TaxTMI 
TaxTMI 
2023 (3) TMI 205
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.... 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 Permanent Establishment in India. 4 That on the facts and circumstance....
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....reby 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 ('DAPE') under Article 5(4) of the tax treaty. (Para 8.1) * The business of the Appellant in India is being conducted with active involvement of the employees of H....
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....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 case, the Learned AO and Hon'ble DRP erred in holding that Huawei India creates Business Connection in India under section 9(1)(i) of the Act due to following reasons: * The Appellant is in the business of supplying telecom equipment's to telecom operators in India; * It is in ....
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....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 income in India. 6.1 Without prejudice to the above, on the facts and circumstances of the case and in law, the Learned AO as well as the Hon'ble DRP erred in arbitrarily proceeding to attribute 20 per cent of profits to the alleged PE which is arbitrary and excessive given the purported functions basis which PE has been alleged. This arbitrary allocat....
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....'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'. 7.3 That on the facts and circumstances of the case and in law, the Learned AO as well as the Hon'ble DRP erred in not following the decision of Jurisdictional Hon'ble Delhi High Court in the Appellant's own case i.e. DIT v. M/s Huawei Technologies Co. Ltd.: ITA No. 562 to 565 of 2016 and other precedents viz.Nokia Networks OY (Supra) and Ericsson A.B. (Supra) and Infrasoft Ltd. (ITA No. 1034/2009) e....
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....ted 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 by the assessee from outside India. As observed by the Assessing Officer, these services were provided to Indian telecom operators under independent contracts between Huawei Indian and Indian telecom operators. For the assessment year under dispute, the assessee filed its return of income offering the income received from provision of technical services to Huawei Indian as Fees for Technical Services (FTS) and royalty income on gross basis. It also offered interest on Income Tax Refund as income and pa....
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....l 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 business connection in India under section 9(1)(i) of the Income-tax Act, 1961(` the Act'). As explained during the course of the hearing before this Hon'ble Bench and also submitted as part of submissions before the lower authorities (copies of which are placed as part of the paper book), at the cost of repetition, it is most humbly submitted that the findings / observations made during the course of Survey conducted on the premises of Huawei Telecommunications (India) Company Private Limited (`Huawei India') in Feb....
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....: * 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 to tax in the hands ofHuawei India. Therefore, this amount, which is received in India on account of the overall business connection in India of the sales made by Huawei China, has been subjected to tax in India. In view of this, the attribution of profits arising to the assessee out of the sale/ supply of the network equipment and handsets etc. is done at 20% of the profits. The reply and the details provided by the assessee have been discussed only to assess a just and reasonable rate of attribution of profit and it does not in any way dilute the finding that on the facts of this case that an g attribution of Income is requ....
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....le 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 the case, the DRP upholds the decision of AO on this issue. The objections are rejected." 4.3.2 For the year under the consideration being AY 2018-19 also, the DRP shall not deviate from its earlier observations and direction ns the factual matrix of tire case is same in the instant case and also keeping in view the history of litigation as elaborated above. The assessee's objection in this regard is rejected. In this regard, during the course of the hearing it was submitted that since Huawbi India which has been held to be Fixed Place PE / Dependent Agency PE / Installation PE / Service PE had been remunerated at arm's length, as has also been accepted by the Ld. Tra....
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....(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 officer vide order dated 22-09-06. As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have....
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.... 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 are determined on the basis as if it is an independent enterprise. The profits of the PE are determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own. Article 7(2) of the U.N. Model Convention advocates the arm's length, approach for attribution of profits to a PE. [Para 31] The object behind enactment of transfer regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with FE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the prov....
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.... 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 Ireland, DAPE in Indian and Associated Entity (AE) in India. Supreme Court as above in the case of DIT vs Morgain Stanley & Co. (supra). To the same effect is the order of the ADIT v. E-Funds IT Solution Inc. [2017] 399 ITR 34(SC), Honda Motor Co. Ltd vs. ADIT (301 CTR 601)(SC) and of the Hon'ble Delhi High Court in the case of Adobe Systems Inc. v. ADIT [WP(C)2384, 2385, 2390 of 2013] and DIT v.BBC Worldwide Ltd. [2011] 203 Taxman 554(Delhi), once a transfer pricing analysis has been undertaken in respect of the Indian AE, nothing further would be left to he attributed to it as the alleged PE of Adobe Ireland and that, accordingly, would automatically extinguish the need for attribution of any additional profits to the alleged PE. 13.In all these cases, it has found that the transac....
