Director of Income Tax Intnl T v. Ericsson Radio Systems A.B

\> * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 507/2007,ITA 508/2007 ITA 511/2007,ITA 397/2007 JUDGMENT RESERVED ON;22.7.2011 .TUDGMENT DELIVERED ON;23.12.2011

(1) ITA 507/2007 DIRECTOR OF INCOME TAX APPELLANT Through: Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through: Mi*. Soli Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates

(2) ITA 508/2007 DIRECTOR OF INCOME TAX APPELLANT Through: Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Stariding Counsel Versus ERICSSON RADIO SYSTEM A.B.,NEW DELHI. .RESPONDENT Through: Mr. Soli Dastur, Ml". Percy Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep ITA 507/2007, ITA 508/2007.ITA511/2007,ITA 397/2007 Page I of3 Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing.

(3) Chatterjee and Ms. Meghna Sudha Panda, Advocates ITA 511/2007 DIRECTOR OF INCOME TAX Through; Versus APPELLANT Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Sr. Standing Counsel ERICSSON RADIO SYSTEM A.B.,NEW DELHI. ..RESPONDENT Through: Mr. SoH Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates.

(4) ITA 397 of 2007 DIRECTOR OF INCOME TAX APPELLANT Mr. Sanjeev Sabharwal, Advocate Through: Versus M/S METAPATH SOFTWARE INTERNATIONAL LTD. Through: ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 . ..RESPONDENT Mr. R. Satish Kumar, Advocate with Mr. Parivesh Singh, Advocate. 2 2 of 3 CORAM: HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MS. JUSTICE REVA KHETRAPAL A.K.SIKRI, ACTING CHIEF JUSTICE:

¶1For orders, see ITA 504 of 2007. /T DECEMBER 23,2011 skb I ACTING CHIEF JUSTICE (REVA KHETRAPAL) JUDGE ITA 507/2007, ITA 508/2007,ITASII/2007,ITA 397/2007 Page30^3 •k + ™,rmrH COURTOF DFXHlAT NEW BELB.1 theHIGHcom ^^jTA 507/2007 ITA508/2007,ITA511/2007 ITA 397/2007 JUWMlHLSlSi™ TTA S04/2Q07

(1) afpeixant director of incomeTAX pvasaran, ASO with Mr. Sanjecv Sabharwal. Sr. StandingCounsel Versus ERICSSONA.B.,NEWDELHI. ^r. Percy Through: Ms. PraUbha Smgh, Mr. Sudeep Chatterjce an .• s. McghoaSudhaPanda, Auvocaie.

(2) appellant director OF INCOMETAX /.sq ",ti, Through: M^. s,bharwal, S,. StandingCounsel Versus , «V«TFMABNEW DELia..RESPONDENT ERICSSONRADIOSYSILM A. .,_ pj,|.^y Ms. Prabbha Singh, n/" I'aj.e 1ol'75 ,T,V 504/20.17,.TA 507/2007, ,TA 508,7007,,T.-V5n/20a7,,TA 3.r/20nv Mr Sudeep Chatterjee and Ms. MeghnaSudhaPanda, Advocates

(3) TTA 508/2007 "OROriNCOMKTAX « Sanjeev Sabharwal, Si. Standing Counsel Versus A cvqtitM a B new DELBLI. .RESPONDENT ERICSSONradio system • Ms. Pi-atibha Singh, Mr. Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates

(4) director of income Through; TTA 511/2007 Versus ERICSSONRADIO SYSTEM Through: Mr. Mohan Prasaran, ASG with Mr. Sanjeev Sabharwal, Si. StandingCounsel B NEW DELHI.^.RESPONDENT Mr. Soli Dastur, Mr. Percy Perdiwalla, Ms. Pratibha Singh, Mr Sudeep Chatterjee and Ms. Meghna Sudha Panda, Advocates. 504/2007,ITA 507/2007, ITA 508/2l)07,VrA51 1/2007.ITA 3';7/20I)7 Piige2 ol'75 A TTA .^97 of 2007. director of incometax SabliamairAdvocate M/S _ international LTD. Kumar, Advocate Through: tjh Mr. Parivesh Singh. Advocate. CORAM: HON'BLEthe acting chief justice HON'BLEMS. justicerevakhetrapal A QtKRI. ACTING_CHIEFJlJSTI-£Ei

¶1The assesseeM/s. EricssonRadio Systems A.B. is acompany mcorporatedin Swedenand is a.axresidentof Sweden. The company i, a100% subsidiaryofTelefonakitiebolagetL.M. Ericsson. The mam businessofthe assesseecompanyis tiresupplyofhardwareand software which is used in the businessof renderingtelecommunicationservices and for this purpose, it undeital.es projects on turnkey basis. In Thi-ough; Versus 75-i'-,uK-ion5 ITA 504/2007,ITA 507.-2007. ,TA 508/2007,ITA5,1/1007,ITA 397,no.)7 V? telecommunicationprojects,,tlie activities involved ate supply of hardwareand software,installationand commissioningof the two and after sales service. In tlte assessmetrt year 1997-97. tite assessee companyenteredintoagreementswithten cellularoperatorscollectively called"operators"as follows;- "1. HuchinstonMax TelecomLimited

¶2RPG CellularServicesLimited

¶5BhartiCellularLimited 4_ BirlaAT&TCommunication.Lid. CellularCommunicationIndiaLtd. (RPG CellecomLtd.)

¶6J.T. MobileLimited B.hartiTeleventuresLimited

¶8HexacomIndiaLimited

¶9HuchinstomMax TelecomLtd.

¶10RelianceTelecomPrivateLtd. 07-04-1995 27-06-1995 15-12-1994 05-04-1996 29-05-1996 02-07-1996 23-08-1996 25-09-1996 29-10-1996 13-02-1997"

¶2Pursuant to the aforesaid contracts, the assessee lias supplied various hardware and software to the above mentioned cellular operators duringthe relevantassessmentyear. In regardto 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 ITA 504/2007,ITA 507/2007, ITA 508/20(17.ITA511/2007,ITA 397/2007 Pime '1 of 75 Yi AvoidanceAgi'eementbetweenSwedenand India(the "DTAA"). It is necessai-yto highlightthat the assessee, as stated above, is awholly owned subsidiary of-the L.M. Group of Companieswith whom the cellularoperatorshad entered into supply agreements. The Ericsson Telephone CorporationIndia AB is also aforeign company with a branch in India and is a subsidiai'y of the parent company of tire assessee,viz., TelefonakitiebolagetL.M. Ericsson. There is one more entity,namely,EricssonCommunicationsLimited,which is an Ind.an companyairdis awhollyownedsubsidiai-yofthe parentcompany. For the purposeofbrevity,EricssonRadio SystemAB is referredto as the assessee,whereasEricssonTelephoneCorporationIndiaAB is referred to as EFC and EricssonCommunicationsLimitedis referredto as ECL and the companyTelefonakitiebolagetL.M. Ericsson is referredto as LME.

¶3The assessee,anon-residentcompany,suppUes equipmentto the operators,while the other two companies(EFC and ECL) are mthe business of installation of the equipment and granting marketmg Pi'.ge 5 of 75 ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA311/2007,ITA 397/2007 supportto the assessee.Thus, for the first three months, the work of installationand marketingsupportwas done by the EFC, and for the remaining nine months, the same work was done by ECL. The contractsunderfalcenby EFC, which were pendingon 30'" June, 1996 wereassignedto ECL,whichwas incorporatedin India.

¶4The basicstructureofthe companiesis tabulatedby the Assessmg Officer as follows (Installation contractor & marketing support afterJuly 1996) Ericsson Radio System A.B.

(ERA) Ericsson Telephone j Corporation India < AB \ / Subsidiary • of LME (Equipment supplier to and Indian Customer) Subsidiary ofLME (Installation contractor & marketing support to ERA before July 1996) Non-Resident Company ' N.R. Company having Branch in India Indian Company

¶5Beforethe contractwas signedin India,anumberofemployeesof the assesseecompanyand other associatedcompaniesvisitedIndia for the purposeofnetworksurveyand to negotiatethe termsofthe contract, whichwas acontinuousprocessspreadover along periodoftime. It is ITA 50.1/2007,ITA 507/2007, ITA 508/2007.1TA511/2007,ITA 397/2007 Pilge oi"75 amatterof recordthat duringthe visits of those employees,the branch office of EFC provided office, telephone and other facilities to the aforesaidemployees. The employeesofthe branchofficeusedto attend the meetings and undertook follow-up work with the customers afterwards. In this regard,therewas amarketsupportagreemententered into betweenthe assesseeandEFC.

¶6The supply of the equipment significantly was a continuous pfocess. In accordancewith the contract,the equipmentwas not to be acceptedtill it was finally tested through atest laiown as Acceptance Test (A.T.). Such AcceptanceTest was to be carriedout by EFC in the firstthreemonthsand by the ECL in the last nine monthsofthe relevant year. The contractswere signedin India and till deliveryto the port in India was the responsibilityof the supplier. The supply was on CIP basis and after supply, the defectiveparts were to be replaced by the assessee.

¶7On the aforesaidfacts, the AssessingOfficerafterconsideringthe provisionsof the Income-TaxAct, 1961, and in particulai'Section 9 P:me 7 of 7.5 ITA 504/2007,ITA 5l»7/20n7, ITA 508/2007.ITA511/2007,ITA 397/2007 thereof, held that the assessee had abusmess connectionin India and incomeofthe assesseemustbe deemedto accrueor arisemIndiaand as such was taxable in hidia.

¶8The AssessingOfficer also consideredthe questionwhether the assessee'sincome was taxable in India in view of Article7 read with Article5of the Double TaxationAvoidanceAgreementbetweenIndia and Sweden and concluded as follows "1. The assessee has a permanentestablishment in the form of a dependent agent establishment which is EFC.

