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Income Tax Appellate Tribunal, DELHI BENCH ‘D’: NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’: NEW DELHI (Through Video Conferencing) BEFORE, SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER I.T.A No.1930/Del/2020 (ASSESSMENT YEAR 2017-18)
M/s ZTE Corporation Dy. CIT ZTE Plaza Keji Road South (International Hi-Tech Industrial Park, Vs. Taxation), Nanshan District, Gurgaon. Shenzhen, P R China. PAN-AAACZ 4115A (Appellant) (Respondent)
SA No.364/Del/2020 (Arising out of ITA No.1930/Del/2020) (ASSESSMENT YEAR 2017-18)
M/s ZTE Corporation Dy. CIT 6th Floor, (International RMZ Infinity Tower, Vs. Taxation), Plot No.15, Udyog Vihar, Gurgaon. Phase-IV, Gurgaon (Haryana) PAN-AAACZ 4115A (Appellant) (Respondent)
2 ITA Nos.1930 & 1474 /Del/2020 ITA No.8185/Del/2019 SA No.364/Del/2020 & CO No.07/Del/2021 ZTE Corporation vs. DCIT & Ors.
I.T.A No.8185/Del/2019 (ASSESSMENT YEAR 2016-17) Dy. CIT M/s ZTE Corporation (International ZTE Plaza Keji Road South Taxation), Vs. Hi-Tech Industrial Park, Circle Gurugram. Nanshan District, Shenzhen, P R China. PAN-AAACZ 4115A (Appellant) (Respondent)
C.O. No.07/Del/2021 (Arising out of ITA No.8185/Del/2019) (ASSESSMENT YEAR 2016-17) M/s ZTE Corporation Dy. CIT ZTE Plaza Keji Road South (International Hi-Tech Industrial Park, Vs. Taxation), Nanshan District, Gurgaon Shenzhen, P R China. PAN-AAACZ 4115A (Cross Objector) (Respondent)
I.T.A No.1474/Del/2020 (ASSESSMENT YEAR 2016-17)
M/s ZTE Corporation Jt. CIT (OSD), ZTE Plaza Keji Road South (International Hi-Tech Industrial Park, Vs. Taxation), Nanshan District, Circle Gurugram Shenzhen, P R China. PAN-AAACZ 4115A (Appellant) (Respondent)
3 ITA Nos.1930 & 1474 /Del/2020 ITA No.8185/Del/2019 SA No.364/Del/2020 & CO No.07/Del/2021 ZTE Corporation vs. DCIT & Ors.
Appellant By Sh. Harpreet Ajmani, Adv. Mrs. Ananya Kapoor, Adv. Sh. Rohan Khare, Adv. Respondent by Dr. Prabha Kant, CIT-DR Date of Hearing 25.05.2021 Date of Pronouncement 30.06.2021
ORDER PER SUDHANSHU SRIVASTAVA, JM: 1. Assessee and Department have filed cross-appeals for
Assessment Year 2016-17, ITA No. 1474/Del/2020 is the
appeal of the Assesseeand ITA No. 8185/Del/2019 is the appeal
of the Department against the order dated 20.08.2019in Appeal
No. 10239/2018-19passed by the Commissioner of Income Tax
(Appeals).Also, in the said Department's Appeal for Assessment
Year 2016-17, C.O. No. 7/Del/2021 has been filed by the
Assessee. Whereas, ITA No.1930/Del/2020 is the Assessee's
appeal against the final assessment order dated 06.11.2020
passed in pursuance to the directions of the Ld. Dispute
Resolution Panel ("DRP") vide directions dated 14.09.2020for
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the Assessment Year 2017-18. Since these appeals and cross-
objection pertain to same Assessee involving common
grievances and were heard together, we are disposing them off
by this common order for the sake of convenience and brevity.
The Assessee has also filed stay application for assessment year
2017-18.
The brief facts of the case are that the assessee company is a
tax resident of Republic of China and is engaged in the
business of providing telecom solutions. It provides a wide array
of telecommunications product line in the world, covering
vertical sector or wireless networks, core networks, access &
bearer networks, services and terminals markets. During the
assessment year/s ("A.Y.") 2016-17 and 2017-18, the assessee
was engaged in supply of telecommunication equipment –
Network Equipment, Terminal Equipment (Handsets) and
Software to Indian telecom operators. Whereas, the Indian
subsidiary of the assessee, i.e., ZTE Telecom India Private
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Limited, was engaged in installation, commissioning and testing
of the equipment in India which are supplied by the assessee.
