TaxTMI 
TaxTMI 
2023 (3) TMI 205
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....C(13) of the Income-tax Act, 1961 ('Ace) pursuant to the directions of the Hon'ble Dispute Resolution Panel -1 (hereinafter referred to as `the Hon'ble DRP') in assessing the income of the Appellant at INR 4,19,22,61,900/- as against the returned income of INR 51,76,97,370/- reported by the Appellant in the return of income (`ROP). 2 That on the facts and in the circumstances of the case and in law, the assessment order dated February 28, 2022 passed by the Learned AO is unsigned and hence is bad in law and void-ab-initio. 3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Learned AO erred in passing the impugned Assessment Order while not appreciating the correct factual position and legal principles brought on record by the Appellant. Further, the Learned AO / the Hon'ble DRP erred in making / not rejecting the allegations, incorrect observations, assertions and inferences on the basis of mere conjectures and surmises, which are both factually incorrect as well as legally untenable and therefore, the impugned Assessment Order had in law and void ab-initio. Appellant alleged to constitute a....
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....ion projects (incorrectly assumed that these activities are carried by Huawei China within India) which have lasted for more than 183 days, thereby creating Installation PE' in India. (Para 8.3.3) 4.3 That on the facts and circumstances of the case and in law, the Learned AO has grossly erred in holding that Huawei India constitutes a 'Service PE' of the Appellant in India under Article 5(2) of the India-China Tax Treaty owing to following incorrect assumptions/ inferences: * That employees of the Appellant have rendered services in India, other than in the nature of technical services, and that such services have continued in India for more than 183 days, thereby creating 'Service PE' in India. (Para 8.1) 4.4 That on the facts and circumstances of the case and in law, the Learned AO has grossly erred in holding that Huawei India constitutes a 'Dependent Agent PE' of the Appellant in India under Article 5(4) of the India-China Tax Treaty owing to following incorrect assumptions/ inferences: * The process of joint bidding done by the Appellant and Huawei India does result into Dependent Agency Permanent Establishment (&....
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....t was set up only to aid the Appellant's business in India and hence practically it was working for the Appellant in India. (Para 8.3.8) Revenues from supplies made to India attributed to alleged PE 5 Without prejudice, on the facts and circumstances of the case and in law, the Learned AO has erred in attributing income from supply of products (made on an off-shore basis) to India to the alleged PE of the Appellant in India. 5.1 That on the facts and in the circumstances of the case and in law, the Learned AO erred in proposing and the Hon'ble DRP further erred in confirming the action of Learned AO in assessing the total income of the Appellant under the provisions of the Act and India-China Tax Treaty without appreciating that income of the Appellant (other than the income offered to tax under the ROI for the year under appeal): (a) had not accrued/ arisen in India under section 5(2) of the Act; (b) could not be deemed to have accrued/ arisen in India under section 9 of the Act; and (c) was not taxable in India under the provisions of the Act and / or Tax Treaty. 5.2 That on the facts and circumstances of the ....
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....artment's appeal against the order passed by the Hon'ble ITAT wherein the Hon'ble ITAT specifically negated the above approach taken by Revenue authorities to arbitrarily allocate a portion of total supply revenues towards hardware and software. Attribution of profit from supplies made to the alleged PE 6. That on the facts and circumstances of the case and in law, the Learned AO, while placing reliance on the assessment orders passed for the previous years in the Appellant's own case, has erred in considering the operating margin at 2.51%, has further erred in adoptingthe attribution of 20 per cent of global profits as the same was made by placing on ruling of Special Bench of Delhi ITAT in case of Nokia Networks OY [96 TTJ 1] which has now been negated by Hon'ble Special Bench vide order dated June 5, 2018 [94 taxmann.com 1 1 1]. Further, the Learned AO and Hon'ble DRP has erred in not appreciating that even if for argument's sake it is presumed that activities such as signing, negotiation etc. were undertaken in India, the same are preparatory and auxiliary in nature and would not result -in constitution of PE and/ or attribution of ....
