Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: articles on VAT and GST in India :: Central Excise rule to resale the machines to a new company :: ACCOUNTING STANDARD :: ARTICLES ON INPUT TAX CREDIT IN VAT :: VAT Audit :: list of goods taxed at 4% :: VAT RATES :: cpt :: due date for vat payment :: empanelment :: TDS :: TAX RATES - GOODS TAXABLE @ 4% :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: ACCOUNTING STANDARDS :: form 3cd
 
 
From the Courts »
 Micro Spacematrix Solution P Ltd vs. ITO (ITAT Delhi)
 CIT vs. Greenfield Hotels & Estates Pvt. Ltd (Bombay High Court)
 IndiaBulls Financial Services Ltd vs. DCIT (Delhi High Court)
 Maharao Bhim Singh of Kota vs. CIT (Supreme Court)
 Ravneet Takhar Vs. Commissioner Of Income Tax Ix And Ors.
 Jaiprakash Associates Ltd. Vs. Commissioner Of Income Tax
 Formula One World Championship Limited Vs. Commissioner Of Income Tax, International Taxation-3 And Anr.
 Commissioner Of Income Tax International Taxation-3 Delhi Vs. Formula One World Championship Ltd. And Anr.
 Reliance Communications Ltd vs. DDIT (ITAT Mumbai)
  Sushila Devi vs. CIT (Delhi High Court)
 Ashok Prapann Sharma vs. CIT (Supreme Court)a

M/s Nortel Networks India International Inc. Vs. The Director Of Income Tax-I
May, 12th 2016
       IN THE HIGH COURT OF DELHI AT NEW DELHI
%                                    Judgment delivered on: 04.05.2016

+                        ITA 666/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                        ..... Appellant
                     Through: Mr. Deepak Chopra, Advocate with
                     Ms. Manasvini Bajpai, Advocate.

                         versus

         THE DIRECTOR OF INCOME TAX -I               ..... Respondent
                     Through: Mr. N.P. Sahni, Senior Standing
                     counsel with Mr. Nitin Gulati, Advocate.

                         WITH

+                        ITA 667/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                        ..... Appellant
                     Through: Mr. Deepak Chopra, Advocate with
                     Ms. Manasvini Bajpai, Advocate.

                         versus

        THE DIRECTOR OF INCOME TAX-I                ..... Respondent
                    Through: Mr. N.P. Sahni, Senior Standing
                    counsel with Mr. Nitin Gulati, Advocate.

                         WITH

+                        ITA 689/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                        ..... Appellant
                     Through: Mr. Deepak Chopra, Advocate with
                     Ms. Manasvini Bajpai, Advocate.
                     versus


ITA 666/2014 & Ors.                                         Page 1 of 57
        THE DIRECTOR OF INCOME TAX-I                ..... Respondent
                    Through: Mr. N.P. Sahni, Senior Standing
                    counsel with Mr. Nitin Gulati, Advocate.

                         WITH

+                        ITA 669/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                        ..... Appellant
                     Through: Mr. Deepak Chopra, Advocate with
                     Ms. Manasvini Bajpai, Advocate.

                         versus

        THE DIRECTOR OF INCOME TAX-I                ..... Respondent
                    Through: Mr. N.P. Sahni, Senior Standing
                    counsel with Mr. Nitin Gulati, Advocate.

                         WITH

+                        ITA 671/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                        ..... Appellant
                     Through: Mr. Deepak Chopra, Advocate with
                     Ms. Manasvini Bajpai, Advocate.

                         versus

        THE DIRECTOR OF INCOME TAX-I                ..... Respondent
                    Through: Mr. N.P. Sahni, Senior Standing
                    counsel with Mr. Nitin Gulati, Advocate.

                         WITH

+                        ITA 672/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                            ..... Appellant

ITA 666/2014 & Ors.                                         Page 2 of 57
                          Through: Mr. Deepak Chopra, Advocate with
                          Ms. Manasvini Bajpai, Advocate.

                          versus

        THE DIRECTOR OF INCOME TAX-I                ..... Respondent
                    Through: Mr. N.P. Sahni, Senior Standing
                    counsel with Mr. Nitin Gulati, Advocate.

                          AND

+                         ITA 673/2014

        M/S NORTEL NETWORKS INDIA
        INTERNATIONAL INC.                        ..... Appellant
                     Through: Mr. Deepak Chopra, Advocate with
                     Ms. Manasvini Bajpai, Advocate.

                          versus

    THE DIRECTOR OF INCOME TAX-I                 ..... Respondent
                 Through: Mr. N.P. Sahni, Senior Standing
                 counsel with Mr. Nitin Gulati, Advocate.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU

                              JUDGMENT

VIBHU BAKHRU, J

1.      Nortel Networks India International Inc. (hereafter the Assessee`)

has preferred the present appeals under Section 260A of the Income Tax

Act, 1961 (hereafter the Act`) against orders passed by the Income Tax

Appellate Tribunal (hereafter ITAT`). ITA Nos. 669/2014, 671/2014

and 672/2014 are appeals preferred by the Assessee against a common


ITA 666/2014 & Ors.                                            Page 3 of 57
order dated 13th June, 2014 passed by the ITAT in ITA Nos. 1119, 1120

and 1121/Del/2010, which were appeals preferred by the Assessee against

a common order dated 22nd December, 2009 passed by the Commissioner

of Income Tax (Appeals) [hereafter 'CIT(A)'] in respect of Assessment

Years (AYs) 2003-04, 2004-05 and 2005-06. The common order dated

22nd December, 2009 passed by CIT(A) disposed of the appeals preferred

by the Assessee against two separate assessment orders both dated 18 th

December, 2006 passed by the Assessing Officer (hereafter 'AO') under

Section 147 read with Section 143(3) of the Act in respect of the AYs

2003-04 and 2004-05 as well as an assessment order dated 31st

December, 2007 passed by the AO in respect of assessment year 2005-06.


2.      ITA Nos. 666/2014, 667/2014 and 673/2014 impugn a common

order dated 13th June, 2014 passed by the ITAT in ITA Nos. 2177, 2178

and 2179/Del/2011 which were appeals preferred by the Assessee against

a common order dated 20th January, 2011 passed by CIT(A) in appeals

no.78, 79 and 77/2009-10. These appeals were preferred by the Assessee

against separate orders dated 29th January, 2010 passed by the AO to give

effect to the common order dated 22nd December, 2009 passed by CIT(A)

for AYs 2003-04, 2004-05 and 2005-06.




ITA 666/2014 & Ors.                                           Page 4 of 57
3.      ITA No. 689/2014 is directed against ITAT's order dated 13 th June,

2014 passed in an appeal preferred by the Assessee against final order

dated 17th August, 2011 passed by the AO under Section 144C of the Act

in respect of AY 2008-09.


4.      By an order dated 24th February, 2015, ITA Nos. 666/2014,

667/2014 and 673/2014 were admitted and the following questions of law

were framed:-


        "(i). Whether the Tribunal erred in concluding that the
        Appellant had a Permanent Establishment (PE) within the
        meaning of Article 5 of the Double Taxation Avoidance
        Agreement (DTAA) between India and USA?

        (iii). Whether the finding of the Tribunal that the Appellant had a
        PE in India is perverse and contrary to the facts and material on
        record?"


5.      ITA Nos. 671/2014, 672/2014 and 669/2014 were admitted on 24 th

February, 2015 and the following questions of law were framed:-


        (i). Whether the Tribunal erred in concluding that the
        Appellant had a Permanent Establishment (PE) within the
        meaning of Article 5 of the Double Taxation Avoidance
        Agreement (DTAA) between India and USA?
        (ii). Whether the Tribunal erred in affirming that the Appellant
        had a PE (fixed place PE and dependent agent PE) in India in
        terms of the Liaison Office of Nortel Canada and also in terms
        of the Nortel Networks (India) Private Ltd" (being installation
        and service PE)?



ITA 666/2014 & Ors.                                              Page 5 of 57
        (iii). Whether the finding of the Tribunal that the Appellant
        had a PE in India is perverse and contrary to the facts and
        material on record?

        (iv). Whether, without prejudice, the Tribunal erred in
        attributing 50% of the alleged profits to the alleged PE of the
        Appellant in India and whether such approach and
        quantification was inconsistent with Article 7 of the DTAA?

6.      Similarly, ITA No. 689/2014 was also admitted on 24 th February,

2015 and the following questions of law were framed:-


        (i). Whether the Tribunal erred in concluding that the
        Appellant had a Permanent Establishment (PE) within the
        meaning of Article 5 of the Double Taxation Avoidance
        Agreement (DTAA) between India and USA?

        (ii). Whether the Tribunal erred in affirming that the Appellant
        had a PE (fixed place PE and dependent agent PE) in India in
        terms of the Liaison Office of Nortel Canada and also in terms
        of the Nortel Networks (India) Private Ltd" (being installation
        and service PE)?

