TaxTMI 
TaxTMI 
2021 (7) TMI 91
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....Whereas, ITA No.1930/Del/2020 is the Assessee's appeal against the final assessment order dated 06.11.2020 passed in pursuance to the directions of the Ld. Dispute Resolution Panel ("DRP") vide directions dated 14.09.2020for the Assessment Year 2017-18. Since these appeals and crossobjection pertain to same Assessee involving common grievances and were heard together, we are disposing them off by this common order for the sake of convenience and brevity. The Assessee has also filed stay application for assessment year 2017-18. 2. The brief facts of the case are that the assessee company is a tax resident of Republic of China and is engaged in the business of providing telecom solutions. It provides a wide array of telecommunications product line in the world, covering vertical sector or wireless networks, core networks, access & bearer networks, services and terminals markets. During the assessment year/s ("A.Y.") 2016-17 and 2017-18, the assessee was engaged in supply of telecommunication equipment - Network Equipment, Terminal Equipment (Handsets) and Software to Indian telecom operators. Whereas, the Indian subsidiary of the assessee, i.e., ZTE Telecom India Private Li....
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.... Mr. Cheng left India on 09.12.2019. Subsequently, Mr. Cheng visited India between 15.12.2019 to 29.12.2019 however, even during this period he inadvertently missed to take necessary steps for filing of appeal and also did not informthe other concerned persons in this regard. Thereafter, Mr. Cheng was relocated and sent on deputation to Vietnam. Afterwards, owing to the unprecedented outbreak of the pandemic in China, follow up of the appeal could not happen and it was only once the legal department of the assessee was updating the status of the pending litigation was when the said omissionin filing appeal was discovered. The Ld. AR has argued that the delay in filing of appeal is bona fide and the issues in question have continuously been agitated by the Assessee before various forums including the Hon'ble High Court of Delhi for the preceding years viz. A.Y. 2004-05 to A.Y. 2015-16, where on the issue of attribution, substantial question of law has also been framed in assessee's appeal/s and are pending consideration. It is argued that there was no question of not preferring an appeal for AY 2016-17, had it not been for the inadvertent error. The Assessee has also furn....
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....ficient cause" employed by the legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice - that being the life-purpose for the existence of the institution of courts. It is common knowledge that this Court has been making a justifiably liberal approach in matters instituted in this Court. But the message does not appear to have percolated down to all the other courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that: "1. Ordinarily a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties. 3. "Every day's delay must be explained" does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational common sense pragmatic manner. 4. When substantial justice an....
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.... Assessee and the department may be settled, and therefore on the most contentious issue regarding existence of PE in India,he has instructions not to press the same." 5. This ground was accordingly not considered by the Tribunal in earlier assessment years. Since during the captioned assessment years before us the ld. counsel for the assessee has made a similar concession and on such concession, we decline to dwell into this issue." 15. Hence, respectfully following the co-ordinate bench, we too decline to dwell into this issue of existence of PE and the relevant grounds are disposed off accordingly. 16. The next issue raised in Assessee's appeal for AY 2016-17 [Grounds no. 5 to 10] and Assessee's appeal for AY 2017-18 [Ground No. 8 to 12] relates to the attribution of profit. 17. The Ld.AR submitted that the activities relatable to India and rate of attribution to be applied in relation to such activities undertaken has been adjudicated by this Hon'ble Tribunal in Assessee's own case vide common judgment for AY 2004-05 to AY 2009-10 and AY 2010-11 to AY 2015-16. He further submitted that the Department has accepted the said decision/s of Tribunal and....
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....ational Inc. judgment dated 13.06.2014 in ITA nos. 1119, 1120 & 1121/2010(assessee's appeals) & ITA nos. 1153, 1154 & 1155/Del/2010 (department's appeal), wherein attribution rate of 50% was applied. However, considering that now the said decision of Tribunal in Nortel Networks (supra) has been overruled by the Hon'ble Delhi High Court in Nortel Networks India International Inc. v. DIT (2016) 69 taxmann.com 47 (Delhi), thus, even on this basis the higher rate of attribution is not justified. 20. The Ld. AR submitted that for the AY 2017-18 the Department has applied operating profitability of 2.41% as against the net global operating profitability of (-1.91)% as mandated by the Tribunal in Assessee's own case vide common judgment for AY 2004-05 to AY 2009-10 and AY 2010-11 to AY 2015-16. 21. At this juncture, the Ld. AR fairly submitted that the legal issue on attribution of profit is sub-judice before the Hon'ble Delhi High Court in Assessee's appeal for AY 2004-05 to AY 2015-16, wherein the following substantial questions of law have been framed vide order dated 18.08.2017 in ITA No. 297 to 302 for AY 2004-05 to AY 2009-10 (subsequently, similar order/s were....
