Articles 5, 7, 12 of India-China DTAA; section 9 of the Act, Rule 10 of I T Rules – (i) level of participation of PE in economic life of source country should determine attribution of profit to PE (ii) If supply of software is integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.
Facts – 1
The Taxpayer was resident of China. It was engaged in the business of supplying telecom equipment and mobile handsets to Indian customers. It did not furnish return of its income in India on the ground that it did not have PE in India in terms of Article 5 of India-China DTAA .
According to the AO, since the Taxpayer was carrying on business in India through fixed base for long period, it had fixed place PE, installation PE and dependent agency PE in India. Therefore, the AO proceeded to determine the profits from supply of telecom equipment and mobile handsets that were attributable to the PE in India. Moreover, since the Taxpayer had not maintained separate books of account for its Indian operations, the AO invoked Rule 10(ii) of I T Rules and attributed 20% of net global profits arising out of revenues realized from India.
Facts – 2
In terms of consolidated offshore supply contract executed by the Taxpayer, the Taxpayer also supplied software. The Taxpayer contended that such software was integral and essential part of telecom equipment and hence, payment towards such software should not be treated as royalty. However, the AO concluded that the payments made for use of software were royalty in terms of Article 12(3) of India-China DTAA as well as section 9(1) of the Act.
Held – 1
As regards attribution of profits to PE
Since the Taxpayer had not maintained books of account pertaining to PE in India, indirect method of attribution as per rule 10 should be resorted to.
Primarily, taxable income arises to Taxpayer from nexus between source country and activities of PE. Hence, level of participation of PE in economic life of source country is the most important aspect.
The order of the AO and that of CIT(A) gives clear picture of level of operations of the PE. The level of operations carried out by the Taxpayer through its PE in India was considerable enough to conclude that almost entire sales function was carried out in India.
Since in the present case the hardware and software supplied to Indian customers involved supply, installation, commissioning etc.,, 35% of net global profits of the Taxpayer from its transactions with India were to be attributed to PE in India.
Held – 2
As regards integrally connected supply of software
Since supply of software was integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.
