Delhi High Court The Commissioner Of Income Tax, ... vs Zte Corporation on 24 January, 2017 $~ * RESERVED ON: 16.01.2017 % PRONOUNCED ON: 24.01.2017 + ITA 904/2016, ITA 905/2016, CM APPL.46510/2016 ITA 906/2016, CM APPL.46511/2016 ITA 907/2016, CM APPL.46512/2016 ITA 908/2016, CM APPL.46513/2016 ITA 909/2016, CM APPL.46515/2016 THE COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION2 ..... Appellant versus ZTE CORPORATION ..... Respondent Appearance: Mr. Ruchir Bhatia, Sr. Standing Counsel with Mr. Puneet Rai, Jr. Standing Counsel, on behalf of Revenue, in all the appeals. Mr. Deepak Chopra with Mr. Harpreet Singh Ajmani and Mr. Rohan Khare, Advocates for the assessees in all the appeals. HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE NAJMI WAZIRI S.RAVINDRA BHAT, J. 1. In these appeals, the following questions of law arise for consideration: (i) Are the ITAT's findings with respect to interpretation of Article 12 (3) of the IndoChina Double Taxation Avoidance Agreement (DTAA), in the light of ITA904909/2016 Page 1 of 21 Explanations 5 & 6 to Section 9 (1) (vi), erroneous in law. (ii) Is the impugned order correct in its interpretation of Section 234B of the Income Tax Act, 1961, in the facts and circumstances of the case. 2. Brief facts of the case are that the assessee is a tax resident of the Republic of China and is engaged in the business of supplying telecom equipment. During the financial years, relevant to the subject assessment year, it was engaged in supply of telecom equipment to Indian telecom operators; it also supplied mobile handsets to customers in India. It did not file its return of income arguing that it had no Permanent Establishment (PE) in India in terms of the provisions of Article 5 of the IndoChina Double Taxation Avoidance Agreement ("DTAA"). On 6.10.2009 a survey under Section 133A was undertaken at its premises and several documents were seized. Statements of its senior executives were also recorded. On the basis of these documents and statements, the Assessing Officer (AO) formed the opinion that the assessee had a business connection in India and its business had been carried through its PE in India and further income had accrued to it during the relevant year from such business. 3. A notice under Section 148 of the Income Tax Act ("the Act") was issued on 23.10.2009 requiring the assessee to file its return of income; it did so, declaring Nil income. In the notes to the "statement showing computation of income" the assessee stated that since it did not have PE in India, its revenues were not taxable as business profits. It made detailed submissions justifying that it had no fixed place PE, no dependent agency PE in India, no installation PE and no service PE. It also urged that no part ITA904909/2016 Page 2 of 21 of profits of supplies could be attributed to the independent PE unless it was established by the revenue that the supplies were not at arm's length price. 4. The AO after examining various statements, concluded that the assessee had fixed place PE, installation PE, dependent agency PE in India and, therefore, the revenues from the supply of telecom equipment and mobile hand sets were to be taxed in India as business profits. He, therefore, proceeded to determine the profits attributable to the assessee's PE in India. Before computing the profits he pointed out that the profits to the PE in India have to be computed separately in respect of hardware and software components of the telecom equipment and the mobile handsets. 5. The assessee had contended before the AO that the software embedded in the telecom equipment or provided to the customers separately, or software supplied to the various customers in India should not be treated as royalty under Section 9(1) (vi) of the Act and also under Article 12 (3) of the DTAA. The assessee had argued that: a) Software is sold in the same manner as telecom equipment, b) The software is an integral part of the telecom equipment, which facilitates running of the said equipment. c) The subject software has no independent value of its own. d) No copyrights in the software are transferred to the customers. e) No access to the "source codes" in the software is granted to the customer. f) Payment for software is not related