ALLCATEL USA SOURCING LP ( INCLUDED IN ALCATEL-LUCENT USA INC.), MUMBAI V. ADDL DIT (IT) RG 1, MUMBAI

ITA 8601/MUM/2010

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3885 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 29-03-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 10-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Double taxation relief; Opportunity of being heard; Source of fund; Permanent establishment; Cost of acquisition; Corroborative evidences; Capital receipt
• Section: 143(3); 5(2); 234B; 133(6); 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL L B ENCH, MUMBAI BEFORE SHRI B.R. BASKARAN , ACCOUNTANT MEMBER AND SHRI C.N. PRASAD, JUDICIAL MEMBER / I .TA NO.8601 & 7533/MUM/2010 ( / ASSESSMENT YEAR:2006-07 & 2007-08 M/S. ALCATEL USA SOURCING LP (INCLUDED IN ALCATEL- LUCENT USA INC.) C/O PRICEWATERHOUSE COOPERS, PWC HOUSE, 4 TH FLOOR, GURU NANAK ROAD, BANDRA(W), MUMBAI-400 050 / VS. THE ADDL. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-1, SCINDIA HOUSE, MUMBAI ./ ./ PAN/GIR NO. AALFA9998A / I .TA NO.7534 & 7535/MUM/2011 ( / ASSESSMENT YEAR:2007-08 & 2008-09 M/S. ALCATEL USA SOURCING INC (INCLUDED IN ALCATEL- LUCENT USA INC.) C/O PRICEWATERHOUSE COOPERS, PWC HOUSE, 4 TH FLOOR, GURU NANAK ROAD, BANDRA(W), MUMBAI-400 050 / VS. THE ADDL. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-1, SCINDIA HOUSE, MUMBAI ./ ./ PAN/GIR NO. AAGCA4535R ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI P.J. PARDIWALLA SHRI MADHUR AGARWAL SHRI K.K. VED / RESPONDENT BY: SHRI JASBIR CHAUHAN M/S. ALCATEL USA SOURCING LP 2 / DATE OF HEARING :16.05.2016 ! / DATE OF PRONOUNCEMENT :05.08.2016 / O R D E R PER C.N. PRASAD, JM: THESE FOUR APPEALS ARE FILED BY DIFFERENT ASSESSEES OF SAME GROUP AGAINST THE ORDERS OF THE DISPUTE RESOLUTION PANEL, MUMBAI PERTAINING TO ASSESSMENT YEARS 2006-07 TO 2008-09. SINCE ISSUES ARE COMMON IN ALL THESE APPEALS THEY WERE CLUBBED AND H EARD TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO. 8601/MUM/2010 A.Y. 2006-07 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN ITS APPEAL: 1. A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE ADDITIONAL DIRECTOR OF INCOME-TAX (INTERNA TIONAL TAXATION), RANGE 1, MUMBAI (HEREINAFTER REFERRED TO AS 'THE LEARNED AO') ERRED IN HOLDING THAT THE PAYMENTS REC EIVED FROM ALCATEL SOUTH ASIA LIMITED (PREVIOUSLY KNOWN A S ALCATEL INDIA LIMITED) (HEREINAFTER REFERRED TO AS 'ASAL') FOR PROVIDING REMOTE CALL-IN TECHNICAL SUPPORT SERVICES AS TAXABLE IN INDIA AS ROYALTY AND FEES FOR INCLUDED SERVICES UNDER ARTICLE 12(3) AND ARTICLE 12(4)(A) OF THE DOUBLE TAXATION A VOIDANCE AGREEMENT BETWEEN INDIA AND USA (HEREINAFTER REFERR ED TO AS 'DTAA') . B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFE RRED TO AS ''THE DRP') ERRED IN HOLDING THAT THE PAYMENTS RECE IVED FROM ASAL FOR PROVIDING REMOTE CALL-IN TECHNICAL SUPPORT SERVICES AS TAXABLE IN INDIA AS FEES FOR INCLUDED SERVICES U NDER ARTICLE 12(4)(A) OF THE DTAA. M/S. ALCATEL USA SOURCING LP 3 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED AO AND THE LEARNED DRP HAVE ERRED IN HO LDING THE RECEIPTS OF USD 2.54 MILLION FROM AXES INDIA TE CHNOLOGIES PRIVATE LIMITED (HEREINAFTER REFERRED TO AS 'AXES') AS TAXABLE IN INDIA. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED AO AND THE LEARNED DRP HAVE ERRED IN CONCLUDING THAT THE ASSESSEE HAS A PERMANENT ESTABL ISHMENT (HEREINAFTER REFERRED TO AS 'PE'') IN INDIA AS PER ARTICLE 5(1) AND 5(2)(1) OF THE DTAA. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED AO AND THE LEARNED DRP HAVE ERRED IN HO LDING THAT THE ENTIRE REVENUES OF USD 2.54 MILLION RECEIV ED FROM AXES ARE ATTRIBUTABLE TO THE PE IN INDIA AND TAXABL E AS BUSINESS INCOME IN INDIA. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED AO AND THE LEARNED DRP HAVE ERRED IN HO LDING THAT IN THE EVENT THE ASSESSEE DOES NOT HAVE A PE I N INDIA, THE SAID INCOME IS TAXABLE UNDER THE HEAD CAPITAL GAINS WITHOUT APPRECIATING THE FACT THAT THE NATURE OF INCOME IS NOT DEPENDENT ON AN APPELLANT HAVING A PE IN INDIA. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED AO AND THE LEARNED DRP HAS ERRED LEVYIN G INTEREST UNDER SECTION 234B OF THE ACT . 3. THE FIRST ISSUE AS COULD BE SEEN FROM THE APPEAL OF THE ASSESSEE IS CHALLENGING THE ORDER OF THE DRP IN HOLDING THAT THE PAYMENTS RECEIVED FROM ALCATEL SOUTH ASIA LTD (ASAL) FOR PRO VIDING REMOTE CALL-IN TECHNICAL SUPPORT SERVICES AS TAXABLE IN IN DIA AS ROYALTY AND FEES FOR INCLUDED SERVICES UNDER ARTICLE 12(3) AND ARTICLE 12(4)(A) OF THE DTAA BETWEEN INDIA AND USA. 4. BRIEF FACTS ARE THAT THE ASSESSEE M/S. ALCATEL U SA SOURCING LP IS A NON-RESIDENT COMPANY FILED ITS RETURN OF INCOME O N 31.10.2006 M/S. ALCATEL USA SOURCING LP 4 DECLARING TOTAL INCOME AT NIL. IN THE NOTES ENCLOS ED TO THE COMPUTATION TO INCOME ALONGWITH RETURN, THE ASSESSE E STATED THAT IT HAD TWO REVENUE STREAMS FOR THIS YEAR NAMELY REVENU E FROM REMOTE CALL-IN TECHNICAL SUPPORT SERVICES AND REVENUE FROM THE AMENDMENT IN DEVELOPMENT AGREEMENT. THE CASE WAS SELECTED FO R SCRUTINY AND THE ASSESSMENT WAS COMPLETED U/S. 143(3) R.W. SECTI ON 144C(13) OF THE I.T. ACT. 4.1. WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER TREATED RS. 5,41,06,933/- (USD 12,02,048) RECEIVED BY THE ASSESSEE FROM M/S. ALCATEL INDIA LTD., NOW KNOWN AS ALCATEL SOUT H ASIA LTD., (ASAL) FOR PROVIDING REMOTE CALL-IN TECHNICAL SUPPORT SER VICES AS ROYALTY UNDER ARTICLE 12(3) OF THE DOUBLE TAXATION AVOIDANC E AGREEMENT (DTAA) BETWEEN INDIA AND USA. IN THE COURSE OF ASSE SSMENT PROCEEDINGS, THE ASSESSING OFFICER REQUIRED THE ASS ESSEE TO EXPLAIN IN DETAIL THE NATURE OF THE REMOTE CALL-IN TECHNICAL SUPPORT SERVICES AND WHY THE AMOUNT OF RS. 5,41,06,933/- RECEIVED BY THE ASSESSEE SHOULD NOT BE SUBJECTED TO TAX AS FEES FOR INCLUDED SERVIC ES UNDER ARTICLE (12) OF THE INDIA USA TREATY. THE ASSESSEE BY LETT ERS DATED 29.7.2008 AND 8.10.2009 SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, IT HAD PROVIDED REMOTE CALL-IN TECHNICAL SUPPORT SERVI CES TO ASAL IN RESPECT OF HARDWARE AND SOFTWARE. THE SERVICES WER E REMOTELY PROVIDED BY VIA TELEPHONE, E-MAIL AND REMOTE LOGIN TO THE SYSTEMS AND THEREFORE NO TECHNICAL KNOWLEDGE OR KNOW HOW WA S PASSED ON/PROVIDED TO ASAL DURING THE RENDERING OF SERVICE S. THE ASSESSEE FURTHER SUBMITTED THAT THERE WAS NO FORMAL AGREEMEN T BETWEEN THE ASSESSEE AND ASAL FOR THE PROVISION OF THE SAID REM OTE CALL-IN SUPPORT SERVICES. THE SERVICES WERE PROVIDED ON TH E BASIS OF THE PURCHASE ORDERS RAISED BY ASAL TO AVAIL THE REMOTE CALL-IN TECHNICAL M/S. ALCATEL USA SOURCING LP 5 SUPPORT SERVICES. IT WAS ALSO SUBMITTED THAT THE S AID SUPPORT SERVICES INCLUDE SERVICES RENDERED IN RELATION TO SUPPORT AN D MAINTENANCE OF HARDWARE AND SOFTWARE VIZ., BUG FIXING, SUPPORT SER VICES DURING OUTAGES AND CRITICAL SERVICE IMPACTING EVENTS, ROO T CAUSE ANALYSIS OF REPEATED FAULTS, RESOLVING TECHNICALLY COMPLEX ISSU ES ETC. IT WAS SUBMITTED THAT THESE SERVICES ARE FROM HIGH-END TEC HNICAL AND SUPPORT SERVICES PROVIDED BY THE ASSESSEE REMOTELY FROM THE UNITED STATE OF AMERICA. NO TECHNICAL DETAILS OF THESE AF ORESAID SERVICES HAVE BEEN PROVIDED TO ASAL TO ENABLE ASAL TO PERFOR M THE SERVICES ON ITS OWN. THEREFORE, IT WAS SUBMITTED BY THE ASS ESSEE THAT THE INCOME EARNED FROM THE PROVISION OF REMOTE CALL-IN SUPPORT SERVICES WOULD NOT BE LIABLE TO TAX IN INDIA UNDER PROVISION S OF ARTICLE 12 OF THE INDIA-US TAX TREATY. 4.2. HOWEVER, THE ASSESSING OFFICER WITHOUT APPRECI ATING THE SUBMISSIONS AND ON EXAMINING AND ANALYZING THE PURC HASE ORDER DATED 11.4.2005 AND DESCRIPTION MENTIONED THEREIN, CAME TO THE CONCLUSION THAT THERE IS NO MENTION ABOUT THE SERVI CES RENDERED AND THE TRANSACTION IS CHARACTERIZED AS IMPORTS AND THE REFORE HE WAS OF THE VIEW THAT ASSESSEE FAILED TO CLARIFY MANY ASPEC TS OF THE TRANSACTION. THE ASSESSING OFFICER ON LOOKING FROM THE WEBSITE AND COLLECTING DATA FROM THE WEBSITE, HE CONCLUDED THAT THE DESCRIPTION GIVEN IN THE INVOICE I.E. MOBILE CORE HLR CTAC IS N OTHING BUT TECHNICAL SUPPORT RENDERED TO PROVIDE ACCESS AND TO USE CENTRAL DATABASE, FOR THE NETWORK CONNECTIVITY AND PROCESS, AND AS A RESULT OF WHICH CERTAIN SERVICES WERE ALSO PROVIDED AND THE T RANSACTION IS PART OF A GLOBAL NETWORK TRANSACTION OF THE ASSESSEE GRO UP. THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PAYMENT RECEIVED BY THE ASSESSEE IS FOR THE USE OF DESIGN, PROCESS AND FOR INFORMATION M/S. ALCATEL USA SOURCING LP 6 CONCERNING INDUSTRIAL, COMMERCIAL AND SCIENTIFIC EX PERIENCE AND FOR SCIENTIFIC EQUIPMENT AND THEREFORE FALL WITHIN THE PURVIEW OF ROYALTIES DEFINED IN ARTICLE 12(3)(A) & (B) OF INDO -USA TREATY. THEREFORE, HE CONCLUDED THAT SERVICES RENDERED ARE FOR ANCILLARY AND SUBSIDIARY TO THE APPLICATION FOR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION AND HENCE FALL WITHIN THE PURVIEW OF AR TICLE 12(4)(A) OF INDIA-US TREATY AND ACCORDINGLY AN AMOUNT OF RS. 5, 41,06,933/- WAS SUBJECTED TO TAX AS ROYALTIES AND FEES FOR TECHNI CAL SERVICES AS PER ARTICLE 12(3) AND ARTICLE 12(4)(A) OF THE INDIA-USA TREATY AND COMPLETED THE ASSESSMENT ACCORDINGLY. 5. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP RAI SING VARIOUS CONTENTIONS NAMELY THE SERVICES ARE RENDERED FROM R EMOTE AREA FROM US, THEY ARE NOT TECHNICAL SERVICES, THEY ARE PROVI DED THROUGH TELEPHONE, E-MAIL AND REMOTE LOGIN SYSTEM. THE ASS ESSEE DOES NOT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE TO ASAL TO E NABLE THEM TO APPLY THE SAME IN THE FUTURE. THE ASSESSEE DOES NO T PROVIDE ANY TRAINING TO ASAL IN RESPECT OF THE SERVICES PROVIDE D BY IT. THE ASSESSEE DOES NOT PROVIDE ASAL WITH ANY STEP BY STE P RESOLUTION MANUAL OR PROCEDURAL DOCUMENTATION TO ENABLE ASAL T O APPLY THE SAID KNOWLEDGE WITH OR WITHOUT THE ASSISTANCE OF TH E ASSESSEE. THE ASAL IS NOT ENABLED TO PERFORM THE SERVICES ON ITS OWN WITHOUT ANY ASSISTANCE/RECOURSE TO THE ASSESSEE SINCE THE TECHN OLOGY IS NOT TRANSFERRED/PROVIDED BY THE ASSESSEE AND THEREFORE THE SERVICES RENDERED BY THE ASSESSEE TO ASAL DO NOT QUALIFY AS FEES FOR INCLUDED SERVICES AS PER THE INDIA-USA TAX TREATY. THUS THE SAME ARE NOT SUBJECT TO TAX UNDER ARTICLE-12 OF THE INDIA-USA TA X TREATY. THE DRP WITHOUT APPRECIATING THE SUBMISSIONS AND THE VARIOU S CONTENTIONS RAISED BY THE ASSESSEE CONCLUDED THAT THE SERVICES PROVIDED BY THE M/S. ALCATEL USA SOURCING LP 7 ASSESSEE ARE SQUARELY COVERED UNDER ARTICLE 12(4)(A ) OF INDIA-USA TREATY AND THEREFORE TO BE TREATED AS FEES FOR INCL UDED SERVICES. 6. THE LD. SENIOR COUNSEL, SHRI P.J. PARDIWALA SUBM ITS THAT THE ASSESSEE RENDERED SERVICES TO ASAL IN THE FIELD OF HARDWARE AND SOFTWARE AND THE SERVICES RENDERED BY THE ASSESSEE ARE LIKE ANNUAL MAINTENANCE CONTRACTS. HE SUBMITS THAT THERE IS NO SPECIFIC AGREEMENT AND THE SERVICES ARE PROVIDED BASED ON TH E PURCHASE ORDERS. REFERRING TO PAGE 61 OF THE PAPER BOOK HE SUBMITS T HAT THE COPY OF PURCHASE ORDER DATED 11.4.205 RAISED BY ALC ATEL INDIA LTD. SPECIFIES THE NATURE OF SERVICES AS AMC FOR SDN SOF TWARE MAIN & 3 RD PARTY AND AMC FOR SDN 3 RD PARTY HARDWARE. THEREFORE REFERRING TO THE PURCHASE ORDER, THE LD. COUNSEL FOR THE ASSESSE E SUBMITS THAT SERVICES ARE PROVIDED IN THE FORM OF ANNUAL CONTRAC T. THEREFORE, HE SUBMITS THAT THE ASSUMPTION OF THE ASSESSING OFFICE R THAT THE DESCRIPTION IN THE INVOICE RAISED WAS GIVEN AS MOBI LE CORE HLR CTAC IS MISPLACED. HE FURTHER SUBMITS THAT IT IS NOT KN OWN FROM WHERE THE ASSESSING OFFICER GOT THE INFORMATION ABOUT HOME LO CATION REGISTER AND COMPARING THIS TO THE SERVICES RENDERED BY THE ASSESSEE AND FINALLY CONCLUDING THAT THE SERVICES RENDERED BY TH E ASSESSEE ARE SUBJECTED TO ROYALTIES AND FEES FOR TECHNICAL SERVI CES IS TOTALLY UNJUSTIFIED. THE LD. COUNSEL FOR THE ASSESSEE SUBM ITS THAT THE INFORMATION WHICH THE ASSESSING OFFICER GATHERED HA S NOT BEEN PUT TO THE ASSESSEE AND HE HAS GONE BY THE INFORMATION WHI CH WAS IN THE WEBSITE WHICH IS NOWHERE CONNECTED/SIMILAR TO THE S ERVICES RENDERED BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITS THAT THE DRP HAS SIMPLY AFFIRMED THE ORDER OF THE ASSESSING OFFICER WITHOUT GOING INTO THE SUBMISSIONS OF THE A SSESSEE AND VARIOUS CONTENTIONS RAISED BEFORE HIM. HE ALSO SUB MITS THAT THE M/S. ALCATEL USA SOURCING LP 8 ORDER IS VERY CRYPTIC AND NONE OF THE OBJECTIONS WE RE DEALT WITH BY THE DRP. 7. THE LD. DEPARTMENTAL REPRESENTATIVE PLACES RELIA NCE ON THE ORDERS OF THE AUTHORITIES BELOW. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. ON HEARING BOTH THE PARTIES WE FIND CONSIDERABLE FORCE IN THE SUBMISSIONS OF THE LD. CO UNSEL FOR THE ASSESSEE THAT THE DRP HAS NOT DEALT WITH VARIOUS OB JECTIONS OF THE ASSESSEE. WE ALSO FIND THAT THE ASSESSING OFFICER HAS PLACED HIS CONCLUSIONS BASED ON THE INFORMATION GATHERED BY HI M FROM THE WEBSITE AND NOT FURNISHING THIS INFORMATION TO THE ASSESSEE AND CALLING FOR HIS COMMENTS AND SIMPLY CONCLUDING THAT THE SERVICES RENDERED BY THE ASSESSEE ARE FEES FOR TECHNICAL SER VICES/ROYALTY. WE FIND ASSESSEE HAS MADE ELABORATE SUBMISSIONS BEFORE THE DRP AS TO WHY THE PROVISIONS OF ARTICLE 12(3) & (4) HAVE NO A PPLICATION TO THE FACTS OF ITS CASE BY RELYING ON VARIOUS CASE LAWS A ND NONE OF THESE OBJECTIONS WERE CONSIDERED BY THE DRP AND THE DRP H AS SIMPLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER IN ONE PARAGRAPH AND IN A VERY CRYPTIC MANNER OBSERVING AS UNDER: THIS OBJECTION CONCERNS THE ADDITION OF RS. 5,41,06,933/- AS ROYALTY AND FEES FOR TECHNICAL SER VICES MADE BY THE ASSESSING OFFICER AS PER ART.12(3) AND ART.12(4)(A) OF THE INDIA-USA TREATY. DURING THE A. Y. 2006- 07, THE ASSESSEE, A TAX RESIDENT OF USA EARNED REVE NUE FROM ALCATEL INDIA LTD. (NOW KNOWN AS ALCATEJ SOUTH ASIA LTD.) IN RESPECT OF REMOTE CALL-IN-TECHNICAL SUPPOR T SERVICES RENDERED BY THE ASSESSEE. THE ASSESSEE'S CLAIM IS T HAT THE SERVICES RENDERED BY IT DID NOT MAKE IN ANY TECHNIC AL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OF PROCESS T O M/S. ALCATEL USA SOURCING LP 9 ALCATEL INDIA AND HENCE, THE RECEIPTS FROM ALCATEL INDIA ARE NOT TAXABLE AS FEE FOR INCLUDED SERVICES UNDER ART. 12 OF THE INDIA-US TREATY. IT WAS ALSO CONTENDED BY THE ASSES SEE THAT SINCE IT DID NOT HAVE A PERMANENT ESTABLISHMENT (PE ) IN INDIA, THE REVENUE EARNED BY IT IN RESPECT OF REMOT E CALL-IN- TECHNICAL SUPPORT SERVICES WAS NOT LIABLE TO TAX IN INDIA. THERE IS ADMITTEDLY NO FORMAL AGREEMENT BETWEEN THE ASSESSEE AND ALCATEL INDIA FOR THE PROVISION OF THE SE SERVICES. THE SERVICES ARE PROVIDED ON THE BASIS OF PURCHASE ORDER RAISED BY ALCATEL INDIA TO AVAIL THE REMOTE C ALL-IN- TECHNICAL SUPPORT SERVICES FROM THE ASSESSEE. THE D ETAILED DESCRIPTION OF THE SERVICES RENDERED BY THE ASSESSE E ARE GIVEN ON PAGE NOS. 5 & 6 OF THE ASSESSMENT ORDER. L OOKING TO THE FACTS OF THE CASE, IT IS CLEAR THAT SERVICES PROVIDED ARE SQUARELY COVERED UNDER ART. 12(4)(A) OF THE INDIA U S TREATY AND ARE ACCORDINGLY TO BE TREATED AS FEES FO R INCLUDED SERVICES. IN VIEW OF THIS, THE OBJECTION O F THE ASSESSEE IS DISMISSED. THEREFORE, IN OUR CONSIDERED VIEW THIS ISSUE HAS T O BE EXAMINED THOROUGHLY BY THE DRP WITH REFERENCE TO VA RIOUS OBJECTIONS OF THE ASSESSEE FILED BEFORE HIM. THUS, WE SET ASI DE THE ORDER OF THE DRP AND RESTORE THIS ISSUE TO THE FILE OF THE DRP W HO SHALL DECIDE AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING ADEQU ATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 9. THE SECOND ISSUE IN THE APPEAL OF THE ASSESSEE I S CHALLENGING THE ORDER OF THE DRP IN HOLDING THAT THE RECEIPTS OF RS. 11,43,00,000/-(USD 2.54 MILLION) FROM AXES INDIA TE CHNOLOGIES PVT. LTD (AXES) IS TAXABLE IN INDIA AS BUSINESS PROFITS AND FURTHER ERRED IN HOLDING THAT IN THE EVENT THE ASSESSEE DOES NOT HA VE A PE IN INDIA, THE INCOME IS TAXABLE UNDER THE HEAD CAPITAL GAINS WIT HOUT APPRECIATING THE FACT THAT THE NATURE OF INCOME IS NOT DEPENDENT ON AN ASSESSEE HAVING A PE IN INDIA. M/S. ALCATEL USA SOURCING LP 10 9.1. BRIEF FACTS ARE THAT THE ASSESSEE ENTERED INTO AGREEMENT ON 1.4.2004 TITLED AS DEVELOPMENT AGREEMENT AND ACCORD ING TO THIS AGREEMENT, THE ASSESSEE RECEIVED/AVAILED CERTAIN SE RVICES FROM AXES TECHNOLOGIES INDIA PVT. LTD., (AXES). DURING THE YE AR UNDER CONSIDERATION AXES WAS ACQUIRED BY MAHINDRA BRITI SH TELECOM NOW TECH MAHINDRA LTD., AND ASSESSEE ENTERED INTO AN AM ENDMENT AGREEMENT WITH THE THEN AXES. THE ASSESSEE RECEIVED RS. 11,43,00,000/- (2.54 MILLION US$) TOWARDS THE DISC OUNT DUE FOR THE HUGE VOLUME OF PAST BUSINESS PROVIDED BY THE ASSES SEE TO AXES AND FOR THE EXTENSION OF THE TERM OF THE DEVELOPMENT AG REEMENT. THIS AMOUNT WAS TREATED BY THE ASSESSING OFFICER AS BUSI NESS INCOME OF THE ASSESSEE LIABLE TO BE TAXED IN INDIA ON THE GRO UND THAT ASSESSEE HAS PE IN INDIA. IN THE ALTERNATE, THE ASSESSING O FFICER HELD THAT IN THE ABSENCE OF PE IN INDIA, THE SAID AMOUNT IS LIABLE T O BE TAXED UNDER THE HEAD CAPITAL GAINS. 10. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP RA ISING VARIOUS CONTENTIONS THAT THE AMOUNT RECEIVED IS REVENUE IN NATURE FOR THE REASON THAT: I) THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH AX ES IS ONLY A BUSINESS ARRANGEMENT; II) THE PROFITABILITY OF THE ASSESSEE IS NOT AFFECTED B Y THE AMENDMENT AGREEMENT AS THE ASSESSEE CONTINUES TO AVAIL THE SERVICES OF AXES AFTER EXECUTING THE AMEN DMENT AGREEMENT. III) THE AMENDMENT AGREEMENT WAS EXECUTED WITH A VIEW TO EXTEND THE TERM OF THE DEVELOPMENT AGREEMENT. M/S. ALCATEL USA SOURCING LP 11 IV) THE AMENDMENT/ALTERNATIONS TO THE RIGHTS GRANTED UN DER THE DEVELOPMENT AGREEMENT ARE MERELY INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. V) THE ASSESSEE WAS NOT REFRAINED FROM CARRYING ON ANY BUSINESS ACTIVITIES WITH AXES. THEREFORE, IN VIEW OF THE ABOVE SUBMISSIONS AND CON SIDERING THE FACT THAT ASSESSEE DOES NOT HAVE ANY PE IN INDI A FOR THE YEAR UNDER CONSIDERATION, THE AFORESAID AMOUNT IS NOT LI ABLE TO BE TAXED IN INDIA UNDER ARTICLE-7 R.W. ARTICLE -5 OF THE INDIA- USA TAX TREATY. WITHOUT PREJUDICE TO THE ABOVE, EVEN ASSUMING BUT N OT ACCEPTING THAT THE AFORESAID AMOUNT IS ON CAPITAL ACCOUNT, IT WOUL D NOT BE LIABLE TO TAX IN INDIA, AS THERE IS NO TRANSFER OF CAPITAL AS SET AND IT DOES NOT FALL WITHIN THE EXTENDED MEANING OF INCOME UNDER SECTIO N 2(24) OF THE I.T. ACT. IT WAS FURTHER CONTENDED THAT EVEN FOR T HE SAKE OF ARGUMENT WHERE THE AFORESAID AMOUNT IS REPRESENTING THE CONS IDERATION FOR TRANSFER OF CAPITAL ASSET, THE SAME WOULD AGAIN NOT BE LIABLE TO TAX UNDER THE HEAD CAPITAL GAINS SINCE THE COMPUTATION MACHINERY PROVISIONS UNDER THE ACT FAILS AND THUS THE CAPITAL GAINS IF ANY WOULD NOT BE TAXABLE IN INDIA. WITHOUT APPRECIATING THE SUBMISSIONS OF THE ASSESSEE, THE DRP HELD THAT THE ASSETS WERE IMPORTE D BY THE ASSESSEE AND THE ASSESSEE HAS PE IN INDIA SINCE IT HAD EQUIP MENT LOCATED IN THE PREMISES OF AXES FOR THE PURPOSE OF ITS BUSINESS IS ESTABLISHED, THEREFORE, THE DRP CONCLUDED THAT THERE IS A PE IN INDIA IN TERMS OF PARA-5.1 AND 5.2(1) OF THE INDO-USA DTAA. THE DRP FURTHER OBSERVED THAT THE ENTIRE RECEIPT OF THE ASSESSEE IS FROM ALLOWING ACCESS OF THE NETWORK TO ITS CLIENT AND MOBILE NETW ORK USERS AND THEREFORE, IT IS TRUE THAT THEY UPHELD THE ACTION O F THE ASSESSING OFFICER IN BRINGING TO TAX TO THE SAID AMOUNT UNDER THE HEAD BUSINESS M/S. ALCATEL USA SOURCING LP 12 INCOME. THE DRP ALSO UPHELD THE ALTERNATE PLEA OF THE ASSESSING OFFICER THAT EVEN IF IT IS HELD THAT THERE IS NO PE , THE SAID AMOUNT IS LIABLE TO BE TAXED UNDER THE HEAD CAPITAL GAIN FOR THE REASON THAT THE INCOME FROM THE TRANSFER OF THESE RIGHTS OF ASSETS SHALL CONSTITUTE INCOME LIABLE TO TAX UNDER SECTION 28 R.W. ARTICLE- 7 OF THE INDIA- US TREATY. 11. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO P AGE-16 OF THE PAPER BOOK SUBMITS THAT DEVELOPMENT AGREEMENT WAS E NTERED INTO BETWEEN THE ASSESSEE AND AXES FOR CERTAIN SERVICES TO BE RENDERED BY AXES TO THE ASSESSEE COMPANY. REFERRING TO PAGE-46 OF THE PAPER BOOK HE SUBMITS THAT THIS AGREEMENT WAS AMENDED ON NOVEMBER 28, 2005. REFERRING TO PARA- 9.3 OF THE ASSESSMENT ORD ER, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSING OFFICER OBSERVED THAT UNDER THE AMENDED AGREEMENT, THE ALCATEL HAS RELEAS ED ALL ITS RIGHTS AND CLAIMS UNDER SCHEDULE 3.1 OF THE DEVELOPMENT AG REEMENT AND IN CONSIDERATION OF SUCH RELEASE, ASSESSEE HAD AGREED TO RECEIVE THE PAYMENT CALCULATED AS PER EXHIBIT B AND THEREFORE T HE SAID AMOUNT RECEIVED BY THE ASSESSEE IS ASSESSABLE AS BUSINESS PROFITS. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF MOTOROLA SUBMI TS THAT THE BURDEN IS ON THE REVENUE TO SHOW THAT THE AMOUNT IS TAXABL E IN THE HANDS OF THE ASSESSEE AND HOW IT IS CHARGEABLE UNDER THE DTA A. 11.1. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBM ITS THAT AXES IS USING ITS OWN EQUIPMENT SUPPLIED BY THE ASSESSEE FO R THEIR BUSINESS ON LOAN BASIS. THE LD. COUNSEL FOR THE ASSESSEE SU BMITS THAT ARTICLE 5(2) WILL NOT APPLY TO THE SITUATION OF THE ASSESSE E. HE FURTHER M/S. ALCATEL USA SOURCING LP 13 SUBMITS THAT PROVISIONS OF SEC. 55(2A) ALSO CANNOT BE INVOKED SINCE AXES IS NOT TRANSFERRING ANY RIGHTS OF THEIR BUSINE SS TO THE ASSESSEE. HE FURTHER SUBMITS THAT THE PROVISIONS OF SEC. 28(4 ) CANNOT BE APPLIED REFERRING TO THE DECISION OF THE BOMBAY HIG H COURT IN THE CASE OF MAHINDRA AND MAHINDRA LTD. VS COMMISSIONER OF INCOME-TAX (261 ITR 501). HE SUBMITS THAT CASH PAYMENT CANNOT FALL UNDER BENEFIT AS DEFINED U/S. 28 OF THE ACT. HE FURTHER SUBMITS THAT IF EQUIPMENT IS LEASED, THESE IS NO PERMANENT ESTABLIS HMENT AS HELD BY THE MUMBAI BENCH IN THE CASE OF DDIT VS NEDERLANDS CHE OVERZEE BAGGERMAATSEHAPPIJI BV (39 SOT 56). HE FURTHER SUB MITS THAT `THE DRP HAS NOT DEALT WITH VARIOUS SUBMISSIONS OF THE A SSESSEE AND IT IS NOT KNOWN AS TO HOW THE DRP CAME TO THE CONCLUSION THAT THE ENTIRE RECEIPT OF THE ASSESSEE IS FROM ALLOWING ACCESS OF THE NETWORK TO ITS CLIENT AND MOBILE NETWORK USES. THE LD. COUNSEL FO R THE ASSESSEE SUBMITS THAT ALCATEL HAS NO TELECOM NETWORK AT ALL. THEREFORE HE SUBMITS THAT THE DRPS CONCLUSIONS ARE BASED ON SUR MISES AND CONJECTURES AND NOT BASED ON FACTS AND ASSESSEE DO NOT KNOW AS TO WHERE FROM SUCH INFORMATION WAS GATHERED BY THE DRP BEFORE COMING TO SUCH CONCLUSION. HE SUBMITS THAT THIS IN FORMATION WAS NOT PUT TO THE ASSESSEE. 12. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY PL ACES RELIANCE ON THE ORDERS OF THE ASSESSING OFFICER AND DRP. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. ON A READING OF THE ORDERS OF THE AUTHORITIES BELOW AND THE SUBMISSIONS MADE BY THE ASSESSEE BEFO RE THE ASSESSING OFFICER AS WELL AS THE DRP, WE ARE OF THE CONSIDERED VIEW M/S. ALCATEL USA SOURCING LP 14 THAT DRP HAS NOT CONSIDERED THE ELABORATE SUBMISSI ONS MADE BY THE ASSESSEE WHICH ARE AS UNDER: 2.1. GROUNDS OF OBJECTION GROUND 3 - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED AO HAS ERRED IN PROPOSING TO CONCLU DE THAT THE ASSESSEE ESTABLISHES A PERMANENT ESTABLISHMENT ('PE ') IN INDIA UNDER THE VARIOUS CLAUSES OF THE DEVELOPMENT AGREEMENT DA TED APRIL 1, 2004. GROUND 4 - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED AO HAS ERRED IN PROPOSING TO CONSID ER THAT IN LIGHT OF THE PE BEING ESTABLISHED IN INDIA, THE REVENUES REC EIVED OF USD 2.54 MILLION FROM AXES INDIA TECHNOLOGIES PRIVATE LIMITE D ('AXES') ARE TAXABLE AS BUSINESS INCOME. 2.2. FACTS SUBMITIED TO THE AO 2.5.1 AXES HAD PERFORMED CERTAIN SERVICES IN CONNEC TION WITH TELECOM PRODUCTS FOR ALCATEL FOR MORE THAN TEN YEARS. OVER THE YEARS, THE ASSESSEE GAVE SIGNIFICANT BUSINESS TO AXES. IN VIEW OF THE PAST BUSINESS RELATIONSHIP, THE ASSESSEE AND AXES ENTERED INTO A BUSINESS AGREEMENT ON APRIL 1, 2004 TITLED AS DEVELOPMENT AGREEMENT. V IDE THE SAID DEVELOPMENT AGREEMENT, THE ASSESSEE WAS TO RECEIVE/ AVAIL OF CERTAIN SERVICES FROM AXES. FURTHER, AXES ALSO ASSUMED CERT AIN OBLIGATIONS TO THE ASSESSEE UNDER THE SAID DEVELOPMENT AGREEMENT. 