¶2The assessee also has a. permanent establishmentin the form of a dependentagent PE which is ECl in the laterpart of the year i.e. after July 1996.

¶3It has PE in theform of a branch which was providingafixedplaceofbusinessto the assessee.

¶4The office of ECI was a fixed place of business,for the assessee company.

¶5The employeesof the assessee company were coming:to India and signing contracts and were stayingin India and using variousfacilitieswhich clearlyshows that the assesseehad afixedplace of business. " The A.O. then proceededto renderdetailedfindings in rcspectof each ofthe aforesaidmatters,to which we shall presentlyadvert before P;\j:e8of75 ITA 504/2007,ITA 507/2007, ITA 508/20fl7.nVv51 1/7.007,ITA 397/2007 proceedingto dealwitlitlie softwaresupplycontractenteredbetweenthe cellularoperatorand the assesseeand Article 13 of the DTAA between India and Swedendealingwith royaltiesand fees for technicalservices. Afterconsideringthe matterfrom all angles,the A.O. concludedthatthe assessee had provided the software to the cellular operators under a licenseand the incomewhicharosetherefromwas to be taxed as royalty as per Article 12 of the Indo-Swedentreaty. Since, however, the assesseehad apermanentestablishmentin India, the same was to be taxed as businessprofitsat aflat rate of 30% as providedin the Indian Income-Tax Act.

¶10The A.O. thenproceededto givethe computationas follows.- "The total supplies made during the year for hardwar.ein US $ 3,80,74,540/-and softwareis US $ 1,10,72,708/-. Aperusalofthe balancesheetfiled by the assesseeshows thatfor the year ending1997, the company has earneda gross margin of 47%. This comesfrom the annualreportfor theyear 1997M-'here the assesseehas earned20142157thousandSwedish Corner gross margin on the net sale of 42797901 thousand Swedish Corner. This is 47% over and above the assessee has claimed selling expenses, administrativeexpenses and R&D expenses in the globalbalancesheet. The assesseehas submittedthat P;i;dC ') ol n-A 504/2007,ITA 507/2007, tTA 508/2007,ITA511/2007,ITA 717/2007 it has reimbursedto the Indian companycommission plus other costs which amounts to 21% of the total turnoverand thereforeout ofthis grossprofitof47%, 21%o is allowedas expendituredirectlyattributableto Indian Operations. The administrativeexpensesand R&D expensesare coveredunder the overallsealing ofSection 44C of the IT. Act and thereforethe net taxableincomeofthe assesseeis computedasfollow: I Total Sales ofhardware = US $ 3,80,74,540/- converting into INR @36.15 =38074540 ='= 36.15 =137,63,94,621/- Taxableprofit@26%) = 35,78,62,601/- Less: H. O. expensesallowed u/s44C@5%= 1,78,93,1307-TaxableIncome = 33,99,69,4717-Tax@55%>= 18,69,83,209/- I Totalconsiderationfor software-US $1,10,72,7087-Convertedinto INR @3615-40,02,78,3947-Tax @30% =Rs/12.00.83.513/- U Total tax = (I) + (11) —30,70,66,7277-Assessed. Issue necessary forms. Charge * interest:Penalty! proceedings u/s 271

(1)

(c) is initiated separately. "

¶11In an appeal filed againstthe aforesaidorder of the DCIT, Non-Resident Circle, New Delhi on 28.03.2000, the Commissioner of Income-Tax(Appeals)examinedthe matter. The appellanthad taken PiU;el()or75 ITA 50.1/2007,ITA 507/2007, ITA 508/2007,rrA511/2007,ITA 397/20U/ 1/0 five grounds of appeal, apart from taldng up two additional grounds subsequentlyas follows

(i) Ground No.l was that the learnedA.O. had erred m holding that the income cliargeableto tax in India accrued or arose to the assessee. This ground was heldto be too generalinnatureby the CIT(A).

(ii) Ground No.2 dealt with the assessee's business connectionin India and the existence of permanent establishmentin India. The CII(A) decided the aspect of business comiectionagainst the appellant, but the additionalgroundtakenup by the assesseeon

21.07.2000againstexistenceofPE ofthe assesseein India,was decidedinfavourofthe assessee.

(iii) GroundNo.3 mentionedthat the assesseeincurred,a loss duringthe year as certifiedby Price WaterHouse Cooper, Sweden and, therefore,the A.O. erroneously brought to tax the impugned income ol .?74,02,47,865/- consisting of business income ot f33,99,69,471/-and royaltiesof?40,02,78,394/-. Fhe CIT(A) :partly allowed this ground, and held that while no business profit can be computed in the absenceiof PE of the assessee in India, the assessee was liableto pay tax on royaltiesreceivedby it from the operatorsin India.

(iv) In ground No.4, the assessee assailed the finding of the A.O. that income from licencing of software amountedto receiptofroyalty. Withoutprejudiceto P<mc 1 I 01*75 ITA 504/2007,ITA 507/2007, ITA 508/2007^ITA511/2007,ITA 397/2007 Sv this ground, it was mentionedthat once it was held that the appellant had PE in India, the royalties obtainedthe characterofbusinessprofits. It was also submittedthat the A.O. had failed to appreciatethat royaltiesare taxableat the rate of 20% under Article 12 ofthe DTAA. The CIT(A)decidedthis ground lor treating license fees received by the assessee as royaltiesagainstthe assessee. However, he directed the A.O. to verify the rate of tax chargeableon the receiptof the royalties and pass a speakingorder in this behalf

(v) Ground No.5 sought to challengethe A.O.'s finding regardingchargingofinterestunderSection234A and 234B on the groundthat the revenueswere liable for tax deductionat source. This groundwas allowedby the CIT(A).

(vi) The additionalground regarding invalidityof^notice issuedby the assessingofficerunder Section 142(1), taken on 05.12.2000, was dismissed. The aT(A) thus partlyallowedthe appealofthe assessee.

¶12The assesseewas not satisfiedwith the partialreliefgrantedto it by the CIT (A). That part ofthe orderwhich went againstthe assessee was challengedby it by filing appeal before the ITAT. Likewise,the Revenuealso challengedotherpart ofthe order ofthe CIT (A) whereby the reliefwas grantedto the assessee. These appeals and cross-appeals P:ige 12of 75 ITA 504/2007.ITA 507/2007. ITA 508/2007.ITA5!1/2007.1TA 397/2007 alongwithcases of other assesseesnamely Nokia and Motorola were referredto the SpecialBench. The SpecialBenchhas decidedthe issues in favour of the assessee resulting in dismissal of the appeals ot the Revenueand allowingthe appealofthe assessee. Challengingthat order ofthe SpecialBench,the Revenuehas filed appealwhichis registeredas ITA 507/2007. ITA 508/2007 arises from the order passed by the. Tribunal disposing of the cross-objectionsof the assessee and ITA 511/2007arisesfrom the orderofthe Tribunaldisposingofthe appealot the Revenue. Thus ITA 507/2007, ITA 508/2007 and ITA 511/2007 relate to one assessmentyear i.e. 1997-98. In the next assessmentyeai, the ITAT followed the aforesaidorder and challengingthat order IIA 504/2007 is filed by the Revenue. These first three appeals were admitted on the following questions of lawi-ITA 507/2007 "1.Whether in law, the Ld. Delhi Tribunal was justifiedin! holding that the assessmentwas invalid inasmuchas it was framedpursuantto a notice issued under Section 142 91)(i) of the Income-Tax Act, 1961, which notice was issued beyond the period of limitation?: ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 Piii^e 13 C)r75

¶2Whether in law, the Ld. Delhi Tribunal was justifiedin holdingthat the assessee did not have a business connection in India?

¶3Whether in law, the Ld. Delhi Tribunal was justifiedin holdingthat the considerationfor supply ofsoftwareWas not apaymentby way ofroyalty,and hence, was not assessable both under Section 9(l)(vi) of the Double Taxation Avoidance Agreement•between the government of India and Sweden?" • TTA 508/2007 "1.Whether in law, the Ld. Delhi Tribunal was justifiedin'holdingthat the assessee did not have a business connection in India.?" TTA 511/2007 "1.Whether in law, the Ld. Delhi Tribunal was justifiedin holdingthat the assessee did not have a permanentiestablishmentinIndia?

¶2Whether in law, the Ld. Delhi Tribunal was justifiedin: deletingthe levy ofinterestchargedunder Section 234B of the Income Tax Act, 1961?"

¶13We may first deal with the two incidentalissues beforecomingto the main issues. First issue pertains to the validity of notices issued ITA 504/2007,ITA 507/2007, ITA 50S/2007,iTA51 1/2007,ITA 397/2007 . /5 under Section 142 ofthe Income-TaxAct. The Tribunalhas concluded that this noticewas issuedafterthe end ofthe assessmentyeai i.e. aftei 31'' March, 1998 and, therefore,it was invalid. Consequently,it held thatthe AssessingOfficerhad no jurisdictionto completethe assessment and, therefore,assessmentframed by him on 28^'' March, 2000 was also invalid. However, subsequent'to this decision of the Tribunal, by FinanceAct, 2006, the Legislaturehas added proviso in Section 142 (i) ofthe Act. The effectthereofisthat an assessmentframedpursuantto a notice issued under Section 142 after the end of the assessmentyear would also be valid.: Concedingthis position, it was accepted by the assessedthat the notice issue was not beyond the period of limitation. Question No.l of ITA 507/2007, is thus decided in favour of the Revenue. ;

¶14Secondquestion,whichwe take up for considerationrelatesto the levy ofinterestchargedundersection234B ofthe Act. The Tribunalhas deletedthis additionand the Revenueis questioningthis decisionof the Tribunal. The question of law No.2 is framed on this issue in ITA ITA fO'l./lOO?. IT.A 507/2007, ITA 508/2007,ITA 515/2007, ITA 397/2007 Piijie 15 (}l"75 511/2007. Perusalofthe order ofthe Tribunalwould reflectthat it has followedits earlierdecisionofDelhi Bench and Mumbai Bench on the basis of which it is held by the Tribunalthat levy of interestwas not justified,inasmuchas the assesseehad no obligationto pay any advance tax as tax was deductableat source on its incomethat was chaigeableto tax inIndia. This vei-y issuehas been discussedin detailby this Courtin CIT Vs. MitsubishiCorporationin ITA 491/2008. Relying upon the judgmentof Bombay High Court in DIT Vs. N.aC NetworkAsia LLC, 313 ITR 187, this Court reached the conclusionthat no interest can be levied.

