Nortel Networks India International Inc vs. DDIT (ITAT Delhi)

Circumstances leading to formation of PE and estimation of profit attributable therto under Rule 10 explained. Even foreign assessees are liable for interest u/s 234B

Nortel Networks India Pvt. Ltd, an Indian company, entered into a contract with Reliance Infocom for supply, installation, testing, commissioning of hardware equipment. Immediately thereafter, the Indian company assigned the supply part of the contract to the assessee, a USA company, without any consideration. The Indian company retained the other obligations of the contract. The assessee purchased the equipment from a group company, Nortel Canada, and supplied them to Reliance Infocom. The assessee claimed that it had suffered a loss from the transaction. The AO took the view that the assessee did not have any manufacturing or trading infrastructure or financial or technological capability of its own and that it was only a paper company incorporated for the sole purpose of evading taxes in India. He accordingly held that the Indian company constituted a PE of the assessee and assessed its income under Rule 10 by recasting the global profits to arrive at the percentage of profit likely to have accrued from the Indian operations. He adopted the global gross profit margin percentage as 42.6% and allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. The CIT(A) upheld the stand of the AO in principle but held that only 50% of such profits had to be considered to be attributable to the PE. On appeal by the assessee to the Tribunal HELD dismissing the appeal:

(i) The contract entered between the assessee and Reliance Infocom is a turnkey contract, indivisible contract for supply, installation, testing, commissioning etc. Nortel India has undertaken the responsibility for negotiating and securing the contracts. The contract for installation and commissioning was also undertaken by Nortel India. These arrangements show that assessee is getting its work executed through Nortel India. The assessee is merely a shadow company of Nortel Group and for all practical purposes, all the facilities and services available to the Nortel Group of Companies are equally available to the assessee. The hardware supplied through it is installed by Nortel India. The contracts were pre-negotiated by Nortel India. Thus, Nortel India is a fixed place of the business and dependent agent PE of the assessee. The Liaison Office of Nortel Canada is rendering all kinds of services to all the group companies including the assessee. The LO building pertaining to Nortel Canada constitutes fixed place PE of the assessee. The assesee’s contention that sales were completed overseas and installation was done under a separate contract is not acceptable. The compensation which has been represented as a sale consideration for the equipment represents the payment for works contract where entire installation and customisation has been carried out in India;

(ii) As regards the estimation of profits attributable to the Indian operations, the accounts of the assessee have no sanctity as they are not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reason that it has been designed as such to avoid taxation in India. The accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Though in other cases such as Nokia, Rolls Royce, ZTE Corporation & Huawei Technologies, the profit was limited to 20% to 35%, that is on the facts of those cases. In the present case, from the gross profit computed by reference to the rate applicable to the global accounts of the assessee, further substantial deduction has been allowed for selling general and marketing expenses and also R&D expenses. Thereafter, 50% of the resultant figure has been attributed to PE. This meets the ends of justice;

(iii) As regards the levy of interest u/s 234B, though the assessee is a non-resident whose income is subject to TDS u/s 195, the assessee had always been holding the position that receipts are not taxable in India and so it cannot be absolved from the liability to pay interest u/s 234B (Jacabs Civil Inc 330 ITR 578 (Del) distinguished; Alcatel Lucent (Del) followed)