ZTE Corporation, V. ADIT, New Delhi

ITA 5870/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7523 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 11-04-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 22-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJEEV SHARMA
• Keywords: Business income; Transfer pricing; Double taxation relief; Permanent establishment; Advance ruling; Initiation of penalty proceedings; Wholly owned subsidiary; Tax effect
• Section: 143(3); 92E; 133A; 234B; 32; 148; 12; 90; 139

Judgement Text

1 ITA 5870/DEL/12 & ORS ZTE CORPORATION IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI: JUDICIAL MEMBER ITA NOS. 5870/DEL/2012 (AY: 2004-05) 5871/DEL/2012 (AY: 2005-06) 5872/DEL/2012 (AY: 2006-07) 5873/DEL/2012 (AY: 2007-08) 5874/DEL/2012 (AY: 2008-09) 1109/DEL/2014 (AY: 2009-10) ZTE CORPORATION VS. ADDL. DIRECTOR OF INCOME-TA X, ZTE PLAZA, KEJI ROAD SOUTH, RANGE-3, INTERNATIONAL TAXATION, HI-TECH INDUSTRIAL PARK, NEW DELHI. NANSHAN DISTRICT, SHENZHEN P.R. CHINA-518057. ZTE CORPORATION 6 TH FLOOR, TOWER B, BUILDING 10, DLF CYBER CITY, PHASE-II, GURGAON, HARYANA. PAN: AAACZ 4115 A AND ITA NOS. 5974/DEL/2012 (AY: 2004-05) 5975/DEL/2012 (AY: 2005-06) 5976/DEL/2012 (AY: 2006-07) 5977/DEL/2012 (AY: 2007-08) 5978/DEL/2012 (AY: 2008-09) ADIT, RANGE-3, VS. ZTE CORPORATION (INTERNATIONAL TAXATION) NEW DELHI. ( APPELLANT ) (RESPONDENT) ASSESSEE BY : SHRI DEEPAK CHOPRA ADV. SHRI HARPREET AJMANI ADV. SHRI ROHAN KHARE ADV. REVENUE BY : SHRI SANJEEV SHARMA CIT(DR) DATE OF HEARING : 12/04/2016. DATE OF ORDER : 30/05/2016. 2 ITA 5870/DEL/12 & ORS. ZTE CORPORATION O R D E R PER BENCH: THE ASSESSEE AS WELL AS THE REVENUE ARE IN CROSS AP PEALS FOR A.YS. 2004-05 TO 2008-09. THE ASSESSEE HAS ALSO PREFERRED APPEAL FOR AY 2009-10. SINCE THESE APPEALS INVOLVE IDENTICAL ISSUES FOR AD JUDICATION, THEREFORE, ALL THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DIS POSED OF BY A COMPOSITE ORDER FOR THE SAKE OF CONVENIENCE. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A TAX RESIDENT OF REPUBLIC OF CHINA AND IS ENGAGED IN THE BUSINESS OF PROVIDING TELECOM EQUIPMENTS. DURING THE PREVIOUS YEAR, RELEVANT TO T HE SUBJECT ASSESSMENT YEAR, THE ASSESSEE WAS ENGAGED IN SUPPLY OF TELECOM EQUIPMENTS TO INDIAN TELECOM OPERATORS. THE ASSESSEE WAS ALSO ENGAGED IN SUPPLY OF MOBILE HAND SET TO VARIOUS CUSTOMERS IN INDIA. THE ASSESSEE DID NOT FILE ITS RETURN OF INCOME AS PER THE PROVISIONS OF SECTION 139 OF THE I.T. ACT ON THE GROUND THAT IT HAD NO PE IN INDIA UNDER THE PROVISIONS OF ARTIC LE 5 OF THE INDO-CHINA DTAA. ON 6.10.2009 A SURVEY U/S 133A WAS UNDERTAKEN AT THE OFFICE PREMISES OF ZTE TELECOM INDIA PVT. LTD. AT 6 TH FLOOR, TOWER B, BUILDING NO. 10, PHASE II, GURGAON AND NEW MUMBAI, THANE. AO HAS OBSERVED THAT DURING THE COURSE OF SURVEY PROCEEDINGS SEVERAL INC RIMINATING DOCUMENTS WERE FOUND, COPIES OF WHICH WERE MADE AND INVENTORI ZED. STATEMENT OF 3 ITA 5870/DEL/12 & ORS. ZTE CORPORATION VARIOUS SENIOR EXECUTIVES INCLUDING MR. HUANG DABIN , CEO OF ZTE INDIA, DR. DALIP KUMAR GHOSH, CMD ZTE INDIA, SHRI HEMANT KAMBOJ DY. DIRECTOR SALES & MARKETING AND MR. ROCKY (CHINESE N AME MR. GAN YONG) IN-CHARGE OF MARKETING, WERE ALSO RECORDED. ON THE BASIS OF THESE DOCUMENTS AND STATEMENTS, THE AO WAS OF THE OPINION THAT ASSE SSEE HAD A BUSINESS CONNECTION IN INDIA AND ITS BUSINESS HAD BEEN CARRI ED THROUGH ITS PE IN INDIA AND FURTHER INCOME HAD ACCRUED TO THE ASSESSEE DURI NG THE RELEVANT YEAR FROM SUCH BUSINESS. ACCORDINGLY, NOTICE U/S 148 WAS ISSU ED ON 23.10.2009 REQUIRING THE ASSESSEE TO FILE ITS RETURN OF INCOME . THE ASSESSEE FILED ITS RETURN DECLARING NIL INCOME IN PURSUANCE TO THE NOT ICE U/S 148. ASSESSEE IN NOTES TO THE STATEMENT SHOWING COMPUTATION OF INCO ME HAD STATED THAT SINCE IT DID NOT HAVE PE IN INDIA, ACCORDINGLY, THE REVENUES WERE NOT TAXABLE AS BUSINESS PROFITS. THE ASSESSEE FILED DETAILED SU BMISSIONS VIDE LETTER DATED 29.12.2009 AND 31.12.2009. THE CONTENTS OF THESE LE TTERS HAVE BEEN REPRODUCED IN PARA 7.1 AND 7.2 OF THE ASSESSMENT OR DER. THE ASSESSEE GAVE DETAILED REASONS THAT IT HAD NO FIXED BASE PE, NO D EPENDENT AGENCY PE IN INDIA, NO INSTALLATION PE AND NO SERVICE PE. THE AS SESSEE HAD ALSO SUBMITTED THAT NO PART OF PROFITS OF SUPPLIES COULD BE ATTRIB UTED TO THE INDEPENDENT PE UNLESS IT WAS ESTABLISHED BY THE DEPARTMENT THAT TH E SUPPLIES WERE NOT AT ARMS LENGTH PRICE. THE AO AFTER EXAMINING VARIOUS STATEMENTS, WHICH 4 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ESTABLISHED THE OPERATIONS BEING CARRIED ON IN INDI A AND VARIOUS DOCUMENTS, FOUND IN COURSE OF SURVEY, CONCLUDED THAT THE ASSES SEE WAS CARRYING ON BUSINESS IN INDIA THROUGH FIXED BASE FOR SUFFICIENT LY LONG PERIOD AND, THEREFORE, THESE FIXED PLACES HAD BECOME PERMANENT IN NATURE. THE AO FINALLY CONCLUDED THAT ASSESSEE HAD FIXED PLACE PE , INSTALLATION PE, DEPENDENT AGENCY PE IN INDIA AND, THEREFORE, THE RE VENUES FROM THE SUPPLY OF TELECOM EQUIPMENT AND MOBILE HAND SETS WERE TO B E TAXED IN INDIA AS BUSINESS PROFITS. HE, THEREFORE, PROCEEDED TO DETER MINE THE PROFITS ATTRIBUTABLE TO THE ASSESSEES PE IN INDIA. BEFORE COMPUTING THE PROFITS HE POINTED OUT THAT THE PROFITS TO THE PE IN INDIA HAV E TO BE COMPUTED SEPARATELY IN RESPECT OF HARDWARE AND SOFTWARE COMPONENTS OF T HE TELECOM EQUIPMENTS AND THE MOBILE HANDSETS. AS REGARDS THE TAXATION OF THE REVENUES FROM SOFTWARE, HE POINTED OUT THAT THE SAME WAS TAXABLE AS ROYALTY. 3. AS REGARDS THE ATTRIBUTION OF PROFITS TO THE PE IN INDIA IN RESPECT OF HARDWARE COMPONENTS OF THE TELECOM EQUIPMENTS AND T HE MOBILE HANDSETS AS BUSINESS PROFITS UNDER ARTICLE 7 OF THE INDO-CHINA DTAA, THE AO OBSERVED THAT IN COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE S UBMITTED THAT IT DOES NOT MAINTAIN ANY SEPARATE BOOKS OF A/C FOR INDIAN OPER ATIONS. HE, THEREFORE, INVOKED RULE 10 OF THE INCOME-TAX RULES FOR DETERM INING THE INCOME OF THE ASSESSEE. THE AO REFERRED TO THE DECISION OF IT AT DELHI (SPECIAL BENCH) 5 ITA 5870/DEL/12 & ORS. ZTE CORPORATION IN THE CASE OF MOTROLLA VS. DCIT 95 ITD 269 (IN RES PECT OF NOKIA CORPORATION, WHICH WAS ALSO INVOLVED IN SUPPLY OF T ELECOM INDIA WORK EQUIPMENT TO INDIAN CUSTOMERS) AND POINTED OUT THAT ITAT DELHI SPECIAL BENCH HAD AFFIRMED THAT NOKIA HAD PE IN INDIA AND H AD ATTRIBUTED 20% OF THE NET PROFIT TO THE PE OF NOKIA IN INDIA . THE AO ATTRIBUTED THE PROFITS TO PE AS UNDER: 9.3 IN CHINA, THE FINANCIAL YEAR IS FROM JANUARY TO DECEMBER WHEREAS IN INDIA IT IS FROM APRIL TO MARCH. IN VIEW OF THIS, WEIGHTED AVERAGE NET OPERATING PROFIT HAS BEEN APPL IED TO THE SALES REVENUES TO ARRIVE AT THE PROFITS MADE BY THE ASSESSEE FROM TELECORN EQUIPMENT AND MOBILE PHONE HANDSETS T O INDIAN CUSTOMERS. 20% OF SUCH PROFITS ARE CONSIDERED ATTRI BUTABLE TO THE PE OF THE ASSESSEE IN ACCORDANCE WITH THE PROVI SIONS OF V ARTICLE 7 READ WITH ARTICLE 5 OF THE INDIA-CHINA DT AA. 10. IN VIEW OF THE SAME, COMPUTATION OF INCOME IN THE PRESENT CASE IN RESPECT OF THE HARDWARE AND MOBILE HANDSETS IS AS FOLLOWS: AS PER THE DETAILS SUBMITTED BY THE ASSESSEE, IT HA S MADE THE FOLLOWING SALES IN INDIA: (I) SALE OF HANDSETS - USD 112,000 (RS.49,24,640 @ RS.43.97) (II) SALE OF TELECOM EQUIPMENTS - USD 302,843.31 (RS.1,33,16,020) *SALE OF HARDWARE COMPONENT = 56.14% OF RS.1,33,16, 020 = RS.74,75,614 (*AS PER THE ASSESSEE'S SUBMISSION THE PERCENTAGE O F SOFTWARE COMPONENT FORMING PART OF THE TELECOM EQUIPMENT IS- AY. PERCENTAGE 2010-11 54.87% 2009-10 55.71% 2008-09 48.95% 6 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 2007-08 15.92% THE AVERAGE PERCENTAGE OF THE SOFTWARE COMPONENT IN THE TELECOM EQUIPMENT WORKS OUT TO 43.86%, WHICH HAS BE EN TAKEN FOR THE RELEVANT YEAR. THEREFORE, THE HARDWARE COMP ONENT OF THE TELECOM EQUIPMENT WORKS OUT TO 56.14%). THE TOTAL SALES MADE IN INDIA IN THE RELEVANT YEAR IS RS.1,24,00,254/-. (I+II) AS PER THE GLOBAL FINANCIAL STATEMENTS OF ZTE CHINA , THE NET OPERATING PROFIT OF THE ASSESSEE FOR THE CALENDAR Y EAR 2003 IS 7.32% AND FOR 'THE CALENDAR YEAR 2004 IS 6.36%. FOR THE PERIOD RELEVANT TO FINANCIAL YEAR 2003-04, APPLYING THE AB OVE BASIS, THE NET OPERATING PROFIT (BY TAKING WEIGHTED AVERAG E OF THE NET PROFITS OF THE TWO CALENDAR YEARS) IS COMPUTED AS F OLLOWS: (7.32*9+6.36*3)/12 = 7.08% REVENUES EARNED FROM INDIAN OPERATIONS IS - RS. 1 ,24,00,254 OPERATING PROFIT @7.08% AS PER THE GLOBAL FINANCIAL STATEMENT SUBMITTED BY THE ASSESSEE RS. 8,77,938 ATTRIBUTION RATE APPLIED 20% PROFITS ATTRIBUTED TO ASSESSEE'S PE IN INDIA RS. 1,75,588 THEREFORE, THE INCOME OF THE ASSESSEE FROM SALE OF HARDWARE COMPONENT OF THE TELECOM EQUIPMENTS AND HANDSETS, WHICH IS ATTRI BUTABLE TO THE PE IN INDIA IS RS.1,75,588/-. 4. AS REGARDS TAXATION OF THE SOFTWARE EMBEDDED IN THE TELECOM EQUIPMENT OR PROVIDED TO THE CUSTOMERS SEPARATELY, THE AO HAD SHOW CAUSED THE ASSESSEE AS TO WHY THE PAYMENTS RECEIVED OR ATTRIBUTED FOR THE SUPPLY OF SOFTWARE EMEDDED IN THE TELECOM EQUIPMENT OR SOFTWARE SUPPLIED TO THE VARIOUS CUSTOMERS IN INDIA SHOULD NOT BE TRE ATED AS ROYALTY U/S 9(1)(VI) OF THE ACT AND ALSO UNDER ARTICLE 12(3) OF THE DTAA BETWEEN INDIA AND 7 ITA 5870/DEL/12 & ORS. ZTE CORPORATION CHINA. THE ASSESSEE HAD ADVANCED FOLLOWING SUBMISSI ONS, WHICH HAVE BEEN SUMMARIZED IN PARA 11.1 OF HIS ORDER AS UNDER: THE ASSESSEE HAS MADE SUBMISSION IN THIS REGARD VID E LETTER DATED 04TH JANUARY, 2009 AND THE SAME IS SUMMARIZED AS UNDER: (A) FACTUAL SUBMISSION - SOFTWARE IS SOLD IN THE SAME MANNER AS TELECOM EQUIPMENT, - THE SOFTWARE IS AN INTEGRAL PART OF THE TELECOM EQUIPMENT WHICH FACILITATES RUNNING OF THE SAID EQUIPMENT. - THE SUBJECT SOFTWARE HAS NO INDEPENDENT VALUE OF IT S OWN. - NO COPYRIGHTS IN THE SOFTWARE ARE TRANSFERRED TO TH E CUSTOMERS. - NO ACCESS TO THE 'SOURCE COSIES' IN THE SOFTWARE IS GRANTED TO THE CUSTOMER. - THE PAYMENT FOR SOFTWARE IS NOT RELATED TO THE PRODUCTIVITY, USE OR NUMBER OF SUBSCRIBERS. - THE CUSTOMERS DO NOT HAVE THE RIGHT TO COMMERCIALLY EXPLOIT THE SOFTWARE. - THE SUPPLY OF SOFTWARE IS IN THE NATURE OF TRANSF ER OF COPYRIGHTED ARTICLE' AND NOT TRANSFER OF 'A COPYRIG HTED RIGHT'. (B) LEGAL SUBMISSIONS REVENUE FROM SALE OF COMPUTER SOFTWARE IS IN THE NA TURE OF PAYMENT FOR THE USE OF COPYRIGHTED ARTICLE AS AG AINST PAYMENT FOR USE OF A COPYRIGHT IN THE SOFTWARE AND HENCE SUCH PAYMENT SHALL NOT CONSTITUTE ROYALTY UNDER IND IA- CHINA TAX TREATY. IN THIS REGARD, THE ASSESSEE HAS RELIED ON, THE DEF INITION OF THE TERM 'COPYRIGHT' AS GIVEN U/S 14 OF THE INDI AN COPYRIGHT ACT, 1957. THE ASSESSEE HAS FURTHER RELIE D ON THE DECISION OF DELHI SPECIAL BENCH IN THE CASE OF MOTOROLA INDIA VS DCIT (95 ITD 269). THE ASSESSEE H AS 8 ITA 5870/DEL/12 & ORS. ZTE CORPORATION FURTHER GONE ON TO RELY ON A HOST OF JUDICIAL PRONOUNCEMENT AND ALSO ON THE RELEVANT PART OF THE OECD COMMENTARY AND COMMENTARY OF PHILLIP BAKER. 5. THE AO ALSO REFERRED TO THE DECISION OF THE AUT HORITIES FOR ADVANCE RULING IN THE CASE OF WORLEY PARSONS PTY. LTD. RELI ED FOR THE PROPOSITION THAT THE PAYMENTS FOR SOFTWARE SHOULD BE TAXED ON CASE B ASIS, SINCE THE SAME WERE NOT EFFECTIVELY CONNECTED TO THE PE OF THE ASS ESSEE IN INDIA. THE ASSESSEE IN ITS REPLY DISTINGUISHED THIS DECISION O N FACTS AND POINTED OUT THAT AAR HELD SO SINCE NO MATERIAL EVIDENCE WAS PLACED B Y THE ASSESSEE TO DEMONSTRATE THE ROLE PLAYED BY THE PE UNDER THE PMS CONTRACT AND ITS RELATIONSHIP WITH THE ROYALTY REVENUE EARNED UNDER THE BE &P CONTRACT. IT WAS POINTED OUT THAT THE APPLICANT WAS NOT ABLE TO DEMONSTRATE EFFECTIVE CONNECTION BETWEEN THE B&P REVENUE AND PE UNDER TH E PMS CONTRACT. HOWEVER, IN THE CASE OF ASSESSEE SOFTWARE WAS INTEG RAL AND ESSENTIAL PART OF THE TELECOM EQUIPMENT THAT WAS SUPPLIED UNDER THE T ERMS OF CONSOLIDATED OFFSHORE SUPPLY CONTRACT. THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEES CONTENTION. HE EXAMINED THE VARIOUS TERMS AND CONDI TIONS OF AGREEMENT BETWEEN THE ASSESSEE AND SPICE MOBILE PVT. LTD. AND CONCLUDED AS UNDER: FROM THE ABOVE AGREEMENTS THE FOLLOWING CRUCIAL FAC TS EMERGE: - THE SOFTWARE HAS NOT BEEN SOLD BUT LICENSED TO THE CUSTOMERS. 9 ITA 5870/DEL/12 & ORS. ZTE CORPORATION - THERE IS SEPARATE CONSIDERATION FOR THE SOFTWARE . .THIS IS THE REASON WHY THE ASSESSEE COULD SUBMIT DETAILS OF PAY MENTS RECEIVED IN LIEU OF SUPPLY OF SOFTWARE FOR F.YS. 20 06-07, 2007-08, 2008-09 AND 2009-10. - THE SOFTWARE IS SOMETIMES INDEPENDENTLY SUPPLIED TO THE CUSTOMERS. - THE CUSTOMER HAS BEEN GIVEN THE RIGHT TO USE THE SO FTWARE FOR THE PURPOSE OF ITS BUSINESS THEREBY ASSIGNING T HE USER THE RIGHT TO COMMERCIALLY EXPLOIT THE SOFTWARE. - THE TERM 'COPYRIGHTED ARTICLE' IS NOT DEFINED IN TH E INDIAN COPYRIGHT ACT. THE ASSESSEE HAS ASSIGNED THE CUSTOM ERS 'THE RIGHT TO USE THE SOFTWARE' . THE ASSIGNMENT OF SUCH RIGHTS DOES INDICATE THAT THE CUSTOMERS HAVE BEEN GIVEN TH E 'RIGHT TO USE THE COPYRIGHTED RIGHT IN THE SOFTWARE'. ' - THE RISK AND TITLE PASSED TO THE CUSTOMER IN THE CA SE OF HARDWARE BUT NOT IN THE CASE OF SOFTWARE. AS PER TH E TERMS OF THE CONTRACT BETWEEN THE ASSESSEE AND THE CUSTOMERS , THE BUYER HAS NO TITLE OR OWNERSHIP RIGHTS. BUYER CAN N EITHER LICENSE NOR SELL NOR ALIENATE OR PART WITH ITS POSS ESSION. IN VIEW OF THIS THE SAID TRANSACTION IS NOT A SALE AS PER SALE OF GOODS ACT BUT IT IS A LIMITED RIGHT TO USE THE SOFT WARE AND HENCE THE PAYMENT FOR THE SAME IS IN THE FORM OF RO YALTY . - SINCE THE AGREEMENT SPECIFICALLY PROVIDES FOR THE L ICENSING OF THE SOFTWARE, SUCH LICENSING AMOUNTED TO TRANSFE R OF COPYRIGHT AND NOT MERELY TRANSFER OF COPYRIGHTED AR TICLE AS IS THE CONTENTION OF THE ASSESSEE. 6. FROM THE ABOVE AO CONCLUDED THAT THE PAYMENTS MA DE FOR THE RIGHT TO USE THE SOFTWARE WAS ROYALTY AS PER CLAUSE (I), (II I) AND (V) TO EXPLANATION TO SECTION 9(1)(VI). HE POINTED OUT THAT THE SOFTWARE IS A SECRET FORMULA OR PROCESS FOR THE PURPOSE OF CLAUSE (I) AND (III) OF EXPLANATION 2 AND WAS ALSO A 10 ITA 5870/DEL/12 & ORS. ZTE CORPORATION COPY RIGHT AS PER CLAUSE (V) OF EXPLANATION 2. FURT HER, SUCH PAYMENTS WERE ALSO ROYALTY UNDER ARTICLE 12(3) OF THE DTAA BETWEE N INDIA AND CHINA. 7. AS REGARDS THE ASSESSEES PLEA, RELYING ON THE D ECISION OF ITAT DELHI SPECIAL BENCH IN THE CASE OF MOTROLLA INC. THAT THE PAYMENTS FOR SUPPLY OF SOFTWARE ALONG WITH HARDWARE ARE IN THE NATURE OF B USINESS PROFITS AND NOT ROYALTY, THE AO OBSERVED THAT THE DEPARTMENT WAS IN APPEAL BEFORE HONBLE DELHI HIGH COURT AGAINST THIS DECISION. HE POINTED OUT THAT THE DEPARTMENT WAS IN APPEAL BEFORE VARIOUS HIGH COURT AND HONBL E SUPREME COURT AGAINST SIMILAR DECISION PASSED BY DIFFERENT TRIBUN ALS AND HIGH COURTS. HE, ACCORDINGLY, HELD THAT PAYMENT RECEIVED AGAINST SUP PLY OF SOFTWARE WAS IN THE NATURE OF ROYALTY U/S 9(1)(VI) OF THE ACT AND ALSO UNDER ARTICLE 12(3) OF INDIA-CHINA TAX TREATY. 8. AS REGARDS THE ASSESSEES SUBMISSION THAT IF THE PAYMENTS FOR THE SOFTWARE WAS CONSIDERED AS ROYALTY THEN SINCE SUCH ROYALTY WAS EFFECTIVELY CONNECTED WITH THE PE OF THE ASSESSEE IN INDIA AND, THEREFORE, COULD NOT BE TAXED ON GROSS BASIS AS PER ARTICLE 12(5) OF THE DT AA BETWEEN INDIA AND CHINA, TTHE AO POINTED OUT THAT ASSESSEE HAD FAILED TO ESTABLISH THAT THE RIGHTS, PROPERTY OR THE CONTRACT IN RESPECT OF WHIC H THE ROYALTY WAS PAYABLE, WAS EFFECTIVELY CONNECTED TO THE PE OF THE ASSESSEE IN INDIA. HE, THEREFORE, CONCLUDED THAT ROYALTY WAS NOT EFFECTIVELY CONNECTE D WITH THE PE AND, 11 ITA 5870/DEL/12 & ORS. ZTE CORPORATION THEREFORE, WAS NOT COVERED UNDER ARTICLE 12(5) OF T HE DTAA BETWEEN INDIA AND CHINA. THE AO COMPUTED THE INCOME FROM SUPPLY O F SOFTWARE AT RS. 58,40,406/- AS UNDER: 13. AS PER THE DETAILS SUBMITTED BY THE ASSESSEE, IT HAS RECEIVED AN AMOUNT OF RS. 58,40,406/- [RS.1 ,33, 16,020/- (R EPRESENTING TOTAL VALUE OF TELECOM EQUIPMENT) - RS.74,75,614/- (REPRESENTING HARDWARE COMPONENT OF THE TELECOM EQU IPMENT)] FOR SUPPLY OF SOFTWARE FROM CUSTOMERS IN INDIA. THI S AMOUNT OF RS.58,40,406/- IS TREATED AS ROYALTY UNDER THE AC T AND ALSO UNDER THE INDO-CHINA DTAA. AS PER ARTICLE 12(2) OF THE INDO- CHINA TAX TREATY READ WITH SECTION 90(2) OF THE ACT , 10% OF THIS AMOUNT I.E. RS.5,84,040/- IS THE TAX, WHICH THE AS SESSEE HAS TO PAY IN INDIA. 9. BEING AGGRIEVED WITH THE ASSESSMENT ORDER, THE A SSESSEE PREFERRED APPEAL BEFORE LD. CIT(A), WHO AFTER ELABORATE DISCU SSIONS HAS PRIMARILY HELD THAT: (I) ASSESSEE HAD FIXED PLACE PE AND DEPENDENT AGENCY PE IN INDIA. HOWEVER, HE DID NOT ACCEPT THE AOS PLEA AS REGARDS INSTALLATION PE IN INDIA. (II) ON THE ISSUE OF TAXATION OF SOFTWARE EMBEDDED IN TE LECOM EQUIPMENT MOBILE HANDSETS, LD. CIT(A) HELD THAT THE SAME WAS TAXABLE AS BUSINESS PROFIT. (III) AS REGARDS THE COMPUTATION OF PROFITS ATTRIBUTABLE TO PE, LD. CIT(A) HELD THAT 2.5% OF TOTAL SALES MADE BY FOREIG N COMPANY IN INDIA WAS TO BE ATTRIBUTED AS BUSINESS P ROFITS OF PE (INCLUDING THE VALUE OF SOFTWARE). (IV) LD. CIT(A) ALSO DIRECTED THE AO TO DELETE THE INTER EST LEVIED U/S 234B. 12 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 10. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), B OTH THE ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFORE US. 11. FIRST WE TAKE UP THE ASSESSEES APPEALS: 12. COMMON GROUNDS RAISED BY THE ASSESSEE FOR AY 20 04-05 TO 2008-09 ARE AS UNDER: 1. THAT ON FACTS AND IN LAW, THE LEARNED CIT(A) HA S ERRED IN UPHOLDING THE ORDER PASSED BY THE LEARNED AO WHICH WERE BAD IN LAW AND VOID AB-INITIO AS THEY SUFFERED FROM MAT ERIAL ILLEGALITY AND IRREGULARITY TO THE EXTENT OF ADDITI ONS CONFIRMED BY THE LEARNED CIT(A). 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE VALIDITY OF RE-ASSESSMENT PROCEEDINGS INITIATED BY THE LEARNED AO BY IGNORING THE FACT THAT THE SAME IS WITHOUT JURISDIC TION AND BAD IN LAW. 3. BASED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN HOLDING THAT THE I NCOME EARNED BY THE APPELLANT FROM SUPPLY OF TELECOMMUNIC ATION EQUIPMENT (COMPRISING OF HARDWARE AND SOFTWARE) TO INDIAN TELECOM OPERATORS/ CUSTOMERS IS TAXABLE IN INDIA ON THE BASIS THAT THE APPELLANT HAS A PERMANENT ESTABLISHMENT (' PE') IN INDIA UNDER THE PROVISIONS OF ARTICLE 5 OF THE DOUBLE TAX ATION AVOIDANCE AGREEMENT BETWEEN INDIA AND CHINA ('INDIA -CHINA DTAA'). 4. BASED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN UPHOLDING THE ACTI ON OF 13 ITA 5870/DEL/12 & ORS. ZTE CORPORATION LEARNED AO THAT THE APPELLANT HAS A BUSINESS CONNEC TION IN INDIA IN TERMS OF SECTION 9(1)(I) OF THE ACT. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED-CL'TT A) HAS GROSSLY ERRED IN HOLD ING THAT ZTE TELECOM INDIA PRIVATE LIMITED ('ZTE INDIA') IS A 'F IXED PLACE PE' OF THE APPELLANT IN TERMS OF ARTICLE 5(1) AND A RTICLE 5(2)(C) OF THE INDIA-CHINA DTAA. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS GROSSLY ERRED IN HOLDIN G THAT ZTE INDIA CONSTITUTES A DEPENDENT AGENT PE OF THE APPEL LANT IN TERMS OF ARTICLE 5(4) OF THE INDIA-CHINA DTAA. 7. WITHOUT PREJUDICE TO GROUNDS NO I TO 6 ABOVE, ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARN ED CIT (A) HAS ERRED IN ATTRIBUTING 2.5% OF THE TOTAL SALES RE VENUE (BOTH HARDWARE AND SOFTWARE) TO PE OF THE APPELLANT WHICH IS EXCESSIVE AND UNREASONABLE CONSIDERING THE ACTIVITI ES PERFORMED BY THE APPELLANT IN INDIA. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN NOT ADJUDICATI NG THE GROUND OF THE APPELLANT AGAINST THE INITIATION OF P ENALTY PROCEEDINGS UNDER SECTION 271 (1 )( C) OF THE ACT. 12.1. IN A.Y. 2009-10 GROUNDS OF APPEAL RAISED BY T HE ASSESSEE, ASSAILING THE ASSESSMENT ORDER PASSED BY THE AO, IN PURSUANCE TO DRP DIRECTIONS, ARE AS UNDER: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE APPELLANT, RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253 OF THE INCOME TAX ACT, 1961 ('ACT ') AGAINST 14 ITA 5870/DEL/12 & ORS. ZTE CORPORATION THE ORDER DATED DECEMBERL9, 2013, PASSED BY THE ADD ITIONAL DIRECTOR OF INCOME-TAX, RANGE-3, INTERNATIONAL TAXA TION, NEW DELHI (HEREINAFTER REFERRED TO AS 'LD. AO') UNDER S ECTION 143(3) READ WITH SECTION 144C(1) OF THE ACT PURSUAN T TO THE DIRECTIONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP'), NEW DELHI, ON THE FOLLOWING GROUND S: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER PASSED BY THE LD. AO PURSUANT TO DIRECTIO NS OF HON'BLE DRP IS BAD IN LAW AND VOID AB- INITIO. 2. APPELLANT ALLEGED TO HAVE A BUSINESS CONNECTION IN INDIA BASED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/HON'BLE DRP HAS ERRED IN HOLDING THAT THE AP PELLANT HAS A BUSINESS CONNECTION IN INDIA IN TERMS OF SECT ION 9(1)(I) OF THE ACT. 3. APPELLANT ALLEGED TO HAVE A PERMANENT ESTABLISHM ENT ('PE) IN INDIA 3.1 BASED ON FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. AO/HON'BLE DRP HAS ERRED IN HOLDING THAT TH E INCOME EARNED BY THE APPELLANT FROM SUPPLY OF TELECOMMUNIC ATION EQUIPMENT (COMPRISING OF HARDWARE) TO INDIAN TELECO M OPERATORS/ CUSTOMERS IS TAXABLE IN INDIA ON THE BAS IS THAT THE APPELLANT HAS A PE IN INDIA UNDER THE PROVISIONS OF ARTICLE 5 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN IND IA AND CHINA ('INDIA-CHINA DT AA'). 3.2.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN HO LDING THAT ZTE TELECOM INDIA PRIVATE LIMITED ('ZTE INDIA') IS A 'FIXED PLACE PE OF THE APPELLANT IN TERM OF ARTICLE 5(2)(C ) READ WITH ARTICLE 5(1) OF THE INDIA-CHINA DTAA. 3.2.2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO HAS GROSSLY ERRED IN HOLDING THAT L IAISON OFFICE OF THE APPELLANT IS A 'FIXED PLACE PE' OF THE APPEL LANT IN TERMS OF ARTICLE 5(1) OF THE INDIA-CHINA DT AA. 15 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 3.3 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND 111 LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN HO LDING THAT ZTE INDIA CONSTITUTES A DEPENDENT AGENT PE OF THE A PPELLANT IN TERMS OF ARTICLE 5(4) OF THE INDIA-CHINA DTAA. 3.4 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND 111 LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN HO LDING THAT ZTE INDIA CONSTITUTES AN 'INSTALLATION PE' OF THE A PPELLANT IN TERMS OF ARTICLE 5(2)U) READ WITH ARTICLE 5( 1) OF THE INDIA- CHINA DT AA . 4. REVENUE EARNED FROM THE SUPPLY OF SOFTWARE AS ' ROYALTY' 4.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND 111 LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN TA XING THE REVENUE EARNED BY APPELLANT FROM SUPPLY OF SOFTWARE AS 'ROYALTY' UNDER ARTICLE 12 OF THE INDIA-CHINA TAX T REATY AND ALSO UNDER SECTION 9(1)(VI) OF THE ACT. 4.2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO/ HON'BLE DRP HAS GROSSLY ERRED BY N OT APPRECIATING THE FACT THAT THE PREDOMINANT CHARACTE R OF SUPPLY TRANSACTION IN RESPECT TO NETWORK EQUIPMENT IS SALE OF TELECOM NETWORK EQUIPMENT ALONG WITH SOFTWARE AND THEREFORE REVENUES FROM SUPPLY OF SOFTWARE ALONG WITH TELECOM NETWORK EQUIPMENT SHALL NOT CONSTITUTE 'ROYALTY' 4.3 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO/HON'BLE DRP HAS ERRED IN ALLEGING T HAT THE HANDSETS INCLUDES THE PORTION OF SOFTWARE AND SUCH SUPPLY OF SOFTWARE SHALL CONSTITUTE 'ROYALTY', WITHOUT APPREC IATING THE FACTS THAT THE CUSTOMER IMPORT HANDSETS IN ENTIRETY AND NO PORTION IS TOWARDS SOFTWARE. 4.4 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN PR OPOSING TO HOLD THAT PAYMENTS FOR SUPPLY OF SOFTWARE ARE PAYME NTS FOR USE OF A 'COPYRIGHT' AND NOT OF A 'COPYRIGHTED ARTICLE' 5 PERCENT OF THE NET PROFIT ATTRIBUTED TO ALLEGED PE WITHOUT PREJUDICE TO OUR CONTENTION, THAT THE APPEL LANT DOES NOT HAVE A BUSINESS CONNECTION/PE IN INDIA, WE WISH TO SUBMIT: 16 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 5.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN AT TRIBUTING45 PERCENT OF THE NET PROFIT TO THE ALLEGED PE OF THE APPELLANT IN INDIA WHICH IS EXCESSIVE AND UNREASONABLE. 5.2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN NO T APPRECIATING THE DECISION OF HON'BLE COMMISSIONER O F INCOME TAX (APPEALS) IN APPELLANT'S OWN CASE FOR ASSESSMEN T YEARS 2004--2005 TO 2008-2009 WHEREIN 2.5 PERCENT OF ENTI RE SALE REVENUE (INCLUDING HARDWARE AND SOFTWARE) IS ATTRIB UTABLE TO ALLEGED PE A NET PROFIT TO BE TAXED AS BUSINESS INC OME 5.3 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN NO T TAKING INTO CONSIDERATION THE ACTIVITIES PERFORMED BY THE APPELLANT IN INDIA AND THAT ZTE INDIA HAS BEEN REMUNERATED AT AR M'S LENGTH PRICE FOR THE SERVICES PROVIDED TO THE APPELLANT. 6. ARBITRARY PROFIT MARGIN OF 7.5 PERCENT CONSIDER ED WITHOUT PREJUDICE TO OUR CONTENTION THAT THE APPELL ANT DOES NOT HAVE A BUSINESS CONNECTION/PE IN INDIA AND GROUND 5 ABOVE, WE WISH TO SUBMIT: 6.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN NO T APPLYING RULE 10 OF THE INCOME-TAX RULES, 1962 FOR DETERMINI NG THE PROFITS ATTRIBUTABLE TO THE ALLEGED PE OF THE APPEL LANT. 6.2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO/ HON'BLE DRP HAS ERRED ON FACTS AND IN LAW IN CONSIDERING THE ARBITRARY PROFIT MARGIN OF 7.5 PERC ENT WHEREAS THE APPELLANT HAS EARNED A WEIGHTED AVERAGE GLOBAL NET PROFIT OF 2.53 PERCENT ACCORDING TO THE GLOBAL FINANCIAL S TATEMENTS OF THE APPELLANT FOR CALENDAR YEAR 2008 AND 2009. 7. SUPPLY OF SOFTWARE NOT CONNECTED WITH ALLEGED PE WITHOUT PREJUDICE TO OUR AFORESAID CONTENTION THAT THE APPELLANT DOES NOT HAVE A BUSINESS CONNECTION/PE IN INDIA AND THE REVENUE EARNED FROM THE SUPPLY OF SOFTWARE IS N OT ROYALTY BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE 17 ITA 5870/DEL/12 & ORS. ZTE CORPORATION LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN HOLDING THA T INCOME FROM SUPPLY OF SOFTWARE IS NOT EFFECTIVELY CONNECTE D WITH THE ALLEGED PE. 8. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN NO T FOLLOWING THE CONSISTENCY WITH THE EARLIER YEAR ASSESSMENT OR DERS PASSED BY HIS PREDECESSORS IN TERMS OF ATTRIBUTION OF PROF ITS FROM THE SUPPLY OF HARDWARE TO THE ALLEGED PE OF THE APPELLA NT. 9. LEVY OF INTEREST BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. AO HAS GROSSLY ERRED IN CHARGING INTEREST U NDER SECTION 234B OF THE ACT. 10. APPLICABILITY OF TRANSFER PRICING PROVISIONS TO THE APPELLANT BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. AO/ HON 'BLE DRP HAS GROSSLY ERRED IN NOT A PPRECIATING THAT TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE IN THE INSTANT CASE AND THEREFORE, HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 27LBA OF THE ACT FOR NOT FURNISHING T HE ACCOUNTANT'S REPORT IN FORM 3CEB UNDER SECTION 92E OF THE ACT. 11. INITIATION OF PENALTY PROCEEDINGS BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. AO/HON'BLE DRP HAS GROSSLY ERRED IN INITIAT ING THE PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT, HOLDING THAT THE APPELLANT HAS FURNISHED INACCURATE PARTICU LARS AND HAS CONCEALED THE PARTICULARS OF ITS INCOME. 13. AT THE TIME OF HEARING, LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT HE HAS INSTRUCTIONS FROM HIS CLIENTS THAT THE DISPUTE BETWEEN THE ASSESSEE AND DEPARTMENT MAY BE SETTLED AND, THEREFORE, ON THE MO ST CONTENTIOUS ISSUE 18 ITA 5870/DEL/12 & ORS. ZTE CORPORATION REGARDING THE EXISTENCE OF PE IN INDIA, HE HAS INST RUCTIONS NOT TO PRESS THE SAME. THEREFORE, THE ONLY GROUND WHICH REMAINS FOR ADJUDICATION IS GROUND NO.7 REGARDING ATTRIBUTION OF PROFITS TO PE. 14. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ATTRIBUTION @ 2.5% OF SALES AS DONE BY LD. CIT(A) IS HIGHLY EXCESSIVE. HE POINTED OUT THAT THE ATTRIBUTION DONE BY AO BY APPLYING 20% OF THE NET G LOBAL PROFIT IS REASONABLE. HE POINTED OUT THAT IN AYS 2006-07 TO 2 008-09 ASSESSEE HAS PAID MARKET SUPPORT SEPARATE FEE TO INDIAN AE WHICH IS AT ARMS LENGTH AND, THEREFORE, THE PROFITS EARNED BY PE GOT SUBSUMED IN THE SAME AND, HENCE, NO FURTHER ATTRIBUTION OF PROFITS IS REQUIRED. 15. LD. CIT(DR) SHRI SANJEEV SHARMA SUBMITTED THAT CONSIDERING THE LEVEL OF OPERATIONS CARRIED OUT BY PE IN REGARD TO SALE ACTIVITIES OF ASSESSEE IN INDIA, LD. CIT(A)S FINDINGS, AS REGARDS ATTRIBU TION OF PROFITS @ 2.5% OF SALE PRICE, IS QUITE REASONABLE AND, THEREFORE, MAY BE UPHELD. 16. LD. CIT(DR) SUBMITTED THAT AS FAR AS ASSESSEES PLEA REGARDING MARKETING SUPPORT SERVICES BEING PAID AT ARMS LENG TH IS CONCERNED, THE SAME IS A SEPARATE ACTIVITY AND, THEREFORE, THE SAME IS NOT TO BE CONSIDERED FOR ATTRIBUTION OF PROFITS. HE POINTED OUT THAT MARKET SUPPORT SERVICE IS PRESALE SERVICE AND, THEREFORE, NOT PART OF ATTRIBUTION. 19 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 17. LD. CIT(DR) SUBMITTED THAT IN THE CASE OF ROLLS ROYCE 35% PROFITS HAVE BEEN ATTRIBUTED AND IN THE CASE OF M/S NORTEL NETWORKS INDIA INTERNATIONAL INC. 50% OF THE PROFITS HAD BEEN ATTR IBUTED. 18. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE HAVE NOTED EARLI ER THAT ASSESSEE HAD AGREED FOR ATTRIBUTION OF PROFITS TO PE WITHOUT PRE JUDICE TO HIS CLAIM THAT THERE WAS NO PE IN INDIA. LD COUNSEL HAS POINTED OU T THAT THERE WAS ENDEAVOR ON THE PART OF ASSESSEE TO END THE PROTRACTED LITIG ATION WITH THE REVENUE AND TO SAVE JUDICIAL TIME AND EFFORTS. WE ARE, THEREFOR E, ONLY TO CONFINE OURSELVES TO THE QUANTUM OF ATTRIBUTION OF PROFITS TO PE. 19. THE FUNDAMENTAL PRINCIPLE GOVERNING THE ATTRIBU TION OF PROFITS IS THAT ONCE THE DOMESTIC CASE LAW HAS DETERMINED THAT BUSI NESS INCOME HAS A SOURCE IN THE COUNTRY, THE MECHANICS OF LAW THEN APPLY TO CALCULATE THE AMOUNT OF TAXABLE PROFIT. THIS INVOLVES DETERMINATION OF GROS S ASSESSABLE INCOME DERIVED FROM THE COUNTRY, FROM WHICH ALLOWABLE EXPE NSES AND PAST YEARS LOSSES CARRIED FORWARD ARE DEDUCTED TO ARRIVE AT TH E NET AMOUNT OF INCOME. THIS IS A DIRECT METHOD FOR ATTRIBUTION OF PROFIT T O PE. BUT, ADMITTEDLY, ASSESSEE HAS NOT MAINTAINED ANY BOOKS OF A/C RELATI NG TO PE IN INDIA AND, THEREFORE, WE HAVE TO RESORT TO INDIRECT METHOD AS PRESCRIBED IN RULE 10 OF THE I.T. RULES FOR ATTRIBUTION OF PROFITS. 20 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 20. MEASUREMENT OF PROFIT IS NOT AN EXACT SIGN AND THIS IS PARTICULARLY EVIDENT IN THE CASE OF PES BECAUSE THE TAXING STRUC TURE OF RESIDENT STATE AND THE SOURCE STATE ARE NEVER SAME. FOR THE PURPOSE O F ATTRIBUTION OF PROFITS TO PE, THE MOST IMPORTANT ASPECT TO BE KEPT IN MIND IS THE LEVEL OF PES PARTICIPATION IN THE ECONOMIC LIFE OF SOURCE COUNTR Y. IT IS PRIMARILY NEXUS BETWEEN SOURCE COUNTRY AND THE PES ACTIVITIES WHIC H PRODUCE THE TAXABLE INCOME TO ASSESSEE. 21. DUE TO DIFFERENCE IN TAXING STATUTE OF COUNTRY R AND COUNTRY S, THERE CANNOT BE EXACT SYNCHRONIZATION OF THE AMOUNT OF PROFITS OF A PE I.E. TAXABLE IN COUNTRY R WITH THAT OF THE SAME PE OPE RATING IN COUNTRY S. CONSEQUENTLY, THE ORDINARY CREDIT GIVEN BY COUNTRY R FOR TAX PAID BY ITS RESIDENT TO COUNTRY S, ON THE RESIDENTS INCOME ( AS DETERMINED UNDER THE DOMESTIC CASE LAW OF COUNTRY S), WILL NOT BE IN R ESPECT OF EXACTLY THE SAME AMOUNT OF INCOME THAT COUNTRY R MEASURES FOR THE PURPOSES OF CALCULATION OF ITS TAX CREDIT. ARTICLE 23B OF THE OECD MODEL DT AA PROVIDES THAT METHODOLOGY IS NOT AN EXACT SSIENCE BUT MERELY AN ACCEPTABLE ESTIMATE TO GIVE A RESULT THAT MORE OR LESS FAIRLY REMOVES THE EFFECT OF JURIDICAL DOUBLE TAXATION. THIS SYSTEM WORKS SO LONG AS THE INCOME T AX SYSTEMS OF BOTH COUNTRIES ARE ALMOST SIMILAR. ALL THESE BASIC PRINC IPLES ARE EMBODIED IN ARTICLE 7 OF THE DTAA BETWEEN INDIA-CHINA WHICH REA DS AS UNDER: 21 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ARTICLE 7 BUSINESS PROFITS 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT CONTRACTING STATE UNLESS THE E NTERPRISE CARRIES BUSINESS IN THE OTHER CONTRACTING STATE THR OUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE EN TERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF TH E ENTERPRISE MAY BE TAXED IN THE OTHER CONTRACTING STATE BUT ONL Y SO MUCH OF THEM AS IS DIRECTLY OR INDIRECTLY ATTRIBUTA BLE TO THAT PERMANENT ESTABLISHMENT. THE PROVISIONS OF THIS PARAGRAPH SHALL, HOWEVER, NO T APPLY IF THE ENTERPRISE PROVES THAT THE ABOVE ACTIVITIES COU LD NOT HAVE BEEN UNDERTAKEN BY THE PERMANENT ESTABLISHMENT OR H AVE NO RELATION WITH THE PERMANENT ESTABLISHMENT. 2. SUBJECT TO THE PROVISIONS OF PARAGRAPH 3, WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE O THER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING S TATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROF ITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WH OLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT. 3. INSOFAR AS THE TAX LAW OF A CONTRACTING STATE PROVI DES WITH RESPECT TO A SPECIFIC BUSINESS ACTIVITY THAT THE PR OFITS TO BE ATTRIBUTED TO A PERMANENT ESTABLISHMENT ARE TO BE D ETERMINED ON THE BASIS OF A DEEMED PROFIT, NOTHING IN PARAGRA PH 2 SHALL PRECLUDE THAT CONTRACTING STATE FROM APPLYING THOSE PROVISIONS OF ITS LAW, PROVIDED THAT THE RESULT IS IN ACCORDANCE WITH THE PRINCIPLES CONTAINED IN THIS AR TICLE. 22 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 4. IN DETERMINING THE PROFITS OF A PERMANENT ESTABLISH MENT, THERE SHALL BE ALLOWED AS DEDUCTION EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PE RMANENT ESTABLISHMENT, INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO INCURRED, WHETHER IN THE CONTRACTING STATE IN WHICH THE PERMANENT ESTABLISHM ENT IS SITUATED OR ELSEWHERE IN ACCORDANCE WITH THE PROVIS IONS OF TAX LAW OF THAT CONTRACTING STATE. 