¶15The circumstancesof the present case are virtually similar. In• fact, we may recordthatthere was hardlyany resistanceby the Revenue to the aforesaidposition. We thus answerthis questionin favour of the assessee and against the Revenue.

¶16It is now the stage to deal with the basic issues raised in these appeals which are:- :

(1) Whether;theassesseehas businessconnectioninIndia? ITA 504/2007,ITA 507/2007, ITA 50S/2007,ITA511/2007,ITA 397/2007 Pi'i'e I

(2) Whether the assessee has permanentestabhshmentin India? (We may clarify that if the assessee has busuiess connection in India, then this question may not even need to be considered).

(3) Whether.hardware and software componentsof the equipmentcan be segregatedfor the purposeof Section

(l)(Yi) of the Act?

¶17The issue as to whetherany incomecan be broughtto tax in tenns ofthe Act is dealtwith in paras 103 to 123 ofthe Tribunal'sorder. The . Tribunalhas come to the conclusionthat no part ofthe income accrues or arisesin Indiabecausehavingregardto the terms of Article 13 ofthe SupplyContractit is clearthat propertyin the goods has passedoutside India. In this regard; the Tribunalhas held that the mere fact that the contract was signed,in India is an irrelevant circumstance and the reliance by the revenue on the judgmentof the Supreme Court in the case of20^'' Century'.FinanceCorporationis misplaced. The Supreme Court in that case was concernedwith 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 thM contextthat the SupremeCourtheld thatthe situs ITA 504/2007,ITA 507/2007, ITA 508/2007,ITASI 1/2007,ITA 397/20(17 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. Accordingto the Tribunalhavingregardto the provisionsof Section 19 and 20 ofthe Sale of(joodsAct, the propertyin the goods passeswhen the parties intend it to pass, and' the intention of the parties was manifestedin Article13 ofthe Supply Contract. The Tribunalalso held that the mere fact than an AcceptanceTest was carriedout in hidiawas an. irrelevant circumstance and in this regard relied on its eailiei decisionsas well as in the judgmentofthe AndhraPradeshIligh Court mAdditionalCITYs.SkodaExportPraha, 172 ITR 358. Accordingto the Tribunal,the mere fact that an acceptancetest had to be performed did not in any way meanthatthe titlehad not passedfrom the assesseeto the Cellularoperatoroutsidein India.

¶18.The Tribunalnotedthatit was not uncommonthat in executionot such large projectsthe variouscomponentsofaturnkeyprojectnamely plamiing and designing, supply of equipment, civil works and installation,testingand commissioningofthe equipmentmay be handled ITA 504/2007,ITA 507/2007, ITA 5n8/2007,nA51 I/20C7,ITA 397/2007 "^75 by aconsortiumof companies. Separateagreementswould be entered into to carry out eachi ofthe aforesaidobligationsand each contractor wouldbe responsiblefor its obligationsunderits contractalthoughthere may be an overall responsibility. Two separate independentcontiacts were enteredinto: one'betweenthe assesseeand the cellularoperatorfor the supplyofthe goods and the other betweenthe installationcontractor and the cellularoperatorand the Tribunalfor the reasons given in para 118 ofits orderfound, on aconstructionofthe relevantprovisionsofthe two agreements,that the contractscould not be treated as turnkey or a works contract. The Tribunalalso did not acceptthe argumentthat by virtueofthe overallagreementthe incomethat arose to the assesseewas chargeable to tax in India. As regards the overall agreement, the Tribunal held that the overall agreementwas executed as a matter of commercialprudenceas the cellularoperatorneeds to be instilledwith confidencethat the projectwould ultimatelytake offand, therefore,he would insist on a single point responsibility. The Tribunal also noted that this was a commonpracticeand InstructionNo. 1829 issued by the ITA 504/2007, ITA 507/2007. ITA 508/2007,ITA511/2007, ITA 397/2007 Page 19of 75 CentralBoardofDirectTaxeswhichwas in force on the first day ofthe assessmentyear also takes cognizanceof the commercialnecessityfor having such overallresponsibility. The Tribunalfurther found that no payment accrued either to the assessee or the installationcontractor under the overall agreement,but the overall agreementmerely ensured supervisionand guaranteedthe performanceof all the contractsin aco ordinated manner. The Tribunal further noted that the installation contractorsand the assesseewere separateindependententitiesand there was no evidencebroughton recordto disclosethat any one is dependent on the other, either financiallyor in any other manner. The Tribunal, furtherheldthatthe findingofthe CommissionerofIncome-Tax(A) that the various entitieswere formed for the purpose of business and were doing business independentlyas per their instrumentsof incorporation was not disputedby the Revenue. The Tribunalfound that both EFC as well as ECI were separatelyassessedto tax in India. The Tribunalthus came to the conclusionthat there was no business connectionwith the assesseein Indiahavingregardto the natureofthe arrangementthat the ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 Page 20 111 75 assessee had with eitlier EFC or ECL Further, as no operationswere formed by the assessee in India no income could be charged to tax in India. The Tribunal,therefore,ultimatelyconcludedthat no part of the income accruedto the|assesseein India and that as the assesseedid not have a business connection in India no part of the income could be regardedas deemed to accrue in India also; and that income from the supply of equipment•accrues outside India, where the equipment is manufacturedoutsideIndiaand the propertythereinpassesoutsideIndia and the place of executionofthe contractis not relevant. In this regard reliance was placed by the Tribunal on the judgmentofthe Supreme Court in IshikawajmaHarimaheavyIndustriesLtd, Vs. DIT^ 288 ITR 408 where the Courthas held that the fact that the contractwas signed in India is of no materialconsequencesince all activitiesin connection withthe off shore supplywere carriedon outsideIndia.

¶19It would thus be proper to first deal with the issue of business connection. : ITA 504/2007,ITA 507/2007, ITA 50S/2007,!TA511/2007,ITA 397/2007 Pilge?,! Ol75 u RE: BUSINESS CONNECTION:

¶20Mr. MohanParaisharan,learnedASG openedthe argument on this aspectby submittingthat it was an integratedbusinessarrangementfor supply of GSM system for which three agreementswere entered mto viz., the SupplyAgreement,the histallationAgreementand the Overall Agreement with JT MOBILES, which together form an Integrated BusinessArrangementthat is governedby the OverallAgreement. The said IntegratedBusiness Arrangementis 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 submissionof Mr. Prasaranthat a plain readingof the terms and conditipns of the three contracts, all entered into on the same day and at the same place in India, viz., Bangalore,indicatesthat they are all interlinked,inter-twinedand 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 ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007 PfiyC 22 Ol75 supplied/licensedby |the assessee, the installation thi-ough a sister concern of the assessSe was to be overseen by the assessee and the overallresponsibilityof the three contractsalso was upon the assessee. He drew our attentionto the salient features of the three Agreements which accordingto him conclusivelyshow that they are, meffect, one integrated business arrangement. He specifically referred to the followingfeatures of these Agreements: Supply Agreement * Preamble; Agreement for supply of hardware and software license. Article5! Scope of the contract. Fhe said clausc uses the phrase"turnkey basis". * Article18: Acceptance Test and Acceptance certificate issued by the InstallationContiactoi \^ill bind on' the assessee. * Article 2b: Provides for the license to use software for the purposesof settingup of a system. * Article2;1: Assignmentof the contractmay be done whereby!the hardwaremay be assignedto anyone by the Indian supplier,but the softwaremay be assigned only aft^r due permission of the assessee. * Article 3:1: Provides for termination of the supply contract.; ITA 504/2007,ITA 507/2007, ITA 508/2007,I^A511/2007,ITA 397/2007 P{iye 2.1 Ol 75 Installation Agreement Preamble; Agreement for installation of hardware supplied and software for which license has already been granted. Article15;: AcceptanceTest made by the installation contractor includes the integrity of the whole system and certificate binds the assessee. Article 17: The installation contractor warranties to rectify delfects in both hardware and software (which areprovidedbythe assessee). Article 25: Provides for termination of the contract. * Article29: Assignmentof the contractmay be done at anytime at the option of the InstallationContractoi to any subsidiarycompanyof LME. Overall Agreement I * Preamble: Clearly indicates that the parties aie setting up a system and not just supply of goods oi-installation separately. * Clause2; Clearly outlines that the overall responsibility for the supply agreement and the installation agreement rests with the assessee. Clause5i Clearlyshows that the terminationof both the contracts is simultaneous and that where only the installatipncontract is terminated,the prerogative is that of the assessee to fmd the replacement for the installation contractor. Clause 6: Provides that the Overall Agreement has precedenceover the other two agreementsand in case of any conflictin interpretationwith the othertwo, will prevail. : ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 2'lol 75

