2017-TII-22-SC-INTL
DIT Vs NORTEL NETWORKS INDIA INTERNATIONAL INC: SUPREME COURT OF INDIA (Dated: July 7, 2017)
Income tax - Sections 4, 5, 9(1)(i), 143(2) & (3), 144C, 147, 148 & 234B & Rule 10 - India-USA & India-Canada DTAAs - Articles 5 & 7.
Keywords: business connection, PE - Dependent Agency PE - Service PE - installation - LO - attribution of profits - GSM systems - principle of apportionment - piercing of corporate veil - shadow company - tax audit - turnkey contract & levy of interest.
The assessee, Nortel Networks India International Inc, is a tax resident of Delaware, USA. It is a step-down subsidiary of Nortel Networks Limited (Canada) which in turn is wholly owned subsidiary of Nortel Canada. Nortel Canada also has an indirect subsidiary in India - Nortel Networks India Pvt. Ltd. The Nortel Canada also has a Liaison Office in India. Nortel India negotiated and entered into three contracts with Reliance Infocom Limited - Optical Equipment Contract, Optical Services Contract and the Software Contract. 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. The Revenue took the view 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 the relevant period. Since according to the Assessee, its income was not chargeable to tax, it did not file any return for the AYs 2003-04 and 2004-05. The AO issued Sec 148 notice and the assessee filed its statement of accounts disclosing loss. AO observed that the Assessee did not have any financial or technical ability to perform the Equipment Contract. The AO further concluded that Nortel India and Nortel LO were involved in pre-contract survey, pre-contract negotiation, finalization of documents and carrying out of installation activities and at ground level, there was no difference between the LO and Nortel India and both were operating from the same premises and were providing services to the group companies including the Assessee. AO was of the view that 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. Finally AO concluded that Nortel India and Nortel LO constituted the Assessee‘s PE in India (both Fixed Place PE as well as Dependent Agent PE). He then proceeded to estimate the taxable income of the Assessee based on the accounts of Nortel Group. The AO noticed that the global accounts of the Nortel Group disclosed a gross profit margin of 42.6%. He held that average selling, general and marketing expenses of other similarly placed non-resident companies was 5% of the turnover and, therefore, made an allowance of 5% of such expenses. He also made a further allowance for Head office expenses at 5% of the adjusted profits and estimated the total taxable income of the Assessee at Rs.81,28,06,917/-. The CIT(A), on appeal, partly ruled against the assessee and the ITAT upheld the order of the CIT(A).
Upon appeal High Court allowed assessee's appeal. It was held that even if it is accepted that the equipment supplied overseas continued to be in possession of Nortel India till the final acceptance by Reliance, the same would not imply that the Assessee‘s income from supply of equipment could be taxed under the Act. Although, the Assessee had repeatedly asserted that all other obligations for testing, installation and commissioning was done by Nortel India, for which Nortel India had been paid separately, no material or evidence was gathered by the AO to contradict the same. Thus, in absence of any such evidence or material, it is difficult for us to concur with the view that certain activities were performed in India for which the consideration was received by the Assessee. It was also held that there was no material on record that would even remotely suggest that Nortel LO had acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf. Thus, it is not possible to accept that the offices of Nortel LO could be considered as a fixed place of business of the Assessee. Aggrieved Revenue preferred special leave petition albeit with delay.
Having heard the parties, the Supreme Court condoned the delay and granted leave.
Leave granted
2017-TII-11-SC-TP
PR CIT Vs BOSE CORPORATION INDIA PVT LTD: SUPREME COURT OF INDIA (Dated: July 3, 2017)
Income Tax - AMP expenses - framing a question of law - principle of consistency.
The assessee company, was a wholly owned subsidiary of Bose Corporation, USA. It was engaged in the business of reselling high end audio products. It was a buy-sell distributor of Bose products and a support service provider. Bose India had divided its operation on two lines – retail sales and professional sales; and marketing efforts in both the business lines was different. On reference made by AO u/s 92CA (3) to determine ALP in respect of international transactions entered into by assessee during FY 2008-09, TPO issued a notice and assessee filed necessary documents through its AR. Assessee had entered into various international transactions and declared income during the year under assessment at Rs.4,09,24,720/- and as per P&L account, the total revenue of assessee from various segments. TPO noticed that assessee spent an amount of Rs.7,63,64,766/- on AMP expenditure. TPO in order to determine ALP of international transactions relating to AMP expenditure, noticed that assessee was not only engaged in promotion of Bose products but also developed marketing intangibles for AE by launching products and creating awareness for the Bose brand. TPO further noticed that assessee had launched and permitted Bose brand in India and had incurred huge expenditure under heads AMP expenditure in earlier years and in the year under consideration. TPO treated the AMP expenditure of Rs.7.63 crores as international transaction and accordingly, issued SCN to assessee. Assessee company submitted that there was no agreement between the assessee and AE for the use of brand name and trade name by assessee and TP regulations require that it was not the form but the overall arrangement / substance of transaction that must be borne in mind. TPO proceeded to conclude that the expenditure incurred on AMP by the assessee to promote the brand name / trade name owned by Bose US is international transactions which has not been reported by the assessee in Form 3CB nor been benchmarked in TP study. It was noted that the expenditure incurred by assessee company was for the advantage of its AE since the brand name and trade name was owned by AE for which assessee company should have been suitably compensated by AE. Also, the assessee had not received any payment in this regard from the AE. On the basis of TP study, TPO adjusted Rs.7,92,95,484/- on account of AMP expenditure for the benefit of AE along with mark-up of 15.27%. Upon appeal the Tribunal remanded the case by holding that in case it has not been ascertained as to whether an AMP expenditure is international transaction or not, in such a matter remand is a best suited alternative. Revenue aggrieved by the orders of ITAT urged two questions of law. The first pertained to the AMP expenditure – for which the ITAT has remitted the matter for fresh consideration in the light of its previous Special Bench judgment in L.G. Electronics India Pvt. Ltd. v. ACIT. The High Court held that since the case of L.G. Electronics itself has been partially reversed and the matter has been remitted to be reconsidered in light of the directions in Sony Ericsson Mobile Communications India Private Limited v. CIT, no question of law arises while considering the matter afresh. Revenue preferred appeal vide special leave but with a delay.
Having heard the parties, the Supreme Court condoned the delay and granted leave.
Leave granted
