\> * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 507/2007,ITA 508/2007 ITA 511/2007,ITA 397/2007 JUDGMENT RESERVED ON;22.7.2011 .TUDGMENT DELIVERED ON;23.12.2011 (1) ITA 507/2007 DIRECTOR OF INCOME TAX APPELLANT Through: Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through: Mi*. Soli Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates (2) ITA 508/2007 DIRECTOR OF INCOME TAX APPELLANT Through: Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Stariding Counsel Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through: Mr. Soli Dastur, Ml". Percy Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep ITA 507/2007, ITA 508/2007.ITA511/2007,ITA 397/2007 Page I of3 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified (3) Chatterjee and Ms. Meghna Sudha Panda, Advocates ITA 511/2007 DIRECTOR OF INCOME TAX Through; Versus APPELLANT Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel ERICSSON RADIO SYSTEM A.B.,NEW DELHI. ..RESPONDENT Through: Mr. SoH Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates. (4) ITA 397 of 2007 DIRECTOR OF INCOME TAX APPELLANT Mr. Sanjeev Sabharwal, Advocate Through: Versus M/S METAPATH SOFTWARE INTERNATIONAL LTD. Through: ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 . ..RESPONDENT Mr. R. Satish Kumar, Advocate with Mr. Parivesh Singh, Advocate. 2 2 of 3 CORAM: HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MS. JUSTICE REVA KHETRAPAL A.K.SIKRI, ACTING CHIEF JUSTICE: 1. For orders, see ITA 504 of 2007. /T DECEMBER 23,2011 skb I ACTING CHIEF JUSTICE (REVA KHETRAPAL) JUDGE ITA 507/2007, ITA 508/2007,ITASII/2007,ITA 397/2007 Page30^3 •k + ™,rmrH COURTOF DFXHlAT NEW BELB.1 theHIGHcom ^^jTA 507/2007 ITA508/2007,ITA511/2007 ITA 397/2007 JUWMlHLSlSi™ TTA S04/2Q07 (1) afpeixant director of incomeTAX pvasaran, ASO with Mr. Sanjecv Sabharwal. Sr. StandingCounsel Versus ERICSSONA.B.,NEWDELHI. ^r. Percy Through: Ms. PraUbha Smgh, Mr. Sudeep Chatterjce an .• s. McghoaSudhaPanda, Auvocaie. (2) appellant director OF INCOMETAX /.sq „,ti, Through: M^. s,bharwal, S,. StandingCounsel Versus , «V«TFMABNEW DELia..RESPONDENT ERICSSONRADIOSYSILM A. .,_ pj,|.^y Ms. Prabbha Singh, n/" I'aj.e 1ol'75 ,T,V 504/20.17,.TA 507/2007, ,TA 508,7007,,T.-V5n/20a7,,TA 3.r/20nv Mr Sudeep Chatterjee and Ms. MeghnaSudhaPanda, Advocates (3) TTA 508/2007 "OROriNCOMKTAX « Sanjeev Sabharwal, Si. Standing Counsel Versus A cvqtitM a B new DELBLI. .RESPONDENT ERICSSONradio system • Ms. Pi-atibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates (4) director of income Through; TTA 511/2007 Versus ERICSSONRADIO SYSTEM Through: Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Si. StandingCounsel B NEW DELHI.^.RESPONDENT Mr. Soli Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates. 504/2007,ITA 507/2007, ITA 508/2l)07,VrA51 1/2007.ITA 3';7/20I)7 Piige2 ol'75 A TTA .^97 of 2007. director of incometax SabliamairAdvocate M/S _ international LTD. Kumar, Advocate Through: tjh Mr. Parivesh Singh. Advocate. CORAM: HON'BLEthe acting chief justice HON'BLEMS. justicerevakhetrapal A QtKRI. ACTING_CHIEFJlJSTI-£Ei 1. The assesseeM/s. EricssonRadio Systems A.B. is acompany mcorporatedin Swedenand is a.axresidentof Sweden. The company i, a100% subsidiaryofTelefonakitiebolagetL.M. Ericsson. The mam businessofthe assesseecompanyis tiresupplyofhardwareand software which is used in the businessof renderingtelecommunicationservices and for this purpose, it undeital.es projects on turnkey basis. In Thi-ough; Versus 75- i'-,uK-ion5 ITA 504/2007,ITA 507.-2007. ,TA 508/2007,ITA5,1/1007,ITA 397,no.)7 V? telecommunicationprojects,,tlie activities involved ate supply of hardwareand software,installationand commissioningof the two and after sales service. In tlte assessmetrt year 1997-97. tite assessee companyenteredintoagreementswithten cellularoperatorscollectively called"operators"as follows;- "1. HuchinstonMax TelecomLimited 2. RPG CellularServicesLimited 5. BhartiCellularLimited 4_ BirlaAT&TCommunication.Lid. 5 CellularCommunicationIndiaLtd. (RPG CellecomLtd.) 6. J.T. MobileLimited 7 B.hartiTeleventuresLimited 8. HexacomIndiaLimited 9. HuchinstomMax TelecomLtd. 10. RelianceTelecomPrivateLtd. 07-04-1995 27-06-1995 15-12-1994 05-04-1996 29-05-1996 02-07-1996 23-08-1996 25-09-1996 29-10-1996 13-02-1997" 2. Pursuant to the aforesaid contracts, the assessee lias supplied various hardware and software to the above mentioned cellular operators duringthe relevantassessmentyear. In regardto tax liability in India, the assessee claimed that it is not liable to tax under the provisions of the Income-Tax Act, 1961- and the Double Taxation ITA 504/2007,ITA 507/2007, ITA 508/20(17.ITA511/2007,ITA 397/2007 Pime '1 of 75 Yi AvoidanceAgi'eementbetweenSwedenand India(the "DTAA"). It is necessai-yto highlightthat the assessee, as stated above, is awholly owned subsidiary of-the L.M. Group of Companieswith whom the cellularoperatorshad entered into supply agreements. The Ericsson Telephone CorporationIndia AB is also aforeign company with a branch in India and is a subsidiai'y of the parent company of tire assessee,viz., TelefonakitiebolagetL.M. Ericsson. There is one more entity,namely,EricssonCommunicationsLimited,which is an Ind.an companyairdis awhollyownedsubsidiai-yofthe parentcompany. For the purposeofbrevity,EricssonRadio SystemAB is referredto as the assessee,whereasEricssonTelephoneCorporationIndiaAB is referred to as EFC and EricssonCommunicationsLimitedis referredto as ECL and the companyTelefonakitiebolagetL.M. Ericsson is referredto as LME. 3. The assessee,anon-residentcompany,suppUes equipmentto the operators,while the other two companies(EFC and ECL) are mthe business of installation of the equipment and granting marketmg Pi'.ge 5 of 75 ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA311/2007,ITA 397/2007 supportto the assessee.Thus, for the first three months, the work of installationand marketingsupportwas done by the EFC, and for the remaining nine months, the same work was done by ECL. The contractsunderfalcenby EFC, which were pendingon 30'" June, 1996 wereassignedto ECL,whichwas incorporatedin India. 4. The basicstructureofthe companiesis tabulatedby the Assessmg Officer as follows (Installation contractor & marketing support afterJuly 1996) Ericsson Radio System A.B. (ERA) Ericsson Telephone j Corporation India < AB \ / Subsidiary • of LME (Equipment supplier to and Indian Customer) Subsidiary ofLME (Installation contractor & marketing support to ERA before July 1996) Non-Resident Company ' N.R. Company having Branch in India Indian Company 5. Beforethe contractwas signedin India,anumberofemployeesof the assesseecompanyand other associatedcompaniesvisitedIndia for the purposeofnetworksurveyand to negotiatethe termsofthe contract, whichwas acontinuousprocessspreadover along periodoftime. It is ITA 50.1/2007,ITA 507/2007, ITA 508/2007.1TA511/2007,ITA 397/2007 Pilge oi"75 amatterof recordthat duringthe visits of those employees,the branch office of EFC provided office, telephone and other facilities to the aforesaidemployees. The employeesofthe branchofficeusedto attend the meetings and undertook follow-up work with the customers afterwards. In this regard,therewas amarketsupportagreemententered into betweenthe assesseeandEFC. 6. The supply of the equipment significantly was a continuous pfocess. In accordancewith the contract,the equipmentwas not to be acceptedtill it was finally tested through atest laiown as Acceptance Test (A.T.). Such AcceptanceTest was to be carriedout by EFC in the firstthreemonthsand by the ECL in the last nine monthsofthe relevant year. The contractswere signedin India and till deliveryto the port in India was the responsibilityof the supplier. The supply was on CIP basis and after supply, the defectiveparts were to be replaced by the assessee. 7. On the aforesaidfacts, the AssessingOfficerafterconsideringthe provisionsof the Income-TaxAct, 1961, and in particulai'Section 9 P:me 7 of 7.5 ITA 504/2007,ITA 5l»7/20n7, ITA 508/2007.ITA511/2007,ITA 397/2007 thereof, held that the assessee had abusmess connectionin India and incomeofthe assesseemustbe deemedto accrueor arisemIndiaand as such was taxable in hidia. 8. The AssessingOfficer also consideredthe questionwhether the assessee'sincome was taxable in India in view of Article7 read with Article5of the Double TaxationAvoidanceAgreementbetweenIndia and Sweden and concluded as follows "1. The assessee has a permanentestablishment in the form of a dependent agent establishment which is EFC. 2. The assessee also has a. permanent establishmentin the form of a dependentagent PE which is ECl in the laterpart of the year i.e. after July 1996. 3. It has PE in theform of a branch which was providingafixedplaceofbusinessto the assessee. 4. The office of ECI was a fixed place of business,for the assessee company. 5. The employeesof the assessee company were coming:to India and signing contracts and were stayingin India and using variousfacilitieswhich clearlyshows that the assesseehad afixedplace of business. " 9 The A.O. then proceededto renderdetailedfindings in rcspectof each ofthe aforesaidmatters,to which we shall presentlyadvert before P;\j:e8of75 ITA 504/2007,ITA 507/2007, ITA 508/20fl7.nVv51 1/7.007,ITA 397/2007 proceedingto dealwitlitlie softwaresupplycontractenteredbetweenthe cellularoperatorand the assesseeand Article 13 of the DTAA between India and Swedendealingwith royaltiesand fees for technicalservices. Afterconsideringthe matterfrom all angles,the A.O. concludedthatthe assessee had provided the software to the cellular operators under a licenseand the incomewhicharosetherefromwas to be taxed as royalty as per Article 12 of the Indo-Swedentreaty. Since, however, the assesseehad apermanentestablishmentin India, the same was to be taxed as businessprofitsat aflat rate of 30% as providedin the Indian Income-Tax Act. 10. The A.O. thenproceededto givethe computationas follows.- "The total supplies made during the year for hardwar.ein US $ 3,80,74,540/-and softwareis US $ 1,10,72,708/-. Aperusalofthe balancesheetfiled by the assesseeshows thatfor the year ending1997, the company has earneda gross margin of 47%. This comesfrom the annualreportfor theyear 1997M-'here the assesseehas earned20142157thousandSwedish Corner gross margin on the net sale of 42797901 thousand Swedish Corner. This is 47% over and above the assessee has claimed selling expenses, administrativeexpenses and R&D expenses in the globalbalancesheet. The assesseehas submittedthat P;i;dC ') ol n-A 504/2007,ITA 507/2007, tTA 508/2007,ITA511/2007,ITA 717/2007 it has reimbursedto the Indian companycommission plus other costs which amounts to 21% of the total turnoverand thereforeout ofthis grossprofitof47%, 21%o is allowedas expendituredirectlyattributableto Indian Operations. The administrativeexpensesand R&D expensesare coveredunder the overallsealing ofSection 44C of the IT. Act and thereforethe net taxableincomeofthe assesseeis computedasfollow: I Total Sales ofhardware = US $ 3,80,74,540/- converting into INR @36.15 =38074540 ='= 36.15 =137,63,94,621/- Taxableprofit@26%) = 35,78,62,601/- Less: H. O. expensesallowed u/s44C@5%= 1,78,93,1307- TaxableIncome = 33,99,69,4717- Tax@55%>= 18,69,83,209/- I Totalconsiderationfor software-US $1,10,72,7087- Convertedinto INR @3615- 40,02,78,3947- Tax @30% =Rs/12.00.83.513/- U Total tax = (I) + (11) —30,70,66,7277- Assessed. Issue necessary forms. Charge * interest:Penalty! proceedings u/s 271 (1) (c) is initiated separately. " 11. In an appeal filed againstthe aforesaidorder of the DCIT, Non- Resident Circle, New Delhi on 28.03.2000, the Commissioner of Income-Tax(Appeals)examinedthe matter. The appellanthad taken PiU;el()or75 ITA 50.1/2007,ITA 507/2007, ITA 508/2007,rrA511/2007,ITA 397/20U/ 1/0 five grounds of appeal, apart from taldng up two additional grounds subsequentlyas follows (i) Ground No.l was that the learnedA.O. had erred m holding that the income cliargeableto tax in India accrued or arose to the assessee. This ground was heldto be too generalinnatureby the CIT(A). (ii) Ground No.2 dealt with the assessee's business connectionin India and the existence of permanent establishmentin India. The CII(A) decided the aspect of business comiectionagainst the appellant, but the additionalgroundtakenup by the assesseeon 21.07.2000againstexistenceofPE ofthe assesseein India,was decidedinfavourofthe assessee. (iii) GroundNo.3 mentionedthat the assesseeincurred,a loss duringthe year as certifiedby Price WaterHouse Cooper, Sweden and, therefore,the A.O. erroneously brought to tax the impugned income ol .?74,02,47,865/- consisting of business income ot f33,99,69,471/-and royaltiesof?40,02,78,394/-. Fhe CIT(A) :partly allowed this ground, and held that while no business profit can be computed in the absenceiof PE of the assessee in India, the assessee was liableto pay tax on royaltiesreceivedby it from the operatorsin India. (iv) In ground No.4, the assessee assailed the finding of the A.O. that income from licencing of software amountedto receiptofroyalty. Withoutprejudiceto P<mc 1 I 01*75 ITA 504/2007,ITA 507/2007, ITA 508/2007^ITA511/2007,ITA 397/2007 Sv this ground, it was mentionedthat once it was held that the appellant had PE in India, the royalties obtainedthe characterofbusinessprofits. It was also submittedthat the A.O. had failed to appreciatethat royaltiesare taxableat the rate of 20% under Article 12 ofthe DTAA. The CIT(A)decidedthis ground lor treating license fees received by the assessee as royaltiesagainstthe assessee. However, he directed the A.O. to verify the rate of tax chargeableon the receiptof the royalties and pass a speakingorder in this behalf (v) Ground No.5 sought to challengethe A.O.'s finding regardingchargingofinterestunderSection234A and 234B on the groundthat the revenueswere liable for tax deductionat source. This groundwas allowedby the CIT(A). (vi) The additionalground regarding invalidityof^notice issuedby the assessingofficerunder Section 142(1), taken on 05.12.2000, was dismissed. The aT(A) thus partlyallowedthe appealofthe assessee. 12. The assesseewas not satisfiedwith the partialreliefgrantedto it by the CIT (A). That part ofthe orderwhich went againstthe assessee was challengedby it by filing appeal before the ITAT. Likewise,the Revenuealso challengedotherpart ofthe order ofthe CIT (A) whereby the reliefwas grantedto the assessee. These appeals and cross-appeals P:ige 12of 75 ITA 504/2007.ITA 507/2007. ITA 508/2007.ITA5!1/2007.1TA 397/2007 alongwithcases of other assesseesnamely Nokia and Motorola were referredto the SpecialBench. The SpecialBenchhas decidedthe issues in favour of the assessee resulting in dismissal of the appeals ot the Revenueand allowingthe appealofthe assessee. Challengingthat order ofthe SpecialBench,the Revenuehas filed appealwhichis registeredas ITA 507/2007. ITA 508/2007 arises from the order passed by the. Tribunal disposing of the cross-objectionsof the assessee and ITA 511/2007arisesfrom the orderofthe Tribunaldisposingofthe appealot the Revenue. Thus ITA 507/2007, ITA 508/2007 and ITA 511/2007 relate to one assessmentyear i.e. 1997-98. In the next assessmentyeai, the ITAT followed the aforesaidorder and challengingthat order IIA 504/2007 is filed by the Revenue. These first three appeals were admitted on the following questions of lawi- ITA 507/2007 "1.Whether in law, the Ld. Delhi Tribunal was justifiedin! holding that the assessmentwas invalid inasmuchas it was framedpursuantto a notice issued under Section 142 91)(i) of the Income-Tax Act, 1961, which notice was issued beyond the period of limitation?: ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 Piii^e 13 C)r75 2. Whether in law, the Ld. Delhi Tribunal was justifiedin holdingthat the assessee did not have a business connection in India? 3. Whether in law, the Ld. Delhi Tribunal was justifiedin holdingthat the considerationfor supply ofsoftwareWas not apaymentby way ofroyalty,and hence, was not assessable both under Section 9(l)(vi) of the Double Taxation Avoidance Agreement•between the government of India and Sweden?" • TTA 508/2007 "1.Whether in law, the Ld. Delhi Tribunal was justifiedin'holdingthat the assessee did not have a business connection in India.?" TTA 511/2007 "1.Whether in law, the Ld. Delhi Tribunal was justifiedin holdingthat the assessee did not have a permanentiestablishmentinIndia? 2. Whether in law, the Ld. Delhi Tribunal was justifiedin: deletingthe levy ofinterestchargedunder Section 234B of the Income Tax Act, 1961?" 13. We may first deal with the two incidentalissues beforecomingto the main issues. First issue pertains to the validity of notices issued ITA 504/2007,ITA 507/2007, ITA 50S/2007,iTA51 1/2007,ITA 397/2007 . /5 under Section 142 ofthe Income-TaxAct. The Tribunalhas concluded that this noticewas issuedafterthe end ofthe assessmentyeai i.e. aftei 31'' March, 1998 and, therefore,it was invalid. Consequently,it held thatthe AssessingOfficerhad no jurisdictionto completethe assessment and, therefore,assessmentframed by him on 28^'' March, 2000 was also invalid. However, subsequent'to this decision of the Tribunal, by FinanceAct, 2006, the Legislaturehas added proviso in Section 142 (i) ofthe Act. The effectthereofisthat an assessmentframedpursuantto a notice issued under Section 142 after the end of the assessmentyear would also be valid.: Concedingthis position, it was accepted by the assessedthat the notice issue was not beyond the period of limitation. Question No.l of ITA 507/2007, is thus decided in favour of the Revenue. ; 14. Secondquestion,whichwe take up for considerationrelatesto the levy ofinterestchargedundersection234B ofthe Act. The Tribunalhas deletedthis additionand the Revenueis questioningthis decisionof the Tribunal. The question of law No.2 is framed on this issue in ITA ITA fO'l./lOO?. IT.A 507/2007, ITA 508/2007,ITA 515/2007, ITA 397/2007 Piijie 15 (}l"75 511/2007. Perusalofthe order ofthe Tribunalwould reflectthat it has followedits earlierdecisionofDelhi Bench and Mumbai Bench on the basis of which it is held by the Tribunalthat levy of interestwas not justified,inasmuchas the assesseehad no obligationto pay any advance tax as tax was deductableat source on its incomethat was chaigeableto tax inIndia. This vei-y issuehas been discussedin detailby this Courtin CIT Vs. MitsubishiCorporationin ITA 491/2008. Relying upon the judgmentof Bombay High Court in DIT Vs. N.aC NetworkAsia LLC, 313 ITR 187, this Court reached the conclusionthat no interest can be levied. 15. The circumstancesof the present case are virtually similar. In• fact, we may recordthatthere was hardlyany resistanceby the Revenue to the aforesaidposition. We thus answerthis questionin favour of the assessee and against the Revenue. 16. It is now the stage to deal with the basic issues raised in these appeals which are:- : (1) Whether;theassesseehas businessconnectioninIndia? ITA 504/2007,ITA 507/2007, ITA 50S/2007,ITA511/2007,ITA 397/2007 Pi'i'e I (2) Whether the assessee has permanentestabhshmentin India? (We may clarify that if the assessee has busuiess connection in India, then this question may not even need to be considered). (3) Whether.hardware and software componentsof the equipmentcan be segregatedfor the purposeof Section (l)(Yi) of the Act? 17. The issue as to whetherany incomecan be broughtto tax in tenns ofthe Act is dealtwith in paras 103 to 123 ofthe Tribunal'sorder. The . Tribunalhas come to the conclusionthat no part ofthe income accrues or arisesin Indiabecausehavingregardto the terms of Article 13 ofthe SupplyContractit is clearthat propertyin the goods has passedoutside India. In this regard; the Tribunalhas held that the mere fact that the contract was signed,in India is an irrelevant circumstance and the reliance by the revenue on the judgmentof the Supreme Court in the case of20^'' Century'.FinanceCorporationis misplaced. The Supreme Court in that case was concernedwith the issue as to where the situs of the taxable event of a contract to transfer a right to use goods was located. It was in thM contextthat the SupremeCourtheld thatthe situs ITA 504/2007,ITA 507/2007, ITA 508/2007,ITASI 1/2007,ITA 397/20(17 of the taxable event in such a deemed sale was the place where the contract for the transfer of the right to use the goods was made. Accordingto the Tribunalhavingregardto the provisionsof Section 19 and 20 ofthe Sale of(joodsAct, the propertyin the goods passeswhen the parties intend it to pass, and' the intention of the parties was manifestedin Article13 ofthe Supply Contract. The Tribunalalso held that the mere fact than an AcceptanceTest was carriedout in hidiawas an. irrelevant circumstance and in this regard relied on its eailiei decisionsas well as in the judgmentofthe AndhraPradeshIligh Court mAdditionalCITYs.SkodaExportPraha, 172 ITR 358. Accordingto the Tribunal,the mere fact that an acceptancetest had to be performed did not in any way meanthatthe titlehad not passedfrom the assesseeto the Cellularoperatoroutsidein India. 18. .The Tribunalnotedthatit was not uncommonthat in executionot such large projectsthe variouscomponentsofaturnkeyprojectnamely plamiing and designing, supply of equipment, civil works and installation,testingand commissioningofthe equipmentmay be handled ITA 504/2007,ITA 507/2007, ITA 5n8/2007,nA51 I/20C7,ITA 397/2007 "^75 by aconsortiumof companies. Separateagreementswould be entered into to carry out eachi ofthe aforesaidobligationsand each contractor wouldbe responsiblefor its obligationsunderits contractalthoughthere may be an overall responsibility. Two separate independentcontiacts were enteredinto: one'betweenthe assesseeand the cellularoperatorfor the supplyofthe goods and the other betweenthe installationcontractor and the cellularoperatorand the Tribunalfor the reasons given in para 118 ofits orderfound, on aconstructionofthe relevantprovisionsofthe two agreements,that the contractscould not be treated as turnkey or a works contract. The Tribunalalso did not acceptthe argumentthat by virtueofthe overallagreementthe incomethat arose to the assesseewas chargeable to tax in India. As regards the overall agreement, the Tribunal held that the overall agreementwas executed as a matter of commercialprudenceas the cellularoperatorneeds to be instilledwith confidencethat the projectwould ultimatelytake offand, therefore,he would insist on a single point responsibility. The Tribunal also noted that this was a commonpracticeand InstructionNo. 1829 issued by the ITA 504/2007, ITA 507/2007. ITA 508/2007,ITA511/2007, ITA 397/2007 Page 19of 75 CentralBoardofDirectTaxeswhichwas in force on the first day ofthe assessmentyear also takes cognizanceof the commercialnecessityfor having such overallresponsibility. The Tribunalfurther found that no payment accrued either to the assessee or the installationcontractor under the overall agreement,but the overall agreementmerely ensured supervisionand guaranteedthe performanceof all the contractsin aco ordinated manner. The Tribunal further noted that the installation contractorsand the assesseewere separateindependententitiesand there was no evidencebroughton recordto disclosethat any one is dependent on the other, either financiallyor in any other manner. The Tribunal, furtherheldthatthe findingofthe CommissionerofIncome-Tax(A) that the various entitieswere formed for the purpose of business and were doing business independentlyas per their instrumentsof incorporation was not disputedby the Revenue. The Tribunalfound that both EFC as well as ECI were separatelyassessedto tax in India. The Tribunalthus came to the conclusionthat there was no business connectionwith the assesseein Indiahavingregardto the natureofthe arrangementthat the ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 Page 20 111 75 assessee had with eitlier EFC or ECL Further, as no operationswere formed by the assessee in India no income could be charged to tax in India. The Tribunal,therefore,ultimatelyconcludedthat no part of the income accruedto the|assesseein India and that as the assesseedid not have a business connection in India no part of the income could be regardedas deemed to accrue in India also; and that income from the supply of equipment•accrues outside India, where the equipment is manufacturedoutsideIndiaand the propertythereinpassesoutsideIndia and the place of executionofthe contractis not relevant. In this regard reliance was placed by the Tribunal on the judgmentofthe Supreme Court in IshikawajmaHarimaheavyIndustriesLtd, Vs. DIT^ 288 ITR 408 where the Courthas held that the fact that the contractwas signed in India is of no materialconsequencesince all activitiesin connection withthe off shore supplywere carriedon outsideIndia. 19. It would thus be proper to first deal with the issue of business connection. : ITA 504/2007,ITA 507/2007, ITA 50S/2007,!TA511/2007,ITA 397/2007 Pilge?,! Ol75 u RE: BUSINESS CONNECTION: 20. Mr. MohanParaisharan,learnedASG openedthe argument on this aspectby submittingthat it was an integratedbusinessarrangementfor supply of GSM system for which three agreementswere entered mto viz., the SupplyAgreement,the histallationAgreementand the Overall Agreement with JT MOBILES, which together form an Integrated BusinessArrangementthat is governedby the OverallAgreement. The said IntegratedBusiness Arrangementis for the setting up of a GSM system and the same: could not have been set up without the overall supervision, direction and decision making power exercised by the assessee. It was the submissionof Mr. Prasaranthat a plain readingof the terms and conditipns of the three contracts, all entered into on the same day and at the same place in India, viz., Bangalore,indicatesthat they are all interlinked,inter-twinedand inseparable. He pointed out that the assessee and its associated sister concerns had entered into contracts with the Indian buyers for the setting up of a GSM system in India. For the aforesaid purpose, the hardware and software was to be ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007 PfiyC 22 Ol75 supplied/licensedby |the assessee, the installation thi-ough a sister concern of the assessSe was to be overseen by the assessee and the overallresponsibilityof the three contractsalso was upon the assessee. He drew our attentionto the salient features of the three Agreements which accordingto him conclusivelyshow that they are, meffect, one integrated business arrangement. He specifically referred to the followingfeatures of these Agreements: Supply Agreement * Preamble; Agreement for supply of hardware and software license. Article5! Scope of the contract. Fhe said clausc uses the phrase"turnkey basis". * Article18: Acceptance Test and Acceptance certificate issued by the InstallationContiactoi \^ill bind on' the assessee. * Article 2b: Provides for the license to use software for the purposesof settingup of a system. * Article2;1: Assignmentof the contractmay be done whereby!the hardwaremay be assignedto anyone by the Indian supplier,but the softwaremay be assigned only aft^r due permission of the assessee. * Article 3:1: Provides for termination of the supply contract.; ITA 504/2007,ITA 507/2007, ITA 508/2007,I^A511/2007,ITA 397/2007 P{iye 2.1 Ol 75 Installation Agreement Preamble; Agreement for installation of hardware supplied and software for which license has already been granted. Article15;: AcceptanceTest made by the installation contractor includes the integrity of the whole system and certificate binds the assessee. Article 17: The installation contractor warranties to rectify delfects in both hardware and software (which areprovidedbythe assessee). Article 25: Provides for termination of the contract. * Article29: Assignmentof the contractmay be done at anytime at the option of the InstallationContractoi to any subsidiarycompanyof LME. Overall Agreement I * Preamble: Clearly indicates that the parties aie setting up a system and not just supply of goods oi- installation separately. * Clause2; Clearly outlines that the overall responsibility for the supply agreement and the installation agreement rests with the assessee. Clause5i Clearlyshows that the terminationof both the contracts is simultaneous and that where only the installatipncontract is terminated,the prerogative is that of the assessee to fmd the replacement for the installation contractor. Clause 6: Provides that the Overall Agreement has precedenceover the other two agreementsand in case of any conflictin interpretationwith the othertwo, will prevail. : ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 2'lol 75 21. Mr. Prasaran slibmitted that in the light of the above, the AssessingOfficeras well as CIT (A) were entirelyjustifiedin comingto the conclusion that ithe contracts formed an Integrated Business • I Arrangementon the piart of the assesseeto provide the Indian buyers with.aGSM system. The assessingofficermade the followingpertinent findingswithrespecttothe integratednatureofthe contract:- * Overall responsibilitywas on the assessee for supply, 1 erection and after sales services as evidenced by, the ResponsibilityMatrix between the assessee company and JT MPBILES (a-s well as the other customers): Responsibility Matrix between Ericsson and JT MOBIT;ES s per their contract ; JT Mobiles Ericsson Sliipmeht CEP to agreed port in India; X Management of Store X Site packing in the store X "k Delivery of documentation according to Annex IL