Income from supply of telecommunications network equipment and software taxable as business income under India-China tax treaty
Upcoming SlideShare
Loading in...5
×
 

Income from supply of telecommunications network equipment and software taxable as business income under India-China tax treaty

on

  • 316 views

Recently, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Huawei Technologies Co. Ltd. (the taxpayer) dealt with the taxability of income from supply of ...

Recently, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Huawei Technologies Co. Ltd. (the taxpayer) dealt with the taxability of income from supply of telecommunications network equipment along with the software embedded in it. The Tribunal held that the taxpayer had a Permanent Establishment (PE) in India under the India-China tax treaty. Further the income from supply of software cannot be treated as royalty since software was supplied in an embedded form along with the hardware under a common contract. Therefore, the income from supply of telecommunications network equipment including software was taxable as business income arising from the taxpayer’s PE in India.

Statistics

Views

Total Views
316
Views on SlideShare
311
Embed Views
5

Actions

Likes
0
Downloads
2
Comments
0

1 Embed 5

https://twitter.com 5

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Income from supply of telecommunications network equipment and software taxable as business income under India-China tax treaty Income from supply of telecommunications network equipment and software taxable as business income under India-China tax treaty Document Transcript

    • © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Background Recently, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Huawei Technologies Co. Ltd. 1 (the taxpayer) dealt with the taxability of income from supply of telecommunications network equipment along with the software embedded in it. The Tribunal held that the taxpayer had a Permanent Establishment (PE) in India under the India- China tax treaty (tax treaty). Further the income from supply of software cannot be treated as royalty since software was supplied in an embedded form along with the hardware under a common contract. Therefore, the income from supply of telecommunications network equipment including software was taxable as business income arising from the taxpayer’s PE in India. Facts of the case  The taxpayer, a Chinese company, was engaged in the business of supplying telecommunications network equipment. i.e., core and access network equipment, mobile network equipment and data communications equipment. The taxpayer did not file its return of income in India. _______________ 1 Huawei Technologies Co. Ltd. v. ACIT (ITA Nos.5253, 5255 & 5256/Del/2011) – Taxsutra.com  During the year under consideration, the survey was undertaken at the office premises of Huawei India Pvt. Ltd. (Huawei India), a taxpayer’s subsidiary. During the course of survey, several documents were found and impounded and statements of various senior executives were recorded.  On the basis of the said documents and statements, the Assessing Officer (AO) issued notice under Section 148 of the Income-tax Act, 1961 (the Act). It was held that the existence of wholly owned subsidiary of the taxpayer creates a business connection under Section 9(1)(i) of the Act. The AO also held that the taxpayer had PE in India and the income from the supply of telecommunications network equipment was taxable in India.  The AO artificially allocated the revenue from supply of equipment between two portion i.e. hardware supplied and the software, which is embedded with hardware/equipment. The AO treated receipt from the software as royalty and receipt from sale of hardware as business income under the tax treaty. Income from supply of telecommunications network equipment and software taxable as business income under India-China tax treaty 25 March 2014
    • © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Dispute Resolution Panel (DRP) upheld the order of the AO. Tribunal’s ruling  The Tribunal relied on the orders of the AO and DRP where it was held that: Business connection Huawei India was economically, technically and financially all dependent upon the taxpayer. Further the telecom equipment supplied by the taxpayer are invariably installed and commissioned by its wholly owned subsidiary Huawei India and hence, it is clear that the taxpayer has a business connection in India. Fixed place PE On the basis of various information collected during the survey it was clear that the taxpayer was carrying out the business in India. The business of the taxpayer in India is being conducted with active involvement of the employees of Huawei India. Such employees of Huawei India along with employees of the taxpayer have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the taxpayer with its Indian customers. The taxpayer has given power of attorney in favour of its employees for signing the contracts, conducting negotiation and executing all necessary matters for the project in India. The taxpayer’s business in India was carried out with the help of its employees, who regularly work from the premises of Huawei India. In view of the above, it was clear that the taxpayer, being tax residents of China, had fixed place PE in India in form of office premises of Huawei India. Agency PE The employees of Huawei India forms the sales teams of the taxpayer, such employees have habitually secured orders in India, wholly or almost wholly for the taxpayer. The documents in the form of agreements/purchase orders/copies of contracts also prove the active involvement of the employees of Indian company in the conclusion of contracts on behalf of the taxpayer. Huawei India was economically, technically and financially all dependent upon the taxpayer. Therefore, Huawei India also constitutes the agent other than an agent of independent status of Huawei China. This results into the creation of the dependent agent PE under the tax treaty and business connection under the Act. Further, the process of joint bidding by the taxpayer and Huawei India constitutes Dependent Agent PE. Installation PE The taxpayer’s employees also visited India to perform activities relating to installation projects lasting for more than 180 days, which constitutes Installation PE. Service PE The statements recorded during the survey also show that the employees render technical services continuing for more than 183 days, constituting Service PE.  The facts recorded by the AO and upheld by the DRP in their order have not been controverted before the Tribunal. Accordingly, the Tribunal held that taxpayer had PE in India. Taxability of income from supply of equipment and software  The facts of the present case are identical with facts of the Delhi High Court in the case of Ericsson A.B. 2 where it was held that the software that was loaded on the hardware did not have any independent existence. The taxpayer sold the hardware and software together and therefore, both software and hardware cannot be assessed separately. Similar view is also expressed by the High Court in the case of Infrasoft Ltd. 3  The Tribunal referred one or two sample agreements and observed that the clauses of all the agreements are more or less similar.  On referring to the clauses of the agreement, it was evident that the software is a set of program embedded in the equipment necessary for control, operation and performance of the equipment. The contract price was for supply of equipment and thus there was a consolidated price for the supply of equipment which consists of hardware and software.  Perusal to the agreement, it was evident that the equipment, i.e. the hardware supplied by the taxpayer, contained the software and the software was not supplied separately. The buyer was granted a non-exclusive, non-transferable and non-sub-licensable license to use the software. Further, the buyer was granted no title or ownership rights or interest in the software.  Accordingly, following the decisions of jurisdictional High Court in the case of Ericsson A.B. and Infrasoft Ltd. it has been held that there was only one contract for supply of equipment which included hardware and software both and, therefore, the income from supply of the equipment is to be assessed as business income arising from the taxpayer’s business connection/PE in India. _________________ 2 Ericsson A.B. v. ADIT [2012] 341 ITR 162 (Del) 3 DIT v. Infrasoft Ltd. [2014] 220 Taxman 273 (Del)
    • © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Our comments Taxability of income from supply of telecommunications network equipment has been a subject matter of litigation before the Courts. The Delhi High Court in the case of Ericsson A. B. held that income from supply of telecommunication equipment was not taxable in India because the property in goods had passed outside India. With regard to taxability of software the High Court held that the software supply is an integral part of the equipment system and the software that was loaded on the hardware did not have any independent existence. There could not be any independent use of such software. Accordingly, payment made for the same cannot be treated as royalty. The Delhi Tribunal in this case held that the taxpayer had PE in India. Accordingly, income from supply of equipment was taxable as business income. However, with regard to taxability of software the Tribunal followed the decision of the Delhi High Court in the case of Ericsson A. B. and Infrasoft Ltd. and held income from supply of software cannot be treated as royalty since software was supplied in an embedded form along with the hardware under a common contract. Therefore, the income from supply of telecommunications network equipment including software was taxable as business income arising from the taxpayer’s PE in India.
    • © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. ©2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata – 700091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010