¶21Mr. Prasaran slibmitted that in the light of the above, the AssessingOfficeras well as CIT (A) were entirelyjustifiedin comingto the conclusion that ithe contracts formed an Integrated Business • I Arrangementon the piart of the assesseeto provide the Indian buyers with.aGSM system. The assessingofficermade the followingpertinent findingswithrespecttothe integratednatureofthe contract:- * Overall responsibilitywas on the assessee for supply, erection and after sales services as evidenced by, the ResponsibilityMatrix between the assessee company and JT MPBILES (a-s well as the other customers): Responsibility Matrix between Ericsson and JT MOBIT;ES s per their contract ; JT Mobiles Ericsson Sliipmeht CEP to agreed port in India; X Management of Store X Site packing in the store X "k Delivery of documentation according to Annex IL X . Delivered on CD-ROM only as built documentation, MSC/BSC & BTSs Delivered as hard copies only correction of remarks on as ITA 504/2007, ITA 507/2007, ITA 508/2007.ITA 511/2007, ITA 397/2007 Pm-e :i5 01*75 •k built documentation X Digitalization of maps (MSI format) X Development of -nominal cellpan ' X Development normal coverage X 1-Preparation of frequency plan X Drive 'test • (when found necessai^y) for checking X Suitability of chosen sites, preferably in conjunctionwith site survey Develop! acceptance plan •k X ^ Provisio!n of equipment and material X Performance and reliability in accordance to agreed to specifications X. Even if the InstallationContractis terminated,the Supply Contractas not terminated and the assessee is responsible for makihg an alternativearrangement. However, if the SupplyContractis terminated,the InstallationContractalso stands terminated as evidencedby Clause 5.5 of the Overall Agreement, which reads thus: "5i5 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 ITA 504/2007, ITA 507/2007, ITA 508/2007JTA 51 «/2007, ITA 397/2007 Pnye 26 of 75 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 I 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." I The Overall Agreement was "not a matter of comfort, but an overallguaranteeprovidedby the supplierright from th6 supply upto the testing and proper functionihg of the system". In fact, the assessee companythereby took responsibilityof the work of installatioji 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 oh the assessee. There was thus an intimate and close relationship between the assessee and its associate bompany EFC and subsequently between the assessee and the Indian company i.e. ECL. The assessee had complete control over the managemlent, affairs and functioning of its associate ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007 PllgelVoI'V-i companies. Neither.EFC nor ECL can operate as I independentagentson an arms lengthbasis.

¶22In the Ught of above, Mr. Prasaranquestionedthe findingsofthe Income Tax Appellate Tribunal regarding the interpretationof the Supply Agreement,InstallationAgreementand 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 agreementhas been decidedand interpretedby 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 indubitablyshows that there was only one integrated agreement whereunder: "The Supply Contractor and the Installation Contractor have agreed to work on a coordinatedbasis 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. ; ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 Paiie 2S til'75

¶23Accordingto liim, anotliererror in the order of the Tribunalwas that while interpreting the scope of the contracts, even the othei provisionsof the Overall Agreementwere not given adequate weight especiallyArticle6oftheOverallAgreement,whichreads as follows:- I "6. PRECEDENCE This Agreementshallprevail over the Contracts, notwithsthnding anything to the contrary contained therein. "

¶24His submissionVas that this clauseclearlyshowsthatthe Overall AgreementbetweenJt MOBILES(the cellularoperator)and the Supply Contractor (the asse^see) and the EFC (the Installation Contractor) "concerningsome additionalterms and conditionsdue to the Supplyand Installationof a Mobile Telephone System" was to prevail over the I Supply Contractand;the InstallationContract,which, in itselfgoes to showthatitwas integi'atedbusinessarrangementbetweenthe parties. I

¶25Mr. Prasaran jfurther 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 ITA 504/2007,ITA 507/2007, ITA508/2007,1jA511/2007,ITA 397/2007 P.uie 2^ 01*75 t whichveststlieresponsibihtyfor the properinstallationwith Agreement, the assessee; ; "And whereas the Supply Contractorand the] InstallationContractorhave agreed to act'dna co-ordinatedmannerso as to supply ^ the':System and install and commissionthe System. Now therefore, it is hereby agreed by and beiween the parties hereto as follows 7 ' Interpretation:

¶2I Execution: ''The Supply Contractor I shall' have overall responsibility to \ ensure that the System is suppliedin \ accordance with the Supply Contract i and installedin accordancewith the \ Installation Contract and commissionedas per Annex 18 (Time Schedule)."

¶26He also stressed that the Income-Tax Appellate Tribunal erroneouslyheld that|theresponsibilityof installingthe systemwas not upon the assessee,and in comparingthe responsibilityof the assessee underthe OverallAgijeementto thatofthe Polishcompanyin the caseof CITvs HindustanShipyardLtd., 109 ITR 158 (AP), where it was held that the servicesofferedwith the contractofsale were merelyincidental ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 357/2007 PiiKe30or75 to the contract by way of guarantee for the efficientworking of the productsofsale. In th|e instantcase, by no stretchit can be said that the servicesofferedby th6 Supply Contractorwere merely incidentalto the sale of hardwareand the licenseto use software. On the contrary,such services were integrail to the proper installationof the entiie UoM system.The assesseeA^vas not merelysellingmachineryand softwarebut had contractedto provide the ftill system which required supervision I I I over the Installation Contractor and other services necessary to set up and maintainthe GS^Il System. Accordingly,the ratio of the judgment ; ; of the Supreme Court in HindustanShipyardLtd (supra) is clearly I inapplicable. The consequentialfinding that no income accruedto the assessee either from ;the Overall Agreement or from the Installation Agreementor from the Marketingand BusinessPromotionAgreement and thus it carmot be; said that there was "intimate connection between I I the parties" is also erroneous.

¶27His next proposition, on this aspect, was that under the above I contracts income had accrued and arisen to the assessee in India and ITA 504/2007,ITA 507/2007, ITA508/2007,IT^A511/2007,ITA397/2007 Pillie HI of 75 • 51 therefore it was taxable in India. In tliis behalf Mr. Prasaran made following submissions I-

(a)Under Sdction 5 (2) (b) the income of a non resident includible in that income subject to tax under section 4 if the said income accrues or arises I or is deenied 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 I I money tliat can be traced to India. I

(c)Whetheror not the right to receivethe 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.

(d)In the present case, it is undisputed that:- ® |A11 the vendeeesare basedin India ® The GSM systems are being set up India. ® ^he softwareis licensedfor use inIndia ® The hardware is being supplied for isettingup of a system in India ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007 Paye 32 0175 ® iriie acceptance test to confirm the successful installation is done in India. o jrhe responsibilityto ensure successful i jinstallation in India rests with the I assessee. • I

(e)The asses'see'sobligationsthereforecannotbe said to end once the title of the goods has passed to the Indian buyer. In addition, valuable rights are I granted by the assessee which can only be exercised: in India and the relationship between the assessee and its Indian customers is more than just that of m6re seller and buyer of goods simpliciter.

(f) In the alternative, income from the contracts amount to a source of the income that constitutes a "business connection" for the purposes of Section 9 (l)(i) of the IncomeTax Act, 1961 and therefore income is deemed to accrue or arise in India.

(g)The businessconnectionmust be real and intimate and incoine should arise as a result of the same within the territory of India. Further, such connecticinmust be continuous and not just a one off i ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007

(h)Further,the transferof a hcense to use an asset in India, with an agreement to share profits thereof, itself can: amount to the existence of a business connection as has been held by the High Court of Bombay in CIT Vs. Metro Goldwyn Mayer, 7 ITR

176.

¶28Ml-. Soli Dastur, learned Senior Counsel appearing for the assessee refuted the 'aforesaid submissions of Mr. Prasaran, heavily relyingupon the conteintionthat in a well reasoneddecisionrenderedby the Tribunal the factual aspects were rightly culled out from the agreements and the Tribunal was justified in its conclusion that the assessee had no business connection in India and in any case no income had accruedor could|be deemedto accrue or had arisen in India which was taxable in this Country. He submitted that the assessee was a non resident and, therefore, could be subjected to tax only of that income which was covered by Section 5 (2) of the Act. Mr. Dastur argued that the income from the!supply of equipment accrues outside India where the equipmentis manufacturedoutside India and the property therein ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 Piiyc passes outside India and the place of execution of the contract is not relevant.

¶29In this regard reliance was placed by him on the judgment of the SupremeCourt in Ishikawajma Harima heavy Industries Ltd. Vs. DIT, 288 ITR 408 where the Court has held that the fact that the contract v/as signed in India is of; no material consequence since all activities in connectiqjtiwith the off shoresupplywere carriedon outsideIndia. This judgment has been followed by the Authority of Advance Rulings in Hyosung Corporation, 314 ITR 343, where the fact situation was even less favourabe than the assessee's case.

¶30He also submitted that the decision in Ishikawqjima's case completely covers the;issue as to whether any part of the profit arising from the supply of the equipment by the assessee is chargeable to tax. He further submitted that in the instant case the title to the system as well as risk therein ^passed to the cellular operator at the part of establishment in Sweden and in fact this position was. not seriously disputed by the Revenue at the time of arguments. He relied upon ITA 504/2007,ITA 507/2007, ITA 508/2007,)Ta!5I1/2007,ITA 357/2007 Page ol'75 Section 19 of the Sale of Goods Act which makes it clear that property in goods passes when the partiesintend it to pass and in the present case, accordingto him, the intentionof the partieswas manifestedin Article 13 of the SupplyContractandthe provisionsof Article 15 relatingto the AcceptanceTest couldnot militateagainstsuch intention.

