M/s. Nortel Networks Singapore Pte Ltd., Gurgaon V. ADIT, New Delhi

ITA 5482/DEL/2012

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5970 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-06-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 30-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G K DHALL
• Assessee Lawyers: SANDEEP KARHAIL
• Keywords: Related party transaction; Business income; Double taxation relief; Permanent establishment
• Section: 143(3); 234B; 2

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH A, NEW DELHI BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 ASSESSMENT YEARS: 2006-07, 2007-08, 2009-10 & 2010- 11 NORTEL NETWORKS SINGAPORE PTE. LTD., C/O SRBC & ASSOCIATES, GOLF VIEW CORPORATE TOWER B, SECTOR-42, SECTOR ROAD, GURGAON. PAN- AACCN0752F (APPELLANT) VS. D DIT, CIRCLE 2(1), INTERNATIONAL TAXATION, NEW DELHI. (RESPONDENT) ITA NOS. 5505/DEL/2012 ASSESSMENT YEAR: 2006-07 DDIT, CIRCLE 2(1), INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) VS. NORTEL NETWORKS SINGAPORE PTE. LTD., C/O SRBC & ASSOCIATES, GOLF VIEW CORPORATE TOWER B, SECTOR-42, SECTOR ROAD, GURGAON. (RESPONDENT) ASSESSEE BY SHRI SANDEEP KARHAIL, ADVOCATE REVENUE BY SHRI G.K. DHALL, CIT/DR ORDER PER L.P. SAHU, A.M.: OUT OF ABOVE FIVE APPEALS, THE FORMER FOUR APPEALS ARE FILED AT THE INSTANCE OF ASSESSEE AND LAST ONE BY THE REVENUE. THE CROSS APPEALS FOR A.Y. 2006-07 ARE DIRECTED AGAINST THE ORDER OF THE LD. C IT(A)-XXIX, NEW DELHI DATED 22.08.2012, WHEREAS THE REMAINING THREE APPEALS BY THE ASSESSEE ARISE OUT OF DATE OF HEARING 22.05.2018 DATE OF PRONOUNCEMENT 28 .05.2018 ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 2 THE ORDERS U/S. 144C/143(3) AND THE DIRECTIONS OF L EARNED DRP U/S. 144C(5) OF THE ACT FOR THE ASSESSMENT YEARS 2007-08, 2009-10 A ND 2010-11. 2. SINCE MOST OF THE ISSUES INVOLVED IN ALL THESE A PPEALS ARE COMMON, THEREFORE, FOR THE SAKE OF CONVENIENCE AND BREVITY, ALL THESE APPEALS ARE BEING DECIDED BY THIS CONSOLIDATED ORDER. 3. THE FIRST ISSUE INVOLVED IN ALL THE APPEALS OF A SSESSEE IS WITH RESPECT TO FASTENING THE TAX LIABILITY ON THE INCOME EARNED ON SUPPLY OF TELECOMMUNICATION EQUIPMENT TO THE INDIAN CUSTOMERS . THE LD. AUTHORITIES BELOW HAVE SUPPORTED THEIR CONCLUSIONS REACHED IN T HIS BEHALF, HOLDING THAT THE ASSESSEE CONSTITUTES A PERMANENT ESTABLISHMENT IN I NDIA IN TERMS OF ARTICLE-5 OF THE INDIA-SINGAPORE DOUBLE TAXATION TREATY AND T HEREFORE, THE PROFIT ON SUCH SUPPLY OF TELECOM EQUIPMENT IN INDIA WAS ATTRI BUTED TO ASSESSEE, THE ALLEGED PE IN INDIA. 4. THE ASSESSEE HAS CHALLENGED THIS ISSUE BY WAY OF GROUNDS NOS. 1 & 2 IN ALL OF ITS FOUR APPEALS, STATING THAT SIMILAR DISPUTE C AME FOR CONSIDERATION BEFORE THE ITAT, NEW DELHI IN ASSESSEES OWN CASE FOR A. Y RS. 2001-02 TO 2005-06 (ITA NOS. 2172 TO 2176/DEL/2011), WHEREIN THE CO-ORDINAT E BENCH OF TRIBUNAL VIDE ORDER DATED 24.04.2018 HAS DECIDED THE ISSUE IN FAV OUR OF THE ASSESSEE. THEREFORE, THIS ISSUE IS SQUARELY COVERED BY THE DE CISION OF COORDINATE BENCH (SUPRA) IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE. THE LD. DR OPPOSING THE CONTENTION OF THE ASSESSEE SUBMITTED THAT THE A BOVE REFERRED ORDER OF THE TRIBUNAL HAS BEEN UNDER CHALLENGE AND RELIED ON THE ORDERS OF ASSESSING OFFICER. ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 3 5. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT THE ABOVE ISSUE STANDS FINALLY DECIDED BY THE TRIBUNAL VIDE ORDER D ATED 24.04.2018 (SUPRA) IN FAVOUR OF THE ASSESSEE IN ITS OWN CASES. THE IDENTI CAL FACTS AND OBSERVATIONS MADE BY THE TRIBUNAL IN THAT ORDER READ AS UNDER : 13.6. THE COMMISSIONER (APPEALS) UPHELD THE ORDER O F ASSESSING OFFICER THAT OFFICE OF NORTEL LO AND NORTEL INDIA WOULD CONSTITUTE A FI XED PE OF THE ASSESSEE IN INDIA AS THE ASSESSEE AND NORTEL CANADA WERE ONE AND THE SAM E ENTITY, AND IN THE PROCESS OF REACHING SUCH A CONCLUSION, LD. CITA MADE THE FOLLO WING OBSERVATIONS:- THAT THE ASSESSEE HAS PERMANENT ESTABLISHMENT AND BUSINESS CONNECTION IN INDIA IN THE FORM OF NORTEL NETWORKS INDIA PRIVATE LIMITED AND THE LIAISON OFFICE OF PARENT NORTEL NET WORKS LTD, CANADA; THE EMPLOYEES OF THE ASSESSEE OR OTHER PERSONNEL CA RRIED OUT THE BUSINESS OF THE ASSESSEE THROUGH THE PREMISES OF TH E LO OR THE PREMISES OF THE SUBSIDIARY; THE ASSESSEE HAS UNDERTAKEN ALL PRE-SUPPLY AND POST SUPPLY ACTIVITIES IN INDIA; NORTEL INDIA HAS NEITHER THE FINANCE, NOR TECHNOLOG Y NOR EXPERIENCE TO INSTALL THESE NETWORKS AND THEREFORE THEIR ONLY INS TALLING EQUIPMENT SUPPLIED BY ITS PRINCIPAL AND THAT TOO AT EACH STAG E WITH THE HELP OF THE ASSESSEE, AND SINCE INDIAN COMPANY DID NOT HAVE ANY EXPERTISE FOR INSTALLATION, THE SAME WAS PROVIDED/SUPERVISED BY T HE ASSESSEE; THE PREMISES OF NORTEL INDIA IS USED AS A SALES OUT LET OF THE ASSESSEE IN INDIA; THE TITLE OF EQUIPMENT DOES NOT PASS OUTSIDE INDIA SINCE THE EQUIPMENT IS FINALLY ACCEPTED BY THE CUSTOMER WHEN IT PASSES