Income arises from off-shore supply of goods cannot be Taxable in India; Delhi HC [DOWNLOAD JUDGMENT]

A Delhi High Court bench comprising of Justice S.Muralidhar and Justice Vibhu Bakhru held that Income aroused from the off-shore supply of goods cannot be taxable in India.

The Delhi High Court, in a number of appeals filed by the assessee, Nortel Networks India International Inc. filed appeals against the common order.

Factual Premises of the Case

The Assessee is a US based company, which is A part of Nortel Group which is stated to be a leading supplier of hardware and software for GSM Cellular Radio Telephone Systems. The Assessee is a step-down subsidiary of Nortel Networks Limited (Canada), a company incorporated in Canada. It is wholly held by Nortel Networks Inc. which in turn is wholly owned subsidiary of Nortel Canada. Nortel Canada also has an indirect subsidiary in India, namely, Nortel Networks India Pvt. Ltd (hereafter ‗Nortel India‘). Nortel Canada also owns 99.99% of share capital of Nortel Networks (Luxemburg) SA which in turn holds the entire share capital of Nortel Networks International Finance & Holdings BV (Nortel BV). Nortel BV holds 99.99% shares of Nortel Networks Mauritius Limited, a company incorporated in Mauritius, which in turn holds 99.99% of Nortel India.

Nortel India negotiated and entered into three contracts with Reliance Infocom Limited, namely, Optical Equipment Contract, Optical Services Contract and the Software Contract on 8th June 2002. On the same date, Nortel India entered into an agreement assigning all rights and obligations to sell, supply and deliver equipment under the Equipment Contract to the Assessee. Reliance and Nortel Canada were also parties to the Assignment Contract and in terms thereof, Nortel Canada guaranteed the performance of the Equipment Contract by the Assessee (Assignee). In terms of the Assignment Contract, Reliance placed purchase orders directly on the Assessee and also made all payments for the equipment supplied directly to the Assessee.

The equipments supplied to Reliance were manufactured by Nortel Canada and another Nortel group entity in Ireland (Nortel Ireland). The same was invoiced by the Assessee directly to Reliance and consideration for the same was also received directly by the Assessee. It is asserted by the AO that the equipment supplied to Reliance was sourced from Nortel Canada and Nortel Ireland at a much higher price than the price charged to Reliance and this resulted in the Assessee suffering a loss during te relevant period.

The assessee, on a strong belief that they are not liable to pay tax, didn’t file income tax returns for several years in respect of this income. However, the AO made an assessment u/s 143(3) by observing that the Assessee had not booked any establishment cost, depreciation or any other indirect costs in its accounts. Further, the Assessee had also not showed any source of funds. The AO noted that the equipment stated to have been supplied by the Assessee to Reliance was purchased from other group companies, namely, Nortel Canada and Nortel Ireland and were supplied to Reliance at almost half the price of the said goods. On the aforesaid basis, the AO concluded that the Assessee did not have any financial or technical ability to perform the Equipment Contract.

On appeal, both the CIT (Appelas) and ITAT held in favour of the Department. Therefore, the assessee preferred an appeal before the Supreme Court. The principal controversy involved in these appeals is whether the Assessee, a tax resident of United States of America (USA), has a Permanent Establishment in India and consequently, is chargeable to tax under the Act in respect of its business income attributable to its PE in India.

Contention of the Department

• The Assessee had been incorporated solely with the sole motive to evade the taxes arising out of supply contract in India and in substance, the contracts were performed by Nortel Canada along with its LO and Nortel India, who acted in unison to identify, negotiate, appraise, secure, execute, manufacture, supply, install, commission and provide warranty and after sales service in respect of the Optical Fibre project of Reliance.
• These companies also provided sales service and training etc. The AO also held that the activities performed by Nortel India were not within the scope of services to be rendered under the Services Contract and the expatriate employees of the Assessee had remained in India for a long period and had rendered services for Nortel India for a period of more than 30 days in a fiscal year and the Assessee had reimbursed large amount of expenses incurred by Nortel India on these expatriate employees.
• The Assessee was ―a Shadow Company of Nortel Group. On the basis of its findings, the Assessee concluded that Nortel India and Nortel LO constituted the Assessee‘s PE in India (both Fixed Place PE as well as Dependent Agent PE).

Decision

The Court decided the case in favour of the assessee by holding that the assessee does not have a PE in India on the basis of the following findings.

• It was observed by the Court that the question whether the Assessee has a PE in India is clearly interlinked with the issue whether Nortel India or Nortel LO had performed any of the functions or discharged any of the obligations assumed by the Assessee
• There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1)(i) of the Act, no part of Assessee‘s income could be brought to tax under the Act. It is only when a non-resident Assessee‘s income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined.
• Some portion of the obligations undertaken by the Assessee were performed in India, the Assessee’s income arising from the performance of the Equipment Contract could be brought to tax only to the extent as permissible under the relevant DTAA – DTAA between India and USA or DTAA between India and Canada.
• The AO‘s conclusion that there is an installation PE in India, is also without any merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee or Nortel Canada. Undisputedly, Nortel India was also received the agreed consideration for performance of the Services Contract directly by Reliance.
• The finding that Nortel India is a services PE of the Assessee is also erroneous. There is no material to hold that Nortel India performed services on behalf of the Assessee.
• In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained.

While concluding the judgment, the Justices Vibhu Bakhru and S. Muralidhar observed that, “in view of our conclusion that the Assessee’s income from supply of equipment was not chargeable to tax in India, the question relating to attribution of any part of such income to activities in India does not arise. In view of our conclusion that the Assessee does not have a PE in India, the question of attribution of any income to the alleged PE also does not arise.”

Read the full text of the Judgment below.

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