        (iii). Whether the finding of the Tribunal that the Appellant
        had a PE in India is perverse and contrary to the facts and
        material on record?

        (iv). Whether, without prejudice, the Tribunal erred in
        attributing 50% of the alleged profits to the alleged PE of the
        Appellant in India and whether such approach and
        quantification was inconsistent with Article 7 of the DTAA?




ITA 666/2014 & Ors.                                               Page 6 of 57
         (v). Whether Tribunal erred in confirming the levy of interest
         under section 234B of the Act?


7.       The principal controversy involved in these appeals (ITA Nos.

669/2014, 671/2014, 672/2014 and 689/2014) is whether the Assessee, a

tax resident of United States of America (USA), has a Permanent

Establishment (hereafter 'PE') in India and consequently, is chargeable to

tax under the Act in respect of its business income attributable to its PE in

India.


Factual background


8.       The Assessee (formerly known as Nortel Networks RIHC Inc) was

incorporated as a company on 7th June, 2002 under the laws applicable in

the State of Delaware, USA and is a tax resident of USA. The Assessee

is a part of Nortel Group which is stated to be a leading supplier of

hardware and software for GSM Cellular Radio Telephone Systems. The

Assessee is a step-down subsidiary of Nortel Networks Limited (Canada),

a company incorporated in Canada (hereafter Nortel Canada`); it is

wholly held by Nortel Networks Inc. which in turn is wholly owned

subsidiary of Nortel Canada. Nortel Canada also has an indirect

subsidiary in India, namely, Nortel Networks India Pvt. Ltd (hereafter

Nortel India`). Nortel Canada also owns 99.99% of share capital of


ITA 666/2014 & Ors.                                               Page 7 of 57
Nortel Networks (Luxemburg) SA which in turn holds the entire share

capital of Nortel Networks International Finance & Holdings BV (Nortel

BV). Nortel BV holds 99.99% shares of Nortel Networks Mauritius

Limited, a company incorporated in Mauritius, which in turn holds

99.99% of Nortel India. The above corporate structure of part of the

Nortel Group can be better understood by the following diagram :-


  NORTEL NETWORKS LIMITED (CANADA)


100%                                        99.99%



Nortel Networks Inc             Nortel Networks (Luxemburg) SA



100%                                        100%

                         Nortel Networks International Finance &
                         Holding BV
Nortel Networks India International Inc.
      (Appellant)



                              99.82%                    99.99%

          Nortel Networks Singapore Pte. Nortel Networks Mauritius Ltd.

                                                         99.99%

                                        Nortel Networks India Pvt. Ltd.




ITA 666/2014 & Ors.                                           Page 8 of 57
9.      The Nortel Canada also has a Liaison Office in India (hereafter

called Nortel LO`).


10.     Nortel India negotiated and entered into three contracts with

Reliance Infocom Limited (hereafter Reliance`), namely, Opt ical

Equipment Contract (hereafter the Equipment Contract`), Optical

Services Contract (hereafter the Services Contract`) and the Software

Contract (hereafter 'the Software Contract') on 8th June 2002. On the

same date, Nortel India entered into an agreement assigning all rights and

obligations to sell, supply and deliver equipment under the Equipment

Contract to the Assessee (hereafter referred to as the Assignment

Contract`). Reliance and Nortel Canada were also parties to the

Assignment Contract and in terms thereof, Nortel Canada guaranteed the

performance of the Equipment Contract by the Assessee (Assignee). In

terms of the Assignment Contract, Reliance placed purchase orders

directly on the Assessee and also made all payments for the equipment

supplied directly to the Assessee.


11.     The equipments supplied to Reliance were manufactured by Nortel

Canada and another Nortel group entity in Ireland (Nortel Ireland). The

same was invoiced by the Assessee directly to Reliance and consideration

for the same was also received directly by the Assessee. It is asserted by


ITA 666/2014 & Ors.                                            Page 9 of 57
the AO that the equipment supplied to Reliance was sourced from Nortel

Canada and Nortel Ireland at a much higher price than the price charged

to Reliance and this resulted in the Assessee suffering a loss during the

relevant period.


12.     Since according to the Assessee, its income was not chargeable to

tax under the Act, it did not file any return for the AYs 2003-04 and

2004-05. The principal issues involved in the AYs 2002-03, 2003-04,

2004-05 and 2008-09 are common. The assessment orders passed by the

AO and the appellate orders passed by CIT(A) and the ITAT for AY

2002-03, 2003-04 and 2004-05 are also more or less similar in effect and,

therefore, for the sake of brevity only the facts as obtained for AY 2003-

04 (ITA 671/2014) are referred to herein.


13.     On 27th March, 2006, the AO issued a notice under Section 148 of

the Act calling upon the Assessee to file its return of income for the AY

2003-04. In response to the aforesaid notice, the Assessee filed its return

of income on 16th May, 2006 disclosing its taxable income as Nil`.

Thereafter, the AO issued notice under Section 143(2) of the Act. In

response to the aforesaid notices, the Assessee filed its statement of

accounts disclosing the loss stated to have been incurred by the Assessee.

The Assessee did not file its balance sheet or its audited accounts as


ITA 666/2014 & Ors.                                             Page 10 of 57
according to the Assessee, it was not required to have its accounts audited

in the tax jurisdiction where the Assessee is a resident, namely, Delaware,

USA. Thereafter, on 18th December, 2006, the AO passed an assessment

order under Section 143(3)/147 of the Act.


Assessment Order dated 18th December, 2006


14.     The AO observed that the Assessee had not booked any

establishment cost, depreciation or any other indirect costs in its accounts.

Further, the Assessee had also not showed any source of funds. The AO

noted that the equipment stated to have been supplied by the Assessee to

Reliance was purchased from other group companies, namely, Nortel

Canada and Nortel Ireland and were supplied to Reliance at almost half

the price of the said goods. On the aforesaid basis, the AO concluded that

the Assessee did not have any financial or technical ability to perform the

Equipment Contract.


15.     The AO further concluded that Nortel India and Nortel LO were

involved in pre-contract survey, pre-contract negotiation, finalization of

documents and carrying out of installation activities and at ground level,

there was no difference between the LO and Nortel India and both were

operating from the same premises and were providing services to the



ITA 666/2014 & Ors.                                               Page 11 of 57
group companies including the Assessee. The AO further held that the

contracts with Reliance constituted a single turnkey contract which had

been artificially divided into three separate contracts. The AO further

held that Nortel India also did not have the capacity to undertake the

contracts entered into with Reliance and consequently, the same was

transferred to other Nortel Group Companies including the Assessee.


16.     The AO was of the view that the Assessee had been incorporated

solely with the sole motive to evade the taxes arising out of supply

contract in India and in substance, the contracts were performed by Nortel

Canada along with its LO and Nortel India, who acted in unison to

identify, negotiate, appraise, secure, execute, manufacture, supply, install,

commission and provide warranty and after sales service in respect of the

Optical Fibre project of Reliance. In addition, these companies also

provided sales service and training etc. The AO also held that the

activities performed by Nortel India were not within the scope of services

to be rendered under the Services Contract and the expatriate employees

of the Assessee had remained in India for a long period and had rendered

services for Nortel India for a period of more than 30 days in a fiscal year

and the Assessee had reimbursed large amount of expenses incurred by

Nortel India on these expatriate employees.



ITA 666/2014 & Ors.                                               Page 12 of 57
17.     According to the AO, the Assessee was a shadow company of

Nortel Group.


18.     On the basis of its findings, the Assessee concluded that Nortel

India and Nortel LO constituted the Assessee`s PE in India (both Fixed

Place PE as well as Dependent Agent PE).


19.     In view of the finding that the Assessee was inserted as an

intermediary and a shadow company of Nortel Canada solely for the

purpose of evading taxes, the AO rejected the accounts furnished by the

Assessee and further observed that the accounts provided by the Assessee

were not audited and had "no sanctity". He then proceeded to estimate the

taxable income of the Assessee based on the accounts of Nortel Group.

The AO noticed that the global accounts of the Nortel Group disclosed a

gross profit margin of 42.6%. He held that average selling, general and

marketing expenses of other similarly placed non-resident companies was

5% of the turnover and, therefore, made an allowance of 5% of such

expenses. He also made a further allowance for Head office expenses at

5% of the adjusted profits and estimated the total taxable income of the

Assessee at Rs.81,28,06,917/-.




ITA 666/2014 & Ors.                                           Page 13 of 57
CIT(A)'s Order dated 22nd December, 2009





20.     The Assessee appealed against the aforesaid assessment order as

also against similar assessment orders passed for AY 2004-05 and 2005-

06. These appeals were heard together and disposed of by the CIT(A) by

an order dated 22nd December, 2009. The CIT(A) observed that: (a) that

the Assessee was assigned the contract for supply of hardware to

Reliance Infocom days after its incorporation; (b) this is the only business

that appellant had done during the relevant period under consideration;

(c) the Assessee did not have any financial or technical capability of its

own; (d) the equipment supplied was manufactured by Nortel Canada and

Nortel Ireland and shipped directly from Canada/Ireland; (e) that the

Assessee had supplied the equipment at approximately half its purchase

price, thus, incurring huge trading loss in the transaction. The CIT(A)

held that the transactions were to be viewed as a whole and not merely in

the form of the agreement. On the basis of the aforesaid findings, the

CIT(A) upheld the conclusion of the AO that the Assessee was a paper

company incorporated only with a motive to evade income tax liability on

the income arising out of the supply contract in India and, therefore,

Nortel Canada and the Assessee were to be considered as a single entity.