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....E of the Appellant in India) while computing taxable income assessable in the hands of the alleged PE of the Appellant in India. Taxation of revenues from supply of software 7 That on the facts and circumstances of the case and in law, the Learned AO has grossly erred in arbitrary allocating 30% of total supplies made towards 'software' in an arbitrary manner and taxing the same as 'Royalty' under Article 12 of the India-China Tax Treaty or under section 9(1)(vi) of the Act. 7.1 Without prejudice, on the facts and circumstances of the case and in law, the Learned AO has grossly erred in not appreciating the fact that the predominant character of the supply transaction is sale of equipment alongwith software and therefore, revenues from supply of software forming an integral part of the equipment cannot constitute 'Royalty' under Article 12 of the India-China Tax Treaty or section 9(1)(vi) of the Act. 7.2 Without prejudice, on the facts and circumstances of the case and in law, the Learned AO has grossly erred in holding that allocated software revenue is for use of a 'copyright' and not of a 'copyrighted article'. ....
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....thout prejudice to each other. 3. Ground nos. 1, 2 and 3 are general in nature, hence, do not require adjudication. 4. In ground nos. 4, 5 and 6 along with their sub-grounds, the assessee has challenged the decision of departmental authorities in holding existence of fixed place Permanent Establishment (PE), installation PE, service PE, dependent agent PE and attribution of profit to the PE. 5. Briefly facts relating to this issue are, the assessee is a non-resident corporate entity incorporated in Peoples Republic of China and tax resident of that country. As stated, the assessee is engaged in sales of telecom equipments comprising of non-terminal products, i.e., advanced telecommunication network, namely, core and access network equipment, mobile network equipment and data communications equipments etc. to customers in various countries, including India. Further, the assessee also provides technical consultancy services to its subsidiary in India, viz., Huawei Telecommunications (India) Co. Pvt. Ltd. (in short 'Huawei India'). Huawei India is involved in the provision of integration installation and commissioning services in relation to telecom network equipment supply b....
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....ing Officer's view, both, on the existence of PE as well as attribution of profit to the PE. 9. Before us, Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee, though, fairly submitted that identical issue has been decided against the assessee in past assessment years, being assessment years 2005-06 to 2016-17, however, he submitted that while deciding the issues in past assessment years, the Tribunal has failed to take note of various submissions made by the assessee on the issue of existence of PE as well as attribution of profit. He submitted, without rendering independent finding on the submissions of the assessee, the Tribunal in assessment years 2009-10 to 2016-17 has followed its earlier decision in assessment years 2005-06 to 2008-09. Thus, challenging the decision of the departmental authorities on the issue of PE and attribution of profit learned counsel made the following submissions in writing: "At the outset, it is submitted that the Appellant vehemently denies existence of any form of Permanent Establishment (`PE') in India under the provisions of the India China Double Taxation Avoidance Agreement (`DTAA') and denies existence of any....
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....ench, it is most respectfully submission as under: The Learned Assessing Officer )'Ld. AO') had held 20 per cent of global profits from offshore supply of telecom network equipment was attributable to tax in the hands of the alleged PE in India. In coming to the said conclusion, the Ld. AO/ Dispute Resolution Panel ('DRP') relied on the decision of the Hon'ble Delhi Income Tax Appellate Tribunal ('ITAT') in the case of Motorola Inc. vs. DCIT: 95 ITD 269 (Del.) wherein, Nokia Networks Oy was also a party, attribution of 20 per cent was made on account of following: * 10 per cent towards signing of supply and installation contracts in India; and * An additional 10 per cent towards network planning and contract negotiations. Relevant extracts of the order passed by the Ld. AO/ directions passed by the Ld. DRP for the subject year under consideration, i.e., Assessment Year ('AY') 2018-19 are reproduced below: Relevant extracts of the assessment order 10.7 The aforesaid services are preliminary and auxiliary in nature and the amount received by Huawei India from providing above services has been subjected ....
