TaxTMI 
TaxTMI 
2016 (5) TMI 373
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....er 'CIT(A)'] in respect of Assessment Years (AYs) 2003-04, 2004-05 and 2005-06. The common order dated 22nd December, 2009 passed by CIT(A) disposed of the appeals preferred by the Assessee against two separate assessment orders both dated 18th December, 2006 passed by the Assessing Officer (hereafter 'AO') under Section 147 read with Section 143(3) of the Act in respect of the AYs 2003-04 and 2004-05 as well as an assessment order dated 31st December, 2007 passed by the AO in respect of assessment year 2005-06. 2. ITA Nos. 666/2014, 667/2014 and 673/2014 impugn a common order dated 13th June, 2014 passed by the ITAT in ITA Nos. 2177, 2178 and 2179/Del/2011 which were appeals preferred by the Assessee against a common order dated 20th January, 2011 passed by CIT(A) in appeals no.78, 79 and 77/2009-10. These appeals were preferred by the Assessee against separate orders dated 29th January, 2010 passed by the AO to give effect to the common order dated 22nd December, 2009 passed by CIT(A) for AYs 2003-04, 2004-05 and 2005-06. 3. ITA No. 689/2014 is directed against ITAT's order dated 13th June, 2014 passed in an appeal preferred by the Assessee against final....
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....cord? (iv). Whether, without prejudice, the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Appellant in India and whether such approach and quantification was inconsistent with Article 7 of the DTAA? (v). Whether Tribunal erred in confirming the levy of interest under section 234B of the Act?" 7. The principal controversy involved in these appeals (ITA Nos. 669/2014, 671/2014, 672/2014 and 689/2014) is whether the Assessee, a tax resident of United States of America (USA), has a Permanent Establishment (hereafter 'PE') in India and consequently, is chargeable to tax under the Act in respect of its business income attributable to its PE in India. Factual background 8. The Assessee (formerly known as Nortel Networks RIHC Inc) was incorporated as a company on 7th June, 2002 under the laws applicable in the State of Delaware, USA and is a tax resident of USA. The Assessee is a part of Nortel Group which is stated to be a leading supplier of hardware and software for GSM Cellular Radio Telephone Systems. The Assessee is a step-down subsidiary of Nortel Networks Limited (Canada), a company incorporated in Canada (herea....
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....4 and 2004-05. The principal issues involved in the AYs 2002-03, 2003-04, 2004-05 and 2008-09 are common. The assessment orders passed by the AO and the appellate orders passed by CIT(A) and the ITAT for AY 2002-03, 2003-04 and 2004-05 are also more or less similar in effect and, therefore, for the sake of brevity only the facts as obtained for AY 2003- 04 (ITA 671/2014) are referred to herein. 13. On 27th March, 2006, the AO issued a notice under Section 148 of the Act calling upon the Assessee to file its return of income for the AY 2003-04. In response to the aforesaid notice, the Assessee filed its return of income on 16th May, 2006 disclosing its taxable income as 'Nil'. Thereafter, the AO issued notice under Section 143(2) of the Act. In response to the aforesaid notices, the Assessee filed its statement of accounts disclosing the loss stated to have been incurred by the Assessee. The Assessee did not file its balance sheet or its audited accounts as according to the Assessee, it was not required to have its accounts audited in the tax jurisdiction where the Assessee is a resident, namely, Delaware, USA. Thereafter, on 18th December, 2006, the AO passed an assessment order....
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....these expatriate employees. 17. According to the AO, the Assessee was "a shadow company of Nortel Group." 18. On the basis of its findings, the Assessee concluded that Nortel India and Nortel LO constituted the Assessee's PE in India (both Fixed Place PE as well as Dependent Agent PE). 19. In view of the finding that the Assessee was inserted as an intermediary and a shadow company of Nortel Canada solely for the purpose of evading taxes, the AO rejected the accounts furnished by the Assessee and further observed that the accounts provided by the Assessee were not audited and had "no sanctity". He then proceeded to estimate the taxable income of the Assessee based on the accounts of Nortel Group. The AO noticed that the global accounts of the Nortel Group disclosed a gross profit margin of 42.6%. He held that average selling, general and marketing expenses of other similarly placed non-resident companies was 5% of the turnover and, therefore, made an allowance of 5% of such expenses. He also made a further allowance for Head office expenses at 5% of the adjusted profits and estimated the total taxable income of the Assessee at Rs. 81,28,06,917/-. CIT(A)'s Order date....
