M/Snortel Networks India International Inc v. The Director Of Income Tax -I

IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 04.05.2016 + ITA 666/2014 M/SNORTEL NETWORKS INDIA INTERNATIONAL INC. ..... Appellant Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX -I..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. WITH+ITA 667/2014 M/SNORTEL NETWORKS INDIA INTERNATIONAL INC...... Appellant Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX-I ..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. WITH+ITA 689/2014 M/SNORTEL NETWORKS INDIA INTERNATIONAL INC. ..... Appellant Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus ITA 666/2014 & Ors. Page 1 of 57 THE DIRECTOR OF INCOME TAX-IThrough: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. ..... Respondent WITH +ITA 669/2014 M/SNORTEL NETWORKS INDIA INTERNATIONAL INC...... Appellant Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX-I..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. WITH+ITA 671/2014 M/SNORTEL NETWORKS INDIA INTERNATIONAL INC...... Appellant Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX-I..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. WITH +ITA 672/2014 M/S NORTEL NETWORKS INDIA INTERNATIONAL INC. ..... Appellant ITA 666/2014 & Ors. Page 2 of 57 Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX-I ..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. AND ITA 673/2014 + M/SNORTEL NETWORKS INDIA INTERNATIONAL INC. ..... Appellant Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX-I ..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. CORAM: JUSTICE S.MURALIDHAR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.Nortel Networks India International Inc. (hereafter ‗the Assessee‘) has preferred the present appeals under Section 260A of the Income Tax Act, 1961 (hereafter ‗the Act‘) against orders passed by the Income Tax Appellate Tribunal (hereafter ‗ITAT‘). ITA Nos. 669/2014, 671/2014 and 672/2014 are appeals preferred by the Assessee against a common ITA 666/2014 & Ors. Page 3 of 57 Through: Mr. Deepak Chopra, Advocate with Ms. Manasvini Bajpai, Advocate. versus THE DIRECTOR OF INCOME TAX-I ..... Respondent Through: Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati, Advocate. CORAM: JUSTICE S.MURALIDHAR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.Nortel Networks India International Inc. (hereafter ‗the Assessee‘) has preferred the present appeals under Section 260A of the Income Tax Act, 1961 (hereafter ‗the Act‘) against orders passed by the Income Tax Appellate Tribunal (hereafter ‗ITAT‘). ITA Nos. 669/2014, 671/2014 and 672/2014 are appeals preferred by the Assessee against a common ITA 666/2014 & Ors. Page 3 of 57 order dated 13[th] June, 2014 passed by the ITAT in ITA Nos. 1119, 1120 and 1121/Del/2010, which were appeals preferred by the Assessee against a common order dated 22[nd] December, 2009 passed by the Commissioner of Income Tax (Appeals) [hereafter 'CIT(A)'] in respect of Assessment Years (AYs) 2003-04, 2004-05 and 2005-06. The common order dated 22[nd] December, 2009 passed by CIT(A) disposed of the appeals preferred by the Assessee against two separate assessment orders both dated 18[th]December, 2006 passed by the Assessing Officer (hereafter 'AO') under Section 147 read with Section 143(3) of the Act in respect of the AYs 2003-04 and 2004-05 as well as an assessment order dated 31[st]December, 2007 passed by the AO in respect of assessment year 2005-06. 2.ITA Nos. 666/2014, 667/2014 and 673/2014 impugn a common order dated 13[th] June, 2014 passed by the ITAT in ITA Nos. 2177, 2178 and 2179/Del/2011 which were appeals preferred by the Assessee against a common order dated 20[th] January, 2011 passed by CIT(A) in appeals no.78, 79 and 77/2009-10. These appeals were preferred by the Assessee against separate orders dated 29[th] January, 2010 passed by the AO to give effect to the common order dated 22[nd] December, 2009 passed by CIT(A) for AYs 2003-04, 2004-05 and 2005-06. 3.ITA No. 689/2014 is directed against ITAT's order dated 13[th] June, 2014 passed in an appeal preferred by the Assessee against final order dated 17[th] August, 2011 passed by the AO under Section 144C of the Act in respect of AY 2008-09. 4.By an order dated 24[th] February, 2015, ITA Nos. 666/2014, 667/2014 and 673/2014 were admitted and the following questions of law were framed:- "(i). Whether the Tribunal erred in concluding that the Appellant had a Permanent Establishment (PE) within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA? (iii). Whether the finding of the Tribunal that the Appellant had a PE in India is perverse and contrary to the facts and material on record?" 