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The Tax Publishers Norel Networks India International Inc v. DIT [ITA No. 666/2014, dt. 4-5-2016] Existence of a PE in a turnkey contract *Facts:* Assessee a US resident a lead player in telecom equipment and software space was the step down subsidiary of Nortel Canada. How this is a step down subsidiary is by way of a chain of cross-country held holdings across Netherlands, Mauritius, Luxembourg etc. There were two Indian entities of the Nortel group in India viz. Nortel India and Nortel India Liaison office separately also part of the Nortel group. A contract was entered into by Nortal India with Reliance infocom for supply of equipment, services and software contract. The contract was entered into by Nortel India on the behest of Reliance that they wanted a single point liaison in India. Immediately after the contract the supply of the equipment was assigned to the assessee who was counter guaranteed for delivery by Nortel Canada as a part of the performance obligations. The equipments were manufactured by Nortel Ireland and supplied to Nortel Canada in turn to the assessee and then sold by appellant to Reliance on FCA at offshore destination. The supply of goods were at a higher price from Nortel Canada than the selling price thus appellant an offshore entity had only losses and had no obligation to file taxes. In a scrutiny cum reassessment order the assessing officer held that the assessee had a PE in India by virtue of Nortel India and the Liaison office, thus attributed income in the hands of the assessee. This was confirmed by Commissioner (Appeals) holding that they had a place PE in the form of Nortel India/Liaison office, an agency PE by virtue of contract conclusion done by Nortel India and a dependent agency PE by virtue of the parent Nortel Canada sending some employees for the installation thus an installation PE also existed. This was upheld in the ITAT. On further appeal by both parties on various grounds key being existence of PE by the assessee: Held in favour of the assessee that there is no PE for the assessee in any form in India thus attribution of income is not called for. The reasoning that the contract was entered by Reliance into with Nortel India was only for Reliance needing a single point contract, did not confer contract concluding powers with Nortel India. The guaranteeing by Nortel Canada was part of performance obligations and this cannot trigger a PE. Even if triggered only part of the service attributable to India can be taxed, no part of the income arose in India. The contract though turnkey contract but a separable one the supply being offshore cannot be taxed in India. The service provided by Nortel India is taxed in its hands as a legal entity. Existence of a subsidiary itself cannot trigger a PE. The pricing for offshore support on services by Nortel India is good enough to be taken care by TP provisions to be seen at Arms length price or otherwise. Ishikawajima Harima decision for separability of contract holds good, each ones obligation and performance is distinct. Even if a PE was to be read into the attribution is not possible since no income arose in India. This being separate on facts there is no PE in any form.

The Tax Publishers

Norel Networks India International Inc v. DIT [ITA No. 666/2014, dt. 4-5-2016]

Existence of a PE in a turnkey contract

Facts:

Assessee a US resident a lead player in telecom equipment and software space was the step down subsidiary of Nortel Canada. How this is a step down subsidiary is by way of a chain of cross-country held holdings across Netherlands, Mauritius, Luxembourg etc. There were two Indian entities of the Nortel group in India viz. Nortel India and Nortel India Liaison office separately also part of the Nortel group. A contract was entered into by Nortal India with Reliance infocom for supply of equipment, services and software contract. The contract was entered into by Nortel India on the behest of Reliance that they wanted a single point liaison in India. Immediately after the contract the supply of the equipment was assigned to the assessee who was counter guaranteed for delivery by Nortel Canada as a part of the performance obligations. The equipments were manufactured by Nortel Ireland and supplied to Nortel Canada in turn to the assessee and then sold by appellant to Reliance on FCA at offshore destination. The supply of goods were at a higher price from Nortel Canada than the selling price thus appellant an offshore entity had only losses and had no obligation to file taxes. In a scrutiny cum reassessment order the assessing officer held that the assessee had a PE in India by virtue of Nortel India and the Liaison office, thus attributed income in the hands of the assessee. This was confirmed by Commissioner (Appeals) holding that they had a place PE in the form of Nortel India/Liaison office, an agency PE by virtue of contract conclusion done by Nortel India and a dependent agency PE by virtue of the parent Nortel Canada sending some employees for the installation thus an installation PE also existed. This was upheld in the ITAT. On further appeal by both parties on various grounds key being existence of PE by the assessee:

Held in favour of the assessee that there is no PE for the assessee in any form in India thus attribution of income is not called for.

The reasoning that the contract was entered by Reliance into with Nortel India was only for Reliance needing a single point contract, did not confer contract concluding powers with Nortel India. The guaranteeing by Nortel Canada was part of performance obligations and this cannot trigger a PE. Even if triggered only part of the service attributable to India can be taxed, no part of the income arose in India. The contract though turnkey contract but a separable one the supply being offshore cannot be taxed in India. The service provided by Nortel India is taxed in its hands as a legal entity. Existence of a subsidiary itself cannot trigger a PE. The pricing for offshore support on services by Nortel India is good enough to be taken care by TP provisions to be seen at Arms length price or otherwise. Ishikawajima Harima decision for separability of contract holds good, each ones obligation and performance is distinct. Even if a PE was to be read into the attribution is not possible since no income arose in India. This being separate on facts there is no PE in any form.