2017 (10) TMI 55 - AT - Income Tax

Assessee not taxable in India for offshore supplies; software sales not royalty. Interest levy academic.

Nortal Networks India International Inc., C/o-M/s SRBC & Associates Versus ADIT, Circle-2 (1), DDIT, Circle-2 (1), New Delhi

The Tribunal held that the assessee did not have a Permanent Establishment (PE) in India, and no income from offshore supplies was taxable in India. The ... Taxability in India - existence of a business connection - P.E. in India - taxability of the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India - Held that:- Assessing Officer placed reliance on the findings of the earlier Assessment Years in the assessment orders for the assessment years under consideration in these appeals. The issue is no longer Res Integra, and stands squarely covered in favour of the Assessee, and since the High Court had held that no taxability arose under the provisions of Section 9 itself, the issue of existence of permanent establishment becomes academic. We, therefore, while respectfully following the decision of the Hon’ble Jurisdictional High Court in assessee’s own case reported in (2016 (5) TMI 373 - DELHI HIGH COURT) answer the grounds in the appeals preferred by the assessee accordingly in favour of the assessee. Taxation of Software - Held that:- We find ourselves in agreement with the submission made on behalf of the assessee that the embedded software is not royalty and the receipts on account of sale of embedded software cannot be separately brought to tax. Levy of interest under section 234B - Held that:- In view of the finding of the Hon’ble High Court in assessee’s own case reported in (2016 (5) TMI 373 - DELHI HIGH COURT) that no portion of the profits from off shore supplies was taxable in India, levy of interest becomes academic given the absence of any taxable income in India. Non-taxability under the provisions of Domestic Law itself - Held that:- Having regard to the facts and circumstances of the case in the light of the fact that for the earlier assessment years a specific finding was given by the High Court as to the non-taxability of the Assessee under the provisions of the Income Tax Act and the revenue had filed a Special Leave Petition before the Hon’ble Supreme Court which stood admitted involving similar questions, the questions relating to the limiting of benefits is only academic and does not required to be adjudicated specifically. We, therefore, find that the cross objections preferred by the Revenue are liable to be dismissed. Issues Involved:1. Existence of Permanent Establishment (PE) in India.2. Taxability of income from offshore supplies.3. Taxability of income from supply of embedded software as royalty.4. Levy of interest under section 234B of the Income Tax Act.5. Revenue's cross objections regarding the applicability of benefits under the India-USA Double Taxation Avoidance Convention (DTAC).Detailed Analysis:1. Existence of Permanent Establishment (PE) in India:The primary issue was whether the assessee had a PE in India under the provisions of the India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) held that Nortel India constituted a fixed place of business and dependent agent PE of the assessee in India. However, the Hon'ble High Court, in the assessee’s own case for earlier assessment years, found that there was no PE in India. The court observed that the activities of Nortel India were performed on its own behalf and not on behalf of the assessee or Nortel Canada. Consequently, the court held that neither the assessee nor Nortel Canada performed any installation or commissioning activity in India, and the income from such activities should be taxed in the hands of Nortel India, not the assessee.2. Taxability of Income from Offshore Supplies:The AO contended that the equipment supplied overseas continued to be in possession of Nortel India until final acceptance by Reliance, implying that the assessee’s income from supply of equipment could be taxed under the Act. However, the Hon'ble High Court ruled that mere possession by Nortel India did not imply taxability in India. The court emphasized that only income attributable to operations carried out in India could be taxed, and since no activities related to offshore supplies were conducted in India, no portion of the income from offshore supplies was taxable in India.3. Taxability of Income from Supply of Embedded Software as Royalty:For the Assessment Year 2006-07, the AO treated the receipts from the sale of embedded software as royalty. The assessee argued that this issue was covered in its favor by the jurisdictional High Court in the case of CIT Vs. ZTE Corporation, which held that the supply of embedded software enabling the use of hardware did not constitute royalty. The court agreed with the assessee, stating that the embedded software could not be taxed separately as royalty.4. Levy of Interest Under Section 234B of the Income Tax Act:The issue of levy of interest under section 234B was also raised. The Hon'ble High Court, in the assessee’s own case, had found that no portion of the profits from offshore supplies was taxable in India. Consequently, the levy of interest under section 234B became academic due to the absence of any taxable income in India.5. Revenue's Cross Objections Regarding the Applicability of Benefits Under the India-USA DTAC:The Revenue raised cross objections questioning whether the assessee was entitled to the benefits of the India-USA DTAC, given that more than 50% of the beneficial interest/shares in the assessee were indirectly owned by Nortel Networks, Canada. The Tribunal condoned the delay in filing the cross objections but found them to be academic. Since the Hon'ble High Court had already ruled on the non-taxability of the assessee under the provisions of the Income Tax Act, the question of limiting benefits under the DTAC did not require specific adjudication.Conclusion:The Tribunal allowed the assessee's appeals, holding that:- The assessee did not have a PE in India.- No portion of the income from offshore supplies was taxable in India.- The receipts from the sale of embedded software could not be taxed as royalty.- The levy of interest under section 234B was academic due to the absence of taxable income.- The Revenue's cross objections were dismissed as academic.The order was pronounced in the open court on 26th September 2017.