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....to be attributable to Indian PE In the assessment orders. ii It has been established that the assessee constituted PE in India. As regards assessee's claim that no further attribution needs to be done as the Arm's Length criteria of international Transaction have been studied by TPO in past years, it is observed that in the current year, no reference has been made to the TPO, hence the argument holds no water anymore and is rejected. Even otherwise, this issue was discussed in para (iii) on page 8 of the Directions of the Panel for AY 2015-16. This argument is thus rejected. The AO has held that 20%, of the estimated profits are attributable India and taxable in the hands of Indian PE, as was done in earlier years. iii. The Panel has considered the issue. In the year under consideration also the AO has attributed 20% of the Global Profit to India as has been upheld by the IT AT and the DRP in the past. The percentage of 20% was adopted in tile preceding years, which were completed pursuant to the survey action. Since, the attribution is based upon the past history of the case which has been upheld by the Hon'ble IT AT after considering all the facts of....
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....es through its employees to MSAS, therefore, Service PE of MSC is constituted in India. In respect of attribution of income to the PE, the Court held that if the transactions between the PE and the foreign Associated Enterprise (`AE') are found to have taken place at arms' length prices, then there is no question of attributing any income to the PE. Relevant extracts of the decision are reproduced below: "33. To conclude, we hold that the AAR was right in ruling that MSAS would be a Service PE in India under Article 5(2)(1), though only on account of the services to be performed by the deputationists deployed by MSCo and not on account of stewardship activities. As regards income attributable to the PE (MSAS) we hold that the Transactional Net Margin Method was the appropriate method for determination of the arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark-lup worked out at 2.9% on the operating costs of MSAS. This position is also accepted by the Assessing Officer in his order dated 29-12-06 (after the impugned ruling) and also by the transfer pricing o....
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....er attribution is required has already been decided by the decision of the Hon'ble Supreme Court in the case of DIT v. Morgan Stanley & Co. Inc [2007] 292 ITR 416 (SC). This aspect was very much Wore the Ld. CIT(A) and he has dealt with the same as under:- "As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm's length principle Article 7(2) is relevant. According to the AAR where there is an international transaction under which a non- resident compensates a PE at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 also issued by CBDT. [Para 29] Article 7 of the U.N. Model Convention inter alia provides that only that portion of business profits is taxable in the source country which is attributable to the PE. It specifies how such business profits should be ascertained. Under the said Article, a PE is treated as if it is an independent enterprise (profit centre) dehors the head office and which deals with the head office at arm's length. Therefore, its profits a....
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.... 11.The Ld. CIT(A) in this regard held that the argument of the appellant is that if the international transactions between the parent entity (HO) and associated entity (AE) stand accepted at an Arm's length based on FAR analysis, in that case, the question of appropriation of profit to DAPE does not arise. That his argument sans the concept of separate entity approach as provided in article 7 of India Ireland DTAA to distinguish between PE and parent entity (HO). That if the international transactions between India AE and HO have been accepted at an arm's length by TPO, it does not automatically mean that FAR of DAPE stands subsumed in the same. That it is important to distinguish between the benchmarking analysis for the transactions between HO and associated enterprise (AE) vis-a-vis that of HO and its PE. That it may be important to make a distinction between the FAR of the parent entity (Head Office (HO) in Ireland) and I AR of the DAPE (India). Further, it is also important to note that FAR of the DAPE is distinct from FAR of the associate enterprise (AE) in India. That so, practically, it is a interplay of FAR amongst three entities i.e. parent entity (HO) in I....
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....e needs to be decided in favour of the assesse." Without prejudice to the above, it was submitted that the Ld. AO erred in allocating 20% of the global profits to the alleged PE in India basis the decision of the Special Bench of the Tribunal in the case of Nokia Networks OY vs. JCIT : 96 TTJ 1. It was contended by the Appellant on without prejudice basis that: (i) The aforesaid decision of the Hon'ble ITAT in the case of Nokia Networks OY vs. JCIT (supra) was set aside by the Hon'ble Delhi High Court in DIT vs. Nokia Network OY: 25 taxmann.com 225 (Delhi) inasmuch as the High Court directed the ITAT to determine whether any profits may be attributed to tax in India on account of signing, network planning and negotiation of offshore supply contracts in India. During the set aside proceedings, the ITAT in Nokia Networks OY vs. JCIT: 94 taxmann.com 111 (Del) inter-alia held that the activities of signing of contracts, network planning and negotiation are in nature of preparatory and auxiliary activities which does not result in constitution of PE of the assessee in India. Therefore, no profits of the assessee are attributable to tax in India. Relevant extrac....
