TaxTMI 
TaxTMI 
2017 (10) TMI 55
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.... the name and style of Nortel Networks India International Inc. (NNIII) under the laws applicable in the State of Delware, USA and is a tax resident of USA. Assessee is engaged in the business of supplying advanced networking/telecom equipment to customers in Asia Pacific region. The assessee is a step-down subsidiary of Nortel Networks Ltd. Canada, and is wholly held by Nortel Network Inc. which in turn also has an indirect subsidiary in India, namely, Nortel Networks India Pvt. Ltd. (Nortel India). Nortel LO is the Liaison Office of Nortel Canada in India. In the relevant year under consideration, Reliance required an Indian company to bid for contract for supply of optical hardware and provision of related installation and commissioning services, and Nortel India had entered into such a contract with Reliance. While retaining the Optical services contract remained with them, Nortel India subsequently assigned all its rights, entitlements, covenants and obligations under the Optical hardware supply contract to NNIII under the Assignment and assumption contract, for the performance of which, Nortel Canada provided guarantee. Equipment supplied to Reliance was sourced from Nortel C....
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.... held as two separate entities. The Assessing Officer also did not accept the assessee's contention that sales were concluded overseas and installation was done under a separate contract. AO observed that assessee through Nortel 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 transfer of title overseas or in mid sea does not alter the facts that the equipment is accepted only after acceptance test is done. This test is done by the Nortel India on behalf of the assessee. The equipment remain in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done. 4. In the appeal preferred by the assessee, Ld. CIT(A) agreed with the AO that for the purpose of supply agreement under consideration, the assessee and Nortel Network Canada should be treated as one and same entity. While rejecting the contention of the assessee that it did not have a PE in India, Ld. CIT(A) held that the activities of the assessee in India constituted PE of the assessee under Article 5(1) fixed place PE, 5(2)(a) a place of manage....
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....ound in terms of the limitation of benefits clause under Article 24 of the DTAA to allege that given the restriction under Article 24 of the DTAA, the Assessee was not eligible to the benefits of the India - US DTAA. According to him, the revenue has also filed an Application dated 06.02.2017 seeking condonation of the delay in the filing of the cross objections. However, no supporting affidavit has been filed to support the contents of the condonation Application. Reliance is placed on a decision of the Delhi Tribunal in the case of DCIT v. YKK India P. Ltd. [(2016) 160 ITD 162 (Delhi)] wherein the department filed cross appeal after a delay of 7 years, it was held as under : "There is at best an indication that the appeal is filed now because of the possibility of damage to the revenue's cause in the other assessment years, but then such a factor, in our considered view, cannot be reason enough to condone the delay. The condonation of delay can only be granted when there is a sufficient cause for delay in filing of appeal, but then in the present case, there is nothing to demonstrate the cause of delay; if at all, the facts set out in the petition show anything, these facts....
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....sue involved and it has been the claim of the assessee before the authorities below that it is covered under the Indo-US DTAC. In these circumstances, we are inclined to condone the delay to permit the Revenue to file the cross objections. 10. Now coming the contentions of the parties on either side, though the assessee has raised many grounds, Ld. AR submitted that the incidental issue has been whether the Assessee had a Permanent Establishment in India under the provisions of the India - USA Double Taxation Avoidance Agreement, but after the decision of the Hon'ble jurisdictional High Court in assessee's own case in Nortel Networks India International Inc. Vs. DIT (2016) 386 ITR 353, the issue singularly revolves around the controversy whether any portion of the offshore supplies made by the Assessee were liable to be taxed in India. However, for Assessment Year 2006-07 an additional issue which arises is in respect of the taxation of income from supply of software to Reliance, and in all these appeals, the Assessee has also agitated the issue of levy of interest u/s 234B of the Act. It is contended on behalf of the Revenue that the decision of the Hon'ble Jurisdictional High Co....
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....t it fit to assume that the Equipment Contract was performed by Nortel Canada and after following the decision of Bombay High Court in the case of Sir Dinshaw Maneckjee Petiti AIR 1927, Bombay, 371 lifted the corporate veil to examine the issue and held that the only issue to be examines is whether any income from supply of equipment could be taxed under the Act. 14. The Hon'ble High Court then examined the taxability of the transaction under the Act, in the light of the provisions of section 9(1) of the Act and the phrase "business connection" as has been discussed by the Hon'ble Supreme Court in the case of CIT v. R.D. Aggarwal &Co. (1965) 56 ITR 20 (SC), inasmuch as the provisions of section 9(1) of the Act clearly provide that 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. Relevant observations of the Hon'ble High Court, vide para 43-44 are that, - "43. It is apparent from the plain reading of Section 9(1) of the Act that all income which accrues or ....
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....a Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259, in assessee's case, the Hon'ble High Court found 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, as such, neither the Assessee nor Nortel Canada can be stated to have performed any installation or commissioning activity in India. Observations of the Hon'ble High Court on this aspect are as follows: "45. In Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259, 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 inclu....
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.... 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. ...... 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. 98. We, therefore, hold as under: (A) Re: Offshore supply (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India....
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....e 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 permanent establishment. In this case, the entire servi....
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....quipment and materials and contractor's equipment: Contractor agrees that title to all equipment and materials shall pass to 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 scope of work and services to be performed ....
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....nbsp; ** ** 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 ....
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.... view. The facts on record only indicate that Nortel India negotiated contracts with Reliance. Even assuming that the contracts form a part of the single turnkey contract, which include supply of equipment - as held by the authorities below - the same cannot lead to the conclusion that Nortel India was acting as a sales outlet. 71. The AO's conclusion that there is an installation PE in India, is also without any merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee or Nortel Canada. Undisputedly, Nortel India was also received the agreed consideration for performance of the Services Contract directly by Reliance. 72. The finding 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 cont....
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....pment supplied overseas continued to be in possession of Nortel India till the final acceptance by Reliance, the same would not imply that the Assessee s income from supply of equipment could be taxed under the Act, and iv. 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 would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee. 18. Facts and circumstances for all these years are the same. 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) 386 ITR 353, answer the grounds in the appeals preferr....
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....has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under Section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as "copyright". 22. In the present case, the facts are closely similar to Ericson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separate invoicing was done for purchase and other transactions did not imply that it was royalty payment. In such cases, the nomenclature (of license or some other fee) is indeterminate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee's customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment." 21. Having considered the submissions of the Ld. AR in the light of the orders of the authorities below and t....