ALLCATEL USA SOURCING LP ( INCLUDED IN ALCATEL-LUCENT USA INC.),MUMBAI vs. ADDL DIT (IT) RG 1, MUMBAI

आदेश / O R D E R

PER C.N. PRASAD, JM:

These four appeals are filed by different assessees of same group against the orders of the Dispute Resolution Panel, Mumbai pertaining to assessment years 2006-07 to 2008-09. Since issues are common in all these appeals they were clubbed and heard together and disposed off by this common order for the sake of convenience.

2. The assessee has raised following grounds in its appeal:

3 M/s. Alcatel USA Sourcing LP

2. On the facts and in the circumstances of the case and in law the Learned AO and the Learned DRP have erred in holding the receipts of USD 2.54 million from Axes India Technologies Private Limited (hereinafter referred to as "Axes") as taxable in India.

3. On the facts and in the circumstances of the case and in law the Learned AO and the Learned DRP have erred in concluding that the assessee has a permanent establishment (hereinafter referred to as "PE"') in India as per Article 5(1) and 5(2)(1) of the DTAA.

4. On the facts and in the circumstances of the case and in law the Learned AO and the Learned DRP have erred in holding that the entire revenues of USD 2.54 million received from Axes are attributable to the PE in India and taxable as business income in India.

5. On the facts and in the circumstances of the case and in law the Learned AO and the Learned DRP have erred in holding that in the event the assessee does not have a PE in India, the said income is taxable under the head capital gains without appreciating the fact that the nature of income is not dependent on an Appellant having a PE in India.

6. On the facts and in the circumstances of the case and in law the Learned AO and the Learned DRP has erred levying interest under section 234B of the Act”.

4 M/s. Alcatel USA Sourcing LP declaring total income at Nil. In the notes enclosed to the computation to income alongwith return, the assessee stated that it had two revenue streams for this year namely revenue from remote call-in technical support services and revenue from the amendment in development agreement. The case was selected for scrutiny and the assessment was completed u/s. 143(3) r.w. section 144C(13) of the I.T. Act.

4.1. While completing the assessment, the Assessing Officer treated Rs. 5,41,06,933/- (USD 12,02,048) received by the assessee from M/s. Alcatel India Ltd., now known as Alcatel South Asia Ltd., (ASAL) for providing remote call-in technical support services as royalty under Article 12(3) of the Double Taxation Avoidance Agreement (DTAA) between India and USA. In the course of assessment proceedings, the Assessing Officer required the assessee to explain in detail the nature of the Remote call-in technical support services and why the amount of Rs. 5,41,06,933/- received by the assessee should not be subjected to tax as fees for included services under Article (12) of the India USA treaty. The assessee by letters dated 29.7.2008 and 8.10.2009 submitted that during the year under consideration, it had provided remote call-in technical support services to ASAL in respect of hardware and software. The services were remotely provided by via telephone, e-mail and remote login to the systems and therefore no technical knowledge or know how was passed on/provided to ASAL during the rendering of services. The assessee further submitted that there was no formal agreement between the assessee and ASAL for the provision of the said remote call-in support services. The services were provided on the basis of the purchase orders raised by ASAL to avail the remote call-in technical

5 M/s. Alcatel USA Sourcing LP support services. It was also submitted that the said support services include services rendered in relation to support and maintenance of hardware and software viz., bug fixing, support services during outages and critical service impacting events, root cause analysis of repeated faults, resolving technically complex issues etc. It was submitted that these services are from high-end technical and support services provided by the assessee remotely from the United State of America. No technical details of these aforesaid services have been provided to ASAL to enable ASAL to perform the services on its own. Therefore, it was submitted by the assessee that the income earned from the provision of remote call-in support services would not be liable to tax in India under provisions of Article 12 of the India-US tax treaty.

4.2. However, the Assessing Officer without appreciating the submissions and on examining and analyzing the purchase order dated 11.4.2005 and description mentioned therein, came to the conclusion that there is no mention about the services rendered and the transaction is characterized as imports and therefore he was of the view that assessee failed to clarify many aspects of the transaction. The Assessing Officer on looking from the website and collecting data from the website, he concluded that the description given in the invoice i.e. Mobile Core HLR CTAC is nothing but technical support rendered to provide access and to use central database, for the Network connectivity and process, and as a result of which certain services were also provided and the transaction is part of a global network transaction of the assessee group. Therefore, the Assessing Officer was of the view that the payment received by the assessee is for the use of design, process and for information

6 M/s. Alcatel USA Sourcing LP concerning industrial, commercial and scientific experience and for scientific equipment and therefore fall within the purview of Royalties defined in Article 12(3)(a) & (b) of Indo-USA Treaty. Therefore, he concluded that services rendered are for ancillary and subsidiary to the application for enjoyment of the right, property or information and hence fall within the purview of Article 12(4)(a) of India-US Treaty and accordingly an amount of Rs. 5,41,06,933/- was subjected to tax as royalties and fees for technical services as per Article 12(3) and Article 12(4)(a) of the India-USA treaty and completed the assessment accordingly.

5. The assessee filed objections before the DRP raising various contentions namely the services are rendered from remote area from US, they are not technical services, they are provided through telephone, e-mail and remote login system. The assessee does not make available any technical knowledge to ASAL to enable them to apply the same in the future. The assessee does not provide any training to ASAL in respect of the services provided by it. The assessee does not provide ASAL with any step by step resolution manual or procedural documentation to enable ASAL to apply the said knowledge with or without the assistance of the assessee. The ASAL is not enabled to perform the services on its own without any assistance/recourse to the assessee since the technology is not transferred/provided by the assessee and therefore the services rendered by the assessee to ASAL do not qualify as fees for included services as per the India-USA tax treaty. Thus the same are not subject to tax under Article-12 of the India-USA tax treaty. The DRP without appreciating the submissions and the various contentions raised by the assessee concluded that the services provided by the 7 M/s. Alcatel USA Sourcing LP assessee are squarely covered under Article 12(4)(a) of India-USA treaty and therefore to be treated as fees for included services.

7. The Ld. Departmental Representative places reliance on the orders of the authorities below.

“This objection concerns the addition of Rs. 5,41,06,933/- as royalty and fees for technical services made by the Assessing Officer as per Art.12(3) and Art.12(4)(a) of the India-USA Treaty. During the A.Y. 2006- 07, the assessee, a Tax Resident of USA earned revenue from Alcatel India Ltd. (now known as AlcateJ South Asia Ltd.) in respect of remote call-in-technical support services rendered by the assessee. The assessee's claim is that the services rendered by it did not make in any technical knowledge, experience, skill, know-how of process to 9 M/s. Alcatel USA Sourcing LP Alcatel India and hence, the receipts from Alcatel India are not taxable as fee for included services under Art. 12 of the India-US Treaty. It was also contended by the assessee that since it did not have a Permanent Establishment (PE) in India, the revenue earned by it in respect of remote call-in- technical support services was not liable to tax in India. There is admittedly no formal agreement between the assessee and Alcatel India for the provision of these services. The services are provided on the basis of purchase order raised by Alcatel India to avail the remote call-in- technical support services from the assessee. The detailed description of the services rendered by the assessee are given on page nos. 5 & 6 of the assessment order. Looking to the facts of the case, it is clear that services provided are squarely covered under Art. 12(4)(a) of the India US Treaty and are accordingly to be treated as fees for included services. In view of this, the objection of the assessee is dismissed.”

Therefore, in our considered view this issue has to be examined thoroughly by the DRP with reference to various objections of the assessee filed before him. Thus, we set aside the order of the DRP and restore this issue to the file of the DRP who shall decide afresh in accordance with law after providing adequate opportunity of being heard to the assessee.

9. The second issue in the appeal of the assessee is challenging the order of the DRP in holding that the receipts of Rs. 11,43,00,000/-(USD 2.54 million) from Axes India Technologies Pvt. Ltd (Axes) is taxable in India as business profits and further erred in holding that in the event the assessee does not have a PE in India, the income is taxable under the head capital gains without appreciating the fact that the nature of income is not dependent on an assessee having a PE in India.