In both the years under consideration, i.e., A.Y. 2016-17 and
A.Y. 2017-18, show-cause notice was issued by the Assessing
Officer whilst relying on survey under section 133A of the
Income Tax Act, 1961 (“Act”) conducted on 06.10.2009,in the
office premises of ZTE Telecom India Private Limited [at 6th
Floor, Tower-B, Building No. 10 Phase-II, Gurgaon, Haryana
and in New Mumbai, Thane]. As per the Assessing Officer,
during the course of survey proceedings, several incriminating
documents were found and inventorised. Statements of various
senior executives were also recorded. The said documents lead
the assessing officer/s to believe that the assessee has a
business connection in India and the business has been carried
out through its Permanent Establishment in India. During the
relevant year/s also, Assessing Officer relied on the survey
proceedings and earlier year/s assessment orders for A.Y.
2004-05 to A.Y. 2015-16.
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Since all the appeals and cross objection pertain to the same
Assessee involving common grievances, we will adjudicate the
same together.
At the very outset, we note that there is a delay of 274 days in
filing of appeal by the Assessee for AY 2016-17. The Assessee
had preferred an application for condonation of delay wherein it
has been stated that the order of the CIT (A) dated 20.08.2019
was received by the Assessee on the communication address on
09.09.2019. In Paragraph 11 and 12 of the application for
condonation of delay it is submitted that immediately after
getting the information regarding the order being passed by the
CIT(A), the assessee decided to file an appeal before the
Tribunal and designated Mr. Cheng Yu Xiang, an authorised
signatory to coordinate in drafting and filing of appeal in India.
Mr. Cheng earlier had visited India for facilitating in follow-up
with clients on outstanding payments. Owing to visa related
issues, travel of Mr. Cheng was delayed and he could visit India
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only on 11.11.2019. After visiting India, on account of prior
commitments due to facilitating in follow-up on outstanding
payments, Mr. Cheng inadvertently missed to take necessary
steps for filing the appeal and he also did not inform the other
concerned persons regarding non-filing of the appeal.
Thereafter, Mr. Cheng left India on 09.12.2019. Subsequently,
Mr. Cheng visited India between 15.12.2019 to 29.12.2019
however, even during this period he inadvertently missed to
take necessary steps for filing of appeal and also did not
informthe other concerned persons in this regard. Thereafter,
Mr. Cheng was relocated and sent on deputation to Vietnam.
Afterwards, owing to the unprecedented outbreak of the
pandemic in China, follow up of the appeal could not happen
and it was only once the legal department of the assessee was
updating the status of the pending litigation was when the said
omissionin filing appeal was discovered. The Ld. AR has argued
that the delay in filing of appeal is bona fide and the issues in
question have continuously been agitated by the Assessee
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before various forums including the Hon'ble High Court of Delhi
for the preceding years viz. A.Y. 2004-05 to A.Y. 2015-16, where
on the issue of attribution, substantial question of law has also
been framed in assessee's appeal/s and are pending
consideration. It is argued that there was no question of not
preferring an appeal for AY 2016-17, had it not been for the
inadvertent error. The Assessee has also furnished an affidavit
along with the application for condonation of delay to the same
effect.
Our attention was also drawn to Paragraph 14 of the
application for condonation of delay wherein reliance has been
placed on order dated 23.03.2020 passed by the Hon'ble
Supreme Court in suo moto W.P. (C) No. 3 of 2020, whilst
acknowledging these unprecedented times in exercise of its
jurisdiction under Article 142 read with Article 141 of the
Constitution of India, on its own motion had extended all
statutory limitations for filing before Court / Tribunal w.e.f.
15.03.2020.While referring to section 253(5) of the Act and the
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decision of Hon'ble Supreme Court in Collector, Land
acquisition, Anantnag v Mst. Katiji, (1987) 2 SCC 107. The Ld.
AR submitted that in the present facts sufficient cause has
been explained to condone the bona fide delay.
Alternatively, the Ld. AR argued that the assessee has also
preferred cross-objections in Department's appeal for A.Y.
2016-17, which is in line with the grounds agitated in the
Assessee's appeal and thus, considering that the cross-
objections have been filed within limitation, even otherwise the
matter requires adjudication on merits.
On the other hand, the Ld. DR has opposed the condonation of
delay and adjudication of appeal for AY 2016-17 on merits.
We have heard the submissions of both the parties and are of
the considered opinion that there is a bona fide justification for
the delay in filing appeal and no contrary material has been
brought on record by the Department to refute that the
averments in the condonation application which is supported
by an affidavit are false, thus, to advance substantial justice
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the delay in filing of Assessee's appeal for AY 2016-17 is
condoned. We even find force in the alternative submission of
the Ld. AR that the cross-objections involve identical grounds
as the appeal and either ways the matter requires consideration
on merits. A bona fide litigant should not suffer merely on
account of an inadvertent omission on the part of its employee
/ agent. Our view is fortified by the decision of Hon'ble Supreme
Court in Collector, Land acquisition, Anantnag v Mst. Katiji,
(1987) 2 SCC 107wherein the guidelines to be considered for
'condonation of delay' has been succinctly explained by
observing as follows:
"3. ….The expression “sufficient cause” employed by the legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice — that being the life-purpose for the existence of the institution of courts. It is common knowledge that this Court has been making a justifiably liberal approach in matters instituted in this Court. But the message does not appear to have percolated down to all the other courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that:
“1. Ordinarily a litigant does not stand to benefit by lodging an appeal late.
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Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties. 3. “Every day's delay must be explained” does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational common sense pragmatic manner. 4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. 5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact he runs a serious risk. 6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so."
As we have condoned the delay in filing of appeal for AY 2016-
17, to avoid duplication, the cross-objection filed by the
Assessee in Department's appeal on identical grounds is treated
as academic and disposed off accordingly.
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Having held the above, we now embark on the merits of the
matter and take up appeals for AY 2016-17 and AY 2017-18.
The first common grievance in Assessee’s appeal for AY 2016-
17 (Ground No. 1 to 4) and Assessee's appeal for AY 2017-18
(Ground No. 1 to 7) relates to the existence of Permanent
Establishment ("PE")of the assessee in India.
At the very outset, the Ld. AR submitted that he has
instructions from his client to submit that to avoid protracted
litigation the grounds of appeal dealing with the profusely
litigated issue of existence of a PE are not pressed. Whereas,
the Ld. DR has relied on the orders of the lower authorities.
We note that a similar concession was given by Assessee before
the Tribunal in the preceding years i.e. AY 2004-05 to AY 2009-
10 as well as AY 2010-11 to AY 2015-16. The co-ordinate bench
in Assessee's own case in ITA No. 2805/Del/2016 [AY 2010-
11]at Paragraph 4 and 5 incommon judgment dated 15.02.2019
for AY 2010-11 to AY 2015-16 has recorded that:-
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"4. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below qua the issue. We find that in assessment years 2004- 05 to 2009-10, when this issue was agitated before the Tribunal, the Tribunal in ITA No. 5870/DEL/2012 at para 13 of its order observed as under:
“At the time of hearing Ld. Counsel of the Assessee submitted that he has instructions from his clients that the dispute between the Assessee and the department may be settled, and therefore on the most contentious issue regarding existence of PE in India,he has instructions not to press the same.”
This ground was accordingly not considered by the Tribunal in earlier assessment years. Since during the captioned assessment years before us the ld. counsel for the assessee has made a similar concession and on such concession, we decline to dwell into this issue."
Hence, respectfully following the co-ordinate bench, we too
decline to dwell into this issue of existence of PE and the
relevant grounds are disposed off accordingly.
The next issue raised in Assessee's appeal for AY 2016-17
[Grounds no. 5 to 10] and Assessee’s appeal for AY 2017-18
[Ground No. 8 to 12] relates to the attribution of profit.
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The Ld.AR submitted that the activities relatable to India and
rate of attribution to be applied in relation to such activities
undertaken has been adjudicated by this Hon'ble Tribunal in
Assessee's own case vide common judgment for AY 2004-05 to
AY 2009-10 and AY 2010-11 to AY 2015-16. He further
submitted that the Department has accepted the said
decision/s of Tribunal and accordingly, on this issue, no
further appeal has been filed before the High Court on either
the issue of activities identified or the method / rate of
attribution to be applied qua such activities. In this regard, he
submitted that the final assessment order/s for AY 2016-17
and AY 2017-18 are consistent with the order of Tribunal and
attribution rate of 35% has been applied.
The Ld. AR drew our attention to Para 50 of the common
judgment dated 30.05.2016 for AY 2004-05 to AY 2009-10 in
Assessee's own case, wherein whilst considering the level of
operations carried out by the Assessee through its PE in India it
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was concluded that almost entire sales functions including
marketing, banking and after sales were carried out by the PE
in India. He argued that in terms of the available judicial
precedents none of the activities identified in relation to the PE
are revenue generating and thus, no portion of income qua
such activities ought to be taxed in India. He also argued that
the activities identified by the Assessing Officer viz. negotiation
or place of signing of contract or formal acceptance of contract
or general supervision being undertaken by the Assessee are
irrelevant factors, as these are merely incidental in nature.
When the main business of the Assessee is different, the
incidental activities which are only to aid and support the main
activity would fall under exclusionary clause of DTAA (India-
China) being preparatory and auxiliary in character. He further
argued that considering that the transaction/s between the
Assessee and its Indian subsidiary i.e., ZTE Telecom India
Private Limited have already been subjected to transfer pricing,
no further attribution is justified.
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Alternatively, on a without prejudice basis the Ld. AR also
argued that considering the activities identified in relation to
the PE, the rate of attribution of 35% is far too high and ought
to have been restricted to attribution rate of 20% as originally
applied by the Assessing Officer during AY 2004-05 to AY 2008-
09 or a lesser rate in terms of the activities being subsequently
restricted by the Tribunal, which is also in line with the
available judicial precedents. He argued that in the common
judgment dated 30.05.2016 for AY 2004-05 to AY 2009-10,
much emphasis has been placed on decision of co-ordinate
Bench in the case of Nortel Networks India International Inc.
judgment dated 13.06.2014 in ITA nos. 1119, 1120 &
1121/2010(assessee’s appeals) & ITA nos. 1153, 1154 &
1155/Del/2010 (department’s appeal), wherein attribution rate
of 50% was applied. However, considering that now the said
decision of Tribunal in Nortel Networks (supra) has been
overruled by the Hon'ble Delhi High Court in Nortel Networks
India International Inc. v. DIT (2016) 69 taxmann.com 47
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(Delhi), thus, even on this basis the higher rate of attribution is
not justified.
The Ld. AR submitted that for the AY 2017-18 the Department
has applied operating profitability of 2.41% as against the net
global operating profitability of (-1.91)% as mandated by the
Tribunal in Assessee's own case vide common judgment for AY
2004-05 to AY 2009-10 and AY 2010-11 to AY 2015-16.
At this juncture, the Ld. AR fairly submitted that the legal issue
on attribution of profit is sub-judice before the Hon'ble Delhi
High Court in Assessee's appeal for AY 2004-05 to AY 2015-16,
wherein the following substantial questions of law have been
framed vide order dated 18.08.2017 in ITA No. 297 to 302 for
AY 2004-05 to AY 2009-10 (subsequently, similar order/s were
passed for AY 2010-11 to AY 2015-16):
"3. Having heard learned counsel for the parties, the following questions of law are framed for determination: (i) Even assuming that the Assessee has a Permanent Establishment (‘PE’) in India, could any income be attributed to such PE on account of offshore supplies? (ii) If the answer to the question (i) above is in the affirmative what should be the rate of attribution?
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(iii) Is the Assessee entitled to adjustment of the expenses already incurred by it by way of payment to the Indian entity for marketing services?
For the AY 2009-10, the following additional question is framed:- Was the AO justified in adopting a different rate of attribution contrary to Article 7 of the Indo-China DTAA?"
Per contra, the Ld. DR emphatically relied on the orders passed
by the lower authorities.
Having heard the parties at length, we notice that the
coordinate Bench vide a detailed common judgment dated
30.05.2016 for AY 2004-05 to AY 2009-10 has adjudicated the
issue of attribution of profit and observed as follows:
"24. The issue of attribution of profits depends on the facts in particular case and is fully dependent on the level of operations of the activities carried out in India. This is evident from Article 7 of DTAA and Explanation 1 to clause (i) of section 9(1). Facts in two cases cannot be identical. The AO had attributed only 20% (from AYs. 2004-05 to 2008-09) of the operating profit as per the global financial statement submitted by the assessee. This implies that 20% of the profits were generated on account of involvement of PE in the revenue generating structure and the 80% profit accrued in the resident state. However, for AY 2009-10, the AO has attributed 45% of the operating profit. Considering the
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different modes adopted by AO and ld. CIT (A), it becomes necessary to examine the level of operation carried out by PE in India so as to arrive at reasonable percentage of profit to be attributed to PE in India. XXXXX 46. From the aforementioned discussion it is evident that each case has to be considered on its own merits, depending upon the level of operations carried out by PE in India. In the present case we have earlier reproduced paras 6.2.2 and 7.2.3 from ld. CIT(A)’s order and also findings from AO’s order for AY 2009-10 which give a clear picture of the level operations carried out by ZTE India, the assessee’s PE. Ld. CIT(A) has pointed out that ZTE India is doing preparatory work, negotiating the contract and price and answering specified queries of the customers on behalf of the assessee. These are all vital functions which are revenue generating. The AO in AY 2009-10, as noted earlier, has elaborated in detail the functions carried out by PE in connection with sale in India. At the cost of repetition, we reproduce the same:- “Activities performed by PE, summarized by AO as under, - Supervision and control of projects in India by MD of ZTE India - Meetings at Tendering/ Pre Bid stage in India - Preparation of Bidding Documents in India - Signing and submissions of bids in India - Price and contract negotiations in India - Preparation of draft agreements and MOUs in India - Signing of agreement in India - Entering contracts in India - Obtaining Purchase Orders/ other supply orders on behalf of ZTE China
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- LC opening and supply of equipments/ handsets - Shipment of equipments/ handsets - Customs clearances - Transportation and delivery - Installation and commissioning - Supervision of installation and commissioning - Technical support services - Quality assurances - After sales services and replacement - Concluding agreements and MOUs on behalf of ZTE China - Performance Guarantee of the .company- ZTE - Coordination with Government Departments - negotiation at Government level - Decisions regarding partnership with other concerns/ marketing. - Foreign Investments in India - Taxation matters of ZTE China - Marketing Functions - Banking Functions - Visiting customers and vendors
In the case of Motorola (supra), Tribunal has referred to the decision in the case of Ahmadbhai Umarbhai (supra), wherein it has been held that income attributable to the manufacturing activity should be more than the income attributable to the activity of sale. Therefore, out of the total global income of assessee relatable to the supplies made to India more income is to be attributed to the assessee as accruing in China and from sale activity, it is not to that extent. We find that ld. CIT (A) has adopted the reasoning in the case of Alcatel Lucent. In this decision ld. CIT (A) himself
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noted that assessee had accepted and not contested in appeal attribution @ 2.5% of total sales revenue. Therefore, this decision, considered by ld. CIT (A), cannot be the basis for arriving at the conclusion that 2.5% of entire sales revenue should be attributable to Indian PE, which is primarily as per Rule 10(1) methodology provided. We are not inclined to accept this plea of ld. CIT (DR). Therefore, in our opinion, attribution is to be done as per Rule 10(2) of the IT Rules. 48. Ld. counsel has endeavoured to distinguish the decision in the case of Rolls Royce PLC by referring to absence of identical Article 7(3) of India UK DTAA being present in India China DTAA. In our opinion, this is not of much significance because it only considers the involvement of assessee’s representatives in negotiations. We have to consider the overall operations carried out by PE in India. Mere involvement of expatriates in the activities of PE for assisting the Indian team cannot substantially affect the revenue generating capacity of PE. 49. The decision in the case of M/s Nortel Networks India International Inc.( ITA nos. 119 to 121/Del/2010 and 1153 to 1155/Del/2010 order dated13.6.2014), the Tribunal in para 14.4 has noted that in assessee’s case hardware supply contract was a part of the turnkey contract which involved supply, Installation, testing and commissioning etc. as is in the present case. Activities of M/s Nortel India and that of LO of Nortel Canada and services of expatriate workers had also been taken as part of the execution of the work by the PE. Thus, the level of operation carried out in India were extensive and under such circumstances Tribunal
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had attributed 50% of the net profit arising out of Indian transactions as assessee’s income. 50. Having discussed the entire case law and after considering the factual aspects, we find that the level of operations carried out by assessee through its PE in India are considerable enough to conclude that almost entire sales functions including marketing, banking and after sales were carried out by PE in India and, therefore, keeping in view the decision of Hon’ble Supreme Court in the case of Ahmedbhai Umarbhai & Co. (supra), the decision of Rolls Royce (supra) and Nortel Networks India International Inc. (supra), we are of the opinion that it would meet the ends of justice if 35% of net global profits as per published accounts out of transactions of assessee with India are attributed to PE in India in respect of both hardware and software supplied by assessee to Indian customers. At this juncture we may point out that while deciding the department’s appeal in subsequent part of this order, we have upheld the findings of ld. CIT (A) to tax the income from sale of software as business income and not royalty. We may point out that in AY 2009-10 the AO estimated the operating profits at 7.5% as against the weighted average of net operating profit at 2.53% as per the global accounts. We are not inclined to accept this mode of computation resorted by AO, particularly in view of Rule 10 of the IT Rules, which mandates the AO to go by the published accounts of assessee. In the result assessee’s ground no. 6 in AY 2009-10 stands allowed. We may further clarify that our decision does not amount to enhancement of income because overall tax effect will be less as compared to tax computed by AO/CIT (A).
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Now we proceed to decide the assessee’s submission that since for AY 2006-07 (Rs. 20,56,87,472/-), 2007-08 )Rs. 17,10,23,750/-)and for AY 2008-09 (Rs. 2,38,84,545), the assessee had paid marketing support services, therefore, no attribution should be made. The submission is that TPO in the case of ZTE India has accepted that the payment for market support service is at arm’s length and, therefore, in view of the decision of Hon’ble Supreme Court in the case of DITVs. Morgan Stanley 292 ITR 416, since the assessee had been remunerated on an arm’s length basis, no further profit could be attributed. We are unable to accept this plea of ld. counsel of the assessee because it is only after the survey operations were carried out that extensive involvement of PE came to light."
We also note that the decision of Tribunal in Assessee's own
case for AY 2004-05 to AY 2009-10 has been followed in
subsequent years i.e., AY 2010-11 to AY 2015-16 vide common
judgment dated 15.02.2019. Now considering that there is no
material change in facts and the legal issue on attribution of
profit is already sub-judice in Assessee's appeal before High
Court, whilst respectfully following the decision of co-ordinate
Bench in earlier years we dispose off the grounds raised in
Assessee's appeal for AY 2016-17 and AY 2017-18.
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However, it has been brought to our attention that in AY 2017-
18, the Assessing Officer has taken the “operating profitability”
instead of the "net-operating profitability" as per published
accounts. In view of the decision as rendered in the preceding
years, we direct the Assessing Officer to take the "net-operating
profitability" as per published accounts whilst calculating the
attribution.
The other issue raised in Department's Appeal for AY 2016-17
[Ground No. 1 to 3] and Assessee’s appeal for AY 2017-18
[Ground No. 15 to 17]is regarding the taxability of income from
supply of software as Royalty.
The Ld. AR submitted that this issue is covered in favour of
Assessee and against the Department vide common judgment
dated 30.05.2016 for Assessment Year 2004-05 to AY 2009-10
and common judgment dated 15.02.2019 for Assessment Year
2010-11 to AY 2015-16. He also drew our attention to the fact
that Department's appeal on this issue has been dismissed by
25 ITA Nos.1930 & 1474 /Del/2020 ITA No.8185/Del/2019 SA No.364/Del/2020 & CO No.07/Del/2021 ZTE Corporation vs. DCIT & Ors.
the Hon'ble Delhi High Court for AY 2004-05 to AY 2015-16. He
further submitted that though Department's petition's
challenging judgment of Hon'ble Delhi High Court is sub-judice
before the Hon'ble Supreme Court, however, recently in the
case of Engineering Analysis Centre of Excellence Private
Limited v. CIT (2021 SCC On Line SC 159) the ratio laid down
by the High Court in the case of Assessee has been expressly
approved. Alternatively, he also argued that considering that
the sale of software was inextricably linked with the hardware
and assuming that there exists a permanent establishment of
the Assessee in India, than such income from sale of software
could not be taxed as 'Royalty' in terms of the exclusion carved
out under Article 12(5) of the India-China DTAA and thus, even
such income from sale of software would be taxable as
"Business Profits" in terms of Article 7 of the India-China DTAA.
The Ld. DR relied on the orders passed by the lower authorities
for AY 2016-17 and AY 2017-18.
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We have heard the parties at length. We note that the co-
ordinate Bench in Assessee's own case for AY 2004-05 to AY
2009-10 vide common judgment dated 30.05.2016 had decided
the issue in favour of Assessee whilst observing as follows:
"73. We have considered the submissions of both the parties and have perused the record of the case. We find that in the case of Alcatel Lucent, France Tribunal in para 12,13& 14 it has been held as under: “12. We have carefully considered the arguments of both the sides and perused relevant material placed before us. We find that learned CIT(A) allowed the relief to the assessee following the decision of ITAT in assessee's own case for AY 1997-98 in ITA No.407/Del/200l. The ITAT had delivered the above decision following the decision of Special Bench of ITAT in the case of Motorola Inc. (supra). We find at Hon'ble jurisdictional High Court upheld the decision of ITAT of Special Bench in the case of Motorola Inc. (supra) in the case of DIT Vs. Ericsson A.B. (supra). In the appeal by the Revenue, question No.3 pre posed before the Hon'ble Jurisdictional High Court and admitted by their Lordships reads as under.- "Whether in law, the learned Delhi Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and, hence, was not assessable both under section 9(1)(vi) of the Double Taxation Avoidance Agreement between the Government of India and Sweden?"
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That the Hon'ble Jurisdictional High Court, after detailed discussions which are at pages 474 to 506 of the ITR 343, answered the question in favour of the assessee and against the Revenue. 14. The Revenue had also filed the appeal against the decision of ITAT in assessee's own case which is decided by their Lordships alongwith various other cases including the case of M/s Nokia Networks, In this case also, the question NO.3 proposed by the Revenue and admitted by their Lordships reads as under:- "Whether any part of the consideration for supply of software stated by the respondent to be integral to the equipment is taxable as 'royalty' either under section 9(1)(vi) or the relevant provisions of the Double Taxation Avoidance Agreement?" After detailed discussion, their Lordships answered the question in favour of the assessee and against the Revenue. Since the issue is squarely covered by the decision of Hon'ble Jurisdictional High Court in the case of the assessee as well as in the case of Ericsson A.B. (supra). respectfully following the same, we uphold the order of learned CIT(A) in this regard and reject ground No.2 of the Revenue's appeal.” 74. Respectfully following the decision of Hon’ble Jurisdictional High Court, as noted by Tribunal, ground nos. 2 & 3 are rejected."
Thereafter, the Department agitated the said judgment dated
30.05.2016 passed by the Tribunal in Assessee's own case for
AY 2004-05 to AY 2009-10 before the High Court. The Hon'ble
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Delhi High Court vide judgment dated 24.01.2017 passed in
ITA No. 904 to 909 of 2016 for AY 2004-05 to AY 2009-
10[(2017) 77 taxmann.com 304 (Delhi)] dismissed the appeal of
the Department by observing as follows:
"5. The assessee had contended before the AO that the software embedded in the telecom equipment or provided to the customers separately, or software supplied to the various customers in India should not be treated as royalty under Section 9(1)(vi) of the Act and also under Article 12(3) of the DTAA. The assessee had argued that: (a) Software is sold in the same manner as telecom equipment, (b) The software is an integral part of the telecom equipment, which facilitates running of the said equipment. (c) The subject software has no independent value of its own. (d) No copyrights in the software are transferred to the customers. (e) No access to the "source codes" in the software is granted to the customer. (f) Payment for software is not related to the productivity, use or number of subscribers. (g) Customers do not have the right to commercially exploit the software. (h) Software supply is in the nature of transfer of copyrighted article and not transfer of "a copyrighted right". 6. The assessee also relied on the definition of "copyright" under Section 14 of the Indian Copyright Act, 1957. It also relied on the decision of Delhi Special Bench Tribunal in
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Motorola Inc. v. Dy. CIT [2005] 95 ITD 269/147 Taxman 39 (Mag.) (Delhi) (SB). It was therefore stated that the receipts from sale of computer software is in the nature of payment for the use of copyrighted article as against payment for use of a copyright in the software and hence such payment shall not constitute royalty under IndiaChina tax treaty. 7. The AO also referred to the decision of the Authority for Advance Ruling in Worley Parsons Pty. Ltd., In re [2009] 312 ITR 273/179 Taxman 347 for the proposition that the payments for software should be taxed on case basis, since the same were not effectively connected to the PE of the assessee in India. The assessee in its reply distinguished this decision on facts and pointed out that AAR held so since no material evidence was placed by the assessee to demonstrate the role played by the PE under the PMS contract and its relationship with the royalty revenue earned under the BE & P contract. It was pointed out that the applicant before the ruling was not able to demonstrate 'effective connection' between the BE & P revenue and PE under the PMS contract. The AO rejected these contentions. 8. Aggrieved by the AO's order, the assessee appealed to the CIT (A). The appellate commissioner accepted the assessee's contentions and found as follows: (i) Assessee had fixed place PE and dependent agency PE in India. However, he did not accept the AO's plea as regards installation PE in India. (ii) On the issue of taxation of software embedded in telecom equipment mobile handsets, CIT (A) held it to be taxable as business profit. (iii) As regards the computation of profits attributable to PE, the CIT(A) held that 2.5% of total sales made by foreign
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company in India was to be attributed as business profits of PE (including the value of software). (iv) The CIT (A) also directed the AO to delete the interest levied under Section 234B.
XXXX
The misconception that the revenue harbors stems from its flawed appreciation of a copyright license. True, "copyright" is not defined; yet what works are capable of copyright protection is spelt out in the Copyright Act. Sections 13 and 14 of the Copyright Act flesh out the essential ingredients that make copyright a property right. More particularly, Section 14 states as follows: '14. Meaning of copyright For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely :— (a) In the case of a literary, dramatic or musical work not being a computer programme— (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work;
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(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in subclauses(i) to (vi) (b) In the case of a computer programme,— (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. (c) In the case of an artistic work,— (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in subclauses(i) to (iv); (d) In the case of a cinematograph film— (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public (e) In the case of a sound recording— (i) to make any other sound recording embodying it;
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(ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) To communicate the sound recording to the public Explanation - For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation." Thus, Section 14 categorically provides that copyright "means the exclusive right to do or authorizing the doing of any of the acts mentioned in Section 14(a) to (e) or any substantial part thereof. The content of copyright in respect of computer programmes is spelt out in Section 14(b). A joint reading of the controlling provisions of the earlier part of Section 14 with clause (b) implies that in the case of computer programs, copyright would mean the doing or authorizing the doing in respect of work (i.e. the programme) or any substantial part thereof — (b) In the case of a computer programme, — (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where theprogramme itself is not the essential object of the rental.' 21. The reference to clauses (a) and (b) means that all the rights which are in literary works i.e. "(i) toreproduce the work in any material form including the storing of it in any medium by electronic means;(ii)to issue copies of the work to the public not being copies already in circulation;(iii) to perform the work in public, or communicate it to the public;(iv) to make any cinematograph film or sound
33 ITA Nos.1930 & 1474 /Del/2020 ITA No.8185/Del/2019 SA No.364/Del/2020 & CO No.07/Del/2021 ZTE Corporation vs. DCIT & Ors.
recording in respect of the work;(v) to make any translation of the work;(vi) to make any adaptation of the work;(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in subclauses(I) to (vi)" inhere in the owner of copyright of a computer programme. Therefore, the copyright owner's rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods significantly enough, Section 14(1) talks of sale or rental of a "copy". The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign it, divesting itself of the title implying that it has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under Section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as "copyright". 22. In the present case, the facts are closely similar to Ericson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separate invoicing was done for purchase and other transactions did not imply that it was royalty payment. In such cases, the nomenclature (of license or some other fee) is
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indeterminate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee's customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities; moreover, even in Ericson A.B. (supra), a similar provision existed in the DTAA between India and Sweden."
We also note that the Hon'ble Supreme Court in Engineering
Analysis Centre of Excellence Private Limited v. CIT (2021 SCC
On Line SC 159) at Para 118 of the judgments has quoted Para
20 to 22 of the said judgment dated 24.01.2017 passed by the
Hon'ble Delhi High Court in Assessee's case and thereafter
observed as follows:
"119. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who
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becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the
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enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Collector of Customs, (2000) 1 SCC 727 (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. 120. Consequently, the view contained in the determinations of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft (supra),ZTE (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India's DTAAs are based."
We also note that the subsequent appeals for AY 2010-11 to
2015-16 preferred by the Department on the issue of Software
have also been dismissed by the Hon’ble High Court.
Respectfully following the decision of the co-ordinate Bench as
approved by the jurisdictional High Court, we rule in favour of
the Assessee. We also agree with the alternate argument of the
Assessee that since the sale of software is inextricably linked
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with sale of software than the provision of Article 12(5) of the
India-China DTAA would be applicable and such income from
supply of software could be taxed only as business profits in
terms of Article 7 of the India-China DTAA.
No other grounds have been pressed before us in respect to
Appeals for AY 2016-17 and AY 2017-18 and the same are
disposed off accordingly.
In the final result, the appeal of the Assessee for AY 2016-17
and AY 2017-18 are partly allowed as indicated above.
Whereas, the appeal of the Revenue and cross-objection of the
Assessee for AY 2016-17 are dismissed as indicated above. Stay
Application No. 364/Del/2020 is dismissed as in fructuous.
Order pronounced on 30th June, 2021 [ Sd/- Sd/- (ANIL CHATURVEDI) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:30/06/2021 *dragon*
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