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....0 which give a clear picture of the level operations carried out by ZTE India, the assessee's PE. Ld. CIT(A) has pointed out that ZTE India is doing preparatory work, negotiating the contract and price and answering specified queries of the customers on behalf of the assessee. These are all vital functions which are revenue generating. The AO in AY 2009-10, as noted earlier, has elaborated in detail the functions carried out by PE in connection with sale in India. At the cost of repetition, we reproduce the same:- "Activities performed by PE, summarized by AO as under, - Supervision and control of projects in India by MD of ZTE India - Meetings at Tendering/ Pre Bid stage in India - Preparation of Bidding Documents in India - Signing and submissions of bids in India - Price and contract negotiations in India - Preparation of draft agreements and MOUs in India - Signing of agreement in India - Entering contracts in India - Obtaining Purchase Orders/ other supply orders on behalf of ZTE China - LC opening and supply of equipments/ handsets - Shipment of equipm....
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....enerating capacity of PE. 49. The decision in the case of M/s Nortel Networks India International Inc.( ITA nos. 119 to 121/Del/2010 and 1153 to 1155/Del/2010 order dated13.6.2014), the Tribunal in para 14.4 has noted that in assessee's case hardware supply contract was a part of the turnkey contract which involved supply, Installation, testing and commissioning etc. as is in the present case. Activities of M/s Nortel India and that of LO of Nortel Canada and services of expatriate workers had also been taken as part of the execution of the work by the PE. Thus, the level of operation carried out in India were extensive and under such circumstances Tribunal had attributed 50% of the net profit arising out of Indian transactions as assessee's income. 50. Having discussed the entire case law and after considering the factual aspects, we find that the level of operations carried out by assessee through its PE in India are considerable enough to conclude that almost entire sales functions including marketing, banking and after sales were carried out by PE in India and, therefore, keeping in view the decision of Hon'ble Supreme Court in the case of Ahmedbhai U....
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....spectfully following the decision of co-ordinate Bench in earlier years we dispose off the grounds raised in Assessee's appeal for AY 2016-17 and AY 2017-18. 25. However, it has been brought to our attention that in AY 2017-18, the Assessing Officer has taken the "operating profitability" instead of the "net-operating profitability" as per published accounts. In view of the decision as rendered in the preceding years, we direct the Assessing Officer to take the "net-operating profitability" as per published accounts whilst calculating the attribution. 26. The other issue raised in Department's Appeal for AY 2016-17 [Ground No. 1 to 3] and Assessee's appeal for AY 2017-18 [Ground No. 15 to 17]is regarding the taxability of income from supply of software as Royalty. 27. The Ld. AR submitted that this issue is covered in favour of Assessee and against the Department vide common judgment dated 30.05.2016 for Assessment Year 2004-05 to AY 2009-10 and common judgment dated 15.02.2019 for Assessment Year 2010-11 to AY 2015-16. He also drew our attention to the fact that Department's appeal on this issue has been dismissed by the Hon'ble Delhi High Court for AY 200....
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....er section 9(1)(vi) of the Double Taxation Avoidance Agreement between the Government of India and Sweden?" 13. That the Hon'ble Jurisdictional High Court, after detailed discussions which are at pages 474 to 506 of the ITR 343, answered the question in favour of the assessee and against the Revenue. 14. The Revenue had also filed the appeal against the decision of ITAT in assessee's own case which is decided by their Lordships alongwith various other cases including the case of M/s Nokia Networks, In this case also, the question NO.3 proposed by the Revenue and admitted by their Lordships reads as under:- "Whether any part of the consideration for supply of software stated by the respondent to be integral to the equipment is taxable as 'royalty' either under section 9(1)(vi) or the relevant provisions of the Double Taxation Avoidance Agreement?" After detailed discussion, their Lordships answered the question in favour of the assessee and against the Revenue. Since the issue is squarely covered by the decision of Hon'ble Jurisdictional High Court in the case of the assessee as well as in the case of Ericsson A.B. (supra). res....
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....Parsons Pty. Ltd., In re [2009] 312 ITR 273/179 Taxman 347 for the proposition that the payments for software should be taxed on case basis, since the same were not effectively connected to the PE of the assessee in India. The assessee in its reply distinguished this decision on facts and pointed out that AAR held so since no material evidence was placed by the assessee to demonstrate the role played by the PE under the PMS contract and its relationship with the royalty revenue earned under the BE & P contract. It was pointed out that the applicant before the ruling was not able to demonstrate 'effective connection' between the BE & P revenue and PE under the PMS contract. The AO rejected these contentions. 8. Aggrieved by the AO's order, the assessee appealed to the CIT (A). The appellate commissioner accepted the assessee's contentions and found as follows: (i) Assessee had fixed place PE and dependent agency PE in India. However, he did not accept the AO's plea as regards installation PE in India. (ii) On the issue of taxation of software embedded in telecom equipment mobile handsets, CIT (A) held it to be taxable as business profit....
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.... (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in subclauses(i) to (iv); (d) In the case of a cinematograph film- (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public (e) In the case of a sound recording- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) To communicate the sound recording to the public Explanation - For the purposes of this section, a copy which has been sold....
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.... "copy". The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign it, divesting itself of the title implying that it 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 pa....
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....ensed" computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Collector of Customs, (2000) 1 SCC 727 (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. 120. Consequently, the view contained in the determinations of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supr....