TaxTMI 
TaxTMI 
2019 (2) TMI 1942
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....has also filed stay application for assessment year 2015-16. 2. The first common grievance in assessee's appeal relates to the denial of having any Permanent Establishment [PE] in India. At the very outset, the ld. counsel for the assessee stated that to avoid protracted litigation, he is not pressing this common grievance. 3. However, the ld. DR submitted the following written submissions in this regard, explaining the stand of the revenue: "PRELIMINARY 1. The assessment order and the DRP directions /order of the CIT(A) are emphatically relied upon. 2. This submission is restricted only to specific aspects. On balance aspects, above orders and oral submissions are relied upon. Claim during Assessment Proceedings- Function/Claims As per Assessee As per Survey documents Collection of market Info ZTE India (AO-4) Huang Dabin Q-4 (AO-9) Time to time clarifications and communicating with the assessee ZTE India (AO-4) Huang Dabin Q-2 (AO-9) Identifying business opportunities ZTE India (AO-4) Act as interface with Indian customers ZTE India (AO-4) Contracts with Indian customers were negotiated through electronic means or through short visits of ....
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.... - We need technical support from ZTE China for installation and commissioning of equipments supplied by ZTE China. The employees of ZTE China come on short visits to render such technical support. (Huang Dabin Q.5 p.95 Annex-1) - Office of ZTE China (India Office) shown as 804-808, Tower-B, Global Business Park, Gurgaon India and Rajesh Singh shown as contact person (p.21 Annex-7 as per Q. 25 to Huang Dabin p.91 Annex-1) C. ITAT Order dt.30.05.2016 S.No Findings & Observations of Hon'ble ITAT Ref. Para No Challenged 1 Business Connection (not a GOA before ITAT) 2 Existence of PE under Art-5(1), 5(2)(c), 5(2)(u) &5(4) not pressed 13 No 3 Level of PE's participation /Functions carried out by PE 46, 50 No 4 Attribution of Profits to PE 50 Yes (194,195,196,227, 228) 5 Whether activities are preparatory & auxiliary in character (not a GOA before ITAT) 28 r.w. 46 No. In p.187, 194,196,228, it profitability of activities are highlighted. Para-18 "We have noted earlier that the assessee had agreed for attribution of profits to PE without prejudice to his claim that there is no PE in India (in its) endeavor .....
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....years in respect of business model, revenue streams and their taxability in India. (AO-09-10) * No evidence produced to controvert the finding of facts recorded by Hon'ble ITAT in para-46 of its order relating to the functions and operations carried out by the assessee in India through its PE. * The findings of the Hon'ble ITAT on the role and functions of the PE and the activities & operations carried out by such PE has not been challenged before the Hon'ble High Court. The questions of law raised before the Hon'ble ITAT relate only to the attribution of income to such PE. It was claimed that marketing, negotiation and conclusion of contracts are not revenue generating activities (as distinct from preparatory and auxiliary activities) and consequently no income should be attributed to the PE (Ref. p.196 & 228 of Common Paper Book) * Once the existence of Fixed Place PE is established by the Revenue during earlier years, the onus is on the assessee to establish and prove that such a PE has ceased to exist during relevant year. The assessee has failed to prove this. * In the TP study for ZTE India for A.Y.2012-13 it was confirmed that "During the year the c....
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.... leasing out of an enterprise or a PE by the taxpayer will usually bring the PE of the lessor taxpayer to an end. Likewise, a PE ceases to exist as soon as one of the negative elements contained in Art-5(4) or (6) OECD and UN MC occurs. It is important to note, however, that the determination of the beginning and end of a PE is relevant for capital taxation only. By contrast, it need not be considered for income tax purposes. This is particularly true with regard to Art 7(1) & (2).... as the rules on attribution of profits to a PE allow an attribution of earnings and expenses to the PE even if they have accrued at a time when the PE had not subsisted yet - or vice versa, after the PE ceased to exist." (pp.348-349) E. Analysis of Documents relating to assessee found during Survey- Description Reference Non-Disclosure Agreement dt. 6/3/07 between assessee and Dishnet. -Address of the assessee given at 8th Floor, Tower B, Global Business Park, Gurgaon -Agreement signed by Mr. Yi Chen, GM, Marketing (signing for ZTE Corp) p. 244-248, Survey Doc, Vol.Ill Communication between ZTE India &Airceldt. 15/10/07 & 17/9/07 signed by James Yi Chen, GM, Marketing (compare the signatu....