ITA 666/2014 & Ors.                                              Page 14 of 57
The CIT(A) further rejected the Assessee's contention that it did not have

a business connection in India.


21.     On the issue of existence of a PE in India, the CIT(A) held that

there were two places in the business model which could be considered to

be Assessee's fixed place of business - (i) the location of Nortel India to

which employees of Nortel Group were sent on secondment basis to

assist in the execution of the project; and (ii) the place of installation of

equipment. Further, the CIT(A) also held that office of Nortel LO and

Nortel India would also constitute a fixed PE of the Assessee in India as

the Assessee and Nortel Canada were one and the same entity.


22.     The CIT(A) held that Nortel India constituted a fixed place of

business of the Assessee as according to him, the Assessee had employed

the services of Nortel India for fulfilling his obligation of installation,

commissioning, and after sales service and warranty. In addition, Nortel

India had also undertaken all the pre-supply activities such as feasibility

survey, negotiation of terms and conditions of supply, finalization of

documents and signing of the contract, etc. He also concluded that since

the employees of Nortel Group companies visited India in connection

with the project, they had performed business of the Assessee through the

premises of Nortel India or the LO of Nortel Canada.


ITA 666/2014 & Ors.                                               Page 15 of 57
23.     The CIT(A) referred to clause 6.1.2 of the Equipment Contract

which provided for rendering of certain services in relation to the

equipment supplied and held that the Equipment Contract did not end

with loading of equipment on vessels but also included a number of

activities to be carried out in India, the compensation of which was

included in the consideration for supply of equipment. The CIT(A) also

referred to clause 5.3.2 of the Equipment Contract and on the basis of the

said clause held that the consideration for supply of equipment in fact

represents the payment of works contract, where installation and

customization is carried out in India. He held that Nortel India had not

only acted as a service provider of the Assessee but also as a "sales

outlet" providing after sales service and any other assistance as requested

by the Assessee.


24.     On the aforesaid basis, the CIT(A) held that Assessee had (a) a

fixed place of business in terms of Article 5(1) of the Indo-US Double

Taxation Avoidance Agreement (DTAA); (b) a fixed place of

management in India and thus, a PE in terms of Article 5(2)(a) of the

Indo-US DTAA; (c) a sales outlet and thus, a PE in terms of Article

5(2)(i) of the Indo-US DTAA; (d) an Installation PE in terms of Article

5(2)(k) of the Indo-US DTAA; (e) a Service PE in terms of Article 5(2)(l)



ITA 666/2014 & Ors.                                             Page 16 of 57
of the Indo-US DTAA; and (f) a Dependent Agent PE in terms of Article

5(4) of the Indo-US DTAA.


25.     Insofar as the attribution of income is concerned, the CIT(A)

concurred with the AO that Rule 10 of the Income Tax Rules, 1962 was

applicable. He further held that the accounts provided by the Assessee

could not be accepted for computing the income as the transaction

between the Assessee and Nortel Canada was not on an Arm's Length

basis. However, the CIT(A) held that the expenses relatable to the PE

were liable to be allowed as a deduction while estimating the profits

attributable to the Assessee's PE in India and, accordingly, directed the

AO to do so. The CIT(A) further held that keeping in view the facts of

the case, 50% of the profits of the Assessee's estimated profits could be

attributed to the PE in India.


Proceedings before the ITAT


26.     Both, the Assessee and the Revenue preferred appeals against the

order dated 22nd December, 2009. The Assessee was principally

aggrieved by the CIT(A)'s decision upholding that the Assessee had a PE

in India and attributing a part of its profits, computed on estimated basis,

to its PE and assessing the same as chargeable under the Act. On the



ITA 666/2014 & Ors.                                              Page 17 of 57
other hand, the Revenue was aggrieved to the extent that CIT(A) had

reduced the proportion of profits attributable to the Assessee's PE in

India. The ITAT concurred with the AO and the CIT(A) that the contracts

entered into between Nortel India and Reliance Infocom were a part of a

'turnkey contract' which had been artificially split up into three separate

contracts. The ITAT further upheld the conclusion that the Assessee was

only a shadow company of Nortel Group and was getting its work inter

alia executed through Nortel India. The contracts were pre-negotiated by

Nortel India and in view of the above, the ITAT concurred with the AO

and the CIT(A) that Nortel India constituted a fixed place of business and

a dependent agent PE of the Assessee in India. The ITAT also concurred

with the view that the LO of Nortel Canada was rendering all kinds of

service to Group companies including the Assessee and constituted a

fixed place PE of the Assessee.


27.     The ITAT rejected the Assessee's contention that the sale of

equipment was completed overseas and the installation was done under a

separate contract. The ITAT held that "the assessee through Nortel India

and LO approached the customer, negotiated the contract, bagged the

contract, supplied equipment, installed the same, undertook acceptance

test after which the system was accepted. The equipment remained in the



ITA 666/2014 & Ors.                                             Page 18 of 57
virtual possession of Nortel Group till such time the equipment is set up

and acceptance test is done."


28.     The ITAT also held that the employees of the group companies

visited India in connection with the project and this indicated that the

employees of the Nortel Group carried on the business of the Assessee

through the premises of     Nortel India or the LO.       As regards the

attribution of income to the Assessee's PE in India, the ITAT concurred

with the CIT(A)'s view that 50% of the estimated profits were attributable

to the Assessee's PE in India. Accordingly, the appeals filed by the

Revenue and the Assessee were dismissed.


Submissions


29.     Mr Chopra, learned counsel appearing for the Assessee submitted

that the contract for supply of equipment was a separate contract and was

performed by the Assessee independently. He submitted that the said

contract could have been entered into directly but Reliance insisted on

having an Indian company as a single point of contact and, therefore, the

contract was initially entered into between Nortel India and Reliance and,

subsequently, assigned to the Assessee. He emphasized that Reliance is a

party to the assignment contract and such assignment was also



ITA 666/2014 & Ors.                                            Page 19 of 57
contemplated under the Equipment Contract. He submitted that the

purchase orders were placed directly by Reliance on the Assessee and the

payments for the supply were also made directly by Reliance to the

Assessee. Mr Chopra further referred to the definition of "price list"

under the Equipment Contract and submitted that the prices for

equipment as listed in Schedule A to the Equipment Contract were " FCA

relevant international airport basis INCOTERM 2000, including costs of

exportation procedures from the country/ies of export and insurance from

the Vendor's (i.e. Nortel India) warehouse up to Substantial Completion"

and this meant that the Vendor was liable to deliver the equipment to the

carrier at the port of shipment. He contended that in the circumstances,

the Equipment Contract only obliged the Assessee to deliver the

equipment overseas and no part of the Assessee's activities were to be

performed in India.


30.     Next, Mr Chopra contended that Nortel India was an independent

Assessee and any income attributable to Nortel India was liable to be

assessed in its hands and not in the hands of the Assessee. He referred to

the decision of the Supreme Court in the case of DIT (International

Taxation), Mumbai v. Morgan Stanley and Co. Inc.: (2007) 292 ITR

416 (SC) and Director of Income Tax and Ors. etc v. M/s. E. Funds IT



ITA 666/2014 & Ors.                                            Page 20 of 57
Solution and Ors. etc: (2014) 364 ITR 256 (Delhi) in support of his

contention that a subsidiary of a foreign company could not be construed

as its PE. He further submitted that no expatriate employee of the

Assessee had visited India in connection with the Equipment Contract

since the equipment was manufactured and supplied from overseas and

there was no requirement to depute personnel to India.


31.     Mr Chopra submitted that there was no material or evidence on

record which would suggest that any fixed place in India had been made

available to the Assessee for execution of its activities. Therefore, the

AO's conclusion that Assessee had a fixed place PE in India is palpably

erroneous. He further submitted that it was Nortel India who had

negotiated the contract on its behalf and, therefore, its activities prior to

assignment of contract could not be considered as the Assessee's

activities. He submitted that since Reliance had insisted that the contract

be secured with an Indian company, Nortel India had undertaken the

responsibility and secured the contracts which included the Services

Contract that was to be executed by Nortel India. In the circumstances,

the conclusion that Nortel India had acted on behalf of the Assessee was

erroneous.




ITA 666/2014 & Ors.                                               Page 21 of 57
32.     Insofar as the existence of an installation PE is concerned, Mr

Chopra argued that in terms of the services agreement, Nortel India was

to carry out all activities relating to installation, erection and

commissioning. Since installation was not a part of scope of the works

contracted to the Assessee, there was no question of the Assessee having

any installation PE in India.


