Netwo… · Web viewin the income tax appellate tribunal. delhi bench 'a' (special bench) i.t.a. no. 2455/del/01 and i.t.a. no. 2516/del/01 (assessment year: 1997-98)

2005-TIOL-103-ITAT-DEL-SB

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH 'A' (SPECIAL BENCH)

I.T.A. NO. 2455/DEL/01 AND I.T.A. NO. 2516/DEL/01

(Assessment Year: 1997-98)

MOTOROLA INC

C/o M/s BHARAT S. RAUT & CO

511, WORLD TRADE CENTRE, BABAR RD., NEW DELHI

Vs

DEPUTY CIT, NON-RESIDENT CIRCLE

NEW DELHI

(and vice-versa)

2. I.T.A. NO 815/DEL/01 AND I.T.A. NO. 1798/DEL/01


ERICSSON RADIO SYSTEMS A.B.

C/o R.S.M. & CO.

516-517, WORLD TRADE CENTRE,

BARAKHAMAB LANE, NEW DELHI-110001

Vs

DEPUTY C.I.T, NON-RESIDENT CIRCLE

NEW DELHI

(and Vice-versa)

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C.O. NO. 60/DEL/2001


ERICSSON RADIO SYSTEMS A.B.

C/o R.S.M. & CO.,

516-517, WORLD TRADE CENTRE,

BARAKHAMBA LANE, NEW DELHI-110001

Vs

DEPUTY CIT NON-RESIDENT CIRCLE

NEW DELHI

(Cross Objector)

3. I.T.A. NOS. 1963 & 1964/DEL/01

(Assessment Year: 1997-98 & 1998-99)

NOKIA NETWORKS, OY.KEILALAHDENTIE-4

BOX 300, FIN - 00045

NOKIA GROUP, FINLAND

Vs

DEPUTY C.I.T, NON-RESIDENT CIRCLE

4. I.T.A. NO. 2510 & 2511/DEL/01

(Assessment Year: 1997-98 and 1998-99)

DEPUTY C.I.T.

NON-RESIDENT CIRCLE,

NEW DELHI

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Vs

NOKIA NETWORKS OY, (FORMERLY NOKIA TELE

COMMUNICATIONS OY), KEILALAHDENTIE 4,

FIN-02125, ESPOO, BOX 300

FINLAND - 0045

Before Shri Vimal Gandhi, Hon'ble President, Shri R V Easwar, Vice President

and Shri Pradeep Parikh, Accountant Member

Dated: June 22, 2005

Assessees by:

1. Motorola Inc., and Nokia Networks OY: Shri M.S. syali, Sr. Adv, Shri Faroukh Irani, Adv.

(Shri Satyen Sethi, Shri Manu K. Giri, Shri Satish Khosla, Adv and Shri Sanjay Chaudhary, C.A., with them)

2. Ericsson Radio Systems A.B. Shri Sohrab E. Dastur, Sr. Adv and Shri P.J. Pardiwala, Adv. with him.

Department by:

Shri G.C. Sharma, Sr. Adv, (Special Counsel for the Department)

(Shri Anoop Sharma, Shri R.K. Raghvan and Shri T.R. Talwar, Add and Shri Salil Gupta, Sr. D.R., with him)

ORDER

PER BENCH:

All these cross-appeals and cross-objections in respect of the three assessees are directed against the orders of the learned CIT(A) in the respective case. Since common issues are involved in all these appeals, they were heard together and are being disposed of by this consolidated order, for the sake of convenience.

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1.1 These matters were fixed before the Division Benches but at the instance of the assessees and in the light of the importance of the issues involved, a request was made to the Hon’ble President to refer the matter to a Special Bench u/s. 255(4) of the Income Tax Act, 1961 (the Act). The President, ITAT after considering the facts and circumstances of the case decided to constitute a Special Bench. The following question was referred to the Special Bench:

“Whether, on the facts and in the circumstances, the revenues earned by the appellant from supply of equipment and software to Indian Telecom Operators were taxable in India?”

2. It may be relevant to mention that the revenue had earlier opposed the constitution of a Special Bench. The Revenue further opposed joining of Ericsson and Nokia as parties before the Special Bench. However, subsequently the learned counsel appearing for the revenue Shri G.C. Sharma, Sr. Advocate agreed that a Special Bench may be constituted and the above mentioned two assessees may also join as parties.

3. Before the hearing started on 19th July, 2004, Mr. M.S. Syali, the learned counsel for Motorola, referred to the assessee’s application dated “Nil” (received in the office of the Tribunal on 26.5.2004) and requested the Bench that he be permitted to argue on the validity of the notice issued u/s. 142(1) of the Act as entire appeals were to be heard by the Bench as per directions dated 19.1.2004. Shri G.C. Sharma, Learned counsel, appearing for the revenue, opposed the above request. It was argued by Shri Sharma that only a specified question has been referred to and is to be considered by the Special Bench. After hearing all the concerned parties at length, the Bench, vide its order dated 20th July, 2004 directed that the entire appeals in all the three cases will be head by the Special Bench.

4. Two Major issues which arise in the appeals are:

(a) The validity of the notice issued under section 142(1) of the Act, and

(b) The validity of the levy of interest under sections 234A and 234B of the Act.

The first issue arises only in the cases of Motorola and Ericsson, whereas the second issue arises in all the three cases namely Motorola, Ericsson and Nokia. We propose to decide these two issues first and thereafter decide the various grounds assessee-wise.

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Validity of notice under section 142(1) (Motorola & Ericsson).

5. The first ground in the case of Motorola is against the validity of the notice issued u/s. 142(1) of the Act. The said notice was issued on 3rd of November, 1999 and was served thereafter. The learned counsel for the assessee submitted that the said notice should have been issued and served within one year from the end of the previous year. The notice issued and served after the above date was barred by limitation and hence the assessment was vitiated.

5.1 Shri Syali referred to the provisions of sub-sections (2) and (4) of sec. 139. He contended that before 1.4.1989 sub-section (2) of sec. 139 prescribed that the notice thereunder should be served before the end of the assessment year. After 1.4.1989. section 142(1) was amended to provide for issue of notice calling for the return of income. According to Mr. Syali this was a case of substitution of the earlier section 139(2) and though section 142(1) did not specify any time limit within which the notice should be issued, his contention was that such a limitation was built in and should be inferred having regard to the scheme of the statute. Mr. Syali pointed out that section 142(1) provided for two situations namely:

(a) Where a return was filed u/s. 139(1) in which case the notice u/s. 142(1) could call for further information and particulars, and

(b) Where time allowed u/s. 139(1) had expired and no return was filed by the asessee, the notice u/s. 142(1) could call for a return to be filed by the assessee.

6. Shri M.S. Syali then referred to the decision of the Hydrabad Bench of the Tribunal in the case of Dr. Vijaykumar Datla Vs. Astt. CIT 58 ITD 339 and of the Delhi Bench in the case of Sheraton International Inc. Vs. Dy. CIT 85 ITD 110. Shri Syali pointed out that the Hyderabad Bench while deciding the matter had taken all the relevant provisions of the law into consideration. The decision of the Delhi Bench of the Tribunal, on the other hand, was per incuriam as the decision of the Hon’ble Supreme Court and the relevant statutory provisions were not discussed. Shri Syali at the same time added that both the Benches agree that some period of limitation has to be read in the statutory provisions and it is not possible to hold that the notice u/s. 142(1) could be issued at any time. Shri Syali referred to the decision in the case of Iswara Bhat Vs. Commissioner of Agricultural Income tax 200 ITR 238 (Ker.) to contended that even in the absence of a time limit prescribed by law, any proceedings have to be initiated and computed within a reasonable time. Where no time limit is prescribed for the completion of the proceedings, the logic that the

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repository of the power shall initiate the proceeding within a reasonable time should apply an the final order should be passed within a reasonable time, even in the absence of a time limit in the statute concerned. The Kerala High Court held that both initiation and completion of the proceedings stand on the same footing.

6.1. Mr. M.S. Syali referred to Explanation 2(a) to section 147 of the Act which deems certain cases to be cases of escaped assessment. Under this provisions, a case where no return of income has been furnished by the assessee although the total income or the total income of any other person in respect of which he is assessable under the Act exceeded the maximum about not chargeable to income-tax would also be deemed to be a case of escaped assessment. From this provisions, the learned counsel sought to contend that there is a point at which the income escaping assessment is fixed, and any notice u/s. 142(1) could be given only before that point is reached. In the case of escaped assessment, the only remedy with the revenue is to issue notice u/s. 148 treating it as a case of escaped assessment. The present case, according to him can at best be considered as escaped assessment for which no notice u/s. 142(1) could be issued. In such a case, a notice u/s. 148 should have been issued which not having been issued, the assessment is without jurisdiction.

6.2 Shri Syali then pointed out with reference to the impugned order of the CIT (Appeals) and argued that four reasons were given not to accept the decision in the case of Dr. Vijaykumar Datla (supra):

(1) The decision in the case of Dr. Vijaykumar Datla (supra) ignores the provisions of Section 139(2),

(2) The judgment of the Hon’ble Supreme Court in the case of CIT Vs. Narsee Nagsee & Co. (40 ITR 307) was not rendered under the provisions of the Income-tax Act but was rendered under the Business Profits Tax Act, 1947 under which the provisions were materially different.

(3) The order of the Hyderabad Bench in the case of Dr. Vijaykumar Datla (supra) is not a decision of the jurisdictional Bench of the tribunal and hence not binding; and

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(4) The Assessing Officer has concurrent jurisdiction over the assessee in the sense that he can issued notice u/s. 142(1) or a notice u/s 148 and if the exercises one of these two options, there is not illegality about the same.

7. Criticising the approach of the CIT(A) as above, Mr. Syali submitted that in the case of Dr. Vijaykumar Datla (supra), the Hyderabad Bench did consider section 139(2) and that too in extenso and he drew out attention to the relevant parts of the order. Secondly, he submitted that the judgement of the Hon’ble Supreme Court in the case of Narsee Nagsee & Co. (supra) clearly notes that the provisions of the Business Profits Tax Act which were before them are in pari material with the provisions of the Indian Income-tax Act, 1922. Thirdly, it was submitted that it was irrelevant that Dr. Vijaykumar Datla (supra) was an order by the Hyderabad Bench which was not the jurisdictional Bench in so far as the present case is concerned, because there is no judgment of any High Court taking a view contrary to the view taken by the Hyderabad Bench in Dr. Vijaykumar Datla’s case. Lastly, Mr. Syali contended that the theory of concurrent jurisdiction was rejected by the Hon’ble Supreme Court in the case of Narsee Nagsee & Co. (supra) and further he added that the rule is that jurisdiction has to be expressly conferred and no inference of concurrent jurisdiction can be drawn.

8. Mr. Syali then referred to the order of the Delhi Bench in the case of Sheraton International Inc. (supra) and submitted for our consideration the following points. According to him Sheraton International Inc. (supra) proceeded entirely on the basis of first principles without referred to the law laid down by the courts including the judgement of the Hon’ble Supreme Court in the case of Narsee Nagsee & Co. (supra). Therefore, the order is per incuriam. He also invited our attention to paragraph 16 of Sheraton’s order and pointed out what according to him were certain incorrect observations made by the Delhi Bench vis-à-vis Dr. Vijaykumar Datla’s case. On merits, Mr. Syali submitted that the interpretation of the expression “for the purpose of making an assessment” appearing in section 142(1), on which strong reliance had been placed by the Delhi Bench in Sheraton International Inc. (supra) case, would equally apply to a case of re-assessment since by definition in section 2(8), an assessment includes a re-assessment. He further pointed out that section 142(1) refers to section 139 at two places. In the first place where the section is referred, no sub-section is specified. In clause (i) of sub-section (1) where there is again a reference to section 139, the reference is specifically to sub-section (1) of section 139. This distinction, according to the learned counsel, is very important for this reason namely; that simply because the assessee has not filed a return, the department is not powerless because notice u/s. 142(1) vis-à-vis production of accounts can be issued after issue of notice u/s. 148 also. It was in this context that he dissected the provisions of section 142(1) into two limbs as mentioned earlier.

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9. Shri M.S. Syali also drew out attention to the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Sultan Ali Gharami 20 IT 432 to contend that merely because the assessee can file a return u/s. 139(4) of the Act, it does not mean that the notice u/s. 142(1) can be issued after the end of the assessment year. Under such circumstances, a notice u/s. 148 was necessary. The learned counsel sought to drew parity between the provisions of sections 142(1) and 143(2) to contend that just as the Assessing Officer. (AO) cannot make an assessment u/s. 143(3) after the expiry of 12 months, similarly no notice could be issued u/s 142(1) after the end of the assessment year. After the end of the assessment year, only notice u/s. 148 could be issued as by that time it becomes a case of escaped assessment. The decision in the case of Sharaton International (supra) overlooked the two limbs of section 142(1) namely: (a) calling for the return and (b) calling for the details. It was submitted that these were two different powers with different attributes governing different situations. It was submitted that in principle, a notice under the section has to be issued during the assessment year which position has been confirmed by the court. Later on limb (a) was incorporated in section 139(2) which now stands substituted by the provisions of section 142(1) and hence the question arises as to why the earlier position cannot be implied into the new provisions.

9.1 On the basis of certain observations of the Calcutta High Court in Sultan Ali Gharami’s case (supra), Mr. Syali contended that on the expiry of the assessment year, which in the case of Motorola was on 31.3.1998, the assessee acquired a vested right not to be disturbed except by a procedure known to law and that procedure has been prescribed only by section 147 of the Act and, therefore, once the assessment year had come to an end on 31.3.1998 and no assessment had been made upon the assessee, the A.O. has no option but to treat it as case of “escaped assessment” and proceed to issue a notice u/s. 148 of the Act. At page 448, of Sultan Ali’s case (supra), the Calcutta High Court observed that on the expiry of the assessment year, “…… the assessee acquires a kind of immunity of which he can be deprived any if certain preliminary conditions laid down in Section 34 are fulfilled.” Accordingly, the contention was that in the case of Motorola the AO could not have validly issued any notice u/s. 142(1) after 31.3.1998 and ought to have issued a notice only u/s 148 and since no such notice was issued, the assessment made was without jurisdiction. To the same effect is the judgment of the Hon’ble Supreme Court in the case of State of Assam and Another Vs. D.C. Choudhuri And another (76 ITR 706) which was also cited by Mr. Syali.

9.2. In support of the contention that a period of limitation has to be contextually inferred reference was made by Mr. Syali to page 132 of the treatise on interpretation of Statutes by francis Benion where there is a reference to the doctrine of Ellipsis which means that a period of limitation has to be read into the statutory

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provisions where it is not expressly prescribed, considering the consequences of not reading such limitation into the provisions.