5.ITA Nos. 671/2014, 672/2014 and 669/2014 were admitted on 24[th] February, 2015 and the following questions of law were framed:- ―(i). Whether the Tribunal erred in concluding that the Appellant had a Permanent Establishment (PE) within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA? (ii). Whether the Tribunal erred in affirming that the Appellant had a PE (fixed place PE and dependent agent PE) in India in terms of the Liaison Office of Nortel Canada and also in terms of the Nortel Networks (India) Private Ltd" (being installation and service PE)? ITA 666/2014 & Ors. Page 5 of 57 (iii). Whether the finding of the Tribunal that the Appellant had a PE in India is perverse and contrary to the facts and material on record? (iv). Whether, without prejudice, the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Appellant in India and whether such approach and quantification was inconsistent with Article 7 of the DTAA?‖ 6. Similarly, ITA No. 689/2014 was also admitted on 24[th] February, ITA 666/2014 & Ors. Page 5 of 57 (iii). Whether the finding of the Tribunal that the Appellant had a PE in India is perverse and contrary to the facts and material on record? (iv). Whether, without prejudice, the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Appellant in India and whether such approach and quantification was inconsistent with Article 7 of the DTAA?‖ 6. Similarly, ITA No. 689/2014 was also admitted on 24[th] February, 2015 and the following questions of law were framed:- ―(i). Whether the Tribunal erred in concluding that the Appellant had a Permanent Establishment (PE) within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA? (ii). Whether the Tribunal erred in affirming that the Appellant had a PE (fixed place PE and dependent agent PE) in India in terms of the Liaison Office of Nortel Canada and also in terms of the Nortel Networks (India) Private Ltd" (being installation and service PE)? (iii). Whether the finding of the Tribunal that the Appellant had a PE in India is perverse and contrary to the facts and material on record? (iv). Whether, without prejudice, the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Appellant in India and whether such approach and quantification was inconsistent with Article 7 of the DTAA? ITA 666/2014 & Ors. Page 6 of 57 (v). Whether Tribunal erred in confirming the levy of interest under section 234B of the Act?‖ 7.The principal controversy involved in these appeals (ITA Nos. 669/2014, 671/2014, 672/2014 and 689/2014) is whether the Assessee, a tax resident of United States of America (USA), has a Permanent Establishment (hereafter 'PE') in India and consequently, is chargeable to tax under the Act in respect of its business income attributable to its PE in India. Factual background 8.The Assessee (formerly known as Nortel Networks RIHC Inc) was incorporated as a company on 7[th] June, 2002 under the laws applicable in the State of Delaware, USA and is a tax resident of USA. The Assessee is a part of Nortel Group which is stated to be a leading supplier of hardware and software for GSM Cellular Radio Telephone Systems. The Assessee is a step-down subsidiary of Nortel Networks Limited (Canada), a company incorporated in Canada (hereafter ‗Nortel Canada‘); it is wholly held by Nortel Networks Inc. which in turn is wholly owned subsidiary of Nortel Canada. Nortel Canada also has an indirect subsidiary in India, namely, Nortel Networks India Pvt. Ltd (hereafter ‗Nortel India‘). Nortel Canada also owns 99.99% of share capital of ITA 666/2014 & Ors. Page 7 of 57 Nortel Networks (Luxemburg) SA which in turn holds the entire share capital of Nortel Networks International Finance & Holdings BV (Nortel BV). Nortel BV holds 99.99% shares of Nortel Networks Mauritius Limited, a company incorporated in Mauritius, which in turn holds 99.99% of Nortel India. The above corporate structure of part of the Nortel Group can be better understood by the following diagram :- NORTEL NETWORKS LIMITED (CANADA) 100% 99.99% Nortel Networks Inc Nortel Networks (Luxemburg) SA 100% 100% Nortel Networks International Finance & Holding BV Nortel Networks India International Inc. (Appellant) 99.82% 99.99% Nortel Networks Singapore Pte. Nortel Networks Mauritius Ltd. 99.99% Nortel Networks India Pvt. Ltd. ITA 666/2014 & Ors. Page 8 of 57 Nortel Group can be better understood by the following diagram :- NORTEL NETWORKS LIMITED (CANADA) 100% 99.99% Nortel Networks Inc Nortel Networks (Luxemburg) SA 100% 100% Nortel Networks International Finance & Holding BV Nortel Networks India International Inc. (Appellant) 99.82% 99.99% Nortel Networks Singapore Pte. Nortel Networks Mauritius Ltd. 99.99% Nortel Networks India Pvt. Ltd. ITA 666/2014 & Ors. Page 8 of 57 9.The Nortel Canada also has a Liaison Office in India (hereafter called ‗Nortel LO‘). 