2.5.2 DURING THE YEAR UNDER CONSIDERATION, AXES WAS ACQUIRED BY MAHINDRA BRITISH TELECOM (NOW KNOWN AS ''TECH MAHIN DRA LIMITED') AND THE ASSESSEE ENTERED INTO AN AMENDMENT AGREEMEN T DATED NOVEMBER 28, 2005 WITH AXES. FURTHER, THE PARTIES MUTUALLY CONFIRMED THEIR UNDERSTANDING IN RESPECT OF THE SAI D AGREEMENT VIDE LETTER DATED SEPTEMBER 30, 2006. ALL THE AFORESAID AGREEMENTS/LETTER WERE SUBMITTED ALONGWITH THE RETURN OF INCOME AS WE LL AS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. COPIES OF THE SAM E ARE ENCLOSED AT PAGE NOS. 79 TO 116. 2.5.3 THE ASSESSEE SUBMITTED THAT THE AMOUNT OF USD 2.54 MILLION (WHICH WAS RECEIVED BY THE ASSESSEE ON JUNE 14, 200 6) IS TOWARDS THE DISCOUNT DUE FOR THE HUGE VOLUME OF PAST BUSINESS P ROVIDED BY THE ASSESSEE TO AXES AND FOR THE EXTENSION OF THE TERM OF THE DEVELOPMENT AGREEMENT . 2.5.4 THE ASSESSEE FURTHER SUBMITTED THAT IT WAS IN RECIPIENT OF OR USED TO AVAIL OF CERTAIN SERVICES FROM AXES. THE ASSESSE E WAS REQUIRED TO MAKE PAYMENTS TO AXES TOWARDS THE SAME. THE RELATIO NSHIP BETWEEN AXES AND THE ASSESSEE WAS NOT THAT GENERATED ANY 'I NCOME' OR WAS A SOURCE OF INCOME' FOR THE ASSESSEE. ON THE CONTRARY , IT RESULTED IN AN M/S. ALCATEL USA SOURCING LP 15 OUTFLOW/PAYMENT FOR THE ASSESSEE IN THE ORDINARY CO URSE OF ITS BUSINESS. THUS, AS THE PAYMENTS FOR SERVICES UNDER THE DEVELO PMENT/AMENDMENT AGREEMENT IS 'REVENUE' IN NATURE, LIKEWISE, ANY AMO UNTS RECEIVED BY THE ASSESSEE FROM AXES UNDER THE AFORESAID AMENDMENT AG REEMENT WOULD ALSO PARTAKE TO BE 'REVENUE' IN NATURE. 2.3. FACTS MODIFIED BY THE AO 2.3.1 THE LEARNED AO HAS MENTIONED THAT NO CONVINCI NG REPLY WAS SUBMITTED BY THE ASSESSEE FOR PROVIDING THE BASIS O F THE WORKING FOR ARRIVING AT THE CONSIDERATION OF USD 2.54 MILLION. 2.3.2 THE LEARNED AO HAS OBSERVED THAT UNDER THE DE VELOPMENT AGREEMENT, THE ASSESSEE EXERCISED CONTROL OVER AXES . 2.3.3 THE LEARNED AO HAS OBSERVED THAT THE ASSESSEE HAD CARRIED ON ITS BUSINESS ACTIVITIES THROUGH THE MACHINERY GIVEN TO AXES IN THE FORM OF 'LOANED EQUIPMENTS'. 2.3.4 THE LEARNED AO HAS OBSERVED THAT THE ASSESSEE FAILED TO SUBSTANTIATE ITS CLAIM WITH REFERENCE TO THE AMENDM ENT AGREEMENT, UNDER WHICH THE AMOUNT WAS RECEIVED BY IT. DO YOU WHOLLY AGREE WITH THE MODIFICATIONS IN THE FACTS BY THE AO. IF NOT, GIVE REASONS POINTING THE SPECIFIC FACT OR FACTS WITH WHICH YOU DO NOT AGREE ALONG WITH THE REASONS AND DOCUMENTARY EVIDCENCE, IF ANY. 2.4.1. THE ASSESSEE SUBMITS THAT A DETAILED WORKING OF HOW THE DISCOUNT COMPUTATION WAS MADE ALONGWITH THE BASIS A ND REFERENCES TO THE AGREEMENT WERE SUBMITTED TO THE ASSESSING OFFIC ER DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN AS MUCH AS SO T HAT THE ENTIRE WORKING WAS EXPLAINED TO THE ASSESSING OFFICER DURI NG THE COURSE OF THE PROCEEDINGS. A COPY OF THE SUBMISSIONS DT. NOV EMBER, 26, 2009 IS ENCLOSED AT PAGER NOS. 117 TO 121. 2.4.2 THE ASSESSEE SUBMITS THAT UNDER THE DEVELOPME NT AGREEMENT IT AVAILED SERVICES OF AXES. WHILE IN FORM THE DEVELOP MENT AGREEMENT PROVIDES THAT AXES WAS ENTRUSTED WITH THE OBLIGATIO N OF DEPLOYMENT OF FIXED ASSETS, PERSONNEL, ETC IN FACT, THE SAME WERE TO BE COMPLIANT WITH THE BUSINESS STANDARDS AGREED UPON BETWEEN THE ASSE SSEE AND AXES. THE SAME FACT HAS BEEN FURTHER SUPPLEMENTED BY WAY OF THE RESPONSE SOUGHT BY THE LEARNED AO FROM AXES/TECH MAHINDRA. I N RESPONSE TO THE QUERY SO RAISED BY THE LEARNED AO, REQUIRING A LIST OF FIXED ASSETS AND PERSONNELS DEPLOYED FOR RENDERING SERVICES TO T HE ASSESSEE, AXES/TECH MAHINDRA SUBMITTED THAT NO SEPARATE LIST OF FIXED ASSETS AND PERSONNELS WAS MAINTAINED BY AXES/TECH MAHINDRA, RE NDERING SERVICES TO THE ASSESSEE. HENCE, IT CAN BE UNDERSTOOD THAT S ERVICES PROVIDED TO M/S. ALCATEL USA SOURCING LP 16 THE ASSESSEE WERE A PART OF ROUTINE BUSINESS ACTIVI TIES OFAXIS/TECH MAHINDRA AND HENCE, NO EVIDENCE WAS PLACED ON RECOR D BY THE LEARNED AO TO SUGGEST THAT ANY FORM OF CONTROL WAS EXERCISED BY THE ASSESSEE. HENCE, THE CONTENTION OF THE LEARNED AO I S NOT TENABLE. 2.4.3 THE ASSESSEE SUBMITS THAT THE LOANED EQUIPMEN TS WERE ACTUALLY CONSIGNED TO AXES TO ENABLE AXES TO PROVIDE REQUISI TE SERVICES TO THE ASSESSEE. THESE EQUIPMENTS WERE USED AS TEST EQUIPM ENTS FOR ENSURING EFFECTIVE PROVISION OF SERVICES. THE ASSESSEE SUBMI TS THAT THESE EQUIPMENTS WERE NOT UTILISED TO GENERATE ANY INCOME OR CARRY OUT ANY BUSINESS ACTIVITIES OF THE ASSESSEE IN INDIA AND HE NCE, THE SAME-CANNOT BE CONSIDERED TO ESTABLISH A PE FOR THE ASSESSEE IN INDIA. FURTHER, THE LEARNED AO HAS ALSO NOT ESTABLISHED OR SUBSTANTIATE D HOW AND WHAT BUSINESS ACTIVITIES ARE CARRIED ON BY THE ASSESSEE IN INDIA THROUGH THE LOANED EQUIPMENTS AND MERELY BASED ON HIS OWN CONJE CTURES AND SURMISES CONCLUDED THAT THE LOANED EQUIPMENTS CONST ITUTE A PE IN INDIA. 2.4.4 THE ASSESSEE SUBMITS THAT AS PER THE REQUEST OF THE LEARNED AO, NECESSARY DETAILS IN RESPECT OF THE COMPUTATION OF THE CONSIDERATION OF USD 2.54 MILLION AS WELL AS THE TAXABILITY OF THE S AME WERE SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. ALSO, ALL THE NECESSARY EXPLANATIONS AS REQUIRED WITH REFERENCE TO THE SAID AMOUNT AS WELL AS THE AMENDMENT AGREEMENT WERE MADE TO THE LEARNED AO . COPIES OF THE SUBMISSIONS ARE ENCLOSED AT PAGE NOS. 117 TO 121. A CCORDINGLY, THE ASSESSEE DOES NOT AGREE THAT IT FAILED TO SUBSTANTI ATE ITS CLAIM WITH REFERENCE TO THE AMENDMENT AGREEMENT. 2.5. LEGAL ARGUMENTS SUBMITTED TO ASSESSING OFFICER 2.5.1. THE ASSESSEE SUBMITTED THAT THE AFORESAID AM OUNT OF USD 2.54 MILLION DUE TO IT IS WAS REVENUE IN NATURE AND IN T HE ABSENCE OF ANY PE IN INDIA, THE SAME WAS NOT LIABLE TO BE TAXED IN IN DIA. 2.5.2 TO SUPPORT THE ABOVE CONTENTION, RELIANCE WA S PLACED ON THE FOLLOWING JUDICIAL PRECEDENTS CIT V. PRABHU DAYAL [1971] 82 ITR 804 (SC) IN THIS CASE, THE APEX COURT HAS HELD THAT IT IS WE LL-SETTLED THAT A DISTINCTION HAS TO BE DRAWN BETWEEN A PAYMENT MADE FOR PAST SERVICES OR DISCHARGE OF PAST LIABILITIES, AND THAT MADE FOR COMPENSATION OF TERMINATION OF INCOME PRODUCING ASSET. THE FORMER D OES NOT LOSE ITS REVENUE NATURE, BUT THE LATTER BEING A PAYMENT FOR DESTRUCTION OF A CAPITAL ASSET, MUST BE CONSIDERED AS CAPITAL RECEIP T. ASST. CIT V. HINDITRON SERVICES P LTD. [2006] 99 ITD 479 (MUM) IN THE INSTANT CASE, THE JURISDICTIONAL MUMBAI TRIB UNAL, BASED ON THE DECISIONS OF THE SUPREME COURT AND HIGH COURT, LAID THE FOLLOWING M/S. ALCATEL USA SOURCING LP 17 PRINCIPLES FOR CONSIDERING THAT THE COMPENSATION RE CEIVED ON THE TERMINATION/CANCELLATION OF THE AGREEMENT IS A REVE NUE RECEIPT: '1. WHEN A PAYMENT IS MADE TO COMPENSATE A PERSON F OR CANCELLATION OF CONTRACT WHICH DOES NOT AFFECT THE TRADING STRUC TURE OF THE RECIPIENT'S BUSINESS NOR DEPRIVE THE ASSESSEE FROM SOURCE OF IN COME, THEN TERMINATION OF CONTRACT IS ONLY A NORMAL INCIDENCE OF BUSINESS. 2. WHERE TRADING STRUCTURE OF THE ASSESSEE IS IMPAI RED OR CANCELLATION RESULTS IN LOSS OF SOURCES OF INCOME, PAYMENT TO CO MPENSATE SUCH LOSS OF SOURCE IS CAPITAL. 3. A SOURCE OF INCOME MAY BE A CAPITAL STRUCTURE OF ONE ASSESSEE. BUT WHERE THE ASSESSEE IS DEALING IN SEVERAL SUCH SOURC ES/ASSETS THEN IT BECOMES A STOCK-IN-TRADE. LOSS OF ONE SUCH SOURCE/A SSET WILL BE A LOSS OF CAPITAL IF THE ASSESSEE IS DEALING ONLY IN ONE B UT WILL BE REVENUE IF IT IS DEALING IN MANY SUCH SOURCES/ASSETS AS STOCK-IN- TRADE. 4. WHEN ASSESSEE IS DEALING IN SEVERAL AGENCIES, LO SS OF ONE SUCH AGENCY WILL BE INCIDENTAL TO THE CARRYING ON OF THE BUSINESS IN AGENCIES. WHERE THERE IS A MODIFICATION IN THE TERM S OF ANYONE OF SUCH AGENCIES, IT WILL AGAINST BE A NORMAL INCIDENCE OF BUSINESS. 5. THERE IS NO IMMUTABLE PRINCIPLE THAT COMPENSATIO N RECEIVED ON CANCELLATION OF AN AGENCY MUST ALWAYS BE REGARDED A S CAPITAL . 6. COMPENSATION PAID FOR AGREEING TO REFRAIN FROM CARRYING ON BUSINESS IN THE COMMODITIES IN RESPECT OF THE AGENC Y TERMINATED FOR LOSS OF GOODWILL IS PRIMA FACIE, OF THE NATURE OF C APITAL RECEIPT. 7. MANNER OF PAYMENT OF COMPENSATION IS NOT MATERIA L. WHETHER CAPITAL IS REPAID IN INSTALMENTS OR IS PAID IN LUMP SUM, IT WILL NOT AFFECT THE BASIC NATURE OF RECEIPT IN THE HANDS OF THE REC IPIENT. 8. WHEN ASSESSEE IS NOT DISPOSED OF ANY ASSET, THEN AM OUNT RECEIVED CANNOT BE REGARDED AS COMPENSATION IN RESPECT OF LO SS OF AN ENDURING ASSET. 9. PAYMENT MADE IN SETTLEMENT OF TRADING RIGHTS UND ER A TRADING CONTRACT ARE TRADING RECEIPTS, BUT WHERE A PERSON I S PREVENTED FROM DOING BUSINESS AND INJURY IS INFLICTED ON CAPITAL A SSET, THEN THE COMPENSATION WILL BE CAPITAL AND IF INJURY IS TO ST OCK-IN-TRADE, THEN THE COMPENSATION SO RECEIVED WILL BE REVENUE IN NATURE. ' (EMPHASIS SUPPLIED BY US) CIT V. RAI BAHADUR JAIRAM VALJI (35 ITR 148) (SC) THE SUPREME COURT HAS HELD THAT IF IT WAS FOUND THA T A CONTRACT WAS ENTERED INTO THE ORDINARY COURSE OF BUSINESS, ANY C OMPENSATION M/S. ALCATEL USA SOURCING LP 18 RECEIVED FOR ITS TERMINATION WOULD BE A REVENUE REC EIPT , IRRESPECTIVE OF WHETHER ITS PERFORMANCE WAS TO CONSIST OF A SING LE ACT OR A SERIES OF ACTS SPREAD OVER A PERIOD. (EMPHASIS SUPPLIED BY US ) KETTLEWELL BULLEN AND CO. LTD. V. CIT (53 ITR 261 ) (SC): THE SUPREME COURT HAS HELD THAT WHERE PAYMENT IS MA DE TO COMPENSATE A PERSON FOR CANCELLATION OF A CONTRACT, WHICH DOES NOT AFFECT THE TRADING STRUCTURE OF HIS BUSINESS OR DOE S NOT DEPRIVE HIM OF WHAT IN SUBSTANCE IS HIS SOURCE OF INCOME, TERMINAT ION OF CONTRACT BEING A NORMAL INCIDENT TO THE BUSINESS, AND SUCH C ANCELLATION LEAVES HIM FREE TO CARRY ON HIS TRADE (FREED FROM CONTRACT TERMINATED), THE RECEIPT IS REVENUE; WHEREBY THE CANCELLATION OF AN AGENCY IS IMPAIRED, OR SUCH CANCELLATION RESULTS IN LOSS OF WHAT MAY BE REGARDED AS SOURCE OF THE ASSESSEE'S INCOME OR INVOLVES LOSS OF ENDURI NG ASSETS, THE PAYMENT MADE TO COMPENSATE FOR CANCELLATION OF THE AGENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. THIS PRINCIPLE HAS BEEN FURTHER CONFIRMED BY THE SU PREME COURT IN THE CASE OF OBEROI HOTELS PVT. LTD. V. CIT [1999] 236 I TR 903 (SC). 2.5.3 RELYING ON THE FACTS OF THE CASE AND THE PRIN CIPLES LAID DOWN IN THE VARIOUS JUDICIAL PRECEDENTS (CITED ABOVE), THE ASSESSEE SUBMITTED THAT THE AFORESAID AMOUNT OF USD 2.54 MILLION IS 'R EVENUE' IN NATURE FOR THE FOLLOWING REASONS: * THE AFORESAID AGREEMENT IS ONLY A BUSINESS ARRANG EMENT. *. THE PROFITABILITY OF THE ASSESSEE IS NOT AFFECT ED BY (OR A SOURCE OF INCOME IS NOT LOST AS A RESULT OF) THE AMENDMENT AG REEMENT AS THE ASSESSEE CONTINUES TO AVAIL THE SERVICES OF AXES AF TER EXECUTING THE AMENDMENT AGREEMENT. * THE AMENDMENT AGREEMENT WAS EXECUTED WITH A VIEW TO EXTEND THE TERM OF THE DEVELOPMENT AGREEMENT. * THE AMENDMENT/ALTERATIONS TO THE RIGHTS GRANTED U NDER THE DEVELOPMENT AGREEMENT ARE MERELY INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. * THE ASSESSEE WAS NOT REFRAINED FROM CARRYING ON ANY BUSINESS ACTIVITIES WITH AXES 2.5.4. IN LIGHT OF THE ABOVE SUBMISSIONS AND CONSID ERING THE FACT THAT THE ASSESSEE DOES NOT HAVE ANY PE IN INDIA FOR THE YEAR UNDER CONSIDERATION, THE AFORESAID AMOUNT IS NOT LIABLE T O TAX IN INDIA UNDER ARTICLE 7 READ WITH ARTICLE 5 OF THE INDIA-USA TAX TREATY. 