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....ons of supply, finalization of documents and signing of the contract, etc. He also concluded that since the employees of Nortel Group companies visited India in connection with the project, they had performed business of the Assessee through the premises of Nortel India or the LO of Nortel Canada. 23. The CIT(A) referred to clause 6.1.2 of the Equipment Contract which provided for rendering of certain services in relation to the equipment supplied and held that the Equipment Contract did not end with loading of equipment on vessels but also included a number of activities to be carried out in India, the compensation of which was included in the consideration for supply of equipment. The CIT(A) also referred to clause 5.3.2 of the Equipment Contract and on the basis of the said clause held that the consideration for supply of equipment in fact represents the payment of works contract, where installation and customization is carried out in India. He held that Nortel India had not only acted as a service provider of the Assessee but also as a "sales outlet" providing after sales service and any other assistance as requested by the Assessee. 24. On the aforesaid basis, the CIT(A)....
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.... dependent agent PE of the Assessee in India. The ITAT also concurred with the view that the LO of Nortel Canada was rendering all kinds of service to Group companies including the Assessee and constituted a fixed place PE of the Assessee. 27. The ITAT rejected the Assessee's contention that the sale of equipment was completed overseas and the installation was done under a separate contract. The ITAT held that "the 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 remained in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done." 28. The ITAT also held that the employees of the group companies visited India in connection with the project and this indicated that the employees of the Nortel Group carried on the business of the Assessee through the premises of Nortel India or the LO. As regards the attribution of income to the Assessee's PE in India, the ITAT concurred with the CIT(A)'s view that 50% of the estimated profits were attributable ....
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....e was no requirement to depute personnel to India. 31. Mr Chopra submitted that there was no material or evidence on record which would suggest that any fixed place in India had been made available to the Assessee for execution of its activities. Therefore, the AO's conclusion that Assessee had a fixed place PE in India is palpably erroneous. He further submitted that it was Nortel India who had negotiated the contract on its behalf and, therefore, its activities prior to assignment of contract could not be considered as the Assessee's activities. He submitted that since Reliance had insisted that the contract be secured with an Indian company, Nortel India had undertaken the responsibility and secured the contracts which included the Services Contract that was to be executed by Nortel India. In the circumstances, the conclusion that Nortel India had acted on behalf of the Assessee was erroneous. 32. Insofar as the existence of an installation PE is concerned, Mr Chopra argued that in terms of the services agreement, Nortel India was to carry out all activities relating to installation, erection and commissioning. Since installation was not a part of scope of the work....
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....on behalf of the Assessee that the agreement for supply of hardware (Equipment Contract) could have been directly executed between Reliance and the Assessee but Reliance had insisted on an Indian company being responsible for the entire works. Therefore, at the insistence of Reliance, in the first instance, the agreements were executed between Nortel India and Reliance, with Nortel Canada as a surety. 39. Thus, it is an admitted position that Nortel India had negotiated for the contracts and had entered into agreements that were to be performed not by Nortel India but by other entities of the Nortel group. According to the Assessee, the only reason for Nortel India executing the contracts was the insistence on the part of Reliance to have an entity in India responsible for the contracts. In this view, the contention advanced on behalf of the Assessee that Nortel India had acted for itself and not on behalf of any other group entity cannot be accepted and the findings of the Income Tax Authorities that Nortel India had negotiated the contract on behalf of the Nortel group as a whole cannot be faulted. 40. The Income Tax Authorities concluded that the Assessee was a shadow comp....
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....for levy of income tax in respect of total income of the previous year of every person. Section 5 of the Act outlines the scope of total income and provides that the total income of a person who is a non-resident in any previous year includes income from whatever source, which: (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Section 9 of the Act specifies the income that are deemed to accrue or arise in India. Section 9 (1) of the Act specifies incomes which are deemed to accrue and arise in India. At this stage, it is necessary to refer to Section 9(1)(i), clause (a) of Explanation 1, Explanation 2 and Explanation 3 to Section 9(1)(i) which are quoted below:- "Section 9 (1)The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India: [E....
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....portion of the said income could be attributed to operations in India. 44. There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1)(i) of the Act, no part of Assessee's income could be brought to tax under the Act. It is only when a non-resident Assessee's income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. 45. In Ishikawajima-Harima Heavy Industries v. Dir. Of Income Tax: (2007) 288 ITR 408 (SC), the Supreme Court considered a case where Petronet LNG Limited and five members of a consortium had entered into an agreement for setting up a Liquefied Natural Gas (LNG) receiving, storage and de-gasification facility at Dahej in the State of Gujarat. The contract was a turnkey project and th....
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....ct in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India. We would, however, deal with this aspect of the matter a little later. xxxx xxxx xxxx xxxx xxxx 39. The territorial nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income may take place partly in one territory and partly in another. The question which would fall for our consideration is as to whether the income that arises out of the said transaction would be required to be proportioned to each of the territories or not. 40. Income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income "accrues or arises" in each of the jurisdiction. ...... xxxx xxxx xxxx xxxx xxxx 76. In construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, t....
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....B) Re: Offshore services: (1) Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable. (2) The entire contract would not be attributable to the operations in India viz. the place of execution of the contract, assuming the offshore elements form an integral part of the contract. (3) Section 9(1)(vii) of the Act read with Memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of non-resident taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in international law also, is that of the taxpayer and not that of the recipient of such services. (5) For Section 9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a "live link" with India that the entire income from fees as envisaged in Article 12 of DTAA becomes taxable in India. (6) The terms 'effectively connected' and 'attributable to' are to be construed differently even if th....