10 M/s. Alcatel USA Sourcing LP 9.1. Brief facts are that the assessee entered into agreement on 1.4.2004 titled as Development Agreement and according to this agreement, the assessee received/availed certain services from Axes Technologies India Pvt. Ltd., (Axes). During the year under consideration Axes was acquired by Mahindra British Telecom now Tech Mahindra Ltd., and assessee entered into an amendment agreement with the then Axes. The assessee received Rs. 11,43,00,000/- (2.54 million US$) towards the discount due for the huge volume of past business provided by the assessee to Axes and for the extension of the term of the Development Agreement. This amount was treated by the Assessing Officer as business income of the assessee liable to be taxed in India on the ground that assessee has PE in India. In the alternate, the Assessing Officer held that in the absence of PE in India, the said amount is liable to be taxed under the head capital gains.

11 M/s. Alcatel USA Sourcing LP iv) The amendment/alternations to the rights granted under the Development Agreement are merely incidental to the business of the assessee. v) The assessee was not refrained from carrying on any business activities with Axes.

Therefore, in view of the above submissions and considering the fact that assessee does not have any PE in India for the year under consideration, the aforesaid amount is not liable to be taxed in India under Article-7 r.w. Article -5 of the India-USA Tax Treaty. Without prejudice to the above, even assuming but not accepting that the aforesaid amount is on capital account, it would not be liable to tax in India, as there is no transfer of capital asset and it does not fall within the extended meaning of income under section 2(24) of the I.T. Act. It was further contended that even for the sake of argument where the aforesaid amount is representing the consideration for transfer of capital asset, the same would again not be liable to tax under the head capital gains since the computation machinery provisions under the Act fails and thus the capital gains if any would not be taxable in India. Without appreciating the submissions of the assessee, the DRP held that the assets were imported by the assessee and the assessee has PE in India since it had equipment located in the premises of Axes for the purpose of its business is established, therefore, the DRP concluded that there is a PE in India in terms of para-5.1 and 5.2(1) of the Indo-USA DTAA. The DRP further observed that the entire receipt of the assessee is from allowing access of the network to its client and mobile network users and therefore, it is true that they upheld the action of the Assessing Officer in bringing to tax to the said amount under the head business

12 M/s. Alcatel USA Sourcing LP income. The DRP also upheld the alternate plea of the Assessing Officer that even if it is held that there is no PE, the said amount is liable to be taxed under the head capital gain for the reason that the income from the transfer of these rights of assets shall constitute income liable to tax under section 28 r.w. Article-7 of the India- US Treaty.

11.1. The Ld. Counsel for the assessee further submits that Axes is using its own equipment supplied by the assessee for their business on loan basis. The Ld. Counsel for the assessee submits that Article 5(2) will not apply to the situation of the assessee. He further

13 M/s. Alcatel USA Sourcing LP submits that provisions of Sec. 55(2A) also cannot be invoked since Axes is not transferring any rights of their business to the assessee. He further submits that the provisions of Sec. 28(4) cannot be applied referring to the decision of the Bombay High Court in the case of Mahindra And Mahindra Ltd. vs Commissioner Of Income-Tax (261 ITR 501). He submits that cash payment cannot fall under benefit as defined u/s. 28 of the Act. He further submits that if equipment is leased, these is no permanent establishment as held by the Mumbai Bench in the case of DDIT Vs Nederlandsche Overzee Baggermaatsehappiji bv (39 SOT 56). He further submits that `the DRP has not dealt with various submissions of the assessee and it is not known as to how the DRP came to the conclusion that the entire receipt of the assessee is from allowing access of the network to its client and mobile network uses. The Ld. Counsel for the assessee submits that Alcatel has no telecom network at all. Therefore he submits that the DRP’s conclusions are based on surmises and conjectures and not based on facts and assessee do not know as to where from such information was gathered by the DRP before coming to such conclusion. He submits that this information was not put to the assessee.

14 M/s. Alcatel USA Sourcing LP that DRP has not considered the elaborate submissions made by the assessee which are as under:

2.1. Grounds of objection Ground 3 - On the facts and in the circumstances of the case and in law the Learned AO has erred in proposing to conclude that the assessee establishes a permanent establishment ('PE') in India under the various clauses of the development agreement dated April 1, 2004. Ground 4 - On the facts and in the circumstances of the case and in law the Learned AO has erred in proposing to consider that in light of the PE being established in India, the revenues received of USD 2.54 million from Axes India Technologies Private Limited ('Axes') are taxable as business income. 2.2. FACTS SUBMITIED TO THE AO 2.5.1 Axes had performed certain services in connection with telecom products for Alcatel for more than ten years. Over the years, the assessee gave significant business to Axes. In view of the past business relationship, the assessee and Axes entered into a business agreement on April 1, 2004 titled as Development Agreement. Vide the said Development Agreement, the assessee was to receive/avail of certain services from Axes. Further, Axes also assumed certain obligations to the assessee under the said Development Agreement. 2.5.2 During the year under consideration, Axes was acquired by Mahindra British Telecom (now known as ''Tech Mahindra Limited ) and the assessee entered into an Amendment Agreement dated November 28, 2005 with Axes. Further, the parties mutually confirmed their understanding in respect of the said Agreement vide letter dated September 30, 2006. All the aforesaid agreements/letter were submitted alongwith the return of income as well as during the course of assessment proceedings. Copies of the same are enclosed at Page Nos. 79 to 116. 2.5.3 The assessee submitted that the amount of USD 2.54 million (which was received by the assessee on June 14, 2006) is towards the discount due for the huge volume of past business provided by the assessee to Axes and for the extension of the term of the Development Agreement. 2.5.4 The assessee further submitted that it was in recipient of or used to avail of certain services from Axes. The assessee was required to make payments to Axes towards the same. The relationship between Axes and the assessee was not that generated any 'income' or was a source of income' for the assessee. On the contrary, it resulted in an 15 M/s. Alcatel USA Sourcing LP outflow/payment for the assessee in the ordinary course of its business. Thus, as the payments for services under the Development/Amendment Agreement is 'revenue' in nature, likewise, any amounts received by the assessee from Axes under the aforesaid Amendment Agreement would also partake to be 'revenue' in nature.

2.3. FACTS MODIFIED BY THE AO 2.3.1 The Learned AO has mentioned that no convincing reply was submitted by the assessee for providing the basis of the working for arriving at the consideration of USD 2.54 million.

2.3.2 The Learned AO has observed that under the development agreement, the assessee exercised control over Axes.

2.3.3 The Learned AO has observed that the assessee had carried on its business activities through the machinery given to Axes in the form of 'loaned equipments'.

2.3.4 The Learned AO has observed that the assessee failed to substantiate its claim with reference to the amendment agreement, under which the amount was received by it.

DO YOU WHOLLY AGREE WITH THE MODIFICATIONS IN THE FACTS BY THE AO. IF NOT, GIVE REASONS POINTING THE SPECIFIC FACT OR FACTS WITH WHICH YOU DO NOT AGREE ALONG WITH THE REASONS AND DOCUMENTARY EVIDCENCE, IF ANY.

2.4.1. The assessee submits that a detailed working of how the discount computation was made alongwith the basis and references to the agreement were submitted to the Assessing Officer during the course of assessment proceedings in as much as so that the entire working was explained to the Assessing Officer during the course of the proceedings. A copy of the submissions dt. November, 26, 2009 is enclosed at pager Nos. 117 to 121.

2.4.2 The assessee submits that under the Development Agreement it availed services of Axes. While in form the Development Agreement provides that Axes was entrusted with the obligation of deployment of fixed assets, personnel, etc in fact, the same were to be compliant with the business standards agreed upon between the assessee and Axes. The same fact has been further supplemented by way of the response sought by the Learned AO from Axes/Tech Mahindra. In response to the query so raised by the Learned AO, requiring a list of fixed assets and personnels deployed for rendering services to the assessee, Axes/Tech Mahindra submitted that no separate list of fixed assets and personnels was maintained by Axes/Tech Mahindra, rendering services to the assessee. Hence, it can be understood that services provided to 16 M/s. Alcatel USA Sourcing LP the assessee were a part of routine business activities ofAxis/Tech Mahindra and hence, no evidence was placed on record by the Learned AO to suggest that any form of control was exercised by the assessee. Hence, the contention of the Learned AO is not tenable.