2.5.5 WITHOUT PREJUDICE TO THE ABOVE PARAS AND EVEN ASSUMING BUT NOT ACCEPTING THAT THE AFORESAID AMOUNT IS ON CAPITAL A CCOUNT, IT WOULD NOT M/S. ALCATEL USA SOURCING LP 19 BE LIABLE TO TAX IN INDIA AS THERE IS NO TRANSFER O F CAPITAL ASSET AND IT DOES NOT FALL WITHIN THE EXTENDED MEANING OF INCOME UNDER SECTION 2(24) OF THE ACT. ) 2.5.6 FURTHER, WITHOUT PREJUDICE AND FOR THE SAKE O F ARGUMENT, WHERE THE AFORESAID AMOUNT IS REPRESENTING CONSIDERATION FOR TRANSFER OF CAPITAL ASSET (WHICH IT IS NOT), THE SAME WOULD AGA IN NOT BE LIABLE TO TAX UNDER THE HEAD CAPITAL GAINS, SINCE THE COMPUTATION MACHINERY PROVISIONS UNDER THE ACT FAILS AND THUS, THE CAPITA L GAINS, IF ANY, WOULD NOT BE TAXABLE IN INDIA 2.6. CASE LAWS RELIED UPON BY THE ASSESSEE CIT V. PRABHU DAYAL [1971] 82 ITR 804 (SC) ASST. CIT V. HINDITRON SERVICES P LTD. [2006] 99 ITD 479 (MUM) CIT V. RAI BAHADUR JAIRAM VALJI (35 ITR 148) (SC) KETTLEWELL BULLEN AND CO. LTD. V. CIT (53 ITR 261 ) (SC)\ OBEROI HOTELS PVT. LTD. V. CIT [1999] 236 ITR 90 3 (SC) 2.7. LEGAL ARGUMENTS RELIED UPON BY AO 2.7.1 THE ASSESSEE CARRIED ON ITS BUSINESS ACTIVITI ES IN INDIA THROUGH THE MACHINERY GIVEN TO AXES IN THE FORM OF 'LOANED EQUIPMENTS' AND HENCE, SUCH EQUIPMENTS LOCATED IN THE PREMISES OF A XES, FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE, CONSTITUT ED A PE FOR THE ASSESSEE IN INDIA. 2.7.2 THE LEARNED AO OBSERVED THAT THE ASSESSEE HAD RELEASED ALL ITS RIGHTS AND CLAIMS UNDER SCHEDULE 3.1 OF THE DEVELOP MENT AGREEMENT AND IN CONSIDERATION OF SUCH RELEASE, IT AGREED TO RECEIVE THE PAYMENTS OF USD 2.54 MILLION. THE ASSESSEE HAD EXCLUSIVE PRE MISES IN THE FORM OF ALCATEL DIVISION FOR ITS BUSINESS ACTIVITIES. TH E ASSESSEE EXERCISED MANAGERIAL, ECONOMIC AND OTHER CONTROL OVER AXES. T HUS, THE ASSESSEE HAD A PE IN INDIA. 2.7.3 THE LEARNED AO OBSERVED THAT AS THE CONSIDERA TION WAS RECEIVED FOR WAIVING OF ALL THE RIGHTS UNDER SCHEDULE 3.1 OF THE DEVELOPMENT AGREEMENT, THE SAID CONSIDERATION IS NOT IN THE NAT URE OF DISCOUNT. 2.7.4 IN LIGHT OF THE PE BEING CONSTITUTED IN INDIA , THE SAID CONSIDERATION OF USD 2.54 MILLION (ABOUT RS.11 ,43, 00,000) IS TAXABLE AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE IND IA 2.8. CASE LAWS RELIED UPON BY THE LEARNED AO 2.9. ANY ADDITIONAL NEW CASE LAWS WHICH THE ASSESSE E MAY LIKE TO RELY UPON 2.10. FACTUAL & LEGAL ARGUMENTS AGAINST THE ADDITIO N PROPOSED BY THE AO M/S. ALCATEL USA SOURCING LP 20 2.10.1. AXES HAD PERFORMED CERTAIN DEVELOPMENT SER VICES IN CONNECTION WITH TELECOM PRODUCTS FOR ALCATEL FOR MORE THAN TEN YEAR S. OVER THE YEARS, THE ASSESSEE GAVE SIGNIFICANT BUSINESS TO AXES. IN VIEW OF THE PAST BUSINESS RELATIONSHIP, THE ASSESSEE AND AXES ENTERED INTO A BUSINESS AGREEMENT ON APRIL 1, 2004 TITLED AS DEVELOPMENT AGREEMENT. VIDE THE S AID DEVELOPMENT AGREEMENT, THE ASSESSEE WAS TO RECEIVE/AVAIL OF CER TAIN SERVICES FROM AXES. FURTHER, AXES ALSO ASSUMED CERTAIN OBLIGATIONS TO T HE ASSESSEE UNDER THE SAID DEVELOPMENT AGREEMENT. 2.10.2 DURING THE YEAR UNDER CONSIDERATION, AXES WA S ACQUIRED BY MAHINDRA BRITISH TELECOM (NOW KNOWN AS 'TECH MAHINDRA LIMITE D') AND THE ASSESSEE ENTERED INTO AN AMENDMENT AGREEMENT WITH AXES. FURT HER, THE PARTIES MUTUALLY CONFIRMED THEIR UNDERSTANDING IN RESPECT O F THE SAID AGREEMENT VIDE LETTER DATED SEPTEMBER 30, 2006. ALL THE AFORESAID AGREEMENTS/LETTER WERE SUBMITTED TO THE LEARNED AO AT THE TIME OF ASSESSME NT PROCEEDINGS (A CCPY OF THE SAID AGREEMENTS/LETTER WAS ALSO FILED ALONGWITH THE RETURN OF INCOME). 2.10.3 THE ASSESSEE SUBMITS THAT CONSIDERATION OF U SD 2.54 MILLION IS TOWARDS THE DISCOUNT DUE FOR THE HUGE VOLUME OF BUSINESS PR OVIDED BY THE ASSESSEE IN THE PAST AND FOR THE EXTENSION OF THE DEVELOPMENT A GREEMENT. COPY OF THE DEBIT NOTE EVIDENCING THE SAME IS ENCLOSED AT PAGE NO. 12 2. 2.10.4 AS PER PARA 3.1 (A) OF ARTICLE III OF THE S AID DEVELOPMENT AGREEMENT, DURING EACH YEAR OF THE THREE YEARS TERM OF THE SAI D AGREEMENT, THE ASSESSEE COMMITTED TO AXES THAT IT WOULD GIVE AXES INDIA A S IGNIFICANT VOLUME OF BUSINESS TO AXES, SO LONG AS AXES (A) WAS IN COMPLI ANCE WITH THE AGREEMENT, (B) REMAINED PRICE COMPETITIVE WHEN COMPARED TO SIM ILAR SERVICES MADE AVAILABLE BY PUBLICLY TRADED TELECOM CONTRACT DEVEL OPERS, AND (C) CONTINUED TO MEET QUALITY/DELIVERY REQUIREMENTS. 2.10.5 FURTHER, AS PER THE SAID DEVELOPMENT AGREEME NT, THE ASSESSEE HAS SUPPLIED LOANED EQUIPMENTS TO AXES. THESE EQUIPMENT S WERE ACTUALLY CONSIGNED TO AXES TO ENABLE AXES TO PROVIDE REQUISI TE SERVICES TO THE ASSESSEE. THESE LOANED EQUIPMENTS WERE USED AS TEST EQUIPMENT S FOR ENSURING EFFECTIVE PROVISION OF SERVICES TO THE ASSESSEE. THE ASSESSEE SUBMITS THAT THESE LOANED EQUIPMENTS WERE SENT BACK TO THE ASSESSEE FROM TIME TO TIME. THE ASSESSEE ALSO SUBMITS THAT NO BUSINESS OF THE ASSESSEE WAS CARRIE D OUT IN INDIA THROUGH THE USE OF SUCH EQUIPMENTS AND THE SAME WAS MERELY USED TO PROVIDE THE SERVICES TO THE ASSESSEE. 2.10.6 FURTHER, THE ASSESSEE SUBMITS THAT VIDE THE SAID DEVELOPMENT AGREEMENT, CERTAIN OBLIGATIONS AS PER SCHEDULE 3.1 WERE CASTED ON AXES AS REGARDS DEPLOYMENT OF FIXED ASSETS, PERSONN EL, ETC BY AXES IN RENDERING SERVICES UNDER THE SAID AGREEMENT TO THE ASSESSEE, WHICH ARE DESCRIBED HEREUNDER. 2.10.6.1 THE SERVICES TO BE RENDERED BY AXES INDIA WERE TO BE SEGREGATED INTO A SEPARATE DIVISION WITHIN AXES. TH E ASSESSEE SUBMITS M/S. ALCATEL USA SOURCING LP 21 THAT THE SAID DIVISION BELONGED TO AND WAS THE PROP ERTY OF AXES AND WAS NOT OWNED BY THE ASSESSEE. 2.10.6.2 AXES WAS REQUIRED TO PROVIDE TO THE ASSESS EE A LIST OF ASSET AND PERSONNEL DEPLOYED IN THE SAID DIVISION. THE AS SESSEE SUBMITS THAT THE PRIMARY OBJECTIVE OF THESE DETAILS WERE TO ENSU RE THAT APPROPRIATE LEVEL OF ASSETS AND PERSONNEL WERE DEPLOYED BY AXES INDIA WHILE RENDERING SERVICES TO THE ASSESSEE. HOWEVER, WHILE, IN FORM, THIS INFORMATION WAS REQUIRED AS PER THE DEVELOPMENT AGR EEMENT, IN FACT, NO SUCH INFORMATION WAS FURNISHED. THIS IS ALSO EVI DENT FROM THE FACT THAT AXES/TECH MAHINDRA, IN RESPONSE TO THE QUERY R AISED BY THE LEARNED AO IN RESPECT OF THE SAID DETAILS, HAS REPL IED STATING THAT THE DETAILS OF FIXED ASSETS AND PERSONNELS WERE NOT MAI NTAINED DIVISION- WISE AND HENCE, COULD NOT BE SUBMITTED TO THE LEARN ED AO. COPY OF THE SUBMISSIONS FILED BY AXES/TECH MAHINDRA IN RESPONSE TO THE NOTICE ISSUED UNDER 133(6) OF THE ACT IS ENCLOSED AT PAGE NOS. 123 TO 163. 2.10.6.3 FURTHER, THE ASSESSEE SUBMITS THE IT HAD A RIGHT TO APPOINT MR. HUBERT DE PESQUIDOUX AND MR. MICHEL RAHIER ON THE M ANAGEMENT BOARD OF THE SAID DIVISION OWNED BY AXES. THIS WAS INTENDED ONLY TO ENSURE APPROPRIATE COMMITMENT AND DELIVERY OF SERVI CES BY AXES TO THE ASSESSEE. THE ASSESSEE FURTHER SUBMITS THAT NEITHER MR. HUBERT NOR MR. MICHEL VISITED INDIA TO ATTEND ANY_BOARD MEETINGS OF THE DIVISION OF AXES. 2.10.6.4. THE ASSESSEE, INTER ALIA, ALSO HAD AN OPT ION TO BUY THE ABOVE SAID DIVISION AT A PRICE AS TO BE DETERMINED IN THE DEVELOPMENT AGREEMENT. THE ASSESSEE SUBMITS THAT IT DID NOT EXE RCISE THE OPTION TO BUY THE DIVISION OWNED BY AXES. 2.10.6.5 THE ASSESSEE FURTHER SUBMITS THAT NEITHER THE ASSESSEE NOR IT'S AFFILIATES ACQUIRED CAPITAL STOCK (IE. SHARES) OF A XES. 2.10.6.6 THE ASSESSEE SUBMITS THAT 'RETURN ON SALES ' REFERRED TO THE NET INCOME OF AXES ATTRIBUTABLE TO THE SAID DIVISION DI VIDED BY THE TOTAL REVENUES ARISING FROM THE SAID DIVISION. THE SAID R ETURN ON SALES WAS RELEVANT TO ARRIVE AT THE REBATE THAT THE ASSESSEE MAY RECEIVE FROM AXES. THE ASSESSEE, VIDE SUBMISSIONS DATED DECEMBER 10,2009, COPY ENCLOSED AT PAGE NOS. 164 TO 166, HAS CONFIRMED THA T IT DID NOT RECEIVE ANY REBATE FROM AXES. 2.10.6.7 THE OTHER CLAUSES OF THE SAID SCHEDULE INC LUDED; INTER-ALIA, THE PRICING DISCOUNTS IN THE EVENT THE ASSESSEE WAS ABL E TO MEET ITS TARGETS. 2.10.7. FROM THE ABOVE, IT MAY BE NOTED THAT THOUG H, IN FORM, THE ASSESSEE HAD RIGHT TO MANAGE AND EXERCISE CONTROL O VER THE DIVISION, IN SUBSTANCE, NO SUCH RIGHT WAS EXERCISED. THESE RIGHT S WERE ONLY CONTEMPLATED IN THE AGREEMENT SO AS TO ENSURE THAT THE QUALITY OF THE SERVICES PROVIDED BY AXES WERE OF ADEQUATE STANDARD S AND AS PER THE ASSESSEE'S REQUIREMENTS. FURTHER, THE ASSESSEE SUBM ITTED THAT THOUGH A M/S. ALCATEL USA SOURCING LP 22 SEPARATE DIVISION WAS SEGREGATED BY AXES FOR PROVID ING SERVICES TO THE ASSESSEE, THE SAID DIVISION ALWAYS CONTINUED TO REM AIN THE PROPERTY OF AXES AND WAS NOT OWNED BY THE ASSESSEE. 2.10.8 THE LEARNED AO HAS OBSERVED THAT THE RIGHTS IN THE EXCLUSIVE PREMISES, APPOINTMENT OF MEMBERS IN THE MANAGEMENT BOARD, RIGHT TO ACQUIRE CAPITAL STOCK, INFERS THAT THE ASSESSEE HAD A PE IN INDIA. IN THIS CONNECTION, AT THE OUTSET, THE ASSESSEE SUBMITS THA T THE LEARNED AO HAS NOT CONCLUDED OR IDENTIFIED THE SPECIFIC CLAUSE OF ARTICLE 5 OF THE DTAA UNDER WHICH THE PE IS ESTABLISHED. WITHOUT PREJUDIC E TO THE ASSESSEE'S CONTENTIONS THAT IT DOES NOT HAVE PE IN INDIA, THE ASSESSEE SUBMITS THAT IT APPEARS THAT THE LEARNED AO HAS CONTEMPLATED THA T THE ASSESSEE ESTABLISHES A PE IN INDIA UNDER ARTICLE 5(1) OF THE DTAA. 2.10.9 AT THE OUTSET, THE ASSESSEE WISHES TO RELY O N THE MEANING OF TERM 'PE', WHICH IS VERY LUCIDLY EXPLAINED BY THE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT V VISHAKAPATNAM PORT TRUST , 144 ITR 146. THE HON'BLE HIGH COURT HELD AS UNDER: 'THE EXPRESSION 'PERMANENT ESTABLISHMENT' USED IN DOUBLE TAXATION AVOIDANCE AGREEMENT (DTA) POSTULATE S THE EXISTENCE OF A SUBSTANTIAL ELEMENT OF AN ENDURING O R PERMANENT NATURE OF A FOREIGN ENTERPRISE IN ANOTHER COUNTRY W HICH CAN BE ATTRIBUTED TO A FIXED PLACE OF BUSINESS IN THAT COU NTRY. IT SHOULD BE OF SUCH A NATURE THAT IT WOULD AMOUNT TO A VIRTU AL PROJECTION OF THE FOREIGN ENTERPRISE OF ONE COUNTRY INTO THE S OIL OF ANOTHER COUNTRY. 2.10.10 . THE ASSESSEE GIVES BELOW ITS CONTENTIONS AS TO WHY THE ASSESSEE DOES NOT ESTABLISH IN TERMS OF ARTICLE 5(1 ) OF THE DTAA. 2.10.10.1 ARTICLE 5(1) OF THE DTAA STATES THAT 'FOR THE PURPOSES OF THIS CONVENTION, THE TERM 'PERMANENT ESTABLISHME NT' MEANS A FIXED PLACE OF BUSINESS OF AN ENTERPRISE IS WHOLL Y OR PARTLY CARRIED ON'. 2.10.10.2 AS PER ARTICLE 5(1) OF THE TAX TREATY, TH E MAIN FEATURES OF A PE ARE THE EXISTENCE OF A 'PLACE OF BUSINESS' WHICH IS 'FIXED' THROUGH WHICH THE ENTERPRISE IS 'CARRYING ON ITS BUSINESS WHOLLY OR PARTLY. 2.10.10.3 IT MAY BE WORTHWHILE TO EXAMINE THE COMME NTS IN THE OECD MODEL COMMENTARY AND OTHER INTERNATIONAL LITER ATURE TO UNDERSTAND THE CONCEPT OF PE. M/S. ALCATEL USA SOURCING LP 23 PARAGRAPH 1 GIVES A GENERAL DEFINITION OF THE TERM 'PERMANENT ESTABLISHMENT' WHICH BRINGS OUT ITS ESSENTIAL CHARA CTERISTICS OF A PERMANENT ESTABLISHMENT IN THE SENSE OF THE CONVENT ION, I.E. A DISTINCT 'SITUS', A 'FIXED PLACE OF BUSINESS'. THE PARAGRAPH DEFINES THE TERM 'PERMANENT ESTABLISHMENT' AS A FIXED PLACE OF BUSIN ESS, THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY C ARRIED ON. THIS DEFINITION, THEREFORE, CONTAINS THE FOLLOWING CONDI TIONS: - - THE EXISTENCE OF A 'PLACE OF BUSINESS', I.E. A FA CILITY SUCH AS PREMISES OR, IN CERTAIN INSTANCES, MACHINERY OR EQUIPMENT; - THIS PLACE OF BUSINESS MUST BE 'FIXED', I.E. IT M UST BE ESTABLISHED AT A DISTINCT PLACE WITH A CERTAIN DEGREE OF PERMANENCE; - CARRYING ON OF THE BUSINESS OF THE ENTERPRISE THR OUGH THIS FIXED PLACE OF BUSINESS. THIS MEANS USUALLY THAT PERSONS WHO, I N ONE WAY OR ANOTHER, ARE DEPENDENT ON THE ENTERPRISE (PERSONNEL ) CONDUCT THE BUSINESS OF THE ENTERPRISE IN THE STATE IN WHICH TH E FIXED PLACE IS SITUATED. -THE EXISTENCE OF A 'PLACE OF BUSINESS' 'THE TERM ' PLACE OF BUSINESS' COVERS ANY PREMISES, FACILITIES OR INSTALLATIONS US ED FOR CARRYING ON THE BUSINESS OF THE ENTERPRISE WHETHER OR NOT THEY ARE USED EXCLUSIVELY FOR THAT PURPOSE. A PLACE OF BUSINESS MAY ALSO EXIST WH ERE NO PREMISES ARE AVAILABLE OR REQUIRED FOR CARRYING ON THE BUSINESS OF THE ENTERPRISE AND IT SIMPLY HAS A CERTAIN AMOUNT OF SPACE AT ITS DISP OSAL. IT IS IMMATERIAL WHETHER THE PREMISES, FACILITIES OR INSTALLATIONS A RE OWNED OR RENTED BY OR ARE OTHERWISE AT THE DISPOSAL OF THE ENTERPRISE. AGAIN THE PLACE OF BUSINESS MAY BE SITUATED IN THE BUSINESS FACILITIES OF ANOTHER ENTERPRISE. THIS MAY BE THE CASE FOR INSTANCE WHERE THE FOREIGN ENTERPRISE HAS AT ITS CONSTANT DISPOSAL CERTAIN PRE MISES OR A PART THEREOF OWNED BY THE OTHER ENTERPRISE. PLACE OF BUSINESS WHICH IS 'FIXED' ACCORDING TO THE DEFINITION, THE PLACE OF BUSINESS HAS TO BE A 'FIXED' ONE. THUS, IN THE NORMAL WAY THERE HAS TO BE A LINK BETWEEN THE PLACE OF BUSINESS AND A SPECIFIC GEOGRAPHICAL POINT. THROUGH WHICH THE ENTERPRISE IS CARRYING ON ITS BUSINESS WHOLLY O R PARTLY - THROUGH WHICH THE WORDS 'THROUGH WHICH' MUST BE G IVEN A WIDE MEANING SO AS TO APPLY TO ANY SITUATION IN WHERE BU SINESS ACTIVITIES ARE CARRIED ON AT A PARTICULAR LOCATION THAT IS AT THE DISPOSAL OF THE ENTERPRISE FOR THAT PURPOSE. CARRYING ON ITS BUSINESS WHOLLY OR PARTLY M/S. ALCATEL USA SOURCING LP 24 THE BUSINESS OF AN ENTERPRISE CARRIED ON MAINLY BY THE ENTREPRENEUR OR PERSONS WHO ARE IN A PAID EMPLOYMENT RELATIONSHIP W ITH ENTERPRISE ( PERSONNEL). 