TELENOR ASA,NEW DELHI vs. DCIT, NEW DELHI

Per Dr. B. R. R. Kumar, Accountant Member:

2. Following grounds have been raised by the assessee:

“1. That the Assessing Officer erred on facts and in law in assessing the income of the appellant at Rs.8,26,76,663 on net basis as against the returned income of Rs.13,77,94,438 on gross basis.

2. That the Assessing Officer erred on facts and in law in holding that the fee of Rs. 13,77,94,438 received by the appellant for providing business support services to Unitech Wireless (Tamil Nadu) India P. Ltd. (hereinafter referred to as (‘Unitech Wireless’) was 2 Telenor ASA liable to tax as business profit under Article 7 of the India-Norway Double Tax Avoidance Agreement (‘the Treaty’) instead of “Fees for technical services” (“FTS”) under Article 12, as contended by the appellant.

3. That the Assessing Officer erred on facts and in law in holding that stay of employees of the appellant in India during the relevant previous year resulted in constitution of permanent establishment (“PE”) of the appellant in India under Article 5(2)(1) of the Treaty and the income arising to the appellant from Unitech Wireless was ‘effectively connected’ with such alleged PE.

3.1 That the Assessing Officer erred on facts and in law in aggregating the time spent by appellant’s employees in India for rendering services under each SOF for the purposes of the duration threshold in Article 5(2)(1) of the Treaty.

3.2 That the Assessing Officer erred on facts and in law in not appreciating that each Service Order Form (“SOF”) constituted an independent activity/project, and the duration threshold in Article 5(2)(1) of the Treaty was required to be tested with reference to presence of employees in India in relation to each SOF on an individual basis.

3.3 Without prejudice, that the Assessing Officer erred on facts and in law in not appreciating that even if the presence of employees in India in respect of SOFs of similar nature are clubbed, even then the duration threshold prescribed in Article 5(2)(2) of the Treaty was not breached.

4. That without prejudice, the Assessing Officer erred on facts and in law in not appreciating that fees for technical services received by the appellant from Unitech Wireless was not ‘effectively connected’ to any pre-existing PE of the appellant in India, ; in terms of Article 13(5) and was thus not liable to tax under Article 7 of the Treaty.

3 Telenor ASA 5. Without prejudice to the above, that the Assessing Officer erred on facts and in law in computing the profits attributable to the alleged PE of the appellant in India at Rs.8,26,76,663 without any cogent basis and without considering the provisions of the Act.

5.1 That the Assessing Officer erred on facts and in law in attributing 100% of the fee received by the appellant from Unitech Wireless for the services rendered by appellant during the relevant previous year, without appreciating that the services were partly rendered from Norway and therefore such services are not ‘effectively connected” to the alleged PE of the appellant in India.

5.2 That the Assessing Officer erred on facts and in law in not appreciating that even if it is assumed that the presence of the employees of appellant resulted in PE of the appellant in India, the income derived from such alleged PE was limited to the extent of markup of 3.5% agreed on costs incurred in rendering such services and therefore income to the extent of such markup only should be liable to tax in India.

5.3 That the Assessing Officer erred on facts and in law in holding that the markup of 3.5% on cost, charged by the appellant to Unitech Wireless, which was accepted by to be at arm’s length by the Transfer Pricing Officer in the transfer pricing assessment of the appellant for the assessment year under consideration, cannot be taken into consideration for determining the income attributable to the alleged PE of the appellant in India.

5.4. That without prejudice the Assessing Officer erred on facts and in law in not computing taxable profit of the appellant on the basis of global operating profit/(loss) ratio of the appellant.

6.That the Assessing Officer erred on facts and in law in levying interest under section 234B of the Act.”

4 Telenor ASA 3. The assessee, a tax resident of Norway, entered into Business Service Agreement (BSA), dated 10.08.2010 with Unitech Wireless (Tamil Nadu) India P. Ltd. effective from 01.04.2009. As per the BSA, the assessee provided services under independent SOFs to Unitech Wireless (UW). Such income, as per the assessee was in the nature of “fee for technical services” (FTS) and so offered to tax @10% on gross basis, relying on Article 13 of the DTAA between India and Norway.

5. The assessing officer held that the assessee has a PE in India in terms of Article 5(2)(1) of the Treaty on the following grounds:

(i) The employees of assessee have stayed in India for a period of 260 days, which exceed the threshold provided in item (1) to Paragraph (2) of Article 5 of the treaty; (ii) The consultancy services rendered by various employees are for the same project, in as much as the SOFs are in accordance with the Agreement and are governed by the provisions of the said Agreement; (iii) The SOFs were in nature of job orders where the activities to be performed, its details and persons rendering such services

5 Telenor ASA are mentioned and the clauses of the SOFs bind it to the Agreement only; (iv) The arrangement of rendering services and payment of fee were made in accordance with para 3 read with para 4 of the Agreement only. Accordingly, it was concluded that the SOFs are not separate agreements; (v) Fee received from Unitech Wireless (UW), which was in the nature of ‘fees for technical services’ (FTS) was “effectively connected” with the PE of the assessee and in terms of Article 13(5), income of the assessee was liable to be taxed as per Article 7 of the Treaty read with section 44DA of the Act.

6. The Assessing Officer, in the draft assessment order, dated 28.03.2014, passed under section 143(3)/144C(1) of the Act, held that the assessee has a Permanent Establishment (PE) in India in terms of Article 5(2)(1) of the Treaty. The AO held that the time spent by employees of the assessee in India during the relevant year, while rendering services to Unitech Wireless, exceeded the threshold provided in that Article and has attributed 100% of the receipts to the PE of the assessee in India and computed the income of the PE of the assessee at Rs.8,26,76,663 in relation to the service fee received from Unitech Wireless after allowing deduction of expenses @40%.