5. NO PROFITS SHALL BE ATTRIBUTED TO A PERMANENT ESTAB LISHMENT BY REASON OF THE MERE PURCHASE BY THAT PERMANENT ESTABLISHMENT OF GOODS OR MERCHANDISE FOR THE ENTER PRISE. 6. FOR THE PURPOSES OF PARAGRAPHS 1 TO 5, THE PROFI TS TO BE ATTRIBUTED TO THE PERMANENT ESTABLISHMENT SHALL BE DETERMINED BY THE SAME METHOD YEAR BY YEAR UNLESS T HERE IS GOOD AND SUFFICIENT REASON TO THE CONTRARY. 7. WHERE PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES OF THIS AGREEMENT, THE N THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISIONS OF THIS ARTICLE. 22. RULE 10 OF THE INCOME-TAX RULES PRESCRIBES A ME THOD OF DETERMINATION OF AN INCOME IN THE CASE OF NON-RESIDENTS WHERE EXA CT PROFITS CANNOT BE CALCULATED FOR WANT OF SUFFICIENT INFORMATION. THE SAID RULE IS REPRODUCED HEREUNDER: 10. IN ANY CASE IN WHICH THE ASSESSING OFFICER IS OF THE OPINION THAT THE ACTUAL AMOUNT OF THE INCOME ACCRUI NG OR ARISING TO ANY NON-RESIDENT PERSON WHETHER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA OR THROUGH OR FROM ANY PROPERTY IN INDIA OR THROUGH OR FROM ANY 23 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ASSET OR SOURCE OF INCOME IN INDIA OR THROUGH OR FR OM ANY MONEY LENT AT INTEREST AND BROUGHT INTO INDIA IN CA SH OR IN KIND CANNOT BE DEFINITELY ASCERTAINED THE AMOUNT OF SUCH INCOME FOR THE PURPOSES OF ASSESSMENT TO INCOME-TAX MAY BE CAL CULATED:- (I) AT SUCH PERCENTAGE OF THE TURNOVER SO ACCRUING OR A RISING AS THE ASSESSING OFFICER MAY CONSIDER TO BE REASONA BLE; OR (II) ON ANY AMOUNT WHICH BEARS THE SAME PROPORTION TO TH E TOTAL PROFITS AND GAINS OF THE BUSINESS OF SUCH PER SON (SUCH PROFITS AND GAINS BEING COMPUTED IN ACCORDANC E WITH THE PROVISIONS OF THE ACT), AS THE RECEIPTS SO ACCRUING OR ARISING BEAR TO THE TOTAL RECEIPTS OF T HE BUSINESS; OR (III) IN SUCH OTHER MANNER AS THE ASSESSING OFFICER MAY D EEM SUITABLE. 23. IN THE PRESENT CASE, AS NOTED EARLIER, SINCE AS SESSEE DID NOT MAINTAIN SEPARATE BOOKS OF ACCOUNT, THEREFORE, AO HAD INVOKE D RULE 10(II) AND ATTRIBUTED 20% OF NET GLOBAL PROFITS ARISING OUT OF REVENUES REALIZED FROM INDIA. HOWEVER, LD. CIT(A) ATTRIBUTED 2.5% OF ENT IRE SALES REVENUE AS PER RULE 10(I) PRIMARILY RELYING ON THE DECISION IN THE CASE OF ALKATEL LUCENT, FRANCE, INTER ALIA, OBSERVING THAT ALKATEL LUCENT F RANCE, WHICH WAS IN THE SAME LINE OF BUSINESS AS ASSESSEE HAD ACCEPTED THE SAME AND DID NOT CONTEST IN APPEAL. 24. THE ISSUE OF ATTRIBUTION OF PROFITS DEPENDS ON THE FACTS IN PARTICULAR CASE AND IS FULLY DEPENDENT ON THE LEVEL OF OPERATI ONS OF THE ACTIVITIES CARRIED 24 ITA 5870/DEL/12 & ORS. ZTE CORPORATION OUT IN INDIA. THIS IS EVIDENT FROM ARTICLE 7 OF DTA A AND EXPLANATION 1 TO CLAUSE (I) OF SECTION 9(1). FACTS IN TWO CASES CANN OT 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 O F INVOLVEMENT OF PE IN THE REVENUE GENERATING STRUCTURE AND THE 80% PROFIT ACCRUED IN THE RESIDENT STATE. HOWEVER, FOR AY 2009-10, THE AO HAS ATTRIBUT ED 45% OF THE OPERATING PROFIT. CONSIDERING THE DIFFERENT MODES ADOPTED BY AO AND LD. CIT(A), IT BECOMES NECESSARY TO EXAMINE THE LEVEL OF OPERATION CARRIED OUT BY PE IN INDIA SO AS TO ARRIVE AT REASONABLE PERCENTAGE OF P ROFIT TO BE ATTRIBUTED TO PE IN INDIA. 25. WE HAVE POINTED OUT EARLIER THAT AO HAD HELD TH AT THERE WAS FIXED PE IN INDIA, DEPENDENT AGENCY PE IN INDIA AND INSTALLA TION 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. THE DETAILED FINDINGS, AS RECORDED BY AO IN AY 2009-10 PRIMARILY GIVES AN IND ICATION OF THE LEVEL OF OPERATIONS CARRIED OUT IN INDIA. 26. WE, THEREFORE, REPRODUCE THE FINDINGS OF AO IN AY 2009-10, WHICH WILL GIVE CLEAR INDICATION OF THE LEVEL OF OPERATIO NS CARRIED OUT BY PE IN INDIA. 25 ITA 5870/DEL/12 & ORS. ZTE CORPORATION : PROFIT ATTRIBUTABLE TO THE L'FRMANENT ESTABLISHME NT SINCE, REVENUES FROM SUPPLY OF TELECOM EQUIPMENTS A ND MOBILE HANDSETS ARE TAXABLE IN INDIA AS 'BUSINESS PROFITS' , IT IS IMPERATIVE TO DETERMINE THE PROFITS THAT SHOULD BE ATTRIBUTED TO THE I ASSESSEE'S PE IN INDIA. THE TAXATION OF THE ' SOFTWARE' EITHER EMBEDDED IN THE TELECOM EQUIPMENT OR PROVI DED TO THE CUSTOMERS SEPARATELY HAS BEEN DISCUSSED LATER IN TH IS ORDER. HENCE, IT IS CLARIFIED THAT THE ATTRIBUTION OF PROF ITS TO THE PE IN INDIA IS ILL RESPECT OF THE 'HARDWARE COMPONENT' O F THE TELECOM EQUIPMENTS ARID THE MOBILE HANDSETS . AS PER ARTICLE 7 OF THE INDIA-CHINA DT AA, 'THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STAT E SHALL BE TAXABLE ONLY IN THAT CONTRACTING STATE UNLESS THE E NTERPRISE CARRIES BUSINESS IN THE OTHER CONTRACTING STATE THR OUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE EN TERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF TH E ENTERPRISE MAY BE TAXED IN THE OTHER CONTRACTING STATE BUT ONL Y SO MUCH OF THEM AS IS DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO T HAT PERMANENT ESTABLISHMENT. IN THIS CONTEXT THE ASSESSEE VIDE ORDER SHEET NOTIN GS DATED. 22.03.2013 WAS ASKED TO EXPLAIN THAT BASED UPON THE FACTS AND CIRCUMSTANCES OF THE CASE WHY THE APPROPRIATE PROFI T IS NOT ATTRIBUTED TO THE PE IN INDIA. THE ASSESSEES VIDE I TS LETTER DATED. 25.03.2013 HAS SUBMITTED THAT; ASSESSEE DOES NOT HAVE A BUSINESS CONNECTION OR PER MANENT ESTABLISHMENT IN INDIA. ARTICLE 7 OF THE INDIA- CHINA TAX TREATY PROVIDES F OR ALLOCATION OF TAXATION RIGHTS BETWEEN CONTRACTING STATES RELAT ING TO BUSINESS PROFITS. WITHOUT PREJUDICE TO THE PLEA! CONTENTION THAT NO P E IS CONSTITUTED FOR THE ASSESSEE IN INDIA, EVEN IF IT I S ASSUMED (WITHOUT ACCEPTING) THAT ASSESSEE HAS A.PE IN INDIA , ~LY SUCH PROFITS AS ARE DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THE PE OF ASSESSEE IN INDIA SHALL BE TAXABLE IN INDIA. 26 ITA 5870/DEL/12 & ORS. ZTE CORPORATION THE PE BEING HAS NO ROLE TO PLAY IN THE OFF-SHORE S UPPLY OF MATERIAL& HENCE NO PROFITS FROM OFF-SHORE SUPPLY AR E ATTRIBUTABLE TO THE PE. HENCE, IN DETERMINING THE PROFITS ATTRIBUTABLE TO A PE, IT IS NECESSARY TO DETERMINE THE ALLOCATION OF FUNCTIONS, RISKS AND ASSETS TO THE PE AND THE ATTRIBUTION OF INCOME TO T HE PE UNDER ARM'S LENGTH CONDITIONS, THE PRINCIPLE THAT IF A CORRECT ARM'S LENGTH PRICE IS APPLIED AND AN AGENT IS COMPENSATED ACCORDINGLY, THEN NOTHING F URTHER WOULD BE LEFT TO BE TAXED IN THE HANDS OF THE FOREI GN ENTERPRISE, HAS BEEN LAID DOWN BY THE APEX COURT OF INDIA, IN T HE CASE OF MORGAN STANLEY & CO. INC. VS, DIT THE SAME PRINCIPLE HAS BEEN FOLLOWED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LIMITED ('SET') (307 ITR 205) . THE AUTHORIZED OECD APPROACH IS TO APPLY THE ARM'S LENGTH PRINCIPLE OF ARTICLE 9, AS ARTICULATED IN THE GUIDE LINES, TO THE ATTRIBUTION OF PROFIT TO A PE USING THE ARM'S LENGT H PRINCIPLE UNDER ARTICLE 7(2).IN THE INSTANT CASE, IT IS EVIDE NCED THAT THE TRANSFER PRICING ANALYSIS OF ZTE INDIA FOR FY 2008- 09 DULY REFLECTS THE FUNCTIONS PERFORMED AND RISKS ASSUMED BY ZTE INDIA WHICH IS DULY ACCEPTED BY THE TRANSFER PRICIN G OFFICER. IN VIEW OF THE PROVISIONS OF THE ARTICLE 7(2) OF TH E INDIA- CHINA TAX TREATY AND THE AFORESAID JUDICIAL PRECEDENTS, I T CAN BE INFERRED THAT AS LONG AS THE PE IS BEING REMUNERATE D AT ARMS' LENGTH PRICE, NOTHING FURTHER MAY BE ATTRIBUTED TO THE OPERATIONS ACTIVITIES CARRIED ON BY THE PE OF THE FOREIGN ENTE RPRISE IN INDIA. WITHOUT PREJUDICE TO THE BELIEF THAT THE ASSESSEE D OES NOT HAVE A BUSINESS CONNECTION OR PERMANENT ESTABLISHMENT IN I NDIA, IT HAS SUBMITTED THAT THE ACT DOES NOT PRESCRIBE ANY SPECI FIC METHODOLOGY FOR ATTRIBUTION OF INCOME. SINCE THE AS SESSEE IS EARNING REVENUE IN CHINA FROM THE SALE OF TELECOM E QUIPMENTS MADE TO VARIOUS COUNTRIES, THEREFORE CONSOLIDATED G LOBAL ANNUAL ACCOUNTS ARE PREPARED IN CHINA. 27 ITA 5870/DEL/12 & ORS. ZTE CORPORATION THE ASSESSEES SUBMISSIONS ARE MISPLACED AND WITHOU T APPRECIATION OF THE FACT MATRIX WHICH HAS EMERGED F ROM THE FINDINGS OF THIS CASE AS DISCUSSED IN PRECEDING PAR AS. IT IS OBSERVED THAT THE ONLY THE FOLLOWING TRANSACTIONS W ERE REFERRED TO THE TPO FOR BENCHMARKING. DESCRIPTION OF TRANSACTION AMOUNT(IN RS.) SALE OF TELECOM EQUIPMENT, SPARES, COMPONENTS & HANDSETS 42,14,73,291.00 LOGISTIC SUPPORT SERVICES 34,94,21,178.00 REPAIRS & MAINTENANCE SERVICES 6,33,31,168.00 ADMINISTRATIVE SUPPORT SERVICES 15,40,63,637.00 TOTAL 98,82,89,274.00 THESE TRANSACTIONS DO NOT CONSTITUTE THE PART OF C RUCIAL KEY FUNCTIONS PERFORMED BY THE FIXED PE, INSTALLATION P E, SERVICE PE AND DAPE. IT IS REITERATED THAT BUSINESS CONNECTION IN RESPEC T OF ENTIRE REVENUE OF RS. 1,101.6 CRORE ON ACCOUNT OF SUPPLY O F NETWORKING & TERMINAL EQUIPMENTS HAS BEEN ESTABLISH ED IN INDIA. IT IS ALSO A .PROVEN FACT THAT THE SAID TRAN SACTIONS [EXCLUDING TRANSACTIONS ON ACCOUNT OF SOFTWARE] HAV E TAKEN PLACE THROUGH THE PES IN INDIA/ EFFECTIVELY CONNECT ED TO THE PES. THE FUNCTIONS PERFORMED IN RESPECT OF TRANSACT IONS ON ACCOUNT OF SUPPLY OF EQUIPMENTS AND HANDSETS WITH CUSTOMERS IN INDIA WERE NOT THE SUBJECT MATTER OF TP ANALYSIS BEFORE THE TPO. SINCE, ALL THE FUNCTIONS WERE NOT THE PART OF TP ST UDY, THE ASSESSEE'S CONTENTION, THAT IF A CORRECT ARM'S LENG TH PRICE IS APPLIED THEN NOTHING FURTHER WOULD BE LEFT TO BE TA XED IN THE HANDS OF THE FOREIGN ENTERPRISE IN LIGHT OF THE DEC ISION OF HON'BLE APEX COURT OF INDIA IN THE CASE OF MORGAN S TANLEY & CO. INC. VS, DIT, IS MISPLACED. THE HON'BLE SUPREME COURT IN THIS CASE HAS RULED THAT: 28 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 'AS REGARDS ATTRIBUTION OF FURTHER PROFITS TO THE P E OF MSCO WHERE THE TRANSACTION BETWEEN THE TWO ARE HELD TO B E AT ARM'S LENGTH, WE HOLD THAT THE RULING IS CORRECT IN PRINC IPLE PROVIDED THAT AN ASSOCIATED ENTERPRISE (THAT ALSO CONSTITUTE S A PE) IS REMUNERATED ON ARM'S LENGTH BASIS TAKING INTO ACCOU NT ALL THE RISK-TAKING FUNCTIONS OF THE MULTINATIONAL ENTERPRI SE. IN SUCH A CASE NOTHING FURTHER WOULD BE LEFT TO ATTRIBUTE TO THE PE. THE SITUATION WOULD BE DIFFERENT IF THE TRANSFER PRICIN G ANALYSIS DOES NOT ADEQUATELY REFLECT THE FUNCTIONS PERFORMED AND THE RISKS ASSUMED BY THE ENTERPRISE. IN SUCH A CASE, THERE WO ULD BE NEED TO ATTRIBUTE PROFITS TO THE PE FOR THOSE FUNCTIONS/ RISKS THAT HAVE NOT BEEN CONSIDERED'. THE HON'BLE SC HAS CLEARLY RULED THAT IF TP ANALYSI S DOES NOT ADEQUATELY REFLECT ALL THE FUNCTIONS PERFORMED, FUR THER ATTRIBUTION SHOULD BE DONE FOR THOSE FUNCTIONAL RIS KS THAT HAVE NOT BEEN CONSIDERED. IN VIEW OF ABOVE, IT IS CLEAR THAT THE OBSERVATIONS OF HON'BLE SC IN THE CASE OF MORGAN STANLEY ARE IN RESPECT OF ONL Y THOSE TRANSACTIONS/ FUNCTIONS WHICH HAVE BEEN EXAMINED BY THE TPO FOR DETERMINATION OF ARM'S LENGTH PRICE. THEREFORE, CONTENTION OF THE ASSESSEE THAT NO FURTHER ATTRIBUTION CAN BE DONE IS MISPLACED AND NOT ACCEPTABLE. HENCE, IT IS IMPERATIVE TO ANALYZE THE FUNCTIONS P ERFORMED [WHICH DO NOT FORM THE PART OF TP DOCUMENTATION OF ZTE INDIA] BY DIFFERENT FORMS OF PE IN INDIA, WHICH HAS EMERGED FROM SURVEY FINDINGS, CONTRACT AGREEMENTS AND DETAI LS SUBMITTED DURING THE COURSE OF THIS PROCEEDING. IT IS REITER ATED THAT ZTE CHINA HAS NOT MAINTAINED ANY TP DOCUMENTATION. HOWE VER, THE ANALYSIS IS BEING DONE ON THE BASIS OF DOCUMENTATIO N OF INDIAN SUBSIDIARY. THESE ARE DISCUSSED AS UNDER: FUNCTIONS PERFORMED FOR DISTRIBUTION OF TELECOM EQU IPMENTS AND MOBILE HANDSET AS PER TP DOCUMENTATIONS OF ZTE INDIA SUBMITTED BY THE ASSESSEE 29 ITA 5870/DEL/12 & ORS. ZTE CORPORATION SUMMARY OF FUNCTIONS PERFORMED BY ZTE INDIA AS PER TP DOCUMENTATIONS TRADING OF TELECOM EQUIPMENT PROCURING EQUIPMENT FROM ZTE CHINA SALE TO THE INDIAN CUSTOMERS MINOR INCIDENTAL ACTIVITIES REGARDING INSTALLATION AFTER SALES SERVICES TOWARDS SUCH CONTRACTS SALE OF TELECOM EQUIPMENTS DIRECTLY BY ZTE CHINA TO INDIAN CUSTOMERS PROVISION OF INSTALLATION AND POST INSTALLATION SER VICES THIS IS NOT THE SUBJECT MATTER OF TP STUDY [ADMITTE D AS PER TP DOCUMENTATION] TRADING OF MOBILE HANDSETS FOR ONLY ONE CUSTOMER- D RIVE INDIA ENTERPRISE SOLUTION LTD. PURCHASE OF MOBILE HANDSETS FROM ZTE CHINA FOR ONLY ONE CUSTOMER RESALE TO THE SAID COMPANY SALES DOES NOT TAKE DECISION IN STRATEGIC MARKETING ACTIV ITIES. TENDERING PROCESS ZTE CHINA TO ACTIVELY PARTICIPATE TO PROVIDE TECHNI CAL, MARKETING & COMMERCIAL GUIDANCE AND SUPPORT IN TENDERING PROCES S. ZTE CHINA TO REVIEW AND APPROVE THE FINAL CONTRACTS ENTERED INTO BY ZTE INDIA PROCUREMENT ONLY UPON SECURING ORDERS FROM BSNL AND TAT A TELEC OM PRODUCTS ARE SOLD FROM ZTE CHINA TO ZTE INDIA ON CI F BASIS ZTE INDIA TO DELIVER GOODS TO CUSTOMERS SITE COST BORNE ON LOGISTICS IN INDIA MINOR INCIDENTAL LOCAL PROCUREMENTS PACKAGING AND LABELING READY TO SALE PRODUCTS BY ZTE CHINA INVOICING AND COLLECTIONS ZTE INDIA TO ISSUE INVOICES AS SALES CONTRACTS ARE ENTERED BY ZTE INDIA WITH INDIAN CUSTOMERS ADMINISTRATION (ROUTINE FUNCTIONS] ZTE INDIA'S RESPONSIBILITY LOGISTIC SUPPORT 30 ITA 5870/DEL/12 & ORS. ZTE CORPORATION LOGISTIC SUPPORT SERVICES THE FUNCTIONS MENTIONED ABOVE ARE AS PER THE TP DOCUMENTATION OF INDIAN SUBSIDIARY SUBMITTED BY THE ASSESSEE BEFORE THE TPO. HOWEVER, DURING SURVEY VARIOUS FACT S CONTRARY TO THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN FOUND. THE SURVEY FINDINGS GIVE ACTUAL STATE OF AFFAIRS. THEREFORE, A LL OTHER FUNCTIONS WHICH HAVE BEEN PROVED (SUPRA) ARE NOT TH E PART OF TP DOCUMENTATION OR UNDERTAKEN BY ZTE INDIA IN CONTRAR Y TO THE ABOVE MENTIONED FUNCTIONS. HENCE, IT CAN BE EASILY CONCLUDED THAT THAT MOST OF THE FUNCTIONS ATTRIBUTABLE TO THE PE HAVE NOT BEEN CONSIDERED IN TP STUDY/ TP ANALYSIS. SUMMARY OF FUNCTIONS PERFORMED BY PES WHICH ARE NOT THE PART OF TP /DOCUMENTATION ON THE BASIS OF ANALYSIS OF STATEMENTS OF EMPLOYEES , SURVEY DOCUMENTS, CONTRACT AGREEMENTS AND THE TRANSFER PRI CING DOCUMENTATIONS AS DISCUSSED ABOVE, FOLLOWING FUNCTI ONS OF PES ARE HELD TO BE NOT THE PART OF TP ANALYSIS/ TP DOCU MENTATIONS - SUPERVISION AND CONTROL OF PROJECTS IN INDIA - MEETING WITH TOP DECISION MAKING BODIES OF CUSTOMER S IN INDIA - STRATEGIC DECISION MAKING IN INDIA INCLUDING PARTN ERSHIP ETC - PREPARATION AND FINALIZATION OF BIDS ON BEHALF OF Z TE CHINA - SUBMISSION OF SUCH BIDS - JOINT BIDDING ON BEHALF OF ZTE CHINA - CONTRACT NEGOTIATIONS WITH CUSTOMERS IN INDIA INCLU DING PSUS/ GOVERNMENT. - PREPARATION OF DRAFT AGREEMENTS AND MOUS FOR ZTE CH INA - SIGNING OF AGREEMENTS IN INDIA - CONCLUDING AGREEMENTS AND MOUS ON BEHALF OF ZTE CH INA - SALE OF EQUIPMENTS AND HANDSETS IN INDIA - SALE OF MOBILE HANDSETS TO ALL OTHER CUSTOMERS IN I NDIA - SALE OF EQUIPMENTS TO INDIAN SUBSIDIARY ON CIF BAS IS - TECHNICAL SUPPORT SERVICES - SUPERVISION OF INSTALLATION, COMMISSIONING AND TES TING. - SHIPMENT OF EQUIPMENTS ETC OF SUPPLIES BY ZIE CHINA 31 ITA 5870/DEL/12 & ORS. ZTE CORPORATION - POST INSTALLATION SERVICES. - OBTAINING PURCHASE ORDERS/ ARRANGING SUPPLY ORDERS FOR ZTE CHINA - RAISING INVOICES THROUGH ZTE INDIA - GETTING INVOICES FROM THE CUSTOMERS IN INDIA - PAYMENT NEGOTIATIONS WITH THE CUSTOMERS IN INDIA - OTHER ADMINISTRATIVE FUNCTIONS - FOREIGN INVESTMENTS - FIPB CLEARANCES - TAXATION MATTERS - MARKETING FUNCTIONS - BANKING FUNCTIONS - VISITING CUSTOMERS AND VENDORS - THE PROFIT IS THEREFORE, ATTRIBUTABLE TO THE ABOVE FUNCTIONS - CALCULATION OF PROFIT - DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESS EE SUBMITTED THAT IT DOES NOT MAINTAIN ANY SEPARATE BO OKS OF ACCOUNTS FOR INDIAN OPERATIONS. IN ABSENCE OF ANY B OOKS OF ACCOUNTS IN RESPECT TO INDIA OPERATIONS, RULE 10 OF THE INCOME TAX RULES, 1962 IS INVOKED FOR DETERMINING T HE INCOME OF THE ASSESSEE. - THE ASSESSEE HAS SUBMITTED COPY OF THE GLOBAL ACCOU NTS WHICH SHOWS CONSOLIDATED ACCOUNTS OF - VARIOUS COUNTRIES. IN CHINA, THE FINANCIAL YEAR IS FROM JANUARY TO DECEMBER. AS PER THE GLOBAL ACCOUNTS, TH E NET OPERATING PROFIT FOR THE CALENDAR YEAR 2008 & 2009 COMES TO 1.70% AND 2.80%. - SINCE, IN INDIA THE FIN YEAR IS FROM APRIL TO MARCH , THE WEIGHTED AVERAGE OF NET OPERATING PROFIT COMES TO 2 .)3% [(.2.80% X 9 MONTHS) + (1.70% X 3 MONTHS)/ I2 MONTH S]. VIDE ORDER SHEET NOTINGS DATED.22.03.2013, THE AR O F THE ASSESSEE WAS ASKED TO EXPLAIN THE JUSTIFICATION FOR TAKING PROFIT MARGIN ATTRIBUTABLE TO INDIA OPERATIONS ON T HE BASIS OF GLOBAL ACCOUNTS. - THE AR OF THE ASSESSEE SUBMITTED THAT IT CANNOT BE SAID THAT THE ASSESSEE EARNS HIGHER PROFIT MARGIN FROM THE SA LE OF 32 ITA 5870/DEL/12 & ORS. ZTE CORPORATION TELECOM EQUIPMENTS TO INDIAN CUSTOMERS DUE TO FOLLO WING FACTORS, - THE ASSESSEE FACES LONG DELAY IN COLLECTION OF RECE IVABLES WHICH AFFECTS CASH LIQUIDITY AND PROFITABILITY - THE SALE PRICE IN INDIA IS LOWER - INDIAN CUSTOMERS TYPICALLY OFFER CONTRACTS ON THE B ASIS OF TENDERS/ LOWEST