2.10.10.4 THE ASSESSEE ALSO RELIES ON THE INTERPRET ATION SUGGESTED BY THE LD. AUTHOR PHILLIP BAKER'. HIS VIEWS ON THE PE SUBJECT, WHICH IS ALSO THE INTERNATIONALLY ACCEPTED PROPOSITION OF LA W IS THAT A REQUIREMENT IMPLICIT IN ARTICLE 5(1) IS THAT THE PL ACE OF BUSINESS MUST BE AT THE CONSTANT DISPOSAL OF THE ENTERPRISE. ONE MUST BE ABLE TO POINT TO A PHYSICAL LOCATION AT THE DISPOSAL OF THE ENTER PRISE THROUGH WHICH THE BUSINESS IS CARRIED ON. FURTHER, SUCH PLACE WHI CH IS AT THE DISPOSAL OF THE ENTERPRISE SHOULD BE USED FOR THE BUSINESS O F THE FOREIGN ENTERPRISE. 2.10.10.5. EVEN ACCORDING TO THE FAMOUS AUTHOR KLA US VOGE L2, THE MAIN USE OF THE PE CONCEPT IS TO DETERMINE THE RIGH T OF A CONTRACTING STATE TO TAX THE PROFITS OF AN ENTERPRISE OF THE OT HER CONTRACTING STATE. THE CONCEPT OF PE IS DESIGNED TO ENSURE THAT BUSINE SS ACTIVITIES OF A FOREIGN ENTERPRISE WILL NOT BE TAXED BY A STATE UNL ESS AND UNTIL THEY HAVE CREATED SIGNIFICANT ECONOMIC BONDS BETWEEN THE ENTERPRISE AND THAT STATE. CONVERSELY, IF ECONOMIC BONDS WITH A F OREIGN COUNTRY ARE ONLY LOOSE, TAXATION IS RESERVED FOR THE STATE OF R ESIDENCE. 2.10.10.6 FROM A CONJOINT READING OF THE ABOVE, THE FOLLOWING CONCLUSIONS EMERGE: I) PE DENOTES A PLACE IN THE INDIAN TERRITORY THROUGH WHICH A FOREIGN ENTERPRISE SHOULD CARRY ON ITS BUSINESS. TH IS PLACE MUST BE PLACED AT THE CONSTANT DISPOSAL OF THE FOREIGN E NTERPRISE. II) THIS PLACE SHOULD BE USED BY THE FOREIGN ENTERPRISE TO CARRY ON ITS OWN BUSINESS. IF THE BUSINESS OF THE FOREIGN EN TERPRISE IS NOT CARRIED ON IN THE INDIAN TERRITORY, THERE CANNOT BE ANY QUESTION OF EXISTENCE OF THE PE IN INDIA; : III) MERE PRESENCE OR A VIRTUAL PROJECTION OF THE FOREIG N ENTERPRISE - - INTO THE SOIL OF INDIA WILL NOT CREATE A PE IN IN DIA. IT IS FURTHER REQUIRED TO BE SHOWN THAT THE FOREIGN ENTERPRISE IS USING ITS ' PRESENCE IN INDIA FOR CARRYING ON ITS BUSINESS IN T HE INDIAN TERRITORY. IV) 2.10.10.7 THUS, ACCORDING TO ARTICLE 5(1) OF THE I NDIA-US TAX TREATY, A PE EXISTS IF THE ASSESSEE (I) HAS AT ITS CONSTANT DISPOSAL CERTAIN PREMISES OF AX ES; (II) HAS DOMAIN OR CONTROL OVER THAT PLACE FOR CONDUCT OF ITS BUSINESS; (III) HAS A RIGHT TO OCCUPY SUCH PREMISES AND ABLE TO WA LK INTO THAT PLACE ON ITS OWN RIGHT AND NOT BY PERMISS ION. (IV) CARRIES OUT ITS BUSINESS THROUGH THE PREMISES OF A XES . . M/S. ALCATEL USA SOURCING LP 25 2.10.11 IN THE INSTANT CASE, THE ASSESSEE SUBMITS T HAT THE DIVISION IN AXES WAS SEGREGATED ONLY TO PROVIDE SER VICES TO THE ASSESSEE AND CERTAIN OTHER RIGHTS, AS MENTIO NED ABOVE, WERE GIVEN TO THE ASSESSEE. HOWEVER, THE SAI D DIVISION WAS NOT AT THE DISPOSAL OF THE ASSESSEE AS THE SAME WAS ALWAYS THE PROPERTY OF AND OWNED BY AXES. FURTHER, THE ASSESSEE HAS NOT CARRIED OUT ANY OF BUSINESS IN INDIA THROUGH THE SAID DIVISION, WHICH IS ONE OF THE CONDITIONS THAT NEED TO BE SATISFIED IN ORDE R TO ATTRACT THE PROVISIONS OF ARTICLE 5(1) OF THE DTAA. HENCE, AS THE CUMULATIVE CONDITIONS AS SPECIFIED UN DER ARTICLE 5(1) OF THE DTAA ARE NOT BE COMPLIED WITH AND ACCORDINGLY, THE ASSESSEE CANNOT BE SAID TO ESTABLISH A PE IN INDIA. 2.10.12 THE ASSESSEE WISHES TO EMPHASIZE HERE THAT IT WAS THE RECIPIENT OF OR USED TO AVAIL SERVICES FROM AXE S. THE RELATIONSHIP BETWEEN THE ASSESSEE AND AXES WAS NOT THAT GENERATED ANY INCOME OR WAS A SOURCE OF INCOME FOR THE ASSESSEE. ON THE CONTRARY, IT RESULTED IN AN OUTFLOW/PAYMENT FOR THE ASSESSEE IN THE ORDINARY CO URSE OF BUSINESS. THUS, THE ASSESSEE HAS NOT CARRIED OUT AN Y OF ITS BUSINESS IN INDIA THROUGH THE DIVISION OF AXES AND HENCE, A PE CANNOT BE SAID TO BE ESTABLISHED FOR THE ASSESSE E IN INDIA . 2.10.13. THE ASSESSEE SUBMITS THAT THE LEARNED AO H AS REFERRED THAT THE LOANED EQUIPMENTS IN THE PREMISES OF AXES CONSTITUTED A PE FOR THE ASSESSEE IN INDIA. IN THIS CONNECTION THE ASSESSEE SUBMITS AS UNDER: - AS PER THE OECD COMMENTARY, THE PLACE OF BUSINESS SHALL ALSO INCLUDE THE EQUIPMENT. A PLACE OF BUSI NESS MAY CONSTITUTE A PERMANENT ESTABLISHMENT EVEN THOUGH IT EXISTS, IN PRACTICE, ONLY FOR A SHORT PERIOD OF TIM E BECAUSE THE NATURE OF THE BUSINESS IS SUCH THAT IT WILL BE CARRIED ON FOR A SHORT PERIOD OF TIME. 2.10.13.1 THE ASSESSEE SUBMITS THAT IT HAS NOT CARR IED OUT ANY BUSINESS IN INDIA THROUGH THE EQUIPMENTS AND HENCE, THE SAME DOES NOT FALL WITHIN THE PROVISIONS OF ARTICLE 5(1) OF THE DTAA, AS EXPLAINED ABOVE. M/S. ALCATEL USA SOURCING LP 26 2.10.14 FURTHER, THE ASSESSEE SUBMITS THAT THE LEAR NED AO HAS REFERRED THAT THE ASSESSEE EXERCISED MANAGERIAL, EC ONOMIC AND OTHER CONTROL, IN HIRING AND REMOVAL OF SENIOR MANA GEMENT AND THEIR COMPENSATION, ETC, AS LISTED IN PARA 11 OF TH E DRAFT ASSESSMENT ORDER, AND HENCE, CONSTITUTED A PE IN IN DIA. IN THIS CONNECTION THE ASSESSEE SUBMITS AS UNDER- 2.10.14.1. FOLLOWING IS THE ANALYSIS OF THE ABOVE TERMS BASED ON OECD MC COMMENTARY AND OTHER INTERNATIONAL LITERATU RE 'PARAGRAPH-2 12. THIS PARAGRAPH CONTAINS A LIST, BY NO MEANS EXHAUSTIVE, OF EXAMPLES, EACH OF WHICH CAN BE REGAR DED, PRIMA FACIE, AS CONSTITUTING A PERMANENT ESTABLISHM ENT. AS THESE EXAMPLES ARE TO BE SEEN AGAINST THE BACKGROUN D OF THE GENERAL DEFINITION GIVEN IN PARAGRAPH 1, IT IS ASSUMED THAT THE CONTRACTING STATES INTERPRET OF TERMS LIST ED, A PLACE OF MANAGEMENT, A BRANCH, AN OFFICE, ETC. IN SUCH A WAY THAT SUCH PLACES OF BUSINESS CONSTITUTE PERMA NENT ESTABLISHMENTS ONLY IF THEY MEET THE REQUIREMENTS O F PARAGRAPH 1. (EMPHASIS SUPPLIED BY US) 2.10.14.2 IN THIS CONNECTION, THE ASSESSEE SUBMITS THAT AS PER ARTICLE 5(2)(A) OF THE DTAA, THE PLACE OF MANAG EMENT IS A PLACE WHERE THE BUSINESS OF THE WHOLE OR PART OF THE ENTERPRISE IS CARRIED ON. THE ASSESSEE SUBMITS THAT THE RIGHTS GRANTED TO THE ASSESSEE, VIDE THE DEVELOPMEN T AGREEMENT, WERE ONLY FOR THE LIMITED PURPOSE TO ENS URE THAT SERVICES OF APPROPRIATE STANDARDS AND AS REQUI RED BY THE ASSESSEE WERE PROVIDED BY AXES. FURTHER, WHILE ASSUMING BUT NOT ACCEPTING THAT THE RIGHTS THEREIN CAN BE CONSIDERED TO ESTABLISH A PLACE OF MANAGEMENT FOR T HE ASSESSEE IN INDIA, THE ASSESSEE SUBMITS THAT AS ONE OF THE CONDITIONS AS MENTIONED IN ARTICLE 5(1) RELATING TO THE CARRYING ON BUSINESS THROUGH THE FIXED PLACE IS NOT SATISFIED, THE PROVISIONS OF ARTICLE 5(2) WOULD ALS O NOT BE APPLICABLE. THUS, THE ASSESSEE CANNOT BE CONSIDERED TO M/S. ALCATEL USA SOURCING LP 27 ESTABLISH ANY PE IN INDIA UNDER ARTICLE 5(1) OR 5(2 ) OF THE DTAA. 2.10.15 THE ASSESSEE ONCE AGAIN REITERATES THAT THE LEARNED AO HAS NOT SPECIFIED IN THE DRAFT ASSESSMEN T ORDER UNDER WHICH CLAUSE OF ARTICLE 5 OF THE DTAA IS THE PE OF THE ASSESSEE BEING ESTABLISHED IN INDIA. THE ASSESSEE H AS, HOWEVER, MADE SUBMISSIONS WITH REFERENCE TO ARTICLE 5(1) AND 5(2)(A) OF THE DTAA. THE ASSESSEE SUBMITS THAT AN OPPORTUNITY OF MAKING FURTHER SUBMISSIONS ON THIS M ATTER BE GRANTED TO THE ASSESSEE DURING THE COURSE OF THE HEARING. 2.10.16 THE ASSESSEE SUBMITS THAT AS NO PE OF THE A SSESSEE IS BEING ESTABLISHED IN INDIA, THERE IS NO QUESTION OF ANY ATTRIBUTION OF PROFITS TO THE PE IN INDIA AND CONSE QUENTLY, THE CONSIDERATION OF USD 2.54 MILLION WOULD NOT BE LIABLE TO TAX IN INDIA. 2.10.17 THE ASSESSEE FURTHER SUBMITS THAT THE LEARN ED AO HAS OBSERVED THAT THE CONSIDERATION OF USD 2.54 MIL LION IS NOT IN THE NATURE OF DISCOUNT AS THE ASSESSEE HAS F AILED TO SUBSTANTIATE ITS CLAIM WITH REFERENCE TO THE AMENDM ENT AGREEMENT. IN THIS CONNECTION, THE ASSESSEE SUBMITS AS UNDER- 2.10.17.1. THE ASSESSEE SUBMITS THAT A CONSIDERATIO N OF USD 2.54 MILLION WAS IN THE NATURE OF DISCOUNT RECEIVED FOR THE BUSINESS GIVEN TO AXES. THE BACKGROUND AND THE CIRCUMSTANCES RELATING TO THE RECEIPT OF THE SAID CONSIDERATION ARE DETAILED HEREUNDER. 2.10.17.2 MAHINDRA BRITISH TELECOM ('MBT') DECIDED TO ACQUIRE AXES. ACCORDINGLY, THE ASSESSEE EXECUTED AN AGREEMENT WITH AXES ON NOVEMBER 28, 2005, UNDER WHI CH THE ASSESSEE RECEIVED A CONSIDERATION OF USD 2.54 M ILLION AS PER EXHIBIT A OF THE SAID AGREEMENT, WHICH IS FU RTHER EXPLAINED IN DETAIL IN THE PARA'S HEREUNDER. PERTIN ENTLY IT MAY ALSO BE NOTED THAT UNDER THE ABOVE REFERRED AGREEMENT DATED NOVEMBER 28, 2005, SCHEDULE 3.1 OF THE DEVELOPMENT AGREEMENT DATED APRIL 1, 2004 WAS DELET ED IN ITS ENTIRETY AND HAD NO FURTHER FORCE OR EFFECT. M/S. ALCATEL USA SOURCING LP 28 2.10.17.3 UNDER THIS AGREEMENT, THE CONSIDERATION P AYABLE TO THE ASSESSEE WAS TO BE ARRIVED AT BASED ON THE A MOUNT OF USD 19.5 MILLION ON THE CLOSURE OF TRANSACTION (AS REFERRED TO IN EXHIBIT B OF THE SAID AGREEMENT) AND THE BALA NCE CONSIDERATION WAS SUBJECT TO FURTHER CONDITIONS MEN TIONED IN THE SAID AGREEMENT. THE ASSESSEE WISHES TO SUBMIT HERE THAT IN RESPONSE TO THE NOTICE ISSUED UNDER SECTION 133(6) OF THE ACT TO AX ES/TECH MAHINDRA, IT WAS CONFIRMED BY AXES/TECH MAHINDRA TH AT THE AFORESAID AMOUNT OF USD 19.5 MILLION REPRESENTE D THE SALES OF AXES FOR F.Y 2004-05. 2.10.17.4 .THE SUM OF USD 2.54 MILLION WAS CALCULAT ED WITH REFERENCE TO USD 19.5 MILLION, AND THE BASIS OF ARR IVING AT THE SAME, AS APPEARING IN THE AGREEMENT, IS REPRODU CED HEREUNDER 2.10.17.5 THE FIGURES UNDER 'AVAILABLE FOR DISTRIBU TION' IN EXHIBIT A, INTER ALIA, FORM THE REFERENCE OR BASIS FOR DETERMINING THE CONSIDERATION PAYABLE TO THE ASSESS EE UNDER THE SAID AGREEMENT. THE AMOUNTS MENTIONED 'DISTRIBUTABLE TO THE ASSESSEE' REPRESENTS CONSIDER ATION PAYABLE TO THE ASSESSEE UNDER THE SAID AGREEMENT. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THE AMOUNT O F USD 2.54 MILLION WAS COMPUTED AS UNDER AMOUNTS AVAILABLE FOR DISTRIBUTION - USD 19.5 MILLI ON - T1 (USD 19.5 MILLION ON CLOSURE OF TRANSACTION REFERRE D TO IN EXHIBIT B AND T1 REFERS TO TRANSACTION COSTS) AMOUNTS DISTRIBUTABLE TO THE ASSESSEE - (USD 19.5 M ILLION - T1) X 14% [(USD 19.5 MILLION - USD 1.34 MILLION) X 14% I.E. U SD 2.54 MILLION] THE ASSESSEE SUBMITS THAT USD 1.34 MILLION REPRESEN TED THE TRANSACTION COSTS TO AXES INDIA. THE FIGURE OF 14% WAS APPLIED AS THE SAME WAS NEGOTIATED AND MUTUALLY AGR EED BETWEEN THE PARTIES. M/S. ALCATEL USA SOURCING LP 29 2.10.17.6. THE ASSESSEE SUBMITS THAT THE DETAILS OF THE AFORESAID COMPUTATION WERE SUBMITTED TO THE LEARNED AO DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS AND WERE ALSO EXPLAINED. THE ASSESSEE SUBMITS THAT THE ENTIR E WORKING OF THE AFORESAID AMOUNT OF USD 2.54 MILLION IS BROUGHT OUT IN THE AGREEMENT DATED NOVEMBER 28, 200 5. 2.10.17.7. THE ASSESSEE REITERATES THAT A SIGNIFICA NT VOLUME OF THE BUSINESS OF THE ASSESSEE WAS PROVIDED BY IT TO AXES OVER THE YEARS. THUS, THE VALUE OF THE AXES AND IN PARTICULAR, THE DIVISION WAS DUE TO SUCH VOLUMINOUS BUSINESS AND HENCE, WHILE ENTERING INTO THE SAID AG REEMENT DATED NOVEMBER 28, 2005, IT WAS AGREED BETWEEN BOTH THE PARTIES TO CONSIDER THE VALUE OF AXES FOR THE PURPO SES OF COMPUTING DISCOUNTS DUE TO THE ASSESSEE FOR THE BUS INESS PROVIDED OVER A NUMBER OF YEARS. THE ASSESSEE SUBMI TS THAT IT IS THE SUBSTANTIAL VOLUME OF THE BUSINESS OF AXE S, WHICH CREATED ITS VALUE AND HENCE, THE SAME WAS CONSIDERE D FOR THE PURPOSES OF DISCOUNT COMPUTATION. 