2.4.3 The assessee submits that the loaned equipments were actually consigned to Axes to enable Axes to provide requisite services to the assessee. These equipments were used as test equipments for ensuring effective provision of services. The assessee submits that these equipments were not utilised to generate any income or carry out any business activities of the assessee in India and hence, the same-cannot be considered to establish a PE for the assessee in India. Further, the Learned AO has also not established or substantiated how and what business activities are carried on by the assessee in India through the loaned equipments and merely based on his own conjectures and surmises concluded that the loaned equipments constitute a PE in India.

2.4.4 The assessee submits that as per the request of the Learned AO, necessary details in respect of the computation of the consideration of USD 2.54 million as well as the taxability of the same were submitted during the course of assessment proceedings. Also, all the necessary explanations as required with reference to the said amount as well as the amendment agreement were made to the Learned AO. Copies of the submissions are enclosed at Page Nos. 117 to 121. Accordingly, the assessee does not agree that it failed to substantiate its claim with reference to the amendment agreement.

2.5. LEGAL ARGUMENTS SUBMITTED TO ASSESSING OFFICER 2.5.1. The assessee submitted that the aforesaid amount of USD 2.54 million due to it is was revenue in nature and in the absence of any PE in India, the same was not liable to be taxed in India. 2.5.2 To support the above contention, reliance was placed on the following judicial precedents – • CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC)

In this case, the Apex Court has held that it is well-settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities, and that made for compensation of termination of income producing asset. The former does not lose its revenue nature, but the latter being a payment for destruction of a capital asset, must be considered as capital receipt.

• Asst. CIT v. Hinditron Services P Ltd. [2006] 99 ITD 479 (Mum)

In the instant case, the jurisdictional Mumbai Tribunal, based on the decisions of the Supreme Court and High Court, laid the following 17 M/s. Alcatel USA Sourcing LP principles for considering that the compensation received on the termination/cancellation of the agreement is a revenue receipt:

"1. When a payment is made to compensate a person for cancellation of contract which does not affect the trading structure of the recipient's business nor deprive the assessee from source of income, then termination of contract is only a normal incidence of business.

3. A source of income may be a capital structure of one assessee. But where the assessee is dealing in several such sources/assets then it becomes a stock-in-trade. Loss of one such source/asset will be a loss of capital if the assessee is dealing only in one but will be revenue if it is dealing in many such sources/assets as stock-in-trade.

4. When assessee is dealing in several agencies, loss of one such agency will be incidental to the carrying on of the business in agencies. Where there is a modification in the terms of anyone of such agencies, it will against be a normal incidence of business.

6. Compensation paid for agreeing to refrain from carrying on business in the commodities in respect of the agency terminated for loss of goodwill is prima facie, of the nature of capital receipt.

8. When assessee is not disposed of any asset, then amount received cannot be regarded as compensation in respect of loss of an enduring asset.

• CIT v. Rai Bahadur Jairam Valji (35 ITR 148) (SC) The Supreme Court has held that if it was found that a contract was entered into the ordinary course of business, any compensation

18 M/s. Alcatel USA Sourcing LP received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. (Emphasis supplied by us)

• Kettlewell Bullen and Co. Ltd. v. CIT (53 ITR 261) (SC):

The Supreme Court has held that where payment is made to compensate a person for cancellation of a contract, which does not affect the trading structure of his business or does not deprive him of what in substance is his source of income, termination of contract being a normal incident to the business, and such cancellation leaves him free to carry on his trade (freed from contract terminated), the receipt is revenue; whereby the cancellation of an agency is impaired, or such cancellation results in loss of what may be regarded as source of the assessee's income or involves loss of enduring assets, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.

This principle has been further confirmed by the Supreme Court in the case of Oberoi Hotels Pvt. Ltd. v. CIT [1999] 236 ITR 903 (SC).

2.5.3 Relying on the facts of the case and the principles laid down in the various judicial precedents (cited above), the assessee submitted that the aforesaid amount of USD 2.54 million is 'revenue' in nature for the following reasons:

* The aforesaid agreement is only a business arrangement.

*. The profitability of the assessee is not affected by (or a source of income is not lost as a result of) the Amendment Agreement as the assessee continues to avail the services of Axes after executing the Amendment Agreement.

* The Amendment Agreement was executed with a view to extend the term of the Development Agreement.

* The amendment/alterations to the rights granted under the Development Agreement are merely incidental to the business of the assessee.

* The assessee was not refrained from carrying on any business activities with Axes 2.5.4. In light of the above submissions and considering the fact that the assessee does not have any PE in India for the year under consideration, the aforesaid amount is not liable to tax in India under Article 7 read with Article 5 of the India-USA tax treaty.

2.5.5 Without prejudice to the above paras and even assuming but not accepting that the aforesaid amount is on capital account, it would not 19 M/s. Alcatel USA Sourcing LP be liable to tax in India as there is no transfer of capital asset and it does not fall within the extended meaning of income under section 2(24) of the Act. )

2.5.6 Further, without prejudice and for the sake of argument, where the aforesaid amount is representing consideration for transfer of capital asset (which it is not), the same would again not be liable to tax under the head Capital Gains, since the computation machinery provisions under the Act fails and thus, the capital gains, if any, would not be taxable in India 2.6. CASE LAWS RELIED UPON BY THE ASSESSEE • CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) • Asst. CIT v. Hinditron Services P Ltd. [2006] 99 ITD 479 (Mum) • CIT v. Rai Bahadur Jairam Valji (35 ITR 148) (SC) • Kettlewell Bullen and Co. Ltd. v. CIT (53 ITR 261) (SC)\ • Oberoi Hotels Pvt. Ltd. v. CIT [1999] 236 ITR 903 (SC)

2.7. LEGAL ARGUMENTS RELIED UPON BY AO 2.7.1 The assessee carried on its business activities in India through the machinery given to Axes in the form of 'loaned equipments' and hence, such equipments located in the premises of Axes, for the purposes of the business of the assessee, constituted a PE for the assessee in India.

2.7.2 The Learned AO observed that the assessee had released all its rights and claims under schedule 3.1 of the Development Agreement and in consideration of such release, it agreed to receive the payments of USD 2.54 million. The assessee had exclusive premises in the form of Alcatel division for its business activities. The assessee exercised managerial, economic and other control over Axes. Thus, the assessee had a PE in India.

2.7.3 The Learned AO observed that as the consideration was received for waiving of all the rights under Schedule 3.1 of the Development Agreement, the said consideration is not in the nature of discount.

2.7.4 In light of the PE being constituted in India, the said consideration of USD 2.54 million (about Rs.11 ,43,00,000) is taxable as business income in the hands of the assessee india 2.8. CASE LAWS RELIED UPON BY THE LEARNED AO 2.9. ANY ADDITIONAL NEW CASE LAWS WHICH THE ASSESSEE MAY LIKE TO RELY UPON 2.10. FACTUAL & LEGAL ARGUMENTS AGAINST THE ADDITION PROPOSED BY THE AO

20 M/s. Alcatel USA Sourcing LP 2.10.1. Axes had performed certain development services in connection with telecom products for Alcatel for more than ten years. Over the years, the assessee gave significant business to Axes. In view of the past business relationship, the assessee and Axes entered into a business agreement on April 1, 2004 titled as Development Agreement. Vide the said Development Agreement, the assessee was to receive/avail of certain services from Axes. Further, Axes also assumed certain obligations to the assessee under the said Development Agreement.

2.10.2 During the year under consideration, Axes was acquired by Mahindra British Telecom (now known as "Tech Mahindra Limited") and the assessee entered into an Amendment Agreement with Axes. Further, the parties mutually confirmed their understanding in respect of the said Agreement vide letter dated September 30, 2006. All the aforesaid agreements/letter were submitted to the Learned AO at the time of assessment proceedings (a ccpy of the said agreements/letter was also filed alongwith the return of income).

2.10.3 The assessee submits that consideration of USD 2.54 million is towards the discount due for the huge volume of business provided by the assessee in the past and for the extension of the development agreement. Copy of the debit note evidencing the same is enclosed at Page No. 122.