33.      Mr N.P. Sahni, Senior Standing Counsel appearing on behalf of

the Revenue supported the decision of the ITAT.


Reasoning and Conclusion


34.     The questions framed in ITA Nos.671/2014, 672/2014, 669/2014

and 689/2014 are similarly worded except in ITA No.689/2014 wherein

an additional question regarding levy of interest under Section 234B of

the Act is also framed. However, no contentions were advanced on either

side with regard to levy of interest under Section 234B of the Act and

consequently, the same is not being considered.


35.     The first three questions framed in the aforesaid appeals relate to

the dispute whether the Assessee has a PE in India and the fourth

question relates to the issue of attribution of income to the Assessee`s

alleged PE in India.



ITA 666/2014 & Ors.                                             Page 22 of 57
36.     The controversy whether the Assessee has a PE in India is

interlinked to the finding that Nortel India had discharged some of the

obligations of the Assessee under the Equipment Contract. Whilst, the

Income Tax Authorities have held that the contracts entered into with

Reliance ­ the Equipment Contact, Software Contract and Services

Contract ­ are essentially a part of the singular turnkey contract, the

Assessee contends to the contrary. Further, the Income Tax Authorities

have held that a part of the Equipment Contract assigned to the Assessee

was, in fact, performed by Nortel India. This too, is stoutly disputed by

the Assessee. The question whether the Assessee has a PE in India is

clearly interlinked with the issue whether Nortel India or Nortel LO had

performed any of the functions or discharged any of the obligations

assumed by the Assessee.


37.     It is not disputed ­ on the contrary it has been expressly admitted ­

that the contracts entered into with Reliance were negotiated by Nortel

India and neither Nortel LO nor the Assessee were involved in

negotiations with Reliance. There is also no material on record which

would indicate that Nortel LO or the Assessee had participated in any

negotiation with Reliance. The facts on record indicate that Nortel India

had negotiated the contracts with Reliance, and Nortel Canada had



ITA 666/2014 & Ors.                                               Page 23 of 57
executed a deed of guarantee (referred to as a 'Parent Guarantee')

guaranteeing the performance of all the three contracts.


38.     It has been argued on behalf of the Assessee that the agreement for

supply of hardware (Equipment Contract) could have been directly

executed between Reliance and the Assessee but Reliance had insisted on

an Indian company being responsible for the entire works. Therefore, at

the insistence of Reliance, in the first instance, the agreements were

executed between Nortel India and Reliance, with Nortel Canada as a

surety.


39.     Thus, it is an admitted position that Nortel India had negotiated for

the contracts and had entered into agreements that were to be performed

not by Nortel India but by other entities of the Nortel group. According

to the Assessee, the only reason for Nortel India executing the contracts

was the insistence on the part of Reliance to have an entity in India

responsible for the contracts. In this view, the contention advanced on

behalf of the Assessee that Nortel India had acted for itself and not on

behalf of any other group entity cannot be accepted and the findings of

the Income Tax Authorities that Nortel India had negotiated the contract

on behalf of the Nortel group as a whole cannot be faulted.




ITA 666/2014 & Ors.                                               Page 24 of 57
40.     The Income Tax Authorities concluded that the Assessee was a

shadow company of Nortel Canada and both the companies were

essentially a singular entity. In other words, the Income Tax Authorities

had disregarded the corporate structure of the Assessee and had

proceeded on the basis that its identity is the same as Nortel Canada. It is

now well settled that the corporate veil can be lifted only in exceptional

and limited circumstances. Indisputably, in cases where it is found that

the corporate structure has been devised only for evasion of taxes, the

courts have permitted piercing of the corporate veil and this is a well

accepted exception to the rule of a company being a juristic entity having

a separate identity (see : In Re: Sir Dinshaw Maneckjee Petit: AIR

1927, Bombay, 371). However, piercing a corporate veil can be justified

only in circumstances where it is found that a company has been

incorporated only to evade taxes; the company has no real substance; and

there is no commercial expediency for incorporating the company. In the

present case, the Income Tax Authorities found the Assessee to be a mere

paper company with no independent resources. Admittedly, the Assessee

has also not carried out any other activity except supplying equipment

pursuant to the contracts negotiated by Nortel India with Reliance and, in

a later year, with BSNL. The Assessee has neither produced any material

nor advanced any commercial reason for incorporation of the Assessee.

ITA 666/2014 & Ors.                                              Page 25 of 57
Significantly, the Assessee was incorporated a day prior to execution of

the agreements and, clearly, when the award of contract from Reliance

was a certainty. Admittedly, the equipment supplied to Reliance was

manufactured by Nortel Canada and Nortel Ireland and shipped directly

to Reliance. It is important to note that the performance of the Equipment

Contract was also guaranteed by Nortel Canada. In the circumstances, the

view of the authorities below that the Assessee is a mere shadow

company - in other words an alter ego of Nortel Canada - is certainly a

plausible view and cannot be held to be perverse.


41.     In the aforesaid context, it would be appropriate to assume that the

Equipment Contract was performed by Nortel Canada - as has been held

by the AO and CIT(A) and concurred with by the ITAT - and on that

footing, it is to be examined whether any income from supply of

equipment could be taxed under the Act.


42.     Section 4 of Act is a charging section and provides for levy of

income tax in respect of total income of the previous year of every

person. Section 5 of the Act outlines the scope of total income and

provides that the total income of a person who is a non-resident in any

previous year includes income from whatever source, which: (a) is

received or is deemed to be received in India in such year by or on behalf


ITA 666/2014 & Ors.                                              Page 26 of 57
of such person; or (b) accrues or arises or is deemed to accrue or arise to

him in India during such year. Section 9 of the Act specifies the income

that are deemed to accrue or arise in India. Section 9 (1) of the Act

specifies incomes which are deemed to accrue and arise in India. At this

stage, it is necessary to refer to Section 9(1)(i), clause (a) of Explanation

1, Explanation 2 and Explanation 3 to Section 9(1)(i) which are quoted

below:-


           "Section 9 (1)The following incomes shall be deemed
           to accrue or arise in India-
           (i) all income accruing or arising, whether directly or
           indirectly, through or from any business connection in
           India, or through or from any property in India, or
           through or from any asset or source of income in India,
           or through the transfer of a capital asset situate in
           India:
           [Explanation 1] ­For the purposes of this clause--(a)
           in the case of a business of which all the operations are
           not carried out in India, the income of the business
           deemed under this clause to accrue or arise in India
           shall be only such part of the income as is reasonably
           attributable to the operations carried out in India;


           [Explanation 2--For the removal of doubts, it is
           hereby declared that business connection shall
           include any business activity carried out through a
           person who, acting on behalf of the non-resident, ­
           (a) has and habitually exercises in India, an authority
           to conclude contracts on behalf of the non-resident,
           unless his activities are limited to the purchase of
           goods or merchandise for the non-resident; or


ITA 666/2014 & Ors.                                                Page 27 of 57
           (b)has no such authority, but habitually maintains in
           India a stock of goods or merchandise from which he
           regularly delivers goods or merchandise on behalf of
           the non-resident; or
           (c)habitually secures orders in India, mainly or wholly
           for the non-resident or for that non-resident and other
           non-residents controlling, controlled by, or subject to
           the same common control, as that non-resident:
           Explanation 3--Where a business is carried on in India
           through a person referred to in clause (a) or clause (b)
           or clause (c) of Explanation 2, only so much of income
           as is attributable to the operations carried out in India
           shall be deemed to accrue or arise in India."


43.     It is apparent from the plain reading of Section 9(1) of the Act that

all income which accrues or arises through or from any business

connection in India would be deemed to accrue or arise in India. In CIT v.

R.D. Aggarwal & Co.: (1965) 56 ITR 20 (SC), the Supreme Court

observed that business connection would mean "a relation between a

business carried on by a non-resident and some activity in the taxable

territories which are attributable directly or indirectly to the earnings,

profits or gains of such business". However, by virtue of Explanation 1 to

Section 9(1) of the Act, only such part of the income which is reasonably

attributable to operations carried out in India would be taxable. Thus, if it

is accepted that the Assessee has received only the consideration for the

equipment manufactured and delivered overseas, it would be difficult to

uphold the view that any part of Assessee`s income is chargeable to tax

ITA 666/2014 & Ors.                                                Page 28 of 57
under the Act as no portion of the said income could be attributed to

operations in India.


44.     There is little material on record to hold that Nortel India habitually

exercises any authority on behalf of the Assessee or Nortel Canada to

conclude contracts on their behalf. There is also no material on record

which would indicate that Nortel India maintained any stocks of goods or

merchandise in India from which goods were regularly delivered on

behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2

read with Explanation 3 to Section 9(1)(i) of the Act, no part of

Assessee`s income could be brought to tax under the Act. It is only when

a non-resident Assessee`s income is taxable under the Act that the

question whether any benefit under the Double Taxation Avoidance

Treaty is required to be examined.


45.     In Ishikawajima-Harima Heavy Industries v. Dir. Of Income

Tax: (2007) 288 ITR 408 (SC), the Supreme Court considered a case

where Petronet LNG Limited and five members of a consortium had

entered into an agreement for setting up a Liquefied Natural Gas (LNG)

receiving, storage and de-gasification facility at Dahej in the State of

Gujarat. The contract was a turnkey project and the role of each

member/consortium of contractors was separately specified. The contract


ITA 666/2014 & Ors.                                                Page 29 of 57
involved offshore supply, offshore services, onshore supply, onshore

services and construction and erection of the facility. The contract price

included consideration for offshore supplies and offshore services which

was specified separately. The disputes arose as to liability to pay tax

relating to consideration for offshore supplies and offshore services.

Whereas the appellant (a member of the consortium of contractors)

contended that the contract was a divisible one and it did not have any

liability to pay tax in respect of consideration for offshore services and

offshore supplies, the Revenue contended to the contrary. According to

the Revenue, the contract in question was a composite one and could not

be split up for the purposes of considering whether the income arising

therefrom was taxable under the Act. The relevant extracts from the said

judgment are reproduced below:-


        30. The contract is a complex arrangement. Petronet and
        the Appellant are not the only parties thereto, there are other
        members of the consortium who are required to carry out
        different parts of the contract. The consortium included an
        Indian company. The fact that it has been fashioned as a
        turnkey contract by itself may not be of much significance.
        The project is a turnkey project. The contract may also be a
        turnkey contract, but the same by itself would not mean that
        even for the purpose of taxability the entire contract must be
        considered to be an integrated one so as to make the
        appellant to pay tax in India. The taxable events in execution
        of a contract may arise at several stages in several years. The
        liability of the parties may also arise at several stages.
        Obligations under the contract are distinct ones. Supply


ITA 666/2014 & Ors.                                               Page 30 of 57
        obligation is distinct and separate from service obligation.
        Price for each of the component of the contract is separate.
        Similarly, offshore supply and offshore services have
        separately been dealt with. Prices in each of the segment are
        also different.

        31. The very fact that in the contract, the supply segment and
        service segment have been specified in different parts of the
        contract is a pointer to show that the liability of the appellant
        thereunder would also be different.

        32. The contract indisputably was executed in India. By
        entering into a contract in India, although parts thereof will
        have to be carried out outside India would not make the
        entire income derived by the contractor to be taxable in
        India. We would, however, deal with this aspect of the
        matter a little later.
        xxxx          xxxx         xxxx         xxxx          xxxx
        39. The territorial nexus doctrine, thus, plays an important
        part in assessment of tax. Tax is levied on one transaction
        where the operations which may give rise to income may
        take place partly in one territory and partly in another. The
        question which would fall for our consideration is as to
        whether the income that arises out of the said transaction
        would be required to be proportioned to each of the
        territories or not.

        40. Income arising out of operations in more than one
        jurisdiction would have territorial nexus with each of the
        jurisdictions on actual basis. If that be so, it may not be
        correct to contend that the entire income accrues or arises
        in each of the jurisdiction. ......

        xxxx          xxxx         xxxx         xxxx          xxxx
        76. In construing a contract, the terms and conditions thereof
        are to be read as a whole. A contract must be construed
        keeping in view the intention of the parties. No doubt, the
        applicability of the tax laws would depend upon the nature



ITA 666/2014 & Ors.                                                  Page 31 of 57
        of the contract, but the same should not be construed keeping
        in view the taxing provisions.

        xxxx          xxxx        xxxx        xxxx         xxxx

        98. We, therefore, hold as under:


        (A) Re: Offshore supply
        (1) That only such part of the income, as is attributable to
        the operations carried out in India can be taxed in India.

        (2) Since all parts of the transaction in question i.e. the
        transfer of property in goods as well as the payment, were
        carried on outside the Indian soil, the transaction could not
        have been taxed in India.

        (3) The principle of apportionment, wherein the territorial
        jurisdiction of a particular State determines its capacity to
        tax an event, has to be followed.

        (4) The fact that the contract was signed in India is of no
        material consequence, since all activities in connection with
        the offshore supply were outside India, and therefore cannot
        be deemed to accrue or arise in the country.
        (5) There exists a distinction between a business
        connection and a permanent establishment. As the
        permanent establishment cannot be said to be involved in the
        transaction, the aforementioned provision will have no
        application. The permanent establishment cannot be equated
        to a business connection, since the former is for the purpose
        of assessment of income of a non-resident under a Double
        Taxation Avoidance Agreement, and the latter is for the
        application of Section 9 of the Income Tax Act.

        (6) Clause (a) of Explanation 1 to Section 9(1)(i) states
        that only such part of the income as is attributable to the
        operations carried out in India, are taxable in India.

        (7) The existence of a permanent establishment would not
        constitute sufficient business connection, and the


ITA 666/2014 & Ors.                                               Page 32 of 57
        permanent establishment would be the taxable entity. The
        fiscal jurisdiction of a country would not extend to the taxing
        of entire income attributable to the permanent establishment.

        (8) There exists a difference between the existence of a
        business connection and the income accruing or arising out
        of such business connection.
        (9) Para 6 of the Protocol to the DTAA is not applicable,
        because, for the profits to be 'attributable directly or
        indirectly', the permanent establishment must be involved in
        the activity giving rise to the profits.

        (B) Re: Offshore services:
        (1) Sufficient territorial nexus between the rendition of
        services and territorial limits of India is necessary to make
        the income taxable.

        (2) The entire contract would not be attributable to the
        operations in India viz. the place of execution of the
        contract, assuming the offshore elements form an integral
        part of the contract.
        (3) Section 9(1)(vii) of the Act read with Memo cannot be
        given a wide meaning so as to hold that the amendment was
        only to include the income of non-resident taxpayers
        received by them outside India from Indian concerns for
        services rendered outside India.

        (4) The test of residence, as applied in international law
        also, is that of the taxpayer and not that of the recipient of
        such services.

        (5) For Section 9(1)(vii) to be applicable, it is necessary
        that the services not only be utilized within India, but also be
        rendered in India or have such a live link with India that
        the entire income from fees as envisaged in Article 12 of
        DTAA becomes taxable in India.

        (6) The terms 'effectively connected' and 'attributable to'
        are to be construed differently even if the offshore services
        and the permanent establishment were connected.


ITA 666/2014 & Ors.                                                Page 33 of 57
        (7) Section 9(1)(vii)(c) of the Act in this case would have
        no application as there is nothing to show that the income
        derived by a non-resident company irrespective of where
        rendered, was utilized in India.

        (8) Article 7 of DTAA is applicable in this case, and it
        limits the tax on business profits to that arising from the
        operations of the permanent establishment. In this case, the
        entire services have been rendered outside India, and have
        nothing to do with the permanent establishment, and can
        thus not be attributable to the permanent establishment and
        therefore not taxable in India.

        (9) Applying the principle of apportionment to composite
        transactions which have some operations in one territory and
        some in others, is essential to determine the taxability of
        various operations.
        (10) The location of the source of income within India
        would not render sufficient nexus to tax the income from
        that source.

        (11) If the test applied by the Authority for Advanced
        Rulings is to be adopted here too, then it would eliminate the
        difference between the connection between Indian and
        foreign operations, and the apportionment of income
        accordingly.

        (12) The services are inextricably linked to the supply of
        goods, and it must be considered in the same manner.



46.     It is clear from the above that even in cases of a turnkey contract, it

is not necessary that for the purposes of taxability, the entire contract be

considered as an integrated one. And, it does not follow that the amount

payable for supply of goods overseas would be chargeable to tax under

the Act.


ITA 666/2014 & Ors.                                                Page 34 of 57
47.     As noticed earlier, there seems to be no dispute that the title to the

equipment passed in favour of Reliance overseas. However, the AO, CIT

(A) and ITAT did not consider the same to be relevant as according to

them, the equipment continued to be in the possession of the Nortel

Group till its final acceptance by Reliance. In our view, even if it is

accepted that the equipment supplied overseas continued to be in

possession of Nortel India till the final acceptance by Reliance, the same

would not imply that the Assessee`s income from supply of equipment

could be taxed under the Act. Clause (a) of Explanation 1 to Section

9(1)(i) of the Act postulates the principle of apportionment and only such

income that can be reasonably attributed to operations in India would be

chargeable to tax under the Act. The position in Ishikawajima-Harima

Heavy Industries (supra) was also similar. There too, the equipments

were supplied overseas and the contractor continued to retain control of

equipment and material till the provisional acceptance of the work or the

termination of the contract. The relevant clause which was considered by

the Supreme Court in that case is as under:-


         22.1 Title to equipment and materials and contractor's
         equipment:

         Contractor agrees that title to all equipment and materials
         shall pass to the owner from the supplier or subcontractor
         pursuant to section E of exhibit H (General Project

ITA 666/2014 & Ors.                                                Page 35 of 57
         Requirements and Procedures). Contractor shall,
         however, retain case, custody, and control of such
         equipment and materials and exercise due care thereof
         until (a) provisional acceptance of the work, or (b)
         termination of this contract, whichever shall first occur.
         Such transfer of title shall in no way affect the owner`s
         rights under any other provision of this contract.


