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TMI Blog2019 (2) TMI 1942X X X X Extracts X X X X X X X X Extracts X X X X ..... International Inc. [ 2014 (6) TMI 941 - ITAT DELHI] 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. Taxability of software as royalty - HELD THAT:- As decided in own case [ 2016 (6) TMI 329 - ITAT DELHI] 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 - as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dabin Q-2 (AO-9) Identifying business opportunities ZTE India (AO-4) Act as interface with Indian customers ZTE India (AO-4) Contracts with Indian customers were negotiated through electronic means or through short visits of assessee's personnel at the customers locations in India ZTE China (AO-4) ZTE China sometimes seek clarifications from customers through ZTE India (Huang Dabin Q- 47 AO-10) Contracts were accepted and concluded outside India ZTE China (AO-4) No fixed Place & employees visiting India didn't have access to ZTE India premises without its approval ZTE China (AO-4) S P. 21 of Annex-7 (not available) of survey documents shows office address as 804-808, Tower B, Global Business Park, Gurgaon and contact person is Rajesh Singh (Huang Dabin 0-25 AO-10) S The above premises are at the disposal of Z ZTE India. The employees of ZTE Chin are also working here for ZTE China.(RockQ.10 AO-12) On the day of survey expatriates were found working in Gurgaon office of ZTE India. These employees come to meet the customer, impart technical training and for rendering technical support. (Huang Dabin Q14-15 p.93 Annex-1) At the time of joint bids, the bidding tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had agreed for attribution of profits to PE without prejudice to his claim that there is no PE in India (in its) endeavor .... to end protracted litigation with revenue and to save judicial time and efforts" Para-20 "For the purpose of attribution of profits to PE, the most important aspect to be kept in mind is the level of PE's participation in the economic life of source country. It is primarily nexus between source country and the PE's activities which produce the taxable income to assessee." Para-24 "The issue of attribution of profits depends on the facts in particular case and is dependent on the level of operations of the activities carried out in India It becomes necessary to examine the level of operations carried out by PE in India." Para-25 "We have pointed out earlier that AO had held that there was fixed PE in India, dependent agency PE in India and Installation PE in India. These findings were recorded on the basis of operations carried out in India which came to light after the survey was carried out." Para-46 "In the present case, we have earlier reproduced paras 6.2.2 and 7.2.3 from ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onus is on the assessee to establish and prove that such a PE has ceased to exist during relevant year. The assessee has failed to prove this. • In the TP study for ZTE India for A.Y.2012-13 it was confirmed that "During the year the company (ZTE Telecom India Pvt. Ltd.) has taken services from certain expatriate employees in relation to various projects carried out by the company, however, an amount of ₹ 215 million towards salary of such employees have been paid directly by the Holding Company (ZTE Corporation, China). The company has discharged the statutory liabilities with respect to PF, amounting to ₹ 2 million and taxes of ₹ 48 million for these employees to the respective authorities. The amount of PF and taxes are included in personnel expenses. The Holding Company has provided services by such employees on a 'Free of Cost' basis. These employees are not engaged in the administrative services and logistics charges."(p. 408 of Vol-ll of PB for A.Y. 2012-13) * No evidence produced to establish that the functions carried out during the relevant years are in the nature of 'preparatory and auxiliary activities only'. Once it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven at 8th Floor, Tower B, Global Business Park, Gurgaon -Agreement signed by Mr. Yi Chen, GM, Marketing (signing for ZTE Corp) p. 244-248, Survey Doc, Vol.Ill Communication between ZTE India &Airceldt. 