2020 (12) TMI 857 - AT - Income Tax

Income accrued in India - dependent agent PE in India - Service PE and fixed place PE within Article 5 of Indo China DTAA - Deemed to accrue and arise u/s 9 of the Act Income of the Permanent Establishment - HELD THAT - The appellant company, Huawei China (HC) had subsidiary in India, namely, Huawei Telecommunications India Company Private Ltd. (HI). HI not only constitutes dependent agent PE of HC but also Service PE and fixed place PE within Article 5 of Indo China DTAA. The counsel had vehemently argued that statements recorded at the time of survey do not have any evidentiary value in light of the decision in the case of S. Kader Khan 2007 (7) TMI 182 - MADRAS HIGH COURT which has been confirmed by the Hon'ble Supreme Court 2013 (6) TMI 305 - SC ORDER - In our considered opinion, the said decision is totally on different set of facts. In the case in hand, statements of key employees relied upon by the Revenue are well supported by documentary evidences in the form of emails which prompted the Revenue to take a stand that the office of HI in India was engaged in carrying out the business activities of HC. Moreover, in the case in hand, income has not been determined on the basis of any banal declaration by any witness but after analysing in detail the activities of the PE in India since its inception Assessee has repeatedly referred to various clauses of contracts/agreements entered into with Indian buyers for purchase/sale of telecommunication network equipment. The contracts are contractual obligations between the parties, inter se, but who could be in a better position than the key employees of HI to tell how the transactions were actually undertaken, which is the ground reality. Income attribution - As decided in own case 2014 (4) TMI 770 - ITAT DELHI equipment, i.e., the hardware supplied by the assessee contained the software and the software was not separately supplied. The only ground stressed upon by the learned DR was to point out the bifurcation of the contract price between the hardware and software. We find that the facts were identical before the Hon'ble Jurisdictional High Court in the case of Ericsson A.B., New Delhi 2011 (12) TMI 91 - DELHI HIGH COURT - we hold that there was only one contract for supply of equipment which included hardware and software both and, therefore, the income from supply of the equipment is to be assessed as business income arising from the assessee's business connection/PE in India. We, therefore, direct the Assessing Officer to rework out the assessee's income accordingly Charging of interest u/s. 234B - HELD THAT - Under section 195 of the Act, tax is deductible at source from payments made to non-residents. Appellant is a non-resident and thus, tax is deductible at source from the payments made to it under section 195 of the Act. Since tax was deductible at source on all the payments made to Appellant, no advance tax was payable as per the provisions of the Act. In the case of DIT v. GE Packaged Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT held that no interest under section 234B of the Act can be levied on the assessee-payee on the ground of non-payment of advance tax because the obligation was upon the payer to deduct the tax at source before making remittances to them. Amendment to the provisions have been brought by the Finance Act, 2012, w.e.f. 1.4.2012 by which a proviso below section 209(1)(d) of the Act has been added but applicable from A.Y. 2013-14. Considering the law on this issue, we direct the Assessing Officer not to charge interest u/s. 234B of the Act upto A.Y. 2012-13. Interest can be levied as per provisions of law from A.Y. 2013-14 onwards.

Summary

Issues Involved:
1. Limitation of the impugned order.
2. Business Connection (BC) and Permanent Establishment (PE) in India.
3. Taxability of income under the provisions of the Income-tax Act and the Tax Treaty.
4. Existence of BC under Section 9(1)(i) of the Act.
5. Existence of PE under the Tax Treaty.
6. Attribution of income to the PE.
7. Allocation of supplies towards software and its taxation as 'Royalty'.
8. Levy of interest under Section 234B of the Act.

Issue-wise Detailed Analysis:

1. Limitation of the Impugned Order:
The assessee raised an additional ground claiming that the impugned order passed by the Assessing Officer was barred by limitation and should be quashed. This ground was dismissed following the decision in the case of Reliance Capital Markets Ltd., where a similar ground was previously dismissed by the coordinate bench.

2. Business Connection (BC) and Permanent Establishment (PE) in India:
The common grievances included the assertion that the Assessing Officer and the Dispute Resolution Panel erred in assessing the income of the appellant at a significantly higher amount than reported. The key issues were whether the appellant had a BC and PE in India through Huawei Telecommunications (India) Co. Pvt. Ltd. (Huawei India), and whether income should be attributed to the alleged PE.

3. Taxability of Income:
The appellant contended that the income derived from supplying telecommunication equipment to Indian customers qualified as business profits and should be governed by Article 7 of the India-China tax treaty. The appellant argued that the income did not accrue or arise in India under Sections 5(2) and 9 of the Act and was not taxable under the provisions of the Act and/or the Tax Treaty.

4. Existence of BC under Section 9(1)(i) of the Act:
The Assessing Officer concluded that the appellant had a business connection in India under Section 9(1)(i) of the Act. This conclusion was based on the intimate relationship between HC and HI, the involvement of HI in the installation and commissioning of telecommunication equipment, and the overall contribution to HC’s income.

5. Existence of PE under the Tax Treaty:
The Assessing Officer determined that the appellant had multiple types of PE in India, including Fixed Place PE, Installation PE, Service PE, and Dependent Agent PE under the relevant articles of the India-China DTAA. This was based on the activities of the appellant’s employees in India, the involvement of HI in the installation projects, and the overall control exerted by HC.

6. Attribution of Income to the PE:
The Tribunal upheld the findings that HI constituted a dependent agent PE, service PE, and fixed place PE. It was noted that the Indian entity was not capable of independently carrying out the installation and commissioning of the equipment without the supervision of HC’s resources. The Tribunal followed the findings in the appellant’s own case for previous assessment years, concluding that the income from the supply of equipment should be assessed as business income arising from the appellant’s PE in India.

7. Allocation of Supplies towards Software and Its Taxation as 'Royalty':
The Tribunal followed the decision of the Hon’ble Jurisdictional High Court in the case of Ericsson A.B. and Infrasoft Ltd., holding that the software supplied was an integral part of the equipment and should not be separately assessed as 'Royalty'. The income from the supply of equipment, which included both hardware and software, was to be treated as business income.

8. Levy of Interest under Section 234B of the Act:
The Tribunal held that no interest under Section 234B could be levied on the appellant for the assessment years up to 2012-13, as the appellant was a non-resident, and tax was deductible at source under Section 195. The amendment to the provisions brought by the Finance Act, 2012, was applicable from A.Y. 2013-14 onwards. Therefore, interest under Section 234B could only be levied from A.Y. 2013-14 onwards.

Conclusion:
The appeals of the assessee were dismissed, and the Tribunal upheld the findings of the Assessing Officer and the Dispute Resolution Panel regarding the existence of BC and PE in India, the attribution of income, and the taxability under the provisions of the Act and the Tax Treaty. The Tribunal also directed that interest under Section 234B should not be charged for the assessment years up to 2012-13.