THE ACCEPTANCE TEST; THE SUPPLY CONTRACT DOES NOT END WITH THE LOADING T HE EQUIPMENT ON THE SHIP BUT ALSO INCLUDES NUMBER OF ACTIVITIES WHI CH ARE CARRIED OUT IN THE INDIAN TERRITORY AND THE COMPENSATION/REMUNERAT ION FOR THAT IS ALSO INCLUDED IN THE CONSIDERATION; THE EXPAT EMPLOYEES REMAINED AND RENDERED SERVICES FOR MORE THAN 30 DAYS IN A FISCAL YEAR; THE EXPATRIATE EMPLOYEES OF THE ASSESSEE ARE PRESEN T IN INDIA FOR SUPERVISING THE INSTALLATION PROJECTS IN INDIA AND THE ASSESSEE HAS MADE A TECHNOLOGY AND TECHNICAL INFORMATION AVAILABLE TO THE INDIAN SUBSIDIARY AND THUS CONFIRMING THAT THE INDIAN ENTI TY DID NOT HAVE THE TECHNOLOGY; AND ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 4 14. A CAREFUL READING OF THE ORDER DATED 22/12/2009 IN APPEAL NO. 324 AND 325/06-07 AND 242/07-08 PASSED IN THE CASE OF NORTE L NETWORKS INDIA INTERNATIONAL INC BY THE LD. CIT (A), ORDER DATED 04/05/2016 OF T HE HONBLE JURISDICTIONAL HIGH COURT IN ITA NO. 666/2014 AND BATCH IN THE CASE OF M/S NORTEL NETWORKS INDIA INTERNATIONAL INC, (SUPRA) AND THE IMPUGNED ORDER I N THE CASE ON HAND AS NARRATED IN PARAGRAPH NUMBER 8, MAKES IT AMPLY CLEAR THAT THE F ACTS ARE SUBSTANTIALLY THE SAME, GIVING RISE TO THE SIMILAR QUESTIONS OF FACT AND LA W. 15. HONBLE HIGH COURT DEALT WITH THE FINDINGS OF T HE LD. CIT(A), WHICH ARE ON SIMILAR FACTS IN BOTH THE CASES, VIDE PARAGRAPH NOS . 69,74,63,67,71,70,47,59 AND 73 IN THE CASE REPORTED IN 286 ITR 353, IN THE FOLLOWING WAY: 16. ON THE ASPECT OF THE PERMANENT ESTABLISHMENT AN D BUSINESS CONNECTION IN INDIA VIDE PARAGRAPH NO. 69 HONBLE JURISDICTIONAL HIGH COURT OBSERVED THAT,- 69. THE AO, CIT(A) AND ITAT HAVE HELD THAT THE OFF ICE OF NORTEL INDIA AND NORTEL LO CONSTITUTED A FIXED PLACE OF BUSINESS OF THE ASSE SSEE. AS POINTED OUT EARLIER, WE FIND NO MATERIAL ON RECORD THAT WOULD EVEN REMOT ELY SUGGEST THAT NORTEL LO HAD ACTED ON BEHALF OF THE ASSESSEE OR NORTEL CANADA IN NEGOTIATING AND CONCLUDING AGREEMENTS ON THEIR BEHALF. THUS, IT IS N OT POSSIBLE TO ACCEPT THAT THE OFFICES OF NORTEL LO COULD BE CONSIDERED AS A FIXED PLACE OF BUSINESS OF THE ASSESSEE. IN SO FAR AS NORTEL INDIA IS CONCERNED, T HERE IS ALSO NO EVIDENCE THAT THE OFFICES OF NORTEL INDIA WERE AT THE DISPOSAL OF THE ASSESSEE OR NORTEL CANADA. EVEN IF IT IS ACCEPTED THAT NORTEL INDIA HAD ACTED ON BEHALF OF THE ASSESSEE OR NORTEL CANADA, IT DOES NOT NECESSARILY FOLLOW THAT THE OFFICES OF NORTEL INDIA CONSTITUTED A FIXED PLACE BUSINESS PE OF THE ASSESSE E OR NORTEL CANADA. NORTEL INDIA IS AN INDEPENDENT COMPANY AND A SEPARATE TAXA BLE ENTITY UNDER THE ACT. THERE IS NO MATERIAL ON RECORD WHICH WOULD INDICATE THAT ITS OFFICE WAS USED AS AN OFFICE BY THE ASSESSEE OR NORTEL CANADA. EVEN IF IT IS ACCEPTED THAT CERTAIN ACTIVITIES WERE CARRIED ON BY NORTEL INDIA ON BEHALF OF THE ASSESSEE OR NORTEL CANADA, UNLESS THE CONDITIONS OF PARAGRAPH 5 OF ART ICLE 7 OF THE INDO-US DTAA IS SATISFIED, IT CANNOT BE HELD THAT NORTEL INDIA CONST ITUTED A FIXED PLACE OF BUSINESS OF THE ASSESSEE OR NORTEL CANADA. 17. IN RESPECT OF THE ALLEGATION THAT THE EMPLOYEES OF THE ASSESSEE OR OTHER PERSONNEL CARRIED OUT THE BUSINESS OF THE ASSESSEE THROUGH THE PREMISES OF LO OR THE PREMISES OF THE SUBSIDIARY, VIDE PARAGRAPH NO. 74 H ON'BLE HIGH COURT HELD THAT,- 74. THE CIT(A) AS WELL AS THE ITAT HAS PROCEEDED O N THE BASIS THAT THE ASSESSEE HAD EMPLOYED THE SERVICES OF NORTEL INDIA FOR FULFI LLING ITS OBLIGATIONS OF INSTALLATION, COMMISSIONING, AFTER SALES SERVICE AN D WARRANTY SERVICES. THE ITAT ALSO CONCURRED WITH THE VIEW THAT SINCE EMPLOYEES O F GROUP COMPANIES HAD VISITED INDIA IN CONNECTION WITH THE PROJECT, THE BU SINESS OF THE ASSESSEE WAS CARRIED OUT BY THOSE EMPLOYEES FROM THE BUSINESS PRE MISES OF NORTEL INDIA AND NORTEL LO. IN THIS REGARD, IT IS RELEVANT TO OBSERV E THAT A SUBSIDIARY COMPANY IS AN INDEPENDENT TAX ENTITY AND ITS INCOME IS CHARGEA BLE TO TAX IN THE STATE WHERE ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 5 IT IS RESIDENT. IN THE PRESENT CASE, THE TAX PAYABLE ON ACTIVITIES CARRIED OUT BY NORTEL INDIA WOULD HAVE TO BE CAPTURED IN THE HANDS OF NORTEL INDIA. CHAPTER X OF THE ACT PROVIDES AN EXHAUSTIVE MECHANISM FOR DET ERMINING THE ARM'S LENGTH PRICE IN CASE OF RELATED PARTY TRANSACTIONS FOR ENS URING THAT REAL INCOME OF AN INDIAN ASSESSEE IS CHARGED TO TAX UNDER THE ACT. TH US, THE INCOME FROM INSTALLATION, COMMISSIONING AND TESTING ACTIVITIES AS WELL AS ANY FUNCTION PERFORMED BY EXPATRIATE EMPLOYEES OF THE GROUP COMP ANIES SECONDED TO NORTEL INDIA WOULD BE SUBJECT TO TAX IN THE HANDS OF NORTEL INDIA AND THE SAME CANNOT BE CONSIDERED AS INCOME OF THE ASSESSEE. 