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2016 (6) TMI 329 - AT - Income TaxAttribution of profits to the PE in India in respect of hardware components of the telecom equipments and the mobile handsets as business profits under article 7 of the Indo-China DTAA - Measurement of profit - AO had invoked Rule 10(ii) and attributed 20% of net global profits arising out of revenues realized from India - CIT(A) attributed 2.5% of entire sales revenue as per Rule 10(i) Held that - In the present case we have earlier reproduced paras 6.2.2 and 7.2.3 from ld. CIT(A) s order and also findings from AO s order for AY 2009-10 which give a clear picture of the level operations carried out by ZTE India, the assessee s PE. Ld. CIT(A) has pointed out that ZTE India is doing preparatory work, negotiating the contract and price and answering specified queries of the customers on behalf of the assessee. These are all vital functions which are revenue generating. The AO in AY 2009-10, as noted earlier, has elaborated in detail the functions carried out by PE in connection with sale in India We find that the level of operations carried out by assessee through its PE in India are considerable enough to conclude that almost entire sales functions including marketing, banking and after sales were carried out by PE in India and, therefore, keeping in view the decision of Hon ble Supreme Court in the case of Ahmedbhai Umarbhai & Co. (1950 (5) TMI 1 - SUPREME Court) we are of the opinion that it would meet the ends of justice if 35% of 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. CIT(DR) has very rightly pointed out that all the sums paid for market support service are for pre sale activities and, therefore, for post sale activities performed by ZTE India, which surfaced on account of survey operations, profits have to be attributed. The AO in his findings for AY 2009-10, as reproduced earlier, very rightly pointed out that the functions performed in respect of transactions on account of supply of equipments and handsets with customers in India were not the subject matter of TP analysis before the TPO. Since all the functions were not the part of TP study, the assessee s contention that if a correct arm s length is applied then nothing further will be left to be taxed in the hands of foreign enterprise in light of the decision in the case of Morgan Stanley (2007 (7) TMI 201 - SUPREME Court ), cannot be accepted because in that decision itself Hon ble Supreme Court has, inter alia, observed that if the TP analysis does not adequately respect the functions performed and risk assumed by the enterprise then in such a case there would be need to attribute profit to the PE for those functions/ risks that have not been considered.- Decided in favour of assessee Income from supply of software - business income instead of royalty - Held that - This issue stands settled by the Hon ble Delhi High Court in the cases of DIT v. Ericsson AB (2011 (12) TMI 91 - Delhi High Court) Receipts on account of supply of software were integrally connected to the supply of hardware and, therefore, AO was not right in taxing such receipts as royalty. In view of the decision of Hon ble Delhi High Court in the case of DIT v. Nokia India (2012 (9) TMI 409 - DELHI HIGH COURT), software supplies could not be taxed even under the amended law. Further, as per the provisions of Article 12(5) of the DTAA the supply of software being integral to the supply of hardware and the finding of existence of a PE of assessee in India, Article 12(5) of the DTAA would cease to apply and the provision of Article 7 would be applicable and, therefore, the income from software is to be taxed as business income.- Decided in favour of assessee Levy of interest u/s 234B - Held that - We find that the facts are almost identical to the facts as obtaining in the case of GE Packaged Power Inc. (2015 (1) TMI 1168 - DELHI HIGH COURT ) which is the latest decision of Hon ble Jurisdictional High Court on this issue and, therefore, respectfully following the decision of Hon ble Delhi High Court, we hold that assessee was not liable to pay interest u/s 234B.- Decided in favour of assessee
Issues Involved:
1. Validity of re-assessment proceedings. 2. Existence of Permanent Establishment (PE) in India. 3. Attribution of profits to the PE. 4. Taxation of software as royalty or business income. 5. Levy of interest under Section 234B. Detailed Analysis: 1. Validity of Re-assessment Proceedings: The assessee challenged the validity of the re-assessment proceedings initiated by the AO, claiming they were without jurisdiction and bad in law. However, the Tribunal did not specifically address this issue in the final judgment, implying no substantial error in the re-assessment process. 2. Existence of Permanent Establishment (PE) in India: The Tribunal upheld the findings of the lower authorities that the assessee had a fixed place PE and a dependent agency PE in India. The AO's conclusion was based on survey findings, statements from senior executives, and incriminating documents which indicated that the assessee's business operations were carried out through a fixed base for a sufficiently long period, making it permanent in nature. The Tribunal noted that ZTE India was performing significant functions such as contract negotiations, technical support, and post-sales services, which were not merely ancillary or auxiliary. 3. Attribution of Profits to the PE: The Tribunal considered various precedents and the level of operations carried out by the PE in India. It was noted that the PE performed extensive activities, including supervision, control of projects, preparation and finalization of bids, contract negotiations, and technical support. The Tribunal concluded that 35% of the net global profits from transactions with India should be attributed to the PE in India. This decision was based on the significant involvement of the PE in revenue-generating activities and was in line with the principles of Rule 10 of the Income-tax Rules and Article 7 of the DTAA between India and China. 4. Taxation of Software as Royalty or Business Income: The AO had treated the income from the supply of software as royalty under Section 9(1)(vi) of the Act and Article 12(3) of the DTAA. However, the CIT(A) and the Tribunal held that the software was integral to the supply of telecom equipment and should be taxed as business income. This decision was supported by precedents such as DIT v. Ericsson AB and DIT v. Nokia Networks OY, where it was held that payments for software integral to hardware supply do not constitute royalty. 5. Levy of Interest under Section 234B: The Tribunal upheld the CIT(A)'s decision to withdraw interest levied under Section 234B, relying on the Delhi High Court's decision in DIT v. Jacobs Civil Incorporated. It was noted that the primary liability to deduct tax at source under Section 195 lies with the payer, and if the payer defaults, the non-resident assessee should not be held liable for advance tax. This principle was further supported by the decision in DIT v. GE Packaged Power Inc., which clarified that no interest under Section 234B is leviable on the non-resident assessee if the payer fails to deduct tax at source. In conclusion, the Tribunal's judgment addressed all issues comprehensively, maintaining consistency with legal precedents and the principles of international taxation. The decision provided clarity on the attribution of profits to the PE, the characterization of software income, and the applicability of interest under Section 234B.
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