2019 (2) TMI 1942 - AT - Income Tax

PE Dispute Resolved: 35% Profit Attribution, No Royalty Tax

ZTE Corporation Versus The D.D.I.T., International Taxation, Circle - 3 (2), New Delhi AND The J.C.I.T [OSD], International Taxation Circle 3 (2), New Delhi Versus ZTE Corporation

ZTE Corporation Versus The D.D.I.T., International Taxation, Circle - 3 (2), New Delhi AND The J.C.I.T [OSD], International Taxation Circle 3 (2), New ... Issues Involved:1. Denial of having any Permanent Establishment (PE) in India.2. Attribution of profit to the PE.3. Taxability of software as royalty.4. Levy of interest under Section 234B of the Income Tax Act.Detailed Analysis:1. Denial of Having Any Permanent Establishment (PE) in IndiaThe first common grievance in the assessee’s appeal relates to the denial of having any Permanent Establishment (PE) in India. The counsel for the assessee stated that to avoid protracted litigation, he is not pressing this common grievance. Consequently, the Tribunal did not consider this issue in the current assessment years, following a similar concession made in earlier assessment years (2004-05 to 2009-10).2. Attribution of Profit to the PEThe second grievance relates to the attribution of profit. The lower authorities followed the findings from earlier assessment years (2004-05 to 2009-10), where the Tribunal had settled this issue. The Tribunal observed that the issue of attribution of profits depends on the level of operations carried out by the PE in India. The AO had attributed 20% of the operating profit for AYs 2004-05 to 2008-09 and 45% for AY 2009-10. The Tribunal concluded that almost the entire sales functions, including marketing, banking, and after-sales, were carried out by the PE in India. Therefore, it was decided that 35% of net global profits from transactions with India should be attributed to the PE in India for both hardware and software supplied.3. Taxability of Software as RoyaltyThe third grievance relates to the taxability of software as royalty, which was raised in the revenue’s appeal. This issue had been previously settled by the Tribunal and upheld by the Hon’ble Delhi High Court. The Tribunal found that the receipts from the supply of software were integrally connected to the supply of hardware and could not be taxed as royalty. The Hon’ble Delhi High Court confirmed that the software supplies were in the nature of articles or goods and not royalty payments.4. Levy of Interest under Section 234B of the Income Tax ActThe last grievance relates to the levy of interest under Section 234B of the I.T. Act. The Hon’ble High Court, while considering this issue, referred to its judgment in the case of GE Packaging Power Inc., where it was held that the interest under Section 234B is not applicable. However, the Finance Act, 2012, added a proviso to Section 209(1)(d) of the Act, applicable from AY 2013-14 onwards. Therefore, the Tribunal directed the Assessing Officer to charge interest under Section 234B from AY 2013-14 onwards as per the amended provision.ConclusionIn summary, the Tribunal dismissed the assessee’s grievance regarding the denial of PE in India due to the concession made by the assessee. The issue of attribution of profit was settled by attributing 35% of net global profits to the PE in India. The taxability of software as royalty was rejected, following the decisions of the Hon’ble Delhi High Court. Lastly, the levy of interest under Section 234B was directed to be applied prospectively from AY 2013-14 onwards. The appeals of the assessee were partly allowed, whereas the appeals of the Revenue were dismissed.