BIDDERS. HENCE, THE COMPANIES HAVE TO COMPENSATE WITH THE LOWEST PRICE WHICH LEADS TO LOW PROFITABILITY. - REASONS CITED BY THE AR OF THE ASSESSEE ARE GENERAL IZED WITHOUT ANY SUPPORTING FACTS AND FIGURES FROM THE A CCOUNTS. THE REASONS CITED BY HIM HARDLY AFFECT THE PROFITAB ILITY BECAUSE AT NO WHERE THE PEOPLE WANT TO PAY MORE FOR LESS UTILITY. SALE PRICE LARGELY DEPENDS UPON THE DEMAND AND SUPPLY. DELAYS IN PAYMENTS OR CASH LIQUIDITY ARE NO T THE ISSUES IN THE COMPANIES LIKE ZTE, WHO HAS EXPANSION OF BUSINESS ACROSS THE GLOBE IN MANY COUNTRIES. ON THE OTHER HAND, THERE ARE VARIOUS FACTORS WHICH SUPPORT HIGH PROFITABILITY IN INDIA. SOME OF THEM ARE DISCUSSED AS UNDER: - POPULATION OF THE INDIA IS HIGHEST AFTER CHINA HAVI NG WIDE MARKET FOR MOBILE PHONES AND CELLULAR PHONE OPERATORS. - POPULATION OF. ALL CATEGORIES INCLUDING PEOPLE FROM LOW INCOME GROUP OF THE COUNTRY IS USING MOBILE PHONES IN A BIG WAY SINCE THE LAST DECADE. - COST OF THE CHINESE EQUIPMENTSL MOBILE HANDSETS ARE LOWEST IN WORLD. - COST OF SKILLED AND UNSKILLED JABOR IN INDIA IS VER Y LOW IN COMPARISON TO OTHER COUNTRIES. - COST OF MANAGEMENT AND TECHNICAL PERSONNEL ARE LOW ER IN COMPARISON TO MANY OTHER COUNTRIES. - COST OF ENGINEERING AND R&D IS LOWER IN COMPARISON TO OTHER COUNTRIES. & OVERHEAD EXPENDITURE ARE LOW IN COMPARISON TO OTHER COUNTRIES - 33 ITA 5870/DEL/12 & ORS. ZTE CORPORATION - GOVERNMENT POLICY OF EXTENSIVE NETWORK EXPANSION AN D COMMUNICATION TO COVER ENTIRE COUNTRY INCLUDING REM OTEST AREAS. - FOREIGN INVESTMENTS POLICY - TO ATTRACT FOREIGN INV ESTORS IN TELECOM SECTOR AND OTHERS. - THE INDUSTRIES VERTICAL MARKET MIX IN INDIA IS WELL BALANCED ACROSS SEVERAL MATURE AND EMERGING SECTORS. WHILE T HE BANKING, FINANCIAL SERVICES AND INSURANCE SEGMENTS REMAINS THE BIGGEST SECTOR WITH OVER 41% OF TOTAL REVENUES, VERTICALS LIKE HI-TECH/TELECOM MANUFACTUR ING AND RETAIL ARE INCREASINGLY GAINING SHARE. - THE INDIAN IT-BPO INDUSTRY HAS DISPLAYED RESILIENCE AND TENACITY IN ENCOUNTERING THE UNPREDICTABLE CONDITIO NS DURING THESE YEARS AND REITERATING THE VIABILITY OF INDIA' S FUNDAMENTAL VALUE PROPOSITION. - ACCORDING TO NASSCOM FACTSHEET-INDIAN IT-BPO INDUSTRY', THE INDIAN IT-BPO' - INDUSTRY IS ESTIMATED TO ACHIEVE REVENUES OF USD 71 .7 BILLION IN F. YR. 2009. AS ' PROPORTION OF NATIONAL GDP, THE SECTOR REVENUES HAVE GROWN FROM 1;2 PERCENT TO AN ESTIMATED 5.8 PERCENT IN F. YR. 2009. THEREFORE, IN ABSENCE OF INDIA SPECIFIC ACCOUNTS AN D IN VIEW OF THE REASONS CITED ABOVE, THE OPERATING PROFIT ESTIM ATED AT 7.5 %.CONSIDERING THE SCALE OF FUNCTIONS PERFORMED BY T HE PES (WHICH ARE NOT INCLUDED ILL TP DOCUMENTATIONS), 45 % OF SUCH PROFITS ARE CONSIDERED ATTRIBUTABLE TO THE PE OF TH E ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE 7 READ WI TH ARTICLE 5 OF THE INDIA-CHINA DTAA. THIS PROFIT IS APPLIED TO THE SALES REVENUES (EXCLUDING COLLECTION OF REVENUE ON ACCOUN T OF SOFTWARE) TO ARRIVE AT THE PROFITS TAXABLE ON ACCOU NT OF SALE OF TELECOM EQUIPMENT AND MOBILE PHONE HANDSETS TO INDI AN CUSTOMERS: 34 ITA 5870/DEL/12 & ORS. ZTE CORPORATION THE ASSESSEE' HAS NOT SUBMITTED THE BREAKDOWN OF TH E REVENUE EARNED ON ACCOUNT OF SALE OF EQUIPMENTS/ HANDSETS A ND SOFTWARE. HOWEVER, THEY HAVE SUBMITTED THAT THE PERCENTAGE OF SOFTWARE REVENUE FORMING PART OF THE TELECOM EQUIPMENT IS AT 40% OF THE REVENUE EARNED ON ACCOUNT OF EQUIPMENTS. IN OTHER W ORDS THE PERCENTAGE OF REVENUE ON HARDWARE COMPONENT OF TELE COM EQUIPMENT/ HANDSETS IS 60%. ON THE BASIS OF THE SUB MISSION OF THE ASSESSEE, THE PROFIT ATTRIBUTABLE TO THE PE IS CALCULATED AS UNDER S. NO. PARTICULARS AMOUNT IN USD AMOUNT IN INR @ OF 50.53) AS PER IT ACT 1961) 1 SALES OF TELECOM EQUIPMENT 11,14,96,981.77 563,39,42,488.83 2 SALES OF TERMINAL EQUIPMENT 10,77,05,271.94 544,23,47,391.12 3 TOTAL 21,92,02,253.71 1107,62,89,879.95 4. 60% OF 3 ABOVE BEING ESTIMATED PORTION ATTRIBUTED TO SUPPLY OF HARDWARE 664,57,73,928.00 5 7.5% OF 4 ABOVE, BEING PROFIT ON ACCOUNT OF SUPPLY OF HARDWARE 49,84,33,044.59 6 45% OF 5 ABOVE, BEING PROFIT ATTRIBUTABLE TO THE PE 22,42,94,870.06 THEREFORE, THE INCOME OF THE ASSESSEE FROM SALE OF HARDWARE COMPONENT OF THE TELECOM EQUIPMENTS/ HANDSETS, WHIC H IS ATTRIBUTABLE TO THE PE IN INDIA IS RS. 22,42,94,870 .06/- THIS MOUNT IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. OBJECTIONS WAS RAISED BY THE ASSESSEE BEFORE THE DR P WHICH HAVE BEEN DEALT WITH VIDE PARA 4.4/4.4.1 BY THE DR P. IT HEREIN 35 ITA 5870/DEL/12 & ORS. ZTE CORPORATION IT HAS BEEN HELD THAT IN SO FAR AS ATTRIBUTION OF I NCOME OF PES CONCERNED, THE DRP HAS DECLINED TO INTERFERE WITH T HE AO'S ORDER AND ASSESSEE'S OBJECTION IS REJECTED. IN VIEW OF THE ABOVE AMOUNT OF RS. 22,42,94,870 IS ADDED TO THE INCOME O F ASSESSEE , BEINGS PROFITS ATTRIBUTED TO PE OF SALE OF HARDWARE COMPONENT OF TELEPHONE EQUIPMENT/HANDSETS. IT IS OBSERVED FROM THE PRECEDING PARAGRAPHS I SATI SFIED THAT THAT THE ASSESSEE HAS CONCEALED PARTICULARS OF HIS INCOM E AND ALSO HAS FURNISHED INACCURATE PARTICULARS OF HIS INCOME. IN VIEW OF THIS PENALTY PROCEEDINGS U/S 271 (1) ( C) IS INITIA TED SEPARATELY. 27. LD. CIT(A) HAS CONFIRMED THE FINDINGS OF AO IN REGARD TO FIXED PE IN INDIA AND DEPENDENT AGENCY IN INDIA BUT HAS NOT CONCURRED WITH THE FINDINGS OF AO IN REGARD TO INSTALLATION PE. THE OBSERVATIONS OF LD. CIT(A) IN REGARD TO FIXED PE IN INDIA ARE AS UNDER:- 5.4 'FROM ABOVE STATEMENTS, IT CAN BE SEEN THAT ZTE CORPORATION CHINA IS SUPPLYING TELECOM EQUIPMENTS T O CUSTOMERS IN INDIA. ZTE INDIA WHICH IS WHOLLY OWNED SUBSIDIARY OF ZTE CORPORATION CHINA IS RESPONSIBLE FOR INSTALLATION / COMMISSIONING OF EQUIPMENTS SU PLIED BY THE APPELLANT. THE CONTRACTS ARE NEGOTIATED AND CONCLUD ED IN INDIA BY A TEAM CONSISTING OF PERSONS FROM ZTE INDIA AND ZTE CHINA. THE EXPATRIATES FROM ZTE CHINA COME TO INDIA TO PROVIDE TECHNICAL SUPPORT SERVICES TO ZTE INDIA. AL L THESE ACTIVITIES GO ON TO ESTABLISH THAT THE APPELLANT HA S BUSINESS CONNECTION IN INDIA WITHIN THE MEANING OF SECTION 9 (1)(I) OF THE ACT. THE NON- RESIDENT APPELLANT IS DOING BUSINESS ACTIVITIES IN INDIA WHICH ARE NOT ISOLATED INSTANCES, RATHER THES E REPRESENT REAL AND INTIMATE RELATIONSHIP BETWEEN ACTIVITIES O F THE APPELLANT DONE OUTSIDE INDIA AND THOSE DONE INSIDE INDIA. THE BUSINESS OPERATIONS BEING DONE IN INDIA BY THE APPELLANT ARE REVENUE 36 ITA 5870/DEL/12 & ORS. ZTE CORPORATION GENERATING AS THESE OPERATIONS ARE REQUIRED TO EARN THE CONTRACT AND TO MEET WITH CONTRACTUAL OBLIGATIONS. THEREFORE , ALL THE PARAMETERS OF BUSINESS CONNECTION AS PRESCRIBED BY VARIOUS JUDICIAL AUTHORITIES AS MENTIONED SUPRA ARE SATISFI ED. EVEN THE APPELLANT HAS NOT TAKEN ANY CONTENTION BEFORE AO D URING ASSESSMENT STAGE THAT IT DOES NOT HAVE BUSINESS CON NECTION IN INDIA. THIS FACT HAS BEEN MENTIONED IN THE ASSESSME NT ORDER ITSELF BY THE AO. 5.2.5 IN VIEW OF DISCUSSION SUPRA, I HOLD THAT THE APPELLANT HAS BUSINESS CONNECTION IN INDIA WITHIN THE MEANING OF SECTION 9(1)(I) OF THE ACT THE GROUND OF APPEAL IS THEREFOR E DISMISSED. XXX XXX XXX XXX 6.2.2 TO DECIDE THE ISSUE INVOLVED, IT IS PERTINENT TO GO THROUGH CONTENTS OF VARIOUS STATEMENTS REPRODUCED SUPRA WHI CH WERE RECORDED DURING THE COURSE OF SURVEY PROCEEDINGS. T HE BUSINESS MODEL OF THE APPELLANT IS THAT IT IS SUPPLYING TELE COM EQUIPMENTS TO CUSTOMERS IN INDIA AND ZTE INDIA WHIC H IS A SUBSIDIARY OF THE APPELLANT IN INDIA, IS CARRYING O UT INSTALLATION /COMMISSIONING OF THE TELECOM EQUIPMENTS SUPPLIED B Y THE APPELLANT. ANALYSIS OF VARIOUS STATEMENTS REPRODUCE D SUPRA REVEALS THAT EMPLOYEES OF THE APPELLANT COME TO IND IA. THESE EMPLOYEES ALONG WITH PERSONNEL FROM ZTE INDIA GO TH ROUGH THE ENTIRE PROCESS OF CONTRACT NEGOTIATION WITH INDIAN CUSTOMER (Q. 3 IN STATEMENT OF MR. HEMANT KAMBOJ). THE EMPLOYEES OF THE APPELLANT IN INDIA HELP ZTE INDIA PERSONNEL IN PREP ARATION OF BID DOCUMENTS. THESE EMPLOYEES ALSO CONDUCT IN INDI A DIRECT MEETINGS WITH INDIAN CUSTOMERS ( Q.47 IN STATEMENT OF SH. HUANG DABIN). THESE EMPLOYEES PROVIDE ALL KINDS OF TECHNICAL SUPPORT TO ZTE INDIA BE IT TENDERING SUPPORT, PRODU CT SUPPORT, POST SALES SUPPORT ETC. ( Q.49 IN STATEMENT OF SH. HUANG DABIN, Q.8 & 9 IN STATEMENT OF MR. ROCKY, Q.6 & 7 IN STATE MENT OF DR. DALIP GHOSH). ALL THESE EMPLOYEES WORK FOR ZTE CORP ORATION 37 ITA 5870/DEL/12 & ORS. ZTE CORPORATION CHINA FROM FOLLOWING ADDRESSES IN INDIA (Q. 10 IN S TATEMENT OF MR. ROCKY): A. 6TH FLOOR, BUILDING NO. LOB, DLF CYBER CITY, PHA SE-IL, GURGAON. B. 2ND FLOOR, B-BLOCK, SALARPURIA HALLMARK, PLOT NO . 15&16, KADUBEESANA HALLI, OUTER RING ROAD, BANGALORE. C. MILLENIUM BUSINESS PAR AL8, SCETOR-I, 2ND FLOOR, A-WING, MAHAPE, NAVI MUMBAI THESE ADDRESSES ARE OFFICES OF ZTE INDIA AND CHINES E EXPATRIATES COME TO INDIA AND OPERATE FOR ZTE CHINA , THE APPELLANT, FROM THESE PLACES. 28. AS REGARDS THE DEPENDENT AGENCY PE, LD. CIT(A) HAS OBSERVED IN PARAS 7.2.2 AND 7.2.3 AS UNDER: 7.2.2 COMBINED READING OF THESE TWO CLAUSES OF ART ICLE 5 SHOWS THAT INDIAN ENTITY SHOULD BE OTHER THAN AN AG ENT OF INDEPENDENT STATUS AND IT SHOULD HABITUALLY EXERCIS E AUTHORITY TO SIGN CONTRACT ON BEHALF OF NON-RESIDENT PROVIDED IT S ACTIVITIES ARE NOT OF ANCILLARY OR AUXILIARY NATURE. IN PRESEN T CASE, ZTE INDIA IS PERFORMING INSTALLATION ACTIVITIES IN RESP ECT OF TELECOM EQUIPMENTS SUPPLIED BY ZTE CORPORATION TO CUSTOMERS IN INDIA. IT IS NOT THE CASE OF THE APPELLANT THAT ZTE INDIA IS PERFORMING SIMILAR SERVICES FOR OTHER SUCH SUPPLIERS. THUS, AC TIVITIES OF ZTE ARE DEVOTED WHOLLY OR ALMOST WHOLLY ON BEHALF OF TH E APPELLANT AND HENCE IT CANNOT BE CONSIDERED AS AGENT OF INDEP ENDENT STATUS. FURTHER, EVEN FOR TECHNICAL INPUT, ZTE INDI A IS WHOLLY DEPENDENT UPON THE APPELLANT. IT IS UNDISPUTED THAT EMPLOYEES OF THE APPELLANT ARE ALWAYS PROVIDING TECHNICAL SUP PORT SERVICES TO ZTE INDIA REQUIRED FOR PURPOSES OF INSTALLATION OF EQUIPMENT SUPPLIED BY THE APPELLANT THEREFORE, EVEN PROFESSIO NALLY SPEAKING, ZTE INDIA NEEDS LEGS OF THE APPELLANT TO STAND. IT GOES 38 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ON TO PROVE THAT ZTE INDIA IS NOT AN AGENT OF INDEP ENDENT STATUS. 7.2.3 FURTHER, FROM PERUSAL OF VARIOUS STATEMENTS R ECORDED DURING THE COURSE OF SURVEY PROCEEDINGS, IT IS EVID ENT THAT NEGOTIATION OF CONTRACT AND IS SIGNING IS DONE JOIN TLY BY THE TEAM COMPRISING PERSONS FROM ZTE CORPORATION CHINA AND ZTE INDIA. REPLY TO Q. 3 IN STATEMENT OF SH. HEMANT KAMBOJ REPRODUCED SUPRA IS PARTICULARLY RELEVANT IN THIS R EGARD. REPLY TO Q. 7 IN STATEMENT OF MR. ROCKY CLEARLY POINTS OUT T HAT EVEN PRICE NEGOTIATION IS DONE -OY THE EMPLOYEES OF ZTE INDIA ON BEHALF OF THE APPELLANT. REPLY (C) TO Q. 47 IN STAT EMENT OF MR. HUANG DABIN SHOWS THAT EVEN BID DOCUMENTS IN RESPEC T OF EQUIPMENT SUPPLY ARE PREPARED BY ZTE INDIA AND THE APPELLANT PROVIDES SUPPORT ONLY. THEREFORE, IT CAN SAFELY BE INFERRED THAT ZTE INDIA IS DOING PREPARATORY WORK, NEGOTIATING TH E CONTRACT AND PRICE AND SATISFYING QUERIES OF THE CUSTOMERS O N BEHALF OF THE APPELLANT. THESE ACTIVITIES BEING DONE BY ZTE I NDIA ARE NOT IN NATURE OF ANCILLARY OR AUXILIARY ACTIVITIES AS T HESE ARE VITAL FUNCTIONS WHICH ARE REVENUE GENERATING. IN SUCH A S ITUATION, IT BECOMES CLEAR THAT ZTE INDIA IS HABITUALLY USING IT S AUTHORITY TO NEGOTIATE AND CONCLUDE CONTRACT ON BEHALF OF THE AP PELLANT. NOW, EVEN IF THE CONTRACT IS FORMALLY SIGNED BY THE APPELLANT AFTER ZTE INDIA HAS MADE IT RIPE, IT DOES NOT CHANG E THE GROUND REALITY. FOR THIS PROPOSITION, STRENGTH IS DERIVED FROM OEED COMMENTARY ON ARTICLE 5, WHICH SAYS: 'A PERSON WHO IS AUTHORIZED TO NEGOTIATE ALL ELEMENTS AND DETAILS OF A CONTRACT IN A WAY BINDING ON ENTERPRISE CAN BE SAID TO EXERCISE THIS AUTHORIT Y IN THAT STATE EVEN IF THE CONTRACT IS SIGNED BY ANOTHER PERSON IN THE STATE IN WHICH THE ENTERPRISE IS SITUATED'. AGENCY PE IS CONSTITUTED WHEN APPROVAL/SIGNING OF C ONTRACT IS A PURE FORMALITY. IN PRESENT CASE, CONTRACTS ARE NEGO TIATED BY TEAM COMPRISING PERSONS FROM ZTE CHINA AND ZTE INDIA. TH EREFORE, 39 ITA 5870/DEL/12 & ORS. ZTE CORPORATION THE APPELLANT REMAINS REGULARLY INFORMED ABOUT THE STATUS AND TERMS OF NEGOTIATION. THEREFORE, SUBSEQUENT SIGNING REMAINS A PURE FORMALITY ESPECIALLY IN VIEW OF THE FACTS THAT TERMS AND CONDITIONS MENTIONED IN CONTRACT DOCUMENT ARE MORE OR LESS STANDARD ONE. FURTHER, PLACE OF SIGNING OF CONTRACT IS IRRELEVANT FOR CONSTITUTION OF AGENCY PE. ONLY REQUIREMENT IS THAT BUSINESS ACTIVITY OF AGENT SHOULD BE PURSUED IN THE STATE WH ERE AGENCY PE IS TO BE CONSTITUTED. 29. BEFORE ARRIVING AT ANY CONCLUSION ON THE BASIS OF AFOREMENTIONED FINDINGS OF LOWER REVENUE AUTHORITIES ON THE LEVEL OF OPERATION S CARRIED OUT AT PE IN INDIA, WE WILL FIRST REFER TO VARIOUS CASE LAWS RELIED UPON B Y BOTH THE SIDES. 30. THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE ITAT DELHI SPECIAL BENCH DECISION IN THE CASE OF MOTOROLA INC. VS. DCIT (200 5) 95 ITD 269 (DEL.)(SB). IN THIS CASE THE TRIBUNAL IN PARA 287 HAS OBSERVED THA T THE ONLY ACTIVITIES WHICH THE ASSESSEE CARRIED ON IN INDIA THROUGH ITS PE WERE (A) NET WORK PLANNING; (B) NEGOTIATIONS IN CONNECTION WITH THE SALE OF EQU IPMENT; AND (C) THE SIGNING OF THE SUPPLY AND INSTALLATION CON TRACTS. 31. TRIBUNAL FURTHER NOTICED THE DECISION OF HONBL E SUPREME COURT IN THE CASE OF CIT V. AHMEDBHAI UMARBHAI & CO. (1950) 18 ITR 47 2 (SC) (PARA 19), WHEREIN THE HONBLE SUPREME COURT HELD THAT THE INCOME ATTR IBUTABLE TO THE MANUFACTURING ACTIVITY SHOULD BE MORE THAN THE INCOME ATTRIBUTABL E TO THE ACTIVITY OF SALE. 32. TRIBUNAL FURTHER REFERRED TO THE DECISION OF HO NBLE MADRAS HIGH COURT IN THE CASE OF CIT V. ANAMALLAIS TIMBER TRUST LTD. (1 950) 18 ITR 333 (MAD.), 40 ITA 5870/DEL/12 & ORS. ZTE CORPORATION WHEREIN HONBLE HIGH COURT HAD APPROVED THE TRIBUNA LS DECISION THAT 10% OF THE INCOME CAN BE ATTRIBUTED TO THE SIGNING OF THE CONT RACTS IN INDIA. FURTHER, TRIBUNAL REFERRED TO THE DECISION OF HONBLE CALCUTTA HIGH C OURT IN THE CASE OF CIT V. BERTAMS SCOTT LTD. (1987) 31 TAXMAN 144 (CAL.) (PA RA 197) WE HAVE KEPT THE PRINCIPLES LAID DOWN IN THESE JUD GMENTS IN MIND. IN THE PRESENT CASE, AS ALREADY NOTED, IN ADD ITION TO THE SIGNING OF THE CONTRACTS IN INDIA, THE PRELIMINARY NEGOTIATIONS FOR THE CONTRACTS AND THE NETWORK PLANNING WERE CAR RIED OUT THROUGH THE PE. WE MAY CLARIFY HERE THAT THE NETWOR K PLANNING ACTIVITY IS DIFFERENT FROM THE ACTIVITIES WHICH ARE OF A PREPARATORY OR AUXILIARY CHARACTER. IN RESPECT OF S IGNING OF CONTRACTS, ALONE, THE INCOME ATTRIBUTED IS 10%, IN THE DECISIONS CITED ABOVE. TWO MORE ACTIVITIES HAVE BEEN CARRIED OUT BY THE PE IN INDIA AND, THEREFORE, WE HAVE TO ATTRIBUTE A HIGHER INCOME THAN WHAT WAS ATTRIBUTED IN THE DECIDED CASES. THE NEGOTIATIONS WHICH ULTIMATELY LEAD TO THE SIGNING OF THE CONTRAC TS MAY INVOLVE MORE EFFORT ON THE PART OF THE PE AND THE S IGNING OF THE CONTRACTS IS ONLY THE FRUCTIFICATION OF THOSE EFFOR TS. OBVIOUSLY, THEREFORE, THE INCOME ATTRIBUTABLE TO THE NEGOTIATI ONS PART SHOULD BE MORE AND IN ADDITION TO THE INCOME ATTRIBUTABLE TO THE SIGNING OF THE CONTRACTS. SOME INCOME HAS TO BE ATTRIBUTED TO THE NET WORK PLANNING ALSO. TAKING ALL THESE INTO CONSIDERA TION, WE CONSIDER IT FAIR AND REASONABLE TO ATTRIBUTE 20~QI THE NET PROFIT IN RESPECT OF THE INDIAN SALES AS THE INCOME ATTRIB UTABLE TO THE PE. THE FOLLOWING STEPS ARE INVOLVED IN COMPUTING T HE INCOME ATTRIBUTABLE TO THE PE. 33. THE SECOND DECISION ON THIS ISSUE IS IN THE CAS E OF HUAWEI TECHNOLOGIES CO. LTD. VS. ADIT (INTERNATIONAL TAXATION)(2014) 149 IT D 323 (DEL.), WHEREIN THE 41 ITA 5870/DEL/12 & ORS. ZTE CORPORATION TRIBUNAL IN PARA 12 TOOK NOTE OF THE FACT THAT AO E STIMATED OPERATING PROFIT AND THEN ATTRIBUTED 20% TOWARDS THE PE IN INDIA. 34. DCIT VS. METAPATH SOFTWARE INTERNATIONAL LTD. ( 2006) 9 SOT 305 (DEL.). LD. COUNSEL REFERRED TO THIS DECISION AND POINTED O UT THAT AO HAD WORKED OUT 40% OF TOTAL VALUE OF HARDWARE SUPPLY AS INCOME ATTRIBU TABLE TO PE. HOWEVER, LD. CIT(A) AFTER TAKING INTO CONSIDERATION THE CONTRIBU TION OF PE TOWARDS EARNING OF TAXABLE REVENUE OBSERVED THAT SINCE PE WAS MERELY DOING JOB BUSINESS OF NEGOTIATIONS, PROFITS ATTRIBUTABLE TO PE WERE TO BE REDUCED TO 8%. TRIBUNAL UPHELD THE LD. CIT(A)S CONTENTION AFTER CONSIDERING THE D ECISION IN THE CASE OF MOTOROLA INC. (SUPRA). TRIBUNAL, INTER ALIA, OBSERVED THAT S INCE PE WAS MERELY DOING THE JOB BUSINESS OF NEGOTIATION, THEREFORE, 8% PROFITS ATTR IBUTABLE TO PE WERE IN LINE WITH THE REQUIREMENT OF RULE 10(2) OF THE IT RULES. 35. LD. CIT(DR) REFERRED TO THE ASSESSMENT ORDER P ASSED IN THE CASE OF ALCATEL LUCENT, FRANCE FOR AY 2006-07 AND REFERRED TO PARA 6.6 AT PAGE 78 OF THE SAID ORDER, WHICH IS REPRODUCED HEREUNDER: 6.6. ASSESSEE HAS SUBMITTED THE ANNUAL. ACCOUNTS O F THE GROUP FOR THE CALENDAR YEARS 200 1 TO 2008. HOWEVER , THIS BASIS CANNOT BE ADOPTED BECAUSE ARTICLE 7(2) OF THE TREAT Y PROVIDES THAT PROFITS TO BE ATTRIBUTED TO A PERMANENT ESTABL ISHMENT ARE THOSE WHICH THAT PERMANENT ESTABLISHMENT WOULD HAVE MADE IF, INSTEAD OF DEALING WITH ITS HEAD OFFICE, IT HAD BEE N DEALING WITH AN ENTIRELY SEPARATE ENTERPRISE UNDER CONDITIONS AN D AT PRICES PREVAILING IN THE ORDINARY MARKET. THE BUSINESS OF THE ASSESSEE 42 ITA 5870/DEL/12 & ORS. ZTE CORPORATION GROUP IS GROWING AT THE FASTEST PACE IN INDIA AND I NDIAN MARKET HAS BEEN A PROFITABLE MARKET FOR THE GROUP; THESE A RE ALSO SUPPORTED BY THE CONTINUOUS INCREASE IN EFFORTS IN INDIA & THE PRESENCE IN INDIA. THE GLOBAL PROFITABILITY II DOES NOT REFLECT. THE RIGHT PERSPECTIVE VIS-A-VIS PROFITABILITY OF SALES MADE IN INDIA. FURTHER, FOR THE PURPOSE OF ATTRIBUTING PROFITS TO THE PE, SOME COMPARABLE ENTITIES WERE IDENTIFIED FOR BENCHMARKIN G HOW MUCH A FULL RISK DISTRIBUTOR IS LIKELY TO EARN. BAS ED ON SAME, A TRADING MARGIN OF 3.87% IS FOUND OUT, IN THIS REGAR D REFERENCE IS MADE TO POINT 2.6(A) OF THE SHOW CAUSE NOTICE DATED 8.3.10. ASSESSEE HAS NOT OBJECTED TO THE SAME EXCEPT HAS CL AIMED THAT ON THE GROUP BASIS A PAYMENT OF 0.88% OF SALES IN I NDIA HAS BEEN MADE TO ALIL ON ACCOUNT OF MARKETING SUPPORT S ERVICES; WHICH IS ARRIVED BY TAKING INTO ACCOUNT THE PAYMENT S MADE TO INDIAN ENTITY, DIVIDED BY TOTAL TURNOVER BY ALL THE ENTITIES FROM FY. 2001- 02 TO FY . AFTER THAT 2.99% REMAINS. IT H AS ALSO BEEN CONTENDED THAT THE AGENT IN INDIA IS PERFORMING MIN IMAL FUNCTIONS AND TAKING MINIMAL RISKS I.E IS A LIMITED RISK DISTRIBUTOR AND THEREFORE A DEDUCTION IS TO BE ALLO WED RELATING TO THE RISKS NOT UNDERTAKEN BY ALIL ON ACCOUNT OF MARK ETING, ETC. AFTER CONSIDERING THE REDUCTION ON THESE TWO ACCOUN TS ABOVE; NET INCOME CHARGEABLE TO TAX, AS ATTRIBUTABLE TO TH E PE, IS WORKED OUT @ 2.50% OF THE SALE PRICE. SIMILAR REASO NING HAS BEEN FOLLOWED BY THIS OFFICE IN CALCULATING INCOME OF THE ASSESSEE FOR THE A Y -2007-08 IN THE DRAFT ASSESSME NT ORDER- PASSED FOR THAT YEAR. THE ASSESSEE HAS SUBMITTED THE GLOBAL FINANCIAL RES ULTS OF THE GROUP. THE COMPANY HAD EARNED AN OPERATING MARGIN O F 9:63% DURING THE YEAR 2004, WHICH IS AN YEAR BEFORE THE M ERGER OF ALCATEL & LUCENT- TOOK PLACE. IF THE PERCENTAGE OF 35% (TAKING REFERENCE FROM THE 'CASE OF ROLLS ROYCE (SUPRA)) IS APPLIED ON THE SAME, A PERCENTAGE OF 3.37% IS DERIVED. ASSESSE E HAS CLAIMED THAT ON THE GROUP BASIS A PAYMENT OF 0.88% OF SALES IN 43 ITA 5870/DEL/12 & ORS. ZTE CORPORATION INDIA HAS BEEN MADE TO ALIL ON ACCOUNT OF MARKETING SUPPORT SERVICES. FURTHER, IF, OUT OF 3.37% A DEDUCTION IS ALLOWED FOR PAYMENTS MADE TO ALIL, A FIGURE OF 2.49% WILL BE AR RIVED AT. CONSIDERING THE RULE 10 OF THE INCOME TAX RULES 196 2 AND THE ARTICLE 7 OF THE DTAA IN VIEW OF THE DISCUSSION IN THIS ORDER AND TAKING GUIDANCE FROM THE PRE-PARAGRAPHS, IT IS ESTIMATED THAT, ON A NET BASIS I.E. AFTER REDUCING THE PAYMEN T MADE TO INDIAN COMPANY FOR MARKETING SUPPORT; 'AN OBJECTIVE & REASONABLE PROFIT ATTRIBUTED TO THE PE IN INDIA WIL L BE 2.50% OF THE TURNOVER. THERE ARE FACTS WHICH WERE NOT DISCLOSED EARLIER AN D AS PER THE DISCUSSION ABOVE, SATISFACTION IS HEREBY RECORDED T HAT THE ASSESSEE HAD CONCEALED THE PARTICULARS OF ITS INCOM E INTER-ALIA BY FURNISHING INACCURATE PARTICULARS OF ITS INCOME. PENALTY PROCEEDINGS U/S 271 (1)( C) OF THE INCOME-TAX ACT 1 961 INITIATED; SEPARATELY. 36. LD. CIT(DR) FURTHER REFERRED TO THE APPELLATE O RDER PASSED IN THE CASE OF ALCATEL LUCENT FRANCE AND REFERRED TO PARA 5.8 OF L D. CIT(A)S ORDER WHEREIN LD. CIT(A) HAS, INTER ALIA, OBSERVED AS UNDER: . AS MENTIONED IN PARA 3.3 ABOVE, IN RESPECT OF H ARDWARE SALES, THE LD. AO HAS ESTIMATED NET PROFIT CHARGEAB LE TO TAX AS ATTRIBUTABLE TO PE IN INDIA @ 2.5% OF THE HARDWARE SALES MADE BY APPELLANT IN INDIA AND THE APPELLANT HAS NOT DIS PUTED THE FINDINGS OF THE LD. AO ON TAXABILITY OF HARDWARE SA LES. 37. THIS REMAINED THE BASIS FOR ASSESSMENT YEARS 2 004-05 AND 2005-06. 38. LD. CIT(DR) REFERRED TO PARA 9.2.3 OF CIT(A)S ORDER, WHEREIN IT IS OBSERVED AS UNDER: 44 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 9.2.3 ACCORDING TO ARTICLE 7(2),- IT IS SEEN THAT PROFIT ATTRIBUTABLE TO PE HAS TO BE DETERMINED ON SEPARATE ENTITY BASIS. IN PRESENT CASE, NO TP STUDY HAS BEEN FURNISHED BY THE APPELLANT. THEREFORE, PROFIT OF PE CAN BE DETERMINE D ONLY BY RESORTING TO PROVISIONS OF RULE 10. HOWEVER, THE AO HAS MADE NO ATTEMPT TO FIND OUT COMPARABLE CASES SO AS TO AR RIVE AT % OF PROFIT ATTRIBUTABLE TO INDIAN PE. IT HAS BEEN FOUND THAT IN ANOTHER CASE NAMELY M/S ALCATEL LUCENT FRANCE, FACT S WERE SIMILAR. THAT ENTITY IS ALSO ENGAGED IN SAME LINE O F BUSINESS AS THAT OF THE APPELLANT AND IS SUPPLYING TELECOM EQUI PMENTS TO CUSTOMERS IN INDIA. THE EQUIPMENTS SO SUPPLIED WERE INSTALLED BY ITS INDIAN SUBSIDIARY. A SURVEY OPERATION U/S 13 3A WAS ALSO CARRIED OUT IN THAT CASE. MIS ALCATEL LUCENT FRANCE HAS ACCEPTED AND NOT CONTESTED IN APPEAL THAT 2.5% OF TOTAL SALE REVENUE IS ATTRIBUTABLE TO PE IN INDIA AS NET PROFIT SUBJECT T O TAX AS BUSINESS INCOME. IN MY VIEW, IT SHALL BE FAIR TO ADOPT THE S AME METHOD IN CASE UNDER CONSIDERATION. I HAVE HELD IN SUBSEQUENT PARAS THAT REVENUE FROM SALE OF SOFTWARE IS ALSO TO BE TAXED A S BUSINESS INCOME IN SAME MANNER AS REVENUE FROM SALE OF HARDW ARE. THEREFORE, I HOLD THAT 2.5% OF ENTIRE SALE REVENUE (INCLUDING HARDWARE AND SOFTWARE) IS ATTRIBUTABLE TO INDIAN PE AS NET PROFIT TO BE TAXED AS BUSINESS INCOME. THE AO HAS GIVEN DI FFERENT TREATMENT TO REVENUE FROM SALE OF HARDWARE AND SOFT WARE A;:D TOTAL TAX EFFECT IN THAT CASE IS MORE THAN WHAT WIL L BE AFTER GIVING EFFECT TO THIS APPEAL ORDER. THEREFORE, THIS METHODOLOGY DOES NOT AMOUNT TO ENHANCEMENT AND HENCE NO SEPARAT E NOTICE FOR THAT WAS GIVEN TO THE APPELLANT. THE GROUND OF APPEAL IS ACCORDINGLY PARTLY ALLOWED. WITH REFERENCE TO AFOREMENTIONED FINDINGS OF LD. CI T(A), LD. CIT(DR) SUBMITTED THAT SINCE M/S ALCATEL LUCENT, FRANCE IS CARRYING OUT SIMILAR ACTIVITIES AS THE ASSESSEE AND IS ENGAGED IN THE SAME LINE OF BUS INESS AS ASSESSEE AND THE 45 ITA 5870/DEL/12 & ORS. ZTE CORPORATION OPERATIONS CARRIED OUT BY ALCATEL LUCENT, FRANCE IN INDIA ARE ALMOST SIMILAR, THEREFORE, 2.5% OF TOTAL SALES REVENUE HAS RIGHTLY BEEN ATTRIBUTED TO PE BY LD. CIT(A). 39. THE NEXT DECISION REFERRED TO BY LD. CIT (DR) I S TRIBUNALS ORDER DATED 13.6.2014 IN THE CASE OF M/S NORTEL NETWORKS INDIA INTERNATIONAL INC. FOR AY 2003-04, 2004-05 AND 2005-06, RENDERED IN ITA NOS. 1119, 1120 & 1121/2010 (ASSESSEES APPEALS) & ITA 1153, 1154 & 1155/DEL/20 10 (DEPARTMENTS APPEAL). THE TRIBUNAL HAS OBSERVED THAT M/S NORTEL NETWORKS INDIA INTERNATIONAL INC., A COMPANY INCORPORATED IN USA, WAS A GROUP CONCERN OF M/S NORTEL GROUP, WHICH IS A LEADING SUPPLIER OF HARDWARE AND SOFTWARE PRODUCT S FOR GSM CELLULAR RADIO TELEPHONES SYSTEM. DURING THE YEAR UNDER CONSIDERAT ION THE ASSESSEE HAD SUPPLIED TELECOMMUNICATION HARDWARE TO RELIANCE INFOCOM. TRI BUNAL, AFTER REJECTING THE ASSESSEES PLEA THAT THERE WAS NO PE IN INDIA, CONS IDERED THE ISSUE OF ATTRIBUTION OF PROFITS FROM PARA 9 ONWARDS OF ITS ORDER. THE AO NO TED FROM THE GLOBAL ACCOUNTS OF NORTEL, THE GROSS PROFIT MARGIN PERCENTAGE OF THE A SSESSEE WAS 42.6%. HE ALLOWED 5% DEDUCTION TOWARDS EXPENSES ON GENERAL AND MARKET ING AND THUS 37.6% OF THE TOTAL VALUE OF SUPPLIES OF HARDWARE MADE TO INDIAN CUSTOMER WAS TAXED BY AO. LD. CIT(A) ATTRIBUTED 50% OF THE PROFITS TO THE ACTIVIT IES OF PE IN INDIA WHICH WAS UPHELD BY TRIBUNAL. 46 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 40. LD. CIT(DR) FURTHER REFERRED TO THE DECISION IN THE CASE OF ROLLS ROYCE PLC VS. DIT INTERNATIONAL TAXATION 339 ITR 147 (DEL), W HEREIN THE HONBLE DELHI HIGH COURT APPROVED 35% PROFITS ATTRIBUTABLE TO PE ON AC COUNT OF MARKETING ACTIVITIES IN INDIA. THE HONBLE DELHI HIGH COURT OBSERVED AS UND ER: WHILE RESTRICTING THE ATTRIBUTION TO 35 PER CENT, THE REASON GIVEN BY THE TRIBUNAL WAS THAT PROFIT ATTRIBUTED TO MANUFACTURING ACTIVITY AND R&D ACTIVITIES I. E. 50 PER CENT AND 15 PER CENT RESPECTIVELY HAD TO BE EXCLUDED. THUS THE EXPENSES ON R&D WERE ALREADY TAKEN CARE OF WHEN REMUNERATION @ 35 PER CENT WAS ATTRIBUTED TO MARKETING ACTIVITIES IN INDIA ON WHICH GLOBAL PROFITS WAS APPORTIONED AND THERE WAS NO Q UESTION OF SETTING OFF THE R&D EXPENSES AGAIN IN RESPECT OF MA RKETING ACTIVITIES. FOR SUFFICIENT AND ADEQUATE REASONS, THE AUTHORITIE S BELOW HAVE HELD THAT RRIL TO BE THE PE OF THE ASSESSEE IN INDI A AND IN THE PROCESS, THE OBJECTIONS OF THE ASSESSEE ARE DULY ME T WITH AND ANSWERED. THE TRIBUNAL FIRST CONSIDERED THE QUESTIO N OF BUSINESS CONNECTION. AFTER TAKING NOTE OF THE RELEV ANT PROVISIONS WHICH EXISTED AT THAT TIME AS WELL AS TH E CASE LAW, THE TRIBUNAL TOOK NOTE OF THE FACT THAT AN AGREEMENT WA S ENTERED INTO BY THE ASSESSEE WITH RRIL WHEREBY RRIL WAS TO RENDER CERTAIN SERVICES TO THE ASSESSEE. FROM THE EXTENT A ND SCOPE OF THESE SERVICES, THE TRIBUNAL HELD THAT THE ASSESSEE HAD A BUSINESS CONNECTION IN INDIA WITHIN THE MEANING OF S. 9(1)(I). IT WOULD BE RELEVANT TO POINT OUT AT THIS STAGE THAT T HE AFORESAID CONCLUSION OF THE TRIBUNAL WAS NOT RESTED SOLELY ON THE AGREEMENT WITH RRIL. IT ALSO TOOK INTO CONSIDERATIO N AND ANALYSED VARIOUS PAPERS WHICH WERE FOUND DURING THE COURSE OF THE SURVEY AND WHICH WERE NOT THERE EARLIER WHEN TH E TRIBUNAL 47 ITA 5870/DEL/12 & ORS. ZTE CORPORATION HAD DECIDED THE APPEAL OF THE ASSESSEE FOR THE ASST . YR. 2001-02. IT IS NOT NECESSARY TO STATE IN DETAIL THE NATURE O F THOSE DOCUMENTS HAVING REGARD TO THE FACT THAT THIS ASPEC T OF BUSINESS CONNECTION WAS NOT DISPUTED. AFTER HOLDING THAT THE ASSESSEE HAD BUSINESS CONNECTION IN INDIA, THE TRIBUNAL ADVE RTED TO THE QUESTION AS TO WHETHER THERE WAS ANY PE IN INDIA WI THIN THE MEANING OF ART. 5 OF THE INDO-UK DTAA. THE TRIBUNAL EXTRACTED THE PROVISIONS OF ART. 5 AND STATED THE L EGAL POSITION THAT EMERGED THEREFROM. THEREAFTER, IT REFERRED TO VARIOUS DOCUMENTS AND NARRATED ITS EFFECT IN DETAIL. THERE IS A DETAILED DISCUSSION AFTER TAKING INTO CONSIDERATION ALL THE RELEVANT ASPECTS WHILE HOLDING THAT RRIL CONSTITUTED PE OF T HE ASSESSEE IN INDIA. WHILE UNDERTAKING CRITICAL ANALYSIS OF T HE MATERIAL ON RECORD, THE TRIBUNAL KEPT IN MIND THE OBJECTIONS FI LED BY THE ASSESSEE AS WELL AS THE DOCUMENTS ON WHICH IT WANTE D TO RELY UPON. THOSE OBJECTIONS WERE DULY MET AND ANSWERED. THUS, THERE IS NO NEED TO REMAND THE CASE BACK TO THE TRI BUNAL FOR THIS PURPOSE WHICH WAS THE PLEA RAISED BY THE COUNSEL FO R THE ASSESSEE. THE VIEW TAKEN BY THE TRIBUNAL IN THE IMP UGNED ORDER AS WELL AS IN THE MISCELLANEOUS APPLICATION IS UPHE LD.- - ROYCE PLC VS. DY. DIRECTOR OF IT (2008) 113 IT) ( DEL) 446 : (2008) 1 DTR (DEL) 394 AND ROLLS ROYCE PIC VS. DY. DIRECTOR OF IT (2009) 122 I T) (DEL) 359 : (2009) 20 DTR (DEL) 140 AFFIRMED. 41. LD. CIT(DR), THEREFORE, SUBMITTED THAT THERE IS NO THUMB RULE THAT ONLY 20% OF THE PROFITS ARE TO BE ATTRIBUTED AND IT DEPENDS ON FACTS OF EACH CASE AS TO WHAT IS THE LEVEL OF OPERATION WHICH IS QUITE EXTENSIVE IN THE PRESENT CASE AS IS EVIDENT FROM THE FINDINGS OF AO IN AY 2009-10 AND LD. CIT(A)S F INDINGS. 42. LD. COUNSEL HAS FILED A DETAILED REBUTTAL WITH REFERENCE TO THE DECISION IN THE CASE OF ROLLS ROYCE PLC (SUPRA). LD. COUNSEL SUBMIT TED THAT TRIBUNAL HAD TAKEN 48 ITA 5870/DEL/12 & ORS. ZTE CORPORATION NOTE OF ARTICLE 7(3) OF INDO-UK DTAA AS PER WHICH W HERE A PE TAKES AN ACTIVE PART IN NEGOTIATING, CONCLUDING OR FULFILLING CONTR ACTS, NOTWITHSTANDING THAT OTHER PART OF THE ENTERPRISE HAS ALSO PARTICIPATED IN THO SE TRANSACTIONS, THE PROPORTION OF THE PROFIT ARISING OUT OF THOSE CONTRACTS SHALL BE TREATED AS PROFIT INDIRECTLY ATTRIBUTABLE TO THE PE AND WILL BE TAXABLE IN SUCH CONTRACTING STATE WHERE THE PE IS SITUATED. TRIBUNAL FURTHER NOTED THAT IN VIEW OF T HE PROVISIONS OF ARTICLE 7(3), THE DIRECT AS WELL AS INDIRECT INCOME ATTRIBUTABLE TO T HE PE WAS CHARGEABLE TO TAX. TRIBUNAL FURTHER TOOK NOTE OF THE FACT THAT FOR THE PURPOSE OF THAT CASE IT WAS IMMATERIAL AS TO WHETHER IN NEGOTIATING THE CONTRAC TS, REPRESENTATIVES OF THE ASSESSEE (I.E. ROLLS ROYCE PLC) WERE ALSO PRESENT. 43. IT WAS IN THESE PECULIAR CIRCUMSTANCES AND PROV ISIONS THAT THE TRIBUNAL ATTRIBUTED 35% OF THE PROFITS TO THE PE IN INDIA FO R NEGOTIATING CONTRACT AND MARKETING ACTIVITIES BY THE PE IN INDIA. HE POINTED OUT THAT THERE IS NO SUCH ARTICLE IN DOUBLE TAX TREATY BETWEEN INDIA AND CHINA. THER EFORE, WHERE THE EMPLOYEES OF BOTH CHINA AND INDIA WERE PRESENT AND CARRIED OUT T HE ACTIVITY OF NEGOTIATION OF CONTRACT, THE ENTIRE PROFIT ON SUCH ACCOUNT COULD N OT BE ATTRIBUTABLE TO THE PE IN INDIA. 44. LD. COUNSEL FURTHER CLARIFIED THAT BEFORE HONB LE DELHI HIGH COURT ASSESSEE DID NOT CHALLENGE THE ATTRIBUTION OF 35% OF THE GRO SS PROFITS TO THE ACTIVITIES CARRIED 49 ITA 5870/DEL/12 & ORS. ZTE CORPORATION OUT IN INDIA. LD. COUNSEL POINTED OUT THAT DECISION IN THE CASE OF ROLLS ROYCE SINGAPOE VS. ADIT, WHEREIN TRIBUNAL HAD THE OCCASIO N TO EXAMINE WHETHER THE FOREIGN COMPANY HAD A PE IN INDIA AND IN THE EVENT PE COMING INTO EXISTENCE WHAT WAS THE PROFIT WHICH WAS REQUIRED TO BE ATTRIBUTED IN THE FACTS OF THE CASE. HE POINTED OUT THAT TRIBUNAL CONCLUDED THAT THE CORRE CT ATTRIBUTION OF PROFIT TO ITS PE WOULD BE TO THE EXTENT OF 10% OF THE PROFIT EARNED FROM THE ACTIVITIES OF SALE OR SUPPLIES BY THE ASSESSEE COMPANY TO THE INDIAN CUS TOMERS. LD. COUNSEL POINTED OUT THAT THERE WAS NO PROVISION LIKE ARTICLE 7(3) OF THE INDIA UK TREATY IN THE DTAA BETWEEN INDIA AND SINGAPORE. 45. LD. COUNSEL FURTHER POINTED OUT THAT IN CASE OF DIT VS. ERICSON AB 343 ITR 470, HONBLE DELHI HIGH COURT HAS HELD THAT IRRESP ECTIVE OF THE EXPENSES OF A PE IF THE GOODS WERE TRANSFERRED OUTSIDE INDIA NO PORT ION OF ANY PROFIT ARISING FROM THE OFFSHORE SUPPLY COULD BE BROUGHT TO TAX IN INDIA. 46. FROM THE AFOREMENTIONED DISCUSSION IT IS EVIDEN T THAT EACH CASE HAS TO BE CONSIDERED ON ITS OWN MERITS, DEPENDING UPON THE L EVEL OF OPERATIONS CARRIED OUT BY PE IN INDIA. IN THE PRESENT CASE WE HAVE EARLIE R REPRODUCED PARAS 6.2.2 AND 7.2.3 FROM LD. CIT(A)S ORDER AND ALSO FINDINGS FRO M AOS ORDER FOR AY 2009-10 WHICH GIVE A CLEAR PICTURE OF THE LEVEL OPERATIONS CARRIED OUT BY ZTE INDIA, THE ASSESSEES PE. LD. CIT(A) HAS POINTED OUT THAT ZTE INDIA IS DOING PREPARATORY WORK, NEGOTIATING THE CONTRACT AND PRICE AND ANSWE RING SPECIFIED QUERIES OF THE 50 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 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 IN INDIA. AT THE COST OF REPETITION, WE REPRODUCE THE SAME:- ACTIVITIES PERFORMED BY PE, SUMMARIZED BY AO AS UN DER, - 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 NEGOTIATIONS 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 B EHALF OF ZTE CHINA - LC OPENING AND SUPPLY OF EQUIPMENTS/ HANDSETS - SHIPMENT 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 - CONCLUDING AGREEMENTS AND MOUS ON BEHALF OF ZTE CHI NA - PERFORMANCE GUARANTEE OF THE . COMPANY- ZTE - COORDINATION WITH GOVERNMENT DEPARTMENTS - NEGOTIATION AT GOVERNMENT LEVEL - DECISIONS REGARDING PARTNERSHIP WITH OTHER CONCERNS / MARKETING. - FOREIGN INVESTMENTS IN INDIA 51 ITA 5870/DEL/12 & ORS. ZTE CORPORATION - TAXATION MATTERS OF ZTE CHINA - MARKETING FUNCTIONS - BANKING FUNCTIONS - VISITING CUSTOMERS AND VENDORS 47. IN THE CASE OF MOTOROLA )SUPRA), TRIBUNAL HAS R EFERRED TO THE DECISION IN THE CASE OF AHMADBHAI UMARBHAI (SUPRA), WHEREIN IT HAS BEEN HELD THAT INCOME ATTRIBUTABLE TO THE MANUFACTURING ACTIVITY SHOULD B E MORE THAN THE INCOME ATTRIBUTABLE TO THE ACTIVITY OF SALE. THEREFORE, OU T OF THE TOTAL GLOBAL INCOME OF ASSESSEE RELATABLE TO THE SUPPLIES MADE TO INDIA MO RE INCOME IS TO BE ATTRIBUTED TO THE ASSESSEE AS ACCRUING IN CHINA AND FROM SALE ACT IVITY, 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 ASSESSE E HAD ACCEPTED AND NOT CONTESTED IN APPEAL ATTRIBUTION @ 2.5% OF TOTAL SALES REVENU E. THEREFORE, THIS DECISION, CONSIDERED BY LD. CIT(A), CANNOT BE THE BASIS FOR A RRIVING AT THE CONCLUSION THAT 2.5% OF ENTIRE SALES REVENUE SHOULD BE ATTRIBUTABLE TO INDIAN PE, WHICH IS PRIMARILY AS PER RULE 10(1) METHODOLOGY PROVIDED. WE ARE NOT INCLINED TO ACCEPT THIS PLEA OF LD. CIT(DR). THEREFORE, IN OUR OPINION, ATTRIBUTIO N IS TO BE DONE AS PER RULE 10(2) OF THE IT RULES. 48. LD. COUNSEL HAS ENDEAVOURED TO DISTINGUISH THE DECISION IN THE CASE OF ROLLS ROYCE PLC BY REFERRING TO ABSENCE OF IDENTICAL ARTI CLE 7(3) OF INDIA UK DTAA BEING PRESENT IN INDIA CHINA DTAA. IN OUR OPINION, THIS IS NOT OF MUCH 52 ITA 5870/DEL/12 & ORS. ZTE CORPORATION SIGNIFICANCE BECAUSE IT ONLY CONSIDERS THE INVOLVEM ENT OF ASSESSEES REPRESENTATIVES IN NEGOTIATIONS. WE HAVE TO CONSI DER 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 AFFE CT 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 THA T IN ASSESSEES CASE HARDWARE SUPPLY CONTRACT WAS A PART OF THE TRUNKEY CONTRACT WHICH INVOLVED SUPPLY, INSTALLATION, TESTING AAND COMMISSIONING ETC. AS IS IN THE PRESENT CASE. ACTIVITIES OF M/S NORTEL INDIA AND THAT OF LO OF NORTEL CANADA AN D SERVICES OF EXPATRIATE WORKERS HAD ALSO BEEN TAKEN AS PART OF THE EXECUTIO N OF THE WORK BY THE PE. THUS, THE LEVEL OF OPERATION CARRIED OUT IN INDIA WERE EX TENSIVE AND UNDER SUCH CIRCUMSTANCES TRIBUNAL HAD ATTRIBUTED 50% OF THE NE T PROFIT ARISING OUT OF INDIAN TRANSACTIONS AS ASSESSEES INCOME. 50. HAVING DISCUSSED THE ENTIRE CASE LAW AND AFTER CONSIDERING THE FACTUAL ASPECTS, WE FIND THAT THE LEVEL OF OPERATIONS CARRI ED OUT BY ASSESSEE THROUGH ITS PE IN INDIA ARE CONSIDERABLE ENOUGH TO CONCLUDE THAT A LMOST ENTIRE SALES FUNCTIONS INCLUDING MARKETING, BANKING AND AFTER SALES WERE CARRIED OUT BY PE IN INDIA AND, THEREFORE, KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF 53 ITA 5870/DEL/12 & ORS. ZTE CORPORATION AHMEDBHAI UMARBHAI & CO. (SUPRA), THE DECISION OF R OLLS ROYCE (SUPRA) AND NORTEL NETWORKS INDIA INTERNATIONAL INC. (SUPRA), W E ARE OF THE OPINION THAT IT WOULD MEET THE ENDS OF JUSTICE IF 35% OF NET GLOBAL PROFITS AS PER PUBLISHED ACCOUNTS OUT OF TRANSACTIONS OF ASSESSEE WITH INDI A ARE ATTRIBUTED TO PE IN INDIA IN RESPECT OF BOTH HARDWARE AND SOFTWARE SUPPLIED BY A SSESSEE TO INDIAN CUSTOMERS. AT THIS JUNCTURE WE MAY POINT OUT THAT WHILE DECIDING THE DEPARTMENTS APPEAL IN SUBSEQUENT PART OF THIS ORDER, WE HAVE UPHELD THE F INDINGS OF LD. CIT(A) TO TAX THE INCOME FROM SALE OF SOFTWARE AS BUSINESS INCOME AN D NOT ROYALTY. WE MAY POINT OUT THAT IN AY 2009-10 THE AO ESTIMATED THE OPERATI NG PROFITS AT 7.5% AS AGAINST THE WEIGHTED AVERAGE OF NET OPERATING PROFIT AT 2.5 3% AS PER THE GLOBAL ACCOUNTS. WE ARE NOT INCLINED TO ACCEPT THIS MODE OF COMPUTAT ION RESORTED BY AO, PARTICULARLY IN VIEW OF RULE 10 OF THE IT RULES, W HICH MANDATES THE AO TO GO BY THE PUBLISHED ACCOUNTS OF ASSESSEE. IN THE RESULT A SSESSEES 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). 51. NOW WE PROCEED TO DECIDE THE ASSESSEES SUBMISS ION THAT SINCE FOR AY 2006-07 (RS. 20,56,87,472/-), 2007-08 )RS. 17,10,23 ,750/-)AND FOR AY 2008-09 (RS. 2,38,84,545), THE ASSESSEE HAD PAID MARKETING SUPPORT SERVICES, THEREFORE, NO 54 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ATTRIBUTION SHOULD BE MADE. THE SUBMISSION IS THAT TPO IN THE CASE OF WEBT INDIA HAS ACCEPTED THAT THE PAYMENT FOR MARKET SUPPORT SE RVICE IS AT ARMS LENGTH AND, THEREFORE, IN VIEW OF THE DECISION OF HONBLE SUPRE ME COURT IN THE CASE OF DIT VS. MORGAN STANLEY 292 ITR 416, SINCE THE ASSESSEE HAD BEEN REMUNERATED ON AN ARMS LENGTH BASIS, NO FURTHER PROFIT COULD BE ATTR IBUTED. WE ARE UNABLE TO ACCEPT THIS PLEA OF LD. COUNSEL OF THE ASSESSEE BECAUSE IT IS ONLY AFTER THE SURVEY OPERATIONS WERE CARRIED OUT THAT EXTENSIVE INVOLVEMENT OF PE C AME TO LIGHT. 52. LD. CIT(DR) HAS VERY RIGHTLY POINTED OUT THAT A LL THE SUMS PAID FOR MARKET SUPPORT SERVICE ARE FOR PRE SALE ACTIVITIES AND, TH EREFORE, FOR POST SALE ACTIVITIES PERFORMED BY ZTE INDIA, WHICH SURFACED ON ACCOUNT OF SURVEY OPERATIONS, PROFITS HAVE TO BE ATTRIBUTED. THE AO IN HIS FINDINGS FOR A Y 2009-10, AS REPRODUCED EARLIER, VERY RIGHTLY POINTED OUT THAT THE FUNCTION S PERFORMED IN RESPECT OF TRANSACTIONS ON ACCOUNT OF SUPPLY OF EQUIPMENTS AND HANDSETS WITH CUSTOMERS IN INDIA WERE NOT THE SUBJECT MATTER OF TP ANALYSIS B EFORE THE TPO. SINCE ALL THE FUNCTIONS WERE NOT THE PART OF TP STUDY, THE ASSESS EES CONTENTION THAT IF A CORRECT ARMS LENGTH IS APPLIED THEN NOTHING FURTHER WILL B E LEFT TO BE TAXED IN THE HANDS OF FOREIGN ENTERPRISE IN LIGHT OF THE DECISION IN THE CASE OF MORGAN STANLEY (SUPRA), CANNOT BE ACCEPTED BECAUSE IN THAT DECISION ITSELF HONBLE SUPREME COURT HAS, INTER ALIA, OBSERVED THAT IF THE TP ANALYSIS DOES NOT ADE QUATELY RESPECT THE FUNCTIONS PERFORMED AND RISK ASSUMED BY THE ENTERPRISE THEN I N SUCH A CASE THERE WOULD BE 55 ITA 5870/DEL/12 & ORS. ZTE CORPORATION NEED TO ATTRIBUTE PROFIT TO THE PE FOR THOSE FUNC TIONS/ RISKS THAT HAVE NOT BEEN CONSIDERED. 53. IN THE RESULT ASSESSEES APPEALS STAND PARTLY A LLOWED. DEPARTMENTS APPEALS : 54. REVISED GROUNDS, COMMON IN ALL THE APPEALS, RA ISED BY THE REVENUE ARE AS UNDER: 1. ON THE FADS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD CIT(A) HAS ERRED IN CHARACTERIZING THE NATURE OF CO NSIDERATION RECEIVED BY ASSESSEE FOR SUPPLY OF SOFTWARE AS CONS IDERATION RECEIVED FOR SUPPLY OF GOODS AND THEREFORE TREATING THE INCOME FROM SUPPLY OF SOFTWARE AS BUSINESS INCOME INSTEAD OF ROYALTY CONSIDERED BY THE A.O .. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD CIT(A) HAS ERRED IN DELETING THE ADDITIONS MADE BY THE AO TAXING THE INCOME FROM SUPPLY OF SOFTWARE AS ROYALT Y, WITHOUT CONSIDERING THAT THE ADDITIONS MADE BY THE AO WERE BASED ON DETAILED ANALYSIS OF INFORMATION GATHERED DURING SU RVEY U/S 133A AND THE CASE WAS THEREFORE DISTINGUISHABLE FRO M THE CASE OF DIT VS ERICSSON AB DECIDED BY THE HON'BLE DELHI HIGH COURT IN ITA NO 504/2007 DATED 23-12-2011 AND IN TH E CASE OF NOKIA NETWORK DATED 07-09-2012. 3. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE , THE LD CIT(A) HAS ERRED IN NOT CONSIDERING THE APPLICABILI TY OF RETROSPECTIVE CLARIFICATORY AMENDMENTS THROUGH INSE RTION OF EXPLANATION 5 & 6 TO SECTION 9(1) (VI) OF THE ACT V IDE FINANCE ACT, 2012, WHICH HELPS IN DEFINING THE TERM ROYALTY INCOME MORE CLEARLY. 4. THE LD CIT(A) ERRED IN DIRECTING THE AO TO WITHD RAW INTEREST U/S 234B BY RELYING UPON THE DECISION OF H ON'BLE DELHI HIGH COURT DATED 30-08-2010 IN THE CASE OF DIT VS J ACOBS 56 ITA 5870/DEL/12 & ORS. ZTE CORPORATION CIVIL INCORPORATED, WITHOUT APPRECIATING THAT THE L EVY OF INTEREST U/S 234B IS MANDATORY AS HELD IN THE CASE OF CIT VS ANJUM M. GHASWALA & OTHERS 252 ITR 1 (SC). 55. IN THE REVISED GROUNDS OF APPEAL RAISED BY DEPA RTMENT THERE ARE PRIMARILY 2 ISSUES. FIRSTLY, THE DEPARTMENT IS AGGRIEVED BY TH E FINDINGS OF LD. CIT(A) THAT THE INCOME FROM SUPPLY OF SOFTWARE WAS TO BE TREATED AS BUSINESS INCOME INSTEAD OF ROYALTY CONSIDERED BY THE AO. THE SECOND ISSUE ON W HICH DEPARTMENT IS AGGRIEVED IS IN REGARD TO FINDING OF LD. CIT(A) IN DIRECTING THE AO TO WITHDRAW INTEREST U/S 234B BY RELYING UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. JACOBS CIVIL INCORPORATION . 56. AS REGARDS THE FIRST ISSUE, LD. CIT(DR) AT THE OUTSET FAIRLY CONCEDED THAT THOUGH THIS ISSUE IS COVERED AGAINST THE DEPARTMENT BY THE DECISIONS IN THE CASES OF MOTROLA AND ALCATEL LUCENT, BUT THE GROUND HAS BEE N RAISED IN ORDER TO KEEP THE ISSUE ALIVE, AS THE ISSUE IS YET TO BE DECIDED BY H ONBLE SUPREME COURT. 57. LD. CIT(DR) REFERRED TO PARA 12 OF THE ASSESSME NT ORDER WHEREIN AO HAS CONSIDERED THE TERMS OF AGREEMENT BETWEEN ASSESSEE AND SPICE MOB. PVT. LTD. LD. CIT(DR) REFERRED TO VARIOUS COVENANTS OF THE AGREE MENT, WHICH HAVE BEEN REPRODUCED IN THE ASSESSMENT ORDER. THE SAME ARE RE PRODUCED HEREUNDER: (AGREEMENT BETWEEN THE ASSESSEE AND SPICE MOBILE PV T. LTD.) THIS MEMORANDUM OF AGREEMENT IS MADE ON THIS 21ST D AY OF NOVEMBER, 2006 BETWEEN 57 ITA 5870/DEL/12 & ORS. ZTE CORPORATION SPICE MOBILE PVT. LTD, A COMPANY INCORPORATED IN IN DIA AND HAVING ITS PRINCIPAL/ REGISTERED OFFICE AT VIII. BI LLANWALLA LABANA, P.O. BADDI, TEHSIL NALAGARH, DIST SOLAN- 17 3001 (H.P.) (HEREINAFTER REFERRED TO AS 'PURCHASER'? OR SOMETIM ES ALSO REFERRED TO AS 'CUSTOMER'? OF THE ONE PART, AND ZTE CORPORATION, A COMPANY INCORPORATED UNDER THE L AWS OF P.R. CHINA HAVING ITS REGISTERED OFFICE AT ZTE PLAZ A, KEJI ROAD SOUTH, HI-TECH INDUSTRIAL PARK, NANSHAN DISTRICT, S HENZHEN, P.R. CHINA (HEREINAFTER REFERRED TO AS 'CONTRACTO,J KOR SOMETIMES REFERRED TO AS 'ZTE'?, WHICH EXPRESSION S HALL BE DEEMED TO MEAN AND INCLUDE ITS ALL SUCCESSORS-IN-IN TEREST END ASSIGNS OF THE OTHER PART. - WHEREAS: B. THE PURCHASER IS ENGAGED IN THE SALE AND DISTRIB UTION OF TELECOMMUNICATIONS EQUIPMENTS FOR INFRASTRUCTURE SE RVICES TO TELECOM COMPANIES IN INDIA I.E. END USERS; C. THE CONTRACTOR IS INTER-ALIA ENGAGED IN THE MANU FACTURE OF TELECOMMUNICATIONS EQUIPMENT FOR INFRASTRUCTURE SER VICES AND ALSO HAS THE EXPERIENCE AND SKILLED PERSONNEL FOR S UPPLY, INSTALLATION, COMMISSIONING AND TEST SUCH TELECOMMU NICATIONS EQUIPMENTS ON A TURN-KEY BASIS AND TO ENSURE THAT S UCH TELECOMMUNICATIONS EQUIPMENTS MAINTAIN HIGH QUALITY PERFORMANCE LEVELS. 1.12. EQUIPMENT' MEANS THE PHYSICAL ITEMS AND THEI R CORRESPONDING SOFTWARE ALSO INS;1UDING THE SERVICES AND TO ENSURE THAT SUCH TELECOMMUNICATIONS EQUIPMENTS MAIN TAIN HIGH QUALITY PERFORMANCE LEVELS OF SUCH ITEM TO BE PROVI DED BY THE CONTRACTOR UNDER THE CONTRACT AS REQUIRED FOR THE S ATISFACTORY IMPLEMENTATION OF THE WORKS OR AS SPECIFICALLY PROV IDED FOR IN THE CONTRACT. 1.24 IISQFTWARE' ME~NS THE SOFTWARE BUNDLE'! WITH, EMBEDDED, OR SUPPLIED BY THE CONTRACTOR. ALONG WITH THE EQUIP MENT(S) WHICH IS DESCRIBED IN THE SPECIFICATIONS, OR ANY IM PROVEMENTS AND/ OR ENHANCEMENTS THEREOF, INCLUDING: (I) MAN-MA CHINE 58 ITA 5870/DEL/12 & ORS. ZTE CORPORATION EXECUTABLE OBJECT CODE VERSION OF THE USER LOADABLE PROGRAMS, (II) THE MICROCODE EMBEDDED IN THE EQUIPMENT, (HI) ANY UPDATED OR REVISION OF THESE PROGRAMS OR THE MICROC ODE DELIVERED TO THE PURCHASER AND (IV) ANY FURTHER PRO GRAMS AND MICROCODES NECESSARY FOR INTEGRATION OF THE EQUIPME NTS WITH THE EQUIPMENTS OF OTHER VENDORS/ SUPPLIERS OF THE PURCH ASER. ARTICLE 16: SOFTWARE LICENSE 16. 1 SUBJECT TO THE TERMS AND CONDITIONS OF THIS C ONTRACT, THE CONTRACTOR GRANTS TO THE PURCHASER AND END-USER THE NON- EXCLUSIVE AND TRANSFERABLE RIGHT TO USE THE SOFTWAR E DELIVERED WITH THE EQUIPMENT. EXCEPT AS PROVIDED HEREIN, THE PURCHASER SHALL NOT DIRECTLY OR INDIRECTLY, SELL, TRANSFER, O FFER, DISCLOSE, LEASE, OR SUBLICENSE THE SOFTWARE TO ANY THIRD PART Y WITHOUT PRIOR AUTHORIZATION FROM THE CONTRACTOR. THE CONTRACTOR W ARRANTS THAT THE SOFTWARE SHALL BE FREE FROM ANY VIRUS, TROJAN O R ANY OTHER DISABLING FUNCTION AND AGREES TO PROMPTLY PROVIDE A LL IMPROVISATIONS, UPDATES AND PATCHES TO THE PURCHASE R AND THE END USER FROM TIME TO TIME, AS APPLICABLE. 16.2 EXCEPT AS PERMITTED BY THIS CONDITION AND TIL L THE FULL PRICE OF THE EQUIPMENT TO THE CONTRACTOR, THE PURCH ASER SHALL NOT ITSELF (OR THROUGH ANY HOLDING, SUBSIDIARY OR ASSOC IATED PURCHASER, AGENT OR THIRD PARTY TO) (II) MODIFY, VA RY, ENHANCE, COPY OR DUPLICATE, ANY PART OF THE SOFTWARE, OR (II ) CREATE OR ATTEMPT TO CREATE, OR PERMIT OTHERS TO CREATE OR AT TEMPT TO CREATE, BY ADAPT, DISSEMBLE, DECOMPILE, REASSEMBLE, TRANSLA TE, REVERSE ENGINEERING, OR OTHERWISE, THE SOURCE PROGRAMS OR A NY PART THEREOF FROM THE OBJECT PROGRAMS OR FROM OTHER INFO RMATION MADE AVAILABLE UNDER THIS CONTRACT. (AGREEMENT WITH SHYAM TELELINK LIMITED) THIS CONTRACT IS MADE ON THIS 2:FD DAY OF AUGUST, 2 008 BETWEEN SHYAM TELELINK LIMITED, A COMPANY INCORPORETEDIN IN DIA AND HAVING ITS REGISTERED OFFICE AT B-2-D, SHIV MARG, B ANI PARK, JAIPUR, INDIA AND ITS CORPORATE OFFICE AT A-60, NAR AINA INDUSTRIAL AREA, PHASE-1, NEW DELHI 110028 (HEREINAFTER REFERR ED TO AS 59 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 'THE BUYER') WHICH EXPRESSION SHALL DEEM TO MEAN AN D INCLUDE ALL ITS SUCCESSORS-IN-INTEREST AND PERMITTED ASSIGN S OF THE ONE PART. AND ZTE CORPORATION, CHINA A COMPANY INCORPORATED UNDER THE CHINA LAWS, HAVING ITS REGISTE.RED OFFICE AT 3/F, A WING, ZTE PLAZA, KEJI ROAD SOUTH, HI-TECH INDUSTRIAL PARK, NA NSHAN DISTRICT, SHENZHEN, P.R. CHINA HEREINAFTER CALLED T HE 'SUPPLIER' WHICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONT EXT OR MEANING THEREOF INCLUDE ITS AFFILIATES, SUCCESSORS AND PERMITTED ASSIGNS OF THE OTHER PART. BUYER AND SUPPLIER ARE HEREINAFTER CALLED 'PARTY', OR, COLLECTIVELY THE 'PARTIES'. WHEREAS SUPPLIER IS ENGAGED IN THE BUSINESS OF PROVIDING SO LUTION FOR COMA MOBILE TELEPHONE SYSTEMS IN CHINA AND ABROAD A LONG WITH CERTAIN ASSOCIATED SERVICES. BUYER DESIRES TO PLACE A PURCHASE ORDER FOR COMA MO BILE TELEPHONE SYSTEM (SYSTEM) FOR ITS OPERATIONS IN CER TAIN TELECOM CIRCLES IN INDIA; SUPPLIER HAS AGREED TO PROVIDE THE SYSTEM TO BUYER. 'SOFTWARE' MEANS COMPUTER APPLICATION PROGRAM, SOFT WARE APPLICATION MODULE OR PACKAGE OR ANY PART THEREOF I N BINARY CODE FROM LICENSED TO BUYER UNDER THIS CONTRACT AND LISTED IN ANNEXURE 8 OF THIS CONTRACT WHICH ARE REQUIRED FOR THE PURPOSE SPECIFIED IN THIS CONTRACT. 'SOITWER UPDATES' SHALL MEAN LATEST RELEASE OF SOF TWARE VERSION APPLICABLE TO THE SYSTEM OR PART THEREOF WI TH ALL AVAILABLE FEATURES AND FUNCTIONALITIES AS PER SCOPE OF THIS CONTRACT WITH RESPECT TO SOFTWARE AND CORRECTIONS O F THE SOFTWARE FAULTS THAT MAY OR MAY NOT BE REPORTED BY THE BUYER TO THE SUPPLIER, WHICH ARE ISSUED AS SOFTWARE UPDATES BY T HE SUPPLIER TO THE BUYER. THE SOFTWARE UPDATE SHALL CONTAIN THE AP PROPRIATE LOAD FILE, IMPLEMENTATION INSTRUCTIONS AND USER DOC UMENTATION. ARTICLE: 5: CONTRACT PRICE 60 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 5.1 THE TOTAL TENTATIVE CONTRACT PRICE (CIF DELHI) IS USD 556,000,000 (US DOLLARS FIVE HUNDRED AND FIFTY-SIX MILLION ONLY) WHICH SHALL BE SUBJECT TO CHANGE AS PER THE M UTUAL AGREEMENT BETWEEN THE PARTIES BASED ON THE FINAL CO NFIGURATION OF THE BILL OF MATERIAL OF ALL THE THREE PHASES AND THE PURCHASE VALUE FOR THE FIRST PO IS USD 46,756,935 (US DOLLAR S FORTY SIX MILLION SEVEN HUNDRED AND FIFTY SIX THOUSAND NINE H UNDRED THIRTY FIVE ONLY). THE CONTRACT PRICE SHALL BE ESTA BLISHED FOR THE FULL TERM OF THE CONTRACT AND IT REPRESENTS A SUM I N THE LIMITS OF WHICH THE BUYER SHALL PLACE ORDERS FOR THE DELIVERY OF EQUIPMENT AND THE DELIVERY OF SOFTWARE PRODUCTS UNDER THIS CO NTRACT. THE CONTRACT PRICE MAY BE CHANGED BY MUTUAL WRITTEN AGR EEMENT BETWEEN THE PARTIES. EQUIPMENT PRICES SHALL INCLUDE THE COST OF PACKAGIN G AND MARKING, EXPORT LICENSES AND CERTIFICATES WHICH APP LY TO THE SUPPLIER IN THIS CONTRACT, ALL TAXES AND FEES CHARG ED OUTSIDE INDIA, AS WELL AS THE COST OF FREIGHT, INSURANCE AN D SHIPMENT IN ACCORDANCE WITH THE DELIVERY TERM CIF (LNCOTERMS 20 00) AS PER ARTICLE 16 OF THE CONTRACT. PRICES FOR SOFTWARE SPECIFIED IN INDIVIDUAL ORDERS FOR THE DELIVERY OF SOFTWARE SHAL L INCLUDE ALL TAXES AND FEES CHARGED OUTSIDE INDIA AND THE COST O F WARRANTY SERVICES FOR SOFTWARE UNDER THIS CONTRACT. ARTICLE 34 LICENSE 34.1 SUBJECT TO THIS ARTICLE, BUYER IS HEREBY GRAN TED A LIMITED, NON- TRANSFERABLE, PERPETUAL, NON-EXCLUSIVE LICENSE TO USE THE SOFTWARE AND DOCUMENTATION PROVIDED PURSUANT TO THE CONTRACT (IISOFTWARE LICENSE'? BUYER AGREES THAT THE COPYRIG HT IN THE SOFTWARE AND DOCUMENTATION LICENSED TO IT BY SUPPLI ER INCLUDING ANY RENEWALS, EXTENSIONS, OR EXPANSIONS THEREOF, SH ALL BE TREATED AS PROPRIETARY OF SUPPLIER OR ITS SUB-SUPPLIERS. 34.2 BUYER SHALL NOT MAKE ANY COPIES OF SOFTWARE O R DOCUMENTATION, EXCEPT FOR ARCHIVAL BACK-UP PURPOSES . BUYER SHALL NOT TRANSLATE, REVERSE ENGINEER, MODIFY, DECO MPILE, DISASSEMBLE OR CREATE DERIVATIVE WORKS FROM THE SOF TWARE. 61 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 34.3 BUYER MAY ASSIGN THE RIGHT TO USE THE SOFTWAR E LICENSE TO A THIRD PARTY IN INDIA FOR THE PURPOSE OF OPERATION S AND MAINTENANCE OF THE BUYER'S NETWORK PROVIDED THAT AN Y SUCH THIRD PARTY AGREES IN WRITING TO ABIDE BY ALL OF THE TERM S AND CONDITIONS OF THIS SOFTWARE LICENSE. 34.4 THE SOFTWARE LICENSED UNDER A PURCHASE ORDER MAY BE DELIVERED IN AN INSEPARABLE PACKAGE ALSO CONTAINING SOFTWARE PROGRAMS AND FEATURES OTHER THAN THE SOFTWARE. BUYE R MAY USE SUCH OTHER SOFTWARE PROGRAMS AND FEATURES UNLESS EX PRESSLY PROVIDED OTHERWISE IN THE PURCHASE ORDER. 34.5 THE OBLIGATIONS OF BUYER UNDER THIS ARTICLE, S HALL SURVIVE THE TERMINATION OR EXPIRATION OF THIS CONTRACT FOR ANY REASON. 58. LD. CIT(DR) SUBMITTED THAT FROM ARTICLE 16 GRA NTING SOFTWARE LICENSE IT IS CLEAR THAT THE ASSESSEE WAS GRANTED NON-EXCLUSIVE T RANSFERABLE RIGHTS. THUS, THE TRANSFERABLE RIGHTS OF LICENSEE WAS SUBJECT TO THE ASSESSEES PERMISSION. THE OWNERSHIP RIGHTS OF SOFTWARE REMAINED WITH ASSESSEE ONLY AND ONLY USER RIGHTS WERE GIVEN. 59. LD. CIT(DR) REFERRED TO ANNEXURE XII OF DEPARTM ENTS PAPER BOOK AND REFERRED TO PAGE 75 WHEREIN THE ADDENDUM TO THE S UPPLY CONTRACT FOR THE TELECOM EQUIPMENT DATED 5.9.2008 IS CONTAINED. HE REFERRED TO PAGE 72 OF PB WHEREIN THE ORIGINAL SUPPLY AGREEMENT DATED 5.9.2008 BETWEEN AS SESSEE AND SHYAM TELELINK LTD. IS CONTAINED. HE POINTED OUT THAT THIS AGREEM ENT WAS FOUND DURING SURVEY OPERATION. 60. LD. CIT(DR) REFERRED TO ARTICLE 1 OF THE AFOREM ENTIONED AGREEMENT DEALING WITH DEFINITION AND INTERPRETATION OF VARIOUS WORDS AND PHRASES OF AGREEMENT AND 62 ITA 5870/DEL/12 & ORS. ZTE CORPORATION POINTED OUT THAT BSS SOFTWARE MEANS SOFTWARE RELATE D TO BSS EQUIPMENT. HE FURTHER POINTED OUT THAT EQUIPMENT HAS BEEN DEFINED TO MEAN THE HARDWARE, SOFTWARE, MATERIAL, COMPONENTS AND DOCUMENTATION TO BE DELIVERED UNDER THIS CONTRACT. THUS, HE POINTED OUT THAT SOFTWARE HAS SE PARATE INDEPENDENT IDENTITY. HE FURTHER REFERRED TO THE DEFINITION OF SOFTWARE AS PER WHICH SOFTWARE MEANS COMPUTER APPLICATION PROGRAM, SOFTWARE APPLICATION MODULE OR PACKAGE OR ANY PART THEREOF IN BINARY CODE FROM LICENSED TO BUYER UND ER THIS CONTRACT AND LISTED IN ANNEXURE 8 OF THIS CONTRACT WHICH ARE REQUIRED FOR THE PURPOSE SPECIFIED IN THIS CONTRACT. 61. THE DEFINITION OF SOFTWARE UPDATES READS AS UND ER: SOFTWARE UPDATES SHALL MEAN LATEST RELEASE OF SOF TWARE VERSION APPLICABLE TO THE SYSTEM OR PART THEREOF WI TH ALL AVAILABLE FEATURES AND FUNCTIONALITIES AS PER SCOPE OF THIS CONTRACT WITH RESPECT TO SOFTWARE AND CORRECTIONS O F THE SOFTWARE FAULTS THAT MAY OR MAY NOT BE REPORTED BY THE BUYER TO THE SUPPLIER, WHICH ARE ISSUED AS SOFTWARE UPDATES BY THE SUPPLIER TO THE BUYER. THE SOFTWARE UPDATE SHALL CO NTAIN THE APPROPRIATE LOAD FILE, IMPLEMENTATION INSTRUCTIONS AND USER DOCUMENTATION. 62. THEREAFTER LD. DR REFERRED TO ARTICLE 2 DEALING WITH SCOPE OF SUPPLY REFERRED TO PARA 2.3 WHICH READS AS UNDER THE DELIVERY OF SYSTEM AND PROVISION OF SOFTWARE P RODUCE SHALL BE IMPLEMENTED ON THE OASIS OF PURCHASE ORDER S. A PURCHASE ORDER SHALL BE SIGNED BY THE AUTHORIZED 63 ITA 5870/DEL/12 & ORS. ZTE CORPORATION REPRESENTATIVES OF THE PARTIES AND SHALL BE DEEMED TO BE PLACED WHEN BOTH THE PARTIES HAVE SIGNED THE PURCHASE ORDE R IN ORIGINAL OR BY MEANS OF - EXCHANGED SIGNED FAXED CO PIES. THE SUPPLIER SHALL WITHIN 3 (THREE) BUSINESS DAYS AFTER RECEIPT OF A COPY OF THE PURCHASE ORDER SIGNED BY THE BUYER SHAL L EITHER SIGN THE PURCHASE ORDER AND SEND IT TO THE BUYER OR INFORM THE BUYER IN WRITING ABOUT ITS NON ACCEPTANCE. IN CASE THE SUPPLIER FAILS TO SIGN THE PURCHASE ORDER OR FAILS TO SEND A NY INTIMATION IN TOKEN OF ITS ACCEPTANCE WITHIN THE ALLOWED THREE (3) DAYS TIME, IN THAT EVENT, THE PURCHASE ORDER SHALL DEEME D TO BE CONSIDERED AS ACCEPTED BY THE SUPPLIER. HOWEVER, IN CASE OF ANY CLARIFICATION NEEDED BY SUPPLIER, THE NUMBER OF DAY S FOR ACCEPTANCE SHALL BE SUITABLY EXTENDED. 63. WITH REFERENCE TO THIS LD. CIT(DR) SUBMITTED TH AT SYSTEM AND SOFTWARE HAVE SEPARATELY BEEN MENTIONED. THE PURCHASE ORDERS HAVE SEPARATELY BEEN ISSUED FOR BOTH AND THE INVOICES HAVE ALSO SEPARATELY BEEN RAI SED. 64. LD. CIT(DR) FURTHER REFERRED TO ARTICLE 5 WHICH DEALS WITH CONTRACT PRICE, THE CONTENTS FROM WHICH ARE REPRODUCED HEREUNDER:- EQUIPMENT PRICES SHALL INCLUDE THE COST OF PACKAGIN G AND MARKING, EXPORT LICENCES AND CERTIFICATES WHICH APP LY TO THE SUPPLIER IN THIS CONTRACT, ALL TAXES AND FEES CHARG ED OUTSIDE INDIA, AS WELL AS THE COST OF FREIGHT, INSURANCE AN D SHIPMENT IN ACCORDANCE WITH THE DELIVERY TERM CIF (INCOTERMS 20 00) AS PER ARTICLE 16 OF THE CONTRACT. PRICES FOR SOFTWARE SPECIFIED IN INDIVIDUAL ORDERS FOR THE DELIVERY OF SOFTWARE SHA LL INCLUDE ALL TAXES AND FEES CHARGED OUTSIDE INDIA AND THE COST O F WARRANTY SERVICES FOR SOFTWARE UNDER THIS CONTRACT. 64 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 65. THUS, HE SUBMITTED THAT SOFTWARE PRICES ALSO HA VE SEPARATELY BEEN MENTIONED IN THE CONTRACT ITSELF. ARTICLE 34 LICENSE 34.1 SUBJECT TO THIS ARTICLE, BUYER IS HEREBY GRAN TED A LIMITED, NON- TRANSFERABLE , PERPETUAL, NON-EXCLUSIVE LICEN SE TO USE THE SOFTWARE AND DOCUMENTATION PROVIDED PURSUANT TO T HE CONTRACT ('SOFTWARE LICENSE'). BUYER AGREES THAT TH E COPYRIGHT IN THE SOFTWARE AND DOCUMENTATION LICENSED TO IT BY SUPPLIER INCLUDING ANY RENEWALS, EXTENSIONS, OR EXPANSIONS T HEREOF, SHALL BE TREATED AS PROPRIETARY OF SUPPLIER OR ITS SUB-SU PPLIERS. 34.2 BUYER SHALL NOT MAKE ANY COPIES OF SOFTWARE OR DOCUMENTATION, EXCEPT FOR ARCHIVAL BACK UP PURPOSES . BUYER SHALL NOT TRANSLATE, REVERSE ENGINEER, MODIFY, DECO MPILE, DISASSEMBLE OR CREATE DERIVATIVE WORKS FROM THE SOF TWARE. 34.3. BUYER MAY ASSIGN THE RIGHT TO USE THE SOFTWA RE LICENSE TO A THIRD PARTY IN INDIA FOR THE PURPOSE OF OPERAT IONS AND MAINTENANCE OF THE BUYER'S NETWORK , PROVIDED THAT ANY SUCH THIRD PARTY AGREES IN WRITING TO ABIDE BY ALL OF TH E TERMS AND CONDITIONS OF THIS SOFTWARE LICENSE. 34.4. THE SOFTWARE LICENSED UNDER A PURCHASE ORDER MAY BE DELIVERED IN. AN INSEPARABLE PACKAGE ALSO CONTAININ G SOFTWARE PROGRAMS AND FEATURES OTHER THAN THE SOFTWARE. BUYE R MAY USE SUCH OTHER SOFTWARE PROGRAMS AND FEATURES UNLESS EX PRESSLY PROVIDED OTHERWISE IN THE PURCHASE ORDER. 34.5. THE OBLIGATIONS OF BUYER UNDER THIS ARTICLE, SHALL SURVIVE THE TERMINATION OR \ EXPIRATION OF THIS CONTRACT FO R ANY REASON. 65 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 66. THUS, AS PER THE LICENSING TERMS AS CONTAINED I N ARTICLE 34, LIMITATIONS HAVE BEEN PRESCRIBED FOR USE OF SOFTWARE. THE PROPRIETA RY RIGHT REMAINED WITH ASSESSEE AS IS EVIDENT FROM THE RESTRICTION IMPOSED WHILE GR ANTING LICENSE. 67. TO FURTHER BUTTRESS HIS SUBMISSION THAT SOFTWAR E WAS SEPARATELY ORDERED AND INVOICES SEPARATELY RAISED, LD. CIT(DR) REFERRED T O ANNEXURE XI OF DEPARTMENTS PAPER BOOK PAGE 109 PB WHEREIN THE INVOICES RAISED BY ASSESSEE ON M/S SISTEMA SHYAM TELESERVICES LTD. IS CONTAINED IN WHICH THE I TEM DESCRIPTION IS AS UNDER: 1. EVDO FOR BTS JAIPUR-SOFTWARE 2. BSC UPGRADE FOR EVDO JAIPUR-SOFTWARE 68. HE ALSO REFERRED TO PAGE 107 WHEREIN THE COPY O F BILL OF LADING IS CONTAINED. LD. CIT(DR) POINTED OUT THAT THE CONTENTION OF TAX PAYER IS THAT SINCE ON SOFTWARE THERE IS NO CUSTOM DUTY, SEPARATE INVOICES WERE RA ISED. HE SUBMITTED THAT CHARACTERIZATION OF A TRANSACTION SHOULD REMAIN SAM E FOR ALL STATUTES AND THE ASSESSEE CANNOT CHANGE ITS STAND UNDER INCOME-TAX A CT. 69. LD. DR, FOR LEGAL SUBMISSION, RELIED ON PARA 11 OF THE TRIBUNALS ORDER DATED 4.4.2010 IN THE CASE OF ALCATEL LUCENT, FRANCE VS. ACIT, RENDERED IN ITA NO. 4866/DEL/2010 & 2519/DEL/2010 & OTHERS. THE SAME AR E REPRODUCED BELOW: 11. LEARNED DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND HE ALSO FURNISHED THE WRI TTEN SUBMISSIONS WHICH READS AS UNDER:- 66 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 'THIS BRIEF WRITTEN SUBMISSION IS A SUMMARY OF ARGUMENTS OF THE REVENUE ON THE ISSUE OF TAXATION OF SOFTWARE PAYMENT AS ROYALTY. BRIEF FACTS 2. A SURVEY UNDER SECTION 133A WAS CARRIED OUT AT THE OFFICE PREMISES OF ALCATEL LUCENT INDIA ON 27.02.2009. DURING THE COURSE OF SURVEY PROCEEDINGS PHOTO COPY OF VARIOUS DOCUMENTS WAS OBTAINED AND STATEMENTS OF SENIOR EMPLOYEES INVOLVED IN ADMINISTRATION, SALES AND MARKETING WERE RECORDED. SOME EXPATRIATE PERSONS WHO WERE EMPLOYEES OF ALCATEL GROUP WERE ALSO FUNCTIONING FROM THESE OFFICES. ON THE BASIS OF INFORMATION OBTAINED DURING SURVEY AND POST SURVEY INQUIRIES, NOTICES UNDER SECTION 148 OF THE ACT WERE ISSUED TO ALL ALCATEL GROUP ENTITIES WHICH HAD CARRIED OUT BUSINESS IN INDIA. ALCATEL GROUP IS HAS SUPPLIED TELECOMMUNICATION EQUIPMENTS AND SOFTWARE TO VARIOUS INDIAN CUSTOMERS. 3. IN THE ASSESSMENT ORDERS IT WAS HELD THAT VARIOU S ALCATEL GROUP ENTITIES HAVE BUSINESS CONNECTION AS WELL AS A PERMANENT ESTABLISHMENT IN THE FORM OF FIXED PLACE PE, DEPENDENT AGENT PE AND INSTALLATION PE. A PROFIT BASED ON THE SALES OF EQUIPMENTS MADE IN INDIA WAS ATTRIBUTED TO THESE PERMANENT ESTABLISHMENTS. INDIAN PERMANENT ESTABLISHMENT WAS ALSO INVOLVED IN MAKING SALES IN SOME SOUTH ASIAN COUNTRIES. A PROFIT ON ACCOUNT OF THESE SALES WAS ALSO ATTRIBUTED TO INDIAN PERMANENT ESTABLISHMENT. THE ASSESSEE HAS NOT DISPUTED THE ISSUE OF THE PERMANENT ESTABLISHMENT AS WELL AS ATTRIBUTION OF PROFIT TO THE SAME AND HA S PAID THE DUE TAXES. TAXATION OF INCOME FROM LICENSING OF SOFTWARE 67 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 4. INCOME FROM SOFTWARE HAS BEEN TAXED AS ROYALTY. THE PARAGRAPH 8 OF THE ASSESSMENT ORDER FOR A Y 2006-07 DEALS WITH THE TAXATION OF INCOME FROM LICENSING OF SOFTWARE AS ROYALTIES. THE ASSESSEE HA S TAKEN THIS OF TAXATION IN APPEAL. 5. THE 1D.C/T(A) HAS DISCUSSED THE ISSUE OF TAXATION OF INCOME FROM LICENSING OF SOFTWARE IN PARAGRAPHS 3.4 TO 5.8 OF HIS ORDER. THE ID.CIT(A) BY FOLLOWING THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASES OF ERICSSON AS AND M/S NOKIA NETWORKS HAS ALLOWED THE APPEAL OF THE ASSESSEE. HOWEVER, IN PARAGRAPH 5.8 OF THE ORDER, THE ID.CIT(A) HAS DIRECTED THE AD TO TAX PROFIT WORKED OUT @ 2.5% OF TOTAL SALE CONSIDERATION RECEIVED BY THE APPELLANT FOR SUPPLY OF HARDWARE AND SOFTWARE. 6. THE REVENUE IS AGGRIEVED WITH THE DECISION OF ID.CIT(A) TO THE EXTENT OF NOT UPHOLDING TAXATION O F INCOME FROM SOFTWARE AS ROYALTY AND ALSO NOT CONSIDERING THE APPLICABILITY OF RETROSPECTIVE CLARIFICATORY AMENDMENTS THROUGH INSERTION OF EXPLANATIONS 5 AND 6 TO SECTION 9(1)(VI) OF THE ACT BY FINANCE ACT 2012. 7. THE UNDISPUTED FACTS IN PRESENT CASE ARE THAT SOFTWARE HAS BEEN LICENSED AND NOT SOLD. FURTHER, TITLE IN THE SOFTWARE HAS NOT BEEN TRANSFERRED. ONL Y PARTIAL RIGHTS PERMITTING THE USE OF SOFTWARE HAVE BEEN GRANTED. 8. THE REVENUE RELIES ON THE DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF INFRASOFT LTD (ORDER DATED 22.11.2013 IN ITA NO. 1 034/2009) TO THE EXTENT THAT THE ASSESSEE HAS NOT CONTESTED T HE TAXABILITY OF INCOME FROM SOFTWARE AS ROYALTY UNDER THE PROVISIONS OF THE INCOME TAX 4CT. THE HON'BLE, HIGH COURT IN THE CASE OF DIT VS NOKIA 68 ITA 5870/DEL/12 & ORS. ZTE CORPORATION NETWORKS OY [2013} 212 TAXMAN 68 HAS CONSIDERED THE APPLICABILITY OF THE NEW EXPLANATION 5 AND 6 PROVIDING FOR RETROSPECTIVE CLARIFICATORY AMENDMENTS IN THE ACT CONCERNING TAXABILITY OF INCOME FROM SOFTWARE AS ROYALTY. HOWEVER, THE HONBLE COURT HAS NOT CONSIDERED THE PROVISIONS OF ARTICLE 3(2) WHILE HOLDING THAT IN ABSENCE OF AN Y CHANGE TO THE TREATY THE EARLIER DECISIONS OF THE HONBLE COURT IN THE CASE OF ERICSSON APPLY. 9. THE REVENUE SUBMITS THAT ARTICLE 3(2) OF THE TAX TREATY BETWEEN INDIA AND FRANCE AND OTHER APPLICABLE TREATIES IN THE PRESENT CASE PROVIDES THAT AS REGARDS THE APPLICATION OF THE CONVENTION BY A CONTRACTING STATE, ANY TERM NOT DEFINED THEREIN SHALL, UNLESS THE CONTEXT OTHERWISE REQUIRES, HAVE THE MEANING WHICH IT HAS UNDER THE LAW OF THAT CONTRACTING STATE CONCERNING THE TAXES TO WHICH THE CONVENTION APPLIES'. THEREFORE, TAKING INTO ACCOUNT THE RULES OF TREATY INTERPRETATION IT IS EXPLICITLY CLEAR THAT FOR FIND ING OUT THE MEANING OF A TERM REFERENCE CAN ONLY BE MADE TO INCOME TAX ACT AND ' UNDER NO CIRCUMSTANCES THE ASSISTANT OF COPYRIGHT ACT OR ANY OTHER ACT LIKE SALES TAX ACT CAN BE TAKEN IN THIS REGARD. 10. THE REVENUE STRONGLY RELIES ON THE DECISION OF CENTRAL ECONOMIC-ADMINISTRATIVE COURT OF SPAIN IN CASE NUMBER 3604/2006 WHEREIN THE ISSUE OF TAXATION OF INCOME FROM SOFTWARE UNDER THE TAX TREATY BETWEEN SPAIN AND THE USA HAS BEEN ADJUDICATED. IN THIS CASE THE TAXPAYERS HAD CLAIMED THAT THE COMPUTER SOFTWARE HAD TO BE REGARDED AS LITERARY WORK UNDER THE TAX TREATY BETWEEN SPAIN AND THE USA. THE SPANISH COURT GAVE DECISION IN THE FAVOUR OF THE SPANISH TAX AUTHORITIES AND 69 ITA 5870/DEL/12 & ORS. ZTE CORPORATION AGAINST THE TAXPAYER. THE COURT OBSERVED THAT COMPUTER SOFTWARE IS NOT EXPRESSLY INCLUDED IN THE DEFINITION OF ROYALTY IN ARTICLE 12(3) OF THE TREAT Y DUE TO RAPID DEVELOPMENT OF COMPUTER TECHNOLOGY IN RECENT YEARS. THE COURT THEN OBSERVED THAT PARAGRAPH 13.1 OF THE OECD MODEL COMMENTARY 2000 ON ARTICLE 12 RECOGNIZES THAT THERE MAY BE DIFFICULTIES IN APPLYING THE COPYRIGHT PROVISIONS O F ART. 12 TO SOFTWARE PAYMENTS SINCE PARAGRAPH 2 REQUIRES THAT SOFTWARE BE CLASSIFIED AS A LITERARY, ARTISTIC OR SCIENTIFIC WORK, BUT NONE OF THESE CATEGORIES SEEMS ENTIRELY APT CONSIDERING THE INTERPRETATION REQUIRED BY ARTICLE 3(2) OF THE TREA TY AND THE AMENDMENT IN SPANISH TAX LAW THAT RECENTLY ADOPTED A DEFINITION OF ROYALTY (ART. 12 O F NON-RESIDENT INCOME TAX ACT (LAW 41/1998 OF 9 DECEMBER AMENDED BY LAW 46/2002 OF 8 DECEMBER, CURRENTLY ARTICLE 13.1) NO.3 OF ROYAL LEGISLATIVE DECREE 5/2004), THE ADMINISTRATIVE COURT CONCLUDED THAT PAYMENTS DERIVED FROM THE USE OF COMPUTER SOFTWARE SHOULD NOT BE REGARDED AS LITERARY OR SCIENTIFIC WORK AND THEREFORE, SUCH ROYALTIES SHOULD BE TAXED AS OTHER ROYALTIES AT A HIGHER RATE OF 10% AND NOT AT 5% AS APPLICABLE TO LITERARY OR SCIENTIFIC WORK. COPY OF SUMMARY OF THI S DECISION IS SUBMITTED. 11. RELEVANT PORTION OF ARTICLE 12 OF SPAIN-USA TREATY IS ALSO ATTACHED. THE ISSUE OF TAXATION OF INCOME FROM SOFTWARE AS ROYALTY WAS NEVER IN DOUBT AND NOT DISPUTED UNDER THE SPAIN-USA TREATY, THE DISPUTE ONLY CONCERNED RATE OF TAX. 12. KIND REFERENCE IS ALSO INVITED TO PARAGRAPHS 114 TO 117 AND 130 TO 134 OF THE ASSESSMENT ORDER FOR A Y 2006- 07 IN THE MATTER. PAGE 116 AND 117 SHOWS THAT EVEN THE GECD COUNTRIES NAMELY 70 ITA 5870/DEL/12 & ORS. ZTE CORPORATION MEXICO, SPAIN, SLOVAK REPUBLIC, GREECE, KOREA, POLAND AND PORTUGAL TAXES THE INCOME FROM SOFTWARE. INDIA ALONG WITH MANY NON-MEMBER COUNTRIES OF THE GECD HAVE SUBMITTED THEIR POSITION ON TAXATION OF SOFTWARE (KINDLY REFER TO PAGES 132 AND 133 OF THE ASSESSMENT ORDER). IT IS MENTIONED THAT UNDER SECTION 90 OF THE ACT, THE PARLIAMENT HAS DELEGATED THE AUTHORITY TO THE CENTRAL GOVERNMENT TO NEGOTIATE THE TAX TREATIES WITH OTHER COUNTRIES. TAX TREATIES SIGNED BY THE GOVERNMENT HAS FULL FORCE OF LAW AND DO NOT REQUIRE ANY FURTHER RATIFICATION BY THE PARLIAMENT ' THEREFORE, ANY STATED- POSITION OF THE GOVERNMENT IS FULLY EFFECTIVE AND HAS EQUAL FORCE OF LAW AS TH E TAX TREATIES. THE POSITION OF INDIA ON TAXATION OF INCOME FROM SOFTWARE IS KNOWN TO ALL THE TREATY PARTNERS AND THIS HAS NOT BEEN OBJECTED BY ANYONE. 13. THE REVENUE WOULD LIKE TO SUBMIT THAT CHINA, KOREA, JAPAN AND VIETNAM HAVE TAXED INCOME FROM SOFTWARE UNDER THEIR RESPECTIVE TAX TREATY WITH FINLAND. COPY OF A SUMMARY OF DECISION OF THE SUPREME ADMINISTRATIVE COURT OF FINLAND IN CASE NUMBER KHO 2011 : 101 DATED 12 DECEMBER 2011 IS ENCLOSED. ' 70. AS REGARDS GROUND NO. 3 ALSO, HE RELIED ON THE WRITTEN SUBMISSIONS REPRODUCED ABOVE. 71. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH IS ISSUE STANDS SETTLED BY THE HONBLE DELHI HIGH COURT IN THE CASES OF DIT VS. ER ICSSON AB 343 ITR 470 (DEL.); DIT VS. NOKIA NETWORKS OY 58 ITR 259 AND 35 8 ITR 259. HE SUBMITTED THAT RECEIPTS ON ACCOUNT OF SUPPLY OF SOFTWARE WERE INTEGRALLY CONNECTED TO THE 71 ITA 5870/DEL/12 & ORS. ZTE CORPORATION SUPPLY OF HARDWARE AND, THEREFORE, AO WAS NOT RIGHT IN TAXING SUCH RECEIPTS AS ROYALTY. HE SUBMITTED THAT LD. CIT(A) HAS RIGHTLY H ELD 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 HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. NOKIA INDIA (SUP RA), SOFTWARE SUPPLIES COULD NOT BE TAXED EVEN UNDER THE AMENDED LAW. FURTHER, AS PE R THE PROVISIONS OF ARTICLE 12(5) OF THE DTAA THE SUPPLY OF SOFTWARE BEING INTE GRAL 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 ART ICLE 7 WOULD BE APPLICABLE AND, THEREFORE, THE INCOME FROM SOFTWARE IS TO BE T AXED 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 (DE L.) - ASPECT SOFTWARE INC. VS. ADIT (2015) 61 TAXMANN.COM 36 (DEL.) 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 U S. WE FIND THAT LEARNED ( (A) ALLOWED THE RELIEF TO THE ASSESS EE FOLLOWING THE DECISION OF ITAT IN ASSESSEE'S OWN CASE FOR AY 1997-98 IN ITA NO.407/DEL/200L. THE ITAT HAD DELIVERED THE ABO VE 72 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'B LE JURISDICTIONAL HIGH COURT UPHELD THE DECISION OF IT AT 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 JURISDIC TIONAL HIGH COURT AND ADMITTED BY THEIR LORDSHIPS READS AS UNDE R.- '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 AVOIDANCE AGREEMENT BETWEEN THE GOVERNMENT OF INDIA AND SWEDEN?' 13. THAT THE HON'BLE JURISDICTIONAL HIGH COURT, AFT ER DETAILED DISCUSSIONS WHICH ARE AT PAGES 474 TO 506 OF THE IT R 343, ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 14. THE REVENUE HAD ALSO FILED THE APPEAL AGAINST T HE DECISION OF ITAT IN ASSESSEE'S OWN CASE WHICH IS DECIDED BY THEIR LORDSHIPS ALONGWITH VARIOUS OTHER CASES INCLUDING T HE CASE OF MIS NOKIA NETWORKS, IN THIS CASE ALSO, THE QUESTION NO.3 PROPOSED BY THE REVENUE AND ADMITTED BY THEIR LORDS HIPS 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 UND ER 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'BL E 73 ITA 5870/DEL/12 & ORS. ZTE CORPORATION JURISDICTIONAL HIGH COURT IN THE CASE OF THE ASSESS EE AS WELL AS IN THE CASE OF ERICSSON A.B. (SUPRA). RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDER OF LEARNED CIT(A) IN THIS REGARD AND REJECT GROUND NO.2 OF THE REVENUE'S APPEAL. 74. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT, AS NOTED BY TRIBUNAL, GROUND NOS. 2 & 3 ARE REJECTED. 75. APROPOS GROUND NO. 4, RELATING TO LEVY OF INTER EST U/S 234B, LD. CIT(DR) SUBMITTED THAT LD. CIT(A) WAS NOT CORRECT IN WITHDR AWING INTEREST U/S 234B BY RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. JACOBS CIVIL INCORPORATION 330 ITR 578. HE SUBMITTED THAT LEVY OF INTEREST U/S 234B IS MANDATORY IN VIEW OF THE DECISION OF HONBLE SUPREM E COURT OF IN THE CASE OF CIT VS. ANJUM M. GHASWALA & OTHERS 252 ITR 1(SC). 76. LD. DR POINTED OUT THAT HONBLE DELHI HIGH CO URT IN THE CASE OF JACOBS (SUPRA) HAS HELD THAT SECTION 195 PUTS AN OBLIGATI ON ON THE PAYER I.E. ANY PERSON RESPONSIBLE FOR PAYING ANY SUM FROM WHICH TAX IS TO BE DEDUCTED, TO DEDUCT TAX AT SOURCE AT THE RATE IN FORCE, FROM SUCH PAYMENT AND IF PAYER HAS DEFAULTED IN DEDUCTING TAX AT SOURCE, THE DEPARTMENT CAN TAKE AC TION AGAINST THE PAYER UNDER THE PROVISIONS OF SECTION 201. IN SUCH A CASE THE NON-R ESIDENT IS LIABLE TO PAY TAX BUT THERE IS NO QUESTION OF PAYMENT OF ADVANCE TAX AND, THEREFORE, IT CANNOT BE HELD LIABLE TO PAY INTEREST U/S 234B ON ACCOUNT OF DEFAU LT OF THE PAYER IN DEDUCTING TAX AT 74 ITA 5870/DEL/12 & ORS. ZTE CORPORATION SOURCE FROM THE PAYMENTS MADE TO THE ASSESSEE. THE RELEVANT PART OF THE JUDGMENT IS QUOTED BELOW: 8 THIS CLAUSE CATEGORICALLY USES THE EXPRESSION' D EDUCTIBLE OR COLLECTIBLE AT SOURCE' AND IT IS THIS CLAUSE WHI CH IS INCORPORATED BY THE UTTARANCHAL HIGH COURT IN THE S AID JUDGMENT (SUPRA) IN THE MANNER ALREADY POINTED ABOV E. THE SCHEME OF THE ACT IN RESPECT OF NON-RESIDENTS IS CL EAR. SECTION 195 OF THE ACT PUTS AN OBLIGATION ON THE PAYER, I. E., ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT, TO DEDUCT INCOME-TAX AT SOURCE AT THE RATES IN FORCE FROM SUCH PAYMENTS EXCLUDING THOSE INCOMES WHICH ARE CHARGEABLE UNDER THE HEAD ' SALARIES'. THEREFORE, THE ENTIRE TAX IS TO BE DEDUCTED AT SOUR CE WHICH IS PAYABLE ON SUCH PAYMENTS MADE BY THE PAYEE TO THE NON- RESIDENT. SECTION 201 OF THE ACT LAYS DOWN THE CONS EQUENCES OF FAILURE TO DEDUCT OR PAY. THESE CONSEQUENCES INCLUD E NOT ONLY THE LIABILITY TO PAY THE AMOUNT WHICH SUCH A PERSON WAS REQUIRED TO DEDUCT AT SOURCE FROM THE PAYMENTS MADE TO A NON- RESIDENT BUT ALSO PENALTIES ETC. ONCE IT IS FOUND T HAT THE LIABILITY WAS THAT OF THE PAYER AND THE SAID PAYER HAS DEFAU LTED IN DEDUCTING THE TAX AT SOURCE, THE DEPARTMENT IS NOT REMEDY-LESS AND THEREFORE CAN TAKE ACTION AGAINST THE PAYER UND ER THE PROVISIONS OF SECTION 201 OF THE INCOME-TAX ACT AN D COMPUTE THE AMOUNT ACCORDINGLY. NO DOUBT, IF THE PERSON (PA YER) WHO HAD TO MAKE PAYMENTS TO THE NON-RESIDENT HAD DEFAUL TED IN DEDUCTING THE TAX AT SOURCE FROM SUCH PAYMENT, THE NON-RESIDENT IS NOT ABSOLVED FROM PAYMENT OF TAXES THEREUPON. HO WEVER, IN SUCH A CASE, THE NON-RESIDENT IS LIABLE TO PAY TAX AND THE QUESTION OF PAYMENT OF ADVANCE TAX WOULD NOT ARISE. THIS WOULD BE CLEAR FROM THE READING OF SECTION 191 OF THE ACT ALONG WITH SECTION 209(1)(D) OF THE ACT. FOR THIS REASON, I T WOULD NOT BE PERMISSIBLE FOR THE REVENUE TO CHARGE ANY INTEREST UNDER SECTION 234B OF THE ACT. 75 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 77. LD. CIT(DR) THEREAFTER REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. ALCATEL LUCENT USA (2014) 4 5 TAXMANN.COM 422 (DEL)WHEREIN IT HAS BEEN, INTER ALIA, HELD THAT IT IS OPEN TO THE ASSESSEE TO DENY ITS LIABILITY TO TAX IN INDIA ON WHATEVER GROUNDS IT T HINKS FIT AND PROPERTY. HAVING DENIED ITS TAX LIABILITY, IT SEEMS UNFAIR ON THE PA RT OF THE ASSESSEE TO EXPECT THE INDIAN PAYER TO DEDUCT TAX FROM THE REMITTANCES. IT IS ALSO OPEN TO THE ASSESSEE TO CHANGE ITS STAND AT THE FIRST APPELLATE STAGE AND S UBMIT TO THE ASSESSMENT OF THE INCOME. WHEN IT DOES SO ALL CONSEQUENCES UNDER TH E ACT FOLLOW INCLUDING ITS LIABILITY TO PAY INTEREST U/S 234B, SINCE IT WOULD NOT HAVE PAID ANY ADVANCE TAX. IN THIS REGARD HE REFERRED TO PARA 20 & 21 OF THE ALCA TEL ORDER WHICH ARE REPRODUCED HEREUNDER: 20. THE OTHER ARGUMENT ON BEHALF OF THE ASSESSEE T HAT THE LIABILITY OF THE PAYER UNDER SECTION 20 I IS ABSOLU TELY DIFFERENT FROM THE LIABILITY OF THE NON-RESIDENT ASSESSEE UND ER SECTION 234B NEED NOT BE EXAMINED AND FOR THE PURPOSE OF TH E PRESENT CASE IT WOULD NOT MAKE ANY DIFFERENCE, ON ACCOUNT O F THE PECULIAR FACTS OF THE PRESENT CASE. IT MAY BE RECAL LED THAT THE ARGUMENT PUT FORTH BY THE REVENUE BEFORE THE INCOME TAX APPELLATE TRIBUNAL WAS THAT A~ THE TIME OF THE RECE IPT OF MONIES FROM INDIA, THE ASSESSEE TOOK THE PLEA THAT IT DID NOT HAVE ANY PE IN INDIA AND, THEREFORE, THE PAYMENT WAS NOT CHA RGEABLE TO TAX IN INDIA, WITH THE CONSEQUENCE THAT SECTION 195 (1) WAS NOT APPLICABLE, WHEREAS IN THE APPEALS BEFORE THE CI A PEALS), A CONTRADICTOR STAND WAS ADOPTED BY THE ASSESSEE, BY ACCEPTING THE FACT THAT IT HAD A PE IN INDIA AND BY ADMITTING THAT THE INCOME EARNED IN INDIA WAS CHARGEABLE TO TAX. IT WA S FURTHER 76 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ARGUED BY THE-REVENUE THAT SUCH A CONTRADICTORY PL EA CANNOT BE PERMITTED TO BE TAKEN BY THE ASSESSEE. IT WAS POINT ED OUT THAT CONSISTENT WITH THE STAND TAKEN IN THE RETURN, THE ASSESSEE WOULD HAVE TOLD THE INDIAN PAYER THAT NO TAX SHOULD BE DE DUCTED FROM THE REMITTANCE AND IT WAS, THEREFORE, NOT OPEN TO T HE ASSESSEE, MERELY BECAUSE AT THE FIRST APPEAL STAGE IT CHOSE N OT TO CONTEST THE ASSESSMENT OF THE INCOME ATTRIBUTABLE TO THE IN DIAN PE, TO TURN AROUND AND SAY THAT SINCE IT HAS NOW ACCEPTED ITS LIABILITY TO PAY TAX ON THE INDIAN INCOME, IT WAS FOR THE INDIAN PAYERS TO HAVE DEDUCTED THE TAX AND IF THEY HAD NOT DONE SO T HE ASSESSEE CANNOT BE HELD LIABLE FOR THE INTEREST. THIS ARGUME NT OF THE REVENUE WAS REJECTED BY THE TRIBUNAL ON THE GROUND THAT THERE WAS NO MATERIAL IN SUPPORT OF THE LEA THAT THE ASSE SSEE REPRESENTED TO THE INDIAN PAYERS NOT TO DEDUCT TAX, NOR DID ANY SUCH FACTS OR CIRCUMSTANCES EMERGE FROM THE IMPUGNE D ORDERS 21. WE ARE UNABLE TO UPHOLD THIS PART OF THE DECISI ON OF THE TRIBUNAL. IT MUST BE REMEMBERED THAT IN THE NOTE AP PENDED TO THE RETURN THE ASSESSEE WAS QUITE CATEGORICAL IN DE NYING ITS LIABILITY TO BE ASSESSED IN INDIA. IT RELIED ON THE DOUBLE TAXATION A VOIDANCE AGREEMENT BETWEEN INDIA AND USA AND POIN TED OUT THAT THERE WAS NO PERMANENT ESTABLISHMENT IN INDIA. IT FURTHER STATED THAT THE TELECOM EQUIPMENTS WERE SOLD OUTSID E INDIA AND THE PAYMENTS WERE ALSO RECEIVED OUTSIDE INDIA AND T HUS THE ASSESSEE DID NOT HAVE ANY TAXABLE PRESENCE IN INDIA SO AS TO BE LIABLE FOR TAX ON ITS INDIAN INCOME. IF THIS WAS TH E STAND OF THE ASSESSEE, IT IS NOT IMPERMISSIBLE OR UNREASONABLE T O VISUALISE A SITUATION WHERE, THE ASSESSEE WOULD HAVE REPRESENTE D TO ITS INDIAN DEALERS NOT TO DEDUCT TAX FROM THE REMITTANC ES MADE TO IT. ON THE CONTRARY IT WOULD BE SURPRISING IF THE ASSES SEE DID NOT MAKE ANY SUCH REPRESENTATION; SUCH A REPRESENTATION WOULD ONLY BE CONSISTENT WITH THE ASSESSEE'S STAND REGARDING I TS TAX LIABILITY IN INDIA. MOREOVER, NO PURPOSE WOULD HAVE BEEN SERV ED BY THE ASSESSEE TAKING SUCH A CATEGORICAL STAND REGARDING ITS TAX LIABILITY IN INDIA AND AT THE SAME TIME SUFFERING T AX DEDUCTION 77 ITA 5870/DEL/12 & ORS. ZTE CORPORATION UNDER SECTION 195( 1). THEREFORE, IN OUR OPINION, E VEN THOUGH THERE MAY NOT BE ANY POSITIVE OR DIRECT EVIDENCE TO SHOW THAT THE ASSESSEE DID MAKE A REPRESENTATION TO ITS INDIA N TELECOM DEALERS NOT TO DEDUCT TAX FROM THE REMITTANCES, SUC H A REPRESENTATION OR INFORMAL COMMUNICATION OF THE RE QUEST CAN BE REASONABLY INFERRED OR PRESUMED. THE TRIBUNAL OUGHT TO HAVE ACCORDED DUE WEIGHTAGE TO THE STRONG POSSIBILITY O R PROBABILITY OF SUCH A REQUEST HAVING BEEN MADE BY THE ASSESSEE TO THE INDIAN PAYERS SINCE OTHERWISE THE DENIAL OF ITS TAX LIABILITY ON ITS INDIAN INCOME WOULD HAVE SERVED LITTLE PURPOSE FOR THE ASSESSEE. 78. LD. CIT(DR), THEREFORE, SUBMITTED THAT THE DECI SION IN THE CASE OF JACABS (SUPRA), HAS BEEN CLARIFIED BY HONBLE DELHI HIGH C OURT IN THE CASE OF ALCATEL LUCENT (SUPRA). HE SUBMITTED THAT FACTS IN THE PRES ENT CASE ARE SIMILAR TO THAT OF THE ALCATEL LUCENT (SUPRA) 79. LD. CIT(DR) REFERRED TO THE DECISION OF ITAT DE LHI BENCH IN THE CASE OF HUAWEI TECHNOLOGIES CO. LTD. VS. ADIT ( INTERNATION AL TAXATION) IN ITA NOS. 5253 & OTHERS DATED 21.3.2014, WHEREIN THE MATTER H AS BEEN RESTORED TO AO BY OBSERVING IN PARA 27 AS UNDER: 27. FROM THE ABOVE, IT IS EVIDENT THAT WHAT WAS TH E STAND OF THE ASSESSEE IN THE RETURN OF INCOME FILED BY IT WO ULD BE RELEVANT FOR DECIDING THE LIABILITY TO INTEREST UND ER SECTION 2348. WE FIND THAT THIS ASPECT HAS NOT BEEN CONSIDE RED EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED DRP. IN FACT, THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF 78 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ALCATEL LUCENT USA, INC. (SUPRA) IS DATED 7TH NOVEM BER, 2013, THEREFORE, THIS DECISION WAS NOT AVAILABLE' AT THE TIME WHEN EITHER THE ASSESSING OFFICER OR THE DRP PASSED THE ORDER. IN OUR OPINION, IT WOULD MEET THE ENDS OF JUSTICE IF T HIS MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO READJUDICATE THE ISSUE AFTER TAKING INTO ACCOUNT THE DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF JACABS CIVIL INCORPORATED (SUPRA) AND ALCATEL LUCENT USA, INC. ( SUPRA). WE, THEREFORE, SET ASIDE THE ORDERS OF AUTHORITIES BELOW WITH REFERENCE TO LEVY OF INTEREST UNDER SECTION 2348 OF THE ACT AND DIRECT THE ASSESSING OFFICER TO ALLOW ADEQUATE OPPO RTUNITY OF BEING HEARD TO THE ASSESSEE. THEREAFTER, HE WILL RE ADJUDICATE THE ISSUE IN THE LIGHT OF THE RATIO OF THE DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF JACABS CIV IL INCORPORATED (SUPRA) AND ALCATEL LUCENT USA, INC. ( SUPRA). WITH REGARD TO INTEREST CHARGED UNDER SECTION 234A, NO SPECIFIC ARGUMENT WAS ADVANCED AT THE TIME OF HEARI NG BEFORE US. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO REWORK OUT THE SAME IN ACCORDANCE WITH LAW AFTER FINAL DETERMI NATION OF INCOME. 80. WITH REFERENCE TO AFOREMENTIONED DECISION, LD. CIT(DR) SUBMITTED THAT THE ENTIRE JURISPRUDENCE OF SECTION 234B IS BASED ON P RINCIPLE OF EQUITY. WHAT-EVER AMOUNT WAS DUE TO GOVERNMENT AND WAS WRONGLY WITHHE LD SHOULD BE DULY COMPENSATED BY WAY OF PAYMENT OF INTEREST. HE SUBMI TTED THAT THE INTEREST U/S 234B IS COMPENSATORY IN NATURE. 81. ON PAGE 13 OF ITS SYNOPSIS LD. COUNSEL REFERR ED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT, INTERNATIONAL TAXATION VS. GE PACKAGED POWER INC. 373 ITR 65, WHEREIN HONBLE DELHI HIGH C OURT VIDE ITS DECISION DATED 79 ITA 5870/DEL/12 & ORS. ZTE CORPORATION 12.1.2015 APPLIED THE DECISION IN THE CASE OF DIT V S. JACABS CIVIL INCORPORATED (SUPRA) AND DISTINGUISHED THE DECISION IN THE CASE OF ALCATEL LUCENT USA. HE REFERRED TO THE HEAD NOTE OF THE SAID DECISION, WHI CH IS REPRODUCED HEREUNDER: THE IMPLICATION OF AN ABSOLUTE OBLIGATION UPON THE PAYER TO DEDUCT TAX AT SOURCE UNDER SECTION 195(1) OF THE IN COME-TAX ACT, 1961, IS THAT IT BECOMES THE RESPONSIBILITY OF THE PAYER TO DETERMINE THE AMOUNT IT OUGHT TO DEDUCT FROM THE RE MITTANCE TO BE PAID TO THE ASSESSEE, TOWARDS TAX. THIS DETERMIN ATION WOULD DEPEND DIRECTLY ON THE INCOME OF THE ASSESSEE THAT IS TAXABLE IN INDIA ON ACCOUNT OF BEING ATTRIBUTABLE TO ITS PERMA NENT ESTABLISHMENT IN INDIA. THAT THIS DETERMINATION IS THE RESPONSIBILITY OF THE PAYER IS PROVIDED FOR, IN THE STATUTE, IN SECTION 195(2). THUS THE ASSESSEE'S LIABILITY TO TA X DOES NOT DEPEND ON ITS OWN VIEW OF ITS PERMANENT ESTABLISHME NT STATUS, OR ITS ADMISSION OR DENIAL OF TAX LIABILITY. I[AN A SSESSEE FILES NIL RETURNS AT THE STAGE OF ASSESSMENT, AND MAINTAINS T HAT IT IS NOT LIABLE TO TAX IN INDIA, THE PAYER IS OBLIGED TO APP LY TO THE ASSESSING OFFICER TO DETERMINE WHAT PORTION, IF ANY , OF ITS REMITTANCE TO THE ASSESSEE, IS LIABLE TO BE DEDUCTE D AT SOURCE TOWARDS TAX. THE ANOMALY OF AN ASSESSEE DENYING TAX LIABILITY (W HETHER UNDER A BONA FIDE MISTAKE OR BY DECEIT), THEREBY NO T SUFFERING A TAX DEDUCTION AT SOURCE, AND STILL BEING PERMITTED A TAX CREDIT FOR THE TAX DEDUCTIBLE WAS REMEDIED AFTER THE FINANCE A CT, 2012. HELD, THAT THE PRIMARY LIABILITY OF DEDUCTING TAX ( FOR THE PERIOD CONCERNED, SINCE THE LAW HAD UNDERGONE A CHANGE AFT ER THE FINANCE ACT, 2012) WAS THAT OF THE PAYER. THE PAYER WOULD BE AN ASSESSEE-IN-DEFAULT, ON FAILURE TO DIS-CHARGE TH E OBLIGATION TO DEDUCT TAX, UNDER SECTION 201 OF THE ACT. NO INTERE ST WAS LEVIABLE ON THE ASSESSEES UNDER SECTION 234B, EVEN THOUGH THEY 80 ITA 5870/DEL/12 & ORS. ZTE CORPORATION FILED RETURNS DECLARING NIL INCOME AT THE STAGE OF REASSESSMENT. THE PAYERS WERE OBLIGED TO DETERMINE WHETHER THE AS SESSEES WERE LIABLE TO TAX UNDER SECTION 195(1), AND TO WHA T EXTENT, BY RECOURSE TO THE MECHANISM PROVIDED IN SECTION 195(2 ) OF THE ACT. THE FAILURE OF THE PAYERS TO DO SO DID NOT LEA VE THE REVENUE WITHOUT REMEDY; THE PAYER MAY BE REGARDED A N ASSESSEE-IN-DEFAULT UNDER SECTION 201, AND THE CONS EQUENCES DELINEATED IN THAT PROVISION WOULD VISIT THE PAYER. DIT V. JACABS CIVIL INCORPORATED [2011J 330 ITR 578 (DELHI) APPLIED. DIT (INTERNATIONAL TAXATION) V. ALCATEL LUCENT USA. INC. [12014] 2 ITR-OL276 (DELHI) DISTINGUISHED. 82. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE DECISION IN THE CASE OF GE PACKAGED POWER INC. (SUPRA), IS THE LATEST DECISION IN WHICH BOTH THE D ECISIONS IN THE CASES OF JACABS CIVIL INC. (SUPRA) AND ALCATEL LUCENT USA (SUPRA) OF HONBLE DELHI HIGH COURT HAVE BEEN CONSIDERED. HONBLE DELHI HIGH COURT HAS ALSO, INTER ALIA, REFERRED TO THE DECISION IN THE CASE OF ANJUM M.H. GHASWALA 252 ITR 1 (SC). THE FACTS IN THAT CASE WERE THAT GENERAL ELECTRIC GROUP WAS MANUFACT URING EQUIPMENTS RELATING TO OIL AND GAS, ENERGY, TRANSPORTATION AND AVIATION F OR SUPPLY TO CUSTOMERS IN INDIA. AFTER A SURVEY U/S 133A AT THE PREMISES OF GENERAL ELECTRIC INTERNATIONAL OPERATIONS CO. INC., LIAISON OFFICE, REASSESSMENT P ROCEEDINGS WERE INITIATED AGAINST SEVERAL ENTITIES OF THE GE GROUP. THE AO FOUND THAT THE ASSESSEE HAD A PE IN 81 ITA 5870/DEL/12 & ORS. ZTE CORPORATION INDIA. THE TAXABLE INCOME OF THE ASSESSEE WAS COMPU TED BY ATTRIBUTING SOME PERCENTAGE OF THE SALE PRICE/ CONSIDERATION RECEIVE D AS PROFITS TO THE PE AND INTEREST U/S 234A & 234B WAS LEVIED. HONBLE DELHI HIGH COUR T, AFTER CONSIDERING THE ENTIRE CASE LAWS ON THIS ISSUE, INTER ALIA, HELD TH AT THERE WAS ABSOLUTE OBLIGATION UPON THE PAYER TO DEDUCT TAX AT SOURCE U/S 195(1). IT WAS HELD THAT THE ASSESSEES LIABILITY TO TAX DOES NOT DEPEND ON ITS OWN VIEW OF ITS PE STATUS, OR ITS ADMISSION OR DENIAL TO TAX LIABILITY. UNDER SUCH CIRCUMSTANCES, THE PAYER WOULD BE TREATED AS THE ASSESSEE IN DEFAULT UNDER SECTION 201. HONBLE DEL HI HIGH COURT POINTED OUT THAT THE ANOMALY OF AN ASSESSEE DENYING TAX LIABILITY (W HETHER UNDER A BONA FIDE MISTAKE OR BY DECEIT), THEREBY NOT SUFFERING A TAX DEDUCTION AT SOURCE, AND STILL BEING PERMITTED A TAX CREDIT FOR THE TAX DEDUCTIBLE WAS REMEDIED AFTER THE FINANCE ACT, 2012. THE HONBLE HIGH COURT HELD THAT NO INTE REST WAS LEVIABLE ON THE ASSESSEE U/S 234B, EVEN THOUGH THEY FILED RETURNS D ECLARING NIL INCOME AT THE STAGE OF REASSESSMENT. 83. IN THE PRESENT CASE ALSO WE FIND THAT THE FACT S ARE ALMOST IDENTICAL TO THE FACTS AS OBTAINING IN THE CASE OF GE PACKAGED POWER INC. (SUPRA) WHICH IS THE LATEST DECISION OF HONBLE JURISDICTIONAL HIGH COURT ON TH IS ISSUE AND, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELH I HIGH COURT, WE HOLD THAT 82 ITA 5870/DEL/12 & ORS. ZTE CORPORATION ASSESSEE WAS NOT LIABLE TO PAY INTEREST U/S 234B. I N THE RESULT, THIS GROUND IS DISMISSED. IN THE RESULT, REVENUES APPEALS ARE DIS MISSED. 84. IN THE RESULT ALL THE APPEALS PREFERRED BY THE ASSESSEE ARE PARTLY ALLOWED AND THE REVENUES ARE DISMISSED. ORDER PRONOUNCEMENT IN OPEN COURT ON 30/05/2016. SD/- SD/- (BEENA A. PILLAI) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30/05/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.