2.10.4 As per para 3.1 (a) of Article III of the said Development Agreement, during each year of the three years term of the said Agreement, the assessee committed to Axes that it would give Axes India a significant volume of business to Axes, so long as Axes (a) was in compliance with the Agreement, (b) remained price competitive when compared to similar services made available by publicly traded telecom contract developers, and (c) continued to meet quality/delivery requirements.

2.10.5 Further, as per the said Development Agreement, the assessee has supplied loaned equipments to Axes. These equipments were actually consigned to Axes to enable Axes to provide requisite services to the assessee. These loaned equipments were used as test equipments for ensuring effective provision of services to the assessee. The assessee submits that these loaned equipments were sent back to the assessee from time to time. The assessee also submits that no business of the assessee was carried out in India through the use of such equipments and the same was merely used to provide the services to the assessee.

2.10.6 Further, the assessee submits that vide the said Development Agreement, certain obligations as per Schedule 3.1 were casted on Axes as regards deployment of fixed assets, personnel, etc by Axes in rendering services under the said agreement to the assessee, which are described hereunder.

2.10.6.1 The services to be rendered by Axes India were to be segregated into a separate division within Axes. The assessee submits

21 M/s. Alcatel USA Sourcing LP that the said division belonged to and was the property of Axes and was not owned by the assessee.

2.10.6.2 Axes was required to provide to the assessee a list of asset and personnel deployed in the said division. The assessee submits that the primary objective of these details were to ensure that appropriate level of assets and personnel were deployed by Axes India while rendering services to the assessee. However, while, in form, this information was required as per the Development Agreement, in fact, no such information was furnished. This is also evident from the fact that Axes/Tech Mahindra, in response to the query raised by the Learned AO in respect of the said details, has replied stating that the details of fixed assets and personnels were not maintained division- wise and hence, could not be submitted to the Learned AO. Copy of the submissions filed by Axes/Tech Mahindra in response to the notice issued under 133(6) of the Act is enclosed at Page Nos. 123 to 163.

2.10.6.3 Further, the assessee submits the it had a right to appoint Mr. Hubert de Pesquidoux and Mr. Michel Rahier on the management board of the said division owned by Axes. This was intended only to ensure appropriate commitment and delivery of services by Axes to the assessee. The assessee further submits that neither Mr. Hubert nor Mr. Michel visited India to attend any_board meetings of the division of Axes.

2.10.6.4. The assessee, inter alia, also had an option to buy the above said division at a price as to be determined in the Development Agreement. The assessee submits that it did not exercise the option to buy the division owned by Axes.

2.10.6.5 The assessee further submits that neither the assessee nor it's affiliates acquired capital stock (ie. shares) of Axes.

2.10.6.6 The assessee submits that 'return on sales' referred to the net income of Axes attributable to the said division divided by the total revenues arising from the said division. The said return on sales was relevant to arrive at the rebate that the assessee may receive from Axes. The assessee, vide submissions dated December 10,2009, copy enclosed at Page Nos. 164 to 166, has confirmed that it did not receive any rebate from Axes.

2.10.6.7 The other clauses of the said schedule included; inter-alia, the pricing discounts in the event the assessee was able to meet its targets.

2.10.7. From the above, it may be noted that though, in form, the assessee had right to manage and exercise control over the division, in substance, no such right was exercised. These rights were only contemplated in the agreement so as to ensure that the quality of the services provided by Axes were of adequate standards and as per the assessee's requirements. Further, the assessee submitted that though a 22 M/s. Alcatel USA Sourcing LP separate division was segregated by Axes for providing services to the assessee, the said division always continued to remain the property of Axes and was not owned by the assessee.

2.10.8 The Learned AO has observed that the rights in the exclusive premises, appointment of members in the management board, right to acquire capital stock, infers that the assessee had a PE in India. In this connection, at the outset, the assessee submits that the Learned AO has not concluded or identified the specific clause of Article 5 of the DTAA under which the PE is established. Without prejudice to the assessee's contentions that it does not have PE in India, the assessee submits that it appears that the Learned AO has contemplated that the assessee establishes a PE in India under Article 5(1) of the DTAA.

2.10.9 At the outset, the assessee wishes to rely on the meaning of term 'PE', which is very lucidly explained by the Andhra Pradesh High Court in the case of CIT v Vishakapatnam Port Trust, 144 ITR 146. The Hon'ble High Court held as under:

"the expression "Permanent Establishment" used in Double Taxation Avoidance Agreement (DTA) postulates the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.

2.10.10 . The assessee gives below its contentions as to why the assessee does not establish in terms of Article 5(1) of the DTAA.

2.10.10.1 Article 5(1) of the DTAA states that 'for the purposes of this Convention, the term "permanent establishment" means a fixed place of business of an enterprise is wholly or partly carried on'.

2.10.10.2 As per Article 5(1) of the tax treaty, the main features of a PE are –

• the existence of a 'place of business' • which is 'fixed' • through which the enterprise is 'carrying on its business wholly or partly.

2.10.10.3 It may be worthwhile to examine the comments in the OECD Model Commentary and other International Literature to understand the concept of PE.

23 M/s. Alcatel USA Sourcing LP Paragraph 1 gives a general definition of the term "permanent establishment" which brings out its essential characteristics of a permanent establishment in the sense of the Convention, i.e. a distinct "situs", a "fixed place of business". The paragraph defines the term "permanent establishment" as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: - - the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment;

- this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; - carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

-the existence of a 'place of business' "The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise.

• place of business which is 'fixed' According to the definition, the place of business has to be a "fixed" one. Thus, in the normal way there has to be a link between the place of business and a specific geographical point.

• through which the enterprise is carrying on its business wholly or partly - through which The words "through which" must be given a wide meaning so as to apply to any situation in where business activities are carried on at a particular location that is at the disposal of the enterprise for that purpose.

Carrying on its business wholly or partly

24 M/s. Alcatel USA Sourcing LP The business of an enterprise carried on mainly by the entrepreneur or persons who are in a paid employment relationship with enterprise ( personnel). 2.10.10.4 The assessee also relies on the interpretation suggested by the Ld. author Phillip Baker'. His views on the PE subject, which is also the internationally accepted proposition of law is that a requirement implicit in Article 5(1) is that the place of business must be at the constant disposal of the enterprise. One must be able to point to a physical location at the disposal of the enterprise through which the business is carried on. Further, such place which is at the disposal of the enterprise should be used for the business of the foreign enterprise. 2.10.10.5. Even according to the famous author Klaus Voge l2, the main use of the PE concept is to determine the right of a contracting state to tax the profits of an enterprise of the other contracting state. The concept of PE is designed to ensure that business activities of a foreign enterprise will not be taxed by a State unless and until they have created significant economic bonds between the enterprise and that state. Conversely, if economic bonds with a foreign country are only loose, taxation is reserved for the State of residence. 2.10.10.6 From a conjoint reading of the above, the following conclusions emerge: i) PE denotes a place in the Indian Territory through which a foreign enterprise should carry on its business. This place must be placed at the constant disposal of the foreign enterprise. ii) This place should be used by the foreign enterprise to carry on its own business. If the business of the foreign enterprise is not carried on in the Indian Territory, there cannot be any question of existence of the PE in India; : iii) Mere presence or a virtual projection of the foreign enterprise - - into the soil of India will not create a PE in India. It is further required to be shown that the foreign enterprise is using its ' presence in India for carrying on its business in the Indian Territory. iv) 2.10.10.7 Thus, according to Article 5(1) of the India-US tax treaty, a PE exists if the assessee – (i) has at its constant disposal certain premises of Axes; (ii) has domain or control over that place for conduct of its business; (iii) has a right to occupy such premises and able to walk into that place on its own right and not by permission. (iv) Carries out its business through the premises of Axes . .

25 M/s. Alcatel USA Sourcing LP

2.10.11 In the instant case, the assessee submits that the division in Axes was segregated only to provide services to the assessee and certain other rights, as mentioned above, were given to the assessee. However, the said division was not at the disposal of the assessee as the same was always the property of and owned by Axes. Further, the assessee has not carried out any of business in India through the said division, which is one of the conditions that need to be satisfied in order to attract the provisions of Article 5(1) of the DTAA. Hence, as the cumulative conditions as specified under Article 5(1) of the DTAA are not be complied with and accordingly, the assessee cannot be said to establish a PE in India.

