TaxTMI 
TaxTMI 
2014 (7) TMI 678
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....ncome from supply of telecom hardware to Reliance and VSNI. b) holding that 80% of the profits arising to the Appellant from supply of telecom hardware to Indian customers are attributable to the alleged permanent establishment (hereinafter referred to as 'PE') in India. c) holding that Research and Development(hereinafter referred to as 'R&D') expenses are not allowable as deduction while applying profit margins of Nortel Networks Limited., while computing taxable income of the alleged PE in India. 2. The learned AO has erred on facts and circumstances of the case and in law in initiating penalty proceedings under section 271 (1)( c) of the Act against the Appellant. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 3. The assessee M/s Nortel Networks India International Inc. is a company incorporated in USA. It is a group concern of M/s Nor....
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....pute Resolution Panel-II, Delhi vide Directions issued u/s. 144C(5) dated 8.8.2011 has confirmed the attribution done by the AO in the draft assessment order [in para 4(iii) on page 2]." 3.1 AO further noted that with reference to the taxability of receipts against the supply of hardware on net income basis. He noted that the assessee has submitted that Research and Development expenses be allowed on proportionate basis. AO noted that assessee could not furnish any evidence that expenses incurred under the head Research and Development can be specifically linked to the hardware supplied to the Indian customers. Hence, AO held that assessee's submissions was mere bald assertion without any supporting evidence to substantiate its claim of allowability of such expenses. AO further observed that Research and Development is mainly and mostly on the development of software. Telecom equipments are actually the carriers of advanced cutting edge software which is the core or the heart of Telecom Industry. That assessee could not produce any evidence to prove whether any R&D expense has been incurred on the hardware component and the quantum of expenditure if any. The AO noted that despit....
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....T. The DRP chose to confirm the disallowance of Research and Development expenses. 4. Now against the above order the assessee appealed before us. 5. We have heard both the counsel and perused the records. 6. We find that assessment in this case has been framed by referring to the assessment of earlier years. Both the counsel have also agreed that the ratio of the earlier decision may be applied here also. We find that in assessee's own case for asstt. year 2003-04, 2004-05 and 2005-06 vide Order dated 13.6.2014 in ITA Nos. 1119, 1120 & 1121/DEL/2010 and I.T.A. Nos. 1153, 1154 & 1155/DEL/2010 for A.Yrs. : 2003-04, 2004-05 & 2005-06, we have considered the identical issue. Since the facts are identical, we do not find any reason to differ from earlier conclusions. Our conclusion as regards the issue dealt in the said order are as under:- (i) Whether the assessee constitutes a Permanent Establishment in India:- "8.2 The assessee Nortel Network International Inc. Corporation Ltd. is a company incorporated in the USA. It is a group concern of M/s Nortel Group, which is a leading supplier of hardware and software products for GSM Cellular Radio Telephones System. During t....
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....e assessee through Nortel India and LO approached the customer, negotiated the contract, bagged the contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted. The equipment remain in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done. 8.8 It is also an admitted fact that employees of group companies did visit in India in connection with Project in India. Thus, this indicates the employees of the group companies did carry out business of the assessee through the premise of LO or the premise of the subsidiary. Thus, the entire business enterprise activities of the assessee is managed by the subsidiary in India and the requisite supply is made from abroad. The contract does not only need loading of the equipments in the ship, but includes number of activities which are carried out in the Indian territory and the compensation / remuneration for that is also included in consideration. We agree with the Ld. CIT(A) that the compensation which has been represented to a sale consideration for the equipment represent the payment for works contract where entire installation and cust....
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...., the expenses pertaining to the PE have to be allowed as deduction. Assessee has contended before the Ld. CIT(A) that in other cases attributed profits was determined @ 20% in the case of Nokia and 35% in the Rolls Royce. In this regard, Ld. CIT(A) has held that income of the PE has to be computed on the facts of each case. Ld. CIT(A) has held that he was of the view that an attribution of 50% of the profits to the activities of PE in India would be a reasonable attribution. 14.3 In this regard, we note that assessee has also contended in the written submissions that Income Tax Department in case of several non-resident, assessee engaged in the same line of business on the ground that non-residents have PE in India, has attributed much lower profit. In such cases attributed profit has been limited to 20% to 35%. In this regard, instances of ZTE Corporation and Huawei Technologies Co. Ltd. have been cited. Ld. DR in this regard has argued that they were on the facts of these cases. He also submitted that the submission of Ld. Counsel of the assessee in this regard remains to be properly corroborated. Upon careful consideration we are of the opinion that various rates of attribut....