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.... 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 extract of the decision are as under: "47. Now coming to the paragraphs 2, 3 and 4 of Article 5, it is not the case of any one that the NIPL constitutes any kind of PE under these provisions. Albeit if one goes by clause (e)of Paragraph 4 of Article 5, where it has been categorically provided that the PE shall not be deemed to include a maintenance of a fixed place of business solely either; & for the purpose of advertising; r b) for the supply of information or for scientific research; c) being activities solely of a preparatory or an auxiliary character in the business of the enterprise. This clause clearly excludes any activities solely for preparatory or auxiliary in nature and if one goes by scope of remand by the Hon'ble High Court, i.e.. to see, whether signing, networking planning and negotiation constitutes a....
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....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 part of the manufacturing profits could be allocated to the alleged PE; having regard to the limited activities carried out by the alleged PE. The attribution, at the highest should be limited to 10% of the global profit as held in Anglo-French Textile Co Ltd. v. CIT: 25 ITR 27 (SC) and CIT Vs Bertrams Scotts Ltd.: 31 Taxman 444 (Cal. HC) (iii) Without prejudice, where Huawei India is held to constitute a business connection/ PE of the Appellant in India and profits are held to be attributable to activities in India, then, while calculating the profits assessable to tax in India in the hands of the alleged PE, deduction should be allowed for the payment made to Huawei India for support services. Reliance in this regard is placed on the decision of Hon'ble Delhi High Court in the case of Adobe Systems Incorporated [76 taxmann.com 297], whe....
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....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 entire expenses in the form of remuneration paid to AIN. was held as allowable deduction and was reduced while computing the income of appellant If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant for assessment years 1997-98 and 1998-99 will be 'Nil'." 15. So, we are of the considered view that when we deduct commission/remuneration from the RIPL from the profits attributed to the PE, no taxable income left in the hands of PE. Consequently, addition made by the AO/CIT (A) is not sustainable in the eyes of law. 16. Decision rendered by the coordinate Bench of the Tribunal in case of Amadeus Global Travel Distribution S.A. (supra), affirmed by t....
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....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 Payable - 612,978 (iv) The losses, if any, computed in preceding years should be carried forward and set off against profits of any of the succeeding years. The Ld. CIT DR further argued that the question of attribution having already been decided against the Appellant by the Hon'ble ITAT in the appeals for AYs 2005-06 to 2008-09 (ITA Nos. 5253 to 5256 of 2011) and subsequently followed by the Hon'ble ITAT in the appeals for AYs 2009-10 to 2016-17 (ITA Nos. 1500/De1/2014 and others), the same ought not to be followed. In rebuttal, the Appellant submitted that while arguing the appeals for AYs 2005-06 to 2008-09, the Appellant made no submission on the profits attributed to the alleged PE by the assessing officer in those years. That aspect is duly noted by the Hon'ble ITAT while upholding the orders of the Ld. AO / DRP and dismissing the appeal filed by the Appellant for those years. Further, for the AYs 2009-10 to 2016-17, the Hon'ble ITAT has merely relied on the order passed by it for AYs 2005-06 to 2008-....
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....nal in assessment years 2005-06 to 2008-09, the assessee had filed a miscellaneous applications raising the plea that issues concerning PE were not properly considered. However, the Tribunal dismissed the miscellaneous applications. Thus, he submitted, in the aforesaid scenario the contention of the assessee that the earlier decisions of the Tribunal should not be followed is unacceptable. 18. We have considered rival submissions and perused the materials on record. As far as the material facts relating to existence of PE and attribution of profit are concerned, they are more or less identical to past assessment years. The dispute between the assessee and the Revenue with regard to existence of PE and attribution of profit arose for the first time in assessment year 2005-06 and continued in subsequent assessment years. Revenue authorities held that Huawei India constitutes fixed place PE, installation PE, service PE and dependent agent PE. Appeals for assessment years 2005-06 to 2008-09 on these issues came up for consideration before the Tribunal in assessment years 2005-06 to 2008-09. After considering the submissions of both sides the Tribunal while deciding the appeals vide or....