2.10.12 The assessee wishes to emphasize here that it was the recipient of or used to avail services from Axes. The relationship between the assessee and Axes was not that generated any income or was a source of income for the assessee. On the contrary, it resulted in an outflow/payment for the assessee in the ordinary course of business. Thus, the assessee has not carried out any of its business in India through the division of Axes and hence, a PE cannot be said to be established for the assessee in India.

2.10.13. The assessee submits that the Learned AO has referred that the loaned equipments in the premises of Axes constituted a PE for the assessee in India. In this connection the assessee submits as under: -

As per the OECD Commentary, the place of business shall also include the equipment. A place of business may constitute a permanent establishment even though it exists, in practice, only for a short period of time because the nature of the business is such that it will be carried on for a short period of time.

2.10.13.1 The assessee submits that it has not carried out any business in India through the equipments and hence, the same does not fall within the provisions of Article 5(1) of the DTAA, as explained above.

26 M/s. Alcatel USA Sourcing LP 2.10.14 Further, the assessee submits that the Learned AO has referred that the assessee exercised managerial, economic and other control, in hiring and removal of senior management and their compensation, etc, as listed in para 11 of the draft assessment order, and hence, constituted a PE in India. In this connection the assessee submits as under- 2.10.14.1. Following is the analysis of the above terms based on OECD MC Commentary and other International Literature "Paragraph-2 12. This paragraph contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, as constituting a permanent establishment. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States interpret of terms listed, “a place of management”, “a branch”, “an office”, etc. in such a way that such places of business constitute permanent establishments only if they meet the requirements of paragraph 1.

(Emphasis supplied by us)

2.10.14.2 In this connection, the assessee submits that as per Article 5(2)(a) of the DTAA, the place of management is a place where the business of the whole or part of the enterprise is carried on. The assessee submits that the rights granted to the assessee, vide the Development Agreement, were only for the limited purpose to ensure that services of appropriate standards and as required by the assessee were provided by Axes. Further, while assuming but not accepting that the rights therein can be considered to establish a place of management for the assessee in India, the assessee submits that as one of the conditions as mentioned in Article 5(1) relating to the carrying on business through the fixed place is not satisfied, the provisions of Article 5(2) would also not be applicable. Thus, the assessee cannot be considered to 27 M/s. Alcatel USA Sourcing LP establish any PE in India under Article 5(1) or 5(2) of the DTAA.

2.10.15 The assessee once again reiterates that the Learned AO has not specified in the draft assessment order under which clause of Article 5 of the DTAA is the PE of the assessee being established in India. The assessee has, however, made submissions with reference to Article 5(1) and 5(2)(a) of the DTAA. The assessee submits that an opportunity of making further submissions on this matter be granted to the assessee during the course of the hearing.

2.10.16 The assessee submits that as no PE of the assessee is being established in India, there is no question of any attribution of profits to the PE in India and consequently, the consideration of USD 2.54 million would not be liable to tax in India.

2.10.17 The assessee further submits that the Learned AO has observed that the consideration of USD 2.54 million is not in the nature of discount as the assessee has failed to substantiate its claim with reference to the amendment agreement. In this connection, the assessee submits as under- 2.10.17.1. The assessee submits that a consideration of USD 2.54 million was in the nature of discount received for the business given to Axes. The background and the circumstances relating to the receipt of the said consideration are detailed hereunder.

2.10.17.2 Mahindra British Telecom ('MBT') decided to acquire Axes. Accordingly, the assessee executed an agreement with Axes on November 28, 2005, under which the assessee received a consideration of USD 2.54 million as per Exhibit A of the said agreement, which is further explained in detail in the para's hereunder. Pertinently it may also be noted that under the above referred agreement dated November 28, 2005, Schedule 3.1 of the Development Agreement dated April 1, 2004 was deleted in its entirety and had no further force or effect.

28 M/s. Alcatel USA Sourcing LP 2.10.17.3 Under this agreement, the consideration payable to the assessee was to be arrived at based on the amount of USD 19.5 million on the closure of transaction (as referred to in Exhibit B of the said agreement) and the balance consideration was subject to further conditions mentioned in the said agreement.

The assessee wishes to submit here that in response to the notice issued under section 133(6) of the Act to Axes/Tech Mahindra, it was confirmed by Axes/Tech Mahindra that the aforesaid amount of USD 19.5 million represented the sales of Axes for F.Y 2004-05.

2.10.17.4 .The sum of USD 2.54 million was calculated with reference to USD 19.5 million, and the basis of arriving at the same, as appearing in the agreement, is reproduced hereunder – 2.10.17.5 The figures under 'available for distribution' in Exhibit A, inter alia, form the reference or basis for determining the consideration payable to the assessee under the said agreement. The amounts mentioned 'distributable to the assessee' represents consideration payable to the assessee under the said agreement. Accordingly, the assessee submits that the amount of USD 2.54 million was computed as under – Amounts available for distribution - USD 19.5 million - T1 (USD 19.5 million on closure of transaction referred to in Exhibit B and T1 refers to transaction costs)

Amounts distributable to the assessee - (USD 19.5 million - T1) x 14% [(USD 19.5 million - USD 1.34 million) x 14% i.e. USD 2.54 million] The assessee submits that USD 1.34 million represented the transaction costs to Axes India. The figure of 14% was applied as the same was negotiated and mutually agreed between the parties.

29 M/s. Alcatel USA Sourcing LP 2.10.17.6. The assessee submits that the details of the aforesaid computation were submitted to the Learned AO during the course of the assessment proceedings and were also explained. The assessee submits that the entire working of the aforesaid amount of USD 2.54 million is brought out in the agreement dated November 28, 2005.

2.10.17.7. The assessee reiterates that a significant volume of the business of the assessee was provided by it to Axes over the years. Thus, the value of the Axes and in particular, the division was due to such voluminous business and hence, while entering into the said agreement dated November 28, 2005, it was agreed between both the parties to consider the value of Axes for the purposes of computing discounts due to the assessee for the business provided over a number of years. The assessee submits that it is the substantial volume of the business of Axes, which created its value and hence, the same was considered for the purposes of discount computation.

2.10.17.8 The assessee submits that the consideration was not paid for waiving any particular right of Schedule 3.1 of the Development Agreement, but, the same was paid for entering into the agreement dated November 28, 2005 which was executed with the purpose of waiving off all the rights of Schedule 3.1 of the Development Agreement. This is also evident from Clause 7 of the said agreement, which is also reproduced by the Learned AO at point 7 - page 24 of the draft assessment order. The assessee submits that all the rights in the Schedule 3.1 of the Development agreement were either relating to the value of Axes (which would be arrived at on the basis of the significant volume of the business provided by Axes) or were purely revenue in nature (i.e. pricing discounts, return on sales, etc). Thus, the assessee submits that as the payments for the services rendered under the Development Agreement and agreement dated November 28, 2005 were 'revenue' in nature, likewise, any consideration received by the assessee under the said agreements would also partake to be 'revenue in nature'. The said contention of the assessee is 30 M/s. Alcatel USA Sourcing LP also supported by various judicial precedents as cited in para 2.5.2 above.

2.10.17.9. The assessee submits that based on the facts of the case and the principles laid down in the various judicial precedents (as cited in para 2.5.2 above), the assessee submitted that the aforesaid amount of USD 2.54 million is 'revenue' in nature for the following reasons:

• The aforesaid agreement is only a business arrangement This is evident from the fact that the assessee availed services of Axes and provided a significant volume of business to Axes. Also, the agreement indicates that it is agreed to amend certain clauses of the Development Agreement, which itself was an agreement in revenue nature, indicates the fact that such agreement was business arrangement intended for the assessee to avail services of Axes and Axes to provide services to the assessee.