10.Nortel India negotiated and entered into three contracts with Reliance Infocom Limited (hereafter ‗Reliance‘), namely, Optical Equipment Contract (hereafter ‗the Equipment Contract‘), Optical Services Contract (hereafter ‗the Services Contract‘) and the Software Contract (hereafter 'the Software Contract') on 8[th] June 2002. On the same date, Nortel India entered into an agreement assigning all rights and obligations to sell, supply and deliver equipment under the Equipment Contract to the Assessee (hereafter referred to as the ‗Assignment Contract‘). Reliance and Nortel Canada were also parties to the Assignment Contract and in terms thereof, Nortel Canada guaranteed the performance of the Equipment Contract by the Assessee (Assignee). In terms of the Assignment Contract, Reliance placed purchase orders directly on the Assessee and also made all payments for the equipment supplied directly to the Assessee. 11.The equipments supplied to Reliance were manufactured by Nortel Canada and another Nortel group entity in Ireland (Nortel Ireland). The same was invoiced by the Assessee directly to Reliance and consideration for the same was also received directly by the Assessee. It is asserted by the AO that the equipment supplied to Reliance was sourced from Nortel Canada and Nortel Ireland at a much higher price than the price charged to Reliance and this resulted in the Assessee suffering a loss during the relevant period. 12.Since according to the Assessee, its income was not chargeable to tax under the Act, it did not file any return for the AYs 2003-04 and 2004-05. The principal issues involved in the AYs 2002-03, 2003-04, 2004-05 and 2008-09 are common. The assessment orders passed by the AO and the appellate orders passed by CIT(A) and the ITAT for AY 2002-03, 2003-04 and 2004-05 are also more or less similar in effect and, therefore, for the sake of brevity only the facts as obtained for AY 2003-04 (ITA 671/2014) are referred to herein. 13.On 27[th] March, 2006, the AO issued a notice under Section 148 of the Act calling upon the Assessee to file its return of income for the AY 2003-04. In response to the aforesaid notice, the Assessee filed its return of income on 16[th]May, 2006 disclosing its taxable income as ‗Nil‘. Thereafter, the AO issued notice under Section 143(2) of the Act. In response to the aforesaid notices, the Assessee filed its statement of accounts disclosing the loss stated to have been incurred by the Assessee. The Assessee did not file its balance sheet or its audited accounts as according to the Assessee, it was not required to have its accounts audited in the tax jurisdiction where the Assessee is a resident, namely, Delaware, USA. Thereafter, on 18[th] December, 2006, the AO passed an assessment order under Section 143(3)/147 of the Act. Assessment Order dated 18[th] December, 2006 14.The AO observed that the Assessee had not booked any establishment cost, depreciation or any other indirect costs in its accounts. The Assessee did not file its balance sheet or its audited accounts as according to the Assessee, it was not required to have its accounts audited in the tax jurisdiction where the Assessee is a resident, namely, Delaware, USA. Thereafter, on 18[th] December, 2006, the AO passed an assessment order under Section 143(3)/147 of the Act. Assessment Order dated 18[th] December, 2006 14.The AO observed that the Assessee had not booked any establishment cost, depreciation or any other indirect costs in its accounts. Further, the Assessee had also not showed any source of funds. The AO noted that the equipment stated to have been supplied by the Assessee to Reliance was purchased from other group companies, namely, Nortel Canada and Nortel Ireland and were supplied to Reliance at almost half the price of the said goods. On the aforesaid basis, the AO concluded that the Assessee did not have any financial or technical ability to perform the Equipment Contract. 15.The AO further concluded that Nortel India and Nortel LO were involved in pre-contract survey, pre-contract negotiation, finalization of documents and carrying out of installation activities and at ground level, there was no difference between the LO and Nortel India and both were operating from the same premises and were providing services to the group companies including the Assessee. The AO further held that the contracts with Reliance constituted a single turnkey contract which had been artificially divided into three separate contracts. The AO further held that Nortel India also did not have the capacity to undertake the contracts entered into with Reliance and consequently, the same was transferred to other Nortel Group Companies including the Assessee. 16.The AO was of the view that the Assessee had been incorporated solely with the sole motive to evade the taxes arising out of supply contract in India and in substance, the contracts were performed by Nortel Canada along with its LO and Nortel India, who acted in unison to identify, negotiate, appraise, secure, execute, manufacture, supply, install, commission and provide warranty and after sales service in respect of the Optical Fibre project of Reliance. In addition, these companies also provided sales service and training etc. The AO also held that the activities performed by Nortel India were not within the scope of services to be rendered under the Services Contract and the expatriate employees of the Assessee had remained in India for a long period and had rendered services for Nortel India for a period of more than 30 days in a fiscal year and the Assessee had reimbursed large amount of expenses incurred by Nortel India on these expatriate employees. ITA 666/2014 & Ors. Page 12 of 57 17.According to the AO, the Assessee was ―a shadow company of Nortel Group.‖ 18.On the basis of its findings, the Assessee concluded that Nortel India and Nortel LO constituted the Assessee‘s PE in India (both Fixed Place PE as well as Dependent Agent PE). 19.In view of the finding that the Assessee was inserted as an intermediary and a shadow company of Nortel Canada solely for the purpose of evading taxes, the AO rejected the accounts furnished by the Assessee and further observed that the accounts provided by the Assessee were not audited and had "no sanctity". He then proceeded to estimate the taxable income of the Assessee based on the accounts of Nortel Group. The AO noticed that the global accounts of the Nortel Group disclosed a gross profit margin of 42.6%. He held that average selling, general and marketing expenses of other similarly placed non-resident companies was 5% of the turnover and, therefore, made an allowance of 5% of such expenses. He also made a further allowance for Head office expenses at 5% of the adjusted profits and estimated the total taxable income of the Assessee at Rs.81,28,06,917/-. ITA 666/2014 & Ors. Page 13 of 57 CIT(A)'s Order dated 22[nd] December, 2009 20.The Assessee appealed against the aforesaid assessment order as also against similar assessment orders passed for AY 2004-05 and 2005-06. These appeals were heard together and disposed of by the CIT(A) by an order dated 22[nd] December, 2009. The CIT(A) observed that: (a) that the Assessee was assigned the contract for supply of hardware to Reliance Infocom days after its incorporation; (b) this is the only business that appellant had done during the relevant period under consideration; (c) the Assessee did not have any financial or technical capability of its own; (d) the equipment supplied was manufactured by Nortel Canada and Nortel Ireland and shipped directly from Canada/Ireland; (e) that the Assessee had supplied the equipment at approximately half its purchase price, thus, incurring huge trading loss in the transaction. The CIT(A) held that the transactions were to be viewed as a whole and not merely in the form of the agreement. On the basis of the aforesaid findings, the CIT(A) upheld the conclusion of the AO that the Assessee was a paper company incorporated only with a motive to evade income tax liability on the income arising out of the supply contract in India and, therefore, Nortel Canada and the Assessee were to be considered as a single entity. ITA 666/2014 & Ors. Page 14 of 57 The CIT(A) further rejected the Assessee's contention that it did not have a business connection in India. 21.On the issue of existence of a PE in India, the CIT(A) held that there were two places in the business model which could be considered to be Assessee's fixed place of business - (i) the location of Nortel India to which employees of Nortel Group were sent on secondment basis to assist in the execution of the project; and (ii) the place of installation of equipment. Further, the CIT(A) also held that office of Nortel LO and Nortel India would also constitute a fixed PE of the Assessee in India as the Assessee and Nortel Canada were one and the same entity. 22.The CIT(A) held that Nortel India constituted a fixed place of business of the Assessee as according to him, the Assessee had employed the services of Nortel India for fulfilling his obligation of installation, commissioning, and after sales service and warranty. In addition, Nortel India had also undertaken all the pre-supply activities such as feasibility survey, negotiation of terms and conditions of supply, finalization of documents and signing of the contract, etc. He also concluded that since the employees of Nortel Group companies visited India in connection with the project, they had performed business of the Assessee through the premises of Nortel India or the LO of Nortel Canada. ITA 666/2014 & Ors. Page 15 of 57 23. 23.The CIT(A) referred to clause 6.1.2 of the Equipment Contract which provided for rendering of certain services in relation to the equipment supplied and held that the Equipment Contract did not end with loading of equipment on vessels but also included a number of activities to be carried out in India, the compensation of which was included in the consideration for supply of equipment. The CIT(A) also referred to clause 5.3.2 of the Equipment Contract and on the basis of the said clause held that the consideration for supply of equipment in fact represents the payment of works contract, where installation and customization is carried out in India. He held that Nortel India had not only acted as a service provider of the Assessee but also as a "sales outlet" providing after sales service and any other assistance as requested by the Assessee. included in the consideration for supply of equipment. The CIT(A) also referred to clause 5.3.2 of the Equipment Contract and on the basis of the said clause held that the consideration for supply of equipment in fact represents the payment of works contract, where installation and customization is carried out in India. He held that Nortel India had not only acted as a service provider of the Assessee but also as a "sales outlet" providing after sales service and any other assistance as requested by the Assessee. 24.On the aforesaid basis, the CIT(A) held that Assessee had (a) a fixed place of business in terms of Article 5(1) of the Indo-US Double Taxation Avoidance Agreement (DTAA); (b) a fixed place of management in India and thus, a PE in terms of Article 5(2)(a) of the Indo-US DTAA; (c) a sales outlet and thus, a PE in terms of Article 5(2)(i) of the Indo-US DTAA; (d) an Installation PE in terms of Article 5(2)(k) of the Indo-US DTAA; (e) a Service PE in terms of Article 5(2)(l) ITA 666/2014 & Ors. Page 16 of 57 of the Indo-US DTAA; and (f) a Dependent Agent PE in terms of Article 5(4) of the Indo-US DTAA. 25.Insofar as the attribution of income is concerned, the CIT(A) concurred with the AO that Rule 10 of the Income Tax Rules, 1962 was applicable. He further held that the accounts provided by the Assessee could not be accepted for computing the income as the transaction between the Assessee and Nortel Canada was not on an Arm's Length basis. However, the CIT(A) held that the expenses relatable to the PE were liable to be allowed as a deduction while estimating the profits attributable to the Assessee's PE in India and, accordingly, directed the AO to do so. The CIT(A) further held that keeping in view the facts of the case, 50% of the profits of the Assessee's estimated profits could be attributed to the PE in India. Proceedings before the ITAT 26.Both, the Assessee and the Revenue preferred appeals against the order dated 22[nd] December, 2009. The Assessee was principally aggrieved by the CIT(A)'s decision upholding that the Assessee had a PE in India and attributing a part of its profits, computed on estimated basis, to its PE and assessing the same as chargeable under the Act. On the other hand, the Revenue was aggrieved to the extent that CIT(A) had reduced the proportion of profits attributable to the Assessee's PE in India. The ITAT concurred with the AO and the CIT(A) that the contracts entered into between Nortel India and Reliance Infocom were a part of a 'turnkey contract' which had been artificially split up into three separate contracts. The ITAT further upheld the conclusion that the Assessee was only a shadow company of Nortel Group and was getting its work inter alia executed through Nortel India. The contracts were pre-negotiated by Nortel India and in view of the above, the ITAT concurred with the AO and the CIT(A) that Nortel India constituted a fixed place of business and a dependent agent PE of the Assessee in India. The ITAT also concurred with the view that the LO of Nortel Canada was rendering all kinds of service to Group companies including the Assessee and constituted a fixed place PE of the Assessee. 27.The ITAT rejected the Assessee's contention that the sale of equipment was completed overseas and the installation was done under a separate contract. The ITAT held that "the assessee through Nortel India and LO approached the customer, negotiated the contract, bagged the contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted. The equipment remained in the ITA 666/2014 & Ors. Page 18 of 57 virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done." 27.The ITAT rejected the Assessee's contention that the sale of equipment was completed overseas and the installation was done under a separate contract. The ITAT held that "the assessee through Nortel India and LO approached the customer, negotiated the contract, bagged the contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted. The equipment remained in the ITA 666/2014 & Ors. Page 18 of 57 virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done." 28.The ITAT also held that the employees of the group companies visited India in connection with the project and this indicated that the employees of the Nortel Group carried on the business of the Assessee through the premises of Nortel India or the LO. As regards the attribution of income to the Assessee's PE in India, the ITAT concurred with the CIT(A)'s view that 50% of the estimated profits were attributable to the Assessee's PE in India. Accordingly, the appeals filed by the Revenue and the Assessee were dismissed. Submissions 29.Mr Chopra, learned counsel appearing for the Assessee submitted that the contract for supply of equipment was a separate contract and was performed by the Assessee independently. He submitted that the said contract could have been entered into directly but Reliance insisted on having an Indian company as a single point of contact and, therefore, the contract was initially entered into between Nortel India and Reliance and, subsequently, assigned to the Assessee. He emphasized that Reliance is a party to the assignment contract and such assignment was also ITA 666/2014 & Ors. Page 19 of 57 contemplated under the Equipment Contract. He submitted that the purchase orders were placed directly by Reliance on the Assessee and the payments for the supply were also made directly by Reliance to the Assessee. Mr Chopra further referred to the definition of "price list" under the Equipment Contract and submitted that the prices for equipment as listed in Schedule A to the Equipment Contract were "FCA relevant international airport basis INCOTERM 2000, including costs of exportation procedures from the country/ies of export and insurance from the Vendor's (i.e. Nortel India) warehouse up to Substantial Completion" and this meant that the Vendor was liable to deliver the equipment to the carrier at the port of shipment. He contended that in the circumstances, the Equipment Contract only obliged the Assessee to deliver the equipment overseas and no part of the Assessee's activities were to be performed in India. 30.Next, Mr Chopra contended that Nortel India was an independent Assessee and any income attributable to Nortel India was liable to be assessed in its hands and not in the hands of the Assessee. He referred to the decision of the Supreme Court in the case of DIT (International Taxation), Mumbai v.Morgan Stanley and Co. Inc.: (2007) 292 ITR 416 (SC) and Director of Income Tax and Ors. etc v. M/s. E. Funds IT ITA 666/2014 & Ors. Page 20 of 57 Solution and Ors. etc: (2014) 364 ITR 256 (Delhi) in support of his contention that a subsidiary of a foreign company could not be construed as its PE. He further submitted that no expatriate employee of the Assessee had visited India in connection with the Equipment Contract since the equipment was manufactured and supplied from overseas and there was no requirement to depute personnel to India. Taxation), Mumbai v.Morgan Stanley and Co. Inc.: (2007) 292 ITR 416 (SC) and Director of Income Tax and Ors. etc v. M/s. E. Funds IT ITA 666/2014 & Ors. Page 20 of 57 Solution and Ors. etc: (2014) 364 ITR 256 (Delhi) in support of his contention that a subsidiary of a foreign company could not be construed as its PE. He further submitted that no expatriate employee of the Assessee had visited India in connection with the Equipment Contract since the equipment was manufactured and supplied from overseas and there was no requirement to depute personnel to India. 31.Mr Chopra submitted that there was no material or evidence on record which would suggest that any fixed place in India had been made available to the Assessee for execution of its activities. Therefore, the AO's conclusion that Assessee had a fixed place PE in India is palpably erroneous. He further submitted that it was Nortel India who had negotiated the contract on its behalf and, therefore, its activities prior to assignment of contract could not be considered as the Assessee's activities. He submitted that since Reliance had insisted that the contract be secured with an Indian company, Nortel India had undertaken the responsibility and secured the contracts which included the Services Contract that was to be executed by Nortel India. In the circumstances, the conclusion that Nortel India had acted on behalf of the Assessee was erroneous. ITA 666/2014 & Ors. Page 21 of 57 32.Insofar as the existence of an installation PE is concerned, Mr Chopra argued that in terms of the services agreement, Nortel India was to carry out all activities relating to installation, erection and commissioning. Since installation was not a part of scope of the works contracted to the Assessee, there was no question of the Assessee having any installation PE in India. 33. Mr N.P. Sahni, Senior Standing Counsel appearing on behalf of the Revenue supported the decision of the ITAT. Reasoning and Conclusion 34.The questions framed in ITA Nos.671/2014, 672/2014, 669/2014 and 689/2014 are similarly worded except in ITA No.689/2014 wherein an additional question regarding levy of interest under Section 234B of the Act is also framed. However, no contentions were advanced on either side with regard to levy of interest under Section 234B of the Act and consequently, the same is not being considered. 35.The first three questions framed in the aforesaid appeals relate to the dispute whether the Assessee has a PE in India and the fourth question relates to the issue of attribution of income to the Assessee‘s alleged PE in India. ITA 666/2014 & Ors. Page 22 of 57 36.The controversy whether the Assessee has a PE in India is interlinked to the finding that Nortel India had discharged some of the obligations of the Assessee under the Equipment Contract. Whilst, the Income Tax Authorities have held that the contracts entered into with –Reliance the Equipment Contact, Software Contract and Services –Contract are essentially a part of the singular turnkey contract, the Assessee contends to the contrary. Further, the Income Tax Authorities have held that a part of the Equipment Contract assigned to the Assessee was, in fact, performed by Nortel India. This too, is stoutly disputed by the Assessee. The question whether the Assessee has a PE in India is clearly interlinked with the issue whether Nortel India or Nortel LO had performed any of the functions or discharged any of the obligations assumed by the Assessee. ––37.It is not disputed on the contrary it has been expressly admitted ––37.It is not disputed on the contrary it has been expressly admitted that the contracts entered into with Reliance were negotiated by Nortel India and neither Nortel LO nor the Assessee were involved in negotiations with Reliance. There is also no material on record which would indicate that Nortel LO or the Assessee had participated in any negotiation with Reliance. The facts on record indicate that Nortel India had negotiated the contracts with Reliance, and Nortel Canada had executed a deed of guarantee (referred to as a 'Parent Guarantee') guaranteeing the performance of all the three contracts. 38.It has been argued on behalf of the Assessee that the agreement for supply of hardware (Equipment Contract) could have been directly executed between Reliance and the Assessee but Reliance had insisted on an Indian company being responsible for the entire works. Therefore, at the insistence of Reliance, in the first instance, the agreements were executed between Nortel India and Reliance, with Nortel Canada as a surety. 39.Thus, it is an admitted position that Nortel India had negotiated for the contracts and had entered into agreements that were to be performed not by Nortel India but by other entities of the Nortel group. According to the Assessee, the only reason for Nortel India executing the contracts was the insistence on the part of Reliance to have an entity in India responsible for the contracts. In this view, the contention advanced on behalf of the Assessee that Nortel India had acted for itself and not on behalf of any other group entity cannot be accepted and the findings of the Income Tax Authorities that Nortel India had negotiated the contract on behalf of the Nortel group as a whole cannot be faulted. ITA 666/2014 & Ors. Page 24 of 57 40. 40.The Income Tax Authorities concluded that the Assessee was a shadow company of Nortel Canada and both the companies were essentially a singular entity. In other words, the Income Tax Authorities had disregarded the corporate structure of the Assessee and had proceeded on the basis that its identity is the same as Nortel Canada. It is now well settled that the corporate veil can be lifted only in exceptional and limited circumstances. Indisputably, in cases where it is found that the corporate structure has been devised only for evasion of taxes, the courts have permitted piercing of the corporate veil and this is a well accepted exception to the rule of a company being a juristic entity having a separate identity (see : In Re: Sir Dinshaw Maneckjee Petit: AIR 1927, Bombay, 371). However, piercing a corporate veil can be justified only in circumstances where it is found that a company has been incorporated only to evade taxes; the company has no real substance; and there is no commercial expediency for incorporating the company. In the present case, the Income Tax Authorities found the Assessee to be a mere paper company with no independent resources. Admittedly, the Assessee has also not carried out any other activity except supplying equipment pursuant to the contracts negotiated by Nortel India with Reliance and, in a later year, with BSNL. The Assessee has neither produced any material nor advanced any commercial reason for incorporation of the Assessee. ITA 666/2014 & Ors. Page 25 of 57 Significantly, the Assessee was incorporated a day prior to execution of the agreements and, clearly, when the award of contract from Reliance was a certainty. Admittedly, the equipment supplied to Reliance was manufactured by Nortel Canada and Nortel Ireland and shipped directly to Reliance. It is important to note that the performance of the Equipment Contract was also guaranteed by Nortel Canada. In the circumstances, the a later year, with BSNL. The Assessee has neither produced any material nor advanced any commercial reason for incorporation of the Assessee. ITA 666/2014 & Ors. Page 25 of 57 Significantly, the Assessee was incorporated a day prior to execution of the agreements and, clearly, when the award of contract from Reliance was a certainty. Admittedly, the equipment supplied to Reliance was manufactured by Nortel Canada and Nortel Ireland and shipped directly to Reliance. It is important to note that the performance of the Equipment Contract was also guaranteed by Nortel Canada. In the circumstances, the view of the authorities below that the Assessee is a mere shadow company - in other words an alter ego of Nortel Canada - is certainly a plausible view and cannot be held to be perverse. 41.In the aforesaid context, it would be appropriate to assume that the Equipment Contract was performed by Nortel Canada - as has been held by the AO and CIT(A) and concurred with by the ITAT - and on that footing, it is to be examined whether any income from supply of equipment could be taxed under the Act. 42.Section 4 of Act is a charging section and provides for levy of income tax in respect of total income of the previous year of every person. Section 5 of the Act outlines the scope of total income and provides that the total income of a person who is a non-resident in any previous year includes income from whatever source, which: (a) is received or is deemed to be received in India in such year by or on behalf ITA 666/2014 & Ors. Page 26 of 57 of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Section 9 of the Act specifies the income that are deemed to accrue or arise in India. Section 9 (1) of the Act specifies incomes which are deemed to accrue and arise in India. At this stage, it is necessary to refer to Section 9(1)(i), clause (a) of Explanation 1, Explanation 2 and Explanation 3 to Section 9(1)(i) which are quoted below:- "Section 9 (1)The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India: –—[Explanation 1] For the purposes of this clause(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; —[Explanation 2For the removal of doubts, it is hereby declared that ―business connection‖ shall include any business activity carried out through a –person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or ITA 666/2014 & Ors. Page 27 of 57 (b)has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c)habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or ITA 666/2014 & Ors. Page 27 of 57 (b)has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c)habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: —Explanation 3Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India." 43.It is apparent from the plain reading of Section 9(1) of the Act that all income which accrues or arises through or from any business connection in India would be deemed to accrue or arise in India. In CIT v. R.D. Aggarwal & Co.: (1965) 56 ITR 20 (SC), the Supreme Court observed that business connection would mean “a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business”. However, by virtue of Explanation 1 to Section 9(1) of the Act, only such part of the income which is reasonably attributable to operations carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of Assessee‘s income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India. 44.There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1)(i) of the Act, no part of Assessee‘s income could be brought to tax under the Act. It is only when a non-resident Assessee‘s income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. 45.In Ishikawajima-Harima Heavy Industries v. Dir. Of Income Tax: (2007) 288 ITR 408 (SC), the Supreme Court considered a case where Petronet LNG Limited and five members of a consortium had entered into an agreement for setting up a Liquefied Natural Gas (LNG) receiving, storage and de-gasification facility at Dahej in the State of Gujarat. The contract wa