15/10/07 & 17/9/07 signed by James Yi Chen, GM, Marketing (compare the signatures)(signing for ZTE India) p. 250 & 253, Survey Doc, Undertaking dt. 25/1/08 by ZTE India w.r.t. RFP dt. 11/4/07 to Aircel&Dishnet signed by Yi Chen, GM, Marketing (signing for ZTE India) p. 254, Survey Doc, Vol.Ill Offer letter issued by assessee to Dishnetdt. 23/8/07 - Printed on the letterhead of ZTE India p. 255-256, Survey Doc, Vol.Ill -Signed by Yi Chen, GM, Marketing -'For and on behalf of ZTE Corporation' accepting the T&C of the purchase order (compare the signatures) Amendment letter dt. 11/8/08 to ZTE Corp contract with Dishnet signed by Yi Chen, GM, Marketing (signing for ZTE India) (compare the signatures) p. 302, Survey Doc, Vol.Ill Aircel letter dt. 14/11/06 to Mr. James Yi Chen, Mobile Project Manager, ZTE Corporation, Gurgaon, Haryana p.333-334, Survey Doc, Vol.Ill Trial Contract for testing of WCDMA Pilot System between ZTE Corp and Airceldt. 11/12/06 p.337-341, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame of employees of ZTE Telecom India Pvt. Ltd. including Project Teams p.710-712, ' Survey Doc, Statement before Customs describing the nature of software supplied (Refer to p.892, Survey Doc, Vol.VIII) p.1140-1143 Survey Doc, Letter from BSNL addressed to ZTE Corpn, Gurgaon p.1159,1164, Survey Doc, Minutes of meeting with ITI CMD by Debashish Bhattacharya Vol.X p.1195-1196, Survey Doc, Blank Letter Head of ZTE Corpn p.1197, Survey Doc, Vol.X Minutes of meeting dt. 22/09/07 relating to status of work with BSNL p.1211-1213, Survey Doc, List of Employees of ZTE Telecom India Pvt. Ltd. 1215-1217, Survey Doc, Letter dt. 5/9/06 from ZTE Corpn to BSNL signed by Mr. Gan Yong for ZTE Corp who is an employee of ZTE India (refer to p. 1215 of Survey Doc, Vol-X to know about the signatory) forwarding Bid Documents p.955, Survey Doc, Vol.IX Section VII of Bid Form for BSNL signed by Mr. Gan Yong for ZTE Corp who is an employee of ZTE India (refer to p. 1215 of Survey Doc, Vol-X) p.956, Survey Doc, Vol.IX Authorisation of Mr Gan Yong to sign the Bid documents on behalf of ZTE Corpn p.957, Survey Doc, Vol.IX Letter to BSNL communicating the presence of Sandeep Kumar &Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext of passing of title for p.772, Survey Doc, Vol.VIII , MOU between ZTE Corp & ITI signed by Liu Ren in the capacity of Director Marketing who is an employee of ZTE India (refer to p. 3 of Survey Doc, VolX) p.773-779782, Survey Doc, Vol.VIII Minutes of meeting between ITI, ZTE Corp & ZTE India signed by CMD, ZTE India on behalf of ZTE Corpn p.812,822-823 Survey Doc, Vol.VIII Huang Zuwei, MD ZTE India signing on behalf of ZTE China on letterhead of ZTE Kangxun Telecom Company India pvt. Ltd. operating from the same p.814, Survey Doc, Vol.VIII Huang Zuwei, MD ZTE India signing on behalf of ZTE China for delivery schedule p.818, Survey Doc, Vol.VIII Huang Zuwei, MD ZTE India signing on behalf of ZTE China p.831-833,836- 838, Survey Doc, Licensing agreement between ZTE China &ITI dt. 5/8/03 signed by MD, India of ZTE (although ZTE Telecom India was not incorporated as on this date) p.840-853, Survey Doc, Vol.VIII Authorisation Letter in favor of Liu Ren dt. 19/12/08 to enter contracts p.871, Survey Doc, Vol.VIII Letter for reclassification of software as 'packaged software' and not as 'customised software'. Refer to Statement before customs in p.1140 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L/2012 and others. The relevant findings given by the Tribunal read as under: "24. The issue of attribution of profits depends on the facts in particular case and is fully dependent on the level of operations of the activities carried ITA 5870/Del/12 & ors. - ZTE Corporation out in India. This is evident from Article 7 of DTAA and Explanation 1 to clause (i) of section 9(1). Facts in two cases cannot be identical. The AO had attributed only 20% (from AYs. 2004-05 to 2008-09) of the operating profit as per the global financial statement submitted by the assessee. This implies that 20% of the profits were generated on account of involvement of PE in the revenue generating structure and the 80% profit accrued in the resident