48.     In the present case, the CIT(A) had concluded that Assessee`s

obligations were not limited to supply of the equipment overseas but also

included other obligations that were to be performed in India. He further

held that the amounts received by the Assessee also included

consideration for performance of certain activities in India. This is stoutly

disputed by the Assessee. This dispute is pivotal for determining whether

any part of the Assessee's income is chargeable to tax in India.


49.     Section 3 of the Services Contract which provide for the scope of

work and services to be performed under the Service Contract and the

relevant extracts from the said section are reproduced below:-





         3.1.1 The Vendor has to provide to Reliance the Services set
         forth in the relevant Purchase Order pursuant to and in
         accordance with this Optical Services Contract. All Services
         shall comply with the Specifications and the Standards. The
         Vendor shall coordinate its efforts hereunder with all
         Subcontractors, Third Party providers and the Other
         Contractors, to ensure compliance with any and all supply and
         transportation requirements and all Governmental Entities. All


ITA 666/2014 & Ors.                                                Page 36 of 57
         Services, requiring certification shall be certified by
         independent and appropriate professionals licensed or
         properly qualified to perform such certification in an
         appropriate jurisdictions, reasonably acceptable and at no cost
         to Reliance, if such certification is required by Applicable
         Law or the Specifications. Vendor shall provide to Reliance,
         necessary installation Certificates, as per EPCG regulations
         for which the Parties will mutually agree on a format and
         procedure and for which Reliance shall reimburse Vendor for
         reasonable actual fees paid to any chartered engineers
         providing such certification.

         xxxx           xxxx        xxxx         xxxx        xxxx

         3.2.1 Vendor shall provide all Services purchased under a
         Purchase Order and in accordance with the relevant
         Specifications on an end-to-end basis to ensure successful
         completion of the Work (provided, however, that installation
         and commissioning Services shall be limited to the Services
         requested ordered in the applicable Purchase Order), which
         Services include but are not limited to:
          (a) Product     installation and commissioning (including
              commissioning testing) Services including, but not limited
              to, ready for installation inspection and validation and as-
              built documentation (redline versions); and
         xxxx           xxxx        xxxx         xxxx        xxxx

         3.2.2 At Reliance's request Vendor shall mobilize and commit
         sufficient resources necessary to successfully implement the
         Initial Optical ,Reliance Network Which will include up to
         two hundred (200) expatriates, with the approval of Reliance,
         as required, including subject matter experts (Subject to the
         experience requirements set forth in Section 3.10 below).


50.     A bare perusal of the Services Contract clearly indicates that the

task of installation, commissioning and testing was contracted to Nortel


ITA 666/2014 & Ors.                                                 Page 37 of 57
India     and     thus,   the   operations   pertaining   to   installation     and

commissioning were not performed by Nortel India on behalf of the

Assessee or Nortel Canada but on its own behalf. Thus, neither the

Assessee nor Nortel Canada can be stated to have performed any

installation or commissioning activity in India.


51.     Next, it will be important to consider whether the consideration

received by the Assessee for supply of equipment also subsumed

consideration for other activities that were performed in India. The

CIT(A) has held that "the supply contract does not end with loading of

equipment on the ship but includes a number of activities which are

carried on in Indian territories and compensation/remuneration for that

is also included in the consideration". This dispute, as observed earlier, is

at the heart of the controversy in this matter.


52.     The equipment supplied by the Assessee is indisputably as per the

terms of the obligations under the Equipment Contract. The recitals of the

said contract reads as under:-


               A. Reliance desires to purchase from the Vendor
         certain Equipment appropriate for the efficient and
         effective installation, operation, management and
         maintenance of the Optical Reliance Network including
         the Initial Optical Reliance Network; and



ITA 666/2014 & Ors.                                                   Page 38 of 57
         B. The Vendor, desires to provide to Reliance such
         Equipment and shall including, without limitation
         manufacture, supply and deliver such Equipment, in
         accordance with the terms and conditions set forth herein.

53.     Paragraph 1.2 of the Equipment Contract indicates the objectives

of the said contract and reads as under:-


               Reliance requires equipment that fully supports: (a)
         the Initial Optical Reliance Network and the Optical
         Reliance Network, including all cost, performance and
         functional requirements set forth in the relevant
         Documents; (b) Interoperability; and (c) Reliance`s
         business requirements described in the Documents
         (collectively, the objectives) The Vendor represents
         warrants and covenants that the Equipment shall be fully
         compatible with and fully supports ,the Objectives as shall
         be demonstrated to Reliance, in part, in the Acceptance
         Tests.


54.     Article 3 of the Equipment Contract provides for the scope of

work, responsibilities and milestones. A bare reading of the Equipment

Contract also indicates that the vendor had other obligations such as

coordinating its efforts with the sub-contractors; maintaining a fully

equipped centre and depot with the requisite tools, spares and test

equipment to ensure spares replacement within a period of 48 hours for

critical spares and 15 working days for normal spares; warranty services;

and a toll free access to vendor`s technical assistance centres. The vendor

was also obliged to provide equipment for a Test Bed Laboratory at no



ITA 666/2014 & Ors.                                             Page 39 of 57
extra cost to Reliance. However, there is no material to indicate that any

of the obligations other than supply of equipment was performed by the

Assessee or on its behalf in consideration of the amounts received by the

Assessee. According to the Assessee, it had supplied the subject

equipment and received the consideration for the same.


55.     Article 5 of the Equipment Contract contains provisions for Pricing

and Invoicing. Sub Article 5.1 is captioned Price List and paragraph

5.1.1 of the Equipment Contract reads as under:-


          5.1.1 The prices as set forth in the Price List shall be
          applicable to all purchases by Reliance of Equipment,
          including without limitation spare and replacement
          parts.

56.     The expression Price List is defined under the contract to read as

under:-


        Price List

        means a table of list prices (FCA, "relevant international
        airport basis, INCOTERM 2000, including costs for
        exportation procedures from the country/ies of export and
        insurance from the Vendor's warehouse up to Substantial
        Completion) applicable to Equipment supplied by Vendor
        to Reliance as amended from time to time as set forth
        herein. The Price List as of the Effective Date is set forth
        in Exhibit A.


57.     The Assessee has consistently asserted that FCA, relevant


ITA 666/2014 & Ors.                                              Page 40 of 57
international airport basis, INCOTERM 2000, from the country/ies of

export and insurance from Vendor's warehouse to Substantial

Completion" meant that the supplier was liable to deliver the equipment

to the carrier at the port of shipment/airport of departure which in the

present case would be outside India. The said interpretation has not been

disputed on behalf of the Revenue.


58.     In terms of the Assignment Contract, the Assessee assumed all

rights and obligations of Nortel India under the Equipment Contract "to

sell, supply and deliver the Equipment to the Purchaser under the

Equipment Contract".


Section 1 of the Assignment Contract is quoted below for ready

reference:-


               Section 1. Assignment and Assumption. Assignor
         hereby assigns to the Assignee all the rights, entitlements,
         covenants and obligations of the Assignor under the
         Equipment Contract to sell, supply and deliver the
         Equipment to the Purchaser under the Equipment Contract
         and the Assignee hereby assumes, and agrees with all of the
         parties hereto, to perform, observe and be bound by each
         and all of the foregoing obligations and covenants of
         Assignor. Notwithstanding the foregoing assignment and
         assumption, except as set forth in the next sentence, as
         between Assignor and Purchaser, the parties agree that
         Assignor shall continue to be bound by all of the terms and
         conditions of the Equipment Contract and shall remain fully

ITA 666/2014 & Ors.                                             Page 41 of 57
         liable to Purchaser under the Equipment contract to the
         same extent as if the foregoing assignment and assumption
         had not occurred. Purchaser agrees that from and after the
         Effective Date of this Assignment, Purchaser shall place all
         Purchase Orders and Change Orders for the supply of
         Equipment directly with Assignee and Assignor shall have
         no liability or obligations under this Assignment with
         respect to such Purchase Orders and Change Orders (the
         "Liability Exception").

59.     It is apparent from the above that the Assessee only assumed the

obligation to sell, supply and deliver equipment in terms of the

Equipment Contract and was paid in terms of the pricing mechanism as

agreed to under the Equipment Contract. It is also material to note that

Nortel India continued to be responsible for performance of the

Equipment Contract except for performance of Purchase Orders and

Exchange Orders for supply of equipment which were placed directly by

Reliance on the Assessee. Although, the Assessee had repeatedly asserted

that all other obligations for testing, installation and commissioning was

done by Nortel India, for which Nortel India had been paid separately, no

material or evidence was gathered by the AO to contradict the same.

