ASSISTANT DIRECTOR OF INCOME TAX Vs. LUCENT TECHNOLOGIES INTERNATIONAL INC.
INCOME TAX APPELLATE TRIBUNAL
Assistant Director Of Income Tax
Lucent Technologies International Inc.
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R.S.Syal, Member (A) -
(1.) THIS appeal by the Revenue emanates from the order passed by the Commissioner of Income -tax (Appeals) on September 30, 2011, in relation to the assessment year 1997 -98. The solitary effective ground projects the grievance of the Revenue as under:
"1. On the facts and in the circumstances of the case, the learned Commissioner of Income -tax (Appeals) has erred holding that the assessee's assistance to M/s. Lucent Technologies India Ltd. In connection with services of installation, commissioning, testing, etc. of the hardware and software constitutes only 'service permanent establishment' and further determining the profits attributable to the Indian permanent establishment of the assessee at the rate of 2.5 per cent of the total turnover for the relevant year."
(2.) BRIEFLY stated, the facts of the case are that the assessee is a company incorporated in the U.S.A. It is a leading supplier of hardware and software products for GSM Cellular Radio Telephone System. The assessee supplied telecommunication hardware and software to customers in India. No return of income was furnished by the assessee for the year in question. On perusal of contract signed between the assessee and various customers, the Assessing Officer opined that the assessee was chargeable to tax in India. Notice was issued to the assessee to file return but without success. The Assessing Officer issued and served notice on its Indian subsidiary in view of the fact that as per the terms of contract between the assessee and Escotel Mobile Communication Ltd., the notice was to be sent to AT and T India Private Ltd., subsequently renamed as Lucent Technologies India Ltd. (LTIL). Once again notice was sent to the assessee. In the absence of any co -operation coming from the side of the assessee, the Assessing Officer finalised assessment under section 144 of the Income -tax Act, 1961 (hereinafter also called "the Act") on the basis of material on record. In this assessment order, the Assessing Officer observed that the assessee entered into contract with Escotel Mobile Communication Ltd. for GSM Cellular and Tata Bell Canada Ltd. for basic services in Andhra Pradesh. In order to do these activities, the assessee sent its employees to India for conducting network survey and undertaking negotiations. The contract for supply of hardware and software was signed in India by Mr. Don Green for and on behalf of the assessee -company. The installation contract was signed between the Indian company and customers. The after -sales services were also to be carried out by the Indian company. The Assessing Officer observed that the assessee earned profit on supply of hardware and software, which was chargeable to tax in India. He held that the profit on supply of hardware was taxable as per article 7 read with article 5 of the Double Taxation Avoidance Agreement between India and the U.S.A. (hereinafter also called "the DTAA") and the profit on supply of software and documentation taxable as "royalty" as per article 12 of the Double Taxation Avoidance Agreement. The Assessing Officer further held that the assessee has a permanent establishment in India by virtue of fixed place of business in the form of office of its Indian subsidiary; service permanent establishment in the form of employees of the assessee -company coming to India and staying here for a long time; and also dependent agent permanent establishment in India in the form of LTIL. Taking into consideration all the relevant factors and without any support from the assessee, the Assessing Officer computed the total income under section 144 of the Act by considering 70 per cent of total receipts as attributable to hardware supplied, liable to tax as "business profits" after deduction at 60 per cent towards expenses, at the rate of 55 per cent. The remaining amount of 30 per cent of total receipts was considered as towards software supplied, liable to tax as fees for technical services. When the matter went before the learned Commissioner of Income -tax (Appeals), he held that there was no permanent establishment of the assessee in India and, hence, income from hardware was not chargeable to tax. He, however, upheld the taxability of income from software as royalty. Both sides appealed before the Tribunal. Vide order dated December 19, 2008 a copy of which is available on pages 76 onwards of the assessee's paper book, the Tribunal held that LTIL constituted a service permanent establishment of the assessee. Relying on the Special Bench order in the case of Motorola, the Tribunal held that the amount charged to tax as royalty towards supply of software should also be considered as "business profits" of the assessee -company along with the income from supply of hardware. While giving effect to the Tribunal order, the Assessing Officer, vide his order dated October 9, 2009, came to hold that total value of hardware and software supplies amounting to Rs. 230.66 crores was attributable to the service permanent establishment of the assessee in India. After allowing deduction for expenses at 60 per cent, as done originally, he computed total business income at Rs. 92.26 crores on which tax rate of 55 per cent was applied. The assessee objected to the said order passed by the Assessing Officer by contending before the hon'ble Delhi High Court that the Assessing Officer did not give any opportunity of hearing before passing this order. The hon'ble High Court set aside this order passed by the Assessing Officer and remitted the matter to him for passing a fresh order after granting an opportunity of hearing. A fresh order was passed by the Assessing Officer on March 29, 2010, a copy of which is available on page 127 of the paper book, repeating the view taken by him in his earlier order and computing the same income. The assessee appealed before the learned Commissioner of Income -tax (Appeals) against this order. Vide the impugned order, the learned Commissioner of Income -tax (Appeals) held that the assessee has a service permanent establishment in India as was directed by the Tribunal. On the question of attribution of income, the learned Commissioner of Income -tax (Appeals) held that 2.5 per cent of the sales made by the overseas entities in India should be considered as the assessee's total income. This rate of 2.5 per cent was applied on the basis of survey proceedings taken up under section 133A in the year 2007 against certain group entities of the assessee -company, in which the Assessing Officer finally determined the net income attributable to the permanent establishment in India at 2.5 per cent of the sales made by the overseas entities in India. The Revenue in the present appeal is aggrieved on two issues, namely, (i) the direction of the learned Commissioner of Income -tax (Appeals) to hold LTIL as service permanent establishment of the assessee in India; and (ii) attribution of income to the Indian permanent establishment at 2.5 per cent of the total turnover. We will deal with both the issues one by one.
I Service permanent establishment
(3.) THE learned Departmental representative vehemently argued that the learned Commissioner of Income -tax (Appeals) fell in error by holding that LTIL constituted service permanent establishment of the assessee in India on the basis of the Tribunal order. It was submitted that the Tribunal no where rendered a finding that LTIL should be considered as service permanent establishment alone. He stated that the Assessing Officer held LTIL to be service permanent establishment on several scores, such as, fixed place; dependent agent; installation permanent establishment; and service permanent establishment. It was argued that LTIL should be considered as permanent establishment of the assessee from all these angles as was held by the Assessing Officer in the original assessment, instead of holding it to be service permanent establishment alone.;
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