7. The ld. DRP vide order dated 16.12.2014 gave directions u/s 144C(5) of the Income Tax Act, 1961 to the Assessing Officer which are as under:

6 Telenor ASA “5.2 DRP has examined the assessment order and finds that the assessment order on page 9 has categorically stated that billing scheme shows consolidated invoices irrespective of the SOF under which services have been rendered. Even before DRP no evidence has been placed by the assessee to contest this finding of fact by the AO. .... While AO has considered business service agreement under which various SOFs have been operated as a single project liable to tax as per DTAA, the assessee has considered each SOF independently for tax purposes.

5.2.2 DRP has examined Article 5 of DTAA with Norway and finds that Section 2(1) clearly defines PE with reference to same or connected project. In the circumstances SOF cannot be considered individually but must be aggregated as has been done by the AO.

5.2.3 Thus there is no infirmity in the order of AO. Consequently in view of the above discussion DRP finds no ground to interfere with the order of the AO and the objection is rejected by the DRP.”

8. Thus, we find that the ld. DRP held the assessee to be having a PE in India based on the billings scheme showing consolidated invoices and various SOF have been operated as a single project.

“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.

2. The term "permanent establishment" includes especially: ……………..

(I) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating to more than six months within any 12-months period.

Clause (1) of paragraph (2) of Article 5 of the Treaty provides that an enterprise shall be deemed to have a PE in a contracting State if it furnishes services (including consultancy services), through employees, for activities that continue (for the same or connected project) for a period or periods exceeding 6 months in any 12 months period in that Contracting State.”

10. Quoting the rationale given by the Assessing Officer, the ld. AR argued that the words “same” or “connected projects” should be interpreted from the prospective of the service provider as clarified in Model Tax Convention on Income and on Capital. The relevant part of the Model Tax Convention relied upon by the ld. AR is as under:

“161. The reference to an “enterprise ... performing these services for the same project’’ should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may

8 Telenor ASA have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project.”

Statement of Form 1 Days Name of the employee Date of Date of Remarks arrival departure Talmoeb, Ivar 16-Mar-09 31-Mar-09 Out of - coverage Rasmussen, Grethelinn 16-Mar-09 3-Apr-09 Soby, Lars Christian 25-Mar-09 2-Apr-09 Moe, Oyvind Solberg 25-Mar-09 2-Apr-09 Nyborg, Espen 29-Mar-09 3-Apr-09 Revhaug, Jon Omund 30-Mar-09 4-Apr-09 Falkgard, Kristian 14-Apr-09 18-Apr-09 April 1-4 April 14-30 Revhaug, Jon Omund 14-Apr-09 18-Apr-09 20 Wellesen, Asbjorn Bjornstad 14-Apr-09 27-Apr-09 Moe Oyvind Solberg 14-Apr-09 29-Apr-09 Lindseth, Bjorn 14-Apr-09 30-Apr-09 Soby, Lars Christian 16-Apr-09 29-Apr-09 Talmoen, Ivar 20-Apr-09 25-Apr-09 Revhaug, Jon Omund 26-Apr-09 KMay-09 Talmoen, Ivar 3-May-09 14-May-09 Nyborg, Espen 6-May-09 16-May-09 Moe, Oyvind Solberg 11-May-09 15-May-09 Revhaug, Jon Omund 11-May-09 15-May-09 May 1

9 Telenor ASA Moe, Qyvind Solberg 20-May-09 29-May-09 May 3-16 25 Talmoen, Ivar 24-May-09 5-Jun-09 May 20-31 Revhaug, Jon Omund 25-May-09 29-May-09 Soby, Lars Christian 25-May-09 4-Jun-09 Nyborg, Espen 27-May-09 5-Jun-09 Lindseth, Bjarn 2-Jun-09 24-Jun-09 Nyborg, Espen 8-Jun-09 23-Jun-09 June 1-27 June 29-30 Moe, Oyvind Solberg 19-Jun-09 23-Jun-09 28 Talmoen, Ivar 15-Jun-09 26-Jun-09 Revhaug, Jon Omund 22-Jun-09 27-Jun-09 Nordhagen, Kjell Sigurd 29-Jun-09 8-Jul-09 July 1-8 8 Torgersen, Torgeir 4-Aug-09 22-Aug-09 Aug 4-22 18 Torgersen, Torgeir 1-Sep-09 19-Sep-09 Sept 1-19 18 TOTAL 117 Statement of Form 2 Name of the employee Date of Date of Remarks Days arrival departure Reitan, Even 19-Jan-09 29-Jan-09 Out of - coverage Talmoen, Ivar 16-Mar-09 31-Mar-09 Out of coverage Bjonness, Flalvor A. 30-Mar-09 3-Apr-09 Lyche, Ingvald 1-Apr-09 6-Apr-0 9 April 1-6 16 April 20-30 Talmoen, Ivar 20-Apr-09 25-Apr-09 Bjonness, Flalvor A. 20-Apr-09 30-Apr-09 Omtveit, Olav Hauge 21-Apr-09 30-Apr-09 Talmoen, Ivar 3-May-09 14-May-09 Landergren, Anders 3-May-09 16-May-09 Clausen, Steinar Conradi 4-May-09 14-May-09 May 3-16 26 May 18-31 Omtveit, Olav Hauge 4-May-09 15-May-09 Bjonness, Halvor A. 4-May-09 15-May-09 Clausen, Steinar Conradi 18-May-09 28-May-09 Omtveit, Olav Hauge 24-May-09 29-May-09 Talmoen, Ivar 24-May-09 5-Jun-09 Bjonness, Flalvor A. 24-May-09 7-Jun-09 Landergren, Anders 25-May-09 6-Jun-09

10 Telenor ASA Wendt, Lars 2 8-May-0 20-Jun-09 June 1-27 28 9 Omtveit, Olav Hauge 7-Jun-09 13-Jun-09 June 29-30 _ Clausen, Steinar Conradi 14-Jun-09 26-Jun-09 Landergren, Anders 14-Jun-09 27-Jun-09 Talmoen, Ivar 15-Jun-09 26-Jun-09