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....e High Court has become purely academic." Accordingly, in view of the above since the activities of the Appellant basis which it was alleged that the Appellant constitutes a PE and attribution of 20 per cent was made, have been held to be in nature of preparatory and auxiliary in nature, PE of the Appellant is not constituted in India. Therefore, no profits Of the Appellant are attributable to tax in India. However, please note that in facts of the Appellant's case, supply contracts entered with: Indian customers were negotiated through electronic means or through short visits of the Appellant's personnel at the customer locations in India. Further, all the contracts were accepted and 'concluded' by the Appellant, outside India. The power to negotiate, decide, vary and accept the terms of supply contract on behalf of the Appellant vests in the employees of the Appellant who reside in China. The telecom equipment supply contracts were 'concluded' only when the employees of the Appellant finally accepted the terms of the respective contracts, outside India. (ii) Considering that equipment supplied by the Appellant was manufactured outside India, no p....
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....CTR 251 (Del.) wherein it is held as under: "Reading the above Article 7 of the Treaty it is clear that the profit of an enterprise will be taxable only to the extent as is attributable to that permanent establishment. This is in pari materia with. clause (a) of Explanation I to section 9(1)(i) of the Income-tax Act. Thus where the entire activity of an enterprise are not carried out in a Contracting State where the PE is situated, than only so much of the profit as is attributable to the functions carried through the PE can be taxable in such source State. While dealing with the. question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15% of the revenue generated from the bookings made within India is taxable in India. The same proportion has to be adopted here while computing profit attributable, to the PE. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguish the assessment as no further income is taxable in India., It is to be noted that even in the first assessment framed by the Assessing Officer, the e....
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.... attributable to the PE of the Appellant in India, the taxable income (loss) in the hands of the PE is computed as under: Particulars AY 2018-19 (in INR) Returned Income 517,697,370 Tax on returned income 51,769,737 (a) Details of Sales of telecom equipment 11,982,078,985 Sales of terminal equipment 124,519,580 Total equipment sales 12,106,598,565 100% Profit Attribution to Hardware 12,106,598,565 1) Income from Hardware _ Profit on sale of hardware (Global profit rates) 303,875,624 Profit attributed to alleged. PE (A) @ 20% 60,835,658 2) Fee for technicalLLvices /Interest income Already offered to tax in return @ 10% (B) 517,697,370 Less : Payment made to Huawei India (C) 3,400,019,206 Taxable Income (D = A+B-C) (2,821,486,178) Hardware (at the rate of 43.26%) Fee for technical services 10% 51,769,737 Total Tax Payable 51,769,737 Less: Taxes Deducted at Source 52,382,715 Tax Payabl....
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....& Co. Inc (supra) and reiterated in successive decisions thereafter cannot be followed in the subsequent AYs." 10. Learned Departmental Representative submitted, the issue is squarely covered against the assessee by the decisions of the Tribunal in past assessment years, up to, assessment year 2016- 17. Further, he submitted, the various contentions now taken by the assessee were considered by the Tribunal while disposing of appeals pertaining to assessment years 2009-10 to 2016-17. In this context, he drew our attention to the grounds raised and submissions made before the Tribunal in these assessment years. Thus, he submitted, when there is no change in the factual position in the impugned assessment year, the Bench is bound to follow its earlier decisions. Further, he submitted, against the earlier decisions of the Tribunal, the assessee has preferred an appeal before the Hon'ble High Court and appeals have been admitted. Therefore, there is no reason to deviate from the earlier decisions of the Tribunal. He submitted, against the appellate order of the Tribunal in assessment years 2005-06 to 2008-09, the assessee had filed a miscellaneous applications raising the plea that i....
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....see has given power of attorney in favor of its employees for signing the contracts, conducting negotiation and executing all necessary matters for MTNL project in India. 8.2 In view of the above, it is clear that the assessee, being tax residents of China, had fixed place PE in India in form of office premises of Huawei India. The business activities of the assessee being conducted from the fixed place of business referred above forms the core of selling activities and cannot be termed as of the preparatory or auxiliary character. 8.3 The employees of Huawei India forms the sales teams of the assessee, such employees have habitually secured orders in India, wholly or almost wholly for the assessee. The various documents in the form of agreements/purchase orders/copies of contracts also proves the active involvement of the employees of Indian company in the conclusion of contracts on behalf of the assessee. Huawei India is economically, technically and financially all dependent upon Huawei China. Therefore, Huawei India also constitutes the agent other than an agent of independent status of Huawei China. This results into the creation of the dependent agent PE as ....
