2019 (10) TMI 512 - AT - Income Tax

Income accrued in India - Fixed place PE - installation PE in India - taxability of offshore supplies made by SMCS to the aforementioned telecom operators in India - Revenue has taken the consistent position that some portion of the profit relating to these offshore supplies should be brought to tax in India - HELD THAT - No business connection can be said to have been established, and therefore, no further income can be attributed to India. Our view is supported by the Circular no. 23 dated 23.07.1969 issued by the Central Board of Direct Taxes, wherein it has been stated that no liability will arise to a non-resident where transaction of sale is on principal to principal basis since the transaction of supply of components by the appellant are on its own account, unaffected by the services to be rendered by SPCNL. This itself would take the transaction of supply of components outside the purview of section 9(1)(i) Fixed place PE - Considering the facts on record, SPCNL should not be considered a fixed place from which business of the appellant was wholly or partly carried out. The business of SPCNL is not dependent on the appellant as the facts show the variance in the scope of activities nor it can be said that SPCNL is at the disposal of the appellant. Installation PE - A perusal of the Supply Contracts between the appellant and the telecom operators in India will indicate that the role of the appellant was limited to mere supply of hardware components directly from Italy. The appellant was neither responsible for, nor undertakes installation, testing and commissioning, the same being the responsibility of the telecom operators themselves, who either undertook the same themselves or had the option of appointing SPCNL. Considering these facts in the light of case of Nortel Networks India International Inc. 2016 (5) TMI 373 - DELHI HIGH COURT it can be said that there was no installation PE of the appellant. Dependent agent PE - Obligation to carry out installation, commissioning and maintenance under the Services Contract was by way of separate contracts between SPCNL and the telecom operators. SPCNL cannot be regarded as DAPE of the appellant in India. Contracts between the appellant and telecom operators show that the appellant was not even responsible for performing pre-network surveys or software updates. The appellant does not hold any equity capital in SPCNL and the sphere of activities performed by SPCNL was much broader than those envisaged under the agreement entered into between SMCS and SPCNL. Assuming, yet not accepting that the installation activities were undertaken by SPCNL at the behest of the appellant, the same would still not render the income of the appellant to be taxable in India, since the supply of hardware components, i.e., the taxable activity, was completed before the installation activities. It was in this context that the offshore contract pertaining to supply of equipments and the onshore contract pertaining to provision of services were inextricably linked. In addition to this, there was a clear finding that contracts were negotiated and concluded by a team of persons in India, which fact finding is missing in the case in hand. Chargeability of interest u/s 234B - Issue decided in favour of the assessee in the case of GE Packaged Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT wherein it has been 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. Thus we hold that no interest is leviable u/s 234B of the Act. Accordingly, we direct the Assessing Officer not to charge interest u/s 234B Taxing income from supply of software to Indian parties as income of the appellant - consideration received by the assessee from offshore supply of hardware components which imbibed the supply of software - HELD THAT - As decided in ZTE CORPORATION 2017 (1) TMI 1338 - DELHI HIGH COURT The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separate invoicing was done for purchase and other transactions did not imply that it was royalty payment. In such cases, the nomenclature (of license or some other fee) is indeterminate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee's customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of offshore supplies made by the appellant.
2. Existence of a "business connection" under Section 9(1)(i) of the Income-tax Act.
3. Permanent Establishment (PE) in India.
4. Attribution of profits to India.
5. Role of Liaison Office (LO) in India.
6. Dependent Agent PE (DAPE).
7. Taxability of software supply as royalty.

Detailed Analysis:

1. Taxability of Offshore Supplies:
The core issue revolves around whether the offshore supplies made by the appellant to telecom operators in India are taxable. The Revenue argued that some portion of the profit from these supplies should be taxed in India due to activities related to installation, commissioning, and maintenance requiring the presence of the appellant in India.

2. Existence of a "Business Connection":
The Revenue's position was that the appellant had a business connection in India under Section 9(1)(i) of the Income-tax Act. However, the Tribunal found that the supply was concluded offshore, with title and risk passing to the telecom operators outside India. The contracts explicitly stated that the title passed offshore, and the consideration was received offshore.

3. Permanent Establishment (PE):
The Tribunal addressed whether the appellant had a PE in India. The Revenue alleged that the appellant's activities in India, including the presence of a Liaison Office (LO) and the role of SPCNL, constituted a PE. However, the Tribunal concluded that the appellant did not have a fixed place PE, installation PE, or dependent agent PE in India. The activities of SPCNL were found to be independent and remunerated on an arm's length basis.

4. Attribution of Profits:
The Tribunal held that in the absence of a PE, no profits from offshore supplies could be attributed to India. The Supreme Court decisions in Formula One World Championship Ltd. and ADIT v. E-Funds IT Solution Inc. supported this view, stating that offshore supplies are not taxable in India without a PE.

5. Role of Liaison Office (LO):
The Tribunal found that the LO, which existed from 03.11.1997 to 31.01.2000, did not constitute a PE. The LO was involved in negotiation and signing of contracts, but these activities were not revenue-generating. The Special Bench of the Tribunal in Motorola Inc. had previously held that an LO does not amount to a PE under Article 5 of the DTAA.

6. Dependent Agent PE (DAPE):
The Tribunal examined whether SPCNL could be considered a DAPE under Article 5(4) of the DTAA. It found that SPCNL did not habitually exercise authority to conclude contracts, maintain a stock of goods for the appellant, or secure orders wholly on behalf of the appellant. Therefore, SPCNL was not a DAPE.

7. Taxability of Software Supply as Royalty:
The Tribunal addressed whether the consideration received for the supply of software should be taxed as royalty. The Assessing Officer had treated it as royalty under Article 13 of the DTAA. However, the Tribunal relied on the Delhi High Court decision in ZTE Corporation, which held that the supply of software enabling the use of hardware does not constitute royalty. The software was considered a copyrighted article, not a licensing fee for the right to use the software.

Conclusion:
The Tribunal concluded that no portion of the profits from offshore supplies made by the appellant could be taxed in India. It held that the appellant did not have a business connection or PE in India, and the supply of software was not taxable as royalty. Consequently, all appeals by the assessee were allowed, and the Revenue's appeal was dismissed. The Tribunal also directed the Assessing Officer not to charge interest under Section 234B of the Act.