18. ON THE ASPECT OF THE ASSESSEE UNDERTAKING THE P RE-SUPPLY AND THE POST SUPPLY ACTIVITIES IN INDIA, IT IS RELEVANT TO REFER TO PAR AGRAPH NUMBERS 63 AND 67 OF THE ORDER OF THE HONBLE HIGH COURT: 63. UNDISPUTEDLY, EVEN IF IT IS ACCEPTED THAT SOME PORTION OF THE OBLIGATIONS UNDERTAKEN BY THE ASSESSEE WERE PERFORMED IN INDIA, THE ASSESSEE'S INCOME ARISING FROM THE PERFORMANCE OF THE EQUIPMENT CONTR ACT COULD BE BROUGHT TO TAX ONLY TO THE EXTENT AS PERMISSIBLE UNDER THE RELEVANT DTAA - DTAA BETWEEN INDIA AND USA OR DTAA BETWEEN INDIA AND CANADA. XXX XXX XXX XXX XXX XXX 67. THUS, IF WE PROCEED ON THE ASSUMPTION THAT A PA RT OF THE ASSESSEES INCOME IS ATTRIBUTABLE TO ACTIVITIES CARRIED OUT IN INDIA THROU GH A BUSINESS CONNECTION, THE QUESTION WHETHER THE ASSESSEE HAD A PE IN INDIA DUR ING THE RELEVANT AYS WOULD BECOME RELEVANT. THIS IS SO BECAUSE, IF THE ASSESSEE DID NOT HAVE ANY PE IN INDIA THEN ITS BUSINESS INCOME WOULD NOT BE TAXABLE UNDER THE ACT EVEN THOUGH A PART OF THE SAME CAN BE ATTRIBUTED TO ACTIVITIES IN INDIA. 19. WHILE ADVERTING TO THE FINDING OF THE AUTHORITI ES BELOW THAT THE NORTON INDIA HAS NEITHER THE FINANCE, NOR TECHNOLOGY NOR EXPERIE NCE TO INSTALL THE NETWORKS, AS SUCH THEY ARE ONLY INSTALLING EQUIPMENT SUPPLIED BY ITS PRINCIPAL AND THAT TOO AT EACH STAGE WITH THE HELP OF THE ASSESSEE AND FURTHER THA T SINCE THE INDIAN COMPANY DID NOT HAVE ANY EXPERTISE 5 INSTALLATION, THE SAME AS PROV IDED/SUPERVISED BY THE ASSESSEE, THE HONBLE HIGH COURT HELD IN PARAGRAPH NO. 71 THA T,- 71. THE AOS CONCLUSION THAT THERE IS AN INSTALLAT ION PE IN INDIA, IS ALSO WITHOUT ANY MERIT. A BARE PERUSAL OF THE SERVICES CONTRACT CLEAR LY INDICATES THAT THE TASKS OF INSTALLATION, COMMISSIONING AND TESTING WAS CONTRAC TED TO NORTEL INDIA AND NORTEL INDIA PERFORMED SUCH TASKS ON ITS OWN BEHALF AND NOT ON BE HALF OF THE ASSESSEE OR NORTEL CANADA. UNDISPUTEDLY, NORTEL INDIA WAS ALSO RECEIVE D THE AGREED CONSIDERATION FOR PERFORMANCE OF THE SERVICES CONTRACT DIRECTLY BY RE LIANCE. ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 6 20. THE HIGH COURT REJECTED THE CONTENTION OF THE R EVENUE THAT THE PREMISES OF NORTEL INDIA WAS USED AS A SALES OUTLET OF THE ASSE SSEE IN INDIA, BY OBSERVING IN PARAGRAPH NO. 70 THAT,- 70. THE AO HAS FURTHER ALLEGED THAT THE OFFICES OF NORTEL LO AND NORTEL INDIA WERE USED AS A SALES OUTLET. IN OUR VIEW, THIS FIND ING IS ALSO UNMERITED AS THERE IS NO MATERIAL WHICH WOULD SUPPORT THIS VIEW. THE FACT S ON RECORD ONLY INDICATE THAT NORTEL INDIA NEGOTIATED CONTRACTS WITH RELIANC E. EVEN ASSUMING THAT THE CONTRACTS FORM A PART OF THE SINGLE TURNKEY CONTRAC T, WHICH INCLUDE SUPPLY OF EQUIPMENT - AS HELD BY THE AUTHORITIES BELOW - THE S AME CANNOT LEAD TO THE CONCLUSION THAT NORTEL INDIA WAS ACTING AS A SALES OUTLET. 21. INSOFAR AS THE OBSERVATIONS OF THE 1 ST APPELLATE AUTHORITY THAT THE SUPPLY CONTRACT DOES NOT END WITH THE LOADING THE EQUIPMEN T ON THE SHIP BUT ALSO INCLUDES NUMBER OF ACTIVITIES WHICH ARE CARRIED OUT IN THE I NDIAN TERRITORY AND THE COMPENSATION/REMUNERATION FOR THAT IS ALSO INCLUDED IN THE CONSIDERATION, IS CONCERNED, IT IS HELD VIDE PARAGRAPH NO. 59 THAT,- 59. IT IS APPARENT FROM THE ABOVE THAT THE ASSESSEE ONLY ASSUMED THE OBLIGATION TO SELL, SUPPLY AND DELIVER EQUIPMENT IN TERMS OF T HE EQUIPMENT CONTRACT AND WAS PAID IN TERMS OF THE PRICING MECHANISM AS AGREE D TO UNDER THE EQUIPMENT CONTRACT. IT IS ALSO MATERIAL TO NOTE THAT NORTEL I NDIA CONTINUED TO BE RESPONSIBLE FOR PERFORMANCE OF THE EQUIPMENT CONTRACT EXCEPT FO R PERFORMANCE OF PURCHASE ORDERS AND EXCHANGE ORDERS FOR SUPPLY OF EQUIPMENT WHICH WERE PLACED DIRECTLY BY RELIANCE ON THE ASSESSEE. ALTHOUGH, THE ASSESSEE HAD REPEATEDLY ASSERTED THAT ALL OTHER OBLIGATIONS FOR TESTING, INSTALLATION AND COMMISSIONING WAS DONE BY NORTEL INDIA, FOR WHICH NORTEL INDIA HAD BEEN PAID S EPARATELY, NO MATERIAL OR EVIDENCE WAS GATHERED BY THE AO TO CONTRADICT THE S AME. THERE IS NO MATERIAL TO INDICATE THAT EQUIPMENT FOR TEST BED LABORATORY, WHI CH WAS TO BE SUPPLIED AT NO ADDITIONAL COST TO RELIANCE HAD BEEN PROCURED BY NOR TEL INDIA AT ADDITIONAL COST OR THAT NORTEL INDIA WAS NOT REMUNERATED FOR ALL TH E SERVICES RENDERED BY IT TO RELIANCE. IN TERMS OF THE EQUIPMENT CONTRACT, ADEQU ATE STOCK OF SPARES WAS REQUIRED TO BE MAINTAINED IN INDIA, HOWEVER, THERE I S NO MATERIAL TO INDICATE THAT SUCH STOCK WAS MAINTAINED IN INDIA BY THE ASSE SSEE OR THAT SUCH STOCK WAS MAINTAINED BY NORTEL INDIA, NOT ON ITS OWN BEHALF BUT ON BEHALF OF THE ASSESSEE, WITHOUT BEING SUFFICIENTLY REMUNERATED. THUS, IN ABS ENCE OF ANY SUCH EVIDENCE OR MATERIAL, IT IS DIFFICULT FOR US TO CONCUR WITH THE VIEW THAT CERTAIN ACTIVITIES WERE PERFORMED IN INDIA FOR WHICH THE CONSIDERATION WAS RECEIVED BY THE ASSESSEE. 22. LD. CIT(A) OBSERVED THAT EXPATRIATES EMPLOYEES OF THE ASSESSEE WERE PRESENT IN INDIA FOR SUPERVISING THE INSTALLATION PROJECTS IN INDIA AND THE ASSESSEE HAS MADE TECHNOLOGY AND TECHNICAL INFORMATION AVAILABLE TO T HE INDIAN SUBSIDIARY AS SUCH CONFIRMING THAT THE INDIAN ENTITY DID NOT HAVE THE TECHNOLOGY. ON THE OBSERVATIONS OF THE CIT(A) THAT THE EXPAT EMPLOYEES REMAIN IN INDIA AND RENDERED SERVICES FOR MORE THAN 30 DAYS IN A FINANCIAL YEAR, THE HONBLE HIGH COURT OBSERVED AT PARAGRAPH NO. 74 THAT,- ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 7 74. THE CIT(A) AS WELL AS THE ITAT HAS PROCEEDED O N THE BASIS THAT THE ASSESSEE HAD EMPLOYED THE SERVICES OF NORTEL INDIA FOR FULFI LLING ITS OBLIGATIONS OF INSTALLATION, COMMISSIONING, AFTER SALES SERVICE AN D WARRANTY SERVICES. THE ITAT ALSO CONCURRED WITH THE VIEW THAT SINCE EMPLOYEES O F GROUP COMPANIES HAD VISITED INDIA IN CONNECTION WITH THE PROJECT, THE BU SINESS OF THE ASSESSEE WAS CARRIED OUT BY THOSE EMPLOYEES FROM THE BUSINESS PRE MISES OF NORTEL INDIA AND NORTEL LO. IN THIS REGARD, IT IS RELEVANT TO OBSERV E THAT A SUBSIDIARY COMPANY IS AN INDEPENDENT TAX ENTITY AND ITS INCOME IS CHARGEA BLE TO TAX IN THE STATE WHERE IT IS RESIDENT. IN THE PRESENT CASE, THE TAX PAYABLE ON ACTIVITIES CARRIED OUT BY NORTEL INDIA WOULD HAVE TO BE CAPTURED IN THE HANDS OF NORTEL INDIA. CHAPTER X OF THE ACT PROVIDES AN EXHAUSTIVE MECHANISM FOR DET ERMINING THE ARM'S LENGTH PRICE IN CASE OF RELATED PARTY TRANSACTIONS FOR ENS URING THAT REAL INCOME OF AN INDIAN ASSESSEE IS CHARGED TO TAX UNDER THE ACT. TH US, THE INCOME FROM INSTALLATION, COMMISSIONING AND TESTING ACTIVITIES AS WELL AS ANY FUNCTION PERFORMED BY EXPATRIATE EMPLOYEES OF THE GROUP COMP ANIES SECONDED TO NORTEL INDIA WOULD BE SUBJECT TO TAX IN THE HANDS OF NORTEL INDIA AND THE SAME CANNOT BE CONSIDERED AS INCOME OF THE ASSESSEE. 23. THE HONBLE HIGH COURT CONSIDERED THE ASPECT WH ETHER OR NOT THE NORTEL INDIA IS DEPENDENT ON AGENT OF THE ASSESSEE VIDE PARAGRAP H NO. 73 IN THE LIGHT OF THE FACTS INVOLVED IN THIS CASE. 73. THE AO HAS ALSO HELD THAT NORTEL INDIA CONSTIT UTED DEPENDENT AGENT PE OF THE ASSESSEE IN INDIA. THE AFORESAID CONCLUSION WAS PREMISED ON THE FINDING THAT NORTEL INDIA HABITUALLY CONCLUDES CONTRACTS ON BEHALF OF THE ASSESSEE AND OTHER NORTEL GROUP COMPANIES. IN THE PRESENT CASE, THERE IS NO MATERIAL ON RECORD WHICH WOULD INDICATE THAT NORTEL INDIA HABITUALLY EX ERCISES AUTHORITY TO CONCLUDE CONTRACTS FOR THE ASSESSEE OR NORTEL CANAD A. IN ORDER TO CONCLUDE THAT NORTEL INDIA CONSTITUTES A DEPENDENT AGENT PE, IT W OULD BE NECESSARY FOR THE AO TO NOTICE AT LEAST A FEW INSTANCES WHERE CONTRACTS HAD BEEN CONCLUDED BY NORTEL INDIA IN INDIA ON BEHALF OF OTHER GROUP ENTITIES. IN ABSENCE OF ANY SUCH EVIDENCE, THIS VIEW COULD NOT BE SUSTAINED. 24. INSOFAR AS THE PLACE OF TRANSFER OF TITLE IN TH E EQUIPMENT, WHETHER IT IS WITHIN OR WITHOUT INDIA, IN THE CASE OF NORTEL NETWORKS IN DIA INTERNATIONAL INC HONBLE HIGH COURT OBSERVED THAT, THERE SEEMS TO BE NO DISPUTE T HAT THE TITLE TO THE EQUIPMENT PASSED IN FAVOUR OF RELIANCE OVERSEAS. IN THE CASE ON HAND, IT IS THE OBSERVATION OF THE LD. COMMISSIONER THAT THOUGH IN TERMS OF AGREEMENT THE OWNERSHIP IN RESPECT OF EQUIPMENT WAS TRANSFERRED OUTSIDE, THE ASSESSEE HAS BEEN RENDERING SERVICES LIKE CUSTOMER TECHNICAL ASSISTANT SERVICE AND EMERGENCY TECHNICAL ASSISTANT SERVICE ON A 24-HOUR BASIS AND 7 DAYS A WEEK BASIS, AND THE SUPP LY CONTRACT DOES NOT END WITH THE LOADING OF THE EQUIPMENT ON THE SHIP BUT INCLUDES A NUMBER OF ACTIVITIES WHICH ARE CARRIED OUT IN THE INDIAN TERRITORY AND THE COMPENS ATION/REMUNERATION FOR THAT IS ALSO INCLUDED IN THE CONSIDERATION. ON THIS PREMISE LD. CIT(A) CONCLUDED THAT THE IT IS AN ARRANGEMENT BETWEEN THE ASSESSEE AND THE INDIAN ENTITY ACCORDING TO WHICH THEIR RISK AND RESPONSIBILITY OF BOTH ARE CONTERMINOUS. ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 8 25. IN FURTHERANCE OF THIS, LD. DR SUBMITTED THAT T HE BUSINESS OF SUPPLY OF GOODS INVOLVED THE BROAD STEPS LIKE GENERATION OF ENQUIRI ES FROM THE CUSTOMERS, OBTAINING LICENSE FROM DEPARTMENT OF TELECOM AND VARIOUS AGEN CIES, NETWORK SURVEY, PRE-BID NEGOTIATIONS, PRESENTATION AND CLARIFICATIONS, SIGN ING THE CONTRACT, MANUFACTURE OF HARDWARE AND SOFTWARE, ACTUAL SUPPLY, COMMISSIONING AND TESTING, TRAINING OF ENGINEERS OF INDIAN CUSTOMERS IN NETWORK MANAGEMENT AND AFTER SALES SERVICES WHICH INCLUDES REPAIR SERVICE, SUPPLY OF SPARES WIT HOUT EXTRA CHARGES TILL WARRANTY PERIOD, REMOVING SOFTWARE BUGS AND SUPPLY OF SOFTWA RE UPDATES WITHOUT EXTRA CHARGES TILL WARRANTY PERIOD. HE SUBMITS THAT SINCE MOST OF THE WORK IN EXECUTION OF THE SUPPLY CONTRACT INCLUDES THE STEPS TAKEN ON THE INDIAN SOIL, IT CANNOT BE SAID THAT ONLY WHEN THE PRODUCT WAS FINALLY ACCEPTED BY THE C USTOMER, THE TITLE IN THE EQUIPMENT PASSED TO THE INDIAN CUSTOMER AND SUCH PA RT OF CONTRACT TOOK PLACE ON INDIAN SOIL AND LIABLE FOR TAX. 26. AS COULD BE SEEN FROM THE ORDER OF THE HONBLE JURISDICTIONAL HIGH COURT, THIS ASPECT OF PASSING OF TITLE OF THE EQUIPMENT, WHETHE R IT IS IN INDIA OR OUTSIDE INDIA IN THE LIGHT OF THE FACT THAT THE EQUIPMENT WAS FINALL Y ACCEPTED BY THE CUSTOMER WHEN IT PASSES THE ACCEPTANCE TEST, WAS ALSO CONSIDERED AND IN PARAGRAPH NO. 47 THE HONBLE HIGH COURT OBSERVED THAT, - 47. AS NOTICED EARLIER, THERE SEEMS TO BE NO DISPUT E THAT THE TITLE TO THE EQUIPMENT PASSED IN FAVOUR OF RELIANCE OVERSEAS. HOWEVER, THE AO, CIT (A) AND ITAT DID NOT CONSIDER THE SAME TO BE RELEVANT AS ACCORDING TO TH EM, THE EQUIPMENT CONTINUED TO BE IN THE POSSESSION OF THE NORTEL GROUP TILL ITS FINAL ACCEPTANCE BY RELIANCE. IN OUR VIEW, EVEN IF IT IS ACCEPTED THAT THE EQUIPMENT SUP PLIED OVERSEAS CONTINUED TO BE IN POSSESSION OF NORTEL INDIA TILL THE FINAL ACCEPTANC E BY RELIANCE, THE SAME WOULD NOT IMPLY THAT THE ASSESSEES INCOME FROM SUPPLY OF EQU IPMENT COULD BE TAXED UNDER THE ACT. CLAUSE (A) OF EXPLANATION 1 TO SECTION 9(1 )(I) OF THE ACT POSTULATES THE PRINCIPLE OF APPORTIONMENT AND ONLY SUCH INCOME THA T CAN BE REASONABLY ATTRIBUTED TO OPERATIONS IN INDIA WOULD BE CHARGEABLE TO TAX UN DER THE ACT. THE POSITION IN ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES (SUPRA) WAS AL SO SIMILAR. THERE TOO, THE EQUIPMENTS WERE SUPPLIED OVERSEAS AND THE CONTRACTO R CONTINUED TO RETAIN CONTROL OF EQUIPMENT AND MATERIAL TILL THE PROVISIONAL ACCE PTANCE OF THE WORK OR THE TERMINATION OF THE CONTRACT. THE RELEVANT CLAUSE WH ICH WAS CONSIDERED BY THE SUPREME COURT IN THAT CASE IS AS UNDER:- 22.1 TITLE TO EQUIPMENT AND MATERIALS AND CONTRACT ORS EQUIPMENT: CONTRACTOR AGREES THAT TITLE TO ALL EQUIPMENT AND M ATERIALS SHALL PASS TO THE OWNER FROM THE SUPPLIER OR SUBCONTRACTOR PURSUAN T TO SECTION E OF EXHIBIT H (GENERAL PROJECT REQUIREMENTS AND PROCEDUR ES). CONTRACTOR SHALL, HOWEVER, RETAIN CASE, CUSTODY, AND CONTROL O F SUCH EQUIPMENT AND MATERIALS AND EXERCISE DUE CARE THEREOF UNTIL (A) P ROVISIONAL ACCEPTANCE OF THE WORK, OR (B) TERMINATION OF THIS CONTRACT, WHIC HEVER SHALL FIRST OCCUR. ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 9 SUCH TRANSFER OF TITLE SHALL IN NO WAY AFFECT THE O WNERS RIGHTS UNDER ANY OTHER PROVISION OF THIS CONTRACT. 27. BASING ON THE ABOVE FINDINGS, HONBLE JURISDICT IONAL HIGH COURT REACHED A CONCLUSION THAT THE INCOME OF THE ASSESSEE FROM SUP PLY OF EQUIPMENT WAS NOT CHARGEABLE TO TAX IN INDIA AND THE QUESTION RELATIN G TO THE ATTRIBUTION OF ANY PART OF SUCH INCOME TO ACTIVITIES IN INDIA DOES NOT ARISE. IT FURTHER HELD THAT THE INCOME FROM INSTALLATION, COMMISSIONING AND TESTING ACTIVITIES AS WELL AS ANY FUNCTION PERFORMED BY EXPATRIATE EMPLOYEES OF THE GROUP COMPANIES SECO NDED TO NORTEL INDIA WOULD BE SUBJECT TO TAX IN THE HANDS OF NORTEL INDIA AND THE SAME CANNOT BE CONSIDERED AS INCOME OF THE ASSESSEE THEREIN. 28. IN VIEW OF THE SIMILARITY OF THE FACTS AND QUES TIONS OF LAW INVOLVED IN THESE TWO MATTERS, WE ARE OF THE CONSIDERED OPINION THAT THE OBSERVATIONS OF THE HONBLE HIGH COURT IN THE CASE OF M/S NORTEL NETWORKS INDIA INTE RNATIONAL INC (SUPRA) ARE SQUARELY APPLICABLE TO THE FACTS OF THIS CASE ALSO, AND ACCO RDINGLY WE FIND THAT THE INCOME OF THE ASSESSEE WHEREIN FROM SUPPLY OF EQUIPMENT WAS NOT C HARGEABLE TO TAX IN INDIA AND THE QUESTION RELATING TO THE ATTRIBUTION OF ANY PAR T OF SUCH INCOME TO ACTIVITIES IN INDIA DOES NOT ARISE. INCOME FROM INSTALLATION, COM MISSIONING AND TESTING ACTIVITIES AS WELL AS ANY FUNCTION PERFORMED BY EXPATRIATE EMP LOYEES OF THE GROUP COMPANIES SECONDED TO NORTEL INDIA WOULD BE SUBJECT TO TAX IN THE HANDS OF NORTEL INDIA AND THE SAME CANNOT BE CONSIDERED AS INCOME OF THE ASSESSEE THEREIN. IN VIEW OF OUR FINDING, THE QUESTION OF ATTRIBUTION OF ANY INCOME TO THE AL LEGED PE DOES NOT ARISE. GROUNDS NO. 1 AND 1.1 IN ALL THE APPEALS OF THE ASSESSEE AR E, ACCORDINGLY, ALLOWED. 6. THERE BEING COMPLETE PARITY OF FACTS, RESPECTFUL LY FOLLOWING THE DECISION OF COORDINATE BENCH, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE HOLDING THAT THE INCOME OF THE ASSESSEE FROM SUPPLY OF EQUIPMENT IN INDIA WAS NOT CHARGEABLE TO TAX IN INDIA AND THEREFORE ANY SUCH I NCOME OR ANY PART THEREOF IS NOT ATTRIBUTABLE TO THE ACTIVITIES OF ASSESSEE IN I NDIA. THEREFORE, GROUNDS NOS. 1 & 2 IN ALL THE FOUR APPEALS OF THE ASSESSEE DESERVE TO BE ALLOWED. 7. SIMILAR IS THE POSITION WITH RESPECT TO SECOND ISSU E INVOLVED IN ASSESSEES APPEALS FOR A.YRS. 2006-07, 2007-08 AND 2009-10, WH ICH RELATES TO TAX LIABILITY FASTENED ON INCOME FROM SUPPLY OF SOFTWARE TO RELIA NCE AS ROYALTY INCOME UNDER THE PROVISIONS OF ARTICLE 12 OF THE INDIA SIN GAPORE TAX TREATY. THIS ISSUE HAS BEEN CHALLENGED BY THE ASSESSEE BY WAY OF GROUN DS NO. 3 IN APPEALS FOR THE ABOVE YEARS. THE ASSESSING OFFICER HELD THIS INCOME AS ROYALTY TAXABLE IN INDIA ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 10 IN THE HANDS OF ASSESSEE WHEREAS THE LD. CIT(A) HEL D IT AS BUSINESS INCOME TAXABLE IN INDIA. WE, HOWEVER, FIND THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE VIDE AFORESAID ORDER OF TRIBUNAL DATED 24.04.2018 (SUPRA) OBSERVING AS UNDER : 29. NEXT COMING TO SOFTWARE ISSUE, ASSESSEES CONTE NTION THAT IT HAS TRANSFERRED THE SUBJECT MATTER OF A COPYRIGHT, WHICH TANTAMOUNT TO SALE OF A PRODUCT, NOT COVERED WITHIN THE SCOPE OF ROYALTY, WHILE RETAINING WITH ITSELF