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....tituting Fixed Place PE. The assessee's employees also visit India to perform activities relating to installation projects lasting for more than 180 days, which constitutes Installation PE. The statements recorded during survey also show that the employees render technical services continuing for more than 183 days, constituting Service PE. Further, the process of joint bidding by the assessee and Huawei India constitutes Dependent Agent PE. The AO has also reproduced the relevant extracts from the statements of employees recorded during the survey, which: amply prove the existence of assessee's PE in India. As such, the AO is justified in holding that the assessee has PE as well as business connection in India and its income is taxable both under the Act as well as the DTAA." 10. At the time of hearing before us, the learned counsel for the assessee was unable to controvert thefinding recorded by the Assessing Officer as well as learned DRP. The Assessing Officer has clearly recorded the finding that the business of the assessee in India is being conducted with active involvement of the employees of Huawei India. Such employees of Huawei India alongwith the employ....
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....ribunal the Appellate Tribunal has jurisdiction to pass the order disposing of the application and cannot reject the application on the ground that four years have elapsed." 5. In the present case, the order of the ITAT was dated 21st Marcy, 2014. The assessee filed the miscellaneous application on 11th February, 2015. As per section 154(2), , at the relevant time, there was a limitation of four years for filing of the appeal. Thus, the assessee had filed the miscellaneous application well within the time. Accordingly, learned DR's contention that the miscellaneous applications of the assessee are barred by limitation is rejected. 6. Now, coming to the merit of the assessee's contention, at the outset, we may mention that the modification sought for by the assessee is only cosmetic and not substantive. We are of the opinion that the mention of the words that the assessee's counsel has not been able to controvert the finding recorded by the Assessing Officer as well as learned DRP does not mean that the assessee's counsel has not properly argued the matter. it only means that the ITAT was not able to agree with the submission 4f the learned counsel. However....
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....ns. Notably, assessee's appeals for assessment years 2009-10 to 2016-17 having identical issues, subsequently came up for consideration before the Tribunal and vide order dated 9th December, 2020, the Tribunal disposed of the appeals. However, due to certain inadvertent mistakes in the appellate order, the Tribunal recalled the order for the limited purpose of adjudication ground no. 6 with its sub-grounds, which are on the issues of existence of PE and attribution of profit and ground no. 7, which is on the issue of taxability of royalty income from sale of software. While considering these issues afresh in assessment years 2009-10 to 2016-17, the Tribunal in ITA No.1500/Del/2014 and others dated 13.10.2022 followed its earlier order and decided both the issues regarding existence of PE and attribution of profit to the PE against the assessee. The observations of the Tribunal in this regard are as under: "7. In rebuttal in this regard, the Ld. DR submits that while arguing the appeal for Assessment Years 2005-06 to 2008-09, the assessee has made no submission on profit attributed of alleged PE by the Assessing Officer in those years. That aspect has been duly noted by the....
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....o the norms of judicial discipline the Tribunal had followed its earlier decision in assessee's own case and decided the issues against the assessee. Before us, though, learned counsel appearing for the assessee has contended that various arguments advanced before the Tribunal in assessment years 2009-10 to 2016-17 were not considered, however, we are not convinced. A careful perusal of the observations of the Tribunal reproduced above would make it clear that the Tribunal after taking note of various submissions of the assessee took a conscious decision to follow its earlier decision. Therefore, the allegation of learned Senior Counsel that various submissions made by the assessee were not considered in assessment years 2009-10 to 2016-17 is without any substance. 22. As noted above, the issues have been consistently decided against the assessee by the Tribunal beginning from assessment year 2005-06 to 2016-17. There is no difference in the factual position permeating through different assessment years, including, the impugned assessment year. It is relevant to observe, before us, learned counsel appearing for the assessee has submitted that against the decision of the Tribunal....