state. However, for AY 2009-10, the AO has attributed 45% of the operating profit. Considering the different modes adopted by AO and ld. CIT(A), it becomes necessary to examine the level of operation carried out by PE in India so as to arrive at reasonable percentage of profit to be attributed to PE in India. XXXXX 46. From the aforementioned discussion it is evident that each case has to be considered on its own merits, depending upon the level of operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be attributed to the assessee as accruing in China and from sale activity, it is not to that extent. We find that ld. CIT(A) has adopted the reasoning in the case of Alcatel Lucent. In this decision ld. CIT(A) himself noted that assessee had accepted and not contested in appeal attribution @ 2.5% of total sales revenue. Therefore, this decision, considered by ld. CIT(A), cannot be the basis for arriving at the conclusion that 2.5% of entire sales revenue should be attributable to Indian PE, which is primarily as per Rule 10(1) methodology provided. We are not inclined to accept this plea of ld. CIT(DR). Therefore, in our opinion, attribution is to be done as per Rule 10(2) of the IT Rules. 48. Ld. counsel has endeavoured to distinguish the decision in the case of Rolls Royce PLC by referring to absence of identical Article 7(3) of India UK DTAA being present in India China DTAA. In our opinion, this is not of much ITA 5870/Del/12 & ors. - ZTE Corporation significance because it only considers the involvement of assessee's representatives in negotiations. We have to consider the overall operations carried out by PE in India. Mere involvement of expatriates in the activities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion does not amount to enhancement of income because overall tax effect will be less as compared to tax computed by AO/CIT(A)." 8. Respectfully following the findings of the co-ordinate bench, we hold accordingly. 9. Third grievance relates to taxability of software as royalty [In revenue's appeal]. 10. This dispute has also been considered and decided by the Tribunal in earlier assessment years 2004-05 in ITA No. 5870/DEL/2012 and others [supra]. The relevant findings given by the Tribunal read as under: "71. Ld. counsel for the assessee submitted that this issue stands settled by the Hon'ble Delhi High Court in the cases of DIT Vs. Ericsson AB 343 ITR 470 (Del.); DIT Vs. Nokia Networks OY 58 ITR 259 and 358 ITR 259. He submitted that receipts on account of supply of software were integrally connected to the ITA 5870/Del/12 & ors. - ZTE Corporation supply of hardware and, therefore, AO was not right in taxing such receipts as royalty. He submitted that ld. CIT(A) has rightly held that receipts from supply of software could not be taxed as royalty, relying on various decisions. He further pointed out that ld. CIT(A) also held that in view of the decision of Hon'ble De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Networks, In this case also, the question NO.3 proposed by the Revenue and admitted by their Lordships reads as under:- "Whether any part of the consideration for supply of software stated by the respondent to be integral to the equipment is taxable as 'royalty' either under section (1)(110 or the relevant provisions of the Double Taxation A voidance Agreement?" After detailed discussion, their Lordships answered the question in favour of the assessee and against the Revenue. Since the issue is squarely covered by the decision of Hon'ble ITA 5870/Del/12 & ors. - ZTE Corporation Jurisdictional High Court in the case of the assessee as well as in the case of Ericsson A.B. (supra). respectfully following the same, we uphold the order of learned CIT(A) in this regard and reject ground No.2 of the Revenue's appeal." 74. Respectfully following the decision of Hon'ble Jurisdictional High Court, as noted by Tribunal, ground nos. 2 & 3 are rejected." 11. This quarrel travelled upto the Hon'ble High Court and the Hon'ble High Court in ITA No. 904 to 909 of 2016 has held as under: "22. In the present case, the facts are closely similar to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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