There is no material to indicate that equipment for Test Bed Laboratory,

which was to be supplied at no additional cost to Reliance had been

procured by Nortel India at additional cost or that Nortel India was not

remunerated for all the services rendered by it to Reliance. In terms of the


ITA 666/2014 & Ors.                                              Page 42 of 57
Equipment Contract, adequate stock of spares was required to be

maintained in India, however, there is no material to indicate that such

stock was maintained in India by the Assessee or that such stock was

maintained by Nortel India, not on its own behalf but on behalf of the

Assessee, without being sufficiently remunerated. Thus, in absence of any

such evidence or material, it is difficult for us to concur with the view

that certain activities were performed in India for which the consideration

was received by the Assessee.


60.      It is also necessary to observe that even if the AO was of the view

that Nortel India was not adequately remunerated for the Assignment

Contract, the AO was required to make an appropriate transfer pricing

adjustment in the hands of Nortel India.


61.      Thus, in our view, the question whether the Assessee has a PE in

India is not material as it is not possible to hold that any part of the

income of the Assessee could be apportioned to operations carried on in

India.


62.      Having stated the above, for the sake of completeness, we may also

examine the controversy whether the Assessee has a PE in India and

whether any part of the Assessee's income could be attributed to such PE.



ITA 666/2014 & Ors.                                              Page 43 of 57
63.     Undisputedly, even if it is accepted that some portion of the

obligations undertaken by the Assessee were performed in India, the

Assessee's income arising from the performance of the Equipment

Contract could be brought to tax only to the extent as permissible under

the relevant DTAA - DTAA between India and USA or DTAA between

India and Canada.


64.     Both the OECD and US Model Conventions specify that only such

portion of business profits that is attributable to the PE of a foreign

enterprise would be taxable in the other contracting state. The UN Model

Convention also provides for additionally bringing such business profits

that could be attributed to the PE by force of attraction to a PE; that is,

income from sale of goods and merchandise or through business activities

carried on in a State which are similar to goods and merchandise sold

through the PE or activities carried on through a PE would also be subject

to tax in the contracting state in which the PE is situated. Paragraphs 1 of

Article 7 of the Model Conventions are relevant and are re-produced

below:


         "OECD MC
         Article 7

         Business Profits


ITA 666/2014 & Ors.                                              Page 44 of 57
         1. Profits of an enterprise of a Contracting State shall be
         taxable only in that State unless the enterprise carries on
         business in the other Contracting State through a
         permanent establishment situated therein. If the enterprise
         carries on business as aforesaid, the profits that are
         attributable to the permanent establishment in accordance
         with the provisions of paragraph 2 may be taxed in that
         other State.

         UN MC

         Article 7

         Business Profits

         1. The profits of an enterprise of a Contracting State shall
         be taxable only in that State unless the enterprise carries on
         business in the other Contracting State through a
         permanent establishment situated therein. If the enterprise
         carries on business as aforesaid, the profits of the
         enterprise may be taxed in the other State but only so much
         of them as is attributable to (a) that permanent
         establishment; (b) sales in that other State of goods or
         merchandise of the same or similar kind as those sold
         through that permanent establishment; or (c) other business
         activities carried on in that other State of the same or
         similar kind as those effected through that permanent
         establishment.

         US MC

         Article 7

         Business Profits

         "1. The profits of an enterprise of a Contracting State shall
         be taxable only in that State unless the enterprise carries on
         business in the other Contracting State through a
         permanent establishment situated therein. If the enterprise
         carries on business as aforesaid, the business profits of the
         enterprise may be taxed in the other State but only so much



ITA 666/2014 & Ors.                                                Page 45 of 57
         of them as         is   attributable   to   that   permanent
         establishment."


65.     Article 7 of the Indo-USA DTAA reads as under:

          1. The profits of an enterprise of a Contracting State
          shall be taxable only in that State unless the enterprise
          carries on business in the other Contracting State
          through a permanent establishment situated therein. If
          the enterprise carries on business as aforesaid, the profits
          of the enterprise may be taxed in the other State but only
          so much of them as is attributable to (a) that permanent
          establishment; (b) sales in the other State of goods or
          merchandise of the same or similar kind as those sold
          through that permanent establishment; or (c) other
          business activities carried on in the other State of the
          same or similar kind as those effected through that
          permanent establishment.

          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 that 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 arm's 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


ITA 666/2014 & Ors.                                                 Page 46 of 57
          to the permanent 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.

          3. In the determination of the profits of a permanent
          establishment, there shall be allowed as deductions
          expenses which are incurred for the purposes of the
          business of the permanent establishment, including a
          reasonable allocation of executive and general
          administrative expenses, research and development
          expenses, interest, and other expenses incurred for the
          purposes of the enterprise as a whole (or the part thereof
          which includes the permanent establishment), whether
          incurred in the State in which the permanent
          establishment is situated or elsewhere, in accordance
          with the provisions of and subject to the limitations of
          the taxation laws of that State. However, no such
          deduction shall be allowed in respect of amounts, if any,
          paid (otherwise than towards reimbursement of actual
          expenses) by the permanent establishment to the head
          office of the enterprise or any of its other offices, by
          way of royalties, fees or other similar payments in return
          for the use of patents, know-how or other rights, or by
          way of commission or other charges for specific services
          performed or for management, or, except in the case of a
          banking enterprises, by way of interest on moneys lent
          to the permanent establishment. Likewise, no account
          shall be taken, in the determination of the profits of a
          permanent establishment, for amounts charged
          (otherwise than toward reimbursement of actual
          expenses), by the permanent establishment to the head
          office of the enterprise or any of its other offices, by
          way of royalties, fees or other similar payments in return
          for the use of patents, know-how or other rights, or by


ITA 666/2014 & Ors.                                               Page 47 of 57
          way of commission or other charges for specific services
          performed or for management, or, except in the case of a
          banking enterprise, by way of interest on moneys lent to
          the head office of the enterprise or any of its other
          offices.

          4. No profits shall be attributed to a permanent
          establishment by reason of the mere purchase by that
          permanent establishment of goods or merchandise for
          the enterprise.

          5. For the purposes of this Convention, the profits to be
          attributed to the permanent establishment as provided in
          paragraph 1(a) of this Article shall include only the
          profits derived from the assets and activities of the
          permanent establishment and shall be determined by the
          same method year by year unless there is good and
          sufficient reason to the contrary.

          6. Where profits include items of income which are dealt
          with separately in other Articles of the Convention, then
          the provisions of those Articles shall not be affected by
          the provisions of this Article.

          7. For the purposes of the Convention, the term
          "business profits" means income derived from any trade
          or business including income from the furnishing of
          services other than included services as defined in
          Article 12 (Royalties and Fees for Included Services)
          and including income from the rental of tangible
          personal property other than property described in
          paragraph 3(b) of Article 12 (Royalties and Fees for
          Included Services).




ITA 666/2014 & Ors.                                              Page 48 of 57
66.     India and Canada have also entered into a DTAA. Paragraph 1 of

Article 7 of the Indo-Canada DTAA is slightly different from paragraph 1

of Article 7 of the Indo-US DTAA - which is similar to paragraph 1 of

Article 7 of the UN model convention - in as much as other business

activities carried on in the other State of the same or similar kind as those

effected through the permanent establishment are not subject to tax in the

state where the PE is situated.


67.     Thus, if we proceed on the assumption that a part of the Assessee`s

income is attributable to activities carried out in India through a business

connection, the question whether the Assessee had a PE in India during

the relevant AYs would become relevant. This is so because, if the

Assessee did not have any PE in India then its business income would not

be taxable under the Act even though a part of the same can be attributed

to activities in India.


68.     Article 5 of the Indo-US DTAA defines PE as under:-

        "Article 5
        PERMANENT ESTABLISHMENT
        1. For the purposes of this Convention, the term
        "permanent establishment" means a fixed place of business
        through which the business of an enterprise is wholly or
        partly carried on.




ITA 666/2014 & Ors.                                               Page 49 of 57
        2. The term          "permanent      establishment"      includes
        especially:

            (a)       a place of management;

            (b)       a branch;

            (c)       an office;

            (d)       a factory;

            (e)       a workshop;
            (f)       a mine, an oil or gas well, a quarry, or any other
                      place of extraction of natural resources;
            (g)       a warehouse, in relation to a person providing
                      storage facilities for others;

            (h)       a farm, plantation or other place where
                      agriculture, forestry, plantation or related
                      activities are carried on;

            (i)       a store or premises used as a sales outlet;
            (j)       an installation or structure used for the
                      exploration or exploitation of natural resources,
                      but only if so used for a period of more than 120
                      days in any twelve-month period;

            (k)       a building site or construction, installation or
                      assembly project or supervisory activities in
                      connection therewith, where such site, project or
                      activities (together with other such sites, projects
                      or activities, if any) continue for a period of
                      more than 120 days in any twelve-month period;
             (l)      the furnishing of services, other than included
                      services as defined in Article 12 (Royalties and
                      Fees for Included Services), within a
                      Contracting State by an enterprise through
                      employees or other personnel, but only if:




ITA 666/2014 & Ors.                                                  Page 50 of 57
             (i)      activities of that nature continue within that
                      State for a period or periods aggregating more
                      than 90 days within any twelve-month period; or

             (ii)     the services are performed within that State for a
                      related enterprise [within the meaning of
                      paragraph 1 of Article 9 (Associated
                      Enterprises)].

