under: Most of the documents collected during survey do not relate to the captioned AYs. The documents collected during survey relate to a period when business model of the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CESTAT has considered Appeal No. C/575/2008 is by M/s Ercisson India Pvt Ltd hereafter referred to as EIL or the third appellant against the order of the Commissioner No. 6/2008 dated 30.04.2008 challenging the imposition of penalty of ₹ 10 crores u/s 112(a) of the Customs Act. 44. At clause 4.2, it is mentioned as under: 4.2 Proceedings were initiated by issuance of show-cause notices dated 29-3-2005, 9-3-2006, 29.05.2006 and 29.05.2006 to the appellant-1 wherein it was proposed to adding the value of software separately imported under Rule 4 of the Customs Valuation Rules, 1998 read with Section 14 of the Customs Valuation Rules, 1962; Demand duty of ₹ 28,67,32,517/-, ₹ 53,35,28,802/-, ₹ 120,73,95,283/-, ₹ 3,67,47,428/-under the proviso to Section 28(1) of the Customs Act, 1962 along with applicable interest under Section 28AB ibid: Confiscate the equipment under Section 111(m) of the Customs Act, 1962; and Impose penalty under Section 112(a)/114A of the Customs Act, 1962. 4.3 Proceedings were initiated by issuance of show-cause notices dated 29-5-2006 and 31-5-2006 to the appellant-2 wherein it was proposed to ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same as MSG classifiable under Chapter Heading 85.15, BSC and BTS classifiable under Chapter Heading 85.25. They did not disclose preloading of software in the factory in Sweden. There was a single contract for purchase of equipments; there was no option but to buy the so-called hardware and software only as a package; and no separate fixed price was available for the software component. In fact, no price for BTS software was indicated for period prior to September 2001. (e) The programs that make the switching equipment function are not independent software and cannot be marketed separately. Similarly, the programs required to make the BTS functional are loaded on to flash drive and are integral part of BTS equipment (f) The separately imported softwares are found to be dupes copied in EIL, Gurgaon. Undisputedly, the impugned software is proprietary software. It has not been explained as to how the same was permitted to be copied by a third party, namely, EIL. It was claimed that it might be a cost-saving measure adopted by Ericsson AB Sweden. Allowing copying of proprietary software by a third party (even if the said party happens to be a subsidiary) was not a cost-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sought classification of/both hardware and software separately. (j) The final cost of equipment included the cost of the programs in the form of software. Equipment was imported by the assessees declaring it as hardware and declaring its value less to the extent of the corresponding software price indicated for the software. (k) The programs in the software define and characterize the particular hardware and elevate the same to the functional apparatus/equipment. The software is written in a specialized language PLEX which is proprietary in nature. The software is machine-specific and the same is mandatory required for working of the said machine. It has not been shown that there is separate identity for the impugned software marketable as a separate commodity. We have not been shown that there was an option to buy the impugned software separately. (l) There is no justification for excluding the price of preloaded software from the value of equipments as claimed by the assessee-appellants. (m) There is clear evidence of deliberate under declaration of value of the imported equipments by the assessee-appellants through a grossly deceptive method with intenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) supply has to be segregated from the installation and the only then would question of apportionment arise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India. 50. Considering the facts emanating from the orders of the first appellate authority, we are of the considered opinion that they are not at all distinguishable on the facts of Assessment Years 1997-98 and 1998-99 and since on those facts the Special Bench of this Tribunal has decided the appeal in favour of the assessee, which order has been upheld by the Hon'ble High Court of Delhi [supra], we are of the considered view that the property in goods have been passed outside India alongwith risks and reward. 51. No doubt the contract in question was signed in India and the acceptance test had to be performed in India would not justify the findings of the ld. CIT(A) in light of the judgment of the Hon'ble Andhra Pradesh High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ratio laid down by the Hon'ble Supreme Court in the case of Mitsubhishi Corporation [supra]. 58. As a result, all the captioned appeals of the assessee are allowed. 59. The common grievance of the Revenue in the captioned appeals read as under: 1. On the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in holding an attribution percentage of only twenty percent on account of hardware sales as against fifty percent for A.Y. 1999-2000 to A.Y. 2001-2002; zero percent for A.Y.2002-03 due to worldwide loss and hundred percent for A.Y. 2003-04 A.Y. 2004-05, whereas the facts of survey action carried out by the Department on 22.11.2007 merited an attribution of higher percentage. 2. On the facts and circumstances of the case, and in law, the Ld. CIT(A) erred in holding that the payment In respect of supply of software was in nature of business income and cannot be characterized as Royalty either under the Income Tax Act or under the Indo-Sweden DTAA? 60. This issue in now no more res integra by the judgment of the Hon'ble Supreme Court in the case of Enginering Analysis Centre of Excellence Pvt Ltd in Civil Appeal No. 8733 to 87 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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