¶31Refutingthe contentionof Mi". Prasaranthat merely because the acceptancetest ofthe GSM systemwas carriedout,inIndiabyECl/EFC, the income must be regarded arising in India, Mr. Datur submitted that the fact that the acceptance test was performed in India by die installation contractor :is not relevant for determining where the title in the equipment passes; and consequently where income accrues. The terms of the contract! make it clear that the acceptance test is not a material event for the passing of the title and risk in the equipment supplied.The acceptancetest is an actwhich is performedfor the benefit of the cellular operator and although the assessee would be bound by such test performed by the installation contractor, the same is not an act on behalf of the assessee. According to Mr. Dastur, the overall ITA 504/2007,ITA 507/2U07, ITA 508/20n7.n-A!511/2007,ITA 397/2007 Page 30'of75 Oo •> agreement entered intp between the parties also does not in any manner resuh in the accrual of income in hidia. The overall agreement does not result in any income accruing in India as no income arises to the assessee in terms of the overall:agreement. The overall agreement merely casts a responsibility on the; assessee to ensure the functioning of a duly installed system even though different obligations are to be undertaken by different parties. 32, Referring to the provisions of Section 9(1)(i) of the Act, he submitted that it provides that income accruing or arising whether directly or indirectly through or from any business connection in India is deemed to accme or arise in India. Clause (a) Explanation-1 further •provides that in the case of a business of which all the operations are not carried out in India, the income of the business that is deemed to accrue or arise in India in terms of clause (i) shall be only such part of the income as is reasonably attributable to operations carried out in India. It is submitted that the assessee has no business connection in India and in any event has not earned any income in India through or from any ITA 504/2007,ITA 507/2007, ITA508/20U7,ITA511/2007,ITA397/20C17 Pilge 37 01*75 business coixnection. . The cellular operators, who are independent contracting parties, can never be regarded as the assessee's business connection. The law is well settled that there must be something more than a mere transaction of sale and purchase between principal and principal to spell out a business connection such as management control or financial control or by way of sharing of profits for a business connection to come into existence. In support, he referred to the decision in the case of CIT Ys. Hindustan Shipyard Ltd, 109 ITR 158, CITYs. Gulf Oil Great Britain Ltd. 108 ITR 874 and Circular No.23 dated23'^ July, 1979.

¶33His further submission was that the installation contractor also camiot be regarded as ia business connection through which the assessee has earned any income in India, as the income of the assessee arises as a consequence of the supply contracts entered into with the cellular operator. There is no ^contractbetweeh the assessee and the installation contractor and, therefore no profit arises therefi-om^. The mere fact that the installation contractor is a subsidiary of the assessee's holding ITA 504/2007,ITA 507/2007, ITA 508/2007,ITa'511/2007,ITA 3!l7/2007 Payi-ol'75 a company would not, By itself, give rise to a business connection of the assessee as held in Gulf Oil Great Britain Ltd. (supra).

¶34His alternate submission was that even assuming the assessee is regarded as having a business connection in hidia, either in the form of the installation contractor or in the fonii of the cellular operators, nevertheless, by virtue of clause (a) of Explanation-1 to Section 9 (1) (i) no part of the income arising to the assessee from the supply of equipment can be deemed to accrue or arise in India as the material operations in connection with such supply viz, the manufacture and the transfer of property of the goods supplied, were completed outside India.

¶35Mr. Dastur' went to the extent of arguing that even if one treats the contracts as a composite contract, as alleged by the Revenue, the consideration attributable to the work performed in India, namely, the marketing activity and the installation activity is already assessed to tax in India in the assessments made on EFC and EC! and as no authority has disputed that the installation contractor and the marketing agent are remunerated on an arm's length basis the charge to tax, if any, in India ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/20Q7 Pauc3^'01*75 would stand exhausted. In support, he relied upon the judgment of this Court in DIT Ys. Galileo International Ltd. 224 CTR 251.

¶36In order to decide the issue at hand, let us recapitulate some of the salient features. The assessee is a foreign Company. Its activities involved supply of hardware and software as well as installation and commissioning of the; two and also after sale services. It entered into agreements with various Cellular Operators and entered into three contracts with them namely (1) Overall Agreement, (2) the Supply of Agreement and (3) the|Installation Agreement.

¶37In the present case, we are concernedwith the income earned by the assessee as a result of supply of hardware and software licence under the Supply Agreement. If this Supply Agreement is taken as standalone Agreement, the factsIon record show that such supplies under this agreement were made Overseas. The property in goods had passed on to the buyer under the Supply Contract outside India where the equipment was manufactured. As per the judgment of Supreme Court in IshikawajUna's (supra), such agreement would not be taxable in India. ITA 504/2007,ITA 507/2007. ITA508/2007,ITA|511/2007, ITA 397/2007 Page '10of 75 go In Ishikawajima's, the SupremeCourt held that no part of profit arising from the supply of equipment outside India would be chargeable to tax in India. Mr. Dastur is right in his analysis of the present case on the basis of the ratio of Ishikawajima's inasmuch as:-

(i) In both the cases the property in the equipment passed outside India and in the assessee's case even the risk passed outside India;

(ii) In the case of Ishikawajima's even though it was to perform onshore services including the erection and commissioning of the equipment supplied by it, nevertheless,;the Supreme Court held that no part of the profit on the offshoresupply of the equipment was taxable in India as a consequence of the performance of such activities in India. In the assessee's case the assessee dods not perform any service in India in connection vvith the installation of the equipment or otherwise;

(iii) the performance of the acceptance test in India was not considered a relevant circumstance, whilst determining iwhether any part of the profit on the offshore supply was chargeable to tax in India in the case of Ishikawajima, so also in the assessee's case.

(iv) although admittedly a permanent establishment existed in the case of Ishikawajima, nevertheless, the Court held that no part of the profit arising from the supply of the equipment was chargeable to tax in India as the permanent establishment had no role to ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 Pnue 41 or75 play in the ti-ansactionsought to be taxed as it took place abroad! whilst in the case of the assessee, it has been found as a fact by both the appellate authorities that no permanent establishment existed;

(v) the mere signing of the contract pursuant to which the supply was made in India, in both cases does not result in giving rise to a tax liability in India;

(vi) the existence of the overall responsibility clause was held to be irrelevant in Islilcawajnna's case and likewise the overall agreement executed in the assessee's case should not make any difference to the taxability of tJie equipment supplied;

(vii)giving the nomenclature of a turnlcey project or works contract is not relevant in determining whether any profit arising from the supply of equipment pursuant to such contract was chargeable to tax in India;

(viii) the Supreme Court relied upon Instruction No. 1829 to come to the conclusion that the existence of an overall responsibility clause was not material in determining the tax liability arising from the offshore supply of equipment and as the said instruction continues to; be in force for tlie assessment year relevant to the present appeals, the existence of an overall agreelnent should make no difference to the taxability of the equipment supplied by the assessee. ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 Page42 of 7;)

¶38We may add that Section 19 of the Sale of Goods Act makes it clearthat propertyin goods passeswhen the parties intendit to pass and in the present case, the:intention of the parties is manifested in Article 13 of the supply contract and the provisions of Article 15 in no manner militate against such intention. Further, there is nothing in the conduct of the parties which would suggest that the express provisions of Article. 13 have been given a g,o-by.

¶39No doubt, the contract in question was signed in India. However, that may not be a relevant circumstance to determine the taxability of such an income in view of the judgment of Andhra Pradesh High Court in Skoda Export (supra).

¶40We may point out that the learned Additional Solicitor General was conscious of the aforesaid legal position and, therefore, the limitation of Revenue'is case if the same was to be determined on the examination of the Supply Contract per se and de hors the histallation Agreement and Overall Agreement. It is for this reason that his line of argument proceeded op the basis that the three agreements are to be ITA 504/2007,ITA 507/2007, ITA 508/2007,ITAlu/2007, ITA 397/2007 Page43 dI'TS taken to form an 'Integrated business arrangement' between the parties which was governed by the Overall Agreement. As noticed above, this submission proceeded; on the basis that the assessee had entered into contracts with cellular, operators in India for setting up of GSM system in India, the hardware and software for which was supplied by the assessee, and the installation thereof was also over-seen by the assessee who was to ensure that it was carried out to the satisfaction of Indian buyer in accordance with the terms of the contract. Various clauses of Overall Agreement as well as Installation Agreement have been relied upon as already noticed above. Article 15 of the Installation Agreement deals with acceptance; test made by the Installation contractor which "includes the integrity of whole system and certificate binds the assessee". Article 17 iprovides warranties to rectify the defects in both hardware and software provided by the assessee. On this basis it was argued that the Assessing Officer rightly concluded that overall responsibility was on :the assessee for supply, erection and after sale services and the assessee had complete control over the management, ITA 504/2007,ITA 507/2007, ITA508/2007,1TA511/2007,ITA397/2007 I'llye or75 functionsand tlie assofciates. The questionthat fahs for considercitionis as to whetiierthis acceptancetest, whichwas performedin India, would be relevant for deteraiining as to whether income accrued in India in terms of Section 5 (2)(^) of the Act.

¶41We, fmd that the terms of contractmake it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the systemdid not conformto the contractiveparameters, as per article21.1 of the Supply Contract,the only consequence aa-'ouM be that the CellularOperator wouldbe entitledto call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused duei to the acceptancetest not being complied with, Article 19 of the Supjply Contract provided for damages. Thus, the taxable event took plape outside India with the passing of the property from seller to buyer ajiid acceptance test was not determinative of this factor. The position |might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 - ^5 ;)[' 75 out in India. In SkodaExport(supra),the AndhraPradeshHigh Court dealt this issueinthe followingmanner:- "We may also mention that learned standing counselfor the Departmentchallengedthe finding of the Tiibunal that the sale of machinery was completed outside India; According to him, the sale was completed only in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the; quality and standard of the machinery supplied.'We do not see any substance in this contention.The various clauses in the agreement referred to above make it clear that the sale of machinery was F. O. B., European port, and the time of fulfilmentof deliverywas prescribedas the date of the bills of lading.The paymentwas also to be made; outside India. The agreement further makes it clear that the insurance risk during the course of :the journey was that of the assessee and it paid for;the same : even the freight charges from the European port to the place of destination were paid by tlie assessee. Thus, judged from any angle, the sale of machinery, which are "goods" within the meaning of. the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case,: detract from the fundamental position that the sale took place outside India. In such a situation, | one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA397/2007 bf-the agreement, we have no doubt that the sale of machinery did take place outside India."

¶42We may also usefiillyrefen-edto the judgmentofthe High Court in Mahavir Commetcial Company Vs. CIT, 86 ITR 147 wherein following principle was enunciated: "Even though the propertyin the goods may pass to the buyerwhen the documentsare handedover, the buyer;may yet retain the right to examine and repudiatethe goods butthis rightgenerallywhicha buyer has in c.i.f contract does not by itself indicate that the property in the goods has not passed to him. This supposed incongruity was sought to; be explained per curiam in Kwei Tek Chao V. ElritishTradersand ShippersLtd. (1954)2 K.B. 459. that if property passed when the documents are transferred that property is subject to the condition that the goods should re-vest in the seller if qn an examination by the buyer he finds them not to be in accordance with the contract. It is not necessary to consider this aspect because in any case the ascertaimnentofthe obligationsunder the contract will determine to what extent the transfer of property is subject to a condition or if the property passes conditionally whether the ownership left in the seller is the reversionary interest in the property in the event of the conditions subsequent operating to restore it to him. In any case where the performance of some condition;is imposed upon the buyer but is not made a condition of the transfer of the property, ITA 304/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007 Paye 47 or75 the property once passed is not revested in the sellerby the buyer'ssubsequentdefault."

¶43Thus, OverallAgreementdoes not result the income accruingin India. The execution|of an overall agreement is prompted by purely commercial considerationsas the India Cellular Operator would be desirousofhavinga single entitythat he could liaise with, a fact v/hich even the Board has: noted in its Instruction No.1829 dated 21'^ September, 1989. Although Instruction number 1829 stands withdrawn by virtue of Circular No.7/2008 dated 22"'' October, 2009, such withdrawalcan have no retrospectiveeffectand the principlelaid down in Instruction No. 1829 must continue to govern the assessment for the relevant year. :

¶44The aforesaid analysis will bring forth the legal position that the place of negotiation, ; the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant I circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the I property in the goods'passes. In the present case, the finding is that ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA5l 1/2007,ITA 397/20P7 ' P;lge 4S cf 75 propertypassedon thp high seas. Concededly,in the presentcase, the goodswere manufacturedoutsideIndiaand eventhe sale has takenplace outsideIndia. Once that fact is established,even in those cases where it is one compositecontract(thoughit is not found to be so in the present case) supplyhas to bq segregatedfrom the installationand the only then would question of apportionmentarise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India.

¶45Thejudgmentofthe SupremeCourtin PerformingRightsSociety Ltd. Vs. CIT 106 ITR 11 has no relevance for determining where the profits on the supply: of equipment accrues when title to the goods passes outside India. In the case before the Supreme Court the activity which gave rise to the income, namely, the activity of broadcastingtook place in India, and it was in these circumstances the Court held that the royalty earned by the assessee therein accrued in India even though the agreement pursuant to; which such royalty was earned was executed in England. Merely because the activities, namely, the supply activity and ITA 504/2007,ITA 507/2007, ITA S08/2007,1TA?! 1/2007,ITA397/2007 I'liye '19or75 the installationactivityare to be carriedout by two separateCompanies who are part of the same Group cannot result in the transactionbeing treated as one compositetransaction. This is more so when both the entitiesperformtheir:own independentobligations,receive appropriate separateremuneration:and, as found by the Tribunal, are not financially or technically dependent on each other.

¶46Further,all of them are assessedinrespectof the incomethat has accrued to them and even the Revenue has, in the course of its arguments, accepted that it is not their case that only one assessment has to be made treating the transaction as one works contract.

¶47Section 9 (1) (i);of the Act as it stood before the amendment to it by the Finance Act, 2010 provides that income accruing or arising, whether directly or indirectly, through or from any business connection in India is deemed to accrue or arise in India. The Department has not stated that the assessee has any business connection in India, inasrauch as the cellular operators are independent contractee parties and action cannot be held to be assessee's business connection. In such ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007 PageSOonS circumstance,tlie case would be coveredby Explanation-1to Section9

(1) (i) ofthe Act. Clause(a) ofExplanation-1lays down that in the case of businessif all the Operationsare not carriedout India, the incoraeof businessthat is deemed to accrue or arise in India would be only such part of the incomeas is reasonablyattributableto operationscarriedout in India. In view of the aforesaid discussion, it is clear that under the Supply Contract, the: assessee has not earned any income in India through or from any business connection.

¶48Insofar as Installation Contract is concerned, that is between the installation contracteej and the cellular operators. There is no contract between the assessee and the installation contractor and no profit arises therefrom insofar as assessee is concerned. We are in agreement with the submissions of Mr. Dastur that merely because the installation contractor is a subsidiary of the assessee holding company would not, by itself,give rise to ajbusinessconnection.In Gulf Oil(supra)this very I issue was dealt with, referring to CBDT Circular No.23 of 1969 in the following manner:- ! ITA 504/2007,ITA 507/20U7, ITA508/2007,ITA511/2007,ITA397/2007 PjiyeSI ol'75 II Under item (ii) above, the Board has clarified that where a noi^-residentparent company sells goods to its Indiansubsidiary,the income from the transaction will not be deemed to accrue or arise in India under section 9, prbvided three conditions are satisfied :

(i) the contr|actto sell are made outside India which on the finding of the Tribunal has been found in the instantcase in favourofthe non-residentcompany;

(ii) the sales are made on a principal-to-principal basis and at arm's length - an aspect on which Mr. Joshi wanted us to considerthe matterin the light of the facts and: circumstancesof the case; and

(iii) the sub;sidiarydoes not act as an agent of the parent - again an aspect which will have to be considered in view of the facts and circumstances obtained in the instant case. There is no doubt that the Indiansubsidiaryis a hundredper cent, subsidiaryof the non-resident, but the Tribunal has found as a fact that all the contracts regarding the have been made in U.K. principally on the basis that the indents which were placed: by the India subsidiary with the non resident company were accepted by the non-resident company in U.K." PERMANENT ESTABLISHMENT

(PE):

¶49We, therefore, hold that the assessee did not have any business connection in India. In view of this, it is not necessary to go into the ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,[TA397/2007 Paj'e52or75 issue whether the asse ssee had any Permanent Establishment in India or not duringthe relevantperiodinIndiaornot. WHETHER THE INCOME FROM THE SUPPLY CONTRACT CAN BE TREATED AS 'ROYALTY' UNDER SECTIONWDifvn OF THE ACT: :

¶50Section 9 (1) (i) of the Act which deals with the taxabilityof 'royalty income' reads as under:- ''Section 9 .INCOME DEEMED TOACCRUE OR ARISE IN INDIA. I

(1) The following incomes shall be deemed to accrue or;arise in India

(i) All incomeaccruingor arising,whetherdirectly 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"

¶51The submission;of Ml". Prasaran, learned ASG was that software I part of the equipment'supply would attract royalty as copy right of the said software progranime still vests with the assessee. Therefore, payments made for the licence to use the software programme give rise [TA 504/2007, ITA 507/2007, ITA 508/2007,ITA'511/2007, ITA 397/2007 Pai!eS3or7.-> to 'royalty' for the puiposes of both the Income-Tax Act as well as DTAA entered into | between Sweden and India. Referring to Explanation-II

(v) to Section ( (1) (vi) of the Act as well as Article 13, para-3 of DTAA, it was argued that for the purposes of Income-Tax law, royalty is essentially a payment received as consideration for the use or right to use a particular integral property right, whether partially or entirely. |

¶52We find that the Tribunal has held that there was no payment towards any royalty and this conclusion is based on the follov/ing reasoning:- |

(i) . Payment made by the cellular operator cannot be characterized as royalty either under the Income Tax Act or under the DTAA.

(ii) The operatorhas not been given any of the seven rights under S.14 (a) (i) to (vii) of the Copyright Act, 1957;and, thereforewhat is transferredis not a copyrightbutactuallya copyrightedarticle ITA 504/2007,ITA 507/2007, ITA508/2007,ITA511/2007,ITA397/2007

(iii) The cellular operator cannot commercially exploit I the software and therefore a copyright is not transferred, i

(iv) Further, the parties to the agreement have not agreed upoii a separateprice for the softwareand therefore it is not open for the income tax authorities to split the same and consider part of the payment for software to be royalty

(v) The bill of entryfor importingof goods showsthat the price has been separately mentioned for software and that this was only for the purposes of customs. There is no evidence to show that the assesseewas a partyto the fixationof value for the customs duty purposes

(vi) The softwareprovidedunder the contractis goods and thereforeno royaltycan be said to be paid for it. I

¶53Ml". Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Suppfy Contractuses the term 'licence'and the same term is used inthe contextof softwaretlii'oughoutthe threeAgreements, indicatingthat it is not an outrightsale of goods, or a ftill transferof \ p;)iie.5;i o!" 75 ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 397/2007 rights from the assessed to the Indian company. He also submitted that the software is a computer programme, which is treated differently from a book, not only in the Copyright Act, 1957 but also the Income Tax Act itself. His submission was that Section 52(1) (aa) of the Copyright Act only deems that certain acts will not to amount to infringement in the light of various concerns, where otherwise such acts would amount to I infringement under Section 51 of the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place, since the scope of tlie right has to be understood only from the provisionsof Section 1:4 of the CopyrightAct, 1957. He also argued that the ITAT has imisinterpreted• the provisions of the DTAA, specificallyArticle 13,1 para 3 of the DTAA (Article 12, paira 3 ol the Model Convention) which defines royalties to mean "payments of any I kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work". The ITAT, it was submitted,has not appreciatedthat the royaltyis for the use or right to use any copyright. According to him, since title of the software ITA 504/2U07,ITA 507/20117, ITA 508/2007,ITA5,11/2007,ITA 397/2007 Page 56or7,'i continued to vest withj the assessee as provided in clause 20.2 of the Supply Agreement and the assessee was free to grant non-exclusive licenses to other parties; it follow that there was no full time transfer of copyright but it was only a case of right to use the software, and thus payment for use of so'ftware is to be treated as royalty. He further argued that reference to| OECD Commentaiy was not apposite as it could not be usedto interpret^he scopeofthe relevantprovisionsofDTAA. I

¶54It is difficult to abcept the aforesaid submissions in the facts of the presentcase. We have alreadyheld above that the assesseedid not have any businesscomiectionin India. We have also held that the supply of equipmentin question>vas in the natureof supplyof goods. Therelore, this issue is to be examined keeping,in view these findings. Moreover, another finding of facit is recorded by the Tribunal that the Cellulai Operatordid not acquifeany ofthe copyrightsreferredto in Section 14

(b) of the CopyrightAct,1957. I

¶55Once we proceedon the basis ofaforesaidfactual findings, it is difficultto hold that paymentmade to the assesseewas in the natureof ITA 504/2007,ITA 507/2007, ITA50S/2007,ITA511/2007,ITA 3P7/2007 royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what:was sold by the assessee to the hidian customers I was a GSM which l consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software|that was loaded on the hardware did not have any independent existence!. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This softwaremerelyfacilitatesthe ftinctioning of the equipmentand is an integral part thereof. On these facts, it would be useftil to refer to the judgment of the Supreme Court in TATA Consultancy Services Vs. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and. ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA 511/2007, ITA 397/2007 Paiuo8of75 7^ therefore, liable to s^les tax. Following discussion in this behalf is required to be noted:-; "In our A^iew, the term "goods" as used in Article 366(12) Qf the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in completejagreementwiththe observationsmade by this Couijt in Associated Cement Companies Ltd. (supra). A software programme may consist of various qommands which enable the computer to perform a designated task. The copyright in that programihe may remain with the originator of the programme. But the moment copies are made and marketed: it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on td a media, whether it be in the form of books or |canvas (In case of painting) or computer discs or Icassettes, and marketed would become "goods". iWe see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a vidieo cassette/CD. In all such cases, the intellectual property has been incorporated on a media foi; purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What ^he buyer;purchasesand pays for is not the disc or the CD. As in the case of paintings or books or music of films the buyer is purchasing the intellectual property and not the media i.e. the ITA 504/2007,ITA 507/2007, ITA508/2007,ITA'511/2007,ITA397/2007 Pni!(i59of75 paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." I XXX'X XXXXXX "In Advent iSystems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3'''' Cir. 1991), relied on by Mr. Sorabjee,the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held : I . "Computer programs are the product of an intellectual process, but once implanted, in a mediumI are widely distributed to computer owners. lAn analogy can be drawn to a compact disc. recording of an orchestral rendition. The music is;produced by the artistry of musicians and in itself ;is not a "good," but when transfeiTed to a laser-rea:dable disc becomes a readily merchantable commodity.Similarly,when a professordeliversa lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a cbmputer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marlietplace.The fact that some programsmay 7^ ITA 504/2007,ITA 507/2007, ITA 50S'2007,ITA^11/2007,ITA 397/2007 Page 60ol'75 be tailored for specific purposes need not alter their status as "goods" because the Code definition includes;"specially manufactured goods." I I

¶56A fortiorari when the assessee supplies the software which is incorporatedon a CD, it has suppliedtangible property and the payment I made by the cellular pperator-for acquiring such property cannot be regarded as a payment by way of royalty. I

¶57It is also to be borne in mind that the supply contract cannot be separated into two vizj. hardware and software. We would like to refer I I the judgment of Supreme Court in CIT Vs. Sundwiger EMFG Co., 266 I ITR 110 wherein it was held; "A plain dnd cumulative reading of the terms and conditions; of the contract entered into between the principal to principal i.e., foreign company and Midhani i.;e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred tci) above, would clearly show that it was one and the same transaction. One cannot be read in isolatioh of the other. The services rendered by the experts and the payments made towards the same was jpart and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA511/2007,ITA 357/2007 f> >o' 7-'' o e>) machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the teciinical services rendered iby a non-resident company, it must be deemed llhat tiiere was a "business connection", and it attracts the provisions of Section QdXvii) of tlie Income Tax Act cannot be accepted and the judgments rehed upon by tlie Revenue are the cases where there was a separate agreement for the purpose pf teciinical services to be rendered by a foreign cbmpany, which is not connected for the fulfillment of the main contract entered into principal to principal. This is not one such case and thus the Icontention of the Revenue cannot be accepted iin the circumstancesand nature of the terms of the contract of this case." I

¶58No doubt, in an amiexure to the Supply Contract the lump sum price is bifurcated in two components,^viz., the consideration for the supply of the equipment and for the supply of the software. However, it I was argued by the learned counsel for the assessee that this separate specification of the haJrdware/software supply was necessary because of the differential custom^ duty payable. I

¶59Be as it may, in order to qualify as royalty paym.ent, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-I ITA 504/2007,ITA 507/2007. ITA 508/2007,ITA'SI1/2007,ITAJ97/2007 P{|gt:02or7; II thereto, it is necessaryto establishthat there is transferofall or any I I I rights (includingthe grantingof any license)in respect of copy right of a literary,artisticor scientificwork. Section2 (o) of the CopyrightAct makes it clear that a| computer programme is to be regarded as a I 'literary work'. Thus, in order to treat the considerationpaid by the I cellular operator as royalty, it is to be established that the cellular j operator,by making such payment, obtains all or any of the copyright rights of such literar}[ work. In the presence case, this has not been I I established. It is-ndt even the case of the Revenue that any right I contemplated under Section 14 of the Copyright Act,1957 stood vested I in this cellularoperator as a consequenceof Article 20 of the Supply I Contract. Distinction|has to be made between the acquisition of a "copyright righf and a "copyrighted article".

¶60Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a repent ruling of the Authority for Advance Failing I

(AAR) in Dassault Systems KK 229 CTR 125. We also find force in the I I ITA 504/2007,ITA 507/2007, tTA 508/2007,ITAj311/2007,ITA 397/2007 Page ()3 ol'75 submission of Mr. Dastur that even assuming the payment made by the I I I cellular operator is re'gardedas a payment by way of royalty as defined II in Explanation 2 belo|w Section 9 (1) (vi), nevertheless, it can never be ! I regarded as royalty Within the meaning of the said term in article 13, j para 3 of the DTAA.i This is so because the definition in the DTAA is I narrower than the defmition in the Act. Article 13(3) brings within the ambit of the defmitio: 1 of royalty a payment made for the use of or the right of a literary work. Therefore, v^hat is right to use a copy contemplated is a payment that is dependent upon user of the copyright j and not a lump sum paymentas is the positionin thepresentcase. I

¶61We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapableof independentuse and it was a contract for supply of goods. Therefore, no part of |;he payment therefore can be classified as payment I towardsroyalty. i ITA 504/2007, ITA 507/2007, [TA 508/2007,ITA 511/2007, ITA 397/2007 EFFECT OF AMENDMENT TO SECTION 9 OF THE FINANCE ACT, 2010: i

¶61We have to determine as to whether amendment made to Section 9 of the Finance Act, 2;010 whereby Explanation to sub-Section (2) has been inserted has the effect of turning around the result. Vide Finance Act, 2010 the following amendment was made to sub-Section

(2) of Section9:-| I "Explanation-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub sectipn (1) and shall be included in the total incomeoftlje non-resident,whetherorriot,-

(i) the no'n-resident has a residence or place of business or business connection in India; or

(ii)the non-resident has rendered services in India.'i I

¶62We may place Ion record that initially the Finance Act, 2007 inserted an Explanation at the end of Section 9 to provide that "for the removal of doubts, it |is hereby declared that for the puiposes of this I section, where incomejis deemed to accrue to arise in India under clauses ITA 504/2007,ITA 507/2007, ITA 50S/2007,ITa!5I1/2007, ITA 397/2007 65 (in5

(v), (vi), and (vii) of sub-Section (1) ,such income shall be included in I I the total incomeof the!non-resident,whetheror not the non-residenthas a residenceor place of businessor businessconnectionin hidia." This Explanation was inserted ostensibly to get over that part of the judgment of the Supreme court! in the case of Ishikawajima (supra) where the Supreme court had observed that for Section 9(1) (vii) to be applicable it I is necessary that the services should not only be utilized in India but should also be rendered In India. As this Explanation did not achieve the purpose it v/as intended to serve, as was pointed out by the Karnataka High Court in its judgment titled Jindal Thermal Power . I Company Limited Vs. Deputy Commissioner of Income-Tax (ITA 3021/2005 and other| connected matters decided on

16.3.2009) the Legislature once again amended the Explanation below Section 9 by the FinanceAct, 2010 withretrospectiveeffectfrom 1^' June, 1976.

¶63Based on the iaforesaid amendment, the submission of the Revenue is that this amendment has been introduced by the Legislature to undo the effect of 'Ishikawajima (supra) and makes the Legislative ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA511/2007, ITA 397/2007 Pajje (l(> oC75 inteiidment clear by providing "source rule" that is, income which has i arisen in India as taxable under Section 9 of the Act. It .was argued that I even the plain wording of Section 9 was clear, namely, if the income I has its source in India, it would be taxable in India. However, since I Ishikawajima (supra) had not interpreted the provision as containing the "source rule" in order to rectify this situation created by the aforesaid judgment, the Parliament introduced the aforesaid Explanation to clarify i that irrespective of where the services were actually rendered, so long as they were utilized in India, income obtained from such services by a non-residentwouldbejtreatedas incomeaccruingor arisingin India. I

¶64To buttress this; submission, the learned counsel for the Revenue relied upon the Memorandum explaining the following provisions in the Finance Bill, 2010:- ; "Vide Finance Act, 1976, a source rule was provided in Section 9 through insertion of clauses (v), (vi) and

(vii) in sub-sbction (1) for income by way of interest, royalty or feles for technical services respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident I I ITA 504/2007,ITA 507/2007, ITA 508/2007,ITa|511/2007,ITA 397/2007 I'age;67ofS I under the circumstanees specified therein. The intentionofjintroducingthe source rule was to bring to tax interest, royalty and fees for teclinical services, by creating a legal fiction in section 9, even in cases where servibes are provided outside India as long as they are utilized in India. The source rule, therefore, means that tlie situs of the rendering of services is not relevant. It |is the situs of the prayer and the situs of the utilization of services which will determine the taxability ofjsuch services in India. This was the settled position of law till 2007. However, the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. Vs. DIT

(2007) [288 iITR 408], held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient teiTitorial nexus betwefen such income and the territory of India. It further held that for establishing such territorial nexus, the sjsrviceshave to be rendered in India as well as utilized in India. I This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is notj relevant as long as the services are utihzed in iIndia. Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-Section

(2) of Section 9 with retrospective;effect from 1^^ June, 1976 vide Finance Act, 2007. IThe Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section

(1) of Section 9, siich income shall be included in the total income of thjs non-resident, regardless of whether the non-resident; has a residence or place of business or ITA 504/2007,ITA 507/2007, ITA50S/2007,IT/\;511/2007,ITA397/2007 Pilg.;6f; ol' 75 business cpnnection in India. However, tlie Karnataka High Court, in a recent judgment in the case of Jindal Tliermal Power Company Ltd. Vs. DCIT (TDSi), lias held that the Explanation,in its present form, does not do away with the requirement ofrenderingIofservicesinIndiafor any incometo be deemed to accrue or arise to a non-resident under Section9. |It has been held that on a plain reading of the Explalnation, the criteria of rendering services in India and jthe utilization of the service in India laid down by the Supreme court in its judgment in the case of Ishikawajima Harima Heavy Industries Ltd. "(supra) remains untouched and unaffected by the Explanation.; In order to remove any doubt about the legislative intent of thej aforesaid source rule, it is proposed to substitute the existing Explanation with a new Explanation to specifically state that the income of a non-resident; shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub section (;1) of Section 9 and shall be included his total income]whether or not, (a) the non-residenthas a residence! or place of business or business comiection in India; or

(b) the non-resident has rendered services in India. This amendment is proposed to take effect retrospectively from 1^' June, 1976 and will, accordingly, lapply in relation to the assessment year 1977-78 and;subsequent years." ITA 504/2007,ITA 507/2007, ITA 508/2007,ITA(511/2007.ITA397/7.007 Pn{i(;6^or75

¶65It was argued that a plam construction of the Explanation shows that income received by a non-resident from interest, royalty, or fees for technical services will be deemed to accrue or arise in India in accordance with Section 9 (1) (i) irrespective of the place of business, I residence or presence :of business connection in India. Moreover, in the I specific context of royalty and fee for technical service, the second half of the Explanation makes it clear that services for which royalty or fee is being paid need not hp renderedwithinthe territoryof India in order to be deemed as income; accming or arising in India. As per the learned I counsel for the Revehue the scope of the said provisions is made clear I when one examines th^e relevant Notes on Clauses that accompanied the I I Bill in its passage in P|arliament: "Clause 4 ofjthe Bill seeks-to amend section 9 of the Income-Tax Act relating to income deemed to accrue. or arise in India. I The existing iprovisions contained in the Explanation occurring after sub-section

(2) of the aforesaid section provide that,' for the removal of doubts, .for the puiposesof tlie said section,where income is deemed to accrue or krise in India under clauses (v), (vi) and

(vii) of sub-section

(1), such income shall be included ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA5n/2007, ITA 397/2007 p:ige7(lor75 in tlie total income of the non-resident, whether or not, the non-residfenthas a residence or place of business or business comiection in India. It is proposeci to substitute the said Explanation so as to provide that the income of a non-resident shall be deemed to aqcrue or arise in India under clause (v) or clause (vi) or!clause (vii) of subsection (1) and shall be included in |the total income of the non-resident, whether or not,- I the non-resident has a residence or place of business or business connection in India; or I . I the non-resident has rendered services in India. I I This amendment will take effect, retrospectively, from 1^' June, 1976 and will, accordingly,apply in relation to the assessnjientyear 1977-78and subsequent years." So

¶66On the other hand, argument of the learned counsel for the assesseeis thatthis an^iendmentdoes not impactthe presentcase. It was argued that the Explanation as initially inserted in the year 2007 sought to clarifyas to when ijncomereceivedby way of interest,royaltyor fees for teclinical services,! can be regarded as deemed to accrue or arise in India. The subseque'ntamendment made in the Explanation by the Finance Act, 2010 enacts a further clarification (by effectively adding ITA S04/2007,ITA 507/2007, ITA 508/2007,ITA.511/20117,ITA 397/2007 ' PiiyeTlol'?? 9l clause (ii) in the Explanation) in so far as the taxability of fees for technicalservices are Concerned. The SupremeCourt inIshikawajima (supra) has held that if the transfer of property in goods as well as the paymentwere both ijaade outsideIndia, the transactionof supply was not chargeable to tax |in India inspite of the fact that the contract was signed in India. The (Court has further held that under the DTAA even if the non-resident has a permanent establishment in India, the income accruing from the sup^Dly would not be chargeable to tax in India if the permanent establishment is not involved in that activity. In the present case the finding of the Tribunal is that both the transfer of the property in goods as well as risk has passed outside India and, therefore, having regard to the provisions of the Act, the consideration receivable for the supplyof such equipnientis not chargeableto tax in India. According to the assessee, the judgment of the Supreme Couit in the case of Ishikawajima insofar; as it deals with the taxability of the offshore suppliesis in no manijieraffectedby the amendmentmade to section9 by the Finance Act, 2010 as it only impacts the issue as to when income ITA 504/2007, ITA 507/2007, ITA 508/2007,ITA'511/2007, ITA 397/2007 Page?: of75 I by way of fee for tecljiiical servicescan be deemedto accrueor arise in I I India. As it is nobody's case tliat the respondenthas renderedteclinical I I serviceswhich are dejemedto accrue or arise in India when it supphes I the equipmentor the software,the insertion of the Explanationbelow section9 and the additionof clause (ii) in the said Explanationby the Finance Act, 2010 has no relevanceinsofar as the appeals before this I j Court are concerned. I

¶67In our opinionjon the facts of this case, it may not even be i I necessary to go into this issue for the reason that in respect of clauses

(v),(vi), and (vii) of sub Section (1) of Section 9, once it is held that payment in question; is not royalty which would come within the I mischief of clause 6f clause (vi), the Explanation will have no application. . i

¶68Therefore,it is ijiotnecessaryto go into the questionas to whether the puipose of this amendmentwas to undo the effect of Ishikwajima (supra) by providing "source rule" as taxable under Section 9 of the Act. I In the present case, once it relates to supply of goods and further in any I ITA 504/2007,ITA 507/2007, rXA Ci08/2007,ITA'511/2007,ITA397/2007 PflUCViUlfVS case, where both tlje transferof the propertyin goods or risk passed I outside India, the cQnclusion is that no taxable event took place in I I India. The questioijof applicabilityof the Explanationwould arise only when payment is to be treated as "royalty" within the meaning of I I clause (vi) or "fee foil teclmical services" as provided in clause (vii) of I the Act. i I I I I :

¶69The result of the aforesaid discussion would lead to the answer I I to questions framed iii favour of the assessee and against the revenue I and would result in the dismissal of the appeals of the Revenue. ITA No. 397/2007 i

¶70This appeal was' admitted on the following questions of law:- "1. Whether Ld. ITAT in the facts and circumstaijicesof the case erred in holding that such softjvare supplies were 'sale' and hence business iticome and not Royalty in terms of Indo-UK Treaty?j

¶2Whether Ld. ITAT was correct in law in confirming decision of the Ld. CIT (A) by limiting income fr0m hardware sales at 8%? I ITA 504/2007, ITA 507/2007, ITA 508/2007,IT/^ 511/2007,ITA 397/2007 '/A ofV? 9S

¶3Wl|iether Ld. ITAT erred in holding that Assessee lis not hable for interest under Section 234A andi234B of the hicome Tax Act, 1961?" I I I

¶71It was agreed that the result of the aforesaid questions would depend upon the outcome of the ITA 504/2007 and other connected matters.

¶72In view of our (decision in ITA 504/2007,wherebyappealsofthe revenue have been dismissed, the questions of law stand answered against the revenue in this appeal. This appeal is also dismissed. DECEMBER 23,2011 skb ! [TA 504/2007, ITA 507/2007, ITA 508/2007,ITAI511/2007, ITA 397/2007 iv ACTING CHIEF JUSTICE (REVA ICHETRAPAL) JUDGE