AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 207
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....ved in all the appeals of assessee is with respect to fastening the tax liability on the income earned on supply of telecommunication equipment to the Indian Customers. The ld. Authorities below have supported their conclusions reached in this behalf, holding that the assessee constitutes a Permanent Establishment in India in terms of Article-5 of the India-Singapore Double Taxation Treaty and therefore, the profit on such supply of telecom equipment in India was attributed to assessee, the alleged PE in India. 4. The assessee has challenged this issue by way of grounds Nos. 1 & 2 in all of its four appeals, stating that similar dispute came for consideration before the ITAT, New Delhi in assessee's own case for A. Yrs. 2001-02 to 2005-06 (ITA Nos. 2172 to 2176/Del/2011), wherein the Co-ordinate Bench of Tribunal vide order dated 24.04.2018 has decided the issue in favour of the assessee. Therefore, this issue is squarely covered by the decision of Coordinate Bench (supra) in favour of the assessee and against the Revenue. The ld. DR opposing the contention of the assessee submitted that the above referred order of the Tribunal has been under challenge and relied on the orders o....
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....in Appeal No. 324 and 325/06-07 and 242/07-08 passed in the case of Nortel Networks India International Inc by the Ld. CIT (A), order dated 04/05/2016 of the Hon'ble jurisdictional High Court in ITA No. 666/2014 and batch in the case of M/s Nortel Networks India International Inc, (supra) and the impugned order in the case on hand as narrated in paragraph number 8, makes it amply clear that the facts are substantially the same, giving rise to the similar questions of fact and law. 15. Hon'ble High Court dealt with the findings of the Ld. CIT(A), which are on similar facts in both the cases, vide paragraph Nos. 69,74,63,67,71,70,47,59 and 73 in the case reported in 286 ITR 353, in the following way: - 16. On the aspect of the permanent establishment and business connection in India vide paragraph No. 69 Hon'ble jurisdictional High Court observed that,- "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....
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.... 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. On the aspect of the assessee undertaking the pre-supply and the post supply activities in India, it is relevant to refer to paragraph numbers 63 and 67 of the order of the Hon'ble High Court: "63. Undisputedly, even if it is accepted that some portion of the obligations undertaken by the Assessee were performed in India, the Assessee's income arising from the performance of the Equipment Contract could be brought to tax only to the extent as permissible under the relevant DTAA - DTAA between India and USA or DTAA between India and Canada. xxx xxx xxx xxx xxx xxx 67. Thus, if we proceed on the assumption that a part of the Assessee's income is attributable to activities carried out in India through a business connection, the question whether the Assessee had a PE in India during the relevant AYs would become relevant. This is so because, if the Assessee did not have any PE in India then it....
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....f the pricing mechanism as agreed to under the Equipment Contract. It is also material to note that Nortel India continued to be responsible for performance of the Equipment Contract except for performance of Purchase Orders and Exchange Orders for supply of equipment which were placed directly by Reliance on the Assessee. Although, the Assessee had repeatedly asserted that all other obligations for testing, installation and commissioning was done by Nortel India, for 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 remune....
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.... 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." 24. Insofar as the place of transfer of title in the equipment, whether it is within or without India, in the case of Nortel Networks India International Inc Hon'ble High Court observed that, there seems to be no dispute that the title to the equipment passed in favour of Reliance overseas. In the case on hand, it is the observation of the Ld. Commissioner that though in terms of agreement the ownership in respect of equipment was transferred outside, the assessee has been rendering services like customer technical assistant service and emergency technical assistant service on a 24-hour basis and....
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....om supply of equipment could be taxed under the Act. Clause (a) of Explanation 1 to Section 9(1)(i) of the Act postulates the principle of apportionment and only 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 shal....
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....royalty" income under the provisions of Article 12 of the India Singapore Tax Treaty. This issue has been challenged by the assessee by way of grounds No. 3 in appeals for the above years. The Assessing Officer held this income as 'royalty' taxable in India in the hands of assessee whereas the ld. CIT(A) held it as business income taxable in India. We, however, find that this issue is also covered in favour of the assessee vide aforesaid order of Tribunal dated 24.04.2018 (supra) observing as under : 29. Next coming to software issue, Assessee's contention that it has transferred the subject matter of a copyright, which tantamount to sale of a product, not covered within the scope of 'Royalty', while retaining with itself the copyright per se. The Assessing Officer has failed to appreciate the assessee's contention that transfer of the subject matter of a copyright is analogous to the rights acquired by the purchaser of a book. The purchaser of the book does not acquire the right to exploit the underlying copyright. When the purchaser reads the book, he only enjoys its contents. Similarly, the user of the copyrighted software i.e., the integral part of the telecommunicatio....
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.... contended that this issue also stands squarely covered in favour of the Assessee once it was held that the Assessee was not taxable under the provisions of Section 9 itself. Even otherwise, according to him, the issue of embedded software in hardware whether could be taxed separately as royalty already stands decided by the jurisdictional High Court in the case of CIT Vs. ZTE Corporation (2017) 392 ITR page 80 (Del.). Ld. DR vehemently relied on the orders of the authorities below. 20. In CIT Vs. ZTE Corporation (2017) 392 ITR page 80 (Del.) it is held as follows: "21. The reference to clauses (a) and (b) means that all the rights which are in literary works i.e. "(i) to reproduce the work in any material form including the storing of it in any medium by electronic means;(ii) to issue copies of the work to the public not being copies already in circulation;(iii) to perform the work in public, or communicate it to the public;(iv) to make any cinematograph film or sound recording in respect of the work;(v) to make any translation of the work;(vi) to make any adaptation of the work;(vii) to do, in relation to a translation or an adaptation of the work, any of the ac....
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.... It is not the case of the revenue that the software involved in this case is independent of the functioning of the hardware. Revenue does not dispute the fact that in this matter the hardware and software are interdependent in the sense that hardware is useless without this particular software and the software cannot be used in any hardware other than the one for which it is permitted to be used. Similar are the facts in the case of Networks India International Inc. Facts being similar, the above decision is applicable to the present case also. While respectfully following the same we hold that the payment for the embedded software is not royalty and the receipts on account of sale of embedded software cannot be separately brought to tax. Grounds No. 2 and 2.1 in all the appeals are, accordingly, allowed. 44. In view of our conclusion that the Assessee's income from supply of equipment was not chargeable to tax in India, the receipts on account of sale of embedded software cannot be separately brought to tax and that the income from providing training services cannot be treated as fees for technical services under the provisions of Article 12(5)(a) of the DTAA, the qu....
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....009 passed by the CITA, while giving effect to the said order, AO continued to take gross profit margins of Nortel Canada for computing the total tax and interest liability. Challenging the same assessee preferred an appeal and by order dated 22/12/2009, CIT(A) directed that the adjusted net profit margins of Nortel Canada need to be applied while computing taxable income of the alleged PE of Nortel Singapore that is the expenses relatable to the PE made to be allowed in some proportion which expenses of Nortel Canada bear to its revenues. Pursuant to the above the assessee filed computations of its revised taxable income and tax liability claiming several deductions including the research and development expenses. According to the assessee they are engaged in supply of highly advanced network equipment as such the R&D expenses are prima facie included towards earning income from supply of telecom equipment and once an expense on account of supply of such network equipment is held by the CIT(A), it becomes imperative to allow deduction for such R&D expenses which are incurred for the purpose of earning income from supply of network equipment. However ld. AO did not allow the same, ....