Wendt, Lars 29-Jun-09 17-Jul-09 July 1-17 17 Clausen, Steinar Conradi 3-Aug-09 8-Aug-09 Aug 3-14 21 Aug 16-21 Wendt, Lars 3-Aug-09 14-Aug-09 Aug 26-31 Fodstad, Geir 16-Aug-09 21-Aug-09 Wendt, Lars 26-Aug-09 4-Sep-09 Wendt, Lars 21-Sep-09 2-Oct-09 Sept 1-4 13 Sept 21-30 Wendt, Lars 12-Oct-09 21-Oct-09 Oct 1-2, 11 12-21 TOTAL 132 Detail of Service Order Form (SOF) SOF Nature of activity Page No. of Paper Book No. Details of Copy of Details Details of services SOF of days days provided spent spent in in India India - Clubbed 1 Sourcing activities 152 158 137 179-180 10 Sourcing activities 154 169 144 15 Sourcing activities 155 174 149 2 Market activities 152-153 159 138 181 11 Market activities 154 170 145 16 Market activities 155 175 150 3 IT/ IS activities 153 160 139 92 of CL 4 IT/ IS activities 153 161 140 PB 7 IT/ IS activities 154 166 142 12 IT/ IS activities 154 171 146 17 IT/ IS activities 155 176 - 6 HR activities 153 163-165 141 182 18 HR activities 155 177 - 5 Other contracts 153 162 - - 8 Other contracts 154 167 143 - 9 Other contracts 154 168 - - 13 Other contracts 155 172 147 -

11 Telenor ASA 14 Other contracts - 173 148 - 19 Other contracts 155 178 151 -

12. The ld. AR further argued that the various SOFs constitute separate projects and the activities and cannot be treated as single consolidated activities. He argued that three types of services specified in the Agreement are independent of each other and are merely governed by the terms and conditions prescribed in the Agreement. Referring to the various services specified in various SOFs, the ld. AR argued that mere mention of varying services in a common agreement is not a valid ground to treat all the services as one consolidated project. He argued that the separate projects and SOFs are governed by uniform terms and conditions agreed between the parties doesn’t take away the separate and individual nature of the services rendered. There are different services like marketing activities and sourcing activities which are undertaken by the different departments and cannot be clubbed together as an integrated project but should be treated as separate and independent activities. He argued that the performance of services rendered under an SOF is not dependent or linked with performance of services under other SOFs in any manner. It was argued that there is no interconnection or interlacing with other SOF and therefore the period of stay of employees under different and separate SOFs cannot be aggregated to determine the period of stay for the purpose of Article 5(2)(1) of the treaty. The various functions such as HR and marketing should be treated as separate projects but cannot be aggregated to determine the period of stay for the purpose of “Duration Test” under Article 5(2)(1) of the treaty.

12 Telenor ASA 13. The ld. AR further argued that since no PE of the assessee existed in India, prior to the visit of personnel of assessee to India, which has been alleged by the assessing officer, as resulting in constitution of PE of assessee in India, the aforesaid FTS cannot be said to be “effectively connected” to any pre-existing PE and hence the provisions of paragraph 5 of Article 13 have no application. In fact, the year under consideration is the first year of operation of the assessee in India. Consequently, subject payments are taxable @10% only, in terms of Article 13(2) of the Treaty.

“4. The appellant has challenged the AO's addition based on the ground that, a) that services specified in various SOFs constituted separate projects. It is submitted that services governed by uniform terms and conditions agreed between the parties and mere mention of the varying services in a common Agreement, does not make it one consolidated project. b) Further, the appellant submitted that different services under SOFs for Marketing Activities have been provided by different departments with different area of expertise. Similarly, the services related to Sourcing Activities have been by different departments.

13 Telenor ASA Thus, it Is submitted that each SOF, and in some cases, each service under a SOF, is separate and independent. c) The services rendered under each SOF are unique. d) The appellant submitted that the words “same" or “connected projects" in the clause article 5(2)(i) should be interpreted from the prospective of the service provider as clarified in Model Tax Convention of income and on Capital: Condensed Version 2017 as follows:

“161. The reference to an “enterprise ... performing these services for the same project’’ should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project.” e) Intimation is required to given for services agreed through each SOF to the Audit Committee. f) During the year under consideration, Appendix A was not in force and services agreed in Appendix 1 were also not rendered. Only the services agreed vide separate SOFs were rendered by the appellant. In case such services had any connection with the main agreement, then services agreed in Appendix A and Appendix 1 would also have been rendered. g) Each requisition of employees for which separate SOF was placed had no inter connection/inter lacing with the other SOF issued by the appellant and, therefore, the period of stay of employees under different and separate SOFs could not be aggregated to determine the period of stay for purposes of Article 5(2)(i) of the Treaty. h) Unless there is commercial coherence between the said activities, the duration test of six months has to be applied with reference to each activity. i) For constituting a service PE in terms of Article 5(2)(i) of the treaty, furnishing of services involving activities off that nature should continue for a period exceeding six months. Use of the words activities of that nature’ in the said Article would mean that services of the same nature should be rendered for period exceeding six months so as to constitute a service PE. j) At best, activities of the same nature could only be aggregated. Accordingly, it would be appreciated, at best the SOFs listed below under each activity head, viz., (i) Sourcing Activities, (ii) Market Activities, (iii) Information technology/Information system (IT/IS) Activities and (iv) HR Activities, may be considered as part of the same activity or project and even then the number of days spent in India in aggregate during the relevant year under each such activity/contract do not exceed the time threshold prescribed in Article 5(2)(i) of the Treaty. k) In paragraph 5 of Article 13 of the Treaty implies that the permanent establishment of a foreign enterprise must first be existing or situated in the other Contracting State, and the earning of fees for technical services must be effectively connected with such existing PE. Reliance is placed, in this regard, on the decision off the Delhi Bench of the Tribunal in the case of Guardian International Corporation: 97. l) In terms of paragraph (1) of Article 7 of the Treaty, even if a Norwegian enterprise carries on business through a PE in India, only those profits which are attributable to that PE can be brought to tax in India. m) the appellant clarified that the services were partly rendered from India and partly from Norway through phone, emails, etc. for work performed outside India, no profit can be taxed in India, whether or not an appellant has a PE in India. n) Only the markup of 3.5% over cost can be brought to tax in India as income of the alleged PE and not the gross receipts. Since the appellant has incurred loss during the financial year 2009-10, there is no income attributable to the alleged permanent establishment in India on the above basis.

