2014 (6) TMI 941 - AT - Income Tax

Transfer pricing adjustment - whether the assessee constitutes a Permanent Establishment in India in terms of Article 5 of the DTAA between India and the USA? - Held that - We agree with the Ld. CIT(A) that the compensation which has been represented to a sale consideration for the equipment represent the payment for works contract where entire installation and customisation has been carried out in India. That the subsidiary has not only acted as a service provider for the assessee, but at the same time acted as a sale outlet cooperating with after sale service and also providing any assistance or service requested by the assessee. The assignment agreement between Indian subsidiary (assignor), the assessee company (assignee), the parent company Nortel Network Canada (the guarantor) and Reliance Infocom (the Purchaser) indicates that the contract initially signed by the Indian company gets assigned by the Indian subsidiary to the assessee and all the risk and responsibility in this regard are assumed by the parent company.In the background of the aforesaid discussion, we agree with the Ld. CIT(A) that activities of the assessee in India constitute PE of the Assessee in terms of Article 5 of the Indo US DTAA. The activities carried out by the PE are the core activities of the assessee resulting in generation of income to the assessee and they cannot be considered to be preparatory and auxiliary and therefore, the contention of the assessee that it do not have PE in India is rejected. Profits arising to the assessee from supply of telecom hardware to Indian customers is attributable to the PE in India @50% as per CIT(A) - Held that - We are in agreement with the AO that the accounts of the assessee furnished in the assessment proceedings have no sanctity. The same were not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reasons, that it has been designed as such to avoid taxation in India. Hence, we agree that for all purposes the accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Hence, AO s reference to the global accounts of the Nortel and gross profit margin percentage as 42.6% is accepted. Now we come to the issue as to how much of the profit is attributable to the PE. The AO in this regard has only allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. We find that Ld. CIT(A) has held that AO was justified in resorting to Rule 10 as stated hereinabove. We have already concurred with the same. We find ourselves in agreement that the CIT(A) s proposition that when profits are computed under Rule 10 after applying the profit rate, the expenses pertaining to the PE have to be allowed as deduction. Assessee has contended before the Ld. CIT(A) that in other cases attributed profits was determined @ 20% in the case of Nokia and 35% in the Rolls Royce. In this regard, Ld. CIT(A) has held that income of the PE has to be computed on the facts of each case. Ld. CIT(A) has held that he was of the view that an attribution of 50% of the profits to the activities of PE in India would be a reasonable attribution. Thus we note from the gross profit computed by reference to the rate applicable to the global accounts of the assessee, further substantial deduction has been allowed for selling general and marketing expenses and also R&D expenses. Thereafter, 50% of the resultant figure has been attributed to PE. This in our opinion meets the ends of justice.

Issues Involved:
1. Constitution of a Permanent Establishment (PE) in India.
2. Attribution of profits to the alleged PE in India.
3. Levy of interest under section 234B of the Income Tax Act.
4. Eligibility for benefits under the India-USA Double Taxation Avoidance Convention (DTAC).

Detailed Analysis:

1. Constitution of a Permanent Establishment (PE) in India:

Facts:
- The assessee, a US-based company, supplied telecom hardware to Reliance Infocom.
- The Indian subsidiary of Nortel Group entered into a contract with Reliance Infocom, which was later assigned to the assessee without consideration.
- The Assessing Officer (AO) concluded that the assessee was a paper company created to evade taxes in India.

Judgment:
- The contract was a turnkey contract involving supply, installation, testing, and commissioning.
- Nortel India negotiated and secured the contracts, and the LO of Nortel Canada provided various services.
- The tribunal agreed with the authorities that Nortel India acted as a fixed place of business and dependent agent PE of the assessee.
- The LO of Nortel Canada was also considered a fixed place PE of the assessee.
- The tribunal rejected the contention that sales were completed overseas and held that the entire business activities were managed by the subsidiary in India.

2. Attribution of Profits to the Alleged PE in India:

Facts:
- The AO applied the global gross profit margin of 42.6% from Nortel Canada's accounts to the Indian turnover.
- The AO allowed 5% of the turnover as deduction for selling, general, and marketing expenses.
- The CIT(A) directed the AO to allow expenses relatable to the PE and attributed 50% of the profits to the PE in India.

Judgment:
- The tribunal upheld the CIT(A)'s direction to allow expenses relatable to the PE.
- The tribunal noted that the CIT(A) had directed the AO to allow selling, general, and marketing expenses and R&D expenses.
- The tribunal agreed with the CIT(A) that attributing 50% of the profit to the PE was reasonable and upheld the order.

3. Levy of Interest under Section 234B of the Income Tax Act:

Facts:
- The assessee contended that the liability to pay advance tax does not arise where the income is subject to deduction of tax at source.

Judgment:
- The tribunal referred to the decision in DIT vs. Alcatel Lucent Inc., where it was held that the assessee cannot be absolved from the liability to pay tax under section 234B if it had always held the position that receipts are not taxable in India.
- The tribunal upheld the levy of interest under section 234B.

4. Eligibility for Benefits under the India-USA Double Taxation Avoidance Convention (DTAC):

Facts:
- The Revenue raised an additional ground questioning the eligibility of the assessee for benefits under the Indo-US DTAC, considering that the assessee is a subsidiary of a Canadian company.

Judgment:
- The tribunal admitted the additional ground but noted that the adjudication of the ground would not affect the final adjudication of the tax liability since it had already held that the assessee constitutes a PE in India.
- The tribunal treated the additional ground as of academic interest and did not adjudicate it.

Conclusion:
The tribunal upheld the findings that the assessee constitutes a PE in India and attributed 50% of the profits to the PE. It also upheld the levy of interest under section 234B and admitted the additional ground raised by the Revenue but did not adjudicate it.

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