2014 (4) TMI 770 - AT - Income Tax

Tribunal upholds notice to Chinese company with PE in India, rejects software royalty as income

M/s. Huawei Technologies Co. Ltd. Versus Assistant Director of Income Tax (International Taxation)

M/s. Huawei Technologies Co. Ltd. Versus Assistant Director of Income Tax (International Taxation) - TMI Issues Involved:1. Jurisdiction under Section 147 and validity of notice under Section 148.2. Existence of Permanent Establishment (PE) and Business Connection (BC) in India.3. Allocation of income towards software as royalty.4. Levy of interest under Sections 234A and 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Jurisdiction under Section 147 and Validity of Notice under Section 148:The assessee, a company incorporated in China, was engaged in supplying telecommunications network equipment and had not filed any return of income. During a survey at Huawei India, documents and statements indicated that the assessee had a PE in India. Consequently, the Assessing Officer (AO) issued a notice under Section 148, to which the assessee responded by filing a return disclosing income of Rs. 82,69,535. The AO's belief that income had escaped assessment due to non-filing of the return was deemed well-founded. The Dispute Resolution Panel (DRP) upheld the AO's action, noting that the survey revealed a PE in India, justifying the issuance of the notice under Section 148. The Tribunal found no infirmity in the DRP's order and rejected the assessee's ground against the initiation of proceedings under Section 148.2. Existence of Permanent Establishment (PE) and Business Connection (BC) in India:The AO concluded that the assessee had a PE in India based on documents and statements obtained during the survey, showing active involvement of Huawei India's employees in business activities. The DRP upheld this finding, noting that Huawei India's employees prepared bidding documents, negotiated contracts, and secured orders for the assessee. The Tribunal agreed with the DRP, finding that the assessee's business was conducted with the active involvement of Huawei India's employees, thus constituting a PE and BC in India. The Tribunal rejected the assessee's grounds, affirming that the income was taxable in India under both the Income Tax Act and the Double Tax Avoidance Agreement (DTAA).3. Allocation of Income towards Software as Royalty:The AO allocated 30% of the total supplies towards software and taxed it as royalty income. The assessee contended that the software was embedded in the hardware and should be assessed as business income. The Tribunal noted that the issue was covered by the Delhi High Court's decisions in Ericsson A.B. and Nokia Networks OY, which held that software embedded in hardware does not constitute royalty. The Tribunal found that the agreements between the assessee and buyers included a consolidated price for equipment, including hardware and software, and the software was necessary for the equipment's operation. Following the High Court's decisions, the Tribunal held that the income from the supply of equipment, including software, should be assessed as business income and directed the AO to recompute the income accordingly.4. Levy of Interest under Sections 234A and 234B:The assessee argued that as a non-resident, it was not liable to pay advance tax, and thus, interest under Section 234B should not be levied. The Tribunal noted that the issue was covered by the Delhi High Court's decision in Jacobs Civil Incorporated, which held that non-residents are not liable to pay advance tax if tax is deductible at source. However, the Tribunal also considered a subsequent decision in Alcatel Lucent USA, Inc., which held that the assessee's stand in the return of income regarding its tax liability in India was relevant. The Tribunal restored the matter to the AO for re-adjudication in light of both High Court decisions. Regarding interest under Section 234A, the Tribunal directed the AO to rework it in accordance with the law after final determination of income.Conclusion:The Tribunal partly allowed the assessee's appeals for statistical purposes, directing the AO to rework the income and interest based on the Tribunal's findings and relevant High Court decisions. The stay applications filed by the assessee were dismissed as infructuous.