5. With reference to the above arguments of the appellant, at the outset, it may be relevant to take note of the facts off the present case in respect of business service agreement and SOFs (Service order Form).

6. It is noted that UNINOR has been issued United Access Service Licenses by the Department of Telecommunication to provide Telecommunication services and the appellant has been engaged by UNINOR as a service provider to efficiently provide the services. This is the contest recorded in the business service agreement. Further, the agreement itself defines that appendixes and service order forms under the agreement shall be deemed to be read as an integral part of the agreement. (refer page 2 of the agreement). Further, clause 4.4 of the business service agreement provides that the service charge shall be invoiced quarterly and it specifies that direct charge of business service should be used unless the basis for separate charge is demonstrated. It is observed by DRP that the invoice is raised quarter wise without making any distinction SOF wise.

17 Telenor ASA project wise. It does not deal with the position where it is a case of single project with a bouqet of interconnected services.

9. Further, looking into various SOFs, it is important to appreciate that all SOFs are interlaced. Once cannot start SOF of Marketing till SOF of sourcing is complete. Similarly, the SOF of IT/IS activity cannot be initiated till SOF of marketing is over. One SOF is the feeder for other SOF and so on.

11. It is also important to highlight that the article 5(2)(i) nowhere talks of same or similar type of services. It only mandates the services including consultancy services of the same or connected

18 Telenor ASA project. First, it is inclusive definition of services. In the present case, the service provider has worked on only one project which has various interlaced phases spanning over sourcing, marketing etc.

19 Telenor ASA 14. As regards, reliance on decision of ITAT in the case of Guardian International Corporation, the same is distinguishable as the underlying DTAA in cited case is of India USA which is different from India Norway DTAA particularly in respect of Article 5(2)(i).”

21 Telenor ASA Written Submission CIT(DR) 1. The appellant Telenor is a tax resident of Norway. It has entered into Business Service Agreement, dated 10.08.2010, with Unitech Wireless (Tamil Nadu) India P. Ltd., which was effective from 01.04.2009. In terms of the said agreement, the appellant, during the year under consideration, provided services to Unitech Wireless through different service order form (SOF) under various nature of activities such as Sourcing, Marketing, IT/IS, HR and Other Contracts.

4. The appellant has challenged the AO's addition based on the ground that a) that services specified in various SOFs constituted separate projects. It is submitted that services governed by uniform terms and conditions agreed between the parties and mere mention of the varying services in a common Agreement, does not make it one consolidated project. b) Further, the appellant submitted that different services under SOFs for Marketing Activities have been provided by different departments with different area of expertise. Similarly, the services related to Sourcing Activities have been by different departments. Thus, it Is submitted that 22 Telenor ASA each SOF, and in some cases, each service under a SOF, is separate and independent.

c) The services rendered under each SOF are unique. d) The appellant submitted that the words “same" or “connected projects" in the clause article 5(2)(i) should be interpreted from the prospective of the service provider as clarified in Model Tax Convention of income and on Capital: Condensed Version 2017 as follows:

“161. The reference to an “enterprise ... performing these services for the same project’’ should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project.” e) Intimation is required to given for services agreed through each SOF to the Audit Committee. f) During the year under consideration, Appendix A was not in force and services agreed in Appendix 1 were also not rendered. Only the services agreed vide separate SOFs were rendered by the appellant. In case such services had any connection with the main agreement, then services agreed in Appendix A and Appendix 1 would also have been rendered. g) Each requisition of employees for which separate SOF was placed had no inter connection/inter lacing with the other SOF issued by the appellant and, therefore, the period of stay of employees under different and 23 Telenor ASA separate SOFs could not be aggregated to determine the period of stay for purposes of Article 5(2)(1) of the Treaty. h) Unless there is commercial coherence between the said activities, the duration test of six months has to be applied with reference to each activity. i) For constituting a service PE in terms of Article 5(2)(i) of the treaty, furnishing of services involving activities off that nature should continue for a period exceeding six months. Use of the words activities of that nature’ in the said Article would mean that services of the same nature should be rendered for period exceeding six months so as to constitute a service PE. j) At best, activities of the same nature could only be aggregated. Accordingly, it would be appreciated, at best the SOFs listed below under each activity head, viz., (i) Sourcing Activities, (ii) Market Activities, (iii) Information technology/Information system (IT/IS) Activities and (iv) HR Activities, may be considered as part of the same activity or project and even then the number of days spent in India in aggregate during the relevant year under each such activity/contract do not exceed the time threshold prescribed in Article 5(2)(i) of the Treaty. k) In paragraph 5 of Article 13 of the Treaty implies that the permanent establishment of a foreign enterprise must first be existing or situated in the other Contracting State, and the earning of fees for technical services must be effectively connected with such existing PE. Reliance is placed, in this regard, on the decision off the Delhi Bench of the Tribunal in the case of Guardian International Corporation: 97.

24 Telenor ASA l) In terms of paragraph (1) of Article 7 of the Treaty, even if a Norwegian enterprise carries on business through a PE in India, only those profits which are attributable to that PE can be brought to tax in India. m) the appellant clarified that the services were partly rendered from India and partly from Norway through phone, emails, etc. for work performed outside India, no profit can be taxed in India, whether or not an appellant has a PE in India. n) Only the markup of 3.5% over cost can be brought to tax in India as income of the alleged PE and not the gross receipts. Since the appellant has incurred loss during the financial year 2009-10, there is no income attributable to the alleged permanent establishment in India on the above basis.