• The profitability of the assessee is not affected by (or a source of income is not lost as a result of) the Amendment Agreement as the assessee continues to avail the services of Axes after executing the Amendment Agreement – While the entire Schedule 3.1 of the said agreement is deleted, it can be noted that various other clauses, as relevant to the pricing, etc were revised and agreed upon between both the parties to the agreement. Thus, Axes continues to avail the services of Axes after executing the said agreement and hence, cannot be considered to be a loss of source of income for Axes. Separately, the assessee submits that in the entire arrangement, the assessee was availing the services of Axes and thus, there was no question of any profitability of the assessee being affected or any loss of source of income of the assessee.

• The Amendment Agreement was executed with a view to extend the term of the Development Agreement - The letter agreement dated September 30, 2006 clearly indicates that the purpose of entering into the Amendment Agreement was to extend the term of the development agreement from March 31, 2007 to October 31,2008.

31 M/s. Alcatel USA Sourcing LP * The amendment/alterations to the rights granted under the Development Agreement are merely incidental to the business of the assessee.

As mentioned above, the rights granted under the Development Agreement were only with the view that the services rendered to the assessee are of appropriate quality and as required by the assessee. The revenues earned by Axes under this agreement were treated as business receipts in the hands of Axes and hence, revenue income. The assessee submits that any amendments/alterations in the rights of the assessee in the said agreement does not really change the nature of the agreement as well as the revenues. These modifications were only incidental to the business of both the assessee and Axes.

• The assessee was not refrained from carrying on any business activities with Axes.

The assessee submitted that after executing the Amendment Agreement, the business between the assessee and Axes continued. The assessee availed the services of Axes and the same were provided by Axes. Thus, this Amendment Agreement did not refrain the assessee from availing any services from Axes.

2.10.17.10. Further, the assessee also wishes to place its reliance on the fact that the amount of consideration of USD 2.54 million was based on the revenues of Axes for FY 2004-05 and thus, it is evidently clear that the amounts received by the assessee is in the nature of discount as the same was based on the revenues of Axes.

2.10.17.11. In light of all of the above, the assessee submits that the amounts received under the Amendment Agreement were in the nature of discounts and revenue in nature.

2.10.18 The assessee submits that the Learned AO, at para 12 of the draft assessment order, has concluded that the 32 M/s. Alcatel USA Sourcing LP amounts are not in the nature of discount. The assessee submits that the Learned AO has also mentioned that the said amount was received as a consideration for waiving its rights under the Development Agreement in Schedule 3.1. Thus, it may be noted that while the Learned AO does not propose to treat the amounts as 'discounts' as contended by the assessee, the Learned AO has also not characterized the income under a particular class/head so as to fall within the meaning of business income.

2.10.19 At para 13 of the said order, the Learned AO has observed that the assessee has contended that the amounts received under the amendment agreement is in the nature of revenue receipt and in the absence of any PE, the same is not taxable. In this connection the assessee submits that the Learned AO, at the first instance, concluded that the consideration is not in the nature of discount and the same is for waiving the rights of the assessee under the Development Agreement. Immediately thereafter, he concludes that the said consideration is taxable as business income since the assessee has a PE in India. The assessee submits that the Learned AO is blowing hot and cold in the same breath. The Learned AO, himself, has not concluded whether the said consideration is in the nature of business income and has simply proposed to tax the same as business income of the assessee. Thus, without prejudice to the assessee's contention that the receipt of US$ 2.54 million is not taxable in India, the action of the Learned AO is not warranted and tenable in law.

2.10.20. The assessee further submits that, as detailed above, it does not have any PE in India and hence, the consideration of USD 2.54 million is not taxable in India. However, while assuming but not accepting that the assessee has a PE in India, the Learned AO ought to have computed the profits attributable to such a PE in India.

2.10.21. The assessee submits that only the profit attributable to the PE in India is subject to tax in India. The assessee submits that where a PE is established and the income is proposed to be liable to be tax in India, the 33 M/s. Alcatel USA Sourcing LP following general principles of computing the profits attributable to the PE are to be carried out – • The income attributable to the operations in India is to be first computed; • Thereafter, the profits attributable to such income is to be computed, which would then be liable to tax in India.

2.10.22 In the instant case, the Learned AO has not followed the above steps and has combined both the steps together and without any supporting evidence has reached to the conclusion that the entire consideration of USD 2.54 million is the profits attributable to the PE of the assessee in India. Thus, the basis adopted by the Learned AO to conclude that the entire consideration of USD 2.54 million is attributable to the PE is baseless and erroneous.

2.10.23. Further, the assessee submits that as per Article 7(1) of the DTAA, profits a US enterprise (i.e. the assessee in this case) shall be taxable only in the US unless the enterprise carries on business in India through a PE. Where the enterprise carries on business in India through a PE, so much of the profits attributable to the PE may be charged to tax in India. Thus, Article 7(1) of the DTAA is a provision which provides the basis for the charge to tax of profits of an enterprise of a Contracting State. The primary rule is contained in the first sentence of that paragraph. That rule is that the profits of an enterprise of a Contracting State shall be charged to tax only in the country of its residence, unless it carries on business in the other Contracting State through a PE.

2.10.24. The second sentence of Article 7(1) of the DTAA deals with the situation where the enterprise carries on business in India through a PE. In such case, the rule provides that the business profits may be taxed in India. However, it is not the entire profits of the enterprise which may be so taxed. It is only such portion of the profits as are attributable to the PE or are attributable to the activities carried on in India of the same or similar kind as those

34 M/s. Alcatel USA Sourcing LP carried on through the PE that would be charged to tax in India.

2.10.25 Article 7(1) thus determines the country which would have authority ("jurisdiction") to charge such profits.

2.10.26 Para 2 of Article 7 of the India-US tax treaty gives the manner in which the allocation of profits to a PE should be made, the relevant part in relation thereto is reproduced hereunder:

Para 2 of Article 7 - 'BUSINESS PROFITS'

"2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arms length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. "

2.10.27 Article 7(2) of the India-US tax treaty is triggered only in the event that the enterprise has a PE in India. Where the enterprise has PE, it becomes necessary to determine the quantum of profits attributable to the PE.

35 M/s. Alcatel USA Sourcing LP Article 7(2) provides for the mode or manner in which such profits are to be allowed to the PE.

2.10.28 Thus Article 7(2) is not a charging provision. It does not provide for the charge to tax of the profits in India. That is done by Article 7(1) when it provides that the profits of the PE would be chargeable to tax in India. Article 7(1) also limits the profits that can be charged to tax in India of a US enterprise. It provides "but only so much of' the profits can be Charged as are attributable to the PE and to similar activities carried on in India.

2.10.29 Article 7(2) deals with the profits to be attributed to clause (a) in the second sentence of Article 7(1). It does not deal with the entire profits that may be charged to tax in India.

2.10.30 That Article 7(2) deals with allocation of profits. It contains the central directive on which the allocation of profits to a permanent establishment is intended to be based. The paragraph incorporated the view, which is generally contained in bilateral conventions, that the profits to be attributed to a permanent establishment are those which that permanent establishment would have made if, instead of dealing with its head office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market.

2.10.31 In other words, this para requires that the enterprise and the PE are to be treated as two separate independent entities and profits attributable to the PE would be those, which would arise if such enterprise and the PE trade with each other at arm's length price. Further the US Treasury Technical explanation on the India-USA tax treaty states that the business profits of a PE should be determined on an arm's length basis.

2.10.32. The extent to which profits are attributable to PE depends on the functions and the risks assumed by that PE. As stated above, the assessee does not carry out any business through the equipments in India or through Axes in India. The assessee reiterates and emphasizes that it has 36 M/s. Alcatel USA Sourcing LP only availed of services from Axes. Thus, any profits attributable to the PE ought to commensurate with the activities/functions carried out by Axes in India for the assessee.

2.10.33 In light of the above, the assessee submits that while assuming but not accepting that the assessee constitutes a PE in India, the profits attributable only to such activities as carried out by the PE in India ought to be taxable as business profits of the PE of the assessee in India. As mentioned above, the Learned AO has not computed the income attributable to the operations in India and thereafter, the profits attributable to such income in India and hence, the conclusion of the Learned AO that entire amount of USD 2.54 million is attributable to the PE is baseless and erroneous.

2.10.34. The assessee reserves its rights to make further submissions in this regard.

3.1. Grounds of objection Ground 5 - On the facts and in the circumstances of the case and in law the Learned AO has erred in proposing to undertake a without prejudice argument that in the event the assessee does not establish a PE in India, the said income be proposed to be taxable as capital gains 3.2. FACTS SUBMITTED TO THE AO A without prejudice argument was submitted to the Learned AO that where the amount of USD 2.54 million is considered as a consideration for transfer of capital asset (which it is not), the same would again not be liable to tax under the head Capital Gains, since the computation machinery provisions under the Act fails and thus, the capital gains, if any, would not be taxable In India.

3.3. FACTS MODIFIED BY THE AO 3.3.1. The Learned AO has considered that consideration of USD 2.54 million was received for waiving and releasing

37 M/s. Alcatel USA Sourcing LP all the rights and claims under Schedule 3.1 of the Development Agreement. These rights are termed as 'Alcatel Rights' by the Learned AO which includes the rights of business over the Alcatel division by managing its assets, personnel, and placing obligations and restrictions on Axes in dealing with the assets, personnel’s taking any managerial decision, budget decisions and transfer of its stock.

3.3.2. The Learned AO has concluded that consideration of USD 2.54 million received by the assessee was in the nature of capital gains and hence, assessable to tax.

3.3.3 The Learned AO has stated that the assessee failed to furnish complete particulars and basis for arriving at the consideration. Also, the amount of USD 2.54 million represented the net consideration after deducting relatable cost.

3.4. DO YOU WHOLLY AGREE WITH THE MODIFICATIONS IN THE FACTS BY THE AO. IF NOT, GIVE REASONS POINTING THE SPECIFIC FACT OR FACTS WITH WHICH YOU DO NOT AGREE ALONG WITH THE REASONS AND DOCUMENTARY EVIDENCE, IF ANY 3.4.1 The assessee submits that the consideration of USD 2.54 million was received as discounts for the huge volume of business provided over the years. The assessee has submitted a detailed explanation and working of the said amount of USD 2.54 million in the earlier ground, which were also submitted to the Learned AO during the course of assessment proceedings. The said consideration is not received as a consideration for the waiver of all rights but is towards the discounts, as stated earlier. Accordingly, the assessee does not agree to the modification of the facts made by the assessee in as much as so that all the details were submitted to the Learned AO during the course of assessment proceedings.

3.4.2 The assessee further submits that the said consideration was determined on the basis of the value of Axes, which was built on account of the business provided

38 M/s. Alcatel USA Sourcing LP by the assessee to Axes. The assessee submits that the consideration of USD 2.54 million was computed on the basis of the formula, as described in the earlier ground, which was based on the amounts available for distribution and distributable to the assessee. The assessee submits that this consideration was based on a formula, which was accepted by both the parties, wherein the transaction cost of Axes of USD 1.34 million was deducted. Accordingly, the mere deduction of any amount cannot be correlated to the cost of acquisition and hence, the Learned AO's observation that USD 2.54 million represents net consideration is erroneous in facts.

3.5. LEGAL ARGUMENTS SUBMITIED TO ASSESSING OFFICER 3.5.1 The assessee only submitted a without prejudice argument stating that if the consideration of USD 2.54 million is considered to be the consideration for transfer of capital asset (which it is not), the same would not be liable to tax under the head Capital Gains, since the computation machinery provisions under the Act fails and thus, the capital gains, if any, would not be taxable in India.

3.5.2 The Learned AO did not grant an opportunity to the assessee to contend as to why the said consideration of USD 2.54 million ought not to be considered as capital gains and taxable in India.

3.6. CASE LAWS RELIED UPON BY THE ASSESSEE 3.7. LEGAL ARGUMENTS RELIED UPON BY AO 3.7.1 The Learned AO has concluded that the consideration received by the assessee is for the waiver of Alcatel Rights and is in the nature of capital gains and hence, assessable to tax. Further, the cost of acquisition is considered as “Nil” under Section 55(2)(a) of the Act and the entire amount of USD 2.54 million (Rs.11 ,43,00,000) is assessable as capital gains under Article 13 of the DTAA.

3.8. CASE LAWS RELIED UPON BY THE LEARNED AO

39 M/s. Alcatel USA Sourcing LP 3.9. ANY ADDITIONAL NEW CASE LAWS WHICH THE ASSESSEE MAY LIKE TO RELY UPON • B. C. Srinivasa Setty 128 ITR 294 (SC) • CIT v. N.N. Desai [1991] 192 ITR 153 (Bom) • CIT v. S.S. Sukhi [1989] 177 ITR 84 (Bom)

3.10. FACTUAL & LEGAL ARGUMENTS AGAINST THE ADDITION PROPOSED BY THE AO 3.10.1 At the outset, the assessee wishes to reiterate that the consideration of USD 2.54 million was received towards discounts due for the huge volume of services given to Axes over years.

3.10.2 The assessee submits that the Learned AO has observed that all the 'Alcatel Rights' were released by the assessee and as a consideration thereof and for the extension of the term of the Development Agreement, the said amount was received. In this connection, the assessee submits that such rights, as termed by the Learned AO as 'Alcatel Rights', were only for the limited purpose to ensure proper provision of services by Axes to the assessee. The assessee further submits that while in form these rights were available to the assessee, in substance, not all of these rights were exercised by the assessee. As mentioned above, no details of assets or personnels (as contemplated in the Development Agreement) were provided by Axes to the assessee. Thus, it may be possible to conclude that the aforesaid consideration cannot be for the waiver of Alcatel Rights, since the same were never exercised.

3.10.3 Without prejudice to the above, even if it is accepted that the consideration is towards the waiving of Alcatel Rights and extension of the term of agreement without the Alcatel Rights, the assessee submits as under :

3.10.3.1. As per Article 13 of the DTAA, capital gains are taxable as per the provisions of the Act. Thus, in the instant

40 M/s. Alcatel USA Sourcing LP case, the provisions of section 45 to 55A of the Act would apply. - 3.10.3.2. As per section 45 of the Act, any profits and gains arising from the transfer of a capital asset would be liable to capital gains tax at the rates and the manner specified.

3.10.3.3. In the instant case, for the purposes of computing capital gains, the sales consideration has been considered by the Learned AO at Rs.11 ,43,00,000 (USD 2.54 million). In order to compute the gains, the cost of acquisition is required to be deducted. The Learned AO has observed that the said consideration of USD 2.54 million is the net consideration after deducting relatable cost.

In this connection the assessee submits that the consideration of USD 2.54 million, as explained in the earlier ground, was arrived upon based on the formula as appearing in the agreement, which is reproduced here for ready reference.

USD 2.54 million = (USD 19.5 million - USD 1.34 million) x 14% The assessee submits that USD 19.5 million refers to the amount on closure of transaction. The assessee wishes to submit here that in response to the notice issued under section 133(6) of the Act to Axes/ Tech Mahindra, it was confirmed by Axes/Tech Mahindra that the aforesaid amount of USD 19.5 million represented the sales of excess for FY2004-05. The figure of 14% was applied as the same was negotiated and mutually agreed between the parties. Thus, the said consideration in no circumstances can be said to have been computed after deducting the costs. The assessee also submits that the Learned AO has not placed anything on record to establish as to which cost has been deducted to arrive at the aforesaid consideration.

3.10.3.4 In light of the above submissions, the assessee submits that the contention of the Learned AO that the consideration of USD 2.54 million is the net consideration after deducting relatable costs is not acceptable and 41 M/s. Alcatel USA Sourcing LP therefore, the cost of acquisition will have to be determined.

3.10.3.5 As per section 55(2)(a) of the Act, 'cost of acquisition' for the purposes of computing the amount of capital gains liable to tax provides that unless there is a price paid in respect of the following capital assets (in which case the cost would be the price paid), the cost would be assumed to be NIL:

• goodwill of a business or • a trade mark or brand name associated with a business or • a right to manufacture, produce or process any article or thing or • right to carry on any business • tenancy rights, stage carriage permits or loom hours In this connection the assessee, at the outset, submits that the Learned AO has not specified under which of the above clauses he has relied on to conclude that the cost of acquisition is 'Nil'.

Without prejudice to the above, the assessee submits that the 'right to manufacture' would be distinct from 'right to get manufactured'. Further, the assessee did not have any 'right to carry on any business'. The assessee submits that it has merely availed the services of Axes and hence, does not have any right to manufacture or right to carry on any business in India and hence, the provisions of section 55(2)(a) of the Act are not applicable.

3.10.3.6 The assessee submits that where the cost of acquisition cannot be determined, then the computation machinery would fail and the sales consideration/capital gains would not be taxable.

3.10.3.7 To support the above contention, the assessee wishes to place its reliance on the decision of the Supreme Court in the case of B. C. Srinivasa Setty 128 ITR 294,

42 M/s. Alcatel USA Sourcing LP which laid down an important principle that where the cost of acquisition in respect of a capital asset ('goodwill' in this ruling) cannot be determined based on the provisions of the Act, then the computation machinery fails and thus, the capital gain would go untaxed.

3.10.3.8 The assessee submits that the said principle of the Supreme Court has also been followed in the following judicial precedents pronounced by the jurisdictional Bombay High Court – • CIT v. N.N. Desai [1991] 192 1TR 153 • CIT v. S.S. Sukhi [1989] 177 ITR 84 3.10.3.9 In light of the above, the assessee submits that as the cost of acquisition of the Alcatel Rights cannot be determined, the computation machinery fails and hence, the capital gains cannot be liable to tax in India.

3.10.3.10 The assessee submits that it reserves its rights to make further submissions during the course of proceedings.”

“From a perusal of the papers filed before the DRP, it is seen that not only large scale equipment has been loaned by the assessee to Axes, but these equipments have been imported for use at a fixed place of business i.e. Software Technology Park at Axes Technology India Pvt. Ltd. as is apparent from the approval letter of the Direct Software Technology Parks of India dated 10.12.2004 (ref. page 154 of the paper book filed before the DRP). Therefore, the conclusion of the Assessing Officer that the assessee had a PE in India as it had equipment located in the premises of Axes for the purpose of its business is clearly supported by the document furnished by the assessee. The 43 M/s. Alcatel USA Sourcing LP Assessing Officer's action in holding that the assessee had a PE in India, is accordingly in order. Thus, it is held that the assessee had a PE in India in terms of para 5(1) and 5(2)(1) of the Indo- USA DTAA. Further, the entire receipt of the assessee is from allowing access of the network to its client and mobile network users. Therefore, it is difficult to accept the proposition that these activities have any other purpose. It is true that in case of PE in India only the income which is attributable to the operations carried out through the PE is liable to be taxed in India. However, the assessee has not been able to put forth any evidence that these receipts were not attributable to the PE. The onus was on the assessee to submit an FAR analysis to indicate the amount of attributable income to the PE duly supported by evidence. In absence of any such documents or details coming forth from the assessee, the Assessing Officer has examined the facts and attributed the entire amount to PE in India on the ground that the revised agreement/ transfer of rights took place in India only. Therefore in view of the fact that entire receipt is in respect of operations which are carried out through the PE, there is no question to come to a conclusion other than that of the Assessing Officer. Accordingly, the action of the Assessing Officer is upheld. In respect of alternate plea of the Assessing Officer regarding computation of capital gains in respect of transfer of rights, it is held that this indeed represents capital gains which are taxable in India in terms of domestic law as well as the India- US Treaty. It is also important to note that the equipment and the rights constitute business assets of the PE. Therefore, the income from the transfer of these rights of assets shall constitute income liable to tax u/s. 28 read with Article 7 of the India-US Treaty. However, if at a later stage it is decided that the assessee does not have a PE in India, the income would still be taxable as 'capital gains' in view of the fact that the transfer of assets/rights is not in dispute as per the Agreement”.

16.1. The Ld. Counsel for the assessee submits that Chapter XVII - Part C of the Act deals with payment of advance tax by the assessee. According to section 207 of the Act, tax shall be payable in advance during the financial year in accordance with the provisions of section 208 to section 219 (both inclusive). Section 209(1 )(a) of the Act which deals with the computation of advance tax states that the assessee shall first estimate his current income and income-tax thereon shall be calculated at the rates in force in the financial year. Section 209(1) (d) of the Act further provides that the income calculated under section 209(1 )(a) shall be reduced by the amount of income tax which would be deductible or collectible at source during the said financial year under any provision of the Act from any income. The Ld. Counsel for the assessee submits that it is worth noting that the legislature has thought it fit to use the word "deductible" and not "deducted". He further submits that in the instant case, even assuming while not accepting that the income is chargeable to tax as contended by the Learned AO, the whole of such income would be subject to tax deduction at source under section 195 as the assessee is a non-resident company. Accordingly, the 45 M/s. Alcatel USA Sourcing LP payer i.e. Axes would have deducted tax at the rates in force before making payments to the assessee. Therefore he submits that since entire income of the assessee is subject to tax deduction at source under section 195 of the Act, there is no obligation to pay advance tax under section 208.

16.2. The Ld. Counsel for the assessee further submits that in order to compute advance tax liability under section 208 of the Act, the income on which tax is deductible at source is to be reduced from the estimated income, the income on which the advance tax would be payable by assessee would be "NIL". Accordingly, there is no liability to pay advance tax under section 208 of the Act and consequently, no interest liability under section 234B for default in payment of advance tax. He further submits that section 190 of the Act provides that tax in respect of regular assessment is payable either by deduction at source or by advance payment, as the case may be. Thus, the deduction of tax at source and payment of advance tax have been treated as two alternative modes of payment of tax in advance. Hence, where the statute provides for deduction of tax at source in respect of a particular income, the concerned assessee is not required to pay any tax in relation to the said income. In respect of the income earned by the assessee, deduction of tax at source is contemplated under section 195 of the Act.

16.3. The Ld. Counsel for the assessee places reliance on the following decisions in support of his above contentions.

1) Sedco Forex International Drill Inc & Ors Vs CIT & Anr (2005) 199 CTR (SC) 320 2) DIT Vs MGCV Network Asia LLC (2009) 313 ITR 187 (Bom)

46 M/s. Alcatel USA Sourcing LP 3) The DDIT Vs SET Satellite (Singapore) Pte Ltd., 106 ITD 175 (Mum) 4) Motorola Inc Vs DCIT 96 TTJ 1 (Del) 5) CIT Vs Ranoli Investment Pvt. Ltd and Other 235 ITR 433 (Guj) 6) CIT Vs Madras Fertilisers Ltd (`149 ITR 703 (Mad)

16.4. The DRP observing that provisions of Sec. 234B is compensatory in nature and is leviable on the amount of assessed tax therefore the contentions of the assessee was rejected.

16.5. On hearing both sides, we find force in the submissions of the Ld. Counsel for the assessee. However, we restore this issue to the file of the DRP to decide this issue keeping in view the decision of the Hon’ble Bombay High Court as the DRP did not deal with any of the above submissions of the assessee and by simply holding that 234B interest is only compensatory in nature. Thus we restore this issue also to the file of the DRP for fresh adjudication in accordance with law after providing adequate opportunity of being heard to the assessee.

ITA No. 7533/M/2011 – A.Y 2007-08

1) Challenging the order of the DRP in holding that the payments received from Alcatel South Asia Ltd (ASAL) for providing remote call-in technical support services as taxable in India as royalty and fees for included services under Article 12(3) and Article 12(4)(a) of the DTAA between India and USA and (2) The DRP erred in confirming the action of the Assessing Officer in levying interest u/s. 234B of the Act.

48 M/s. Alcatel USA Sourcing LP - A.Y. 2008-09 20. The grounds raised by the assessee in this appeal are identical to the appeal for the Assessment Year 2006-07 in the case of Alcatel USA Sourcing Inc. and the decision rendered therein for the Assessment Year 2006-07 applies mutatis and mutandis to the issues raised in this assessee’s case for the Assessment Year 2008-09. Since we have set aside all the issues to the file of the DRP for the Assessment Year 2006-07, we restore all the issues for the Assessment Year 2008-09 also to the file of the DRP for fresh adjudication in accordance with law and after providing adequate opportunity of being heard to the assessee.

Order pronounced in the open court on 5th August, 2016.