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....y such income that can be reasonably attributed to operations in India would be chargeable to tax under the Act. The position in Ishikawajima-Harima Heavy Industries (supra) was also similar. There too, the equipments were supplied overseas and the contractor continued to retain control of equipment and material till the provisional acceptance of the work or the termination of the contract. The relevant clause which was considered by the Supreme Court in that case is as under:- "22.1 Title to equipment and materials and contractor's equipment: Contractor agrees that title to all equipment and materials shall pass to the owner from the supplier or subcontractor pursuant to section E of exhibit H (General Project Requirements and Procedures). Contractor shall, however, retain case, custody, and control of such equipment and materials and exercise due care thereof until (a) provisional acceptance of the work, or (b) termination of this contract, whichever shall first occur. Such transfer of title shall in no way affect the owner's rights under any other provision of this contract." 48. In the present case, the CIT(A) had concluded that Assessee's obligations were ....
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....xxx 3.2.2 At Reliance's request Vendor shall mobilize and commit sufficient resources necessary to successfully implement the Initial Optical ,Reliance Network Which will include up to two hundred (200) expatriates, with the approval of Reliance, as required, including subject matter experts (Subject to the experience requirements set forth in Section 3.10 below)." 50. A bare perusal of the Services Contract clearly indicates that the task of installation, commissioning and testing was contracted to Nortel India and thus, the operations pertaining to installation and commissioning were not performed by Nortel India on behalf of the Assessee or Nortel Canada but on its own behalf. Thus, neither the Assessee nor Nortel Canada can be stated to have performed any installation or commissioning activity in India. 51. Next, it will be important to consider whether the consideration received by the Assessee for supply of equipment also subsumed consideration for other activities that were performed in India. The CIT(A) has held that "the supply contract does not end with loading of equipment on the ship but includes a number of activities which are carried on in Indian t....
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....it had supplied the subject equipment and received the consideration for the same. 55. Article 5 of the Equipment Contract contains provisions for Pricing and Invoicing. Sub Article 5.1 is captioned "Price List" and paragraph 5.1.1 of the Equipment Contract reads as under:- "5.1.1 The prices as set forth in the Price List shall be applicable to all purchases by Reliance of Equipment, including without limitation spare and replacement parts." 56. The expression "Price List" is defined under the contract to read as under:- "Price List means a table of list prices (FCA, "relevant international airport basis, INCOTERM 2000, including costs for exportation procedures from the country/ies of export and insurance from the Vendor's warehouse up to Substantial Completion) applicable to Equipment supplied by Vendor to Reliance as amended from time to time as set forth herein. The Price List as of the Effective Date is set forth in Exhibit A." 57. The Assessee has consistently asserted that "FCA, relevant international airport basis, INCOTERM 2000, from the country/ies of export and insurance from Vendor's warehouse to Substantial Completion" meant that....
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....or which Nortel India had been paid separately, no material or evidence was gathered by the AO to contradict the same. There is no material to indicate that equipment for Test Bed Laboratory, which was to be supplied at no additional cost to Reliance had been procured by Nortel India at additional cost or that Nortel India was not remunerated for all the services rendered by it to Reliance. In terms of the Equipment Contract, adequate stock of spares was required to be maintained in India, however, there is no material to indicate that such stock was maintained in India by the Assessee or that such stock was maintained by Nortel India, not on its own behalf but on behalf of the Assessee, without being sufficiently remunerated. Thus, in absence of any such evidence or material, it is difficult for us to concur with the view that certain activities were performed in India for which the consideration was received by the Assessee. 60. It is also necessary to observe that even if the AO was of the view that Nortel India was not adequately remunerated for the Assignment Contract, the AO was required to make an appropriate transfer pricing adjustment in the hands of Nortel India. 61....
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.... other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. US MC Article 7 Business Profits "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." 65. Article 7 of the Indo-USA DTAA reads as under: "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the p....
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....es, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than toward reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 5. For the purposes of this Convention, the profits to be a....
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.... (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; (g) a warehouse, in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or premises used as a sales outlet; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period; (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period; (l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregatin....
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.... wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's-length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." The Definition of PE under Article 5 of the DTAA between India and Canada is also similar. 69. The AO, CIT(A) a....
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....inding that Nortel India is a services PE of the Assessee is also erroneous. There is no material to hold that Nortel India performed services on behalf of the Assessee. 73. The AO has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Companies. In the present case, there is no material on record which would indicate that Nortel India habitually exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained. 74. The CIT(A) as well as the ITAT has proceeded on the basis that the Assessee had employed the services of Nortel India for fulfilling its obligations of installation, commissioning, after sales service and warranty services. The ITAT also concurred with the view that since emp....