5. With reference to the above arguments of the appellant, at the outset, it may be relevant to take note of the facts off the present case in respect of business service agreement and SOFs (Service order Form).

6. It is noted that UNINOR has been issued United Access Service Licenses by the Department of Telecommunication to provide Telecommunication services and the appellant has been engaged by UNINOR as a service provider to efficiently provide the services. This is the contest recorded in the business service agreement. Further, the agreement itself defines that appendixes and service order forms under the agreement shall be deemed to be read as an integral part of the agreement. (refer page 2 of the agreement). Further, clause 4.4 of the business service agreement provides that the service charge shall be invoiced quarterly and it specifies that direct charge of business service should be used unless the basis for separate charge is demonstrated. It is observed by DRP that the invoice is raised quarter wise without making any distinction SOF wise.

25 Telenor ASA 7. The most relevant issue in this case is that whether Article 5(2)(i) mandates the services of only similar type to be aggregated to arrive at threshold period of 183 days or the services of the same or connected projects to be aggregated? The appellant position is that the services activity period can be aggregated only if the services are of same nature. However, it is important to note that the treaty has used two different terms “services” and “project. This means that the “project” is distinct from service. As regards definition of “project”, it is an accepted position that the project is a collection of activities that envisages bundle of services or bouquet of services. The project is, thus, a bundle of interconnected and interrelated services with underlying theme of completion of project at hand. Thus, the term “project” and “services” are distinct. The clause article 5(2)(i) not only covers services in a particular project but also connected projects. Thus, the plain reading of the article 5(2)(i) highlights that the scope of services covered under the clause are not limited to one project but also to connected project. Thus, that the services, similar or not, but of the same project and connected project need to be aggregated to check the total duration of the activity.

Coming to the OECD commentary on the explanation towards “same” or “connected projects” in the clause article 5(2)(i), it is clarified that the explanation is towards the same or connected project and not services per se. Further, the example taken in this interpretation only clarifies that if there are two different projects of a service provider pertain to one project of a particular customer, then such unconnected projects would not be taken as same or connected merely because of one customer. So, it provides that merely the service is towards UNINOR group will not make it similar project. However, in the present case, it is only a single project even at the end of the service provider which has been entered through single business service agreement and single invoice has been raised

26 Telenor ASA across services off the same project. Thus, the aforesaid explanation of OECD is limited to two different projects with distinct service project wise. It does not deal with the position where it is a case of single project with a bouqet of interconnected services.

Further, looking into various SOFs, it is important to appreciate that all SOFs are interlaced. Once cannot start SOF of Marketing till SOF of sourcing is complete. Similarly, the SOF of IT/IS activity cannot be initiated till SOF of marketing is over. One SOF is the feeder for other SOF and so on.

This is evident from the perusal of the description of SOF. Sourcing activity SOF provides for preparation, execution and negotiation of 2nd round of GSM awards. All other SOFs are working towards the next stages of same GSM project. The sourcing activity SOF talks of preparation, execution and negotiation of IT outsourcing contract and the marketing activity SOF talks of process description of the same IT project and also about IT procurement. Further, IT/IS activity SOF also talks of IT solution architecture and IT solution scoping. The network and IS/IT activity SOF talks of benchmarking for IT outsourcing projects and its evaluation. Thereafter, project office activity SOF provides for support and assists in completing contract for the GSM network and IT support systems. Furthermore, with same theme of end to end working on GSM project and IS/IT outsourcing, there is SOF on boarding and training, HR and workshop on regulatory issues. Effectively, it is seen that all SOFs are well integrated where one SOF is the input for the subsequent SOF for example, sourcing SOF provides for first phase of preparation and execution of contract and marketing phase provides for next phase i.e. describing the process part of the contract and procurement. IT/IS phase is the next phase where the solution is designed and so on.

27 Telenor ASA It is also important to highlight that the article 5(2)(1) nowhere talks of same or similar type of services. It only mandates the services including consultancy services of the same or connected project. First, it is inclusive definition of services. In the present case, the service provider has worked on only one project which has various interlaced phases spanning over sourcing, marketing etc.

It may be relevant to add that any project is bound to have various verticals to ensure the end to end completion of project. For example any organization or project will be mix of people, processes and technology and all three are well integrated to finally shapeup the project/organization. Thus, one cannot take a plea that HR services towards people functions are different from process functions even it the same are for the same project.

In view of the above, it is submitted that the facts of the present case clearly fit into article 5(2)(1) of India Norway DTAA. Thus, it is prayed to uphold the action of the AO to hold it a case of service PE. As regards the action of the AO in allowing expenses to the tune of 40% of the receipts in accordance with Rule 10, the appellant argued to apply mark up of 3.5% on cost which translates to 3.38% of revenue. The DRP dealt with this plea of the appellant in its order. It is highlighted by DRP that the action of the AO is correct in view of the fact that no documentary evidence was submitted in respect of incurring of expenditure. Since, the cost in this case is mainly on account of salary expenses of resources working on delivery of services, therefore, the appellant ought to have submitted evidence regarding payment of salary to such resources during assessment proceedings. The claim of mark up of 3.5% on cost as per the appellant has to be demonstrated. Otherwise one estimate of the AO (40% of revenue=expenses) cannot be replaced by another estimate of the 28 Telenor ASA appellant (3.5% mark up). In absence of the cost details with documentary evidence in respect of the services conducted in this case, the action of the AO to estimate expenses at 40% off the revenue is appropriate.

As regards, reliance on decision of ITAT in the case of Guardian International Corporation, the same is distinguishable as the underlying DTAA in cited case is of India USA which is different from India Norway DTAA particularly in respect of Article 5(2)(1).”

Rejoinder to the written submissions filed by the Ld. CIT(DR)

“This has reference to the written submissions e-filed by the Ld. CIT(DR) before the Hon’ble Bench on 1st June 2021. In conjunction with written submissions filed on 06.01.2020, the appellant wishes to submit the following rejoinder to legal contentions raised by the Ld. CIT(DR):

Re: Aggregation of ‘services’ of similar nature under different Service Order Forms (‘SOFs’) are an integral part of the Business Service Agreement [Para 5-6 of the submission] In the aforementioned paragraphs, the Ld. CIT (DR), has observed that the Business Service Agreement ("the Agreement”) itself provides that the appendices and service order forms under the Agreement shall be deemed to be read as an integral part of the agreement.

In this regard, it is submitted that the fact that SOFs form integral part of the Business Service Agreement has never been disputed by the appellant. The appellant’s contention, as submitted vide the written submissions filed before the Hon’ble Bench, is that the SOFs constitute separate and independent projects, which are merely governed by uniform terms and 29 Telenor ASA conditions agreed between the parties. Mere mention of the varying services in a common Agreement is, in our respectful submission, not a valid ground for the Revenue to treat all SOFs as one consolidated project. The distinct nature of activities / services requisitioned in each SOFs have already been demonstrated, w.r.t. copies of the SOFs placed on record vide our written submissions filed on 06.01.2020.

Also, contention of the Ld. CIT(DR) that as per clause 4.4, the service charges are to be invoiced quarterly and as a matter of fact the invoices are raised quarterly without making any SOF wise distinction, it is respectfully submitted, is factually incorrect inasmuch each invoice is duly supported by a detailed back-up working [Refer Pages 121-128 of merit paper book] clearly specifying (a) time cost of personnel, and (b) travelling expenses incurred by the appellant as per each SOF separately. The said comprehensive details of cost incurred by the appellant under each SOF further demonstrate the distinct nature of SOFs.

Apart from the above, your Honour’s attention is also drawn to the detailed submissions filed on 06.01.2020 wherein the appellant has explained how each SOF constitutes a separate and distinct project.

Re: All the SOF’s are interlaced/ interconnected [Para 7-12 of the Ld. CHYDRVs submission] In paragraph 7 of the submission, Ld. CIT(DR) seeks to draw a distinction between the terms “services" and “project” and has contended that “the clause article 5(2)(1) not only covers services in a particular project but also connected projects. Thus, the plain reading of the article 5(2) (1) highlights that the scope of services covered under the clause are not limited to one project but also to connected project. Thus, that the 30 Telenor ASA services, similar or not, but of the same project and connected project need to be aggregated to check the total duration of the activity.”

Ld. CIT(DR), in paragraph 8 of the submissions, while accepting interpretation of OECD Commentary that - whether a project is “same” or “connected” has to be seen from the perspective of service provider, has arbitrarily disputed the application of this clause in appellant’s case on the ground that OECD does not make reference to a single project with a bouquet of interconnected services. As per the Ld. CIT(DR), in the present case the SOF’s represent a single project being entered under a single agreement for which a single invoice has been raised.

In paragraphs 9-12, the Ld. CIT(DR) has contended that all the SOFs are interconnected with each other.

Further, the said SOF’s, it is pertinent to note, were issued by UNINOR group from time to time based on its business needs and related to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various part of India. Each such SOF, it is pertinent to note, entailed distinct scope of activities, for which employees from different departments with different areas of expertise were deputed by the appellant.

It will be appreciated that UNINOR group had requisitioned services of different personnel of the appellant in relation to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various parts of India. It is respectfully submitted that each requisition by way of issuance of separate SOF had no commercial or geographical coherence with the other SOF issued by UNINOR, therefore, the period of stay of appellant’s employees under different and separate SOF’s cannot be aggregated to determine the 31 Telenor ASA period of stay for the purposes of Article 5(2)(1) of the India-Norway DTAA.

As regards the Ld. CIT(DR)’s contention that the SOF’s constitute single project owing to execution of a single Agreement and single invoice being raised by the appellant across the services of same project, please refer reply to S.No. (a) above.

The Ld. CIT(DR) has further contended that all the SOF’s are interlaced inasmuch as one SOF acts as feeder for the other, citing that marketing SOF’s cannot start till sourcing SOF is complete and similarly SOF of IT/IS activity cannot be initiated till SOF of marketing is complete. The Ld. CIT(DR) has further reiterated the submission that the activities carried out by the appellant are merely a mix of people, processes and technology which are integrated to finally shape up a single project.

It is respectfully submitted that the contention of the Ld. CIT (DR) that SOF’s are interlaced and one SOF acts as a feeder for the other is factually incorrect, as is clearly evident from the activity- wise details of visits made by the employees in India (refer Pages 103-107 of case law paper book). On perusal of the said details, it will kindly be appreciated that the activities were carried out simultaneously inasmuch as the dates of visit of appellant’s employees to execute the SOF’s issued for sourcing, marketing, IT/IS, and HR activities overlapped with each other. It is, therefore, clear that the appellant’s employees from different departments with different expertise areas of expertise were independently executing the work requisitioned by the UNINOR group.

Your Honour’s kind attention is also invited to clause 2 of the Agreement which clearly states that the appellant has been appointed as a non-

32 Telenor ASA exclusive service provider and that UNINOR group may, at its discretion, appoint any other service provider to provide the said services:

APPOINTMENT 2.1 Subject to the terms and conditions of this Agreement, UNINOR, hereby appoints the Service Provider and the Service Provider hereby accepts the said appointment as non-exclusive service provider for providing Services. 2.2 UNINOR may appoint any other service provider to provide the same/similar services at any of UNINOR locations at whatever terms it deems fit, at its sole discretion. However, such appointment does not free UNINOR for any of the obligations under this Agreement for Services already agreed under this Agreement by way of approval of Appendix A (Appendix 1) or Service Order Form as per the format given in Schedule I.