2.10.17.8 THE ASSESSEE SUBMITS THAT THE CONSIDERATI ON WAS NOT PAID FOR WAIVING ANY PARTICULAR RIGHT OF SCHEDU LE 3.1 OF THE DEVELOPMENT AGREEMENT, BUT, THE SAME WAS PAID F OR ENTERING INTO THE AGREEMENT DATED NOVEMBER 28, 2005 WHICH WAS EXECUTED WITH THE PURPOSE OF WAIVING OFF ALL THE RIGHTS OF SCHEDULE 3.1 OF THE DEVELOPMENT AGREEMENT . THIS IS ALSO EVIDENT FROM CLAUSE 7 OF THE SAID AGREEMENT , WHICH IS ALSO REPRODUCED BY THE LEARNED AO AT POINT 7 - P AGE 24 OF THE DRAFT ASSESSMENT ORDER. THE ASSESSEE SUBMITS THAT ALL THE RIGHTS IN THE SCHEDULE 3.1 OF THE DEVELOPMENT AGREEMENT WERE EITHER RELATING TO THE VALUE OF AXES (WHICH WOULD BE ARRIVED AT ON THE BASIS OF THE SIGNIFICANT VOLUME OF THE BUSINESS PROVIDED BY AXES) OR WERE PURELY RE VENUE IN NATURE (I.E. PRICING DISCOUNTS, RETURN ON SALES, ET C). THUS, THE ASSESSEE SUBMITS THAT AS THE PAYMENTS FOR THE S ERVICES RENDERED UNDER THE DEVELOPMENT AGREEMENT AND AGREEMENT DATED NOVEMBER 28, 2005 WERE 'REVENUE' IN NATURE, LIKEWISE, ANY CONSIDERATION RECEIVED BY THE ASSESSEE UNDER THE SAID AGREEMENTS WOULD ALSO PARTAKE TO BE 'REVENUE IN NATURE'. THE SAID CONTENTION OF THE ASS ESSEE IS M/S. ALCATEL USA SOURCING LP 30 ALSO SUPPORTED BY VARIOUS JUDICIAL PRECEDENTS AS CI TED IN PARA 2.5.2 ABOVE. 2.10.17.9. THE ASSESSEE SUBMITS THAT BASED ON THE F ACTS OF THE CASE AND THE PRINCIPLES LAID DOWN IN THE VARIOU S JUDICIAL PRECEDENTS (AS CITED IN PARA 2.5.2 ABOVE), THE ASSESSEE SUBMITTED THAT THE AFORESAID AMOUNT OF USD 2.54 MILLION IS 'REVENUE' IN NATURE FOR THE FOLLOWING RE ASONS: THE AFORESAID AGREEMENT IS ONLY A BUSINESS ARRANG EMENT THIS IS EVIDENT FROM THE FACT THAT THE ASSESSEE AVA ILED SERVICES OF AXES AND PROVIDED A SIGNIFICANT VOLUME OF BUSINESS TO AXES. ALSO, THE AGREEMENT INDICATES THA T IT IS AGREED TO AMEND CERTAIN CLAUSES OF THE DEVELOPMENT AGREEMENT, WHICH ITSELF WAS AN AGREEMENT IN REVENUE NATURE, INDICATES THE FACT THAT SUCH AGREEMENT WAS BUSINESS ARRANGEMENT INTENDED FOR THE ASSESSEE TO A VAIL SERVICES OF AXES AND AXES TO PROVIDE SERVICES TO TH E ASSESSEE. THE PROFITABILITY OF THE ASSESSEE IS NOT AFFECTED BY (OR A SOURCE OF INCOME IS NOT LOST AS A RESULT OF ) THE AMENDMENT AGREEMENT AS THE ASSESSEE CONTINUES TO AVAIL THE SERVICES OF AXES AFTER EXECUTING THE AMENDMENT AGREEMENT WHILE THE ENTIRE SCHEDULE 3.1 OF THE SAID AGREEMENT IS DELETED, IT CAN BE NOTED THAT VARIOUS OTHER CLAUSES , AS RELEVANT TO THE PRICING, ETC WERE REVISED AND AGREE D UPON BETWEEN BOTH THE PARTIES TO THE AGREEMENT. THUS, AX ES CONTINUES TO AVAIL THE SERVICES OF AXES AFTER EXECU TING THE SAID AGREEMENT AND HENCE, CANNOT BE CONSIDERED TO B E A LOSS OF SOURCE OF INCOME FOR AXES. SEPARATELY, THE ASSESSEE SUBMITS THAT IN THE ENTIRE ARRANGEMENT, THE ASSESSE E WAS AVAILING THE SERVICES OF AXES AND THUS, THERE WAS N O QUESTION OF ANY PROFITABILITY OF THE ASSESSEE BEING AFFECTED OR ANY LOSS OF SOURCE OF INCOME OF THE ASSESSEE. THE AMENDMENT AGREEMENT WAS EXECUTED WITH A VIEW TO EXTEND THE TERM OF THE DEVELOPMENT AGREEMENT - THE LETTER AGREEMENT DATED SEPTEMBER 30, 2006 CLEAR LY INDICATES THAT THE PURPOSE OF ENTERING INTO THE AME NDMENT AGREEMENT WAS TO EXTEND THE TERM OF THE DEVELOPMENT AGREEMENT FROM MARCH 31, 2007 TO OCTOBER 31,2008. M/S. ALCATEL USA SOURCING LP 31 * THE AMENDMENT/ALTERATIONS TO THE RIGHTS GRANTED U NDER THE DEVELOPMENT AGREEMENT ARE MERELY INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. AS MENTIONED ABOVE, THE RIGHTS GRANTED UNDER THE DEVELOPMENT AGREEMENT WERE ONLY WITH THE VIEW THAT THE SERVICES RENDERED TO THE ASSESSEE ARE OF APPROPRIAT E QUALITY AND AS REQUIRED BY THE ASSESSEE. THE REVENU ES EARNED BY AXES UNDER THIS AGREEMENT WERE TREATED AS BUSINESS RECEIPTS IN THE HANDS OF AXES AND HENCE, R EVENUE INCOME. THE ASSESSEE SUBMITS THAT ANY AMENDMENTS/ALTERATIONS IN THE RIGHTS OF THE ASSESSE E IN THE SAID AGREEMENT DOES NOT REALLY CHANGE THE NATURE OF THE AGREEMENT AS WELL AS THE REVENUES. THESE MODIFICATI ONS WERE ONLY INCIDENTAL TO THE BUSINESS OF BOTH THE AS SESSEE AND AXES. THE ASSESSEE WAS NOT REFRAINED FROM CARRYING ON A NY BUSINESS ACTIVITIES WITH AXES. THE ASSESSEE SUBMITTED THAT AFTER EXECUTING THE AMENDMENT AGREEMENT, THE BUSINESS BETWEEN THE ASSES SEE AND AXES CONTINUED. THE ASSESSEE AVAILED THE SERVIC ES OF AXES AND THE SAME WERE PROVIDED BY AXES. THUS, THIS AMENDMENT AGREEMENT DID NOT REFRAIN THE ASSESSEE FR OM AVAILING ANY SERVICES FROM AXES. 2.10.17.10. FURTHER, THE ASSESSEE ALSO WISHES TO PL ACE ITS RELIANCE ON THE FACT THAT THE AMOUNT OF CONSIDERATI ON OF USD 2.54 MILLION WAS BASED ON THE REVENUES OF AXES FOR FY 2004-05 AND THUS, IT IS EVIDENTLY CLEAR THAT THE AM OUNTS RECEIVED BY THE ASSESSEE IS IN THE NATURE OF DISCOU NT AS THE SAME WAS BASED ON THE REVENUES OF AXES. 2.10.17.11. IN LIGHT OF ALL OF THE ABOVE, THE ASSES SEE SUBMITS THAT THE AMOUNTS RECEIVED UNDER THE AMENDMENT AGREEMENT WERE IN THE NATURE OF DISCOUNTS AND REVEN UE IN NATURE. 2.10.18 THE ASSESSEE SUBMITS THAT THE LEARNED AO, A T PARA 12 OF THE DRAFT ASSESSMENT ORDER, HAS CONCLUDED THA T THE M/S. ALCATEL USA SOURCING LP 32 AMOUNTS ARE NOT IN THE NATURE OF DISCOUNT. THE ASSE SSEE SUBMITS THAT THE LEARNED AO HAS ALSO MENTIONED THAT THE SAID AMOUNT WAS RECEIVED AS A CONSIDERATION FOR WAI VING ITS RIGHTS UNDER THE DEVELOPMENT AGREEMENT IN SCHED ULE 3.1. THUS, IT MAY BE NOTED THAT WHILE THE LEARNED A O DOES NOT PROPOSE TO TREAT THE AMOUNTS AS 'DISCOUNTS' AS CONTENDED BY THE ASSESSEE, THE LEARNED AO HAS ALSO NOT CHARACTERIZED THE INCOME UNDER A PARTICULAR CLASS/H EAD SO AS TO FALL WITHIN THE MEANING OF BUSINESS INCOME. 2.10.19 AT PARA 13 OF THE SAID ORDER, THE LEARNED A O HAS OBSERVED THAT THE ASSESSEE HAS CONTENDED THAT THE A MOUNTS RECEIVED UNDER THE AMENDMENT AGREEMENT IS IN THE NA TURE OF REVENUE RECEIPT AND IN THE ABSENCE OF ANY PE, TH E SAME IS NOT TAXABLE. IN THIS CONNECTION THE ASSESSEE SUBMIT S THAT THE LEARNED AO, AT THE FIRST INSTANCE, CONCLUDED TH AT THE CONSIDERATION IS NOT IN THE NATURE OF DISCOUNT AND THE SAME IS FOR WAIVING THE RIGHTS OF THE ASSESSEE UNDER THE DEVELOPMENT AGREEMENT. IMMEDIATELY THEREAFTER, HE CONCLUDES THAT THE SAID CONSIDERATION IS TAXABLE AS BUSINESS INCOME SINCE THE ASSESSEE HAS A PE IN INDIA. THE AS SESSEE SUBMITS THAT THE LEARNED AO IS BLOWING HOT AND COLD IN THE SAME BREATH. THE LEARNED AO, HIMSELF, HAS NOT CONCL UDED WHETHER THE SAID CONSIDERATION IS IN THE NATURE OF BUSINESS INCOME AND HAS SIMPLY PROPOSED TO TAX THE SAME AS BUSINESS INCOME OF THE ASSESSEE. THUS, WITHOUT PREJ UDICE TO THE ASSESSEE'S CONTENTION THAT THE RECEIPT OF US$ 2 .54 MILLION IS NOT TAXABLE IN INDIA, THE ACTION OF THE LEARNED AO IS NOT WARRANTED AND TENABLE IN LAW. 2.10.20. THE ASSESSEE FURTHER SUBMITS THAT, AS DETA ILED ABOVE, IT DOES NOT HAVE ANY PE IN INDIA AND HENCE, THE CONSIDERATION OF USD 2.54 MILLION IS NOT TAXABLE IN INDIA. HOWEVER, WHILE ASSUMING BUT NOT ACCEPTING THAT THE ASSESSEE HAS A PE IN INDIA, THE LEARNED AO OUGHT TO HAVE COMPUTED THE PROFITS ATTRIBUTABLE TO SUCH A PE IN I NDIA. 2.10.21. THE ASSESSEE SUBMITS THAT ONLY THE PROFIT ATTRIBUTABLE TO THE PE IN INDIA IS SUBJECT TO TAX I N INDIA. THE ASSESSEE SUBMITS THAT WHERE A PE IS ESTABLISHED AND THE INCOME IS PROPOSED TO BE LIABLE TO BE TAX IN INDIA, THE M/S. ALCATEL USA SOURCING LP 33 FOLLOWING GENERAL PRINCIPLES OF COMPUTING THE PROFI TS ATTRIBUTABLE TO THE PE ARE TO BE CARRIED OUT THE INCOME ATTRIBUTABLE TO THE OPERATIONS IN INDI A IS TO BE FIRST COMPUTED; THEREAFTER, THE PROFITS ATTRIBUTABLE TO SUCH INCO ME IS TO BE COMPUTED, WHICH WOULD THEN BE LIABLE TO TAX IN I NDIA. 2.10.22 IN THE INSTANT CASE, THE LEARNED AO HAS NOT FOLLOWED THE ABOVE STEPS AND HAS COMBINED BOTH THE STEPS TOGETHER AND WITHOUT ANY SUPPORTING EVIDENCE HAS RE ACHED TO THE CONCLUSION THAT THE ENTIRE CONSIDERATION OF USD 2.54 MILLION IS THE PROFITS ATTRIBUTABLE TO THE PE OF TH E ASSESSEE IN INDIA. THUS, THE BASIS ADOPTED BY THE LEARNED AO TO CONCLUDE THAT THE ENTIRE CONSIDERATION OF USD 2.54 MILLION IS ATTRIBUTABLE TO THE PE IS BASELESS AND ERRONEOUS . 2.10.23. FURTHER, THE ASSESSEE SUBMITS THAT AS PER ARTICLE 7(1) OF THE DTAA, PROFITS A US ENTERPRISE (I.E. THE ASSESSEE IN THIS CASE) SHALL BE TAXABLE ONLY IN THE US UNLES S THE ENTERPRISE CARRIES ON BUSINESS IN INDIA THROUGH A P E. WHERE THE ENTERPRISE CARRIES ON BUSINESS IN INDIA T HROUGH A PE, SO MUCH OF THE PROFITS ATTRIBUTABLE TO THE PE MAY BE CHARGED TO TAX IN INDIA. THUS, ARTICLE 7(1) OF THE DTAA IS A PROVISION WHICH PROVIDES THE BASIS FOR THE CHARGE T O TAX OF PROFITS OF AN ENTERPRISE OF A CONTRACTING STATE. T HE PRIMARY RULE IS CONTAINED IN THE FIRST SENTENCE OF THAT PARAGRAPH. THAT RULE IS THAT THE PROFITS OF AN ENTE RPRISE OF A CONTRACTING STATE SHALL BE CHARGED TO TAX ONLY IN THE COUNTRY OF ITS RESIDENCE, UNLESS IT CARRIES ON BUSI NESS IN THE OTHER CONTRACTING STATE THROUGH A PE. 2.10.24. THE SECOND SENTENCE OF ARTICLE 7(1) OF THE DTAA DEALS WITH THE SITUATION WHERE THE ENTERPRISE CARRI ES ON BUSINESS IN INDIA THROUGH A PE. IN SUCH CASE, THE R ULE PROVIDES THAT THE BUSINESS PROFITS MAY BE TAXED IN INDIA. HOWEVER, IT IS NOT THE ENTIRE PROFITS OF THE ENTERP RISE WHICH MAY BE SO TAXED. IT IS ONLY SUCH PORTION OF THE PRO FITS AS ARE ATTRIBUTABLE TO THE PE OR ARE ATTRIBUTABLE TO THE A CTIVITIES CARRIED ON IN INDIA OF THE SAME OR SIMILAR KIND AS THOSE M/S. ALCATEL USA SOURCING LP 34 CARRIED ON THROUGH THE PE THAT WOULD BE CHARGED TO TAX IN INDIA. 2.10.25 ARTICLE 7(1) THUS DETERMINES THE COUNTRY WH ICH WOULD HAVE AUTHORITY ('JURISDICTION') TO CHARGE SUC H PROFITS. 2.10.26 PARA 2 OF ARTICLE 7 OF THE INDIA-US TAX TRE ATY GIVES THE MANNER IN WHICH THE ALLOCATION OF PROFITS TO A PE SHOULD BE MADE, THE RELEVANT PART IN RELATION THERE TO IS REPRODUCED HEREUNDER: PARA 2 OF ARTICLE 7 - 'BUSINESS PROFITS' '2. SUBJECT TO THE PROVISIONS OF PARAGRAPH 3, WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING STATE BE ATTRIBUTED TO TH AT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND INDEPENDENT ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY AT ARMS LENGTH WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT AND OTHER ENTERPRISES CONTROLLING, CONTROLLED BY OR SUBJECT TO THE SAME COMMON CONTROL AS THAT ENTERPRISE. IN ANY CASE WHERE THE CORRECT AMOUNT OF PROFITS ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IS INCAPABLE OF DETERMINATION OR THE DETERMINATION THEREOF PRESENTS EXCEPTIONAL DIFFICULTIES, THE PROFITS ATTRIBUTABLE TO THE PERMA NENT ESTABLISHMENT MAY BE ESTIMATED ON A REASONABLE BASIS. THE ESTIMATE ADOPTED SHALL, HOWEVER, BE SUCH THAT THE RESULT SHALL BE IN ACCORDANCE WITH THE PRINCIPLES CONTAINED IN THIS ARTICLE. ' 2.10.27 ARTICLE 7(2) OF THE INDIA-US TAX TREATY IS TRIGGERED ONLY IN THE EVENT THAT THE ENTERPRISE HAS A PE IN I NDIA. WHERE THE ENTERPRISE HAS PE, IT BECOMES NECESSARY T O DETERMINE THE QUANTUM OF PROFITS ATTRIBUTABLE TO TH E PE. M/S. ALCATEL USA SOURCING LP 35 ARTICLE 7(2) PROVIDES FOR THE MODE OR MANNER IN WHI CH SUCH PROFITS ARE TO BE ALLOWED TO THE PE. 2.10.28 THUS ARTICLE 7(2) IS NOT A CHARGING PROVISI ON. IT DOES NOT PROVIDE FOR THE CHARGE TO TAX OF THE PROFI TS IN INDIA. THAT IS DONE BY ARTICLE 7(1) WHEN IT PROVIDE S THAT THE PROFITS OF THE PE WOULD BE CHARGEABLE TO TAX IN IND IA. ARTICLE 7(1) ALSO LIMITS THE PROFITS THAT CAN BE CH ARGED TO TAX IN INDIA OF A US ENTERPRISE. IT PROVIDES 'BUT O NLY SO MUCH OF' THE PROFITS CAN BE CHARGED AS ARE ATTRIBUT ABLE TO THE PE AND TO SIMILAR ACTIVITIES CARRIED ON IN INDI A. 2.10.29 ARTICLE 7(2) DEALS WITH THE PROFITS TO BE A TTRIBUTED TO CLAUSE (A) IN THE SECOND SENTENCE OF ARTICLE 7(1 ). IT DOES NOT DEAL WITH THE ENTIRE PROFITS THAT MAY BE CHARGE D TO TAX IN INDIA. 2.10.30 THAT ARTICLE 7(2) DEALS WITH ALLOCATION OF PROFITS. IT CONTAINS THE CENTRAL DIRECTIVE ON WHICH THE ALLOCAT ION OF PROFITS TO A PERMANENT ESTABLISHMENT IS INTENDED TO BE BASED. THE PARAGRAPH INCORPORATED THE VIEW, WHICH I S GENERALLY CONTAINED IN BILATERAL CONVENTIONS, THAT THE PROFITS TO BE ATTRIBUTED TO A PERMANENT ESTABLISHME NT ARE THOSE WHICH THAT PERMANENT ESTABLISHMENT WOULD HAVE MADE IF, INSTEAD OF DEALING WITH ITS HEAD OFFICE, I T HAD BEEN DEALING WITH AN ENTIRELY SEPARATE ENTERPRISE UNDER CONDITIONS AND AT PRICES PREVAILING IN THE ORDINARY MARKET. 2.10.31 IN OTHER WORDS, THIS PARA REQUIRES THAT THE ENTERPRISE AND THE PE ARE TO BE TREATED AS TWO SEPA RATE INDEPENDENT ENTITIES AND PROFITS ATTRIBUTABLE TO TH E PE WOULD BE THOSE, WHICH WOULD ARISE IF SUCH ENTERPRIS E AND THE PE TRADE WITH EACH OTHER AT ARM'S LENGTH PRICE. FURTHER THE US TREASURY TECHNICAL EXPLANATION ON THE INDIA- USA TAX TREATY STATES THAT THE BUSINESS PROFITS OF A PE SHOULD BE DETERMINED ON AN ARM'S LENGTH BASIS. 2.10.32. THE EXTENT TO WHICH PROFITS ARE ATTRIBUTAB LE TO PE DEPENDS ON THE FUNCTIONS AND THE RISKS ASSUMED BY T HAT PE. AS STATED ABOVE, THE ASSESSEE DOES NOT CARRY OUT AN Y BUSINESS THROUGH THE EQUIPMENTS IN INDIA OR THROUGH AXES IN INDIA. THE ASSESSEE REITERATES AND EMPHASIZES TH AT IT HAS M/S. ALCATEL USA SOURCING LP 36 ONLY AVAILED OF SERVICES FROM AXES. THUS, ANY PROFI TS ATTRIBUTABLE TO THE PE OUGHT TO COMMENSURATE WITH T HE ACTIVITIES/FUNCTIONS CARRIED OUT BY AXES IN INDIA F OR THE ASSESSEE. 2.10.33 IN LIGHT OF THE ABOVE, THE ASSESSEE SUBMITS THAT WHILE ASSUMING BUT NOT ACCEPTING THAT THE ASSESSEE CONSTITUTES A PE IN INDIA, THE PROFITS ATTRIBUTABLE ONLY TO SUCH ACTIVITIES AS CARRIED OUT BY THE PE IN INDIA O UGHT TO BE TAXABLE AS BUSINESS PROFITS OF THE PE OF THE ASSESS EE IN INDIA. AS MENTIONED ABOVE, THE LEARNED AO HAS NOT COMPUTED THE INCOME ATTRIBUTABLE TO THE OPERATIONS IN INDIA AND THEREAFTER, THE PROFITS ATTRIBUTABLE TO S UCH INCOME IN INDIA AND HENCE, THE CONCLUSION OF THE LE ARNED AO THAT ENTIRE AMOUNT OF USD 2.54 MILLION IS ATTRIB UTABLE TO THE PE IS BASELESS AND ERRONEOUS. 2.10.34. THE ASSESSEE RESERVES ITS RIGHTS TO MAKE F URTHER SUBMISSIONS IN THIS REGARD. 3.1. GROUNDS OF OBJECTION GROUND 5 - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED AO HAS ERRED IN PROPOSI NG TO UNDERTAKE A WITHOUT PREJUDICE ARGUMENT THAT IN THE EVENT THE ASSESSEE DOES NOT ESTABLISH A PE IN INDIA, THE SAID INCOME BE PROPOSED TO BE TAXABLE AS CAPITAL GAINS 3.2. FACTS SUBMITTED TO THE AO A WITHOUT PREJUDICE ARGUMENT WAS SUBMITTED TO THE LEARNED AO THAT WHERE THE AMOUNT OF USD 2.54 MILLIO N IS CONSIDERED AS A CONSIDERATION FOR TRANSFER OF CAPIT AL ASSET (WHICH IT IS NOT), THE SAME WOULD AGAIN NOT BE LIAB LE TO TAX UNDER THE HEAD CAPITAL GAINS, SINCE THE COMPUTATION MACHINERY PROVISIONS UNDER THE ACT FAILS AND THUS, THE CAPITAL GAINS, IF ANY, WOULD NOT BE TAXABLE IN INDI A. 3.3. FACTS MODIFIED BY THE AO 3.3.1. THE LEARNED AO HAS CONSIDERED THAT CONSIDERA TION OF USD 2.54 MILLION WAS RECEIVED FOR WAIVING AND RELEA SING M/S. ALCATEL USA SOURCING LP 37 ALL THE RIGHTS AND CLAIMS UNDER SCHEDULE 3.1 OF THE DEVELOPMENT AGREEMENT. THESE RIGHTS ARE TERMED AS 'ALCATEL RIGHTS' BY THE LEARNED AO WHICH INCLUDES T HE RIGHTS OF BUSINESS OVER THE ALCATEL DIVISION BY MAN AGING ITS ASSETS, PERSONNEL, AND PLACING OBLIGATIONS AND REST RICTIONS ON AXES IN DEALING WITH THE ASSETS, PERSONNELS TAK ING ANY MANAGERIAL DECISION, BUDGET DECISIONS AND TRANSFER OF ITS STOCK. 3.3.2. THE LEARNED AO HAS CONCLUDED THAT CONSIDERAT ION OF USD 2.54 MILLION RECEIVED BY THE ASSESSEE WAS IN TH E NATURE OF CAPITAL GAINS AND HENCE, ASSESSABLE TO TAX. 3.3.3 THE LEARNED AO HAS STATED THAT THE ASSESSEE F AILED TO FURNISH COMPLETE PARTICULARS AND BASIS FOR ARRIVING AT THE CONSIDERATION. ALSO, THE AMOUNT OF USD 2.54 MILLION REPRESENTED THE NET CONSIDERATION AFTER DEDUCTING RELATABLE COST. 3.4. DO YOU WHOLLY AGREE WITH THE MODIFICATIONS IN THE FACTS BY THE AO. IF NOT, GIVE REASONS POINTING THE SPECIFIC FACT OR FACTS WITH WHICH YOU DO NOT AGREE ALONG WITH THE REASONS AND DOCUMENTARY EVIDENCE, IF ANY 3.4.1 THE ASSESSEE SUBMITS THAT THE CONSIDERATION O F USD 2.54 MILLION WAS RECEIVED AS DISCOUNTS FOR THE HUGE VOLUME OF BUSINESS PROVIDED OVER THE YEARS. THE ASSESSEE H AS SUBMITTED A DETAILED EXPLANATION AND WORKING OF THE SAID AMOUNT OF USD 2.54 MILLION IN THE EARLIER GROUND, W HICH WERE ALSO SUBMITTED TO THE LEARNED AO DURING THE CO URSE OF ASSESSMENT PROCEEDINGS. THE SAID CONSIDERATION I S NOT RECEIVED AS A CONSIDERATION FOR THE WAIVER OF ALL R IGHTS BUT IS TOWARDS THE DISCOUNTS, AS STATED EARLIER. ACCORD INGLY, THE ASSESSEE DOES NOT AGREE TO THE MODIFICATION OF THE FACTS MADE BY THE ASSESSEE IN AS MUCH AS SO THAT ALL THE DETAILS WERE SUBMITTED TO THE LEARNED AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 3.4.2 THE ASSESSEE FURTHER SUBMITS THAT THE SAID CONSIDERATION WAS DETERMINED ON THE BASIS OF THE VA LUE OF AXES, WHICH WAS BUILT ON ACCOUNT OF THE BUSINESS PR OVIDED M/S. ALCATEL USA SOURCING LP 38 BY THE ASSESSEE TO AXES. THE ASSESSEE SUBMITS THAT THE CONSIDERATION OF USD 2.54 MILLION WAS COMPUTED ON T HE BASIS OF THE FORMULA, AS DESCRIBED IN THE EARLIER G ROUND, WHICH WAS BASED ON THE AMOUNTS AVAILABLE FOR DISTRI BUTION AND DISTRIBUTABLE TO THE ASSESSEE. THE ASSESSEE SUB MITS THAT THIS CONSIDERATION WAS BASED ON A FORMULA, WHICH WA S ACCEPTED BY BOTH THE PARTIES, WHEREIN THE TRANSACTI ON COST OF AXES OF USD 1.34 MILLION WAS DEDUCTED. ACCORDING LY, THE MERE DEDUCTION OF ANY AMOUNT CANNOT BE CORRELATED T O THE COST OF ACQUISITION AND HENCE, THE LEARNED AO'S OBSERVATION THAT USD 2.54 MILLION REPRESENTS NET CONSIDERATION IS ERRONEOUS IN FACTS. 3.5. LEGAL ARGUMENTS SUBMITIED TO ASSESSING OFFICER 3.5.1 THE ASSESSEE ONLY SUBMITTED A WITHOUT PREJUDI CE ARGUMENT STATING THAT IF THE CONSIDERATION OF USD 2 .54 MILLION IS CONSIDERED TO BE THE CONSIDERATION FOR T RANSFER OF CAPITAL ASSET (WHICH IT IS NOT), THE SAME WOULD NOT BE LIABLE TO TAX UNDER THE HEAD CAPITAL GAINS, SINCE THE COM PUTATION MACHINERY PROVISIONS UNDER THE ACT FAILS AND THUS, THE CAPITAL GAINS, IF ANY, WOULD NOT BE TAXABLE IN INDI A. 3.5.2 THE LEARNED AO DID NOT GRANT AN OPPORTUNITY T O THE ASSESSEE TO CONTEND AS TO WHY THE SAID CONSIDERATIO N OF USD 2.54 MILLION OUGHT NOT TO BE CONSIDERED AS CAPI TAL GAINS AND TAXABLE IN INDIA. 3.6. CASE LAWS RELIED UPON BY THE ASSESSEE 3.7. LEGAL ARGUMENTS RELIED UPON BY AO 3.7.1 THE LEARNED AO HAS CONCLUDED THAT THE CONSIDE RATION RECEIVED BY THE ASSESSEE IS FOR THE WAIVER OF ALCAT EL RIGHTS AND IS IN THE NATURE OF CAPITAL GAINS AND HENCE, AS SESSABLE TO TAX. FURTHER, THE COST OF ACQUISITION IS CONSID ERED AS NIL UNDER SECTION 55(2)(A) OF THE ACT AND THE ENT IRE AMOUNT OF USD 2.54 MILLION (RS.11 ,43,00,000) IS AS SESSABLE AS CAPITAL GAINS UNDER ARTICLE 13 OF THE DTAA. 3.8. CASE LAWS RELIED UPON BY THE LEARNED AO M/S. ALCATEL USA SOURCING LP 39 3.9. ANY ADDITIONAL NEW CASE LAWS WHICH THE ASSESSEE MAY LIKE TO RELY UPON B. C. SRINIVASA SETTY 128 ITR 294 (SC) CIT V. N.N. DESAI [1991] 192 ITR 153 (BOM) CIT V. S.S. SUKHI [1989] 177 ITR 84 (BOM) 3.10. FACTUAL & LEGAL ARGUMENTS AGAINST THE ADDITION PROPOSED BY THE AO 3.10.1 AT THE OUTSET, THE ASSESSEE WISHES TO REITER ATE THAT THE CONSIDERATION OF USD 2.54 MILLION WAS RECEIVED TOWARDS DISCOUNTS DUE FOR THE HUGE VOLUME OF SERVIC ES GIVEN TO AXES OVER YEARS. 3.10.2 THE ASSESSEE SUBMITS THAT THE LEARNED AO HAS OBSERVED THAT ALL THE 'ALCATEL RIGHTS' WERE RELEASE D BY THE ASSESSEE AND AS A CONSIDERATION THEREOF AND FOR THE EXTENSION OF THE TERM OF THE DEVELOPMENT AGREEMENT, THE SAID AMOUNT WAS RECEIVED. IN THIS CONNECTION, THE A SSESSEE SUBMITS THAT SUCH RIGHTS, AS TERMED BY THE LEARNED AO AS 'ALCATEL RIGHTS', WERE ONLY FOR THE LIMITED PURPOSE TO ENSURE PROPER PROVISION OF SERVICES BY AXES TO THE ASSESSE E. THE ASSESSEE FURTHER SUBMITS THAT WHILE IN FORM THESE R IGHTS WERE AVAILABLE TO THE ASSESSEE, IN SUBSTANCE, NOT A LL OF THESE RIGHTS WERE EXERCISED BY THE ASSESSEE. AS MENTIONED ABOVE, NO DETAILS OF ASSETS OR PERSONNELS (AS CONTEMPLATED IN THE DEVELOPMENT AGREEMENT) WERE PROVIDED BY AXES TO THE ASSESSEE. THUS, IT MAY BE POSSIBLE TO CONCLUDE THAT THE AFORESAID CONSIDERATION CANNOT BE FOR THE WAIVER OF ALCATEL RIGHTS, SINCE THE SAME WERE NEVER EXERCISED. 3.10.3 WITHOUT PREJUDICE TO THE ABOVE, EVEN IF IT I S ACCEPTED THAT THE CONSIDERATION IS TOWARDS THE WAIVING OF AL CATEL RIGHTS AND EXTENSION OF THE TERM OF AGREEMENT WITHO UT THE ALCATEL RIGHTS, THE ASSESSEE SUBMITS AS UNDER : 3.10.3.1. AS PER ARTICLE 13 OF THE DTAA, CAPITAL GA INS ARE TAXABLE AS PER THE PROVISIONS OF THE ACT. THUS, IN THE INSTANT M/S. ALCATEL USA SOURCING LP 40 CASE, THE PROVISIONS OF SECTION 45 TO 55A OF THE AC T WOULD APPLY. - 3.10.3.2. AS PER SECTION 45 OF THE ACT, ANY PROFITS AND GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET WOULD BE LIABLE TO CAPITAL GAINS TAX AT THE RATES AND THE MANNER SP ECIFIED. 3.10.3.3. IN THE INSTANT CASE, FOR THE PURPOSES OF COMPUTING CAPITAL GAINS, THE SALES CONSIDERATION HAS BEEN CON SIDERED BY THE LEARNED AO AT RS.11 ,43,00,000 (USD 2.54 MIL LION). IN ORDER TO COMPUTE THE GAINS, THE COST OF ACQUISIT ION IS REQUIRED TO BE DEDUCTED. THE LEARNED AO HAS OBSERVE D THAT THE SAID CONSIDERATION OF USD 2.54 MILLION IS THE N ET CONSIDERATION AFTER DEDUCTING RELATABLE COST. IN THIS CONNECTION THE ASSESSEE SUBMITS THAT THE CONSIDERATION OF USD 2.54 MILLION, AS EXPLAINED IN THE EARLIER GROUND, WAS ARRIVED UPON BASED ON THE FORMU LA AS APPEARING IN THE AGREEMENT, WHICH IS REPRODUCED HER E FOR READY REFERENCE. USD 2.54 MILLION = (USD 19.5 MILLION - USD 1.34 MIL LION) X 14% THE ASSESSEE SUBMITS THAT USD 19.5 MILLION REFERS T O THE AMOUNT ON CLOSURE OF TRANSACTION. THE ASSESSEE WISH ES TO SUBMIT HERE THAT IN RESPONSE TO THE NOTICE ISSUED U NDER SECTION 133(6) OF THE ACT TO AXES/ TECH MAHINDRA, I T WAS CONFIRMED BY AXES/TECH MAHINDRA THAT THE AFORESAID AMOUNT OF USD 19.5 MILLION REPRESENTED THE SALES OF EXCESS FOR FY2004-05. THE FIGURE OF 14% WAS APPLIED AS THE SAME WAS NEGOTIATED AND MUTUALLY AGREED BETWEEN THE PART IES. THUS, THE SAID CONSIDERATION IN NO CIRCUMSTANCES CA N BE SAID TO HAVE BEEN COMPUTED AFTER DEDUCTING THE COST S. THE ASSESSEE ALSO SUBMITS THAT THE LEARNED AO HAS NOT P LACED ANYTHING ON RECORD TO ESTABLISH AS TO WHICH COST HA S BEEN DEDUCTED TO ARRIVE AT THE AFORESAID CONSIDERATION. 3.10.3.4 IN LIGHT OF THE ABOVE SUBMISSIONS, THE ASS ESSEE SUBMITS THAT THE CONTENTION OF THE LEARNED AO THAT THE CONSIDERATION OF USD 2.54 MILLION IS THE NET CONSID ERATION AFTER DEDUCTING RELATABLE COSTS IS NOT ACCEPTABLE A ND M/S. ALCATEL USA SOURCING LP 41 THEREFORE, THE COST OF ACQUISITION WILL HAVE TO BE DETERMINED. 3.10.3.5 AS PER SECTION 55(2)(A) OF THE ACT, 'COST OF ACQUISITION' FOR THE PURPOSES OF COMPUTING THE AMOU NT OF CAPITAL GAINS LIABLE TO TAX PROVIDES THAT UNLESS TH ERE IS A PRICE PAID IN RESPECT OF THE FOLLOWING CAPITAL ASSE TS (IN WHICH CASE THE COST WOULD BE THE PRICE PAID), THE C OST WOULD BE ASSUMED TO BE NIL: GOODWILL OF A BUSINESS OR A TRADE MARK OR BRAND NAME ASSOCIATED WITH A BUSI NESS OR A RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY AR TICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS TENANCY RIGHTS, STAGE CARRIAGE PERMITS OR LOOM HO URS IN THIS CONNECTION THE ASSESSEE, AT THE OUTSET, SUB MITS THAT THE LEARNED AO HAS NOT SPECIFIED UNDER WHICH OF THE ABOVE CLAUSES HE HAS RELIED ON TO CONCLUDE THAT THE COST OF ACQUISITION IS 'NIL'. WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSEE SUBMIT S THAT THE 'RIGHT TO MANUFACTURE' WOULD BE DISTINCT FROM ' RIGHT TO GET MANUFACTURED'. FURTHER, THE ASSESSEE DID NOT HA VE ANY 'RIGHT TO CARRY ON ANY BUSINESS'. THE ASSESSEE SUBM ITS THAT IT HAS MERELY AVAILED THE SERVICES OF AXES AND HENC E, DOES NOT HAVE ANY RIGHT TO MANUFACTURE OR RIGHT TO CARRY ON ANY BUSINESS IN INDIA AND HENCE, THE PROVISIONS OF SECT ION 55(2)(A) OF THE ACT ARE NOT APPLICABLE. 3.10.3.6 THE ASSESSEE SUBMITS THAT WHERE THE COST O F ACQUISITION CANNOT BE DETERMINED, THEN THE COMPUTAT ION MACHINERY WOULD FAIL AND THE SALES CONSIDERATION/CA PITAL GAINS WOULD NOT BE TAXABLE. 3.10.3.7 TO SUPPORT THE ABOVE CONTENTION, THE ASSES SEE WISHES TO PLACE ITS RELIANCE ON THE DECISION OF THE SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY 128 ITR 294, M/S. ALCATEL USA SOURCING LP 42 WHICH LAID DOWN AN IMPORTANT PRINCIPLE THAT WHERE T HE COST OF ACQUISITION IN RESPECT OF A CAPITAL ASSET ( 'GOODWILL' IN THIS RULING) CANNOT BE DETERMINED BASED ON THE PROVISIONS OF THE ACT, THEN THE COMPUTATION MACHINE RY FAILS AND THUS, THE CAPITAL GAIN WOULD GO UNTAXED. 3.10.3.8 THE ASSESSEE SUBMITS THAT THE SAID PRINCIP LE OF THE SUPREME COURT HAS ALSO BEEN FOLLOWED IN THE FOLLOWI NG JUDICIAL PRECEDENTS PRONOUNCED BY THE JURISDICTIONAL BOMBAY HIGH COURT CIT V. N.N. DESAI [1991] 192 1TR 153 CIT V. S.S. SUKHI [1989] 177 ITR 84 3.10.3.9 IN LIGHT OF THE ABOVE, THE ASSESSEE SUBMIT S THAT AS THE COST OF ACQUISITION OF THE ALCATEL RIGHTS CANNO T BE DETERMINED, THE COMPUTATION MACHINERY FAILS AND HEN CE, THE CAPITAL GAINS CANNOT BE LIABLE TO TAX IN INDIA. 3.10.3.10 THE ASSESSEE SUBMITS THAT IT RESERVES ITS RIGHTS TO MAKE FURTHER SUBMISSIONS DURING THE COURSE OF PROCEEDINGS. 14. THE DRP SUSTAINED THE ACTION OF THE ASSESSING O FFICER IN ASSESSING THE RECEIPTS FROM ALCATEL AS BUSINESS PRO FITS/CAPITAL GAINS BY OBSERVING AS UNDER:- FROM A PERUSAL OF THE PAPERS FILED BEFORE THE DRP, IT IS SEEN THAT NOT ONLY LARGE SCALE EQUIPMENT HAS BEEN L OANED BY THE ASSESSEE TO AXES, BUT THESE EQUIPMENTS HAVE BEEN IM PORTED FOR USE AT A FIXED PLACE OF BUSINESS I.E. SOFTWARE TECH NOLOGY PARK AT AXES TECHNOLOGY INDIA PVT. LTD. AS IS APPARENT FROM THE APPROVAL LETTER OF THE DIRECT SOFTWARE TECHNOLOGY PARKS OF I NDIA DATED 10.12.2004 (REF. PAGE 154 OF THE PAPER BOOK FILED B EFORE THE DRP). THEREFORE, THE CONCLUSION OF THE ASSESSING OF FICER THAT THE ASSESSEE HAD A PE IN INDIA AS IT HAD EQUIPMENT LOCA TED IN THE PREMISES OF AXES FOR THE PURPOSE OF ITS BUSINESS IS CLEARLY SUPPORTED BY THE DOCUMENT FURNISHED BY THE ASSESSEE . THE M/S. ALCATEL USA SOURCING LP 43 ASSESSING OFFICER'S ACTION IN HOLDING THAT THE ASSE SSEE HAD A PE IN INDIA, IS ACCORDINGLY IN ORDER. THUS, IT IS HELD TH AT THE ASSESSEE HAD A PE IN INDIA IN TERMS OF PARA 5(1) AND 5(2)(1) OF THE INDO- USA DTAA. FURTHER, THE ENTIRE RECEIPT OF THE ASSESS EE IS FROM ALLOWING ACCESS OF THE NETWORK TO ITS CLIENT AND MO BILE NETWORK USERS. THEREFORE, IT IS DIFFICULT TO ACCEPT THE PRO POSITION THAT THESE ACTIVITIES HAVE ANY OTHER PURPOSE. IT IS TRUE THAT IN CASE OF PE IN INDIA ONLY THE INCOME WHICH IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT THROUGH THE PE IS LIABLE TO BE TAXED IN INDIA. HOWEVER, THE ASSESSEE HAS NOT BEEN ABLE TO PUT FORTH ANY EVI DENCE THAT THESE RECEIPTS WERE NOT ATTRIBUTABLE TO THE PE. THE ONUS WAS ON THE ASSESSEE TO SUBMIT AN FAR ANALYSIS TO INDICATE THE AMOUNT OF ATTRIBUTABLE INCOME TO THE PE DULY SUPPORTED BY EVI DENCE. IN ABSENCE OF ANY SUCH DOCUMENTS OR DETAILS COMING FOR TH FROM THE ASSESSEE, THE ASSESSING OFFICER HAS EXAMINED THE FA CTS AND ATTRIBUTED THE ENTIRE AMOUNT TO PE IN INDIA ON THE GROUND THAT THE REVISED AGREEMENT/ TRANSFER OF RIGHTS TOOK PLAC E IN INDIA ONLY. THEREFORE IN VIEW OF THE FACT THAT ENTIRE RECEIPT I S IN RESPECT OF OPERATIONS WHICH ARE CARRIED OUT THROUGH THE PE, TH ERE IS NO QUESTION TO COME TO A CONCLUSION OTHER THAN THAT OF THE ASSESSING OFFICER. ACCORDINGLY, THE ACTION OF THE ASSESSING O FFICER IS UPHELD. IN RESPECT OF ALTERNATE PLEA OF THE ASSESSING OFFIC ER REGARDING COMPUTATION OF CAPITAL GAINS IN RESPECT O F TRANSFER OF RIGHTS, IT IS HELD THAT THIS INDEED REPRESENTS CAPI TAL GAINS WHICH ARE TAXABLE IN INDIA IN TERMS OF DOMESTIC LAW AS WE LL AS THE INDIA- US TREATY. IT IS ALSO IMPORTANT TO NOTE THAT THE EQ UIPMENT AND THE RIGHTS CONSTITUTE BUSINESS ASSETS OF THE PE. TH EREFORE, THE INCOME FROM THE TRANSFER OF THESE RIGHTS OF ASSETS SHALL CONSTITUTE INCOME LIABLE TO TAX U/S. 28 READ WITH ARTICLE 7 OF THE INDIA-US TREATY. HOWEVER, IF AT A LATER STAGE IT IS DECIDED THAT THE ASSESSEE DOES NOT HAVE A PE IN INDIA, THE INCOME WOULD STILL BE TAXABLE AS 'CAPITAL GAINS' IN VIEW OF THE FACT THAT THE TRANSF ER OF ASSETS/RIGHTS IS NOT IN DISPUTE AS PER THE AGREEMEN T. 15. AS COULD BE SEEN FROM THE OBSERVATIONS AND THE CONCLUSIONS/DECISIONS OF THE DRP, NONE OF THE ABOVE SUBMISSIONS OF THE ASSESSEE WERE CONSIDERED BY THE DRP NOR ANY VAL ID REASONING HAS BEEN GIVEN TO SUSTAIN THE ACTION OF THE ASSESSING O FFICER IN TREATING THE AMOUNTS RECEIVED BY THE ASSESSEE AS BUSINESS PR OFITS UNDER THE M/S. ALCATEL USA SOURCING LP 44 HEAD INCOME FROM BUSINESS OR ALTERNATIVELY UNDER TH E HEAD CAPITAL GAINS. IN THE CIRCUMSTANCES, WE SET ASIDE THE ORDE R OF THE DRP AND RESTORED THIS ISSUE TO THE FILE OF THE DRP FOR FRES H ADJUDICATION IN ACCORDANCE WITH LAW. THE DRP SHALL PASS A SPEAKING ORDER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE. 16. THE LAST ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT THE DRP ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN LEVYING INTEREST U/S. 234B OF THE ACT. 16.1. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT CHAPTER XVII - PART C OF THE ACT DEALS WITH PAYMENT OF ADVANCE TAX BY THE ASSESSEE. ACCORDING TO SECTION 207 OF THE ACT, TAX SHALL BE P AYABLE IN ADVANCE DURING THE FINANCIAL YEAR IN ACCORDANCE WITH THE PR OVISIONS OF SECTION 208 TO SECTION 219 (BOTH INCLUSIVE). SECTION 209(1 )(A) OF THE ACT WHICH DEALS WITH THE COMPUTATION OF ADVANCE TAX STA TES THAT THE ASSESSEE SHALL FIRST ESTIMATE HIS CURRENT INCOME AN D INCOME-TAX THEREON SHALL BE CALCULATED AT THE RATES IN FORCE I N THE FINANCIAL YEAR. SECTION 209(1) (D) OF THE ACT FURTHER PROVIDES THAT THE INCOME CALCULATED UNDER SECTION 209(1 )(A) SHALL BE REDUCE D BY THE AMOUNT OF INCOME TAX WHICH WOULD BE DEDUCTIBLE OR COLLECTI BLE AT SOURCE DURING THE SAID FINANCIAL YEAR UNDER ANY PROVISION OF THE ACT FROM ANY INCOME. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS TH AT IT IS WORTH NOTING THAT THE LEGISLATURE HAS THOUGHT IT FIT TO U SE THE WORD 'DEDUCTIBLE' AND NOT 'DEDUCTED'. HE FURTHER SUBMITS THAT IN THE INSTANT CASE, EVEN ASSUMING WHILE NOT ACCEPTING THA T THE INCOME IS CHARGEABLE TO TAX AS CONTENDED BY THE LEARNED AO, T HE WHOLE OF SUCH INCOME WOULD BE SUBJECT TO TAX DEDUCTION AT SOURCE UNDER SECTION 195 AS THE ASSESSEE IS A NON-RESIDENT COMPANY. ACCO RDINGLY, THE M/S. ALCATEL USA SOURCING LP 45 PAYER I.E. AXES WOULD HAVE DEDUCTED TAX AT THE RATE S IN FORCE BEFORE MAKING PAYMENTS TO THE ASSESSEE. THEREFORE HE SUBMI TS THAT SINCE ENTIRE INCOME OF THE ASSESSEE IS SUBJECT TO TAX DED UCTION AT SOURCE UNDER SECTION 195 OF THE ACT, THERE IS NO OBLIGATIO N TO PAY ADVANCE TAX UNDER SECTION 208. 16.2. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBM ITS THAT IN ORDER TO COMPUTE ADVANCE TAX LIABILITY UNDER SECTION 208 OF THE ACT, THE INCOME ON WHICH TAX IS DEDUCTIBLE AT SOURCE IS TO B E REDUCED FROM THE ESTIMATED INCOME, THE INCOME ON WHICH THE ADVANCE T AX WOULD BE PAYABLE BY ASSESSEE WOULD BE 'NIL'. ACCORDINGLY, TH ERE IS NO LIABILITY TO PAY ADVANCE TAX UNDER SECTION 208 OF THE ACT AND CONSEQUENTLY, NO INTEREST LIABILITY UNDER SECTION 234B FOR DEFAULT I N PAYMENT OF ADVANCE TAX. HE FURTHER SUBMITS THAT SECTION 190 OF THE ACT PROVIDES THAT TAX IN RESPECT OF REGULAR ASSESSMENT IS PAYABL E EITHER BY DEDUCTION AT SOURCE OR BY ADVANCE PAYMENT, AS THE C ASE MAY BE. THUS, THE DEDUCTION OF TAX AT SOURCE AND PAYMENT OF ADVAN CE TAX HAVE BEEN TREATED AS TWO ALTERNATIVE MODES OF PAYMENT OF TAX IN ADVANCE. HENCE, WHERE THE STATUTE PROVIDES FOR DEDUCTION OF TAX AT SOURCE IN RESPECT OF A PARTICULAR INCOME, THE CONCERNED ASSES SEE IS NOT REQUIRED TO PAY ANY TAX IN RELATION TO THE SAID INCOME. IN R ESPECT OF THE INCOME EARNED BY THE ASSESSEE, DEDUCTION OF TAX AT SOURCE IS CONTEMPLATED UNDER SECTION 195 OF THE ACT. 16.3. THE LD. COUNSEL FOR THE ASSESSEE PLACES RELIA NCE ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS ABOVE CONTENT IONS. 1) SEDCO FOREX INTERNATIONAL DRILL INC & ORS VS CIT & ANR (2005) 199 CTR (SC) 320 2) DIT VS MGCV NETWORK ASIA LLC (2009) 313 ITR 187 (BO M) M/S. ALCATEL USA SOURCING LP 46 3) THE DDIT VS SET SATELLITE (SINGAPORE) PTE LTD., 106 ITD 175 (MUM) 4) MOTOROLA INC VS DCIT 96 TTJ 1 (DEL) 5) CIT VS RANOLI INVESTMENT PVT. LTD AND OTHER 235 ITR 433 (GUJ) 6) CIT VS MADRAS FERTILISERS LTD (`149 ITR 703 (MAD) 16.4. THE DRP OBSERVING THAT PROVISIONS OF SEC. 234 B IS COMPENSATORY IN NATURE AND IS LEVIABLE ON THE AMOUN T OF ASSESSED TAX THEREFORE THE CONTENTIONS OF THE ASSESSEE WAS REJEC TED. 16.5. ON HEARING BOTH SIDES, WE FIND FORCE IN THE S UBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE. HOWEVER, WE RESTORE THIS ISSUE TO THE FILE OF THE DRP TO DECIDE THIS ISSUE KEEPING IN VIE W THE DECISION OF THE HONBLE BOMBAY HIGH COURT AS THE DRP DID NOT DEAL W ITH ANY OF THE ABOVE SUBMISSIONS OF THE ASSESSEE AND BY SIMPLY HOL DING THAT 234B INTEREST IS ONLY COMPENSATORY IN NATURE. THUS WE R ESTORE THIS ISSUE ALSO TO THE FILE OF THE DRP FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 17. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 7533/M/2011 A.Y 2007-08 18. THE GROUNDS RAISED BY THE ASSESSEE IN THIS APPE AL ARE IDENTICAL TO THE APPEAL FOR THE ASSESSMENT YEAR 2006-07 IN TH E CASE OF ALCATEL USA SOURCING LP. THEREFORE THE DECISION RENDERED IN ASSESSMENT YEAR 2006-07 APPLIES MUTATIS AND MUTANDIS TO THE IS SUES RAISED IN ASSESSMENT YEAR 2007-08. SINCE WE HAVE SET ASIDE A LL THE ISSUES TO M/S. ALCATEL USA SOURCING LP 47 THE FILE OF THE DRP FOR THE ASSESSMENT YEAR 2006-07 , WE RESTORE ALL THE ISSUES FOR THE ASSESSMENT YEAR 2007-08 ALSO TO THE FILE OF THE DRP FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AND A FTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . I .TA NO.7534 /MUM/2011 A.Y. 2007-08 19. THE ASSESSEE HAS RAISED TWO GROUNDS IN THIS APP EAL: 1) CHALLENGING THE ORDER OF THE DRP IN HOLDING TH AT THE PAYMENTS RECEIVED FROM ALCATEL SOUTH ASIA LTD (ASAL ) FOR PROVIDING REMOTE CALL-IN TECHNICAL SUPPORT SERVICES AS TAXABLE IN INDIA AS ROYALTY AND FEES FOR INCLUDED SERVICES UNDER ARTICLE 12(3) AND ARTICLE 12(4)(A) OF THE DTAA BETWEEN INDI A AND USA AND (2) THE DRP ERRED IN CONFIRMING THE ACTION OF THE A SSESSING OFFICER IN LEVYING INTEREST U/S. 234B OF THE ACT. 20. THESE GROUNDS ARE IDENTICAL TO THE APPEAL IN T HE CASE OF ALCATEL USA SOURCING INC FOR THE ASSESSMENT YEAR 2006-07 AN D THE DECISION RENDERED IN FOR ASSESSMENT YEAR 2006-07 APPLIES MUT ATIS AND MUTANDIS TO THE ISSUES RAISED IN THIS ASSESSMENT YE AR I.E. 2007-08 ALSO. SINCE WE HAVE SET ASIDE ALL THE ISSUES TO TH E FILE OF THE DRP FOR THE ASSESSMENT YEAR 2006-07, WE RESTORE ALL THE ISS UES FOR THE ASSESSMENT YEAR 2007-08 ALSO TO THE FILE OF THE DRP FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AND AFTER PROVI DING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. M/S. ALCATEL USA SOURCING LP 48 I .TA NO.7535/MUM/2011- A.Y. 2008-09 20. THE GROUNDS RAISED BY THE ASSESSEE IN THIS APPE AL ARE IDENTICAL TO THE APPEAL FOR THE ASSESSMENT YEAR 2006-07 IN TH E CASE OF ALCATEL USA SOURCING INC. AND THE DECISION RENDERED THEREIN FOR THE ASSESSMENT YEAR 2006-07 APPLIES MUTATIS AND MUTANDI S TO THE ISSUES RAISED IN THIS ASSESSEES CASE FOR THE ASSESSMENT YEAR 2008-09. SINCE WE HAVE SET ASIDE ALL THE ISSUES TO THE FILE OF THE DRP FOR THE ASSESSMENT YEAR 2006-07, WE RESTORE ALL THE ISSUES FOR THE ASSESSMENT YEAR 2008-09 ALSO TO THE FILE OF THE DRP FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AND AFTER PROVI DING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 21. IN THE RESULT, ALL THE APPEALS FILED BY THE ASS ESSEES ARE ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH AUGUST, 2016. SD/- SD/- (B.R. BASKARAN) (C.N. PRASAD ) ' / ACCOUNTANT MEMBER $ %' /JUDICIAL MEMBER MUMBAI; (' DATED 5 TH AUGUST, 2016 . % . ./ RJ , SR. PS M/S. ALCATEL USA SOURCING LP 49 !'#$#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ) ( ) / THE CIT(A)- 4. ) / CIT 5. *+ ,%%-. , -.! , / DR, ITAT, MUMBAI 6. , /01 / GUARD FILE. / BY ORDER, *% //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI