SIEMENS COMMUNICATION SPA vs. DDIT, CIRCLE-2(2),,

This is a bunch of appeals filed by the assessee for Assessment Years 1998-99 to 2002-03. The Revenue has filed cross appeal for Assessment Year 1998-99. Since common issues are involved in all the above appeals pertaining to same assessee, these are being disposed off by this common order for the sake of convenience and brevity.

The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.

The appellant, M/s Siemens Mobile Communications [SMCS for short], is a company incorporated under the laws of Italy. The appellant was engaged in the business of manufacture and supply of microwave transmission equipment. During the years under consideration, SMCS supplied microwave transmission equipment (including both hardware and software components) to its customers in India, being independent telecom operators viz., BPL Mobile Communications Ltd., Usha Martin Telecom Ltd., Tata Communications Ltd., Modicom Network Pvt. Ltd. and

The quarrel is in respect of taxability of offshore supplies made by SMCS to the aforementioned telecom operators in India. The Revenue has taken the consistent position that some portion of the profit relating to these offshore supplies should be brought to tax in India. The basis for this position taken by the Revenue is the activities relating to installation, commissioning and maintenance, which would require the presence of SMCS in India and hence some portion of the profit would trigger taxability in India.

The Assessing Officer and the ld. DR have emphasized that unless these activities are completed, sale cannot be said to have been concluded.

On the other hand, the ld. counsel for the assessee has consistently taken a stand that no portion of the profits arising from offshore supplies are liable to be taxed in India. For this proposition, the ld. counsel for the assessee placed strong reliance on the decision of the Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. 288 ITR 408, though it was in context of the provisions of section 9(1)(i) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act']. Similar view was taken by the Hon’ble High Court of Delhi, in the case of Nortel Networks India International Inc. 386 ITR 353.

The entire quarrel can be summarized in the form of the following questions:

The Hon’ble Supreme Court in the case of Formula One World Championship Ltd. 394 ITR 80 and ADIT v. E-Funds IT Solution Inc. 399 ITR 34 has held that there triggers no taxability in respect of offshore supplies in the absence of a PE of the non-resident assessee in India. In so far as the attribution of profit is concerned, as enshrined in Article 7 of the DTAA, the same would be inapplicable in absence of any activity relating to the offshore supplies being carried out in India.

Interestingly, in 1998-99, the ld. CIT(A) has decided the issue involving the existence of a PE in favour of the appellant. However, in subsequent years, the successor ld. CIT(A) did not follow the order passed by his predecessor.

As mentioned elsewhere, the appellant has supplied items to independent telecom operators and such supplies have been made offshore. A perusal of the contracts with the telecom operators shows that supply was concluded with the title and risk in the components passing on to the concerned telecom operators offshore.

However, the ld. DR has analyzed the contracts in a Tabular Form as under:

It seems the ld. DR has misconstrued the relevant clauses of the contracts. Clause 15.1 of the agreement dated 26.02.1997 with BPL Mobile Communications Limited, exhibited at page no. 12 of paper book no. 1; clause 15.1 of the agreement dated 17.09.1997 with BPL Mobile Communications Limited, exhibited at page no. 71 of paper book no. 1; clause 5 of the agreement dated 26.11.1996, with Modicom Network Private Limited, Exhibited at page no. 138 of paper book no. 1; Annexure 2 of the agreement dated 01.08.1997 with Usha Martin Telecom Limited, Exhibited at page no. 352 of paper book no. 1; and clause 16 of the agreement dated 15.01.1998, with Tata Communication Limited, Exhibited at page no. 401 of paper book no. 1 show that supply was concluded with title and risk in the components passing on to the concerned telecom operators offshore.

The Revenue has placed reliance on the decision of the Hon'ble High Court of Andhra Pradesh in the case of M/s Larson and Toubro Ltd. v.

The ld. DR pointed out that the employees of the appellant were constantly visiting India for the purpose of negotiation and signing of contracts. The assessee failed to furnish the details of visit by such employees.

In this context, it would be relevant to understand the dates of signing of each such contracts, which can be understood from the following chart:

It can be seen from the above that all the contracts were signed in F.Y. 1997-98. Therefore, the allegation of the department on the existence of a PE should fall, because, if the expatriate employees were coming for negotiation and signing of contracts, these activities are not revenue generating activities and since no expatriate employees visited in the subsequent years, issue of fixed PE in any case would not arise. For this proposition, we draw support from the decision of the Hon’ble High Court of Delhi in the case of DIT v. Ericsson A.B., New Delhi [2012] 343 ITR 470.

It would be pertinent to understand the role of SPCNL. The appellant had entered into an agreement dated 01.10.1997 with its sister concern, SPCNL, where under SPCNL was required to carry out marketing and promotional activities; inform SMCS about the programs and plans of various public bodies, corporations or private entities; call for tenders; enable commercial, technical, administrative and legal support; etc. For these services rendered, SPCNL was remunerated on arm’s length basis.

On 01.10.1997, SPCNL also entered into independent contracts with the telecom operators in India for undertaking installation, testing and commissioning of the components supplied to them by the appellant. In addition to these activities, the scope of activities performed by SPCNL also encompassed manufacturing, sale and trading of a wide range of telecommunication equipment, such as switching equipment, optical transmission equipment, internet broadband equipment, etc. SPCNL entered into an agreement with BPL Mobile Communications on 2.6.1997 and with Tata Communication Ltd on 13.01.1998.

The Revenue has constantly repeated that installation, testing and commissioning, were performed either by the telecom operators themselves or by SPCNL. These certificates are placed at pages 1027- 1032 of paper book no. 4, stating that pre-network and pre-installation services as well as installation, testing and commission of the hardware components was done by SPCNL under independent contracts. In fact, the certificate issued by Usha Martin Telecom Limited, which is at page no. 1026 of paper book no. 4 states that pre-network and pre-installation services as well as installation, testing and commission of the hardware components was done by Usha Martin Telecom Limited itself.

It would not be out of place to mention here that SPCNL was separately being remunerated by the above telecom operators in India for the services rendered by it. In fact, in the contract between SPCNL and BPL Mobile Communications Limited, separate consideration for providing the installation and other services has specifically been provided for, which can be seem from clause 9 of the Service Contract, Exhibited at page no. 579 of paper book no. 2.

Moreover, the only allegation of the Assessing Officer is that the LO has assisted in the negotiation and signing of the contracts. We find that the Special Bench of the Tribunal in the case of Motorola Inc.96 TTJ 1 itself had held that an LO does not tantamount to existence of a PE in terms of Article 5 of the DTAA.

The ld. DR has placed strong reliance on the decision of the Tribunal in the case of Hitachi Hitech Technologies to 2688/DEL/2015 and pointed out that the Tribunal has held that the existence of the LO constituted a PE of Hitachi Hitech Technologies.

In our considered opinion, the decision in the case of Hitachi Hitech Technologies [supra] was delivered on different set of facts wherein pursuant to survey operation, certain facts were unearthed and on the basis of these facts, the Tribunal came to the conclusion that the LO constituted a PE of Hitachi Hitech Technologies. The case in hand is devoid of all those facts and hence the said decision of the Tribunal would do no good to the Revenue.

As mentioned elsewhere, the Revenue has strongly alleged that title in components passed to telecom operators in India onshore. SMCS had a significant role to play in the process of carrying out acceptance tests and the same was done by SPCNL on behalf of the appellant.

According to the ld. DR, it is not possible that any telecom operator entering into an arrangement with the appellant for supply of components would enter into an arrangement for installation with any other company. Therefore, engagement of SPCNL was dependent and conditional on supply of components by the appellant. These evidences clearly show that the appellant had local presence in the form of SPNCL in India.

Supporting the orders of the authorities below, the ld. DR stated that contracts involving high amounts, like in the present case, can be negotiated and concluded without any face to face interaction.

Referring to the execution of Power of Attorney (PoA) the ld. DR stated that the appellant has failed to substantiate why contracts could not be signed in Italy. It is the say of the ld. DR that the contracts were negotiated and signed in India itself.

As mentioned elsewhere, the ld. CIT(A) had set aside the assessment order for Assessment Year 1989-99 stating that supply of hardware could not be taxed in India in the absence of PE of the appellant in India. Despite this, the Assessing Officer at the time of passing of assessment orders for Assessment Years 1998-99 to 2002-03, simply disregarded the order passed by the appellate authority which was on identical set of facts. The ld. DR, in support of subsequent order stated that in Assessment Year 1998-99 there was no analysis done by the ld. CIT(A) in respect of contractual terms. This assertion by the ld. DR is ill-founded. A perusal of the order of the ld. CIT(A) for Assessment Year 1998-99 clearly shows that he had considered the contracts and had carefully scrutinized the same while holding in favour of the assessee.

Coming to the issue relating to Power of Attorney, facts on record show that the PoA dated 13.09.1997 was not executed for signing of contract dated 26.02.1997 entered into between SPNCL and BPL Mobile Communications. The contract dated 26.02.1997 was signed by Shri Binotti under a separate PoA dated 16.02.1997. This is evident from the contract dated 26.02.1997, exhibited at page no. 2 of paper book no. 1, for which the PoA was executed on 16.02.1997. The said PoA has also been exhibited at page no. 1014 of paper book no. 4. Contract dated 17.09.1997, at page no. 61 of paper book no. 1, PoA was executed on 15.11.1997. This PoA has also been exhibited at page no. 1018 of paper book no. 4. In our considered view, signing of the contract is merely putting signature on a paper and does not, in any manner, lead to an inference of PE or business connection.

As mentioned elsewhere, the Revenue has alleged that the appellant has failed to provide information with respect to employees who visited India during the subject AYs which precluded the Revenue to analyse whether the appellant has a PE in India. We have already pointed out the dates of execution of contracts from which it can be seen that almost all the contracts were signed in F.Y. 1997-98. Since all the contracts were entered into between 26.02.1997 and 15.01.1998, there was no occasion for any employee of the appellant to visit India thereafter.

A thorough understanding of the facts indicate that the role of the appellant was limited to mere supply of hardware components directly from Italy in such a manner that sales stood concluded, title transferred and consideration received outside India. Even the appellant was required to repair or replace faulty equipment during the warranty period. But for this, the telecom operator concerned was required to send the faulty equipment to the facility of the appellant in Italy.

It is pertinent to understand clearly that onshore income from onshore services, i.e., undertaking installation, testing and maintenance by SPCNL and income earned by SPCNL through performance of marketing and promotional activities for the appellant were voluntarily offered to tax in India.

Supporting the business connection of the appellant in India, the ld. DR pointed out that customs clearance, transportation, warehousing and storage facilities were provided by the appellant in respect of components, title in which already vested with the telecom operators in India. Facts on record show that these services were provided through independent Clearing & Forwarding Agents (C&F Agents), who were remunerated for the services rendered by them under separate contracts.

Considering the facts in totality, we have no hesitation to hold that no business connection can be said to have been established, and therefore, no further income can be attributed to India. Our view is supported by the Circular no. 23 dated 23.07.1969 issued by the Central Board of Direct Taxes, wherein it has been stated that no liability will arise to a non-resident where transaction of sale is on principal to principal basis since the transaction of supply of components by the appellant are on its own account, unaffected by the services to be rendered by SPCNL. This itself would take the transaction of supply of components outside the purview of section 9(1)(i) of the Act.

In so far as the issue relating to fixed place PE is concerned, the allegation is that supply of components is linked to a fixed place and also the activity of installation, commissioning and maintenance. In our understanding of the facts, since the offshore contract for supply of components cannot be read together with the onshore contract of rendering installation, commissioning and maintenance, and has to be seen in the light of the provisions of India- Italy DTAA and tests set out in the decision of the Hon'ble Supreme Court in the case of Formula [supra] and which are (a) Place of business (b) Disposal test and (c) Virtual projection.

Considering the facts on record, SPCNL should not be considered a fixed place from which business of the appellant was wholly or partly carried out. The business of SPCNL is not dependent on the appellant as the facts show the variance in the scope of activities nor it can be said that SPCNL is at the disposal of the appellant.

We will now address to the issue of installation PE. The allegation of the Assessing Officer is that since the appellant is engaged in the activity of manufacture and supply of components as well as had other obligations including delivery, acceptance test and installation, assembly or supervision on sites, which activities continued for over 6 months, the said activities constituted PE under the terms of Article 5(2)(j) of the India – Italy, DTAA.

As mentioned elsewhere, a perusal of the Supply Contracts between the appellant and the telecom operators in India will indicate that the role of the appellant was limited to mere supply of hardware components directly from Italy. The appellant was neither responsible for, nor undertakes installation, testing and commissioning, the same being the responsibility of the telecom operators themselves, who either undertook the same themselves or had the option of appointing SPCNL.

Considering these facts in the light of the Hon'ble High Court of Delhi in the case of Nortel Networks India International Inc., [supra], it can be said that there was no installation PE of the appellant.

This is in reference to Article 5(4) of the India – Italy, DTAA and the same would apply only when a non-resident is acting in India, through an agent, other than an agent of independent status on fulfilling the following conditions:

The Revenue has kept on alleging that SPCNL was controlled by the appellant but at the same time, nothing has been brought on record to evidence as to how the aforementioned conditions get satisfied so as to result in formation of DAPE of the appellant in India. In fact, and as mentioned elsewhere, one of the allegations of the Revenue was that the employees of the appellant frequently visited India for negotiations and signing of contracts which itself shows that SPCNL had no authority to conclude contracts.

As has been elaborately discussed elsewhere, obligation to carry out installation, commissioning and maintenance under the Services Contract was by way of separate contracts between SPCNL and the telecom operators. SPCNL cannot be regarded as DAPE of the appellant in India.

Contracts between the appellant and telecom operators show that the appellant was not even responsible for performing pre-network surveys or software updates. The appellant does not hold any equity capital in SPCNL and the sphere of activities performed by SPCNL was much broader than those envisaged under the agreement entered into between SMCS and SPCNL.

Assuming, yet not accepting that the installation activities were undertaken by SPCNL at the behest of the appellant, the same would still not render the income of the appellant to be taxable in India, since the supply of hardware components, i.e., the taxable activity, was completed before the installation activities.

The ld. DR had placed reliance on the decision of the co-ordinate bench in the case Daikin Industries Ltd., Gurgaon [2018 – TII- 165, which is distinguishable on facts, because in that case the Indian entity involved was identifying customers, approaching customers, negotiating prices, and finalizing products sold by it in the capacity of a distributor, as well by the non-resident entity therein. Moreover, in that case, the said Indian entity had failed to establish how it was economically and otherwise independent.

The ld. DR has relied on the decision of the Tribunal in the case of Shanghai Electronic Group Co. Ltd. [2010] 2010 – TIOL – 79 which is also distinguishable on facts as in that case, the non-resident entity also indulged in enabling supervisory services in respect of erection, testing and commissioning in addition to manufacturing boilers, turbine and generator equipments.

It was in this context that the offshore contract pertaining to supply of equipments and the onshore contract pertaining to provision of services were inextricably linked. In addition to this, there was a clear finding that contracts were negotiated and concluded by a team of persons in India, which fact finding is missing in the case in hand.

The issue of chargeability of interest u/s 234B of the Act on the facts of the case in hand has been decided by the Hon'ble High Court of Delhi in favour of the assessee in the case of GE Packaged Power Inc. 373 1TR 65, wherein it has been held that no interest under section 234B of the Act can be levied on the assessee-payee on the ground of non- payment of advance tax because the obligation was upon the payer to deduct the tax at source before making remittances to them. The relevant extracts of the decision are reproduced hereunder:

Considering the facts of the case in totality, the issues mentioned at para 7 hereinabove, are decided in favour of the assessee and against the revenue. Meaning thereby, that all the appeals by the assessee are allowed and that of the revenue is dismissed.

The solitary grievance of the assessee is that the ld. CIT(A) erred in taxing income from supply of software to Indian parties as income of the appellant.

The quarrel is in respect of consideration received by the assessee from offshore supply of hardware components which imbibed the supply of software. The assessee was asked to show cause as to why its income or consideration received by it for licencing to use software should not be taxed as royalty.

The assessee made a detailed submission claiming that it has actually sold only copyrighted article. This contention of the assessee did not find any favour with the Assessing Officer who was of the firm belief that what has been charged as consideration is licensing fees for right to use software. According to the Assessing Officer, what has been transferred is not software itself but the right to use the software.

The Assessing Officer further observed that the assessee is receiving consideration for licensing use of such software and thus the consideration received is taxable as ‘royalty’ within the definition of ‘Royalty’ under Article 13 of the DTAA. The Assessing Officer further observed that the computer software supplied by the assessee contains information concerning commercial use of the software. The software contains facilities such as, call waiting, call divert, voice mail, billing, short messages, fax, conference and numerous other features which are being used by the cellular operators for commercially exploiting the service provided.

Drawing support from the definition given to Explanation 2 to section 9(1)(vi) of ‘Royalty’, the Assessing Officer formed a belief that the scope of definition is much wider in its ambit than the definition given in DTAA.

The Assessing Officer finally concluded by holding that this royalty has not been accrued to the assessee through PE as per para 5 of Article 13 of DTAA but the Royalties have been received directly from Indian customers to whom the assessee has granted the licence to use the software. Therefore, such royalty is not taxable as business income of the assessee as per Article 7 of the DTAA. Rather, it is taxable under Article 13 of the DTAA. The Assessing Officer, accordingly, computed the liability of the assessee as under:

The assessee carried the matter before the ld. CIT(A) but without any success.

Before us, the ld. counsel for the assessee, at the very outset, stated that the impugned issue is directly covered in favour of the assessee and against the revenue by the decision of the Hon'ble High Court of Delhi in the case of ZTE Corporation 392 ITR 80.

The ld. DR could not bring any distinguishing decision in favour of the Revenue.

We have given thoughtful consideration to the orders of the authorities below and have also considered the decision of the Hon'ble High Court of Delhi [supra]. We find force in the contention of the ld. counsel for the assessee. Similar issue was considered and decided by the Hon'ble High Court of Delhi [supra]. The relevant findings of the Hon'ble High Court read as under:

Respectfully following the findings of the Hon'ble High Court [supra] we direct the Assessing Officer to delete the impugned addition.

In the result, all the appeals of the assessee, viz., [A.Y 1998-1999] - Allowed ITA No. 3147/DEL/2003 [A.Y 1999-2000] - Allowed ITA No. 3148/DEL/2009 [A.Y 2000-2001] - Allowed ITA No. 3149/DEL/2009 [A.Y 2001-2002] - Allowed ITA No. 3150/DEL/2009 [A.Y 2002-2003] - Allowed And appeal of the Revenue in ITA No. 3012/DEL/2003 [A.Y 1998-1999] - Dismissed