On perusal of the aforesaid, it will kindly be appreciated that the appellant was not an exclusive service provider and its services were availed by the UNINOR group only on need basis, for which separate SOF’s were issued by it from time to time. In that view of the matter, the appellant, by no stretch of imagination, be construed to be carrying out a consolidated project activity comprising of different services. In fact, the appellant appropriated the manpower and other resources for rendition of services as per distinct SOF’s, as and when issued.

At the cost of repetition, reference is again made to the OECD’s Model Tax Convention on Income and on Capital: Condensed Version 2017 wherein it has been clarified that the words “same” or “connected projects” should be interpreted from the perspective of the service provider and merely

33 Telenor ASA because services under different projects are provided to a single customer, the same should not be aggregated:

"161. The reference to an enterprise ... performing these services for the same project’’ should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project.

Reliance is also placed, in this regard, on the following decisions, wherein applying the aforesaid principle, it has been held that where different purchase orders / contracts were issued for various different activities, unless there is commercial coherence between the said activities, the duration test of six months has to be applied with reference to each activity.

- Sumitomo Corporation v. DCIT: 114 ITD 61 (Del IT AT) - Para 76 to 80 -affirmed by Delhi High Court in 382 ITR 75 (Delhi), against which Revenue’s SLP has been dismissed by the Supreme Court in 257 Taxman 554 - ADIT v. Krupp Uhde GmbH : (2008) 28 SOT 254 (Del ITAT) - ADIT v. Valentine (Mauritius) Ltd.: 130 TTJ 417 (Mum ITAT) - Valentine Maritime (Gulf) LLC vs. ACIT 45 SOT 359 (Mum ITAT) - DCIT vs. J. Ray McDerrmott Eastern Hemisphere Limited: (2012) 54 SOT 363 (Mum ITAT) - referred earlier order of the Tribunal for same assessment year reported in (2010) 39 SOT 240 - Kreuz Subsea Pte. Ltd. vs. DDIT: 69 SOT 368 (Mumbai ITAT)

34 Telenor ASA In the present case too, the activities carried out by the appellant in the capacity of a non-exclusive service provider to Unitech Wireless on need basis, cannot, in our respectful submission, be held to be interlaced/ have commercial coherence.

The appellant, had alternatively contended that even if the SOFs under each activity head, viz., (i) Sourcing Activities, (ii) Market Activities, (iii) Information technology/ Information system (IT/IS) Activities and (iv) HR Activities, were considered as part of the same activity or project, even then the number of days spent in India in aggregate during the relevant year under each such activity/ contract did not exceed the time threshold prescribed in Article 5(2)(1) of the Treaty [refer pages 103 to 107 of case law paper book].

Re: Attribution of Income [Para 13 of the Ld. CIT(DR)’s submission] With regard to the alternate contention of the appellant, w.r.t. attribution of income, the appellant, had submitted as under:

A. In terms of Explanation 1(a) to section 9(1)(i) of the Income-tax Act, 1961 (“the Act”) read with paragraph (1) of Article 7 of the India- Norway DTAA, only the income relating to the services actually rendered by appellant’s employees in India could be attributed to the alleged PE in India; B. Only the mark up of 3.5% of cost [as per Article 4.2 of the Agreement], which translates to 3.38% of revenues, could at best be considered as the income attributable to the revenues pertaining to the alleged PE in India; C. The assessing officer ought to have applied the global operating profit/ (loss) margin of the appellant to the revenues relatable to alleged

35 Telenor ASA PE, the same being a rational and accepted method of computing income of PE. Since the appellant has, in fact, incurred losses globally during the financial year 2009-10, there is no income attributable to the alleged PE in India on the above basis.

With regard to the submission in point (B) above, the Ld. CIT(DR) has reiterated the assessing officer’s stand that the appellant had failed to furnish documentary evidences in respect of incurrence of expenditure. It has further been alleged that since the cost is mainly on account of salary expenses of resources on delivery of services, therefore the appellant ought to have submitted evidence regarding payment of salary to such resources during the assessment proceedings.

In this regard, attention of the Hon’ble Bench is invited to invoices raised by the appellant and the specification sheet providing SOF wise breakup of the hourly and travel costs billed in the invoices raised by the appellant, along with mark-up charged thereon [refer pages 109 to 115 and 121 to 128 of the merit paper book]. Non-furnishing of evidence for actual payment of salary, it is submitted, is inconsequential inasmuch as the complete details of cost base along with mark-up have already been placed on record, which has not been disputed by the lower authorities.

Re: The decision of Delhi Bench of Tribunal in the case of Guardian International Corporation: (Del) 97 [Para 14 of the Ld. CIT(DR)’s submission] As per Article 13(5) of the India-Norway DTAA, income in the nature of, inter alia, Fees for Technical Services (“FTS”) would not be taxable under that Article and would instead be taxable under Article 7, if the payment made is “effectively connected” with a pre-existing Permanent Establishment of the foreign enterprise’ in India.

36 Telenor ASA The appellant, it its written submission, had drawn support from the decision of Delhi Bench of Tribunal in the case of Guardian International Corporation (supra) for the proposition that since the alleged PE of the appellant did not exist in India prior to the visit of personnel of appellant to India, the ‘fees for technical services’ cannot be said to be “effectively connected” to any pre-existing PH and hence the provisions of paragraph 5 of Article 13 have no application. In fact, the year under consideration is the first year of operation of the appellant in India. Consequently, subject payments are taxable @10% only, in terms of Article 13(2) of the Treaty. The Ld. CIT(DR) has, however, submitted that the aforesaid decision if distinguishable since it deals with provisions of India-USA DTAA, while the case of appellant requires application of India-Norway DTAA, particularly in respect of Article 5(2)(1).