THE COPYRIGHT PER SE. THE ASSESSING OFFICER HAS FAILED TO APPRECIATE THE ASSE SSEES CONTENTION THAT TRANSFER OF THE SUBJECT MATTER OF A COPYRIGHT IS ANALOGOUS TO T HE RIGHTS ACQUIRED BY THE PURCHASER OF A BOOK. THE PURCHASER OF THE BOOK DOES NOT ACQUI RE THE RIGHT TO EXPLOIT THE UNDERLYING COPYRIGHT. WHEN THE PURCHASER READS THE BOOK, HE ONLY ENJOYS ITS CONTENTS. SIMILARLY, THE USER OF THE COPYRIGHTED SO FTWARE I.E., THE INTEGRAL PART OF THE TELECOMMUNICATION EQUIPMENT, DOES NOT RECEIVE THE R IGHT TO EXPLOIT THE COPYRIGHT TO THE SOFTWARE HE ONLY ENJOYS THE PRODUCT IN THE NORM AL COURSE OF HIS BUSINESS SINCE THE SOFTWARE EMBEDDED IN THE TELECOMMUNICATION/ EQU IPMENT IS AN OPERATING PROGRAM. THE EQUIPMENT CANNOT FUNCTION WITHOUT THE PROGRAM AND THE PROGRAM CANNOT BE USED IN OTHER EQUIPMENT. THUS, THE SOFTWA RE DOES NOT HAVE ANY VALUE OF ITS OWN. THE USER IS ALLOWED TO USE THE SOFTWARE ONLY, WHEN HE USES THE EQUIPMENT. IT IS ALSO WELL SETTLED INTERNATIONALLY THAT CONSIDERATIO N FOR SUPPLY OF OPERATING SOFTWARE IS IN THE NATURE OF BUSINESS INCOME AND CANNOT BE SUBJ ECTED TO TAX AS ROYALTY. 30. LD. CIT(A), WHILE CONSIDERING THIS ISSUE, OBSER VED THAT THE DOMESTIC COPYRIGHT ACT IS TO BE APPLIED IN THIS CASE IN TERMS OF PARAG RAPH NO. 3(2) OF THE INDO-SINGAPORE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA), WHICH M AKES IT MANDATORY TO ADD AFTER THE DEFINITION OF THE WORD COPYRIGHT AS GIV EN IN THE LAW BY THE STATE APPLYING THE PROVISIONS OF THE TREATY WHICH IN THE INSTANT C ASE IS THE COPYRIGHT ACT, 1957. HE THEREFORE PROCEEDED TO OBSERVE THAT THE INDIAN COPY RIGHT ACTS 1957 OR ANY OTHER CIRCULAR OF CBDT DO NOT MAKE ANY DISTINCTION BETWEE N COPYRIGHT RIGHT OR COPYRIGHTED ARTICLE AND ALSO THAT THE SINGAPORE R EGULATIONS CANNOT BE EXTENDED TO THE INDIAN TERRITORY AS WITHIN THE TERRITORY OF SOV EREIGN THE LAWS PROMULGATED BY THE INDIAN SOVEREIGN SHALL APPLY. ON THIS PREMISE, CIT( A) DISTINGUISHED THE DECISIONS OF THE SPECIAL BENCH IN THE CASE OF MOTOROLA, (97 ITD 1) ON THE BASIS OF FACTS AND THE CASE IN TATA CONSULTANCY SERVICES DELIVERED BY THE HONB LE APEX COURT ON THE GROUND THAT SUCH A DECISION WAS PRONOUNCED ON THE BASIS OF THE SALES- TAX ACT AND NOT ON THE BASIS OF THE PROVISIONS OF THE INCOME TAX ACT. 31. BE THAT AS IT MAY, AN IDENTICALLY SIMILAR ISSU E HAD ARISEN IN THE CASE OF GROUP COMPANY I.E., NORTEL NETWORKS INDIA INTERNATI ONAL INC VS. ADIT IN ITA NOS. 3313 TO 3315/DEL/2012 WHEREIN A COORDINATE BENCH OF THIS TRIBUNAL WHILE PLACING RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF CIT VS. ZTE CORPORATION (2017) 392 ITR PAGE 80 (DEL.) HELD THAT, - 19. NOW COMING TO THE ISSUE RELATING TO TAXATION OF SOFTWARE IS CONCERNED, FOR ASSESSMENT YEAR 2006-07, THE ASSESSING OFFICER HAD SEPARATELY BROUGHT THE ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 11 RECEIPTS ON ACCOUNT OF SALE OF EMBEDDED SOFTWARE AS ROYALTY. LD. AR CONTENDED THAT THIS ISSUE ALSO STANDS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE ONCE IT WAS HELD THAT THE ASSESSEE WAS NOT TAXABLE UNDER THE PRO VISIONS OF SECTION 9 ITSELF. EVEN OTHERWISE, ACCORDING TO HIM, THE ISSUE OF EMBED DED SOFTWARE IN HARDWARE WHETHER COULD BE TAXED SEPARATELY AS ROYALTY ALREADY STANDS DECIDED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ZT E CORPORATION (2017) 392 ITR PAGE 80 (DEL.). LD. DR VEHEMENTLY RELIED ON THE ORD ERS OF THE AUTHORITIES BELOW. 20. IN CIT VS. ZTE CORPORATION (2017) 392 ITR PAGE 80 (DEL.) IT IS HELD AS FOLLOWS: '21. THE REFERENCE TO CLAUSES (A) AND (B) MEANS THA T ALL THE RIGHTS WHICH ARE IN LITERARY WORKS I.E. '(I) TO REPRODUCE THE WORK IN A NY MATERIAL FORM INCLUDING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS;(II ) TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT BEING COPIES ALREADY IN CIRCULATION;(I II) TO PERFORM THE WORK IN PUBLIC, OR COMMUNICATE IT TO THE PUBLIC;(IV) TO MAKE ANY CINEMATOGRAPH FILM OR SOUND RECORDING IN RESPECT OF THE WORK;(V) TO MAKE ANY TRANSLATION OF THE WORK;(VI) TO MAKE ANY ADAPTATION OF THE WORK;(VII) TO DO, IN RELATION TO A TRANSLATION OR AN ADAPTATION OF THE WORK, ANY OF TH E ACTS SPECIFIED IN RELATION TO THE WORK IN SUB-CLAUSES (I) TO (VI)' INHERE IN THE OWNER OF COPYRIGHT OF A COMPUTER PROGRAMME. THEREFORE, THE COPYRIGHT OWNER' S RIGHTS ARE SPELT OUT COMPREHENSIVELY BY THIS PROVISION. IN THE CONTEXT O F THE FACTS OF THIS CASE, THE ASSESSEE IS THE COPYRIGHT PROPRIETOR; IT MADE AVAIL ABLE, THROUGH ONE TIME LICENSE FEE, THE SOFTWARE TO ITS CUSTOMERS; THIS SOFTWARE W ITHOUT THE HARDWARE WHICH WAS SOLD, IS USELESS. CONVERSELY THE HARDWARE SOLD BY THE ASSESSEE TO ITS CUSTOMERS IS ALSO VALUELESS AND CANNOT BE USED WITHO UT SUCH SOFTWARE. THIS ANALYSIS IS TO SHOW THAT WHAT WAS CONVEYED TO ITS C USTOMERS BY THE ASSESSEE BEARS A CLOSE RESEMBLANCE TO GOODS- SIGNIFICANTLY ENO UGH, SECTION 14(1) TALKS OF SALE OR RENTAL OF A 'COPY'. THE QUESTION OF CONVEYI NG OR PARTING WITH COPYRIGHT IN THE SOFTWARE ITSELF WOULD MEAN THAT THE COPYRIGHT P ROPRIETOR HAS TO ASSIGN IT, DIVESTING ITSELF OF THE TITLE IMPLYING THAT IT HAS DIVESTED ITSELF OF ALL THE RIGHTS UNDER SECTION 14. THIS WOULD MEAN AN OUTRIGHT SALE OF THE COPYRIGHT OR ASSIGNMENT, UNDER SECTION 18 OF THE ACT. SECTION 16 OF THE COPYRIGHT ACT ENACTS THAT THERE CANNOT BE ANY OTHER KIND OF RIGHT TERMED AS 'COPYRIGHT'. 22. IN THE PRESENT CASE, THE FACTS ARE CLOSELY SIMI LAR TO ERICSON. THE SUPPLIES MADE (OF THE SOFTWARE) ENABLED THE USE OF THE HARDWA RE SOLD. IT WAS NOT DISPUTED THAT WITHOUT THE SOFTWARE, HARDWARE USE WAS NOT POS SIBLE. 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 NOM ENCLATURE (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 TRANSAC TION, 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.' 21. HAVING CONSIDERED THE SUBMISSIONS OF THE LD. AR IN THE LIGHT OF THE ORDERS OF THE AUTHORITIES BELOW AND THE ABOVE DECISION, WE FIND OUR SELVES IN AGREEMENT WITH THE ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 12 SUBMISSION MADE ON BEHALF OF THE ASSESSEE THAT THE EM BEDDED SOFTWARE IS NOT ROYALTY AND THE RECEIPTS ON ACCOUNT OF SALE OF EMBEDDED SOFT WARE CANNOT BE SEPARATELY BROUGHT TO TAX. 32. IT IS NOT THE CASE OF THE REVENUE THAT THE SOFT WARE INVOLVED IN THIS CASE IS INDEPENDENT OF THE FUNCTIONING OF THE HARDWARE. REV ENUE DOES NOT DISPUTE THE FACT THAT IN THIS MATTER THE HARDWARE AND SOFTWARE ARE I NTERDEPENDENT IN THE SENSE THAT HARDWARE IS USELESS WITHOUT THIS PARTICULAR SOFTWAR E AND THE SOFTWARE CANNOT BE USED IN ANY HARDWARE OTHER THAN THE ONE FOR WHICH IT IS PERMITTED TO BE USED. SIMILAR ARE THE FACTS IN THE CASE OF NETWORKS INDIA INTERNATION AL INC. FACTS BEING SIMILAR, THE ABOVE DECISION IS APPLICABLE TO THE PRESENT CASE AL SO. WHILE RESPECTFULLY FOLLOWING THE SAME WE HOLD THAT THE PAYMENT FOR THE EMBEDDED SOFT WARE IS NOT ROYALTY AND THE RECEIPTS ON ACCOUNT OF SALE OF EMBEDDED SOFTWARE CA NNOT BE SEPARATELY BROUGHT TO TAX. GROUNDS NO. 2 AND 2.1 IN ALL THE APPEALS ARE, ACCORDINGLY, ALLOWED. 44. IN VIEW OF OUR CONCLUSION THAT THE ASSESSEE'S I NCOME FROM SUPPLY OF EQUIPMENT WAS NOT CHARGEABLE TO TAX IN INDIA, THE R ECEIPTS ON ACCOUNT OF SALE OF EMBEDDED SOFTWARE CANNOT BE SEPARATELY BROUGHT TO T AX AND THAT THE INCOME FROM PROVIDING TRAINING SERVICES CANNOT BE TREATED AS FE ES FOR TECHNICAL SERVICES UNDER THE PROVISIONS OF ARTICLE 12(5)(A) OF THE DTAA, THE QUE STION RELATING TO ATTRIBUTION OF ANY PART OF SUCH INCOME TO ACTIVITIES IN INDIA DOES NOT ARISE. IN VIEW OF OUR CONCLUSION THAT THE ASSESSEE DOES NOT HAVE A PE IN INDIA, THE QUEST ION OF ATTRIBUTION OF ANY INCOME TO THE ALLEGED PE ALSO DOES NOT ARISE. 8. RESPECTFULLY FOLLOWING THE ABOVE DECISION REACHE D BY COORDINATE BENCH IN THE IDENTICAL FACTS AND CIRCUMSTANCES OF THE CAS E, WE HOLD THAT THE PAYMENT FOR THE EMBEDDED SOFTWARE IS NOT SEPARATELY TAXABLE IN THE HANDS OF ASSESSEE IN INDIA EITHER AS ROYALTY OR AS BUSINESS INCOME. ACCO RDINGLY, GROUND NO. 3 IN THESE APPEALS OF THE ASSESSEE DESERVE TO BE ALLOWED AND GROUND NO. 2 IN APPEAL OF THE REVENUE FOR A.Y. 2006-07 RAISED IN THIS REGA RD HAS TO BE DISMISSED. 9. REGARDING THE ISSUE RAISED BY THE ASSESSEE VIDE GROUND NOS. 4 IN A.Y. 2006-07, GROUND NO. 6 IN A.Y. 2007-08 AND GROUND NO . 5 IN A. YRS. 2009-10 AND 2010-11, WE FIND THAT INITIATION OF PENALTY PROCEED INGS CHALLENGED BY THE ASSESSEE IS PREMATURE AND IT CANNOT BE ADJUDICATED IN THESE QUANTUM APPEALS. ACCORDINGLY, THESE GROUNDS OF ASSESSEES APPEALS AR E LIABLE TO BE DISMISSED. ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 13 10. THE NEXT ISSUE RAISED BY ASSESSEE IN APPEAL FOR A.Y. 2007-08 PERTAINS TO NON-GRANT OF CREDIT TO THE ASSESSEE FOR THE TAXES D EDUCTED AT SOURCE WHILE COMPUTING THE DEMAND PAYABLE. IN THIS CONTEXT, WE D IRECT THE ASSESSING OFFICER TO GIVEN ELIGIBLE CREDIT OF TDS, AS PER RULES, AFTE R VERIFICATION. 11. THE LAST ISSUE RAISED BY THE ASSESSEE IN ITS AP PEALS FOR A. YRS. 2007-08 TO 2010-11 (GROUND NO. 5 & 4) AND BY REVENUE IN APPEAL FOR A.Y. 2006- 07(GROUND NO. 7) IS WITH RESPECT TO LEVY OF INTERES T U/S. 234B OF THE ACT. THIS ISSUE, BEING CONSEQUENTIAL IN NATURE, THE ASSESSING OFFICER IS DIRECTED TO ACT ACCORDINGLY AS PER RULES. 12. THE ONLY ISSUE WHICH LEFT FOR CONSIDERATION IS WITH RESPECT TO ALLOWABILITY OF DEDUCTION OF RESEARCH AND DEVELOPMENT EXPENSES W HILE COMPUTING THE TAXABLE INCOME OF THE ASESSEES ALLEGED PE IN INDIA . THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER IN THIS REGARD IN APP EAL FOR A.Y. 2006-07 VIDE GROUND NO. 1. WE FIND THIS ISSUE ALSO COVERED BY TH E DECISION OF TRIBUNAL DATED 24.04.2018 (SUPRA), WHEREIN THE COORDINATE BENCH IN THE SIMILAR CIRCUMSTANCES HAS DISMISSED SUCH GROUNDS OF REVENUE VIDE PARA NO. 42 AND 43 OF THAT ORDER, OBSERVING AS UNDER : 38. LASTLY, IN RESPECT OF THE R&D EXPENSES, RECORD REVEALS THAT SUBSEQUENT TO THE ORDER DATED 27/02/2009 PASSED BY THE CITA, WHILE GI VING EFFECT TO THE SAID ORDER, AO CONTINUED TO TAKE GROSS PROFIT MARGINS OF NORTEL CA NADA FOR COMPUTING THE TOTAL TAX AND INTEREST LIABILITY. CHALLENGING THE SAME ASSESS EE PREFERRED AN APPEAL AND BY ORDER DATED 22/12/2009, CIT(A) DIRECTED THAT THE AD JUSTED NET PROFIT MARGINS OF NORTEL CANADA NEED TO BE APPLIED WHILE COMPUTING TA XABLE INCOME OF THE ALLEGED PE OF NORTEL SINGAPORE THAT IS THE EXPENSES RELATABLE TO THE PE MADE TO BE ALLOWED IN SOME PROPORTION WHICH EXPENSES OF NORTEL CANADA BEA R TO ITS REVENUES. PURSUANT TO THE ABOVE THE ASSESSEE FILED COMPUTATIONS OF ITS RE VISED TAXABLE INCOME AND TAX LIABILITY CLAIMING SEVERAL DEDUCTIONS INCLUDING THE RESEARCH AND DEVELOPMENT EXPENSES. ACCORDING TO THE ASSESSEE THEY ARE ENGAGE D IN SUPPLY OF HIGHLY ADVANCED NETWORK EQUIPMENT AS SUCH THE R&D EXPENSES ARE PRIM A FACIE INCLUDED TOWARDS EARNING INCOME FROM SUPPLY OF TELECOM EQUIPMENT AND ONCE AN EXPENSE ON ACCOUNT ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 14 OF SUPPLY OF SUCH NETWORK EQUIPMENT IS HELD BY THE CIT(A), IT BECOMES IMPERATIVE TO ALLOW DEDUCTION FOR SUCH R&D EXPENSES WHICH ARE INC URRED FOR THE PURPOSE OF EARNING INCOME FROM SUPPLY OF NETWORK EQUIPMENT. HO WEVER LD. AO DID NOT ALLOW THE SAME, AS SUCH THE ASSESSEE PREFERRED APPEALS NO. 80 TO 84/09-10. LD. CITA BY ORDER DATED 20/01/2011 ALLOWED THE APPEAL AND DIRECTED TH E AO TO ALLOW R&D EXPENSES TO THE ASSESSEE ON PROPORTIONATE BASIS. CHALLENGING TH IS DIRECTION REVENUE PREFERRED APPEALS NOS.2172 TO 2176/DEL/2011. 39. IT IS THE ARGUMENT OF THE LD. DR THAT THE RESEA RCH AND DEVELOPMENT EXPENSES ARE REVENUE IN NATURE, AS SUCH NO DEDUCTION COULD B E ALLOWED IN RESPECT OF THE SAME BUT THE CIT(A) WITHOUT GIVING AN OPPORTUNITY TO THE AO TO VERIFY SUCH EXPENSES, ALLOWED DEDUCTION, AS SUCH, THE IMPUGNED FINDING NE EDS TO BE REVERSED. 40. IT IS THE ARGUMENT OF THE LD. AR THAT NO REASON S HAVE BEEN GIVEN BY THE LD AO AS TO WHY THIS EXPENSES WERE NOT ALLOWED WHILE ALLO WING THE SELLING AND ADMINISTRATIVE EXPENSES. 41. IN THE REMAND REPORT DATED 08/11/2010, IT IS ST ATED THAT THE RESEARCH AND DEVELOPMENT EXPENSES ARE AVAILABLE ONLY IF IT IS SH OWN DURING THE COURSE OF ASSESSMENT; THAT SUCH EXPENSES ARE BEEN INCURRED ON LY ENDED EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND EARNING INCOME THAT IS BEING TAX, AND ASSESSEE HAD NOT TAKEN ANY STEPS IN THIS DIRECTION. FURTHER IT IS ST ATED BY THE LD. AO THAT WHILE GIVING AFFECTED TO THE APPEAL ORDER IS NOT OPEN FOR HIM TO START ANY NEW LINE OF INQUIRY AS TO THE ALLOWABILITY OF ANY EXPENSE. YOU ADMITTED THAT THIS EXPENSES ARE NOT VERIFIED BY HIM AND IF DESIRED HE WILL CONDUCT SUCH ENQUIRY. 42. HOWEVER, CIT(A) NOTICED THAT NO REASON FOR THIS ALLOWANCE OF R&D EXPENSES WAS GIVEN EITHER IN THE ASSESSMENT ORDER PASSED UND ER SECTION 143(3) OR AT THE TIME OF APPEAL EFFECT ORDERS; THE ASSESSEE IS ENGAGED I N THE BUSINESS OF SUPPLY OF HIGHLY ADVANCED THE TELECOM NETWORK EQUIPMENT TO TELECOM O PERATORS AROUND THE GLOBE AS SUCH THE R&D EXPENDITURE CANNOT BE DENIED TO BE A B USINESS NECESSITY FOR CARRYING OUT INNOVATION AND DEVELOPMENT OF IMPROVED PRODUCTS TO KEEP UP WITH THE CHANGES IN THE TECHNOLOGY; THE R&D EXPENSES APPEAR IN THE S AME SET OF ACCOUNTS OF THE ASSESSEE FROM WHICH THE SALES FIGURES OF THE EQUIPM ENT HAVE BEEN ADOPTED AND A GP RATE HAS ALSO BEEN APPLIED ON THE BASIS OF THE SAME ACCOUNTS; AND THERE ARE SEVERAL CASES OF FOREIGN, EQUIPMENT MANUFACTURERS AND SUPPL IERS INCLUDING NOKIA CORPORATION, BEING ESPECIALLY IN THE DEPARTMENT AND IN ALL SUCH CASES R&D EXPENSES ARE BEING ALLOWED AND NET PROFIT RATIO HAS BEEN ADO PTED FROM GLOBAL ACCOUNTS OF THE ASSESSEE FOR THE PURPOSE OF ATTRIBUTION OF PROFITS WHICH MEANS R&D EXPENSES HAVE BEEN ALLOWED IN THAT CASE ON THE BASIS OF THE GLOBA L ACCOUNTS. 43. WE DO NOT SEE ANY ILLEGALITY OR IRREGULARITY IN THE IMPUGNED ORDERS OF THE LD. CITA. BE THAT AS IT MAY, IN GROUNDS NO 1, 1.1, 2, A ND 2.1 IN ALL THE APPEALS OF THE ASSESSEE, IT IS FOUND THAT INCOME FROM THE SUPPLY O F EQUIPMENT IS NOT TAXABLE IN INDIA. IN THE CIRCUMSTANCES WE DO NOT FIND ANY MERIT IN TH E CONTENTION OF THE REVENUE AND ACCORDINGLY DISMISS THE GROUNDS OF THESE APPEALS. ITA NOS. 5482, 3240, 3241/DEL/2012 & 553/DEL/2015 15 13. IN VIEW OF THESE FINDINGS OF THE TRIBUNAL, AND FIND NO CONTRARY MATERIAL ON RECORD, WE DISMISS THESE GROUNDS OF APPEAL OF TH E REVENUE DESERVE TO BE DISMISSED. THE LD. DR COULD NOT BE ABLE TO PLACE AN Y MATERIAL ON RECORD THAT THE DECISION REACHED BY THE TRIBUNAL IN THE AFORESAID C ASE OF ASSESSEE HAS BEEN REVERSED OR SET ASIDE BY HONBLE HIGHER COURTS TO T AKE A CONTRARY VIEW. ACCORDINGLY, ALL THE APPEALS OF THE ASSESSEE DESERV E TO BE PARTLY ALLOWED AND THAT OF THE REVENUE DESERVES TO FAIL. 14. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH MAY, 2018. SD/- SD/- (BHAVNESH SAINI) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 TH MAY, 2018 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI