9911796707
TMI Blog2023 (3) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended that various arguments advanced before the Tribunal in assessment years 2009-10 to 2016-17 were not considered, however, we are not convinced. A careful perusal of the observations of the Tribunal reproduced above would make it clear that the Tribunal after taking note of various submissions of the assessee took a conscious decision to follow its earlier decision. Therefore, the allegation of learned Senior Counsel that various submissions made by the assessee were not considered in assessment years 2009-10 to 2016-17 is without any substance. The issues have been consistently decided against the assessee by the Tribunal beginning from assessment year 2005-06 to 2016-17. There is no difference in the factual position permeating through different assessment years, including, the impugned assessment year. It is relevant to observe, before us, learned counsel appearing for the assessee has submitted that against the decision of the Tribunal for assessment years 2005-06 to 2008-09, the assessee has preferred appeals before the Hon ble High Court and the appeals have been admitted. Thus, when there are decisions of the Coordinate Bench in assessee s own case on identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... `the Hon'ble DRP') in assessing the income of the Appellant at INR 4,19,22,61,900/- as against the returned income of INR 51,76,97,370/- reported by the Appellant in the return of income (`ROP). 2 That on the facts and in the circumstances of the case and in law, the assessment order dated February 28, 2022 passed by the Learned AO is unsigned and hence is bad in law and void-ab-initio. 3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Learned AO erred in passing the impugned Assessment Order while not appreciating the correct factual position and legal principles brought on record by the Appellant. Further, the Learned AO / the Hon'ble DRP erred in making / not rejecting the allegations, incorrect observations, assertions and inferences on the basis of mere conjectures and surmises, which are both factually incorrect as well as legally untenable and therefore, the impugned Assessment Order had in law and void ab-initio. Appellant alleged to constitute a Permanent Establishment in India. 4 That on the facts and circumstances of the case and in law, the Learned AO has erred in holding Huawei Telecommunicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case and in law, the Learned AO has grossly erred in holding that Huawei India constitutes a 'Service PE' of the Appellant in India under Article 5(2) of the India-China Tax Treaty owing to following incorrect assumptions/ inferences: That employees of the Appellant have rendered services in India, other than in the nature of technical services, and that such services have continued in India for more than 183 days, thereby creating 'Service PE' in India. (Para 8.1) 4.4 That on the facts and circumstances of the case and in law, the Learned AO has grossly erred in holding that Huawei India constitutes a 'Dependent Agent PE' of the Appellant in India under Article 5(4) of the India-China Tax Treaty owing to following incorrect assumptions/ inferences: The process of joint bidding done by the Appellant and Huawei India does result into Dependent Agency Permanent Establishment ('DAPE') under Article 5(4) of the tax treaty. (Para 8.1) The business of the Appellant in India is being conducted with active involvement of the employees of Huawei India. Such employees of Huawei India along with employees of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has erred in attributing income from supply of products (made on an off-shore basis) to India to the alleged PE of the Appellant in India. 5.1 That on the facts and in the circumstances of the case and in law, the Learned AO erred in proposing and the Hon'ble DRP further erred in confirming the action of Learned AO in assessing the total income of the Appellant under the provisions of the Act and India-China Tax Treaty without appreciating that income of the Appellant (other than the income offered to tax under the ROI for the year under appeal): (a) had not accrued/ arisen in India under section 5(2) of the Act; (b) could not be deemed to have accrued/ arisen in India under section 9 of the Act; and (c) was not taxable in India under the provisions of the Act and / or Tax Treaty. 5.2 That on the facts and circumstances of the case, the Learned AO and Hon'ble DRP erred in holding that Huawei India creates Business Connection in India under section 9(1)(i) of the Act due to following reasons: The Appellant is in the business of supplying telecom equipment's to telecom operators in India; It is in this business since 2003; The telecom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case and in law, the Learned AO, while placing reliance on the assessment orders passed for the previous years in the Appellant's own case, has erred in considering the operating margin at 2.51%, has further erred in adoptingthe attribution of 20 per cent of global profits as the same was made by placing on ruling of Special Bench of Delhi ITAT in case of Nokia Networks OY [96 TTJ 1] which has now been negated by Hon'ble Special Bench vide order dated June 5, 2018 [94 taxmann.com 1 1 1]. Further, the Learned AO and Hon'ble DRP has erred in not appreciating that even if for argument's sake it is presumed that activities such as signing, negotiation etc. were undertaken in India, the same are preparatory and auxiliary in nature and would not result -in constitution of PE and/ or attribution of income in India. 6.1 Without prejudice to the above, on the facts and circumstances of the case and in law, the Learned AO as well as the Hon'ble DRP erred in arbitrarily proceeding to attribute 20 per cent of profits to the alleged PE which is arbitrary and excessive given the purported functions basis which PE has been alleged. This arbitrary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and taxing the same as 'Royalty' under Article 12 of the India-China Tax Treaty or under section 9(1)(vi) of the Act. 7.1 Without prejudice, on the facts and circumstances of the case and in law, the Learned AO has grossly erred in not appreciating the fact that the predominant character of the supply transaction is sale of equipment alongwith software and therefore, revenues from supply of software forming an integral part of the equipment cannot constitute 'Royalty' under Article 12 of the India-China Tax Treaty or section 9(1)(vi) of the Act. 7.2 Without prejudice, on the facts and circumstances of the case and in law, the Learned AO has grossly erred in holding that allocated software revenue is for use of a 'copyright' and not of a 'copyrighted article'. 7.3 That on the facts and circumstances of the case and in law, the Learned AO as well as the Hon'ble DRP erred in not following the decision of Jurisdictional Hon'ble Delhi High Court in the Appellant's own case i.e. DIT v. M/s Huawei Technologies Co. Ltd.: ITA No. 562 to 565 of 2016 and other precedents viz.Nokia Networks OY (Supra) and Ericsson A.B. (Supra) and Infrasoft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is a non-resident corporate entity incorporated in Peoples Republic of China and tax resident of that country. As stated, the assessee is engaged in sales of telecom equipments comprising of non-terminal products, i.e., advanced telecommunication network, namely, core and access network equipment, mobile network equipment and data communications equipments etc. to customers in various countries, including India. Further, the assessee also provides technical consultancy services to its subsidiary in India, viz., Huawei Telecommunications (India) Co. Pvt. Ltd. (in short Huawei India ). Huawei India is involved in the provision of integration installation and commissioning services in relation to telecom network equipment supply by the assessee from outside India. As observed by the Assessing Officer, these services were provided to Indian telecom operators under independent contracts between Huawei Indian and Indian telecom operators. For the assessment year under dispute, the assessee filed its return of income offering the income received from provision of technical services to Huawei Indian as Fees for Technical Services (FTS) and royalty income on gross basis. It also offered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the assessee on the issue of existence of PE as well as attribution of profit. He submitted, without rendering independent finding on the submissions of the assessee, the Tribunal in assessment years 2009-10 to 2016-17 has followed its earlier decision in assessment years 2005-06 to 2008-09. Thus, challenging the decision of the departmental authorities on the issue of PE and attribution of profit learned counsel made the following submissions in writing: At the outset, it is submitted that the Appellant vehemently denies existence of any form of Permanent Establishment (`PE') in India under the provisions of the India China Double Taxation Avoidance Agreement (`DTAA') and denies existence of any business connection in India under section 9(1)(i) of the Income-tax Act, 1961(` the Act'). As explained during the course of the hearing before this Hon'ble Bench and also submitted as part of submissions before the lower authorities (copies of which are placed as part of the paper book), at the cost of repetition, it is most humbly submitted that the findings / observations made during the course of Survey conducted on the premises of Huawei Telecommunications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Networks Oy was also a party, attribution of 20 per cent was made on account of following: 10 per cent towards signing of supply and installation contracts in India; and An additional 10 per cent towards network planning and contract negotiations. Relevant extracts of the order passed by the Ld. AO/ directions passed by the Ld. DRP for the subject year under consideration, i.e., Assessment Year ('AY') 2018-19 are reproduced below: Relevant extracts of the assessment order 10.7 The aforesaid services are preliminary and auxiliary in nature and the amount received by Huawei India from providing above services has been subjected to tax in the hands ofHuawei India. Therefore, this amount, which is received in India on account of the overall business connection in India of the sales made by Huawei China, has been subjected to tax in India. In view of this, the attribution of profits arising to the assessee out of the sale/ supply of the network equipment and handsets etc. is done at 20% of the profits. The reply and the details provided by the assessee have been discussed only to assess a just and reasonable rate of attribution of profit and it does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2015-16. This argument is thus rejected. The AO has held that 20%, of the estimated profits are attributable India and taxable in the hands of Indian PE, as was done in earlier years. iii. The Panel has considered the issue. In the year under consideration also the AO has attributed 20% of the Global Profit to India as has been upheld by the IT AT and the DRP in the past. The percentage of 20% was adopted in tile preceding years, which were completed pursuant to the survey action. Since, the attribution is based upon the past history of the case which has been upheld by the Hon'ble IT AT after considering all the facts of the case, the DRP upholds the decision of AO on this issue. The objections are rejected. 4.3.2 For the year under the consideration being AY 2018-19 also, the DRP shall not deviate from its earlier observations and direction ns the factual matrix of tire case is same in the instant case and also keeping in view the history of litigation as elaborated above. The assessee's objection in this regard is rejected. In this regard, during the course of the hearing it was submitted that since Huawbi India which has been held to be Fixed Place PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices to be performed by the deputationists deployed by MSCo and not on account of stewardship activities. As regards income attributable to the PE (MSAS) we hold that the Transactional Net Margin Method was the appropriate method for determination of the arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark-lup worked out at 2.9% on the operating costs of MSAS. This position is also accepted by the Assessing Officer in his order dated 29-12-06 (after the impugned ruling) and also by the transfer pricing officer vide order dated 22-09-06. As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 also issued by CBDT. [Para 29] Article 7 of the U.N. Model Convention inter alia provides that only that portion of business profits is taxable in the source country which is attributable to the PE. It specifies how such business profits should be ascertained. Under the said Article, a PE is treated as if it is an independent enterprise (profit centre) dehors the head office and which deals with the head office at arm's length. Therefore, its profits are determined on the basis as if it is an independent enterprise. The profits of the PE are determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own. Article 7(2) of the U.N. Model Convention advocates the arm's length, approach for attribution of profits to a PE. [Para 31] The object behind enactment of transfer regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with FE in India. A foreign enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly mean that FAR of DAPE stands subsumed in the same. That it is important to distinguish between the benchmarking analysis for the transactions between HO and associated enterprise (AE) vis-a-vis that of HO and its PE. That it may be important to make a distinction between the FAR of the parent entity (Head Office (HO) in Ireland) and I AR of the DAPE (India). Further, it is also important to note that FAR of the DAPE is distinct from FAR of the associate enterprise (AE) in India. That so, practically, it is a interplay of FAR amongst three entities i.e. parent entity (HO) in Ireland, DAPE in Indian and Associated Entity (AE) in India. Supreme Court as above in the case of DIT vs Morgain Stanley Co. (supra). To the same effect is the order of the ADIT v. E-Funds IT Solution Inc. [2017] 399 ITR 34(SC), Honda Motor Co. Ltd vs. ADIT (301 CTR 601)(SC) and of the Hon'ble Delhi High Court in the case of Adobe Systems Inc. v. ADIT [WP(C)2384, 2385, 2390 of 2013] and DIT v.BBC Worldwide Ltd. [2011] 203 Taxman 554(Delhi), once a transfer pricing analysis has been undertaken in respect of the Indian AE, nothing further would be left to he attributed to it as the alleged PE of Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the ITAT to determine whether any profits may be attributed to tax in India on account of signing, network planning and negotiation of offshore supply contracts in India. During the set aside proceedings, the ITAT in Nokia Networks OY vs. JCIT: 94 taxmann.com 111 (Del) inter-alia held that the activities of signing of contracts, network planning and negotiation are in nature of preparatory and auxiliary activities which does not result in constitution of PE of the assessee in India. Therefore, no profits of the assessee are attributable to tax in India. Relevant extract of the decision are as under: 47. Now coming to the paragraphs 2, 3 and 4 of Article 5, it is not the case of any one that the NIPL constitutes any kind of PE under these provisions. Albeit if one goes by clause (e)of Paragraph 4 of Article 5, where it has been categorically provided that the PE shall not be deemed to include a maintenance of a fixed place of business solely either; for the purpose of advertising; r b) for the supply of information or for scientific research; c) being activities solely of a preparatory or an auxiliary character in the business of the enterprise. This clause clearly excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the customer locations in India. Further, all the contracts were accepted and concluded by the Appellant, outside India. The power to negotiate, decide, vary and accept the terms of supply contract on behalf of the Appellant vests in the employees of the Appellant who reside in China. The telecom equipment supply contracts were 'concluded' only when the employees of the Appellant finally accepted the terms of the respective contracts, outside India. (ii) Considering that equipment supplied by the Appellant was manufactured outside India, no part of the manufacturing profits could be allocated to the alleged PE; having regard to the limited activities carried out by the alleged PE. The attribution, at the highest should be limited to 10% of the global profit as held in Anglo-French Textile Co Ltd. v. CIT: 25 ITR 27 (SC) and CIT Vs Bertrams Scotts Ltd.: 31 Taxman 444 (Cal. HC) (iii) Without prejudice, where Huawei India is held to constitute a business connection/ PE of the Appellant in India and profits are held to be attributable to activities in India, then, while calculating the profits assessable to tax in India in the hands of the alleged PE, deduction sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly attributable to the operations carried out in India, we have held that only 15% of the revenue generated from the bookings made within India is taxable in India. The same proportion has to be adopted here while computing profit attributable, to the PE. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguish the assessment as no further income is taxable in India., It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to AIN. was held as allowable deduction and was reduced while computing the income of appellant If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant for assessment years 1997-98 and 1998-99 will be 'Nil'. 15. So, we are of the considered view that when we deduct commission/remuneration from the RIPL from the profits attributed to the PE, no taxable income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100% Profit Attribution to Hardware 12,106,598,565 1) Income from Hardware _ Profit on sale of hardware (Global profit rates) 303,875,624 Profit attributed to alleged. PE (A) @ 20% 60,835,658 2) Fee for technicalLLvices /Interest income Already offered to tax in return @ 10% (B) 517,697,370 Less : Payment made to Huawei India (C) 3,400,019,206 Taxable Income (D = A+B-C) (2,821,486,178) Hardware (at the rate of 43.26%) Fee for technical services 10% 51,769,737 Total Tax Payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is assumed to have dealt with the issue of attribution) being contrary to the law declared by the Hon'ble Apex Court in DIT vs. Morgan Stanley Co. Inc (supra) and reiterated in successive decisions thereafter cannot be followed in the subsequent AYs. 10. Learned Departmental Representative submitted, the issue is squarely covered against the assessee by the decisions of the Tribunal in past assessment years, up to, assessment year 2016- 17. Further, he submitted, the various contentions now taken by the assessee were considered by the Tribunal while disposing of appeals pertaining to assessment years 2009-10 to 2016-17. In this context, he drew our attention to the grounds raised and submissions made before the Tribunal in these assessment years. Thus, he submitted, when there is no change in the factual position in the impugned assessment year, the Bench is bound to follow its earlier decisions. Further, he submitted, against the earlier decisions of the Tribunal, the assessee has preferred an appeal before the Hon ble High Court and appeals have been admitted. Therefore, there is no reason to deviate from the earlier decisions of the Tribunal. He submitted, again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the assessee with its Indian customers. The assessee has given power of attorney in favor of its employees for signing the contracts, conducting negotiation and executing all necessary matters for MTNL project in India. 8.2 In view of the above, it is clear that the assessee, being tax residents of China, had fixed place PE in India in form of office premises of Huawei India. The business activities of the assessee being conducted from the fixed place of business referred above forms the core of selling activities and cannot be termed as of the preparatory or auxiliary character. 8.3 The employees of Huawei India forms the sales teams of the assessee, such employees have habitually secured orders in India, wholly or almost wholly for the assessee. The various documents in the form of agreements/purchase orders/copies of contracts also proves the active involvement of the employees of Indian company in the conclusion of contracts on behalf of the assessee. Huawei India is economically, technically and financially all dependent upon Huawei China. Therefore, Huawei India also cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness is carried out in India with the help of its employees, who regularly work from the premises of Huawei India, thus constituting Fixed Place PE. The assessee's employees also visit India to perform activities relating to installation projects lasting for more than 180 days, which constitutes Installation PE. The statements recorded during survey also show that the employees render technical services continuing for more than 183 days, constituting Service PE. Further, the process of joint bidding by the assessee and Huawei India constitutes Dependent Agent PE. The AO has also reproduced the relevant extracts from the statements of employees recorded during the survey, which: amply prove the existence of assessee's PE in India. As such, the AO is justified in holding that the assessee has PE as well as business connection in India and its income is taxable both under the Act as well as the DTAA. 10. At the time of hearing before us, the learned counsel for the assessee was unable to controvert thefinding recorded by the Assessing Officer as well as learned DRP. The Assessing Officer has clearly recorded the finding that the business of the assessee in India is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. Where the application for rectification is made within four years of the appellate order of the Appellate Tribunal the Appellate Tribunal has jurisdiction to pass the order disposing of the application and cannot reject the application on the ground that four years have elapsed. 5. In the present case, the order of the ITAT was dated 21st Marcy, 2014. The assessee filed the miscellaneous application on 11th February, 2015. As per section 154(2), , at the relevant time, there was a limitation of four years for filing of the appeal. Thus, the assessee had filed the miscellaneous application well within the time. Accordingly, learned DR s contention that the miscellaneous applications of the assessee are barred by limitation is rejected. 6. Now, coming to the merit of the assessee s contention, at the outset, we may mention that the modification sought for by the assessee is only cosmetic and not substantive. We are of the opinion that the mention of the words that the assessee's counsel has not been able to controvert the finding recorded by the Assessing Officer as well as learned DRP does not mean that the assessee's counsel has not properly argued the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the substituted paragraph 10 incorporated in the order disposing of the miscellaneous applications. Notably, assessee s appeals for assessment years 2009-10 to 2016-17 having identical issues, subsequently came up for consideration before the Tribunal and vide order dated 9th December, 2020, the Tribunal disposed of the appeals. However, due to certain inadvertent mistakes in the appellate order, the Tribunal recalled the order for the limited purpose of adjudication ground no. 6 with its sub-grounds, which are on the issues of existence of PE and attribution of profit and ground no. 7, which is on the issue of taxability of royalty income from sale of software. While considering these issues afresh in assessment years 2009-10 to 2016-17, the Tribunal in ITA No.1500/Del/2014 and others dated 13.10.2022 followed its earlier order and decided both the issues regarding existence of PE and attribution of profit to the PE against the assessee. The observations of the Tribunal in this regard are as under: 7. In rebuttal in this regard, the Ld. DR submits that while arguing the appeal for Assessment Years 2005-06 to 2008-09, the assessee has made no submission on profit attributed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough, the Tribunal took note of various submissions made by the assessee, however, adhering to the norms of judicial discipline the Tribunal had followed its earlier decision in assessee s own case and decided the issues against the assessee. Before us, though, learned counsel appearing for the assessee has contended that various arguments advanced before the Tribunal in assessment years 2009-10 to 2016-17 were not considered, however, we are not convinced. A careful perusal of the observations of the Tribunal reproduced above would make it clear that the Tribunal after taking note of various submissions of the assessee took a conscious decision to follow its earlier decision. Therefore, the allegation of learned Senior Counsel that various submissions made by the assessee were not considered in assessment years 2009-10 to 2016-17 is without any substance. 22. As noted above, the issues have been consistently decided against the assessee by the Tribunal beginning from assessment year 2005-06 to 2016-17. There is no difference in the factual position permeating through different assessment years, including, the impugned assessment year. It is relevant to observe, before us, lear ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