It is, respectfully submitted that the language of Article 5(2)(1) of India- Norway DTAA, which relates to constitution of a service PE, has no relevance inasmuch as the decision of Guardian International Corporation (supra) was cited by the appellant in the context of taxation of FTS income in absence of a pre-existing PE. The language of relevant DTAA’s in this regard is reproduced herein below for ready reference:

India-Norway DTAA “ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES ……………..

India-USA DTAA “ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES ………..

In view thereof, it is respectfully submitted that the Ld. CIT(DR)’s contention that the decision of Guardian International Corporation (supra) is distinguishable merely on account of different underlying DTAA has no basis and liable to be rejected.

38 Telenor ASA Attention of the Hon'ble Bench is further invited to the decision of the Delhi High Court in the case of CIT v. Sumitomo Corporation: [2016] 382 ITR 75 (Delhi) [Revenue’s SLP was dismissed by the Supreme Court in 257 Taxman 554]. In that case, the assessee, a Japanese company, having various liason offices (LO) and project offices (PO) in India, received certain supervision fee from Maruti Udyog Ltd. (MUL) for supervising the installation of the machinery and equipment supplied to MUL which was not offered to tax on the ground that said supervisory activities did not constitute a Permanent Establishment (PE) in India. However, the assessing officer held that since the assessee had PE in India by way of PO & LO, even the supervision fee was taxable in India as business income, being attributable to the PE in India. The issue for consideration was whether the supervision fee being in the nature of FTS could be said to be effectively connected with the PE and thus brought to tax as business profits in India.

The High Court, after considering the language of Article 12(5) of the Indo-Japan DTAA [which is similarly worded as Article 13(5) of India- Norway DTAA], observed that the clause makes a distinction between those incomes which are the result of activities of the PE and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the PE. Accordingly, the Court held that only income which is connected with the activities of a pre-existing PE could be brought to tax as business profits, and therefore, supervision fee was not taxable as business profits in this case.”

39 Telenor ASA working of split time, commentary on Article 5 regarding PE and various case laws supported by both the parties.

40 Telenor ASA operator in India, we are delighted to have made such a strong start" augments the fact that there are only two entities involved UNINOR and Telenor, the assessee.

SOF 1: Sourcing Activities

• Preparation, execution and negotiation 2nd of round of GSM awards • Preparation, execution and negotiation of IT outsourcing contract.. • Preparation, execution and negotiation of IN contract award ...................... SOF 2: Market Activities

• Device strategy development .. • Product development .....................

41 Telenor ASA SOF 3: IT/IS Activities • IS/IT Solution, architecture and business scoping • Service Delivery platform solution and architecture .............

SOF 4: Network and IS/IT Activities • Benchmarking for IT outcourcing project; commercial workstream • Project support for IT outsourcing project; commercial workstream .............................. SOF 5: Project Officer Activities • Support and assist in completing contracts for GSM network and IT support systems - Update project plans - Milestone identification .................... SOF 6: 1) On-board and training project support - Advisor to local HR personnel - Induction day

2) Telenor way book-ordering and distribution - 150 copies ordered ..........................

SOF 7: IT/IS Activity • IS / IT solution, architecture and business scoping SOF 8: Planning / strategy workshop on regulatory and carrier issues

42 Telenor ASA • Time and travel cost for preparation and participation in workshop on strategy for various carrier and regulatory issues in Delhi / Noida / Gurgoan.

SOF 9:

1) Procurement — Structural / Tax support on contracts 2) Amalgamation - assessment of tax liabilities —stamp duty ......................

SOF 10: Sourcing Activities

• Execution and negotiations of 3rd round of GSM contract awards • Follow up of IT outsourcing contract ................................

SOF 11: Market Activities • Device strategy • CRM development and specification .................... SOF 12: IT / IS Activities • IS/ IT solution, architecture and business scoping • Revenue Assurance and Fraud Management SOF 13:

1) Security Support 2) Information security support SOF 15: Sourcing Activities • Support in establishing the distribution company 43 Telenor ASA SOF 16: Market Activities

• Product development • Distribution review .................. SOF 17: IT/IS Activities

• India 2G IS/IT • HUB SOF 18: HR Activities • Bonus Compensation

The reference to an “enterprise ... performing these services for the same project’’ should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project.

44 Telenor ASA “The reference to ‘connected projects’ is intended to cover cases where the services are provided in the context of separate projects carried on by an enterprise but these projects have a commercial coherence .The determination of whether projects are connected will depend on the facts and circumstances of each case but factors that would generally be relevant for that purpose include:

- Whether the projects are covered by a single master contract; - Where the projects are covered by different contracts, whether these different contracts were concluded with the same person or with related persons and whether the conclusion of the additional contracts would reasonable have been expected when concluding the first contract; - Whether the nature of the work involved under the different projects is the same; - Whether the same individuals are performing the services under the different projects.

Sub-paragraph b) requires that during the relevant periods, the enterprise is performing services through individuals who are performing such services in that other State. For that purpose, a period during which individuals are performing services means a period during which the services are actually provided, which would normally correspond to the working days of these individuals. An enterprise that agrees to keep personnel available in case a client needs the services of such personnel and charges the client standby charges for making such personnel available is performing services through the relevant individuals even though they are idle during the working days when they remain available”

Thus, based on the unified agreement, consolidated billing pattern, the activities being inter related as found in the preceedings paras, we hereby hold that the existence of the PE of the assessee is undeniable.

46 Telenor ASA ad-hoc disallowance of 60% of the revenues received by the assessee allowing only the 40% of the receipts as expenditure. The assessee argued that only the mark-up of 3.5% of the cost which translates to 3.38% of the revenues could at best be considered as the income attributable to the revenues pertaining to the PE in India. We are also in agreement with the assessee that the revenues raised out of the services rendered from Norway cannot be attributed to the PE of the assessee in India. The issue of determination of the profits is remanded back to the file of the Assessing Officer to pass an order by taking into consideration, the services rendered by the assessee from India and also from Norway, the evidence of the expenses incurred as submitted by the assessee.