The assessee Nortel Networks India International Inc. is a company incorporated in USA, a leading supplier of hardware and software productsfor GSM Cellular Radio Telephones System. During the year underconsideration, the assessee has supplied telecommunication hardwareto Reliance Infocom. The assessee had not filed its return of incomevoluntarily for the relevant year nor audited accounts. The assesse claimed loss on supply of equipment to Reliance Infocom which was purchased from its group company, Nortel Canada. AO held that the Indian company constituted a PE of the assessee and assessed its income under Rule 10 and adopted the global gross profit margin percentage as 42.6% and allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. The CIT(A) held that only 50% of such profits had to be considered to be attributable to the PE.Since theunaudited accounts have no sanctity, the gross trading loss incurred from transaction cannot possibly be explained, except for the reason that it has beendesigned as suc and to avoid taxation in India. Thus, 50% of theresultant figure to be attributed to PE and cannot be absolved from the liability to pay tax u/s.234B.
M/s Nortel Networks India International Inc. – Appellant – Versus - Deputy Director of Income Tax - Respondent
Whether foreign assessees are liable to interest u/s 234B if the business profits cannot be subjected to tax in India in accordance with DTAA? Explanation of circumstances leading to formation of PE and estimation of profit attributable thereto under Rule 10.
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “E” NEW DELHI
I.T.A. Nos. 1119, 1120 & 1121/DEL/2010
A.Yrs. : 2003-04, 2004-05 & 2005-06
M/s Nortel Networks India
Deputy Director of Income Tax,
Circle – 2(1),
I.T.A. Nos. 1153, 1154 & 1155/DEL/2010
A.Yrs. : 2003-04, 2004-05 & 2005-06
Assistant Director of Income Tax,
M/s Nortel Networks India International.Inc.,
Representatives of Assessee : S/Sh. SalilKapoor, Vikas Jain,
and ShrutiKohli, CAs
Department : S /Sh. Sanjeev Sharma, CIT(DR) /
Vivek Kumar, (Sr. DR)
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
AND SHRI C.M. GARG, JUDICIAL MEMBER
Date of Pronouncement: 13/06/2014
Judgement and facts of the case
PER SHAMIM YAHYA: AM
These Cross Appeals by the Assessee and Revenue emanate out of common Order of the Ld. CIT(A) dated 20.12.2009 pertaining to assessment year 2003-04, 2004-05 & 2005-06.
2. The common grounds raised in the Assessee’s appeals read as under:-
“The Appellant respectfully submits that:
1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - XXIX, New Delhi [hereinafter referred to as the 'learned CIT(A)'] erred in confirming the action of the learned Assistant Director of Income Tax, Circle 2(1), International Taxation, New Delhi (hereinafter referred to as the 'learned AO') in taxing income from supply of telecom equipment to Reliance Infocomm Limited
1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the finding of the learned AO that the Appellant constitutes a Permanent Establishment (hereinafter referred to as 'PE') in India in terms of Article 5 of the Double Taxation A voidance Agreement between India and the United States of America ('USA') (hereinafter referred to as the 'tax treaty').
1.2 Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that 50% of the profits arising to the Appellant from supply of telecom hardware to Indian customers are attributable to the alleged PE in India.
2. Without prejudice and in addition, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the levy of interest under section 234B of the Act.
3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not adjudicating on the ground of the Appellant against the initiation of the penalty proceedings under section 271 (l)( c) of the Act.
All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.
The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
3. The common grounds raised in the Revenue’s appeals read as under:-
“1. On the facts and circumstances of the case, Ld. CIT(A) has erred in attributing only 50% of profits to activity of the PE in India.
2. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.”
Since facts are identical, we are adjudicating the issues with reference to facts and figures for Asstt. Year 2003-04.
4. The assessee Nortel Networks India International Inc. is a company incorporated in USA. It is a group concern of M/s Nortel Group, which is a leading supplier of hardware and software products for GSM Cellular Radio Telephones System.. During the year under consideration, the assessee has supplied telecommunication hardware to Reliance Infocom. The assessee has not filed its return of income voluntarily for the relevant year. The assessee does not have any audited accounts. The Assessing Officer has noted that the profit and loss account of the assessee during the year under consideration ofproceedings were unaudited and certified by Manager (Tax). In the said profit and loss account, the assessee has booked huge gross losses.
4.1 The Indian subsidiary of the Nortel Group, M/s Nortel Networks India Pvt. Ltd. entered in to contract with Reliance Infocom for supply of hardware equipment on 8.6.2002. Immediately after the signing this contract was assigned by the Indian subsidiary of Nortel Group to the assessee without any consideration. The equipments supplied by the assessee to the Indian buyer was purchased from a group company i.e. M/s Nortel Canada. The P&L account of the appellant filed during the course of assessment proceedings showed that the appellant purchased this equipment for an amount of $65.99 million and $33.61 million for the years ending on 31.12.2002 and 31.12.2003. The same was supplied to the Indian buyer Reliance Infocom for a consideration of $ 39.88 million and $ 22.76 million respectively incurring a gross loss of 65% and 48% respectively for two years. Very few selling, general and administrative expenses have been shown in P&L a/c amounting to $ 8671 and $ 13331 for two respective years. From these facts the AO concluded that the appellant does not have any manufacturing or trading infrastructure. It does not have any financial or technological capability of its own. Under such circumstances, the AO asked the appellant as to how it procured such a huge order in the absence of any trading infrastructure to which it was replied that the Indian buyer agreed to the assignment of the contract to the appellant on the parent’s guarantee. In view of this analysis the AO reached a conclusion that the appellant is only a paper company incorporated for the sole purpose of evading taxes in India accruing to the present company from the supply contract.
4.2 The assessee in its submissions dated 15.12.2006 with regard to its taxability argued the following points:-
“A. The assessee opted to be taxed under the DTAA.
B. The assessee contended that it does not have any PE within the meaning of Article 5 of the Indo US DTAA, therefore its profit being in the nature of business profit cannot be subjected to tax in India.
C. Supply of Optical equipment is hardware and it did not undertake provision of any software of technical services to Reliance.
4.3 AO observed that the contract in this regard is a turnkey contract, indivisible contract for supply, installation, testing, commissioning etc. Yet the contract for installation and commissioning were assigned to Nortel India. The entire responsibility of the execution of turnkey contract remained with the Guarantor. AO observed that this arrangement shows that assessee is getting its work executed through Nortel India. The responsibilities of the assessee have been assigned to the Indian company without any consideration. That Nortel India has undertaken the responsibility for negotiating and securing the contracts. Nortel India was working so intimately with the assessee, that the contract awarded to Nortel India was assigned to the assesse and the contract awarded to the assessee was assigned to Nortel India. That this shows that both of them are working in unison and are acting as one entity for all practical purposes. Thus, AO held that Nortel India is a fixed place of business and depended agent permanent establishment of the assessee as well as it is business connection of the assessee in India.
To read the full judgement, please find the attached file.