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....ice sought & fees paid. It may be noted that the law farm Fox Mandal& Co discussed various issues including the following which proves that ZTE Corp had its own employees working in India as well as seconded employees to ZTE India who were working for it - Termination of employment of Rajan Kalsi Finalization of secondment agreements with ZTE India Discussion and advice to Deepak Thakur of ZTE India (refer to p. 1215 of Survey Doc, Vol-X) on various issues (after receiving mail from ZTE Corp) i.e. * FRRO * Customs * Contract Employee * IP Issues * Corporate Guarantee matter regarding ASTER-Kenya p.663-671, Survey Doc, Vol.VII Letter from Calyon Bank addressed to ZTE Corpn, Gurgaon p.684, Survey Network Handover Certificate signed by Mr. Zhao Wangxin for ZTE Corp who is an employee of ZTE India (refer to p. 1215 of Survey Doc, Vol-X to know p.708, Survey Doc, Vol.VII Extension List & Name of employees of ZTE Telecom India Pvt. Ltd. including Project Teams p.710-712, ' Survey Doc, Statement before Customs describing the nature of software supplied (Refer to p.892, Survey Doc, Vol.VIII) p.1140-1143 Survey Doc, Letter from BSNL addressed to ZTE Corpn, Gurgaon p.115....
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....d only on 9/12/2003. This shows the merger of functional identities between ZTE Corpn& ZTE Telecom India although the p.743-744, Survey Doc, Vol.VIII Letter from ZTE Corpn in ZTE Corpn letterhead to ITI signed by Liu Ren, MD, ZTE Telecom India on behalf of ZTE Corpn. p.752-753, Survey Doc, Vol.VIII Letter from Huang Zuwei, MD, ZTE India on behalf of /for ZTE Corpn p.757, Survey Doc, Vol.VIII Agreement with ITI signed by Liu Ren, MD ZTE Corpn who is an employee of ZTE India (refer to p. 3 of Survey Doc, Vol-X) p.758,767, Survey Doc, Letter from Himanshu Gupta, Manager, Marketing for ZTE Corpn. Address given at Gurgaon and seal of ZTE Corpn India LO. However, Himanshu is an employee of ZTE Telecom India too (refer to p. 1215 of Survey Doc, Vol-X) p.761, Survey Doc, Vol.VIII Memorandum of Settlement between ZTE Corp & Atlas Interactive on Stored equipments of ZTE Corpn. Very Important in the context of passing of title for p.772, Survey Doc, Vol.VIII , MOU between ZTE Corp & ITI signed by Liu Ren in the capacity of Director Marketing who is an employee of ZTE India (refer to p. 3 of Survey Doc, VolX) p.773-779782, Survey Doc, Vol.VIII Minutes of meeting between ITI, ZTE ....
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....2012 at para 13 of its order observed as under: "At the time of hearing, the ld. counsel for the assessee submitted that he has instructions from his clients that the dispute between the 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. 6. Second grievance relates to attribution of profit. 7. A perusal of the orders of the authorities below show that the lower authorities have followed the findings given in earlier assessment years 2004-05 to 2009-10 and this issue has been settled by the Tribunal in ITA No. 5870/DEL/2012 and others. The relevant findings given by the Tribunal read as under: "24. The issue of attribution of profits depends on the facts in particular case and is fully dependent on the level of operations of the activities carried ITA 5870/Del/12 & ors. - ZTE Corporation out in I....
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....cal support services - Quality assurances - After sales services and replacement - Concluding agreements and MOUs on behalf of ZTE China - Performance Guarantee of the . company- ZTE - Coordination with Government Departments - negotiation at Government level - Decisions regarding partnership with other concerns/ marketing. - Foreign Investments in India ITA 5870/Del/12 & ors. - ZTE Corporation - Taxation matters of ZTE China - Marketing Functions - Banking Functions - Visiting customers and vendors 47. In the case of Motorola )supra), Tribunal has referred to the decision in the case of Ahmadbhai Umarbhai (supra), wherein it has been held that income attributable to the manufacturing activity should be more than the income attributable to the activity of sale. Therefore, out of the total global income of assessee relatable to the supplies made to India more income is to be attributed to the assessee as accruing in China and from sale activity, it is not to that extent. We find that ld. CIT(A) has adopted the reasoning in the case of Alcatel Lucent. In this decision ld. CIT(A) himself noted that assessee had accepted and not contested in appeal attribution....
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.... net global profits as per published accounts out of transactions of assessee with India are attributed to PE in India in respect of both hardware and software supplied by assessee to Indian customers. At this juncture we may point out that while deciding the department's appeal in subsequent part of this order, we have upheld the findings of ld. CIT(A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. We are not inclined to accept this mode of computation resorted by AO, particularly in view of Rule 10 of the IT Rules, which mandates the AO to go by the published accounts of assessee. In the result assessee's ground no. 6 in AY 2009-10 stands allowed. We may further clarify that our decision does not amount to enhancement of income because overall tax effect will be less as compared to tax computed by AO/CIT(A)." 8. Respectfully following the findings of the co-ordinate bench, we hold accordingly. 9. Third grievance relates to taxability of software as royalty [In revenu....
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....in the case of DIT Vs. Ericsson A.B. (supra). In the appeal by the Revenue, question No.3 pre posed before the Hon'ble Jurisdictional High Court and admitted by their Lordships reads as under.- "Whether in law, the learned De/hi Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and, hence, was not assessable both under section 9(l)(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 MIs 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 (1)(110 o....