Mr. Mohan Prasaran, Asg With Mr. Sanjeev Sabharwal, Sr. Standing Counsel v. Ericsson A.b.,New Delhi

* IN THE HIGH COURT OF DELHI AT NEW DELHI+ ITA 504/2007, ITA 507/2007 ITA 508/2007,ITA 511/2007 ITA 397/2007 JUDGMENT RESERVED ON:22.7.2011JUDGMENT DELIVERED ON:23.12.2011 (1) ITA 504/2007 DIRECTOR OF INCOME TAX Through: ..... APPELLANT Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Sr. Versus ERICSSON A.B.,NEW DELHI. Through: ….RESPONDENT Mr. Soli Dastur, Mr. Percy Perdiwalla,Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates (2) ITA 507/2007 DIRECTOR OF INCOME TAX ..... APPELLANT Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Through: Sr. Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through: Mr. Soli Dastur, Mr. Percy Perdiwalla,Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates (3) ITA 508/2007 DIRECTOR OF INCOME TAX ..... APPELLANT Through:Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Sanjeev Sabharwal, Sr. Standing Counsel Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through:Mr. Soli Dastur, Mr. Percy Perdiwalla,Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates (4) ITA 511/2007 DIRECTOR OF INCOME TAX Through: Versus ..... APPELLANT Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Mr. Sanjeev Sabharwal, Sr. Standing Counsel Sr. ERICSSON RADIO SYSTEM A.B.,NEW DELHI. ..RESPONDENT Through:Mr. Soli Dastur, Mr. Percy Perdiwalla,Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates. Through:Mr. Soli Dastur, Mr. Percy Perdiwalla,Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates. Panda, (5) ITA 397 of 2007 DIRECTOR OF INCOME TAX Through: ..... APPELLANT Mr. Sanjeev Sabharwal, Advocate Versus M/S METAPATH SOFTWARE INTERNATIONAL LTD. Through: . ..RESPONDENT Mr. R. Satish Kumar, Advocate with Mr. Parivesh Singh, Advocate. CORAM: HON’BLE THE ACTING CHIEF JUSTICE HON'BLE MS. JUSTICE REVA KHETRAPAL A.K.SIKRI, ACTING CHIEF JUSTICE: 1.The assessee M/s. Ericsson Radio Systems A.B. is a company incorporated in Sweden and is a tax resident of Sweden. The company is a 100% subsidiary of Telefonakitiebolaget L.M. Ericsson. The main business of the assessee company is the supply of hardware and software which is used in the business of rendering telecommunication services and for this purpose, it undertakes projects on turnkey basis. In telecommunication projects, the activities involved are supply of hardware and software, installation and commissioning of the two and after sales service. In the assessment year 1997-97, the assessee company entered into agreements with ten cellular operators collectively - called “operators” as follows: “1.Huchinston Max Telecom Limited 2. RPG Cellular Services Limited 2. RPG Cellular Services Limited 3. Bharti Cellular Limited 4. Birla AT & T Communication Ltd. 5. Cellular Communication India Ltd. (RPG Cellecom Ltd.) 4. Birla AT & T Communication Ltd. 5. Cellular Communication India Ltd. (RPG Cellecom Ltd.) : 07-04-1995 : 27-06-1995 : 15-12-1994 : 05-04-1996 : 27-06-1995 : 15-12-1994 : 05-04-1996 : 29-05-1996 6. J.T. Mobile Limited 7. Bharti Televentures Limited 8. Hexacom India Limited 8. Hexacom India Limited 9. Huchinstom Max Telecom Ltd. 10. Reliance Telecom Private Ltd. 10. Reliance Telecom Private Ltd. : 02-07-1996 : 23-08-1996 : 25-09-1996 : 29-10-1996 : 13-02-1997”: 23-08-1996 : 25-09-1996 : 29-10-1996 : 13-02-1997” “1.Huchinston Max Telecom Limited 2. RPG Cellular Services Limited 2. RPG Cellular Services Limited 3. Bharti Cellular Limited 4. Birla AT & T Communication Ltd. 5. Cellular Communication India Ltd. (RPG Cellecom Ltd.) 4. Birla AT & T Communication Ltd. 5. Cellular Communication India Ltd. (RPG Cellecom Ltd.) : 07-04-1995 : 27-06-1995 : 15-12-1994 : 05-04-1996 : 27-06-1995 : 15-12-1994 : 05-04-1996 : 29-05-1996 6. J.T. Mobile Limited 7. Bharti Televentures Limited 8. Hexacom India Limited 8. Hexacom India Limited 9. Huchinstom Max Telecom Ltd. 10. Reliance Telecom Private Ltd. 10. Reliance Telecom Private Ltd. : 02-07-1996 : 23-08-1996 : 25-09-1996 : 29-10-1996 : 13-02-1997”: 23-08-1996 : 25-09-1996 : 29-10-1996 : 13-02-1997” 2.Pursuant to the aforesaid contracts, the assessee has supplied various hardware and software to the above mentioned cellular operators during the relevant assessment year. In regard to 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 Avoidance Agreement between Sweden and India (the “DTAA”). It is necessary to highlight that the assessee, as stated above, is a wholly owned subsidiary of the L.M. Group of Companies with whom the cellular operators had entered into supply agreements. The Ericsson Telephone Corporation India AB is also a foreign company with a branch in India and is a subsidiary of the parent company of the assessee, viz., Telefonakitiebolaget L.M. Ericsson. There is one more entity, namely, Ericsson Communications Limited, which is an Indian company and is a wholly owned subsidiary of the parent company. For the purpose of brevity, Ericsson Radio System AB is referred to as the assessee, whereas Ericsson Telephone Corporation India AB is referred to as EFC and Ericsson Communications Limited is referred to as ECL and the company Telefonakitiebolaget L.M. Ericsson is referred to as LME. 3.The assessee, a non-resident company, supplies equipment to the operators, while the other two companies (EFC and ECL) are in the business of installation of the equipment and granting marketing support to the assessee. Thus, for the first three months, the work of installation and marketing support was done by the EFC, and for the remaining nine months, the same work was done by ECL. The contracts undertaken by EFC, which were pending on 30[th] June, 1996 were assigned to ECL, which was incorporated in India. 4.The basic structure of the companies is tabulated by the Assessing Officer as follows:- 5.Before the contract was signed in India, a number of employees of the assessee company and other associated companies visited India for the purpose of network survey and to negotiate the terms of the contract, which was a continuous process spread over a long period of time. It is a matter of record that during the visits of those employees, the branch office of EFC provided office, telephone and other facilities to the aforesaid employees. The employees of the branch office used to attend the meetings and undertook follow-up work with the customers afterwards. In this regard, there was a market support agreement entered into between the assessee and EFC. 6.The supply of the equipment significantly was a continuous process. In accordance with the contract, the equipment was not to be accepted till it was finally tested through a test known as Acceptance Test (A.T.). Such Acceptance Test was to be carried out by EFC in the first three months and by the ECL in the last nine months of the relevant year. The contracts were signed in India and till delivery to the port in India was the responsibility of the supplier. The supply was on CIP basis and after supply, the defective parts were to be replaced by the assessee. 7.On the aforesaid facts, the Assessing Officer after considering the provisions of the Income-Tax Act, 1961, and in particular Section 9 provisions of the Income-Tax Act, 1961, and in particular Section 9 6.The supply of the equipment significantly was a continuous process. In accordance with the contract, the equipment was not to be accepted till it was finally tested through a test known as Acceptance Test (A.T.). Such Acceptance Test was to be carried out by EFC in the first three months and by the ECL in the last nine months of the relevant year. The contracts were signed in India and till delivery to the port in India was the responsibility of the supplier. The supply was on CIP basis and after supply, the defective parts were to be replaced by the assessee. 7.On the aforesaid facts, the Assessing Officer after considering the provisions of the Income-Tax Act, 1961, and in particular Section 9 provisions of the Income-Tax Act, 1961, and in particular Section 9 thereof, held that the assessee had a business connection in India and income of the assessee must be deemed to accrue or arise in India and as such was taxable in India. 8.The Assessing Officer also considered the question whether the assessee‟s income was taxable in India in view of Article 7 read with Article 5 of the Double Taxation Avoidance Agreement between India and Sweden and concluded as follows:- “1.The assessee has a permanent establishment in the form of a dependent agent establishment which is EFC. 2. The assessee also has a permanent establishment in the form of a dependent agent PE which is ECI in the later part of the year i.e. after July 1996. 3. It has PE in the form of a branch which was providing a fixed place of business to the assessee. 4. The office of ECI was a fixed place of business for the assessee company. 5. The employees of the assessee company were coming to India and signing contracts and were staying in India and using various facilities which clearly shows that the assessee had a fixed place of business.” 9.The A.O. then proceeded to render detailed findings in respect of each of the aforesaid matters, to which we shall presently advert before proceeding to deal with the software supply contract entered between the cellular operator and the assessee and Article 13 of the DTAA between India and Sweden dealing with royalties and fees for technical services. After considering the matter from all angles, the A.O. concluded that the assessee had provided the software to the cellular operators under a license and the income which arose therefrom was to be taxed as royalty as per Article 12 of the Indo-Sweden treaty. Since, however, the assessee had a permanent establishment in India, the same was to be taxed as business profits at a flat rate of 30% as provided in the Indian Income-Tax Act. 10.The A.O. then proceeded to give the computation as follows:- “The total supplies made during the year for hardware in US $ 3,80,74,540/- and software is US $ 1,10,72,708/-. A perusal of the balance sheet filed by the assessee shows that for the year ending 1997, the company has earned a gross margin of 47%. This comes from the annual report for the year 1997 where the assessee has earned 20142157 thousand Swedish Corner gross margin on the net sale of 42797901 thousand Swedish Corner. This is 47% over and above the assessee has claimed selling expenses, administrative expenses and R&D expenses in the global balance sheet. The assessee has submitted that it has reimbursed to the Indian company commission plus other costs which amounts to 21% of the total turnover and therefore out of this gross profit of 47%, 21% is allowed as expenditure directly attributable to Indian Operations. The administrative expenses and R&D expenses are covered under the overall sealing of Section 44C of the I.T. Act and therefore the net taxable income of the assessee is computed as follow: it has reimbursed to the Indian company commission plus other costs which amounts to 21% of the total turnover and therefore out of this gross profit of 47%, 21% is allowed as expenditure directly attributable to Indian Operations. The administrative expenses and R&D expenses are covered under the overall sealing of Section 44C of the I.T. Act and therefore the net taxable income of the assessee is computed as follow: - 1.Total Sales of hardware = US $ 3,80,74,540/- converting into INR @ 36.15 = 38074540 * 36.15 = 137,63,94,621/- Taxable profit @ 26% = 35,78,62,601/- Less: H.O. expenses allowed u/s 44C @ 5% = 1,78,93,130/- Taxable Income = 33,99,69,471/- Tax @ 55% = 18,69,83,209/- ……………. I–Total consideration for software US $ 1,10,72,708/- –Converted into INR @ 36.15 40,02,78,394/- Tax @ 30% = Rs/12.00.83.513/- …………… IITotal tax = (I) + (II) = 30,70,66,727/- Assessed. Issue necessary forms. Charge interest Penalty proceedings u/s 271 (1) (c) is initiated separately.” 11. In an appeal filed against the aforesaid order of the DCIT, Non- Resident Circle, New Delhi on 28.03.2000, the Commissioner of Income-Tax (Appeals) examined the matter. The appellant had taken five grounds of appeal, apart from taking up two additional grounds subsequently as follows:- (i) Ground No.1 was that the learned A.O. had erred in holding that the income chargeable to tax in India accrued or arose to the assessee. This ground was held to be too general in nature by the CIT(A). holding that the income chargeable to tax in India accrued or arose to the assessee. This ground was held to be too general in nature by the CIT(A). (ii) Ground No.2 dealt with the assessee‟s business connection in India and the existence of permanent establishment in India. The CIT(A) decided the aspect of business connection against the appellant, but the additional ground taken up by the assessee on 21.07.2000 against existence of PE of the assessee in India, was decided in favour of the assessee. connection in India and the existence of permanent establishment in India. The CIT(A) decided the aspect of business connection against the appellant, but the additional ground taken up by the assessee on 21.07.2000 against existence of PE of the assessee in India, was decided in favour of the assessee. (iii) Ground No.3 mentioned that the assessee incurred, a loss during the year as certified by Price Water House Cooper, Sweden and, therefore, the A.O. erroneously brought to tax the impugned income of `74,02,47,865/- consisting of business income of `33,99,69,471/- and royalties of `40,02,78,394/-. The CIT(A) partly allowed this ground, and held that while no business profit can be computed in the absence of PE of the assessee in India, the assessee was liable to pay tax on royalties received by it from the operators in India. loss during the year as certified by Price Water House Cooper, Sweden and, therefore, the A.O. erroneously brought to tax the impugned income of `74,02,47,865/- consisting of business income of `33,99,69,471/- and royalties of `40,02,78,394/-. The CIT(A) partly allowed this ground, and held that while no business profit can be computed in the absence of PE of the assessee in India, the assessee was liable to pay tax on royalties received by it from the operators in India. (iv) In ground No.4, the assessee assailed the finding of the A.O. that income from licencing of software amounted to receipt of royalty. Without prejudice to the A.O. that income from licencing of software amounted to receipt of royalty. Without prejudice to (iv) In ground No.4, the assessee assailed the finding of the A.O. that income from licencing of software amounted to receipt of royalty. Without prejudice to the A.O. that income from licencing of software amounted to receipt of royalty. Without prejudice to this ground, it was mentioned that once it was held that the appellant had PE in India, the royalties obtained the character of business profits. It was also submitted that the A.O. had failed to appreciate that royalties are taxable at the rate of 20% under Article 12 of the DTAA. The CIT(A) decided this ground for treating license fees received by the assessee as royalties against the assessee. However, he directed the A.O. to verify the rate of tax chargeable on the receipt of the royalties and pass a speaking order in this behalf. (v) Ground No.5 sought to challenge the A.O.‟s finding regarding charging of interest under Section 234A and 234B on the ground that the revenues were liable for tax deduction at source. This ground was allowed by the CIT(A). regarding charging of interest under Section 234A and 234B on the ground that the revenues were liable for tax deduction at source. This ground was allowed by the CIT(A). (vi) The additional ground regarding invalidity of notice issued by the assessing officer under Section 142(1), taken on 05.12.2000, was dismissed. The CIT(A) thus partly allowed the appeal of the assessee. issued by the assessing officer under Section 142(1), taken on 05.12.2000, was dismissed. The CIT(A) thus partly allowed the appeal of the assessee. 12.The assessee was not satisfied with the partial relief granted to it by the CIT (A). That part of the order which went against the assessee was challenged by it by filing appeal before the ITAT. Likewise, the Revenue also challenged other part of the order of the CIT (A) whereby the relief was granted to the assessee. These appeals and cross-appeals alongwith cases of other assessees namely Nokia and Motorola were referred to the Special Bench. The Special Bench has decided the issues in favour of the assessee resulting in dismissal of the appeals of the Revenue and allowing the appeal of the assessee. Challenging that order of the Special Bench, the Revenue has filed appeal which is registered as ITA 507/2007. ITA 508/2007 arises from the order passed by the Tribunal disposing of the cross-objections of the assessee and ITA 511/2007 arises from the order of the Tribunal disposing of the appeal of the Revenue. Thus ITA 507/2007, ITA 508/2007 and ITA 511/2007 relate to one assessment year i.e. 1997-98. In the next assessment year, the ITAT followed the aforesaid order and challenging that order ITA 504/2007 is filed by the Revenue. These first three appeals were admitted on the following questions of law:- ITA 507/2007 “1.Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessment was invalid inasmuch as it was framed pursuant to a notice issued under Section 142 91)(i) of the Income-Tax Act, 1961, which notice was issued beyond the period of limitation? 2. Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessee did not have a business connection in India? 3. Whether in law, the Ld. Delhi Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and hence, was not assessable both under Section 9(1)(vi) of the Double Taxation Avoidance Agreement between the government of India and Sweden?” ITA 508/2007 “1.Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessee did not have a business connection in India.?” ITA 511/2007 “1.Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessee did not have a permanent establishment in India? 2. Whether in law, the Ld. Delhi Tribunal was justified in deleting the levy of interest charged under Section 234B of the Income Tax Act, 1961?” 13.We may first deal with the two incidental issues before coming to ITA 508/2007 “1.Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessee did not have a business connection in India.?” ITA 511/2007 “1.Whether in law, the Ld. Delhi Tribunal was justified in holding that the assessee did not have a permanent establishment in India? 2. Whether in law, the Ld. Delhi Tribunal was justified in deleting the levy of interest charged under Section 234B of the Income Tax Act, 1961?” 13.We may first deal with the two incidental issues before coming to the main issues. First issue pertains to the validity of notices issued under Section 142 of the Income-Tax Act. The Tribunal has concluded that this notice was issued after the end of the assessment year i.e. after 31[st] March, 1998 and, therefore, it was invalid. Consequently, it held that the Assessing Officer had no jurisdiction to complete the assessment and, therefore, assessment framed by him on 28[th] March, 2000 was also invalid. However, subsequent to this decision of the Tribunal, by Finance Act, 2006, the Legislature has added proviso in Section 142 (i) of the Act. The effect thereof is that an assessment framed pursuant to a notice issued under Section 142 after the end of the assessment year would also be valid. Conceding this position, it was accepted by the assessed that the notice issue was not beyond the period of limitation. Question No.1 of ITA 507/2007, is thus decided in favour of the Revenue. 14.Second question, which we take up for consideration relates to the levy of interest charged under section 234B of the Act. The Tribunal has deleted this addition and the Revenue is questioning this decision of the Tribunal. The question of law No.2 is framed on this issue in ITA 511/2007. Perusal of the order of the Tribunal would reflect that it has followed its earlier decision of Delhi Bench and Mumbai Bench on the basis of which it is held by the Tribunal that levy of interest was not justified, inasmuch as the assessee had no obligation to pay any advance tax as tax was deductable at source on its income that was chargeable to tax in India. This very issue has been discussed in detail by this Court in CITVs.Mitsubishi CorporationinITA 491/2008. Relying upon the judgment of Bombay High Court inDIT Vs. N.G.C. Network Asia LLC, 313 ITR 187, this Court reached the conclusion that no interest can be levied. 15.The circumstances of the present case are virtually similar. In fact, we may record that there was hardly any resistance by the Revenue to the aforesaid position. We thus answer this question in 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 the assessee has business connection in India? (2)Whether the assessee has permanent establishment in India? India? (We may clarify that if the assessee has business connection in India, then this question may not even need to be considered). connection in India, then this question may not even need to be considered). (3)Whether hardware and software components of the equipment can be segregated for the purpose of Section (1)(vi) of the Act? equipment can be segregated for the purpose of Section (1)(vi) of the Act? 17. The issue as to whether any income can be brought to tax in terms 16.It is now the stage to deal with the basic issues raised in these appeals which are:- (1)Whether the assessee has business connection in India? (2)Whether the assessee has permanent establishment in India? India? (We may clarify that if the assessee has business connection in India, then this question may not even need to be considered). connection in India, then this question may not even need to be considered). (3)Whether hardware and software components of the equipment can be segregated for the purpose of Section (1)(vi) of the Act? equipment can be segregated for the purpose of Section (1)(vi) of the Act? 17. The issue as to whether any income can be brought to tax in terms of the Act is dealt with in paras 103 to 123 of the Tribunal‟s order. The Tribunal has come to the conclusion that no part of the income accrues or arises in India because having regard to the terms of Article 13 of the Supply Contract it is clear that property in the goods has passed outside India. In this regard, the Tribunal has held that the mere fact that the contract was signed in India is an irrelevant circumstance and the reliance by the revenue on the judgment of the Supreme Court in the case of 20[th] Century Finance Corporation is misplaced. The Supreme Court in that case was concerned with 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 that context that the Supreme Court held that the situs 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. According to the Tribunal having regard to the provisions of Section 19 and 20 of the Sale of Goods Act, the property in the goods passes when the parties intend it to pass, and the intention of the parties was manifested in Article 13 of the Supply Contract. The Tribunal also held that the mere fact than an Acceptance Test was carried out in India was an irrelevant circumstance and in this regard relied on its earlier decisions as well as in the judgment of the Andhra Pradesh High Court in AdditionalCIT Vs. Skoda Export Praha, 172 ITR 358. According to the Tribunal, the mere fact that an acceptance test had to be performed did not in any way mean that the title had not passed from the assessee to the Cellular operator outside in India. 18.The Tribunal noted that it was not uncommon that in execution of such large projects the various components of a turnkey project namely planning and designing, supply of equipment, civil works and installation, testing and commissioning of the equipment may be handled by a consortium of companies. Separate agreements would be entered into to carry out each of the aforesaid obligations and each contractor would be responsible for its obligations under its contract although there may be an overall responsibility. Two separate independent contracts were entered into: one between the assessee and the cellular operator for the supply of the goods and the other between the installation contractor and the cellular operator and the Tribunal for the reasons given in para 118 of its order found, on a construction of the relevant provisions of the two agreements, that the contracts could not be treated as turnkey or a works contract. The Tribunal also did not accept the argument that by virtue of the overall agreement the income that arose to the assessee was chargeable to tax in India. As regards the overall agreement, the Tribunal held that the overall agreement was executed as a matter of commercial prudence as the cellular operator needs to be instilled with confidence that the project would ultimately take off and, therefore, he would insist on a single point responsibility. The Tribunal also noted that this was a common practice and Instruction No. 1829 issued by the Central Board of Direct Taxes which was in force on the first day of the assessment year also takes cognizance of the commercial necessity for having such overall responsibility. The Tribunal further found that no payment accrued either to the assessee or the installation contractor under the overall agreement, but the overall agreement merely ensured supervision and guaranteed the performance of all the contracts in a co-ordinated manner. The Tribunal further noted that the installation contractors and the assessee were separate independent entities and there was no evidence brought on record to disclose that any one is dependent on the other, either financially or in any other manner. The Tribunal further held that the finding of the Commissioner of Income-Tax (A) that the various entities were formed for the purpose of business and were doing business independently as per their instruments of incorporation was not disputed by the Revenue. The Tribunal found that both EFC as well as ECI were separately assessed to tax in India. The Tribunal thus came to the conclusion that there was no business connection with the assessee in India having regard to the nature of the arrangement that the assessee had with either EFC or ECI. Further, as no operations were formed by the assessee in India no income could be charged to tax in India. The Tribunal, therefore, ultimately concluded that no part of the income accrued to the assessee in India and that as the assessee did not have a business connection in India no part of the income could be regarded as deemed to accrue in India also; and that income from the supply of equipment accrues outside India, where the equipment is manufactured outside India and the property therein passes outside India and the place of execution of the contract is not relevant. In this regard reliance was placed by the Tribunal on the judgment of the Supreme Court in Ishikawajma Harima heavy Industries Ltd. Vs.DIT, 288 ITR 408 where the Court has held that the fact that the contract was signed in India is of no material consequence since all activities in connection with the off shore supply were carried on outside India. 19.It would thus be proper to first deal with the issue of business connection. RE: BUSINESS CONNECTION: 20.Mr. Mohan Parasharan, learned ASG opened the argument on this aspect by submitting that it was an integrated business arrangement for supply of GSM system for which three agreements were entered into viz., the Supply Agreement, the Installation Agreement and the Overall Agreement with JT MOBILES, which together form an Integrated Business Arrangement that is governed by the Overall Agreement. The said Integrated Business Arrangement is 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 submission of Mr. Prasaran that a plain reading of the terms and conditions of the three contracts, all entered into on the same day and at the same place in India, viz., Bangalore, indicates that they are all interlinked, inter-twined and 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 supplied/licensed by the assessee, the installation through a sister concern of the assessee was to be overseen by the assessee and the overall responsibility of the three contracts also was upon the assessee. He drew our attention to the salient features of the three Agreements which according to him conclusively show that they are, in effect, one integrated business arrangement. He specifically referred to the following features of these Agreements: Supply Agreement Preamble: Agreement for supply of hardware and software license. software license. supplied/licensed by the assessee, the installation through a sister concern of the assessee was to be overseen by the assessee and the overall responsibility of the three contracts also was upon the assessee. He drew our attention to the salient features of the three Agreements which according to him conclusively show that they are, in effect, one integrated business arrangement. He specifically referred to the following features of these Agreements: Supply Agreement Preamble: Agreement for supply of hardware and software license. software license. Article 5: Scope of the contract. The said clause uses the phrase “turn key basis”.uses the phrase “turn key basis”. Article 18: Acceptance Test and Acceptance certificate issued by the Installation Contractor will bind on the assessee. certificate issued by the Installation Contractor will bind on the assessee. Article 20: Provides for the license to use software for the purposes of setting up of a system. for the purposes of setting up of a system. Article 21: Assignment of the contract may be done whereby the hardware may be assigned to anyone by the Indian supplier, but the software may be assigned only after due permission of the assessee. whereby the hardware may be assigned to anyone by the Indian supplier, but the software may be assigned only after due permission of the assessee. Article 31: Provides for termination of the supply contract. contract. Installation Agreement Preamble: Agreement for installation of hardware supplied and software for which license has already been granted. supplied and software for which license has already been granted. Article 15: Acceptance Test made by the installation contractor includes the integrity of the whole system and certificate binds the assessee. contractor includes the integrity of the whole system and certificate binds the assessee. Article 17: The installation contractor warranties to rectify defects in both hardware and software (which are provided by the assessee). rectify defects in both hardware and software (which are provided by the assessee). Article 25: Provides for termination of the contract. * Article 29: Assignment of the contract may be done at anytime at the option of the Installation Contractor to any subsidiary company of LME. at anytime at the option of the Installation Contractor to any subsidiary company of LME. Overall Agreement Preamble: Clearly indicates that the parties are setting up a system and not just supply of goods or installation separately. setting up a system and not just supply of goods or installation separately. Clause 2: Clearly outlines that the overall responsibility for the supply agreement and the installation agreement rests with the assessee. responsibility for the supply agreement and the installation agreement rests with the assessee. Clause 5: Clearly shows that the termination of both the contracts is simultaneous and that where only the installation contract is terminated, the prerogative is that of the assessee to find the replacement for the installation contractor. the contracts is simultaneous and that where only the installation contract is terminated, the prerogative is that of the assessee to find the replacement for the installation contractor. Clause 6: Provides that the Overall Agreement has precedence over the other two agreements and in case of any conflict in interpretation with the other two, will prevail. precedence over the other two agreements and in case of any conflict in interpretation with the other two, will prevail. 21.Mr. Prasaran submitted that in the light of the above, the Assessing Officer as well as CIT (A) were entirely justified in coming to the conclusion that the contracts formed an Integrated Business Arrangement on the part of the assessee to provide the Indian buyers with a GSM system. The assessing officer made the following pertinent findings with respect to the integrated nature of the contract:- Clause 6: Provides that the Overall Agreement has precedence over the other two agreements and in case of any conflict in interpretation with the other two, will prevail. precedence over the other two agreements and in case of any conflict in interpretation with the other two, will prevail. 21.Mr. Prasaran submitted that in the light of the above, the Assessing Officer as well as CIT (A) were entirely justified in coming to the conclusion that the contracts formed an Integrated Business Arrangement on the part of the assessee to provide the Indian buyers with a GSM system. The assessing officer made the following pertinent findings with respect to the integrated nature of the contract:- Overall responsibility was on the assessee for supply, erection and after sales services as evidenced by the Responsibility Matrix between the assessee company and JT MOBILES (as well as the other customers): erection and after sales services as evidenced by the Responsibility Matrix between the assessee company and JT MOBILES (as well as the other customers): Responsibility Matrix between Ericsson and JT MOBILES s per their contract JT Ericsson Mobiles Shipment CIP to agreed port in India x *Management of Store x *Site packing in the store x Delivery of documentation according to Annex 11. x Delivered on CD-ROM only as built documentation, MSC/BSC & BTSs x Delivered as hard copies only correction of remarks on as * Even if the Installation Contract is terminated, the Supply Contract is not terminated and the assessee is responsible for making an alternative arrangement. However, if the Supply Contract is terminated, the Installation Contract also stands terminated as evidenced by Clause 5.5 of the Overall Agreement, which reads thus: “5.5 In the event that the Supply Contractor terminates his contract, by notice in writing to JT MOBILES, the Installation Contractor may also terminate his contract by notice in writing to JT MOBILES. In the event that the Installation Contractor terminates his contract by notice in writing to JT MOBILES, the Supply Contractor shall locate a party acceptable to JT MOBILES for taking up the work under the Installation Contract on the same terms and conditions and without any extra expense and JT MOBILES shall sign the Installation Contract with that party.” * The Overall Agreement was “not a matter of comfort, but an overall guarantee provided by the supplier right from the supply upto the testing and proper functioning of the system”. In fact, the assessee company thereby took responsibility of the work of installation carried out by the Indian company. The Acceptance Test was, however, to be carried out by the Indian company and the said test was to be binding on the assessee. There was thus an intimate and close relationship between the assessee and its associate company EFC and subsequently between the assessee and the Indian company i.e. ECL. * The assessee had complete control over the management, affairs and functioning of its associate companies. Neither EFC nor ECL can operate as independent agents on an arms length basis. 22.In the light of above, Mr. Prasaran questioned the findings of the * The assessee had complete control over the management, affairs and functioning of its associate companies. Neither EFC nor ECL can operate as independent agents on an arms length basis. 22.In the light of above, Mr. Prasaran questioned the findings of the Income Tax Appellate Tribunal regarding the interpretation of the Supply Agreement, Installation Agreement and the Overall Agreement entered into between the assessee, its associate companies and Indian customers. His submission in this behalf was that the scope of the agreement has been decided and interpreted by the ITAT on the basis of the Preambles to the Supply Contract and the Installation Contract, without giving adequate weight to the preamble of the Overall Agreement, which indubitably shows that there was only one integrated agreement whereunder: “The Supply Contractor and the Installation Contractor have agreed to work on a coordinated basis under two separate contracts, being one between JT MOBILES and the Supply Contractor for Hardware and Software Supply and the other between JT MOBILES and the Installation Contractor for the Installation of the system” so as to supply the system and install and commission the system. 23.According to him, another error in the order of the Tribunal was that while interpreting the scope of the contracts, even the other provisions of the Overall Agreement were not given adequate weight especially Article 6 of the Overall Agreement, which reads as follows:- “6.PRECEDENCEThis Agreement shall prevail over the Contracts, notwithstanding anything to the contrary contained therein.” 24.His submission was that this clause clearly shows that the Overall Agreement between JT MOBILES (the cellular operator) and the Supply Contractor (the assessee) and the EFC (the Installation Contractor) “concerning some additional terms and conditions due to the Supply and Installation of a Mobile Telephone System” was to prevail over the Supply Contract and the Installation Contract, which, in itself goes to show that it was integrated business arrangement between the parties. 25.Mr. Prasaran further argued that the Income Tax Appellate Tribunal could not have held that the Supplier, i.e., the assessee was not liable for faulty installation in the teeth of the declaration in the Preamble to the Overall Agreement read with Clause 2 of the said Agreement, which vests the responsibility for the proper installation with the assessee: “And whereas the Supply Contractor and the Installation Contractor have agreed to act in a co-ordinated manner so as to supply the System and install and commission the System. Now therefore, it is hereby agreed by and between the parties hereto as follows……………between the parties hereto as follows…………… 1. Interpretation: …………… 2. Execution:“The Supply Contractor shall have overall responsibility to ensure that the System is supplied in accordance with the Supply Contract and installed in accordance with the Installation Contract and commissioned as per Annex 18 (Time Schedule).”shall have overall responsibility to ensure that the System is supplied in accordance with the Supply Contract and installed in accordance with the Installation Contract and commissioned as per Annex 18 (Time Schedule).” 26.He also stressed that the Income-Tax Appellate Tribunal erroneously held that the responsibility of installing the system was not upon the assessee, and in comparing the responsibility of the assessee under the Overall Agreement to that of the Polish company in the case of CIT vs. Hindustan Shipyard Ltd., 109 ITR 158 (AP), where it was held that the services offered with the contract of sale were merely incidental 26.He also stressed that the Income-Tax Appellate Tribunal erroneously held that the responsibility of installing the system was not upon the assessee, and in comparing the responsibility of the assessee under the Overall Agreement to that of the Polish company in the case of CIT vs. Hindustan Shipyard Ltd., 109 ITR 158 (AP), where it was held that the services offered with the contract of sale were merely incidental to the contract by way of guarantee for the efficient working of the products of sale. In the instant case, by no stretch it can be said that the services offered by the Supply Contractor were merely incidental to the sale of hardware and the license to use software. On the contrary, such services were integral to the proper installation of the entire GSM system. The assessee was not merely selling machinery and software but had contracted to provide the full system which required supervision over the Installation Contractor and other services necessary to set up and maintain the GSM System. Accordingly, the ratio of the judgment of the Supreme Court in Hindustan Shipyard Ltd. (supra) is clearly inapplicable. The consequential finding that no income accrued to the assessee either from the Overall Agreement or from the Installation Agreement or from the Marketing and Business Promotion Agreement and thus it cannot be said that there was “intimate connection between the parties” is also erroneous. 27.His next proposition, on this aspect, was that under the above contracts income had accrued and arisen to the assessee in India and therefore it was taxable in India. In this behalf Mr. Prasaran made following submissions:- (a)Under Section 5 (2) (b) the income of a non-resident is includible in that income subject to tax under section 4 if the said income accrues or arises or is deemed to accrue or arise in India.resident is includible in that income subject to tax under section 4 if the said income accrues or arises or is deemed to accrue or arise in India. (b)Income is said to accrue or arise in India to an assessee if the assessee had a right to receive the money that can be traced to India. assessee if the assessee had a right to receive the money that can be traced to India. (c)Whether or not the right to receive the money has arisen in India is dependent on the facts of each case. Relevant factors in this regard will include inter alia the place where the contract is entered into, the place where the contract has to be performed, where a given right can be exercised and what sort of rights are granted in India. arisen in India is dependent on the facts of each case. Relevant factors in this regard will include inter alia the place where the contract is entered into, the place where the contract has to be performed, where a given right can be exercised and what sort of rights are granted in India. (d)In the present case, it is undisputed that:- All the vendeees are based in India The GSM systems are being set up India.The GSM systems are being set up India. The software is licensed for use in India The hardware is being supplied for setting up of a system in IndiaThe hardware is being supplied for setting up of a system in India The acceptance test to confirm the successful installation is done in India.The acceptance test to confirm the successful installation is done in India. The responsibility to ensure successful installation in India rests with the assessee.The responsibility to ensure successful installation in India rests with the assessee. (d)In the present case, it is undisputed that:- All the vendeees are based in India The GSM systems are being set up India.The GSM systems are being set up India. The software is licensed for use in India The hardware is being supplied for setting up of a system in IndiaThe hardware is being supplied for setting up of a system in India The acceptance test to confirm the successful installation is done in India.The acceptance test to confirm the successful installation is done in India. The responsibility to ensure successful installation in India rests with the assessee.The responsibility to ensure successful installation in India rests with the assessee. (e)The assessee‟s obligations therefore cannot be said to end once the title of the goods has passed to the Indian buyer. In addition, valuable rights are granted by the assessee which can only be exercised in India and t