TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 373
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....nt 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 order dated 17th August, 2011 passed by the AO....
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....he 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 (hereafter 'Nortel Canada'); it is wholly held by Nortel Networks Inc. which in turn is wholly owned subsidiary of Nortel Canada. N....
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....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 under Section 143(3)/147 of the Act. Assessment Order dated 18th December, 2006 14. The AO observed that the Assessee had not booked a....
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.... 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 dated 22nd December, 2009 20. The Assessee appealed against the aforesaid assessment order as also against similar assessment orders passed for AY 2004-05 a....
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....n 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) held that Assessee had (a) a fixed place of business in terms of Article 5(1) of the Indo-US Double Taxation Avoidance Agreement (DTAA); (b) a fixed place of mana....
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....cluding 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 to the Assessee's PE in India. Accordingly, the appeals filed by the Revenue and the Assessee were dismissed. Submissions 29. Mr Chopra, learned counsel appearing for ....
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....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 works contracted to the Assessee, there was no question of the Assessee having any installation PE in India. 33. Mr N.P. Sahni, Senior Standing Counsel appearing on behalf of the Revenue....
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....ompany 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 company of Nortel Canada and both the companies were essentially a singular entity. In other words, the Income Tax Authorities had disregarded the corporate structure of the Assessee and had proceeded on t....
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....esident 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: [Explanation 1] -For the purposes of this clause-(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be ....
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....here 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 the role of each member/consortium of contractors was separately specified. The contract involved offshore supply, offshore services, onshore supply, onshore services and construction and erection of the facility. The contract price included consideration for o....
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....rial 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, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions. xxxx xxxx xxxx xxxx xxxx 98. We, therefore, hold as under: (A) Re: Offshore supply (1) That only such part of the income, as is attributable ....
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....i) 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 the offshore services and the permanent establishment were connected. (7) Section 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non-resident company irrespective of where rendered, was utilized in India. (8) Article 7 of DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the perma....
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....at 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 not limited to supply of the equipment overseas but also included other obligations that were to be performed in India. He further held that the amounts received by the Assessee also included consideration for performance of certain activities in India. This is stoutly disputed by the Assessee. This dispute is pivotal for determining whether any part of the Assessee's income is chargeable to tax in India. 49. Section 3 of the Services Contract which provide for the ....
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....ed 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 territories and compensation/remuneration for that is also included in the consideration". This dispute, as observed earlier, is at the heart of the controversy in this matter. 52. The equipment supplied by the Assessee is indisputably as per the terms of the obligations under the Equipment Contract. The recitals of the said contract reads as under:- "A. Reliance desires to purchase from the Vendor certain Equipment appropriate for the efficient and effective installation, operation, management and maintenance....
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....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 the supplier was liable to deliver the equipment to the carrier at the port of shipment/airport of departure which in the present case would be outside India. The said interpretation has not been disputed on behalf of the Revenue. 58. In terms of the Assignment Contract, the Assessee assumed all rights and obligations of Nortel India under the Equipment Contract "to sell, supply and deliver the Equipment to the Purchaser under the Equipment Contract". Section 1 of the Assignment Contract is quoted below for ready reference:- "Section 1. Assignment and As....
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....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. Thus, in our view, the question whether the Assessee has a PE in India is not material as it is not possible to hold that any part of the income of the Assessee could be apportioned to operations carried on in India. 62. Having stated the above, for the sake of completeness, we may also examine the controversy whether the Assessee has a PE in India and whether any part of the Assessee's income could be attributed to such PE. 63. Undisputedly, even if it is accepted that some portion of the obligations undertaken by the Assessee were performed in India, the Assessee&#....
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..... 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 profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the 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 the other State of the same or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to t....
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....tents, 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 attributed to the permanent establishment as provided in paragraph 1(a) of this Article shall include only the profits derived from the assets and activities of the permanent establishment and shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt with separately in other Articles of the Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 7. For the purposes of the Convention, the term "business profits" means income derived from any trade or business including income from the furnishing of services other than in....
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....ue 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 aggregating more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)]. 3. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include any one or more of the following: (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another ente....
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....r 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) and ITAT have held that the office of Nortel India and Nortel LO constituted a fixed place of business of the Assessee. As pointed out earlier, we find no material on record that would even remotely suggest that Nortel LO had acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf. Thus, it is not possible to accept that the offices of Nortel LO could be considered as a fixed place of business of the Assessee. In so far as Nortel India is concerned, there is also no evidence that the offices of Nortel India were at the disposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had acted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices of Nortel India constituted a fixed place business PE of the Assessee or Nortel Canada. Nortel India is an independent company and a ....
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....t 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 employees of group companies had visited India in connection with the project, the business of the Assessee was carried out by those employees from the business premises of Nortel India and Nortel LO. In this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm's Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, 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 wou....