        3. Notwithstanding the preceding provisions of this
        Article, the term "permanent establishment" shall be deemed
        not to include any one or more of the following:

             (a)      the use of facilities solely for the purpose of
                      storage, display, or occasional delivery of goods
                      or merchandise belonging to the enterprise;
             (b)      the maintenance of a stock of goods or
                      merchandise belonging to the enterprise solely
                      for the purpose of storage, display or occasional
                      delivery;

             (c)      the maintenance of a stock of goods or
                      merchandise belonging to the enterprise solely
                      for the purpose of processing by another
                      enterprise;
              (d)     the maintenance of a fixed place of business
                      solely for the purpose of purchasing goods or
                      merchandise, or of collecting information, for
                      the enterprise;
              (e)     the maintenance of a fixed place of business
                      solely for the purpose of advertising, for the
                      supply of information, for scientific research or
                      for other activities which have a preparatory or
                      auxiliary character, for the enterprise.
        4.    Notwithstanding the provisions of paragraphs 1 and 2,
        where a person--other than an agent of an independent status
        to whom paragraph 5 applies--is acting in a Contracting State
        on behalf of an enterprise of the other Contracting State, that



ITA 666/2014 & Ors.                                                Page 51 of 57
        enterprise shall be deemed to have a permanent establishment
        in the first-mentioned State, if:

             (a)      he has and habitually exercises in the first-
                      mentioned State an authority to conclude
                      contracts on behalf of the enterprise, unless his
                      activities are limited to those mentioned in
                      paragraph 3 which, if exercised through a fixed
                      place of business, would not make that fixed
                      place of business a permanent establishment
                      under the provisions of that paragraph;

             (b)      he has no such authority but habitually
                      maintains in the first-mentioned State a stock of
                      goods or merchandise from which he regularly
                      delivers goods or merchandise on behalf of the
                      enterprise, and some additional activities
                      conducted in that State on behalf of the
                      enterprise have contributed to the sale of the
                      goods or merchandise; or

             (c)      he habitually secures orders in the first-
                      mentioned State, wholly or almost wholly for
                      the enterprise.

        5.     An enterprise of a Contracting State shall not be
        deemed to have a permanent establishment in the other
        Contracting State merely because it carries on business in
        that other State through a broker, general commission agent,
        or any other agent of an independent status, provided that
        such persons are acting in the ordinary course of their
        business. However, when the activities of such an agent are
        devoted wholly or almost wholly on behalf of that enterprise
        and the transactions between the agent and the enterprise are
        not made under arm's-length conditions, he shall not be
        considered an agent of independent status within the meaning
        of this paragraph.
        6.     The fact that a company which is a resident of a
        Contracting State controls or is controlled by a company
        which is a resident of the other Contracting State, or which
        carries on business in that other State (whether through a


ITA 666/2014 & Ors.                                               Page 52 of 57
        permanent establishment or otherwise), shall not of itself
        constitute either company a permanent establishment of the
        other.


The Definition of PE under Article 5 of the DTAA between India and

Canada is also similar.


69.     The AO, CIT(A) and ITAT have held that the office of Nortel India

and Nortel LO constituted a fixed place of business of the Assessee. As

pointed out earlier, we find no material on record that would even

remotely suggest that Nortel LO had acted on behalf of the Assessee or

Nortel Canada in negotiating and concluding agreements on their behalf.

Thus, it is not possible to accept that the offices of Nortel LO could be

considered as a fixed place of business of the Assessee. In so far as Nortel

India is concerned, there is also no evidence that the offices of Nortel

India were at the disposal of the Assessee or Nortel Canada. Even if it is

accepted that Nortel India had acted on behalf of the Assessee or Nortel

Canada, it does not necessarily follow that the offices of Nortel India

constituted a fixed place business PE of the Assessee or Nortel Canada.

Nortel India is an independent company and a separate taxable entity

under the Act. There is no material on record which would indicate that

its office was used as an office by the Assessee or Nortel Canada. Even if

it is accepted that certain activities were carried on by Nortel India on


ITA 666/2014 & Ors.                                              Page 53 of 57
behalf of the Assessee or Nortel Canada, unless the conditions of

paragraph 5 of Article 7 of the Indo-US DTAA is satisfied, it cannot be

held that Nortel India constituted a fixed place of business of the

Assessee or Nortel Canada.


70.     The AO has further alleged that the offices of Nortel LO and

Nortel India were used as a sales outlet. In our view, this finding is also

unmerited as there is no material which would support this view. The

facts on record only indicate that Nortel India negotiated contracts with

Reliance. Even assuming that the contracts form a part of the single

turnkey contract, which include supply of equipment - as held by the

authorities below - the same cannot lead to the conclusion that Nortel

India was acting as a sales outlet.


71.     The AO`s conclusion that there is an installation PE in India, is

also without any merit. A bare perusal of the Services Contract clearly

indicates that the tasks of installation, commissioning and testing was

contracted to Nortel India and Nortel India performed such tasks on its

own behalf and not on behalf of the Assessee or Nortel Canada.

Undisputedly, Nortel India was also received the agreed consideration for

performance of the Services Contract directly by Reliance.




ITA 666/2014 & Ors.                                             Page 54 of 57
72.     The finding that Nortel India is a services PE of the Assessee is

also erroneous. There is no material to hold that Nortel India performed

services on behalf of the Assessee.


73.     The AO has also held that Nortel India constituted Dependent

Agent PE of the Assessee in India. The aforesaid conclusion was

premised on the finding that Nortel India habitually concludes contracts

on behalf of the Assessee and other Nortel Group Companies. In the

present case, there is no material on record which would indicate that

Nortel India habitually exercises authority to conclude contracts for the

Assessee or Nortel Canada. In order to conclude that Nortel India

constitutes a Dependent Agent PE, it would be necessary for the AO to

notice at least a few instances where contracts had been concluded by

Nortel India in India on behalf of other group entities. In absence of any

such evidence, this view could not be sustained.


74.     The CIT(A) as well as the ITAT has proceeded on the basis that the

Assessee had employed the services of Nortel India for fulfilling its

obligations of installation, commissioning, after sales service and

warranty services. The ITAT also concurred with the view that since

employees of group companies had visited India in connection with the

project, the business of the Assessee was carried out by those employees


ITA 666/2014 & Ors.                                            Page 55 of 57
from the business premises of Nortel India and Nortel LO. In this regard,

it is relevant to observe that a subsidiary company is an independent tax

entity and its income is chargeable to tax in the state where it is resident.

In the present case, the tax payable on activities carried out by Nortel

India would have to be captured in the hands of Nortel India. Chapter X

of the Act provides an exhaustive mechanism for determining the Arm's

Length Price in case of related party transactions for ensuring that real

income of an Indian Assessee is charged to tax under the Act. Thus, the

income from installation, commissioning and testing activities as well as

any function performed by expatriate employees of the group companies

seconded to Nortel India would be subject to tax in the hands of Nortel

India and the same cannot be considered as income of the Assessee.


75.     Thus, the first three questions framed in ITA 671/2014, 672/2014,

669/2014 and 689/2014 are answered in the affirmative, that is, in favour

of the Assessee and against the Revenue.


76.     In view of our conclusion that the Assessee's income from supply

of equipment was not chargeable to tax in India, the question relating to

attribution of any part of such income to activities in India does not arise.

In view of our conclusion that the Assessee does not have a PE in India,




ITA 666/2014 & Ors.                                               Page 56 of 57
the question of attribution of any income to the alleged PE also does not

arise.


77.      The controversy involved in ITA 666/2014, 667/2014 and

673/2014 does not relate to the issue whether the Assessee has a PE in

India but concerns the question whether research and development

expenses were liable to be taken into account while estimating the profits

under Rule 10 of the Income Tax Rules, 1962. This issue also no longer

survives in view of our conclusion that no part of the Assessee's income

from supply of equipment is chargeable to tax under the Act.


78.      The appeals are, accordingly, allowed and the impugned orders are

set aside. However, the parties are left to bear their own costs.




                                                     VIBHU BAKHRU, J



                                                     S.MURALIDHAR, J
MAY 04, 2016
RK/MK/pkv




ITA 666/2014 & Ors.                                                 Page 57 of 57

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - We Bring IT. Offshore software outsourcing company. We use Global Delivery Model (GDM) and believe in Follow The Sun principle

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions