Appeal Details
Counselvise Citation
[2019] 118 COUNSELVISE.COM (IT) 3739 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 5 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
15-02-2019
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
G
Assessment Year
2011-2012
Appeal Filed On
15-09-2016
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL , DELHI BENCH B , NEW DELHI BEFORE S HRI N. K. BILLAIYA , ACCOUNTANT MEMBER , AND S MT . BEENA A. PILLAI, J UDICIAL MEMBER SA NO. 877/DEL/2018 [A/O ITA NO. 7471 /DEL/201 8 [ A.Y 201 5 - 1 6 ] ] & ITA NO. 2805 /DEL/201 6 [ A.Y 2010 - 11 ] ITA NO. 4940 /DEL/201 6 [ A.Y 2011 - 12 ] ITA NO. 1554 /DEL/201 7 [ A.Y 201 2 - 1 3 ] ITA NO. 1555 /DEL/201 7 [ A.Y 201 3 - 1 4 ] ITA NO. 7076 /DEL/201 7 [ A.Y 201 4 - 1 5 ] ITA NO. 7471 /DEL/201 8 [ A.Y 201 5 - 1 6 ] ZTE CORPORATION V S. THE D.D . I . T 6 TH FLOOR , TOWER B INTERNATIONAL TAXATION BUILDING NO. 10, CIRCLE - 3 ( 2 ) CYBER CITY, PHASE 2 NEW DELHI GURGAON [HARYANA] PAN: AAAC Z 4115 A ITA NO. 3628 /DEL/201 6 [ A.Y 2010 - 11 ] ITA NO. 5197 /DEL/201 6 [ A.Y 2011 - 12 ] THE J . C . I . T [OSD] VS. ZTE CORPORATION INTERNATIONAL TAXATION 6 TH FLOOR, TOWER B CIRCLE 3(2) BUILDING NO. 10 NEW DELHI CYBER CITY, PHASE 2 GURGAON [HARYANA] PAN: AAACZ 4115 A (APPLICANT) (RESPONDENT) ASSESSEE BY : SH RI HARPREET SINGH AJMANI, ADV SHRI ROHAN KHARE, ADV DEPARTMENT BY : SHRI G.K. BHALL , CIT - DR 2 DATE OF HEARING : 11.02.2019 DATE OF PRONOUNCEMENT : 1 5 . 02.2019 ORDER PER BENCH : - TH E CAPTIONED APPEALS FILED BY THE ASSESSEE AND REVENUE ARE PREFERRED AGAINST THE SEPARATE ORDERS OF THE LD. CIT(A) PERTAINING TO ASSESSMENT YEARS 2010 - 11 TO 15 - 16 . IN ASSESSMENT YEAR S 2010 - 11 AND 201 - 12, THE REVENUE I S ALSO IN CROSS APPEAL. SINCE ALL THE APPEALS PERTAIN TO SAME ASSESSEE INVOLVING COMMON GRIEVANCES AND WERE HEARD TOGETHER, WE ARE DISPOSING THEM OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. THE ASSESSEE HAS ALSO FILED STAY APPLICATI ON FOR ASSESSMENT YEAR 2015 - 16. 2. THE FIRST COMMON GRIEVANCE IN ASSESSEES APPEAL RELATES TO THE DENIAL OF HAVING ANY PERMANENT ESTABLISHMENT [PE] IN INDIA. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT TO AVOID PROTRACTED LITIGATION, HE IS NOT PRESSING THIS COMMON GRIEVANCE. 3. HOWEVER, THE LD. DR SUBMITTED THE FOLLOWING WRITTEN SUBMISSIONS IN THIS REGARD , EXPLAINING THE STAND OF THE REVENUE: 3 PRELIMINARY 1 . THE ASSESSMENT ORDER AND THE DRP DIRECTIONS /ORDER OF THE CIT(A) ARE EMPH ATICALLY RELIED UPON. 2 . THIS SUBMISSION IS RESTRICTED ONLY TO SPECIFIC ASPECTS. ON BALANCE ASPECTS, ABOVE ORDERS AND ORAL SUBMISSIONS ARE RELIED UPON. CLAIM DURING ASSESSMENT PROCEEDINGS - FUNCTION/CLAIMS AS PER ASSESSEE AS PER SURVEY DOCUMENTS COLLECTION OF MARKET INFO ZTE INDIA (AO - 4) HUANG DABIN Q - 4 (AO - 9) TIME TO TIME CLARIFICATIONS AND COMMUNICATING WITH THE ASSESSEE ZTE INDIA (AO - 4) HUANG DABIN Q - 2 (AO - 9) IDENTIFYING BUSINESS OPPORTUNITIES ZTE INDIA (AO - 4) ACT AS INTERFACE WITH INDIAN CUSTOMERS Z TE 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 Z TE 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 ZTE CHINA (AO - 4) S P. 21 OF ANNEX - 7 (NOT AVAILABLE) OF SURVEY DOCUMENTS SHOWS 4 B. ROLE OF EMPLOYEES OF ASSESSEE IN INDIA - - TO PROVIDE TECHNICAL SUPPORT SERVICES FOR THE EQUIPMENTS SOLD BY ASSESSEE TO ITS CUSTOMERS. (DALIP GHOSH, Q - 7, AO - 12) - EMPLOYEES GENERALLY COME TO INDIA TO MEET CUSTOMERS, TO IMPART TECHNICAL TRAINING AND TO RENDER SOME TECHNICAL SUPPORT.(HUANG DABIN Q14 - 15 P.93 ANNEX - 1) ACCESS TO ZTE INDIA PREMISES WITHOUT ITS APPROVAL 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 Z TE INDIA. THE EMPLOYEES OF ZTE CHINA AR E ALSO WORKING HERE FOR ZTE CHINA.(ROCKY Q.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 TEAMS COME TOGETHER MERELV FOR COORDINATION PURPOSES. ZTE CHINA (AO - 5) HUANG DABIN Q - 10 (AO - 9) Q - 47 (AO - 10) ZTE INDIA SUGGESTS PRICE TO BE QUOTED. (ROCKY Q - 7 AO - 11) TECHNICAL SUPPOR T THROUGH EMPLOYEES UNDER SERVICE CONTRACT ZTE CHINA (AO - 5) HUANG DABIN Q - 5 (AO - 9) NO SPECIFIC EMPLOYEES FOR SPECIFIC SERVICES. EMPLOYEES COME TO INDIA TO RENDER ALL KINDS OF TECHNICAL SUPPORT SERVICES, BE IT TENDERING SUPPORT, PRODUCT SUPPORT, POST S ALES SUPPORT ETC. (HUANG DABIN Q - 49AO - 11; Q14 - 15 P.93 ANNEX - L)(ROCKY Q - 8 - 9 AO - 12) TECHNICAL TRAINING OF EMPLOYEES HUANG DABIN Q - 4 (AO - 9) BUSINESS TRANSACTIONS HUANG DABIN Q - 4 (AO - 9) SHARING OF EXPERIENCES HUANG DABIN Q - 4 (AO - 9) LOCAL PURCHASES HUANG DABIN Q - 27 (AO - 10) 5 - EMPLOYEES MEET CUSTOMERS TO INTRODUCE THE PRODUCTS OF THE ASSESSEE, TO EXPLAIN TECHNICAL SOLUTIONS AND TO GET REQUIREMENTS FROM THE CUSTOMERS. (HUANG DABIN Q16 P.9 3 ANNEX - 1) - ZTE CHINA AS A VENDOR OF ZTE INDIA HELPS US TO PREPARE THE TECHNICAL DOCUMENTS IN RESPECT OF SUPPLY OF EQUIPMENTS. (HUANG DABIN Q10 P.94 ANNEX - 1) - W E NEED TECHNICAL SUPPORT FROM ZTE CHINA FOR INSTALLATION AND COMMISSIONING OF EQUIPMENTS SUPPLIE D BY ZTE CHINA. THE EMPLOYEES OF ZTE CHINA COME ON SHORT VISITS TO RENDER SUCH TECHNICAL SUPPORT. (HUANG DABIN Q.5 P.95 ANNEX - 1) - OFFICE OF ZTE CHINA (INDIA OFFICE) SHOWN AS 804 - 808, TOWER - B, GLOBAL BUSINESS PARK, GURGAON INDIA AND RAJESH SINGH SHOWN AS CO NTACT PERSON (P.21 ANNEX - 7 AS PER Q. 25 TO HUANG DABIN P.91 ANNEX - 1) PARA - 18 'WE HAVE NOTED EARLIER THAT THE ASSE S SEE HAD AGREED FOR ATTRIBUTION OF PROFITS TO PE WITHOUT PREJUDICE TO HIS CLAIM THAT THERE IS NO PE IN INDIA (IN ITS) ENDEAVO R .... 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 SOURC E COUNTRY. IT IS PRIMARILY NEXUS BETWEEN C. ITAT ORDER DT.30.05.2016 S.NO FINDINGS & OBSERVATIONS OF HON'BLE ITAT REF. PARA NO CHALLENGED 1 BUSINESS CONNECTION (NOT A GOA BEFORE ITAT) 2 EXISTENCE OF PE UNDER ART - 5(1), 5(2)( C), 5(2)(U) &5(4) NOT PRESSED 13 NO 3 LEVEL OF PE'S PARTICIPATION /FUNCTIONS CARRIED OUT BY PE 46, 50 NO 4 ATTRIBUTION OF PROFITS TO PE 50 YES (194,195,196,227, 228) 5 WHETHER ACTIVITIES ARE PREPARATORY & AUXILIARY IN CHARACTER (NOT A GOA BEFORE ITAT) 2 8 R.W. 46 NO. IN P.187, 194,196,228, IT PROFITABILITY OF ACTIVITIES ARE HIGHLIGHTED. 6 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 INSTALLAT ION 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 REPRODU CED PARAS 6.2.2 AND 7.2.3 FROM L D. CIT(A)'S ORDER AND ALSO FINDINGS FROM AO'S ORDER FOR A.Y.2009 - 10 WHICH GIVE A CLEAR PICTURE OF THE LEVEL (OF) OPERATIONS CARRIED OUT BY ZTE INDIA, THE ASSESSEE'S PE.' ID. CIT (A) HAS POINTED OUT THAT ZTE INDIA IS DOING PREPARATORY WORK, NEGOTIATING THE CONTRACT AND PRICE AN D 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 I N INDIA. AT THE COST OF REPETITION, WE REPRODUCE THE SAME - ' PARA - 50 '... 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, BANKI NG AND AFTER SALES WERE CARRIED OUT BY PE IN INDIA...' 7 D. UNDISPUTED FACTS - SURVEY OPERATION U/S 133A WAS CONDUCTED ON 6.10.2009 IN THE PREMISES OF ZTE INDIA AND NOT IN THE PREMISES OF THE PO OR LO OF THE ASSESSEE; DOCUMENTS RECOVERED FROM ZTE INDIA RELA TING TO ASSESSEE; IT WAS NEVER CLAIMED THAT THE STATEMENTS GIVEN DURING THE COURSE OF SURVEY ARE NOT CORRECT OR DON'T REFLECT THE BUSINESS PROCESSES AND PRACTICES FOLLOWED BY THE ASSESSEE; ASSESSEE VIDE ITS SUBMISSION DT. 15.3.13 SUBMITTED THAT THERE WAS NO CHANGE IN THE FACTS AND CIRCUMSTANCES FROM EARLIER YEARS IN RESPECT OF BUSINESS MODEL, REVENUE STREAMS AND THEIR TAXABILITY IN INDIA. (AO - 09 - 10) NO EVIDENCE PRODUCED TO CONTROVERT THE FINDING OF FACTS RECORDED BY HON'BLE ITAT IN PARA - 46 OF ITS ORDER R ELATING TO THE FUNCTIONS AND OPERATIONS CARRIED OUT BY THE ASSESSEE IN INDIA THROUGH ITS PE. THE FINDINGS OF THE HON'BLE ITAT ON THE ROLE AND FUNCTIONS OF THE PE AND THE ACTIVITIES & OPERATIONS CARRIED OUT BY SUCH PE HAS NOT BEEN CHALLENGED BEFORE THE HON 'BLE HIGH COURT. THE QUESTIONS OF LAW RAISED BEFORE THE HON'BLE ITAT RELATE ONLY TO THE ATTRIBUTION OF INCOME TO SUCH PE. IT WAS CLAIMED THAT MARKETING, NEGOTIATION AND CONCLUSION OF CONTRACTS ARE NOT REVENUE GENERATING ACTIVITIES (AS DISTINCT FROM PREPARA TORY AND AUXILIARY ACTIVITIES) AND CONSEQUENTLY NO INCOME SHOULD BE ATTRIBUTED TO THE PE (REF. P.196 & 228 OF COMMON PAPER BOOK) 8 ONCE THE EXISTENCE OF FIXED PLACE PE IS ESTABLISHED BY THE REVENUE DURING EARLIER YEARS, THE ONUS IS ON THE ASSESSEE TO ESTABLI SH 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 RS. 215 MILLION TOWARDS SALARY OF SUCH EMPLOYEES HAVE BEEN PAID DIRECTLY BY THE HOLDING COMPANY (ZTE CORPORATION, CHINA). THE COMPANY HAS DI SCHARGED THE STATUTORY LIABILITIES WITH RESPECT TO PF, AMOUNTING TO RS. 2 MILLION AND TAXES OF RS. 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 DURIN G THE RELEVANT YEARS ARE IN THE NATURE OF 'PREPARATORY AND AUXILIARY ACTIVITIES ONLY'. ONCE IT IS ESTABLISHED THAT THERE IS A FIXED PLACE PE UNDER ART - 5(1) THE SAME CAN CEASE TO EXIST ONLY WITH THE DISPOSAL OF THE FIXED PLACE OF BUSINESS OR WITH THE CESSAT ION OF ANY ACTIVITY THROUGH IT. TO QUOTE KLAUS VOGEL - ' 11. BEGINNING AND END OF A PE : A PERMANENT ESTABLISHMENT BEGINS TO EXIST AS SOON AS THE ENTERPRISE COMMENCES TO CARRY ON ITS BUSINESS THROUGH A FIXED PLACE OF BUSINESS. THIS IS THE CASE ONCE 9 THE ENTE RPRISE PREPARES, AT THE PLACE OF BUSINESS, THE ACTIVITY FOR WHICH THE PLACE OF BUSINESS IS TO SERVE PERMANENTLY. THE PERIOD OF TIME DURING WHICH THE FIXED PLACE OF BUSINESS ITSELF IS BEING SET UP BY THE ENTERPRISE SHOULD NOT BE COUNTED, PROVIDED THAT THIS ACTIVITY DIFFERS SUBSTANTIALLY FROM THE ACTIVITY FOR WHICH THE PLACE OF BUSINESS IS TO SERVE PERMANENTLY. THE PERMANENT ESTABLISHMENT CEASES TO EXIST WITH THE DISPOSAL OF THE FIXED PLACE OF BUSINESS OR WITH THE CESSATION OF ANY ACTIVITY THROUGH IT, THAT IS WHEN ALL ACTS AND MEASURES CONNECTED WITH THE FORMER ACTIVITIES OF THE PERMANENT ESTABLISHMENT ARE TERMINATED (WINDING UP CURRENT BUSINESS TRANSACTIONS, MAINTENANCE & REPAIR FACILITIES).' (PP.301 - 302) 'C. BEGINNING & END OF A PE 78 ...... THE PE CEASES TO EXIS T AS SOON AS THE FIRST OF THE INDISPENSIBLE ELEMENTS OF ART. 5(1) OECD AND UN MCFOR OF ART. 5(5) OECD AND UN MC. RESPECTIVELY) HAS DROPPED OUT. INSIGNIFICANT INTERRUPTION OF THE BUSINESS ACTIVITY ARE NOT TAKEN INTO ACCOUNT. APART FROM SUCH SHORT - TERM INTER RUPTIONS, THE LEASING OUT OF AN ENTERPRISE OR A PE BY THE TAXPAYER WILL USUALLY BRING THE PE OF THE LESSOR TAXPAYER TO AN END. LIKEWISE, A PE CEASES TO EXIST AS SOON AS ONE OF THE NEGATIVE ELEMENTS CONTAINED IN ART - 5(4) OR (6) OECD AND UN MC OCCURS . IT IS IMPORTANT TO NOTE, HOWEVER, THAT THE DETERMINATION OF THE BEGINNING AND END OF A PE IS RELEVANT FOR CAPITAL TAXATION ONLY. BY CONTRAST, IT NEED NOT BE CONSIDERED FOR INCOME TAX PURPOSES. THIS IS PARTICULARLY TRUE WITH REGARD TO ART 7(1) & (2).... AS THE RU LES ON 10 ATTRIBUTION OF PROFITS TO A PE ALLOW AN ATTRIBUTION OF EARNINGS AND EXPENSES TO THE PE EVEN IF THEY HAVE ACCRUED AT A TIME WHEN THE PE HAD NOT SUBSISTED YET - OR VICE VERSA, AFTER THE PE CEASED TO EXIST.' (PP.348 - 349) - 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 PIL OT SYSTEM BETWEEN ZTE CORP AND AIRCELDT. 11/12/06 - SIGNED BY MR CHEN YI AS WITNESS - SHOWS THAT ZTE CORP CARRIED ON SUPPLY, INSTALLATION AND TESTING OF PILOT SYSTEMS & EQUIPMENTS - ACL WILL PROVIDE SPACE AND POWER TO USE ITS FACILITY TO ZTE CORP (CI - 3) - NOTICES SHALL BE SEND TO - ZTE INDIA (CL.8.4) P.337 - 341, SURVEY DOC, VOL.ILL TRIAL CONTRACT TESTING REPORT SIGNED BY YI CHEN, (SIGNING FOR ZTE CORPN) (COMPARE THE SIGNATURES) P.390 - 409, SURVEY DOC, VOL.IV SERVICES AND OTHER MATERIALS QUOTATION SIGNED BY YI CHEN, (SIGNING FOR ZTE CORPN) (COMPARE THE SIGNATURES) P.494 - 496, SURVEY DOC, VOL.V E. ANALYSIS OF DOCUMENTS RELAT ING TO ASSESSEE FOUND DURING SURVEY - DESCRIPTION REFERENCE NON - DISCLOSURE AGREEMENT DT. 6/3/07 BETWEEN ASSESSEE AND DISHNET. - ADDRESS OF THE ASSESSEE GIVEN AT 8 TH 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, VOL.ILL 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 11 LETTERS ADDRESSED BY AIRCEL TO THE 'PROJECT MANAGER, AIRCEL BIHAR GSM PROJECT, ZTE CORPORATION' ENCLOSING ACCEPTANCE CHECK TEST CERTIFICATES. P. 273 - 278, SURVEY DOC, VOL.ILL TRIAL CONTRACT BETWEEN AIRCEL& ZTE CHINA WITH OFFICE OF ZTE TELECOM INDIA GIVEN AS COMMUNICATION ADDRESS AND SIGNED BY ZHANG LILI, AN EMPLOYEE OF ZTE TELECOM LNDIA(REFER TO P. 1215 OF SURVEY DOC, VOL - X) P.337 - 341, SURVEY DOC, VOL.ILL LETTER FROM AIRCEL TO ZTE CHINA THROUGH JAMES YI CHEN, MOBILE PROJECT MANAGER, ZTE CHINA, GURGAON P.333 - 334, SURVEY DOC, VOL.ILL CERTIFICATES FROM AIRCEL CERTIFYING THAT ZTE CORPN HAS SUCCESSFULLY 'SUPPLIED' AND 'INSTALLED' THE TRIAL SYSTEM P.330, SURVEY DOC, VOL.ILL CONFIDE NTIAL & NON - DISCLOSURE AGREEMENT BETWEEN ZTE CORP &TERACOM SIGNED BY MR. D.BHATTACHRAYA FOR ZTE CORP WHO IS AN EMPLOYEE OF ZTE INDIA (REFER TO P. 1215 OF SURVEY DOC, VOL - X) P.649 - 652, SURVEY DOC, VOL.VII MOU FOR BUSINESS ALLIANCE PARTNERSHIP BETWEEN ZTE C ORP &TERACOM CLIP PHONES (SIGNED BY MR. D.BHATTACHRAYA FOR ZTE CORP WHO IS AN EMPLOYEE OF ZTE INDIA (REFER TO P. 1215 OF SURVEY DOC, VOL - X) P.676 - 683, SURVEY DOC, VOL.VII DETAILS OF LEGAL ADVICE SOUGHT & FEES PAID. IT MAY BE NOTED THAT THE LAW FARM FOX MA NDAL& CO DISCUSSED VARIOUS ISSUES INCLUDING THE FOLLOWING WHICH PROVES THAT ZTE CORP HAD ITS OWN EMPLOYEES WORKING IN INDIA AS WELL AS SECONDED EMPLOYEES TO ZTE INDIA WHO WERE WORKING FOR IT - TERMINATION OF EMPLOYMENT OF RAJAN KALSI FINALIZATION OF SECOND MENT AGREEMENTS WITH ZTE INDIA DISCUSSION AND ADVICE TO DEEPAK THAKUR OF ZTE INDIA (REFER TO P. 1215 OF SURVEY DOC, VOL - X) ON VARIOUS ISSUES (AFTER RECEIVING MAIL FROM ZTE CORP) I.E. FRRO CUSTOMS CONTRACT EMPLOYEE IP ISSUES CORPORATE GUARANTEE MATTER REGAR DING ASTER - KENYA P.663 - 671, SURVEY DOC, VOL.VII LETTER FROM CALYON BANK ADDRESSED TO ZTE CORPN, GURGAON P.684, SURVEY DOC, VOL.VII NETWORK HANDOVER CERTIFICATE SIGNED BY MR. ZHAO WANGXIN FOR ZTE CORP WHO IS AN EMPLOYEE OF ZTE INDIA (REFER TO P. 1215 OF S URVEY DOC, VOL - X TO KNOW ABOUT THE SIGNATORY) P.708, SURVEY DOC, VOL.VII EXTENSION LIST & NAME OF EMPLOYEES OF ZTE TELECOM INDIA PVT. LTD. INCLUDING PROJECT TEAMS P.710 - 712, ' SURVEY DOC, VOL.VII STATEMENT BEFORE CUSTOMS DESCRIBING THE NATURE OF SOFTWARE SUPPLIED (REFER TO P.892, SURVEY DOC, VOL.VIII) P.1140 - 1143 SURVEY DOC, VOL.X LETTER FROM BSNL ADDRESSED TO ZTE CORPN, GURGAON P.1159,1164, 12 SURVEY DOC, VOL.X MINUTES OF MEETING WITH ITI CMD BY DEBASHISH BHATTACHARYA P.1195 - 1196, SURVEY DOC, VOL.X BL ANK 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, VOL.X LIST OF EMPLOYEES OF ZTE TELECOM INDIA PVT. LTD. 1215 - 1217, SURVEY DOC, VOL.X LETTER DT. 5/9/06 FR OM 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 T HE PRESENCE OF SANDEEP KUMAR &GAN YONG DURING BID OPENING P.958, SURVEY DOC, VOL.IX LETTER FROM HUANG ZUWEI, MD, ZTE INDIA ON ZTE CORPN LETTER HEAD TO ITI ASSURING SUPPLY OF EQUIPMENTS. IT MAY BE NOTED THAT THE ADDRESS OF ZTE INDIA GIVEN AS 8 TH FLOOR, TOW ER B, GLOBAL BUSINESS PARK, GURGAON WHICH HAPPENS TO BE THE INDIAN OFFICE OF ZTE CORPN. (SIMILAR LETTERS MAY BE FOUND IN PAGES - 167 - 172 TOO) P.714 - 715, SURVEY DOC, VOL.VIII LETTER FROM HUANG ZUWEI, CMD ASSISTANT ZTE CORP. (INDIA) ON ZTE CORP LETTERHEAD WIT H GURGAON ADDRESS(ALSO AT P.759 - 760,756) P.716 - 720, SURVEY DOC, VOL.VIII MINUTES OF MEETING BETWEEN ITI & ZTE CORPN REPRESENTED BY HUANG ZUWEI, MD &P.P.SINGHAL, VP ON TERMS OF BSNL CONTRACT P.722 - 723; 794 - 796, SURVEY DOC, VOL.VIII LETTER ADDRESSED TO MR . HUANG ZUWEI, MD, ZTE CORPN, AS 8 TH FLOOR, TOWER B, GLOBAL BUSINESS PARK, GURGAON P.724, 834, SURVEY DOC, VOL.VIII LETTER TO ITI FROM ZTE CORPN SIGNED BY HUANG ZUWEI, ASSISTANT TO CMD ZTE LNDIA(ALSO AT P.751,754,755,806 - 815) P.725 - 726, SURVEY DOC, VOL.VI II LETTER TO BSNL/ITI FROM ZTE CORPN SHOWING OFFICES AT BANGALORE 8I NEW DELHI TOO SIGNED BY HUANG ZUWEI, MD P.727 - 730,802 & 820 - 821,824,828, SURVEY DOC, VOL.VIII HIGH COURT NOTICE TO ZTE CORPN SEND TO GURGAON ADDRESS P.731, SURVEY DOC, VOL.VIII LETTER TO CHAIRMAN TELECOM COMMISSION DT. 4/8/2006 FROM ZTE INDIA LTD. IN ZTE INDIA LETTERHEAD SIGNED BY PRESIDENT SOUTH ASIA STATING THAT 'WE ARE DOING BUSINESS IN INDIA FOR LAST 5 YEARS' I.E. FROM 2001 ALTHOUGH ZTE TELECOM INDIA PVT. LTD. WAS INCORPORATED ONLY ON 9/12/2003. THIS SHOWS THE MERGER OF FUNCTIONAL IDENTITIES BETWEEN ZTE CORPN& ZTE TELECOM INDIA ALTHOUGH THE LATER REMAINS AN INDEPENDENT LEGAL ENTITY. P.743 - 744, SURVEY DOC, VOL.VIII LETTER FROM ZTE CORPN IN ZTE CORPN LETTERHEAD TO ITI SIGNED BY LIU RE N, MD, ZTE TELECOM INDIA ON BEHALF OF ZTE CORPN. P.752 - 753, SURVEY DOC, VOL.VIII LETTER FROM HUANG ZUWEI, MD, ZTE INDIA ON BEHALF OF /FOR ZTE CORPN P.757, SURVEY DOC, VOL.VIII AGREEMENT WITH ITI SIGNED BY LIU REN, MD ZTE CORPN WHO IS AN EMPLOYEE OF ZTE I NDIA (REFER TO P. 3 OF SURVEY DOC, VOL - X) P.758,767, SURVEY DOC, VOL.VIII LETTER FROM HIMANSHU GUPTA, MANAGER, MARKETING FOR ZTE CORPN. ADDRESS GIVEN AT GURGAON AND SEAL OF ZTE CORPN INDIA LO. HOWEVER, HIMANSHU IS AN EMPLOYEE OF ZTE TELECOM INDIA TOO (REF ER TO P. 1215 OF SURVEY DOC, VOL - X) P.761, SURVEY DOC, VOL.VIII MEMORANDUM OF SETTLEMENT BETWEEN ZTE CORP & ATLAS INTERACTIVE ON STORED EQUIPMENTS OF ZTE CORPN. VERY IMPORTANT IN THE CONTEXT OF PASSING OF TITLE FOR OVERSEAS SALES. P.772, SURVEY DOC, VOL.V III 13 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW QUA THE ISSUE. WE FIND THAT IN ASSESSMENT YEARS 2004 - 05 TO 2009 - 10, WHEN THIS ISSUE WAS AGITATED BEFORE THE TRIBUNAL, THE TRIBUNAL IN ITA NO. 5870/DEL/2012 AT PARA 13 OF ITS ORDER OBSERVED AS UNDER: 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, VOL - X) P.773 - 779 - 782, SURVEY DOC, VOL.VIII MINUTES OF MEETING BETWEEN ITI, ZTE CORP & ZTE INDIA SIGNED B Y 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 ADDRESS AT 8 TH FLOOR GURGAON P.814, SU RVEY 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, VOL.VIII LICENSING AGREEMENT BETWEEN Z TE 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 LET TER FOR RECLASSIFICATION OF SOFTWARE AS 'PACKAGED SOFTWARE' AND NOT AS 'CUSTOMISED SOFTWARE'. REFER TO STATEMENT BEFORE CUSTOMS IN P.1140 - 1143 SURVEY DOC, VOL.X P.892, SURVEY DOC, VOL.VIII LIU REN SIGNING MOU DT. 25/5/06 WITH SAMSUNG AS MD, ZTE TELECOM IN DIA P.922, SURVEY DOC, VOL.VIII LETTER FROM UNITED TELECOMS TO ZTE CHINA SHOWING INDIA OFFICE ADDRESS AT GURGAON P.931, SURVEY DOC, VOL.VIII PRE - BID AGREEMENT DT. 7.5.05 BETWEEN ITI & ZTE CHINA SIGNED BY LIU REN P.938, SURVEY DOC, VOL.VIII LETTERS BETWE EN ITI & ZTE CORPORATION (INDIA) WITH LIU REN AS MD HAVING OFFICE AT GURGAON P.941, SURVEY DOC, VOL.VIII LETTER TO ITI ON ZTE CHINA LETTERHEAD SIGNED BY LIU REN AS MD OF ZTE TELECOM INDIA ON 28/2/05 P.942 - 943, SURVEY DOC, VOL.VIII COMMUNICATION BETWEEN R ENJUN ZHANG, PRESIDENT, ZTE SOUTH ASIA HAVING OFFICE AT GURGAON AND ITI P.944 - 945, SURVEY DOC, VOL.VIII SUPPLY AGREEMENT DT. 7.12.05 BETWEEN ITI & ZTE CHINA SIGNED BY LIU REN P.946 - 954, SURVEY DOC, VOL.VIII SALES CONTRACT BETWEEN ITI & ZTE DT. 27/12/04 & LETTER FROM ITI ADDRESSED TO BANGALORE OFFICE P.1434 VOL - XII OF PB CONTRACT BETWEEN ATLAS INDIA & ZTE CHINA DT. 2/12/04 SIGNED BY ZUWEI HUANG, MD, ZTE CORPN, GURGAON P.1449 VOL - XII OF PB CONTRACT BETWEEN SHYAMTELELINK& ZTE CHINA DT. 5/9/08 SIGNED BY ZHA O WANGXIN, SEKHARTATIA BOTH EMPLOYEES OF ZTE INDIA. P.1520 & 1522 VOL - XII OF PB 14 AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE HAS INSTRUCTIONS FROM HIS CLIENTS T HAT THE DISPUTE BETWEEN THE ASSESSEE AND THE DEPARTMENT MAY BE SETTLED AND, THEREFORE, ON THE MOST CONTENTIOUS ISSUE REGARDING EXISTENCE OF PE IN INDIA, HE HAS INSTRUCTIONS NOT TO PRESS THE SAME. 5. THIS GROUND WAS ACCORDINGLY NOT CONSIDERED BY THE TRIBU NAL IN EARLIER ASSESSMENT YEARS. SINCE DURING THE CAPTIONED ASSESSMENT YEARS BEFORE US THE LD. COUNSEL FOR THE ASSESSEE HAS MADE A SIMILAR CONCESSION AND ON SUCH CONCESSION, WE DECLINE TO DWELL INTO THIS ISSUE. 6. SECOND GRIEVANCE RELATES TO ATTRIBUTION OF PROFIT. 7. A PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW SHOW THAT THE LOWER AUTHORITIES HAVE FOLLOWED THE FINDINGS GIVEN IN EARLIER ASSESSMENT YEARS 2004 - 05 TO 2009 - 10 AND THIS ISSUE HAS BEEN SETTLED BY THE TRIBUNAL IN ITA NO. 5870/DEL/2012 AND OTH ERS. 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 COR PORATION 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 15 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 GENER ATING 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 OPERATI ON 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 O F OPERATIONS CARRIED OUT BY PE IN INDIA. 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 IND IA, 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 ITA 5870/DEL/12 & ORS. - ZTE CORPORATION CUSTOMERS ON BEHALF OF THE ASSESSEE. THESE ARE AL L 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. AT THE COST OF REPETITION, WE REPRODUCE THE SAME: - 16 'ACTIVITIES PERFORMED BY P E, SUMMARIZED BY AO AS UNDER, - SUPERVISION AND CONTROL OF PROJECTS IN INDIA BY MD OF ZTE INDIA - MEETINGS AT TENDERING/ PRE BID STAGE IN INDIA - PREPARATION OF BIDDING DOCUMENTS IN INDIA - SIGNING AND SUBMISSIONS OF BIDS IN INDIA - PRICE AND CONTRACT NEG OTIATIONS IN INDIA - PREPARATION OF DRAFT AGREEMENTS AND MOUS IN INDIA - SIGNING OF AGREEMENT IN INDIA - ENTERING CONTRACTS IN INDIA - OBTAINING PURCHASE ORDERS/ OTHER SUPPLY ORDERS ON BEHALF OF ZTE CHINA - LC OPENING AND SUPPLY OF EQUIPMENTS/ HANDSETS - S HIPMENT OF EQUIPMENTS/ HANDSETS - CUSTOMS CLEARANCES - TRANSPORTATION AND DELIVERY - INSTALLATION AND COMMISSIONING - SUPERVISION OF INSTALLATION AND COMMISSIONING - TECHNICAL SUPPORT SERVICES - QUALITY ASSURANCES - AFTER SALES SERVICES AND REPLACEMENT - C ONCLUDING AGREEMENTS AND MOUS ON BEHALF OF ZTE CHINA - PERFORMANCE GUARANTEE OF THE . COMPANY - ZTE - COORDINATION WITH GOVERNMENT DEPARTMENTS - NEGOTIATION AT GOVERNMENT LEVEL - DECISIONS REGARDING PARTNERSHIP WITH OTHER CONCERNS/ MARKETING. - FOREIGN INVE STMENTS IN INDIA ITA 5870/DEL/12 & ORS. - ZTE CORPORATION 17 - TAXATION MATTERS OF ZTE CHINA - MARKETING FUNCTIONS - BANKING FUNCTIONS - VISITING CUSTOMERS AND VENDORS 47. IN THE CASE OF MOTOROLA )SUPRA), TRIBUNAL HAS REFERRED TO THE DECISION IN THE CASE OF A HMADBHAI UMARBHAI (SUPRA), WHEREIN IT HAS BEEN HELD THAT INCOME ATTRIBUTABLE TO THE MANUFACTURING ACTIVITY SHOULD BE MORE THAN THE INCOME ATTRIBUTABLE TO THE ACTIVITY OF SALE. THEREFORE, OUT OF THE TOTAL GLOBAL INCOME OF ASSESSEE RELATABLE TO THE SUPPLIES MADE TO INDIA MORE INCOME IS TO 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 ATTRIBUTABL E 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 DI STINGUISH 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/DE L/12 & ORS. - ZTE CORPORATION SIGNIFICANCE BECAUSE IT ONLY CONSIDERS THE INVOLVEMENT OF ASSESSEE'S REPRESENTATIVES IN NEGOTIATIONS. WE HAVE TO CONSIDER 18 THE OVERALL OPERATIONS CARRIED OUT BY PE IN INDIA. MERE INVOLVEMENT OF EXPATRIATES IN THE ACTIVITIES OF PE FOR ASSISTING THE INDIAN TEAM CANNOT SUBSTANTIALLY AFFECT THE REVENUE GENERATING CAPACITY OF PE. 49. THE DECISION IN THE CASE OF M/S NORTEL NETWORKS INDIA INTERNATIONAL INC. ( ITA NOS. 119 TO 121/DEL/2010 AND 1153 TO 1155/DEL/2010 ORDER DATED 13.6.2014) , THE TRIBUNAL IN PARA 14.4 HAS NOTED THAT IN ASSESSEE'S CASE HARDWARE SUPPLY CONTRACT WAS A PART OF THE TRUNKEY CONTRACT WHICH INVOLVED SUPPLY, INSTALLATION, TESTING AND COMMISSIONING ETC. AS IS IN THE PRESENT CASE. ACTIVITIES OF M/S NORTEL INDIA AND THA T OF LO OF NORTEL CANADA AND SERVICES OF EXPATRIATE WORKERS HAD ALSO BEEN TAKEN AS PART OF THE EXECUTION OF THE WORK BY THE PE. THUS, THE LEVEL OF OPERATION CARRIED OUT IN INDIA WERE EXTENSIVE AND UNDER SUCH CIRCUMSTANCES TRIBUNAL HAD ATTRIBUTED 50% OF THE NET PROFIT ARISING OUT OF INDIAN TRANSACTIONS AS ASSESSEE'S INCOME. 50. HAVING DISCUSSED THE ENTIRE CASE LAW AND AFTER CONSIDERING THE FACTUAL ASPECTS, WE FIND THAT THE LEVEL OF OPERATIONS CARRIED OUT BY ASSESSEE THROUGH ITS PE IN INDIA ARE CONSIDERABLE E NOUGH 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 ITA 5870/DEL/12 & ORS. - ZTE CORPORATION AHMEDBHAI UMARBHAI & CO. (SUPRA), THE DECISION OF ROLLS ROYCE (SUPRA) AND NORTEL NETWORKS INDIA INTERNATIONAL INC. (SUPRA), 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 TRANSACTI ONS OF ASSESSEE WITH INDIA ARE ATTRIBUTED TO PE IN INDIA IN RESPECT OF BOTH 19 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 H AVE 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. IN THE RESULT ASSESSEE'S GROUND NO. 6 IN AY 2009 - 10 STANDS ALLOWED. WE MAY FURTHER CLARIFY THAT OUR DECISION 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 REVENUES 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 20 AND O THERS [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 NET WORKS 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 ROYALT Y. 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 DELHI HIGH COURT IN THE CASE OF DIT VS. NOKIA INDIA (SUPRA), 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 INTEGRA L 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. 72. LD. COUNSEL RELIED UPON FOLLOWING DECISIONS: - DIT VS. ERICSSON AB (2012) 343 ITR 470 (DEL.); - DIT VS. INFRASOFT LTD. (2013) 39 TAXMANN.COM 88 (DEL.) - ASPECT SOFTWARE INC. VS. ADIT (2015) 61 TAXMANN.COM 36 (DEL.) 21 73. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE FIND THAT IN THE CASE OF ALCATEL LUCENT, FRANCE TRIBUNAL IN PARA 12,13 & 14 IT HAS BEEN HELD AS UNDER: '12. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BOTH THE SIDES AND PERUSED RELEVANT MATERIAL PLACED BEFORE US. WE FIND THAT LEARNED ( (A) ALLOWED THE RELIEF TO THE ASSESSEE FOLLOWING THE DECISION OF ITAT IN ASSESSEE'S OWN CASE FO R AY 1997 - 98 IN ITA NO.407/DEL/200L. THE ITAT HAD DELIVERED THE ABOVE ITA 5870/DEL/12 & ORS. - ZTE CORPORATION DECISION FOLLOWING THE DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF MOTOROLA INC. (SUPRA). WE FIND AT HON'BLE JURISDICTIONAL HIGH COURT UPHEL D THE DECISION OF ITAT OF SPECIAL BENCH IN THE CASE OF MOTOROLA INC. (SUPRA) IN THE CASE OF DIT VS. ERICSSON A.B. (SUPRA). IN THE APPEAL BY THE REVENUE, QUESTION NO.3 PRE POSED BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT AND ADMITTED BY THEIR LORDSHIPS RE ADS AS UNDER. - 'WHETHER IN LAW, THE LEARNED DE/HI TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE CONSIDERATION FOR SUPPLY OF SOFTWARE WAS NOT A PAYMENT BY WAY OF ROYALTY, AND, HENCE, WAS NOT ASSESSABLE BOTH UNDER SECTION 9(L)(VI) OF THE DOUBLE TAXATION AVOIDA NCE AGREEMENT BETWEEN THE GOVERNMENT OF INDIA AND SWEDEN?' 13. THAT THE HON'BLE JURISDICTIONAL HIGH COURT, AFTER DETAILED DISCUSSIONS WHICH ARE AT PAGES 474 TO 506 OF THE ITR 343, 22 ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 14 . THE REVENUE HAD ALSO FILED THE APPEAL AGAINST THE DECISION OF ITAT IN ASSESSEE'S OWN CASE WHICH IS DECIDED BY THEIR LORDSHIPS ALONGWITH VARIOUS OTHER CASES INCLUDING THE CASE OF MIS NOKIA NETWORKS, IN THIS CASE ALSO, THE QUESTION NO.3 PROPOSED BY THE REV ENUE 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 CORPO RATION 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. RESPECT FULLY FOLLOWING THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT, AS NOTED BY TRIBUNAL, GROUND NOS. 2 & 3 ARE REJECTED. 23 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 ERICSON. 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 INVOICI NG 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 ROUTINEL Y 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, AM OUNTED TO PAYMENTS FOR THE USE OF MACHINERY OR EQUIPMENT. SUCH A SUBMISSION WAS NEVER ADVANCED BEFORE ANY OF THE LOWER TAX AUTHORITIES; MOREOVER, EVEN IN ERICSON (SUPRA), A SIMILAR PROVISION EXISTED IN THE DTAA BETWEEN INDIA AND SWEDEN. 24 23. AS FAR AS THE Q UESTION OF INTEREST PAYMENTS AND SECTION 234B IS CONCERNED, THE COURT IS OF THE OPINION THAT THE ISSUE IS COVERED BY GE PACKAGING (SUPRA). THIS QUESTION OF LAW TOO IS ANSWERED AGAINST THE REVENUE, AND I N FAVOUR OF THE ASSESSEE. 12. LAST GRIEVANCE RELATES TO LEVY OF INTEREST U/S 234B OF THE I.T. ACT. 13. AS CAN BE SEEN FROM THE AFOREMENTIONED JUDGMENT OF THE HON'BLE HIGH COURT, THE HON'BLE HIGH COURT HAS ALSO CONSIDERED THE LEVY OF INTEREST U/S 234B AT PARA 23 OF ITS JUDGMENT WHEREIN THE HON'BLE HIGH COURT HAS CONSIDERED THE JUDGMENT OF ITS OWN IN THE CASE OF GE PACKAGING POWER INC. 373 ITR 65. 14. HOWEVER, IT MAY BE POINTED OUT THAT THE FINANCE ACT, 2012 W.E.F 1.4.2012 ADDED PROVISO BELOW SECTION 209 ID OF THE ACT. THE SAID PROVISO IS APPLICABLE FROM ASSESSMENT YEAR 2013 - 14 AND, THEREFORE, PROSPECTIVE IN OPERATION. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO CHARGE INTEREST U/S 234B OF THE ACT FROM ASSESSMENT YEAR 2013 - 14 ON WARDS AS PER AMENDED PROVISION R.W THE PROVISO. 25 15. IN THE RESULT, THE APPEAL S OF THE ASSESSEE ARE PARTLY ALLOWED WHEREAS APPEAL S OF THE REVENUE ARE DISMISSED. STAY APPLICATION IS DISMISSED AS HAVING BECOME OTIOSE. THE ORDER IS PRO NOUNCED IN THE OPEN COURT ON 15 .02.2019. SD/ - SD/ - [ BEENA PILLAI ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 15 TH FEBRUARY , 201 9 VL/ COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5. DR AS ST. REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON W HICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK D ATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER
