2014 (4) TMI 770 - AT - Income Tax

Jurisdiction of the AO u/s 147 of the Act Issue of notice u/s 148 of the Act Held that - The belief of the AO that income of the assessee had escaped assessment due to non-filing of the return by the assessee, is well-founded DRP was of the view that the basis for issue of notice u/s 148 is very clear - It was upon survey u/s 133A conducted on 17.02.2009 at the office premises of Huawei India at Gurgaon, which led to the information in the form of documents and statements obtained by the Department revealing that the assessee was having a PE in India - It was on this basis that notice u/s 148 was issued there was no infirmity in the order of DRP - the assessee had a taxable income in India which it did not disclose voluntarily but disclosed only after the issuance of notice u/s 148 - it is a clear case where there was escapement of income due to non-filing of return by the assessee Decided against Assessee. Confirmation of income under DTAA - DTAA between India and China Income accrue/arise in India u/s 5(2) of the Act Deemed to accrue and arise u/s 9 of the Act Income of the Permanent Establishment Held that - The assessee was unable to controvert the finding recorded by the AO as well as 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 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 - 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 the facts recorded by the AO and upheld by the DRP have not been controverted this, there is no reason to interfere with the order of DRP Decided against Assessee. Allocation of 30% of total supplies towards software - Bifurcation of the contract price between the hardware and software Held that - The decision in DIT Vs. Ericsson A.B., New Delhi 2011 (12) TMI 91 - Delhi High Court followed - The hardware supplied by the assessee contained the software and the software was not separately supplied - the buyer is granted a non-exclusive, non-transferable and non-sub-licensable license to use the software the buyer is granted no title or ownership rights or interest in the software - there was only one contract for supply of equipment which included hardware and software both - the income from supply of the equipment is to be assessed as business income arising from the assessee s business connection/PE in India the AO is directed to rework out the assessee s income Decided in favour of Assessee. Levy of interest u/s 234A and 234B of the Act Held that - Relying upon DIT-I, International Taxation Vs. Alcatel Lucent USA, Inc. and another 2013 (11) TMI 734 - DELHI HIGH COURT - what was the stand of the assessee in the return of income filed by it would be relevant for deciding the liability to interest under Section 234B - this aspect has not been considered either by the AO or by the DRP - the orders of authorities below with reference to levy of interest under Section 234B of the Act set aside - thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Issues Involved:

1. Jurisdiction under Section 147 and validity of notice under Section 148.
2. Existence of Permanent Establishment (PE) and Business Connection (BC) in India.
3. Allocation of income towards software as royalty.
4. Levy of interest under Sections 234A and 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 147 and Validity of Notice under Section 148:

The assessee, a company incorporated in China, was engaged in supplying telecommunications network equipment and had not filed any return of income. During a survey at Huawei India, documents and statements indicated that the assessee had a PE in India. Consequently, the Assessing Officer (AO) issued a notice under Section 148, to which the assessee responded by filing a return disclosing income of Rs. 82,69,535. The AO's belief that income had escaped assessment due to non-filing of the return was deemed well-founded. The Dispute Resolution Panel (DRP) upheld the AO's action, noting that the survey revealed a PE in India, justifying the issuance of the notice under Section 148. The Tribunal found no infirmity in the DRP's order and rejected the assessee's ground against the initiation of proceedings under Section 148.

2. Existence of Permanent Establishment (PE) and Business Connection (BC) in India:

The AO concluded that the assessee had a PE in India based on documents and statements obtained during the survey, showing active involvement of Huawei India's employees in business activities. The DRP upheld this finding, noting that Huawei India's employees prepared bidding documents, negotiated contracts, and secured orders for the assessee. The Tribunal agreed with the DRP, finding that the assessee's business was conducted with the active involvement of Huawei India's employees, thus constituting a PE and BC in India. The Tribunal rejected the assessee's grounds, affirming that the income was taxable in India under both the Income Tax Act and the Double Tax Avoidance Agreement (DTAA).

3. Allocation of Income towards Software as Royalty:

The AO allocated 30% of the total supplies towards software and taxed it as royalty income. The assessee contended that the software was embedded in the hardware and should be assessed as business income. The Tribunal noted that the issue was covered by the Delhi High Court's decisions in Ericsson A.B. and Nokia Networks OY, which held that software embedded in hardware does not constitute royalty. The Tribunal found that the agreements between the assessee and buyers included a consolidated price for equipment, including hardware and software, and the software was necessary for the equipment's operation. Following the High Court's decisions, the Tribunal held that the income from the supply of equipment, including software, should be assessed as business income and directed the AO to recompute the income accordingly.

4. Levy of Interest under Sections 234A and 234B:

The assessee argued that as a non-resident, it was not liable to pay advance tax, and thus, interest under Section 234B should not be levied. The Tribunal noted that the issue was covered by the Delhi High Court's decision in Jacobs Civil Incorporated, which held that non-residents are not liable to pay advance tax if tax is deductible at source. However, the Tribunal also considered a subsequent decision in Alcatel Lucent USA, Inc., which held that the assessee's stand in the return of income regarding its tax liability in India was relevant. The Tribunal restored the matter to the AO for re-adjudication in light of both High Court decisions. Regarding interest under Section 234A, the Tribunal directed the AO to rework it in accordance with the law after final determination of income.

Conclusion:

The Tribunal partly allowed the assessee's appeals for statistical purposes, directing the AO to rework the income and interest based on the Tribunal's findings and relevant High Court decisions. The stay applications filed by the assessee were dismissed as infructuous.

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