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....dent status of Huawei China. This results into the creation of the dependent agent PE as per the provisions of the tax treaties and business connection as per the provisions of Explanation 2 to Section 9(1)(i) of the Income Tax Act, 1961." 9. The assessee raised the objection before the DRP. However, the DRP rejected the assessee's objection and held that the Assessing Officer is justified in holding that the assessee was having a PE as well as business connection in India. The relevant finding of the DRP reads as under:- "6.1 The third objection raised by the assessee is that it is not taxable in India under the Act and under the DTAA. It is contended that apart from what is declared by it in the return filed in response to notice u/s 148, the assessee's income has not accrued/arisen in India u/s 5(2) of the Act and the AO has erred in holding that Huawei India is the assessee's PE as well as the business connection in India. It is further contended that the AO also erred in assessing the income of the assessee as constituting PE under the DTAA, i.e. fixed place PE, installation PE, service PE and dependent agent PE. 6.2 The contentions raised by the assessee hav....
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....ei India. Such employees of Huawei India alongwith the employees of the assessee have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the assessee with its Indian customers. He has also recorded the finding that the employees of Huawei India form the sales team of the assessee. Such employees have habitually secured orders in India wholly or almost wholly for the assessee. Various documents found during the course of survey in the form of agreements, purchase orders, copies of contract prove the active involvement of employees of Indian company in the conclusion of contracts on behalf of the assessee. All these facts . recorded by the Assessing Officer and upheld by the DRP have not been controverted before us. In view of the above, we do not find justificationto interfere with the order of learned DRP in this regard. Accordingly, ground Nos.5 & 6 of the assessee's appeal are rejected." 19. Notably, after the appeals were decided by the Tribunal, the assessee filed miscellaneous applications seeking rectification of the appeal order. While dismissing the miscellaneous application in order dated 24.03.2017, the Tribunal obser....
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....4f the learned counsel. However, to avoid any misgiving about the ability or sincerity of the learned. Senior Advocate who appeared before us, we deem it proper to modify and replace paragraph 10 of the ITAT's order with the following paragraph:- "10. After considering the facts of the case and submissions of both the sides, we are of the opinion that the learned DRP rightly upheld the finding of the Assessing Officer. 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 employees of the assessee have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the assessee with its Indian customers. He has also recorded the finding that the employees of Huawei India form the sales team of the assessee. Such employees have habitually secured orders in India wholly or almost wholly for the assessee. Various documents found during the course of survey in the form of agreements, purchase orders, copies of contract prove the active involvement of employees of Indian compa....
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....d by the Tribunal while upholding the order of the AO/DRP and dismissing the appeal filed by the assessee for those years. We note that this reference by the ld. counsel for the assessee is not factually correct as ITAT in its order has nowhere mentioned that this aspect has not been argued or this aspect has not been decided by the Tribunal. In this view of the matter, since the Tribunal in assessee's own case has rejected this ground, ground no.6 alongwith all its sub-grounds raised by the assessee is liable to be dismissed and the same is dismissed as such. For this, we place reliance upon the decision of the Hon'ble Apex Court in the case of Honda Siel Power Products Ltd. vs CIT in Appeal (Civil) No.5412 of 200, order dated 26.11.2007 regarding cannon of following Co-ordinate Bench decision. In this view of the matter, other case laws referred by the Ld. counsel for the assessee are not considered applicable in the particular facts of this case. This is more so when ITAT order has not been reversed by Hon'ble jurisdictional High Court. Moreover, it is also noticed that assessee is already in appeal before the Hon'ble High Court against this order of the Tribunal. No such ground....
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....unal for assessment years 2005-06 to 2008-09, the assessee has preferred appeals before the Hon'ble High Court and the appeals have been admitted. Thus, when there are decisions of the Coordinate Bench in assessee's own case on identical set of facts and circumstances upholding the decision of the Revenue Authorities with regard to existence of PE and attribution of profit, as a Bench of equal strength, we are bound by such decisions. Therefore, norms of judicial discipline, decorum and propriety demand that we have to follow the earlier decisions of the Tribunal. In fact, for this very reason, while deciding the appeals for assessment years 2009-10 to 2016-17, the Tribunal had followed its earlier decision. In view of the aforesaid, following the consistent view of the Tribunal in assessee's own case in past assessment years, we uphold the decision of the Departmental authorities on these issues. Accordingly, these grounds are dismissed. 23. In ground no. 7 and its sub-grounds, the assessee has challenged the addition made of Rs.363,19,79,570/- towards royalty on sale of software. 24. Briefly the facts are, following the stand taken by the Assessing Officer in past assessment ye....