9.3. The learned counsel also made reference to the legislative intention while substituting section 139(2) by section 142(1)(i) w.e.f. 1.4.1989 which was only to shorten the period of limitation prescribed for completion of assessment and certain other matters. In this connection he drew out attention to the amendment to section 139(4) and section 153 where the period of limitation was shortened and submitted that in this background the legislature could not have intended that the period u/s. 142(1) could be enlarged as compared to the period of allowed u/s. 139(4).

10. Coming to the case of Ericsson, the following are the relevant dates:

Date Remarks

26.8.1999 Notice u/s 142(1) issued to the Indian Company.

9.11.1999 Notice u/s 142(1) served on the assessee.

24.1.2000 Return of income filed by the assessee showing nil income.

28.3.2000 Assessment made u/s 143(1)

It may be noted that all these dates fell in the financial year 1.4.1999 to 31.3.2000.

11. Mr. Dastur, the learned counsel for the assessee (Ericsson) prefaced his arguments regarding the validity of the notice u/s 142(1) with what he called the basis postulate, which according to him was that we should avoid any interpretation which would result in the overlapping of the provisions of section 142(1) and section 148 over the same period of time. The reason according to him was that if this overlap is allowed, then the A.O. will be in a position to discriminate between different assesses and may even choose to issue notice u/s 148 instead of 142(1), since that would give him more time to complete the assessment. In this connection he referred to section 153(2) which provides for the limitation of two years from the end of the financial year in which the notice u/s. 148 was served, to complete the re-assessment. If such a discrimination is allowed the result in the present case would be tat if the assessment is to be completed u/s., 143(3), it would have to be done so on or before 31.3.2000, whereas if the assessment would have to be done us 148, it would have to be done on or before 31.3.200. This may also empower the A.O. to confer an advantage on certain assesses and allow himself mere time to complete the assessment.

12. Mr. Dastur raised on more preliminary point. He submitted that it is agreed on all sides including the orders of the Hyderabad and Delhi Benches of the Tribunal

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(supra) that though section 142(1) did not expressly provide for a period of limitation for issuing the notice but such a notice has to be issued within a reasonable time. What is the reasonable time is the question for consideration on a proper interpretation of the relevant provisions.

13. Two alternative were put forth before us in connection with the reasonable period of limitation to be read into section 142(1) for issuing the notice. The first alternative was that the notice should be issued on or before 31.3.1998 i.e. within the assessment year itself (with reference to the facts of this case where the assessment year is 1997-98). The reason is that according to him there is an inherent indication of such a time limit in section 148 itself. Section 149 contemplates the issue of notice u/s. 148 at any time on or after 1.4.1998 i.e. after the end of the assessment year but before a period of four years has elapsed. In certain cases a period of six years has been prescribed but this makes no difference to the argument. Therefore, a notice u/s. 148 in the present case can be issued at any time between 1.4.1998 and 31.3.2002. It, therefore, follows that the notice u/s. 142(1) cannot be issued after 31.3.1998 because from 1.4.1998, it would be a case of income escaping assessment into which field a notice u/s. 142(1) cannot intrude. In other words, if 1.4.1998 is the starting point for the issue of notice u/s. 148 on the footing that it is a case of escaped assessment, then 31.3.1998 is the concluding point for the issue of notice u/s. 142(1).

14. In support of this alternative. Mr. Dastur drew out attention to the observations of the Hon’ble Supreme Court at page 318 of Narsee Nagsee & Co., case (supra) and the judgment of the Bombay High Court in the case of Harakchand Makanji & Co. Vs. CIT (16 ITR 119).

15. The second alternative put forth by Mr. Dastur, which he characterized as the narrower view, is like this. Notice u/s. 142(1) can be issued up to one year from the end of the relevant assessment year i.e. in this case notice can be issued only upto 31.3.1999 and not thereafter. The reason is based on the provisions of section 139(4). This section gives an assessee the right to file a voluntary return up to a period of one year from the end of the assessment year. In the present case, such a right is available to the assessee upto 31.3.1999. As long as it is open to the assessee to file a voluntary return u/s 139(4), it cannot be said that the assessee has not filed any return of income and, therefore, Explanation 2(a) to section 147 which enables a re-assessment to be made in a case where no return of income has been furnished by the assessee, cannot be invoked. In other words, a notice u/s. 148 cannot be issued on the footing that the assessee has failed to file the return, so long as the assessee still has time to file a voluntary return u/s 139(4).

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In this situation, it cannot be said that as on 31.03.1998, the assessee had failed to file the return of income. Therefore, the narrower view is that a notice u/s. 142(1) can be issued only up to31.3.1999.

15.1. The above situation, according to Mr. Dastur would also fit in with the provisions of section 139(5) and section 153(1)(b). Section 139(5) gives the assessee a right to revise the return if he has already filed a return u/s. 139(1) or in response to notice u/s. 142(1), if he discovers any omission or wrong statement in the earlier return and such a revised return may be field at any time before the expiry of one year form the end of the relevant assessment year or before completion of the assessment, whichever is earlier. Section 153(1)(b) also provides for a time limit of one year from the end of the financial year in which a return or a revised return is field under sub-section (4) of section 39 or under sub-section (5) of section 139 respectively, for completing an assessment either u/s. 143 section 144.

16. Mr. G.C. Sharma the leaned counsel for the Department put forth the following submissions with regard to the validity of the notice u/s. 142(1). The Question of limitation in statutes, according to him, is of two kinds. The first is that it places an obligation on the subject. The second kind is the limitation which places fetters on the power of the authorities. The notice u/s. 142(1) is of the second kind whereas the obligation on he assessee to file the return is of the first kind. Nothing is to be implied in a taxing statute where it is not expressly stated, more particularly the question of limitation. Section 142(1) does not expressly provides for a period of limitation within which the notice thereunder ought to be issued. The section, it should be remembered, authorizes an enquiry before the assessment or re-assessment and there should be no limit on the power of the A.O. to make such an enquiry. Section 142(1) and section 148 operate in different fields in the sense that the former gives power to the A.O. to conduct an enquiry before making the assessment and call for a return of income in the course of such an enquiry, whereas section 148 is concerned with bringing to charge the escaped income. These fields should not be permitted to overlap and the interpretation to be placed on section 148 or section 147 should not be permitted to control the interpretation to be placed on section 142(1). Under section 142(1), the only limitation is that the notice calling for the return cannot be issued after the assessment. Section 147 has no impact on this aspect of section 142(1) and it should not be permitted to control or limit the filed of operation of section 142(1) or the power of the A.O. to issue a notice thereunder.

17. It was in the above background that Mr. Sharma proceeded to put forth his analysis of section 142(1). He emphasized that section 142(1) commences with the words “for the purpose of making an assessment”, which, according to him can only be read as the determination of the total income. In the determination of the total

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income, it is open to the A.O. as a first step, to compel the assessee to file a return of income where it is not filed u/s. 139(1). He pointed out that the words “before the end of the relevant assessment year”, which were there in section 139(2) were omitted w.e.f. 1.4.1989, on which day section 142(1) was introduced, and to reads into section 142(1) the condition that the notice calling for return thereunder should be issued before the end of the relevant assessment year, would be to ignore the fact that words to the effect which were present in the omitted section 139(2), do not find a place in the newly introduced section 142(1). He filed detailed written submissions which were filed by him before Delhi Bench of the Tribunal when he argued the case of Sheraton International (supra) and submitted that the same may be taken as his arguments vis-à-vis section 142(1) in the present case also.

18. Summing up the arguments Mr. Sharma pointed out that the time available to issue the notice u/s 142(1), in the absence of any express time limit prescribed in the section itself, is up to the making of an assessment. When it was enquired of him by the Bench to what would happen if the notice calling for the return is issued on 31.3.2000, which is that last day for completion of assessment for the assessment year 1997-98 u/s. 153(1)(a) and what would be the assessee’s remedy in such a case, Mr. Sharma answered that in such a case the assessment may be quashed for violation of rules of natural justice and the assessee could be given sufficient time to file the return of income. When it was pointed out by the Bench that under Explanation 2(a) of Section 147, even the failure of the assessee to file a return u/s. 142(1) is taken in, Mr. Sharma replied that the A.O. is entitled to wait till the period allowed to the assessee to file a voluntary return u/s. 139(4) expires, before issuing a notice u/s. 148.

18.1. In the course of his arguments Mr. Sharma also relied on the second proviso to section 144 of the Act which says that if a notice u/s. 142(1) calling for a return is issued to the assessee, in response to which no return was filed then it is not necessary for the AO. to issue a sow cause notice under the first proviso to section 144 calling upon the assessee to show cause why a best judgment assessment should not be made in respect of his income. In furtherance of this argument, Mr. Sharma contended that if the notice issued in this case u/s. 142(1) is held to be invalid for any reason, including the reason that it is beyond the period of limitation, then the assessment order passed u/s. 143(1) of the Act should be reads as an assessment made in substance u/s. 144.

19. In reply to the above, the following arguments were put forth by Mr. Dastur, the learned counsel for Ericsson:

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(a) Section 11 of the business Profits Tax Act corresponded to section 22(2) of the Indian Income tax Act, 1922 which later corresponded to section 139(2) of the I.T., Act, 1961. Section 139(2) was replaced by section 142(1)(i) w.e.f. 1.4.1989. It is in this background that we have to approach the question.

(b) The ratio of the Hon’ble Supreme Court judgment in Narsee Nagsee & Co (supra) is that the A.O. cannot have a concurrent power to proceed u/s. 11 of the Business Profits Tax Act and section 14 of the same Act. Therefore, the AO cannot have a concurrent power to act u/s 142(1) and section 148 of the 1961 Act.

(c) The marginal note to section 142 is “Inquiry before assessment”. This marginal note was appropriate before 1.4.1989 because section 142 before that date provided only for issue of notices by the AO calling upon the assessee to produce the account books and other relevant information in support of the return or on points on which the AO required clarification. This was the kind of inquiry contemplated by section 142 prior to 1.4.1989. The marginal note, therefore, was appropriate. However, when the section underwent a change w.e.f. 1.4.1989 whereby clause (i) was introduced giving the AO the power to call for a return of income and section 139(2) was omitted w.e.f the same date, the marginal note was not suitably changed and it continued to be “Inquiry before assessment”. In this connection, he referred to the decision of Hon’ble Supreme Court in the case of CIT Vs. Ahmedbhai Umarbhai & Co, 18 ITR 472 at 487 and the later judgment of the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (13) ITR 597 at 609. In these judgments, it has been held that the marginal note to the section cannot override or govern the express provisions of the section.

(d) Thee is no dispute that certain powers vest with the AO for issue of notice u/s. 142(1), but these powers are different from the assessee’s right to file a voluntary return u/s. 139(4) within one year from the end of the assessment year.

(e) The contention of Mr. Sharma that if the notice u/s. 142(1) calling for a return is issued on the last day of the period of limitation for completing the assessment thereby preventing the assessee in complying with the same, the assessment may be set aside by the appellate authorities, is a wholly unsatisfactory way of deciding

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the issue. This solution is subjective and is not based on rational interpretation of the provisions of the Act. Therefore, there has to be a definite period for issuing such a notice which in this case (Ericsson) was 31.3.1999.

20. In the course of his reply Mr. Dastur also offered parawise comments on the written submissions filed by Mr. Sharma on the question of section 142(1).

21. At this juncture, as Mr. Dastur was winding up his reply, we asked him as to what would be the effect of the invalidity of the notice issued u/s. 142(1) after the period of limitation, assuming the period of limitation ends on 31.3.1998 or 31.3.1999. To this query he replied that the assessment will have to be struck down as invalid and without jurisdiction. He cited the judgment of the Hon’ble Supreme Court in the case of Kumar Jagdish Chandra Sinha (by Legal Representatives) Vs. CIT 220 ITR 67. He submitted that the AO is entitled to make an assessment u/s. 143(3) only (a) if a valid return of income is filed pursuant to a valid notice issued u/s. 142(1) or (b) if the assessee files a voluntary return u/s. 139(4).

22.1. Mr. Dastur further submitted that since the A.O. in the present case has followed the section 143(2) channel, it is not open to him now to change track and say that the assessment may be treated as made u/s. 144 of the Act (best judgement). He pointed out that this is not a case of the A.O. quoting a wrong section of the Act. In essence and substance, the order is one passed only u/s. 143(3) since otherwise the notice issued u/s. 143(2) and the production of material and evidence makes no sense. The AO did not purport to act u/s. 144 at all and the argument that he only quoted the wrong section is, therefore, not available to the revenue. On he question as to why the assessment cannot be deemed to have been made u/s. 144, it was contended hat firstly, thee was no notice to make the best judgment assessment under the first proviso to section 144 and secondly, in order to apply the second proviso, there should have been a valid notice u/s. 142(1), which in this case was not there. Therefore since the procedure laid down in section 144 had not been followed, there was no question of treating the assessment as a best judgment assessment. Mr. Dastur also relied on the judgment of the Calcutta High Court in the case of Sultan Ali Gharami (supra) to contend that there can be no waiver of a statutory condition and in the present case even on facts, the assessee did not waive the condition that a valid notice u/s. 142(1) ought to have been issued.

22. In his reply Mr. Syali learned counsel for Motorola submitted that the remedy of the assessment being set aside by the appellate authority in a case where the notice u/s. 142(1) is issued on the last day of the period of limitation is not an effective remedy. In his submission, the A.O. should not in the first place be permitted as all to wait till the last day of limitation to issue the notice, thereby compelling the assessee

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to approach the appellate authorities to have the assessment set aside. Further complications may crop up if the assessment is not set aside by the appellate authority. He supported the argument of Mr. Dastur on this aspect of the matter. He also relied heavily on the judgment of the Calcutta High Court in the case of CIT Vs. Sultan Ali Gharami (supra), Satyanarayan Bhalotia Vs. CIT 207 ITR 1030 and Burdwan Wholesale Consumers’ Co-operative Society Ltd. Vs. CIT 191 ITR 570. As regards the effect of the invalidity of the notice issued by the AO, purported to be a notice u/s. 142(1), Mr. Syali submitted that the requirement of a valid notice is a mandatory requirement and not merely directly, that it is not a mere error of exercising the jurisdiction by the A.O. but of lack of jurisdiction and, therefore, it resulted in an illegality, the consequence of which was that the assessment is null and void. He drew out attention to the observations of the majority judgment of the Hon’ble Supreme Court in the case of Narsee Nagsee & Co. (supra) where, after having held that no valid notice had been issued u/s. 11 of the Business Profits Tax Act, the Hon’ble Supreme Court in terms held that the assessment is without jurisdiction.

23. Mr. G.C. Sharma, the learned counsel for the revenue, wished to make a few clarifications on this issue and, therefore, we permitted him to do so. He started by saying that each case cited by the assessee has been decided on the peculiar facts and no general inference can be drawn. He also filed his submissions in three parts wherein part-I were submissions in general part-II pertained to the principle of estoppel wherein it was contended that the assessee cannot at the same time approbate and reprobate and Part – III contained the distinguishing features between the provisions of three Act, namely 1922 Act, the Business Profits Tax Act and the 1961 Act. Apart form the written submissions he also contended that the assessment cannot be quashed, even assuming that the notice issued u/s. 142(1) was beyond the period of limitation. He pointed out that at any rate this point was not raised by the assessee before the A.O. but was raised only before the CIT(Appeals). The assessee, according to Mr. Sharma, led the Department to believe that the notice as well as the return were valid, participated in the proceedings, permitted the AO to make an assessment u/s 143 and thereby prevented the AO from making a best judgment assessment u/s 144 and by doing all this, an advantage was gained by the assessee. Once the assessment was completed, the assessee field an appeal an it was only in this appeal that it look the point that the notice issued by the AO is beyond the period of limitation and, therefore, the assessment was null and void. This should nor be permitted. He relied strongly on the authorities referred to by him in part-II of his written submissions dealing with the principle of estoppel / approbare – reprobate. He further pointed out that the provisions of the Business Profit Tax act considered by the Hon’ble Supreme Court in Narsee Nagsee & Co’s (supra) were

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materially different from the provisions which are now under consideration. In this connection he drew our attention to the fact that no time limit for issue of notice u/s. 11 of the Business Profits Tax Act was provided. According to him, section 142(1) of the 1961 Act is not the same as section 139(2) of the 1961 Act or section 22(2) of the 1922 Act. He reiterated the even assuming that the notice and the return are invalid, the assessment must be treated as one having been made u/s. 144.

24. Since Ms. Sharma for the revenue had filed written submissions in three parts in relation to the issue of notice u/s. 142(1), we though it appropriate to permit the assesses to offer their comments on the written submissions and the authorities cited therein, especially because the question of estoppel and the principle of approbate and reprobate wee not raised earlier. Accordingly we called upon Mr. Dastur to address arguments with reference to the written submission.

25. Mr. Dastur submitted as follows:

(a) Section 22(2) of the 1922 Act did prescribe a time limit but it is not relevant and nothing turns on it.

(b) Section 142(1) does not prescribe a time limit and similar was the position u/s. 11 of the Business Profits Tax Act.

(c) Though section 11 of the Business Profits Tax Act did not prescribe a time limit, section 14 of the said Act was reads long with it by the Supreme Court in Narsee Nagsee & Co. (supra) case and a time limit was read into the provisions of section 11. Similarly, a time limit should be read into the provisions of section 142(1)(i), reading the same along with section 147.

(d) It is agreed by every one concerned that a time limit, though not expressly prescribed in section 142(1), must be read into the provisions of section 142(1)(i). In fact, even in the case of Sheraton International (supra), the Delhi Bench of the Tribunal agreed a reasonable time limit should be read into the provisions. There are two options in this regard. The first is that the notice should be issued before the end of the assessment year because after that date the period of limitation for issue of notice u/s. 148 will start. The second option is to avoid an interpretation of the

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provisions which would given concurrent jurisdiction to the A.O. in the sense that he can issue a notice either u/s. 142(1) or u/s. 148 in respect of the same period.

(e) Without prejudice to the above Mr. Dastur contended that the period of one year from the end of the assessment year i.e. 31.3.1999 in this case should be considered as the period of limitation for issue of notice because section 139(4) gives the assessee a rights to file a voluntary return before that date. Till that period expires, income cannot be said to have escaped assessment.

26. It was contended that the provisions of clause (i) of section 142(1) were different from the provisions of clauses (ii) and (iii) of Section 142(1) in so far as the later two clauses were procedural in nature, the breach of which was curable, if no notice had been issued. However, so far as clause (i) was concerned, it was a substantial provision bestowing jurisdiction on the AO to call for the return form the assessee and the breach of this provisions would render the assessment null and void. In substance, the contention was that there could be different limitation periods in the same section for issue of different notices. This is not strange or unknown and as an illustration Mr. Dastur pointed out the provisions of section 148 in this regard, where periods like 4 years and 6 years have been prescribed for issue of notice depending upon the circumstances.

27. As regards the application of the principle of estoppel, it was submitted by Mr. Dastur that there was no question of estoppel as the assessee had field the return of income simply in compliance with the notice issued u/s. 142(1)(i) of the Act. At the earlier stages, the assessee did not contest this notice only because its Chartered Accountant was not aware of the legal position. Even in the original grounds of appeal, objection to the notice was not raised as a ground. It was raised only as an additional ground, which was admitted by the leaned CIT(Appeals) u/s. 250(5) on being satisfied that the assessee was entitled to raise such a ground and its conduct was bonafide. Complying with a statutory notice by filing the return, participating in the proceedings etc. cannot be termed as misleading as was argued by he learned counsel for the revenue and when any question goes to the root of the matter, the assessee cannot be prevented from raising the same at any stage of the proceedings. The principle of “approbate and reprobate” applied to a factual situation where an assessee has taken some advantage at one stage of the proceedings and then turns round to contest that very situation when it appears to be disadvantageous to the assessee. There cannot be any approbate reprobate on legal principles but the validity of a notice is to be examined by the revenue authorities. It is their duty to act in accordance with law and in such a situation, there

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could but no “approbate and reprobate”. There may be approbate and reprobate only on questions of act. In support of his contention, Mr. Dastur relied on the decision of the Allahabad High Court in Mir Iqbal Husain Vs. State of UP 52 ITR 625 where it was held that mere filing of a return as directed by the notice does not in itself establish that the assessee had waived his right to object to the notice. He also cited the judgment of the Gujarat High Court in P.V. Doshi Vs. CIT, Gujarat 113 ITR 22 where it was held that the jurisdictional provision which was mandatory and enacted in public interest could never be waived and there can be no question of waiver of such a condition by the assessee. Mr. Dastur also made parawise comments vis-à-vis the written submissions filed by Mr. G.C. Sharma on this question.

28. We have given careful thought to the submissions advanced before us by the parties. We have also examined the relevant statutory provisions of the Indian Income Tax Act, 1922 (Old Act) as also of the Income-tax Act, 1961 (New Act) to which our attention was drawn. We have also considered the case law cited before us. It is an admitted position that no time is prescribed under sec. 142(1)(i) to issue notice. However, both the Benches of the Tribunal i.e. Hydrabad Bench in the case of Dr. Vijaykumar Datla (supra) and Delhi Bench in the case of Sheraton International Inc. (supra) agreed that some reasonable time limit has to be read into the provisions. Notice under the above provision calling for a return cannot be issued any time at the whims and fancies of the Assessing Officer. Even Delhi Bench held that some time limit has to be read and held that notice under the above provisions could be issued till the date of the completion of the assessment. Therefore, the proposition that notice is to be issued within a reasonable time having regard to the scheme of the Act is not in dispute. However, there is a controversy as to what is the inbuilt scheme of the Act, which indicates that such notice can be issued within a particular time limit. As per the assessee, the notice is to be issued within the assessment year or within one year of the assessment year. The revenue on the other hand, contends that the said notice can be issued till the time, the AO can make an assessment.

29. In order to resolve the controversy and see the scheme of assessment, it is necessary for us to consider the relevant provisions of the Old and New Income Tax Act, 1961. Certain basis concepts relating to assessment of income must be kept in view. The earning period which is chargeable to tax is called ‘previous year”. The “previous year” was defined in section 2(11) of the old Act and in section 2(34) of the new act. Assessment year” means a period of 12 months commencing on 1st of April every year. It generally follows the previous year and is defined in section 2(9) of the New Act. The year in which the income of the previous year is assessed and the tax is paid, is called the “assessment year”. For appreciating the scheme of

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“assessment”, we refer to the following comparative provisions of the two Acts i.e. old and new.

The Indian Income-tax Act, 1922 Income-tax Act, 1961

Section 22(1) The Income-tax Officer shall, on or before the 1st day of May in each year, give notice, by publication In the prescribed manner, requiring Every person whose total income during The previous year exceeded the maximum Amount which is not chargeable to Income-tax to furnish, within such Period not being less than sixty days As may be specified in the notice, a Return, in the prescribed manner, Setting forth (along with such other Particulars as may be required by the Notice) his total income and total world Income during the year:

Provided that the Income Tax Officer May in his discretion extend the date of The Delivery of the return in the case of Any person or class of person.

Section 139(1) Every person, if his total income or the total income of any other person in respect of the which he is assessable under this Act during the previous year exceeded he maximum amount which is not chargeable to income-tax, shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed.

Explanation - In this sub section, "due date" means -

(a) where the assessee is a company, the (30th day of November) of the assessment year;

(b) where the assessee is a person, other than a company, -

(i) in a case where the account of the Assessee are required under this Act or any Other law to be audited (or where the report Of an accountants is required to be furnished

Under Section 80HHC or section 80HHD), Or in the case of co-operative society, The 31st day of October of the assessment year;

(ii) in a case where the total income referred to in this sub-section includes any income from business or profession, not being a case falling under sub-clause (i), the 31st day of

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August of the assessment year;

(iii) in any other case, the 30th day of June of the assessment year.)

Section 22(2) In the case of any person Whose total income is, in the Income tax Officer's opinion, of such an amount as To render such person liable to income-tax the Income-tax Officer (may serve) A notice upon him requiring him to Furnish, within such period, not being Less than thirty days, as may be Specified in the notice, a return in the Prescribed from and verified in the Prescribed manner setting forth (along with such other particulars as may be provided for in the notice) his total income (and total words income) during the previous year:

Provided that the Income-tax officer may In his discretion extend the date of for the delivery of the return.)

Section 139(2): (Omitted by Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1.4.1989.

Section 22(2A) xxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxx

Section 22(3): If any person has not Furnished a return within the time allowed by or under sub-section (1) Or sub-section (2), or having Furnished a return under either of Those sub-sections, discovers ay omission or wrong statement therein, He may furnish a return or a revised Return, as the case may be, at any Time before the assessment is made.

Section 139(4): Any person who has not furnished a return within the time allowed to him under sub-section (1), or within the time allowed to him under sub-section (1), or within the time allowed under a notice issued under sub-section (1) of section 142, may furnish the return for any previous year at anytime before the expiry of one year from the end of the relevant assessment year Or before the completion of the assessment. Whichever is earlier:

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Provided that where the return relates to a Previous year relevant to the assessment Year commencing on the 1st day of April. 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years form the end of the relevant assessment year.)

139 (5): If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier:

Provided that where the return relates to the Previous year relevant to the assessment Year commencing on the 1st day of April, 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year).

Section 22(4): The Income-tax Officer May serve on any person (who has made a return under sub-section (1) or) upon Whom a notice has been served under Sub-section (2) a notice requiring him, On a date to be therein specified, to Produce, or cause to be produced, such Accounts or documents as the Income-tax Officer may require, (or to furnish In writing and verified in the prescribed Manner information in such from and On such points or matters (including, With the previous

Section 142 (1): For the purpose of making an assessment under this Act, the Assessing Officer may serve on nay person who has made a return under section 139 (or in whose case the time allowed under sub-section (1) of that section for furnishing the return has expired) a notice requiring him. on a date to be therein specified,-

(i) where such person has not made a return (within the time allowed under sub-section (1) of section 139), to furnish a return of his income or the income of any other person in respect of which he is assessable under this

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approval of the Commissioner, a statement of all assets And liabilities not included in the Accounts) as the Income-tax officer May require for the purposes of This Section):

Provided that the Income-tax Officer Shall not require the production of Any accounts relating to a period More than three years prior to the Previous year.

Act, in the prescribed from and verified in the prescribed manner and setting forth such other particulars as may be prescribed; or)

(ii) to produce, or cause to be produced, such accounts or documents as the (Assessing Officer may require, or

(iii) to furnish in writing and verified in the prescribed manner information in such from and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the (Assessing Officer may require:

provided that -

(a) the previous approval of the (Deputy Commissioner shall be obtained before Requiring the assessee to furnish a statement Of all assets and liabilities not included in the accounts;

(b) the (Assessing) Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year.

Section 34(1):

"34(1) If in consequence of definite information which has come into his possession the Income-tax officer discovers that income, profits or gains chargeable o income-tax have escaped assessment in any year, or have been under-assessed, or have been assessed at too law a rate, or have been the subject of excessive relief under this Act the Income-tax Officer may, in any case in Which he

Section 147: If the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also nay other income chargeable to tax which has escaped assessment and which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the

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has reason to believe that The assessee has concealed the particulars Of his income or deliberately furnished Inaccurate particulars thereof, at any time Within eight years, and in any other case At any time within four years of the end of That year, serve on the person liable to Pay tax on such income, profit or gains, Or, in the case of a company, on the principle officer thereof, a notice containing all or any of the requirement which may be included in a notice under sub-section (2) of section 22, and may proceed to assess or reassess such income, profits or gains and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section."

assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, Unless any income chargeable to tax has escaped assessment for such assessment year by reasons of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Explanation 1: Production before the Assessing Officer of account books or other Evidence from which material evidence Could with the diligence have been discovered by the Amount of disclosure within The meaning of the foreign proviso.

Explanation 2 - for the purpose of his section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:

(a) where no return of income has been furnished by the assess although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

(b) where a return of income has been

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furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has under stated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c) where an assessment has been made, but

(i) income chargeable to tax has been under assessed; or

(ii) such income has been assessed at too low rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.)

Section 148 (1): before making the Assessment, reassessment or recomputation Under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish with such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresonding to the relevant assessment year, in the prescribed from and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as May be, apply accordingly as if such return were a return required to be furnished under section 139.

(2) The Assessing Officer shall, before issuing

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any notice under this section, record his reasons for doing so.)"

30. It is evidet form the above that the basic scheme relating to assessment of income is that under the Old Act, after 1939, the ITO was required to give a notice u/s. 22(1) by publication calling for returns in the prescribed form from persons whose total income was assessable under the Act. In the new Act, as per sub-section (1) of section 39, a statutory obligation has been cast on the assessee to furnish a return of income. Under both the Acts, the AO (ITO) is authorized to issue notice to any person if in his opinion such person is liable to tax. Such powers were vested under section 22(2) of the old Act, corresponding to section 139(2) of the new Act. Section 139(2) was omitted with effect from 1.4.1989 and simultaneously the same power was incorporated in section 142(1) of the Act. A detailed reference to the provisions shall be made hereinafter.

31. In case no assessment was made or an under-assessment was made, the income was said to have “escaped assessment” and the ITO was authorized to take action as provided in section 34 of the old act. A similar provisions is retained in section 147/148 of the new Act. If a person having taxable income failed to furnish a return under sub-section (1) or sub-section (2) of section 22 of the old Act, he could furnish such return under sub-section (3) of section 22 of the old Act. A similar right is available to the assessee and such an enabling provision is contained in sub-section (4) of section 139 of the new Act. The period provided has been changed from time to time and the emphasis is on wrapping up the process of the assessment as early as possible. Likewise, other provisions relating to the powers of the ITO to make an assessment, including best judgment assessment, have been referred to above. At this stage it may be relevant to state that sections 11 and 14 of the Business Profits Tax Act where held by their Lordships of the Supreme Court to be identical to section 22(2) and section 34(1) of the old Act respectively, in the case of Narsee Nagsee & Co (supra). Likewise sub-sections (1), (2) and (3) of section 19 and sub-sections (1), (2) and (3) of section 20 of the Assam Agricultural Income-tax Act where held to correspondent to sub-sections (1), (2) and (3) of section 22 and sub-section (1), (2) and (3) of section 23 of the old act respectively Section 30 of the same Act was held to be corresponding to section 34 of the old Act. This was held by their lordships of the Supreme Court in the case of State of Assam & other Vs. D.C. Choudhury & Others (supra).

32. The Hydrabad Bench of the Tribunal in the case of Dr. Vijay Kumar Datla (supra) and leaned counsel for the assessee in appeal before us placed strong reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Narsee Nagsee &

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Co (supra). In the case of CIT Vs. Narsee Nagsee& Co. 1960 40 ITR 307, their Lordships of the Hon’ble Supreme Court, while considering a case under the business Profits Tax Act (BPTA), held that notice issued under sec. 11(1) of BPTA more than four yeas after the close of the charging period, was bad in law as profits had escaped assessment within the meaning of section 14 of the aforesaid Act which was applicable to the case Without applying the above section, notice issued under sec. 11 was held to be beyond time and without jurisdiction. Sections 11 and 14 of the BPTA were held to be similar to sections 22(2) and 34(1) of the old Act. No time limit was provided in section 11 of BPTA also Their Lordships (as per the majority) made the following observations (@ page 315) relating to the scheme of assessment: -

“As the tax under the Act is charged, levied and paid on the taxable profits of a chargeable accounting period buy assessment is in respect of the financial year in which the Act operates it is not an unreasonable inference that notice for the chargeable accounting period must issue in the financial year following that period …………….. Similarly in the financial year 1949-50 notice would have to be given in that year for the proceeding chargeable accounting period. In this view of the matter the contention that there is no provision in section 11(1) of the act as to the chargeable accounting period as there is for the previous year in section 22(2) of the Income-tax Act is not well-founded.

That the notion of the previous year of the accounting period is as much applicable to the Act as to the Indian Income-tax Act is shown by reference to Computation of Profits Rules in the Schedule to the act. There the computation is related to the accounting period. The previous year is shown applicable by reference to the rules under the Act by which some of the rules of the Income-tax Act are made applicable to the Act; and some of the sections of that Act are made applicable by section 19 and by the rules under the Act.

The modified section 50, as introduced into the Act by the rules, means this that the refund, if any, can only be allowed within four yeas of the financial year which commences after the expiry of the accounting period which itself constitutes the chargeable accounting period or includes in it the chargeable accounting period in respect of which the refund is claimed. If the contention of the appellant is correct then this section will be wholly otiose where the assessment is levied after say 10 years from the end of the chargeable accounting period because by no method of calculation will a refund of tax in that circumstance be claimable under section 50. This furnishes a key to when a notice under section 11(1) has to be given. It must be given within the financial year which commences next after the expiry of the accounting period or the previous year which is by itself or includes the chargeable

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accounting period in question. Section 48 of the Income-tax Act, as amended and applied to the Act, does not affect the operation of section 50 because the two sections have to be read together and the assessee must apply for the refund within the period specified by section 50: Adam Haji Dawoo & Co. Ltd. Commissions of Income-tax (1936) 4 ITR 100.”

(underlining ours)

32.1 Hidayatullah J. (as His Lordship then was) did not agree with the majority view as according to him, the provisions of the BPTA were different from the provisions of the Indian Income-tax Act, 1922 and therefore the latter Act could not be applied to the case Yet, in respect of the provisions of the Indian Income-tax Act, the learned Judge made relevant and pertained observations and noted the decision of the Privy Council in the case of CIT Vs. Ved Nath Singh 1940 8 ITR 222, to the following effect: @ page 331 of 40 ITR)

“We are of opinion that section 34 is applicable to cases in which either no assessment at all has been made upon the person who received the income, profits or gains liable to assessment, or where an assessment has been made in the course of the year, but some portion of the income, profits or gains of such assessee for some reason or other ha not been includes in the other of assessment, such income is income which has escaped assessment in the year, and falls within the ambit of section 34 of the Act.” (underlining ours)

His Lordship further observed as under @ page 331 of 40 ITR

“These cases arose before the amendments of 1939 and in those days there was no provision for a general notice such as is now issued under section 22(1). Even in those days, the return asked for the particulars of the total income during the previous year. Thus, as the end of the assessment year it was not possible to issue a notice for a back period beyond the previous year. By the force of section 22(2) it could b said at the end of any assessment year that in so far as he income of the corresponding previous year was concerned, it had escaped assessment. The logical result of this was that if no notice calling for a return under section 22 was issued within the assessment year, then section 34 was the only means to get at the tax. See Rajenderanath Mukerjee Vs. Commissioner of income-ax 1934 2 ITR 71. The scheme of the Indian Income-tax Act is entirely different, and by fixing a time limit for the issuance of a notice under section 22(2) makes it clear that in section 34 of the Indian Income-tax Act, the words “escaped assessment” ex facie covered all case of escaped assessment whether within or without a period assessment. The assessment there “escapes” when once the assessment year expires.”

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32.2 In the case of State of Assam & another Vs. D.C. Choudhury & Another 1970 76 ITDR 706 (SC) (supra), the assessee had sold their tea estate in Assam on July 9, 1953 and had submitted their returns in respect of the income form the business of cultivation, manufacturing and sale of black tea from January 1, 1948 to July 9, 1953. On January 25, 1961 a letter was received by the assesses from the Agricultural Income Tax Officer directing both the assesses to furnish returns of their agricultural income for the assessment years 1949-50 to 1953-54. Thereafter ex parte assessment were made for the assessment years 1951-52 to 1953-54. All these assessment were challenged by means of four write petitions before the High Court on the main ground that no notice under sec. 30 of the relevant Act was served in respect of the assessment years covered by the impugned orders. In the absence of a notice, the Agricultural Income-tax officer had no jurisdiction to make any assessment after the expiry of three years from the end of the financial year. The Division Bench of Assam High Court allowed all the write petitions. About the decision of the Hon’ble High Court, their Lordship of the Supreme Court have observed as under: @ pages 708 – 9 of 76 ITR )

“The learned Chief justice held that where no return had been filed pursuant to a general notice under section 19(1) the Agricultural Income-tax Office was bound to proceed under section 30 and issue a notice under section 19(2) of the Act within the prescribed period, namely, three years of the end of the financial year. He further held that there was no service of notice on the respondent in respect of the assessment years in question either under section 19(2) or section 30 of the Act. S.K. Dutta J. Came to the same conclusion as the learned Chief Justice but he relied on a judgement of the Calcutta High Court in Commissioner of Agricultural Income-tax Vs. Sultan Ali Gharami 20 ITR 432, in which a dissent had been expressed from the Bombay judgment in Harakchand Makanji & Co. Vs. Commissioner of income tax (16 ITR 119), on the question as to when proceedings relating to assessment could be regarded as having commenced. According to the learned judge if no return is made in response to a public notice under section 19(1) of the Act and no individual notice is served under section 19(2) there would be no pending proceedings and it would be a case of escaped assessment. But this would be so only after the expiry of the financial year. In other words after the publication of the notice under section 19(1) there would be no escapement of income till the end of the financial year. Once the financial year is over and no return has been made is response to a notice under section 19(1) and no individual notice had been served under section 19(2) a case would arise of “escaped assessment for the financial year”.

32.3 On appeal after considering the relevant statutory provisions, their Lordship held that the provisions of sections 19 & 20 of the Assam Agricultural Income-tax act were similar to sections 22 & 23 of the Income-tax Act, 1922. Particularly sub-section

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(1), (2) & (3) of sec. 19 of the Agricultural Income-tax Act were held to be identical with sub-sec. (1), (2) & (3) of sec. 22 of the old Act. Likewise, sub-sec. (1), (2) & (3) & (4) of sec. 20 of the Assam Agricultural Income-tax Act were held to correspond with sec. (1), (2) & (3) of sec. 23 of the old Act. Section 30 of the Agricultural Income-tax Act was found to be corresponding to section 34 of the old Act. Their Lordships referred to the decision in Harakchand Makanji & Co. Vs. CIT (16 ITR 119) and observed as under @ page 711 of 76 ITR: -

“…… that once a public notice is given under sub-section (1) of section 22 of the Income-tax Act, which is similar in terms to section 19(1) of the Act, the assessment proceedings should be deemed to have commenced and there is no obligation on the Income-tax Officer to serve a notice on an assessee individually as well. But in the same case it was said that “a notice under section 34 is only necessary if at the end of the assessment year no return has been made by the assessee and the income-tax authorities wish to proceed under section 22(2) by serving a notice individually. It may then the stated that as the assessment year had come to an end and as no return had been furnished an as the authorities wished to proceed under section 22(2) they should not do so without a notice under section 34.”

Their Lordship finally upheld the decision of the Hon’ble Assam High Court with the following observations at page 712 of 76 ITR:

“Keeping in view the above principles it must be held that in the absence of a return having been filed by the assesses in the present case pursuant to a general notice under section 19(1) of the act assessment could be made only after due notice under section 19(2) or by initiating proceedings under section 30 of the Act. Section 19(20 requires that an individual notice is to be served in the financial year. If no notice is served under that section proceedings under section 30 can be initiated by a notice in accordance with that section within three years of the end of that financial year.”

33. The basis scheme of “assessment” under the new Act continues to be the same. Instead of quoting large number of decisions on the proposition, we have deemed it convenient to rely on the latest 2004 commentary of the famous commentators Kanga, Palkhiwala and Vyas in law & Practice of Income-tax 9th edition. With reference to the provisions of sec. 147, the learned authors have observed as under at page 1826:

“nature and basis of Assessment under this Section

The proceedings taken under this section must be deemed to relate to the original assessment proceedings which commenced with the return filed under sec. 139(1)

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or the issue of a notice under sec. 139(2) (now deleted) Calling for return of income. If a particular income was not included in the total income of the relevant year of account, it can be brought to charge only by taking proceedings under this section and by including it in the total income of any other of account.” (sic)

33.1 It can further be seen from the foregoing discussion that even when not time limit was prescribed under sec. 22(2) of the old Act, yet courts held, having regard to the scheme of assessment, that the notice was to be served before the end of the assessment year, otherwise income would escape assessment at the end of the assessment year. What was implicit in the old Act was made explicit in the new Act. The judicial Interpretation was given statutory recognition and in section 139(2) of the new Act it was specifically provided that the notice was to be issued “before the end of the relevant assessment year”. The provisions of section 139(2) of new Act, prior to its omission w.e.f 1.4.1989. read as under:

“(2) In the case of any person who, in the Assessing Officer’s opinion, is assessable under this Act, whether on his own total income or on the total income of any other person during the previous year, the Assessing Officer may, before the end of the relevant assessment year, issue a notice to him and serve the same upon him requiring him to furnish, within thirty days from the date of service of the notice, a return of his income or the income of such other person during the previous year, in the prescribed form the verified in the prescribed manner and setting forth such other, particulars as may be prescribed”:

32.2 It the notice was served on the assessee and no return was filed, the proceedings could be said to be validly initiated and pending at the close of the assessment year and could be completed within the time and manner provided under the Income-tax Act. Such a case was not a case of “escaped assessment”. One could safely hold that till section 139(2) remained in the new Act, there was no change in the scheme of assessment noted above.

33.3. The new Act was amended with effect from 1st April, 1989 omitting sub-section (2) of section 139 and in its place, the ITO was authorized to call upon the assessee to furnish a return under clause (i) of section 142(1). The said sub-section provides as under:

“142(1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 139 (or in whose case the time allowed under sub-section (1) of that section for furnishing the return has expired) a notice requiring him, on a date to be therein specified,

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(i) Where such person has not made a return within the time allowed under sub-section (10 of section 139, to furnish a return of his income or the income of any other person in respect of which he is assessable under this act, in the prescribed from and verified in the prescribed manner and setting forth such other particulars as may be prescribed, or……..”

[The words “within the time allowed under sub-section (1) of section 139” in the above clause wee substituted for the words “before the end of the relevant assessment year” by the Finance Act, 1990 with effect from 1.4.1990.]

33.4. The section as inserted with effect from 1.4.1989 particularly the words “before the end of the relevant assessment year” were not in line with the basis scheme of the Act as it authorized the Income-tax officer to call for a return as per clause (i) after the “end of the assessment Year”., As per the settled law, the scheme of the Act, as noted above, was that income would be treated as having “escaped assessment”, if neither the return was field under sub-section (1) nor any notice under sub-section (2) of section 139 was issued before the end of the assessment year. In the cases of such escaped assessment, the AO was, required to issue notice under section 148 of the Income-tax Act. However, the clause as inserted also authorized the AO to call for a return after the close of the assessment year.

33.5. The provision as inserted was found to be not workable and problematic. Accordingly the changes in the said provisions was made with effect from 1.4.1990 just one year after its insertion. In the change provisions, there is not time limit for issuing notice except that it has to be after the time provided in sub-section (1) of sec. 139 is over. The AO cannot issued notice and call for the return as he could do under sc. 139(2) or section 22(2) of the old Act even before the expiry of time under sub-section (1) of section 139. In other words, the starting point empowering the AO to issue notice calling for the return is specifically indicated. This is the difference. Otherwise, the amended section 142(i) is similar to the provisions of section 22(20 of the Old Act which have been considered in great details by he Apex Court in the case of Narsee Nagsee & Co. (supra) as also in the case of D.C Choudhury (supra). Once can therefore safely hold that a notice calling for a return under the above clause cannot be issued after “the end of the assessment year”. The reasoning given by the Supreme Court in the above two decisions and their interpretation of the scheme of assessment under the Income-tax Act are fully applicable to the provisions and the situation under consideration. No such change in the new Act has been brought t our notice after 1st of April, 1989 which can lead us to infer that the basis scheme of “assessment” and “escapement” of income considered by their Lordships stand modified. As noted above section 139(2) specifically recognized that notice calling for a return is to be issued ‘before the and of the relevant assessment

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year”. With the deletion of section 139(2) and amendment of sec. 142(1)(i), we are relegated to the position similar to once considered by their Lordships in above decision. Even under other Acts, where no period of limitation was prescribed for issuing the notice calling for the period of limitation was prescribed for issuing the notice calling for the return of income, the said notice was held to be required to be issued before the end of the assessment year having regard to similar scheme of assessment. The authoritative pronouncements which held so are equally applicable to the provisions of the Income tax Act under consideration. Therefore, we are inclined to accept the contention of the assesses that a period of limitation to issue a notice calling for the return under sec. 142(1)(i) is inbuilt in the scheme of the act. As per the said scheme, the notice has to be issued after the end of period in section 139(1) and before the end of the relevant assessment year.

34. We now turn to examine Explanation 2 to section 147 which is as under: -

Explanation 2 – For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c) where an assessment has been made, but-

(i) income chargeable to tax has been under-assessed; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.”

34.1. Explanation 2 to section 147 would not make any differences as the said Explanation starts with the words “the following shall also be deemed to be cases where income chargeable to tax has escaped assessment.” The word “ALSO” in the

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above Explanation is relevant and signifies that cases of “deemed escaped assessment” as per Explanation 2 are in addition to the cases of escaped assessment as per the main provisions of the section. The said Explanation therefore, cannot control the meaning an scope of “income escaping assessment” otherwise manifested in the scheme of the Act. The Explanation has been added merely as an abundant precaution and to tide over controversies arising on account of judicial decisions whether non-furnishing of return and other illustrations could be treated as cases of ‘income escaping assessment”. The Explanation therefore, does not alter the point of time at which income is treated to have escaped assessment; that point is always reached at the expiry of the assessment year.

35. Reference was also made to the provisions of section 139(4) of the new Act which entitled the assessee to furnish a return for any previous year before the expiry of one year from the end of the assessment year. It was thus contended that income could not be treated to have escaped assessment before one year from the end of the assessment year as the assessee could file the return within the above period under sub-section (4) of section 139.

35.1 In our considered opinion, the aforesaid provisions does not affect the “escapement of assessment” but only confers a right upon the assessee. The income will escape assessment if no proceeding are initiated before the end of the assessment year. As soon as the assessment year is over and no return is filed by the assessee nor any notice is issued to him under sub-section (1)(i) of section 142 of the Income-tax Act, income would escape assessment. In the above situation the AO is fully competent to issue notice to the assessee under section 148 of the Income tax Act. He is not required to wait for one yea after the expiry of the assessment year to take action under section 148 if the IT act. However, if an assessee voluntarily files a return within the time allowed under sub-section (4) of section 139 of the Income-ax Act, then the AO cannot proceed under section 147/148 of the Income-tax Act against such assessee. The above logic is clearly evident from the scheme of the Act. The purpose of issuing notice under sec. 148 is to cal upon the assessee to file a return in the prescribed from and to treat such a return as far as possible, as a return filed under section 139 of the Income Tax Act. the same object is achieved if the assessee submits a return under sec. 139(4). Once a return for the purpose of assessment is available, there is no question nor is there any need to issue notice again or take action under sec. 148 read with section 147 of the Income Tax Act. Therefore, section 139(4) does not affect the conclusion that income escapes assessment at the end of the assessment year if neither any notice is issued to the assessee not the assessee field any return as per sub-section (1) of section 139 before the end of the year. In the case of Ranchhoddas karsondas (1959) 36 ITR 569 (SC) as per the Head Note. it was held as under: -

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“A return showing income below the taxable limit submitted voluntarily in answer to the general notice under sec. 22(10 of the Income-tax Act is a goods return; it is a return such as the assessee considers represents his true income.

A return in answer to a general notice under section 22(10 of the Income-tax Act can, under section 22(3), be filed at any time before assessment and for this there is no limit of time.

Where is respect of any year a return has been voluntarily submitted before assessment, the ITO cannot choose to ignore the return and any notice of reassessment and consequent assessment under section 34 ignoring the return is invalid.”

Here reference can also be made to the Full Bench decision of the Karnataka High Court in the case of Kareemsons Pvt. Ltd. Vs. CIT 1992 198 ITR 543. It provides a good illustration to explain the scheme. Their Lordships made the following pertinent observations at page 547:

“The decision of Supreme Court in the aforesaid Kulu Valley Transport’s case (1970) 77 ITR 518, meets the argument of Mr. Chanderkumar that nay return filed by an assessee after the receipt of a notice under section 148 but beyond the date stipulated in the notice cannot be treated as a return under section 139. The correct approach is to examine whether the ‘return” satisfied the requirements of section 139(4); and if it satisfied the said statutory requirements, no further argument would arise. The right given to the assessee under section 139(4) by the Act cannot be lost, merely because the Revenue has instituted proceedings under section 147, in the meanwhile. The right to file a return, falling within section 139(4), is as much a statutory right vested in the assessee, as is the power vested in the Assessing officer to net in the escaped income of taxation under section 147. There is no reason to read the two provisions as in conflict with one another, or to read one provision as overriding the other; both can stand harmoniously to arrive at the true taxable income as demonstrated by the decision of the Supreme Court in the aforesaid Kulu Valley Transport’s case 1970 77 ITR 518”.

The AO even under sec. 139(2) had powers to curtail the period of limitation and could issue and ask for a return of income earlier than the time due and provided under sub-section (1) of section 139. (See Venkateswara Power Rolling Mills & Anr Vs. CIT 97 ITR 168 Mys and CIT Vs. New Punjab Calcutta Transport Co. Pvt Ltd (83 ITR 844 (All). For issuing notice under section 139(2) it was not necessary that the ITO should have “reasons to believe” the income had escaped assessment or to wait till the time statutorily allowed to the assessee under sub-section (1) of section 139

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of the Act is over. If he was of the view that any person in his opinion, is assessable under the Income Tax Act, he could issue notice to that person. Thus, the provisions of sub-section (1) and sub-section (2) of section 139 could operate simultaneously.

36. In a similar manner, the provisions of section 139(4) and of section 147 can operate simultaneously. After the end of the assessment year, the AO is fully competent to issue notice under sec. 148 of the Income Tax Act and call for a return. The assessee is also entitled to file a return as per the provisions of sec. 139(4) of the Income Tax Act.

Further, the provisions of sec. 139(4) suggest that notice in terms of sec. 142(1)(i) has to be issued before the time prescribed under the above sub-section. Thus, more than one provision can operate simultaneously without in any manner affecting the machinery/scheme of the assessment. From the mere fact that the assessee can file a return as per the enabling provisions of sub-sec. (4) of sec. 139, it does not follow that no income can be said to have escaped assessment until the period prescribed under Section 139(40 is over. The filling of the return would halt action of the AO as explained above.

36.1. From the above discussion one may carry the impression that the Revenue’s contention that both the notices i.e under sec. 142(1)(i) and 148 and can be issued simultaneously; both the provisions can operate simultaneously and discretion is vested with the AO to utilize any one of them. This is erroneous and cannot be accepted. Firstly, it is directly opposed to the decision of the Hon’ble Supreme Court in the case of Narsee Nagsee & Co. (supra). We have noted that this contention was raised and was specifically rejected by the Supreme Court. Secondly, whereas no condition are prescribed for issuing notice under section 142(1)(i) of the Income Tax Act, the same is not true of a notice under section 148 of the Income Tax Act. In the latter case, the AO must have reason to believe that income has “escaped assessment.” A notice under section 148 and “reason to believe” relating to income escaping assessment must be based on material and not on the fancies of the AO. The words “reason to believe” and other conditions are specially provided to control and check the powers of the AO to issue notice under sec. 148 of the Income Tax Act. We read no such restriction under section 142(1)(i) of the Act. The two provisions govern different fields and can be exercised in different circumstances. There is no similarity, as we have noticed while considering the provisions of sec. 139(1) & 139(2) or those of sec. 139(4) and 148 of the I.T. Act. Both the sub-sections here relate to the powers of the A.O. to be exercised in different circumstances. If income “escapes assessment”, then the only way to initiate assessment proceedings is to issue notice under sec. 148 of the Income-tax Act. There is no such requirement as far as notice under section 142 (1)(i) of the Income-tax Act is concerned. If fact is

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notice has already been issued under sec. 148 of the IT Act calling for a return form the assessee, it looks absurd to call for a return again u/s. 142(1)(i). We therefore, do not find any force in the contention of the revenue.

37. One more contention was taken on behalf of the assessee with reference to the provisions of section 149 to support of the assessee. The said section is as under:

“149(1) – No notice under section 148 shall be issued for the relevant assessment year, -

(a) in a case where an assessment under sub-section (3) of section 143 or section 147 has been made for such assessment year, -

(i) if four years have elapsed form the end of the relevant assessment year, unless the case falls under sub-clause (ii) or sub-clause (iii);

[Clauses (ii) and (iii) relating to cases where limitation is 7 and 10 years and other provisions of the section not considered relevant and not reproduced].

37.1 It is clear from the section that the starting point for issue of notice under sec. 148 relating to escapement of income is to be counted from the end of the relevant assessment year. It would only be logical to infer that income escapes assessment at the end of the assessment year and therefore, the period of limitation to issue notice under sec. 148 is to be taken from the point of time. Thus this section fully supports the contention that at the end of the assessment year income would escape assessment and notice under section 148 will have to be issued. If that is the case, there can be not question of calling for a return under clause (1) of sub-section (1) of section 142 after the end of the assessment year without issuing notice under sec. 148. The position in the case of escaped assessment is totally different and the same is required to be tackled under sec. 148 of the Income tax Act. It is therefore clear that a notice after the end of assessment year cannot be issued under section 142(1)(i) of Income Tax Act. All the provisions are required to be read together and given a harmonious construction. This is well settled law.

38. In the case of Sheraton International Inc. Vs. DCIT 85 ITD 105, the Delhi Bench of the Tribunal took a view different from one taken by the Hyderabad Bench in the case of Dr. Vijay Kumar Datla (supra). The Bench held that the notice u/s. 142(1)(i) can be issued at any time so long as the AO has jurisdictional power to proceed with the assessment of the assessee. In other words, it could be issued “before the time expired for making of an assessment”. The decision was also cited and relied upon by the learned counsel for the revenue. In reaching its conclusion, the Delhi Bench

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noted that section 142 was controlled by the words “for the purposes of making an assessment under this Act.” Therefore, for making an assessment and till the time available for making such assessment, the AO could issue notice to the assessee. The Bench also took into account the time within which return u/s. 139(4) could be field as in their opinion such a return was still a return u/s. 139. For this view the Bench relied upon the decision of the Supreme Court in the case of CIT Vs. Kullu Valley Tpt. Pvt. Ltd. 77 ITR 518. The learned counsel for the assessee contended that the decision has been rendered without considering the detail the reasons given by the Hyderabad Bench in the case of Dr. Vijay Kumar Datla (supra). The Bench further did not consider the decision of the Hon’ble Supreme Court in the case of Narsee Nagsee & Co. (40 ITR 307) and therefore reached an erroneous conclusion. The Bench also misinterpreted the well accepted scheme of assessment under the Income-tax Act. the detailed arguments of the parties on the issue have already been noted.

38.1. On a careful consideration of the rival submissions, we are of the view that the arguments advanced for the assessee are well taken. Section 142 of I.T. Act, prior to its amendment, had the title “Inquiry before assessment”. It started with the words “for the purpose of making an assessment”. It then did not have clause (i) of sub-section (1) authorizing the A.O. to call for a return from the assessee. Other clauses empowered the Assessing Officer to ask the assessee to produce or clause to be produced accounts and documents and given information in writing the verified in the prescribed manner. In the present appeal, there is no quarrel that as far as powers given to the Assessing officer in the provisions other than clause (i)( of sub-section (10 of section 142 are concerned, they can be exercised for the purpose of making an assessment at any time before the assessment is made. The Assessing Officer can ask the assessee to produce accounts etc and do every thing provided in clause (ii) and (iii) of sub-section (1) up to the time of making the assessment. But it does not follow that the A.O. for making an assessment, can exercise any power at any time without satisfying the conditions attached to the exercise of the power. Issue of notice calling for a return i.e. the power which was earlier exercised u/s 139(2) of I.T. Act for initiation of assessment proceedings, cannot be exercised after the end of the assessment year without recourse to section 147/148 of the Act. The question of making an assessment would arise only if some proceedings have been initiated and are pending. Only then the question of exercising the powers “for the purpose of making an assessment” would arise. The power for initiation of proceedings as per the scheme of the Act is very different from the power of making an assessment. Therefore, the contention that the power of making an assessment or reassessment can only be exercise after initiating the assessment or reassessment proceedings is well taken. It is further rightly contended that there is no goods reason why the

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decision of the Supreme Court in the case of Narsee Nagsee & Co. (40 ITR 307) should not be applied and why the Assessing officer should be held to be entitled to issue notice us/.s 142(1)(i) where he is required to issue notice under section 148 read with section 147 treating it to be a case of escaped assessment. If income has escaped assessment, the Assessing officer has to issue notice u/s. 148 after satisfying the conditions of section 147 of I.T. Act recording reasons and establishing ‘reasons to believe” that income had escaped assessment. These requirements would be given a go-by in case the AO is held to be entitled to call for a return u/s. 142(1)(i) of the I.T. Act. Both the sections cannot operate in the same field at the same time. Moreover, the provisions of section 142(1)(i) as they stood in the assessment years, with which we are concerned, were quite similar to the provisions considered the their Lordships in the case of Narsee Nagsee & Co. (supra). No plausible reason has been put forward to convince us not to apply the aforesaid decision. Subject to our aforesaid conclusions we agree with other submissions advanced on behalf of the assessee’s learned representatives without repeating here each one of the those submissions. For all the above reasons ,we are inclined to hold that the decision given in the case of the Vijay Kumar Datla (supra) is correctly decided and has to be given preference cover the decision of the Delhi Bench in the case of Sheraton International (supra).

38.2. It follows for the foregoing discussion that notice u/s. 142(1)(i) cannot be issued after the end of the relevant assessment year.

39. In both the cases, viz. Motorola and Ericsson the notices u/s. 142 (1)(i) were issue after the end of the relevant assessment years and hence invalid. Therefore, the assessments made pursuant thereto are invalid.

40. This decision of ours is sufficient to dispose of the appeals in the cases of Motorola Inc. and Ericsson and there is no need to decide the other issues. However, since the other issues have to be decided in the case of Nokia, and further since both the sides requested that all issues may be adjudicated upon having regard to their importance and also to avoid multiplicity of proceedings, we proceeded to hear arguments on all those issues and our findings thereon are recorded in the following paragraphs.

INTEREST U/S 234A & S234B.

41 The second important issue relates to the levy of interest under sections 234A and 234B, which arises in all the three cases. In support of the levy Mr. G.C. Sharma, the learned counsel for the Revenue, Strongly relied on the judgment of the Hon’ble Supreme Court I the case of CIT Vs. Anjum M H Ghaswala and others 252

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ITR 1 to contend that the interest under these sections is mandatory and it has to be charged in the assessment and the CIT (Appeals) has no powers to cancel the same He also referred to the later judgment of the Supreme Court in CIT Vs. Sant Ram Mangat Ram Jewellers 264 ITR 564 and submitted that in this judgment, the Supreme Court did not consider it fit to re-consider the earlier judgment in Anjum M.H. Ghaswala (supra) even in the light of the Explanation 1 to section 234B which was introduced after the earlier judgment. In short, the submission of Mr. Sharma was that the interest under these sections has to be compulsorily levied.

42. On behalf of Ericsson, Mr. Dastur submitted the following facts:

The return in the case of Ericsson was due to be filed on or before 31.10.1997. The notice u/s. 142(1) was issued on 20.8.1999 and in response thereto the assessee filed the return on 24.1.2000. In the assessment order passed u/s 143(3) of the Act, the only remark made by the A.O., at the end of the order, so far as the levy of interest is concerned, was “charge interest”. The AO did not even mention he specified section under which interest is to be charged, whether it is under section 234A or section 234B and so on. In the assessment form (ITNS 150), the interest u/s. 234A was shown at Rs. 16,58,15,018 and the interest u/s. 234B was shown at Rs. 22,10,88,024. This assessment form was signed by the same A.O. but no date was mentioned. The submissions of Mr. Dastur was that the mere direction in the assessment order to charge interest without mentioning the specified section was not sufficient to raise a demand of the interest u/s. 156 of he Act and that a specified direction that interest is to be charged under specified section of the act and a further demonstration in the assessment order itself that the conditions necessary for the levy of interest under that section were fulfilled are mandatory requirements to justify the levy. In this connection he formulated three or four possibilities. The first possibility was that there is no mention at all in the assessment order about the levy of interest. The second possibility was the one in the present case, namely, that the assessment order contained a direction merely to charge interest without any section being mentioned. The third possibility which is in effect the same as the second is that the direction was to charge interest, if any. The Fourth and the last possibility was the AO to issue a direction to charge interest as per law/rules”. All these possibilities were considered in the judgment of the Patna High Court in the case of Cit Vs. Ranchi Club Ltd. Vs. CIT 222 ITR 44. In this judgment the Patna High Court equated the assessment order to a judgment of the Court and the assessment from in ITNS – 150 to the decree. The High Court held that a decree cannot be beyond the judgment and, therefore, no interest can be charged in the assessment form, if there is no specified direction in the assessment order, mentioning the section under which interest is to be charged. The rationale of this judgment, according to Mr. Dastur, is that a vague direction, such as in the present case, to “charge interest” will

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put the office of the A.O. which prepares the ITNS – 150 in a state of confusion as to the appropriate section under which the interest is to be charged and would leave the decision to the office which would be contrary to law. It was further pointed out by him that the judgment of the Patna High Court has been affirmed in a civil appeal by the Supreme Court which is reported in CIT Vs. Ranchi Club Ltd. (247 ITR 209) as is further clear from the judgment of the Full Bench of the Patna High Court in Smt. Tej Kumari Vs. CIT 247 ITR 210 where the effect of the Supreme Court judgment has been explained. Mr. Dastur pointed out that this is no case of dismissal of S.L.P. but a case of civil appeal being dismissed on merits and on the basis of the judgment of the Supreme Court in V.M. Salgaocar and Bros Vs. CIT 243 ITR 383, the judgment of the Patna High Court got merged with the judgment of the Supreme Court.

43. Mr. Dastur distinguished the case of Kalyankumar Ray Vs. CIT 191 ITR 634 (SC) on the ground that it is applicable only to a case where there is a specified direction in the assessment order but the calculation thereof is left to be made by the office in form No. ITNS-150 and there are observations to this effect at page 637 of the report. He also pointed out that this judgment is being erroneously invoked by the Department in cases of lay of interest under sections 234A etc. whereas in fact that judgment has nothing to do with he levy of interest at all and was only concerned with the question whether the calculation of the tax, interest, etc. should be contained in the assessment order itself or is it enough if such calculations are shown in form ITNS – 150. he also went to the extent of mentioning that the period for which interest is chargeable should be specified in the order because there may be numerous situations where the office to whom the calculation is left may levy interest for the period for which it is not leviable. So it shows that the A.O. himself is required to apply and consider various different situation involved in different types of cases.

44. Mr. Dastur also distinguished the judgment of the Punjab and Haryana High Court in Vinod Khurana Vs. CIT 253 ITR 578 and submitted that this decisions was decided on the basis of Kalyankumar Ray (supra) which according to him is not applicable to case of levy of interest under section 234A and 234B etc. He submitted that the impact of the Supreme Court judgment in the case of Ranchi Club Ltd. (supra) was not noticed properly by the Punjab & Harayana High Court and if the judgment of the Punjab & Haryana High Court is to be given effect to, then it would mean that the judgment of the Supreme Court is to be given effect to, then it would mean that the judgment of the Supreme Court in the case of Ranchi Club Ltd. (supra) would have to be read in a modified manner and there would be no scope to apply that decision. As an illustration, Mrs. Dastur submitted that a vague direction given by the AO to “charge interest” without mentioning the specific section would be better off than a direction to charge interest under a specific section like section

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234A when in fact interest u/s. 234B is also found to be leviable. The revenue in such a situation would be without a remedy to charge interest under the latter provision.

45. Turning to the judgment of the Supreme Court in the case of Anjum M. H. Ghaswala (supra) Mr. Dastur submitted that the precise question before the Supreme Court was not with regard to the power of the A.O. to levy interest u/s. 234A etc. but it was with regard to the power of the Settlement Commission to waive the interest charged under those provisions. It was in that connection held by the Supreme Court that the interest under these provisions was mandatory and cannot be waived by the Settlement Commission. It was the jurisdiction/competence of the settlement Commission which was in question before the Supreme Court and not the modality of charging interest. The effect of the judgment of the Supreme Court is that even the Settlement Commission is obliged to levy interest in its order of settlement, which also means that the specific section under which the interest is levied is to be mentioned and it should also be shown that the conditions precedent for levying such interest have been fulfilled. In this judgment the earlier judgment of the Supreme Court in the case of Ranchi Club Ltd. (supra) was not adverted to, which itself shows that the two judgments operate in different fields. In this connection, Mrs. Dastur also pointed out on the basis of the judgment of the Supreme Court in the case of Cit Vs. sun engineering Works Pvt. Ltd. 198 ITR 297 and certain other decisions that a judgment should not be read out of context and a sentence or a word therefore cannot be picked up without having regard to the controversy before the Court, the context etc. A decision which is directly on the point should be followed in preference to decision which may have only an indirect impact on the controversy before the Court and for this proposition reliance was placed on the judgment of the Bombay High Court in the case of CIT Vs. Abbasbhoy A Dehgamwall 195 ITR 28. Even assuming that there is a conflict between two judgments (of equal strength). According to the judgment of Delhi High Court in Bhika Ram and Others Vs. Union of India (238 ITR 113), it is that later judgment which should prevail.

46. To sum up, the following propositions were put forth by Ms. Dastur in relation to the levy of interest:

(1) The calculation of tax and interest as per the directions in the assessment order can be made in the assessment form (ITNS-150) and they need not be shows in the assessment order, as held by the Supreme Court in the case of Kalyankumar Ray (supra).

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(2) If the assessment form (ITNS-150) contains the calculations and is also signed by the A.O. who has passed the assessment order and also bears the same date as the assessment order, that would amount to sufficient compliance of the requirements laid down in Kalyankumar Ray’s case (supra).

(3) The charge interest, the assessment order must specify not only that interest is to be charged but it should also sate specifically that interest is charged under a particular section which must be mentioned, as per the judgment of the Supreme Court in Ranchi Club Ltd. (supra).

(4) In certain circumstances, it may be necessary also to indicate in the assessment order itself the period to which the levy of interest relates and the amount on which the interest is to be charged.

(5) All the above propositions are independent and non steps into the other, none invalidates the other.

46.1 Mr. Dastur also invited our attention to the order of the Delhi Bench of the Tribunal in the case of V.V. Industries Vs. CIT 78 TTJ 758 in which an unreported judgment of the Hon’ble Delhi High court has been cited and followed by holding that unless there is a specific mention of the section under which interest is charged, the levy of interest cannot beheld to be valid.

47. Mr. Dastur also put forth his submissions on the merits of the levy of interest u/s. 234B. This section is attracted where the advance tax is not paid by the assessee despite there being an obligation to pay the advance tax. The question according to Mr. Dastur is whether there was an obligation upon the assessee to pay advance tax in the present case. He drew out attention to section 209 of the Act and the steps involved in computing the advance tax. According to clause (d) of sub-section (1) of section 209, the income-tax has to be computed on the current income of the assessee. From such tax, the tax “deductible” at source will have to be reduced. Particular attention was drawn to the fact that the tax need not be actually deducted at source and it is sufficient if the tax is deductible under the various provisions of the I.T. Act such as 195 etc. under which the payer of the income is liable to deduct tax. In the present case, according to the assessee the tax is deductible u/s. 195 of the Act, though according to the payer of the income (the Indian companies), there was

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no liable to deduct tax because the amount did not represent income chargeable to tax under the Act. However, if the view of the Revenue is accepted that the income is table under the act tax was deductible at source from such income. In case there is failure on the part of the payer to deduct the tax, the remedy of the Department is to treated the payer as an assessee in default u/s. 2201(1) of the Act and recover the tax from him. They could have further charged interest from the person u/s. 201(1A) of the Act. Relying on these provisions, the learned counsel submitted that the Revenue cannot seek to recover the tax as well as the interest form the assessee also, which would give them a doubt advantage which is not contemplated by the provisions.

48. In support of the above submissions, reliance was placed on the following orders of the Tribunal.

1. Sedco Forex International Drilling Inc. Vs. Dy. CIT (72 ITD 415 Del.)

2. Asia Satellite Telecommunications Vs. Dy. CIT 85 ITD 478 Del)

3. CIT Vs. Rheinbraun Engineering & Wasser Gambh (R.A.No. 36/Mum/98 arising out of ITA No. 1915/Bom/96, order dated 5th June, 1998 of Mumbai Bench ‘A”).

48.1. Since the assessee was not liable to pay advance tax, no interest could be levied u/s. 234B even where there was a specified direction to the effect in the assessment order.

49. Mr. Sharma, the learned counsel for the revenue, on the other hand, submitted that the assessment form in ITNS – 150, the demand notice as well as the assessment order were all signed on the same day namely 28.3.2000. He pointed out that while charging income-tax on the total income, the A.O. is not expected to say “charge income-tax” which is actually done in form ITNS – 150. The same principle, according to him, is applicable to the case of levy of interest in the sense that the A.O. need not give a direction in the assessment order to charge interest. The calculation of interest is only an administrative act which can be done by the office of the A.O. in form No. ITNS-150. According to Mr. Sharma, if the levy of interest is mandatory as held by the Supreme Court in the case of Anjum M.H. Ghaswala (supra), no further application of mind is required on the part of the AO as contended by the assessee. This is also supported by the use of the word “shall” in section 234B. As regards the contention that the mere direction to charge interest is not valid in the absence of the mention of the specific section under which it is charged. Mr. Sharma contended that it is implicit in such a direction that the levy will be only in accordance with the provisions of the Act and the relevant rules and

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therefore, even such a direction constitutes avoid levy of interest. He pointed out if this connection that section 234B itself fixes the liability of the assessee to pay interest as well as the period on which interest is leviable. According to Mr. Sharma, the application of mind on the part of the AO is reflected by the assessment order itself and the view which the assessee may take regarding his liability to pay advance tax is not relevant at all. The assessee cannot assume that no advance tax is payable by him. The AO will charge interest on the basis of his own findings in the assessment order regarding the quantum of assessment. He submitted that the word “mandatory” means that it is automatic and no discretion is left with the AO not to levy interest.

50. Referring to the authorities Mr. Sharma cited the judgment of the Punjab & Haryana High Court in Vinod Khurana Vs. CIT 53 ITR 578 and submitted that in this judgment both Kalyankumar Ray’s judgment and Ranchi Club Ltd. judgment (supra) have been considered and it has been held that interest is mandatorily leviable particularly when the assessment order and the assessment form have been signed by the same officer on the same day. Referring to the judgment in Anjum M.H. Ghaswal (supra), Mr. Sharma submitted that it has not placed nay limitations on the power of the AO to charge interest and in this respect, it has the effect of over ruling all earlier decisions to the contrary. Referring to the judgment in Kalyankumar Ray, Mr. Sharma submitted that the would go to the extent of saying that the AO need not mention anything in the assessment order abut the levy of interest but still the levy could be made in the assessment form in ITNS – 150 which would be valid.

51. In a brief clarification Mr. Dastur pointed out that the judgment of the Punjab & Haryana High court does not advert to the judgment – decree theory laid down by the Patna High Court in the case of Ranchi Club Ltd. (supra). He cited the judgments of the Delhi High Court in CIT Vs. Kishan Lal (HUF) 258 ITD 359 and CIT Vs. Inchcape India P. Ltd. 179 CTR 212, both of which have followed Ranchi Club Ltd. judgment of the Supreme Court and submitted that being the judgments of the jurisdiction High Court, they should be followed in preference to the judgment of the Punjab & Haryana High Court.

52. We have carefully the matter. Sections 234A & 234B were inserted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f 1.4.89. The Section were amended by the Direct Tax Laws (Amendment) Act, 1989, also w.e.f 1.4.89. A perusal of the circular No. 549 dated 31.10.89 (182 ITR (St). 1) shows that these sections were introduced in substitution of earlier provisions of the Act under which discretion was given to the assessing authority to charge or not to charge interest and also to levy penalties for the same default. The old provisions were found to be rather complicated. Therefore, with a view to simplifying them and also to remover the discretion given to the

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assessing authority which had led to litigation and consequent delay in realization of the dues, the amendment. Act substituted the old provisions by a simple scheme of payment of mandatory interest for the defaults mentioned therein. It would be better to reproduce paragraphs 10.1 & 10.2 of the circular: (page 37 of 182 IT (St):

“Payment of mandatory interest to replace various interests and penalties –

10.1 The old provisions in the Income-tax Act, which gave the assessing authorities discretionary powers to charge interest and also to levy penalties for the same default, were found to be rather complicated. These were contained in the following sections of the Act:

(i) Section 139(8) relating to levy of interest for later filing or non-filing of return of income.

(ii) Section 215 relating to levy of interest for under-payment of advance tax.

(iii) Section 216 relating to levy of interest for deferment of instalments of advance tax.

(iv) Section 217 relating to levy of interest for non-payment of advance tax.

(v) Section 271(1)(a) relating to levy of penalty for failure to file the return of income or to file it in time.

(vi) Section 273 relating to levy of penalty for failure to file the statement/estimate or for filing an untrue statement/estimate of advance tax payable.

(vii) Section 140A(3) relating to levy of penalty for failure to pay tax on self-assessment.

102. With a view to simplify the aforesaid provisions and also to remove the discretion of the assessing authorities, which had led to litigation and consequent delay in relization of dues, the Amending Act, 1987, has substituted the above provisions by a simple scheme of payment of mandatory interest for defaults mentioned therein. The provisions relating to charge of mandatory interest are contained in the new sections 234A, 234B and 234C inserted by the Amending Act, 1987. The mandatory interest chargeable under these sections are not appealable At the time of filing the return of income, such mandatory interest, if payable, is to be calculated on the basis of the returned income and paid along with tax on self-assessment u/s. 140A.”

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The constitutional validity of the new sections was upheld in the following judgments:

1. Union of Home Products Ltd. Vs. Union of India, 215 ITR 758 (Kar)

2. Ranchi Club Ltd. Vs. CIT 217 ITR 72 (pat)

3. Sant Lal Vs. Union of India, 222 ITR 375 (P&H)

4. Dr. S. Reddappa Vs. UOI232 ITR 62 (Kar.)

5. Nemichand Jain Vs. Union of India, 234 ITR 764 (MP)

53. The levy of interest u/ss 234A, 234B & 234C has been held by the Supreme Court in CIT Vs. Anjum M.H. Ghaswala 252 ITR 1 to be mandatory in nature. The earlier provisions of the Income-tax Act were noted and the contrast between them and the new provisions was also brought out. At page 13 of the report, it was pointed out that whereas under the earlier provisions there was a discretion given to the authorities to either waive or reduce the interest, under the new provisions, the intention of the legislature was to make the collection of statutory interest, mandatory. It would be better to reproduce the relevant portions of the judgment. It was observed at page 8 as follows:

“for answering the above question, we will have to examine the character of interest payable under the provisions of S. 234A, 234B and 234C. A perusal of these sections shows that the interest for default in the furnishing return of income, default in payment of advance tax and interest for deferment of advance tax are mandatory in nature.”

Again, after referring to sub-section (4) of S. 234A, it was observed as under:

“This section is an indictor of the fact that so far as the interest falling due by virtue of default in furnishing a return of income, default in payment of advance tax or interest for deferment of advance tax are concerned, Part F of Chapter XVII has been obligated with the duty of levy of interest, as also to make the necessary changes in the payment of interest dependent on the change that may occur consequent to the order of settlement u/s. 245D(4).”

At page 9, the position was summed up in the following words:

“If the scheme of levy of interest is thus to be analysed on the anvil of the provisions referred to hereinabove, it shows that the interest contemplated u/s 234A, 234B and 234C is mandatory in nature and the power of waiver or reduction having not been

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expressly conferred on the Commission, the same indicates that so far s the payment of statutory interest is concerned, the same is outside the purview of the settlement contemplated in Chapter XIX-A of the Act."

At page 13 of the report, the Supreme Court contrasted the earlier and new provisions relating to the levy of interest in the following words:

"Sections 234A, 234B and 234C in clear terms impose a mandate to collect interest at the rates stipulated therein. The expression "shall" used in the said section cannot by any stretch of imagination be construed as "may". There are sufficient indications in the scheme of Act to show that the expression "shall" used in section 234A, 234B and 234C is used by the Legislature deliberately and it has not left any scope for interpreting the said expression as "may". This is clear from the fact that prior to the Amendment brought about by the Finance Act, 1987, the Legislature in the corresponding section pertaining to imposition of interest used the expression "may" thereby giving a discretion to the authorities concerned to either reduce or waive the interest. The change brought about by the Amending Act (Finance Act, 1987) is a clear indication of the fact that the intention of the Legislature was to make the collection of statutory interest mandatory." (underlining ours)

The above observations of the Supreme Court clearly lay down that the levy of interest u/ss 234A, 234B & 234C is mandatory in the sense that it cannot be waived or reduced by the income-tax authorities. The AO, after the amendment and the introduction of the new sections, does not have any discretion to waive or reduce the interest chargeable under the new provisions.

The argument advanced on behalf of the assessee with reference to the judgment in the case of Ghaswala (supra) was that the judgment was not concerned with the modalities of the levy of interest and in fact the judgment was about non levy or waiver of the interest by the Settlement Commission. It was argued that the question before the Supreme Court was only whether S. 245D(6), which provides for terms of settlement of tax, penalty or interest empowers the Settlement Commission in any manner to waive or reduce the interest payable u/ss 234A, 234B & 234C. It was submitted that the effect of the judgment is that Settlement Commission has to levy interest in its order which implies that the Commission is not absolved from the duty of mentioning the specific section under which the interest is charged and of disclosing in the order as to how it was satisfied that the levy was attracted. It was further argued that the meaning of the interest being "mandatory" is not that the authority levying the same was relieved of the obligation to specify the particular section under which it is charged.

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55. Mr. Dastur, ld. Counsel for the assessee agreed that the judgment of the Supreme Court in the case of Ghaswala (supra) was rendered by a five judges Constitution Bench of the Supreme Court, whereas the earlier judgment of the Supreme Court in CIT Vs. Ranchi Club Ltd. 247 ITR 209 was rendered by a three judges Bench of the Supreme Court and also that the judgement in Ghaswala (supra) was rendered on 18.10.2001, which is later than the judgment in Ranchi club Ltd. which was rendered on 1.11.2000, but would submit that the issue in Ghaswala’s case (supra) is not the same as in Ranchi Club Ltd. (supra). He would further say that the judgment of the Supreme Court in Ranchi Club Ltd. is a direct judgment on the question before us, which cannot be modified or understood in the light of a judgment which only touches the issue before us indirectly. This contention, according to him would also equally apply vis-à-vis the earlier judgment of the three judges Bench of the Supreme Court in the case of Kalyankumar Ray Vs. CIT 191 ITR 634.

56. It is, no doubt, true that in CIT Vs. Anjum M.H. Ghaswala (supra), the Supreme Court was concerned only with the question whether u/s. 245D(6), the Settlement Commission has to power to waiver or reduce the interest payable u/s 264A to 234C. Superficially therefore, it is possible to say that the question as to whether, in the absence of mention of the specific section under which the interest is charged, the charge would be valid, id not arise in that case. However, a close examination of the judgment shows that while answering the question, the Supreme Court did consider it necessary to examine the character of interest payable under the above sections. It was the view of the Supreme Court that the interest payable under these sections is mandatory in nature. This has been held in more than one place in the judgment (as shows earlier). Since the interest was held to be mandatory in nature and the power of waiver or reduction not having been expressly conferred on the Settlement Commission, it was held that the Settlement Commission could not waive or reduce the interest. Therefore, the ratio of the judgement is that the interest chargeable under these provisions is mandatory in nature. If the interest is mandatory in nature, it follows that if there is such a default as would attract the provisions of Sections 234A to 234C, then the assessee becomes automatically liable to pay the interest. The assessing authority has no power to waive or reduce the same, a power which he enjoyed before the introduction of the new provisions and which has been taken away from him w.e.f 1.4.89. Once the default is established, the liability to pay interest fastens itself upon the assessee, without anything more. The default, once established, may be likened to a lighted match stick to a trail of gun powder.

57. The question that would next arise is whether, where the interest is mandatory, there should be mention in the assessment order of the specific section under which it has been charged. In the cases before us, it is common ground that in none of the

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assessment orders has the assessing officer mentioned the specific section under which the interest has been charged. In the case of Ericsson, the AO has merely stated “charge interest”. The same is the position in the case of Motorola. In the case of Nokia, the AO has started in the assessment order “charged interest as per rule”. However, in all the cases, the section under which the interest has been charged is seen mentioned in the assessment form, which is form No. ITNS 150, copies of which have been field before us. In these forms, it is seen that the specific sections as well as the amounts of the interest charged have been mentioned. In the case of Kalyankumar Ray (supra), the question was whether the assessment form No. ITNS 150 can be treated as part of the assessment order. The question arose before the Supreme Court this way. In that case, the assessment order (where the total income was computed) itself did not contain the calculations of the income-tax. These calculations were made in Form No. ITNS 150. The contention advanced before the Supreme Court was that S. 143(3) mandates that there should be an order in writing determining the sum payable by the assessee on the basis of the assessment and since the assessment order proper did not tin itself contain the calculations or the determination of the tax payable by the assessee, the entire assessment order should be held to be void and annulled. The contention of the department, based on the punctuation in S. 143(3) was that an order in writing was required only for the assessment of the income or loss and no such order in writing is required for determining the tax payable by the assessee which is an independent process. This argument, though found plausible, was rejected by the Supreme Court by saying that even the determination of the tax in writing is a necessary requirement for the purpose of an assessment. The Supreme Court however, proceeded to hold that the Act does not require that both the computation of the total income as well as the tax should be done on the same sheet of paper which is superscribed as “assessment order”. It held that the calculation of the tax payable is a process which is mainly arithmetical and, therefore, it could be done by the office of the ITO under his direction and once the office makes the calculation which the ITO approves, it cannot be argued that there was no order in writing showing the tax payable by the assessee. It was however, made clear that only when the computation sheet is signed or initialed by the ITO that the assessment process gets completed The Supreme Court took note of the practice, prevailing in the Income-tax Deptt. Of the staff preparing form No. ITNS 150 showing the calculations under the necessary columns and also showing the net amount payable by the assessee. It noticed that this form is generally checked and signed or initialed by the ITO and is followed by a demand notice. It was finally held that the assessment form or form no. ITNS 150 “is also a form for determination of tax payable. When it is signed or initialed by the ITO, it is certainly an order in writing by the ITO, determining the tax payable, within the meaning of S. 143(3)”. It was further observed that there is no reason “why this

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document, which is also in writing and which has received the imprimatur of the ITO should not be treated as part of the assessment order in the wider sense in which the expression has to be understood in the context of S. 143(3)”. What was required, in the words of the Supreme Court is that there first be some writing initialed or signed by the ITO before the period of limitation prescribed for completion of the assessment ha expired in which the tax payable is determined and not that the form usually styled as the “assessment order” should itself contain the computation of tax as well”. These observations clearly show that the calculation part of the tax payable need not be done in the assessment order itself, but can be done separately in form No. ITNS 150 subject to the condition that the said form is singed or initiated by the ITO to indicate that the calculations has this approval. If Form No. ITNS 150 is to be treated as part of the assessment order, if follows that if the specific section under which interest is charged is mentioned in the form, it satisfies the requirement that the interest must be charged in the assessment order itself and should specify the section also.

58. The argument before us on behalf of the assessee however, was that the above judgment of the Supreme Court is not a direct decision on the question whether a specific order by the AO, mentioning the section under which the interest is charged, is required for the validity of the levy. It was pointed out that the question before the Supreme Court was not about the validity of the charge of interest, but whether the calculations of the tax have to be made in the assessment order itself and, therefore, the principle laid down in the judgment cannot be extended to cover everything in the assessment form. In addition, it was also argued that the judgment was rendered in disposing of a Special Leave Petition under Article 136 of the Constitution of India and, therefore, though it gives elaborate reasons supporting the decision, nevertheless it cannot be equated to a judgment rendered while disposing of a Civil Appeal to the Supreme Court which is the case in CIT Vs. Ranchi Club Ltd. (supra). It is, therefore, contended that even if the judgment of the Supreme Court in Kalyankumar Ray’s case is considered to be relevant to the present controversy, the judgment of the Supreme Court in Ranchi Club Ltd. (supra), being a judgment rendered in a Civil Appeal and in which the question directly arose, should be preferred.

59. Before we proceed to consider the above argument, it is necessary for us to refer in Ranchi Ltd. (supra). This judgment was rendered by a three Judge Bench of the Supreme Court in a Civil Appeal. The appeal arose from the judgment of the Ranchi Bench of the Patna High Court in the case of Ranchi Club Ltd. Vs. CIT, 217 ITR 72, in which the High Court had held that sections 234A & 234B are constitutionally valid that they are not penal in nature and that the interest charged under these provisions is compensatory in character. This judgment was affirmed by the Supreme Court. By

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the same judgment, the Supreme Court also affirmed another judgment of the Ranchi Bench of the Patna High Court in the case of Ranchi Club Ltd. Vs. CIT 222 ITR 44. In this case before the High Curt, the contention advanced on behalf of the assessee against the levy of interest u/s. 234A to 234C was that the interest cannot be levied merely though a notice of demand u/s. 156 of the Act where there was no specific direction in the assessment order that interest was leviable and further that the mere insertion of the words in the assessment order “charge interest, if any” or “charge interest as per rules” was not sufficient for charging interest through the notice of demand. These contentions were dealt with by the High court 222 ITR 44 and were found in favour of the assessee. It would be better to reproduce the relevant portion of the judgment: @ Page 50 of the report)

“so far as the issue (iii) and (iv) raised by Mr. Moitra are concerned, we see no difficulty in setting aside the notices of demand claiming interest under any of these section 234A,234B or 234C.

Section 156 of the Act is as under:

“156 Notice of demand – When any tax, interest, penalty fine or any other sum is payable in consequence of any order passed under this Act, the Assessing officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum of payable.”

From the bare reading of S. 156 it is clear that notice of demand claiming interest can be issued only when there is order in the assessment order levying interest. Except in the cases of the assessee Tej Kumari Devi C.W.J.C. No. 2732 of 1995 and C.W.J.C. No. 2780 of 1995 there is no order in any of the assessment orders levying interest under any of the sections 234A, 234B or 234C. To use the expression “charge interests, if any” or “charge interest as per rules” cannot be read to mean that the Assessing Officer has passed orders “charge interest under all the aforesaid sections”. The order to charge interest has to be specified and clear, as for the matter any order to charge any tax, penalty or fine. It is different thing as in the case of Tej Kumari Devi where there is an order levying interest but if left the calculation to the office. The assessee must be made to know that the Assessing officer after applying his mind has ordered the charging of interest and under which of the sections of the Act. Interest is payable under various provisions like for default or delay in furnishing the return of income (sections 139(8) and 139(9) and also under the various sections for default in payment of advance tax (Section 215, 216, 217, 234B and 234C). A notice of demand is somewhat like a decree in a civil suit which must follow the order. When a judgment does not specify and amount to be charged under any particular sections, the decree cannot contain any such amount. Similarly

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when the assessment order is silent if any interest is leviable, the notice of demand under section 156 if the Act cannot go beyond the assessment order and the assessee cannot be served with any such notice demanding interest. We, therefore, do not feel any difficulty in coming to the conclusion that the notices of demand in C.W.J.C Nos. 3609 of 1995 3287 of 1995, 3562 of 1995, 3494 of 1995 and 3527 of 1995, have to be quashed so far these relate to charging of interest under section 234A, 234B or 234C of the Act. We get support for the view which we have taken from the decisions of the Calcutta High Court in Monohar Gidwany Vs. CIT 1983 139 ITR 498 and CIT Vs. Williard India Ltd. 1993 202 ITR 423 and that of the Gauhati High Court in CIT Vs. Namdang Tea Co. India Ltd. 1993 202 ITR 414.”

60. The above judgment was also taken up to the Supreme Court by the department and was disposed of the Supreme Court by the same judgment reported in 247 ITR 209 which we have already referred to. The Judgment of the Supreme Court ins as under:

“We have heard learned counsel for the appellant. We find no merit in the appeal.

The Civil appeals are dismissed. No order as to costs.”

61. Relying on the above judgment of the Supreme Court, it is contended before s that the judgment directly answers the question that has arisen before us and since it has been rendered in a Civil Appeal, and not merely in a Special Leave Petition under Article 136 of the Constitution of India, it ought to be followed and it must be held that where the specific section under which the interest is charged is not mentioned in the assessment order, he levy itself is invalid. It is contended that to validly levy interest, the assessment order must specify not only that interest is charged, but also under which section it has been charged.

62. With respect, we are unable to give effect to the argument that the judgment of the Supreme Court in the case of Kalyankumar Ray (supra) is not applicable to the question before us and that judgment of the Supreme Court in the case of Ranchi Club Ltd. (supra) is to be applied. We may firs refer to the judgment of the Supreme Court in the case of Ranchi Club Ltd. (supra). No doubt, it has been rendered in a Civil Appeal. However, the earlier judgment of the Supreme Court in the case of Kalyankumar Ray (supra), rendered by a Bench of equal strength, does not appeal to have been brought to the notice of the Supreme Court in Ranchi Club Ltd. (supra). The judgment in Kalyankumar Ray’s case does not appear to have been brought to the notice of the Ranchi Bench of the Patna High Court also whose judgment was upheld in appeal by the Supreme Court. The ratio on the basis of which the judgment in Kalyankumar Ray’s case was rendered, in our humble understanding is that form

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No. ITNS 150, if it has been signed or initialed by the same AO, has to be read as part of the assessment order u/s. 143(3). In the present cases, the forms have been signed by the same AO, who signed the assessment order. Therefore, these form also have to be read as part of the assessment orders in the present cases. We have already adverted to the fact that in these form, the specific section under which the interest has been charged, as also the amounts of the interest charged under these sections have been separately shown. There is no dispute about the same. If these forms are to be read as part of the assessment orders in the present cases, then there can be on room for the complaint that the AO did not specify the section under which the interest has been charged. Secondly, the observations of the Patna High Court extracted earlier shows that the High Court has relied on the judgment of the Calcutta and Gauhati high courts. These judgments are –

(a) Monohar Gidwany Vs. CIT, 139 ITR 498 (Cal)

(b) CIT Vs. Williard India Ltd. 202 ITR 423 (Cal)

(c) CIT Vs. Mamdang Tea Co India Ltd 202 ITR 414 (Gauhati)

A perusal of these judgments shows that they wee all rendered under the old provisions of the Income-tax Act relating to the levy of interest. In the Calcutta case of Monhar Gidwany Vs. CIT (supra), the contention was that the interest u/s. 139(8) for delayed submission of the return and that u/s. 217 for failure to file an estimate of advance tax must be levied in the assessment order itself and not merely in the demand notice. This contention was accepted by the Calcutta High Court and it was held that unless that order of assessment itself incorporates an order for the payment of interest, the assessee cannot be asked, by means of a simple demand notice, to pay the penal interest u/s 139 and 217 of the Act. In the light of the judgment of the Supreme Court in the case of Kalyankumar Ray (supra) form No. ITNS 150 is also to be considered as part of the assessment order if this form shows that the interest is levied and the specified section under which it is levied is also shown, then it is as if the levy of interest is made in the assessment order itself. A perusal of the judgment of the Calcutta High Court in the case of CIT Vs. Williard India Ltd. (supra) shows that the AO did not give any reasons in the assessment order for charging the interest, but while computing the income, levied interest without mentioning the details of the calculations in the assessment order. The tribunal deleted the interest charged on the ground that no speaking order was passed. The Tribunal’s order was upheld by the Calcutta High Court. In CIT Vs. Namdang Tea Co. India Ltd. (supra), the Gauhati High Court held that the levy of interest u/s. 216 was not mandatory, but was discretionary and if there was under-estimation of advance tax on account of bona fide reason, they shall be taken into

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account by the AO and the could refrain from charging interest if he is satisfied as to be bona fide of the reason. The AO was found to have charged interest on the assumption that the interest was mandatory. This assumption was held by the High Court to be erroneous. Thus, the first judgment of the Calcutta High Court cited above proceeded on the basis that the levy of interest has to be in the assessment order itself, whereas the second judgment of the same High Court cited above laid down that a speaking order has to be passed for levying interest u/s. 216. In that case even the details of the calculations were not mentioned in the assessment order. In the case before the Gauhati High Court, it was held that the levy of interest u/s. 216 was discretionary and not mandatory. It is to be noted that both the Calcutta judgment were rendered before the judgment in the case of Kalyankumar Ray (supra) (SC).

63. The character of the levy of interest has been held by the Supreme Court to be mandatory in nature. Once, it is held to be mandatory in nature and the discretion of the AO having been expressly taken away u/s. 234A to 234C of the Act, it can no longer be stated that merely because the assessment order does not mention that section under which the interest is charged, the levy itself is invalid. The liability to pay interest arises on this default being committed and thereafter any reference to the specific section of the Income-tax Act under which the interest is charged is only a matter of procedure. The omission of the AO to either state that interest is leviable or to mention the specific section under which it is levied does not control or affect in any manner, the liability of the assessee to pay the interest given the default has been committed. The requirement that the AO should mention the specific section under which the interest has been charged, canvassed before us on behalf of the assessee, can govern only to the limited extent of touching upon the rules of natural justice which have to be complied with while completing the assessment. If the AO does not give reasons for the levy of interest, the assessee may not get an opportunity to show cause why in his case the interest cannot be levied at all. Once the interest is held to be mandatory in nature, as laid down by the Supreme Court in the case of Anjum Ghaswala (supra), there is only a limited area which is open to judicial scrutiny. The question which can be examined is only whether the assessee has committed any such default as would attract the levy under any of these sections. Once the default is established, the liability cannot be wished away nor it can it be wiped out on the ground that the AO has not mentioned the specifics section under which it is charged. The only genuine grievance which an assessee can have is that if the AO had indicated his mind to levy interest under any of the these sections and had specifically drawn the assessee’s attention to a particular section authorizing the levy of interest, he would have and an opportunity of showing that no such default has been committed as would attract the levy, Only for this

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limited purpose, it can be said that it is desirable that the AO indicates the specific section under which the interest is charged. In to the words, the appellate authorities can only examine whether there has been a default or not. If there is a default and the same is established to have been committed, the interest cannot be cancelled. On the other hand, if the assessee succeeds in establishing that there is no default, the levy of interest must be stuck down. The rights of the assessee are certainly prejudiced if the is not told as to why he has to pay interest. That prejudice an be removed if the assessment order contains mentioned of the specific section so that the assessee can know what precisely is the default allegedly committed by him according to the income-tax authorities and he can thereafter take steps show that no such default has bee committed. But to say that the levy must be stuck down as invalid merely because the assessment order doe not mention the section under with it is charged appears to us to go contrary to the ratio laid down by the Supreme Court in Ghaswala case (supra) that the character of the interest u/s 234A to 234C is mandatory in nature. In the present case, the assessee’s complaint that the specific section under which the interest is charged has not been mentioned is without force, having regard to the fact that the specific section has been mentioned in form No. ITNS 150 in all the three cases before us and having regard to the legal position laid down by the Supreme Court in Kalyankumar Ray’s (supra) to the effect that form No. ITNS –150 forms part of the assessment order u/s. 143(3).

64. It was pointed out on behalf of the assesses more than once before us that the judgment of the Supreme Court in the case of Ranchi Club Ltd. (supra) should be followed in preference to the judgment in the case of Anjum Ghaswala (supra) because the former judgment is a direct judgment on the issue before us. It was also pointed out that the judgment of the Supreme Court in Kalyankumar Ray’s case (supra) was rendered while dismissing a Special Leave Petition under Article 136, though with reasons, but nevertheless it cannot be preferred to the judgment of the Supreme Court in the case of Ranchi Club Ltd. (supra), because the letter is a judgement rendered in a Civil Appeal. It was also submitted that the judgement of the Patna High Court in Ranchi Club Ltd. Vs. CIT, 222 ITR 44 (supra) having been upheld by the Supreme Court, has merged with the judgment of the Supreme Court and thus ought to be preferred over the other two judgments of the Supreme Court. With respect, we find in difficult to give effect to the submission. As already pointed out, the supreme Court for the first time held in Anjum Ghaswala’s case (supra) that the interest chargeable u/s 234A to 234C is mandatory in nature. The character of the interest chargeable under these provisions was not the subject matter of adjudication before the Supreme Court in the case of Ranchi Club Ltd. (supra) or before the Patna High Court, whose judgment was affirmed by the Supreme Court. The question before the Patna High Court was only whether in the absence of a

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specific direction in the assessment order levying interest, the levy can be upheld. A perusal of the judgment shows that no arguments on the basic question regarding the nature of the levy were addressed. With respect, the High Court’s attention does not also appeal to have been drawn to the judgment of the Supreme Court in the case of Kalyankuam Ray (supra) so also before the Supreme Court in CIT Vs. Ranchi Club Ltd. (supra) in which the Supreme Court upheld the judgment of the Patna High Court. We have also referred to the full Bench judgement of the Ranchi Bench of the Patna High Court in Smt. Tejkumari & Others Vs. CIT & Others, 247 ITR 210 a judgment rendered on 22nd Sept. 2000, after the judgment of the Supreme Court in CIT Vs. Ranchi Club Ltd. (supra) rendered on 1st August, 2000. The question referred to the full Bench of consideration was firstly whether the interest u/s 234A & 234B read with Explanation 4 is liable to be charged on the returned income or assessed income. Another question which was referred for consideration by the Full Bench was whether in the absence of a specific order of the assessing authority, interest could be charged and recovered from the assessee. The final decision of the Full Bench is as under: page 218

“(i) The decision rendered by the Division Bench in Ranchi Club Ltd’s case 1996 217 ITR 72 (Patna) and having been affirmed by the Supreme Court in Civil Appeal No. 10360 of 1996 (see 2001) 247 ITR 209, has correctly decided the issues which are the subject matter of this reference.

(ii) Interest under sections 234A and 234B is leviable on the tax on the total income as declared in the return and not on the income as assessed and determined by the assessing authority.

(iii) In the absence of any specific order of the assessing authority interest could not be charged and recovered from the assessee.”

Here again, the character of the interest was not under consideration by the Full Bench. As we have already pointed out, it was only in the case of Anjum Ghaswala (supra) that for the first time, the Supreme Court examined the character of the levy and held that it is mandatory in nature. This judgment, in our opinion, gives rise to an entirely different complexion to various aspects of the levy of interest, emanating form the fundamental principle that the levy is mandatory. We have earlier outlined the consequences which would arise if a particular levy is held to be mandatory. All that can be complained against the levy which is mandatory is that the default that attracts the levy has not been committed. It is only for this limited purpose that the correctness of the levy can be examined by appellate authorities. It would be open to the aggrieved party before them to show whether the default has occurred or not. The position in such cases has been summed up by the Supreme Court in the case

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of State of Haryana Vs. Hari Ram Yadav & Others AIR 1994 SC 1262 a judgment of three jugde Bench of the Supreme Court. Under the relevant service rules, the Governor of the state had the power to suspend as employee of the State Govt. against whom disciplinary proceedings were pending or were being contemplated. The Rule 3(1) which provided for the suspension sated that the Governor of the State should be “satisfied” that it is necessary or desirable to place the employee under suspension. The suspended employee challenged the order of suspension and contended that the suspension order was passed without satisfying the requirement of the rule which required the state Gov. to be “satisfied”. The Tribunal accepted the contention and held that the suspension order was passed that the Governor was satisfied that it was either necessary o desirable to place the employee under suspension. The Supreme Court observed that the tribunal had quashed the suspension order on the only ground that it did not contain a recital to the effect that the Governor of Haryana was satisfied that it was necessary or desirable to place the employee under suspension. Thereafter, the Supreme Court proceeded to hold as under:

“We find it difficult to agree with the said view of the tribunal. The mere fact that the impugned order of suspension does not contain a recital that the Governor was satisfied that it is either necessary or desirable to place respondent No. 1 under suspension doe not, in our opinion, render the said order invalid. The law is well settled that the case where the exercise of statutory power is subject to the fulfillment of a condition then the recital about the said condition having been fulfilled in the order raised a presumption about the fulfillment of the said condition, and the burden is on the person who challenges the validity of the order to who that the said condition was not fulfilled. In a case, where the order doe not contain a recital about the condition being fulfilled, the burden to prove that the condition was fulfilled would be on the authority passing the order if the validity of the order is challenged on the ground that the said condition is not fulfilled. Reference, in this context, may be made to the decision of this Court in Swdeshi Cotton Mills Co. Vs. State of UP 1962 1 SCR 422: AIR 1961 SC 1381 where it has been observed:

“The validity of the order therefore does not depend upon the recital of the formation for the opinion in the order but upon the actual formation of the opinion and the making of the order in consequence. It would therefore follows that if by inadvertence or otherwise the recital or the formation of the opinion is not mentioned in the preamble to the order the defect can be remedies by showing by other evidence in proceedings where challenge is made to the validity of the order, that in fact that order was made after such opinion had been formed and was thus a valid exercise of the power conferred by the law. The only exception to this course would be where

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the statute require that there should be a recital in the order itself before it can be validly made.” P. 432 of SCR: p. 1386 of AIR:

“We cannot accept the extreme argument of Shri Aggrawala that the mere fact the order has been passed is sufficient to raise the presumption that conditions precedent have been satisfied, even though there is no recital in the order to that effect. Such a presumption in our opinion can only be raised when there is a recital in the order to that effect. In the absence of such recital if the order is challenged on the ground that in fact there was no satisfaction, the authority passing the order will have to satisfy the Court by other means that the conditions precedent were satisfied before the order was passed. We are equally not impressed by Shri Pathak’s argument that if the recital is not there, the public or Courts and Tribunals will not know that the order was validly passed and therefore it is necessary that there must be recital on the face of the order in such a case before it can be held to be legal. The presumption as to eh regularity of public acts would apply in such a case; but as soon as the order is challenged and it is said that it was passed without the conditions precedent being satisfied the burden would be on the authority to satisfy by other means (in the absence of recital in the order itself) that the conditions precedent had been complied with.” P. 434 of SCR) at p. 1387 of AIR

Drawing analogy from this judgment, we can say that where the section under which the interest is charged is not mentioned or where no reasons are given for the levy, all hat can be done, when the levy of challenged is to call upon the AO to support the levy with reasons and show the default committed by the assessee, so that the assessee gets an opportunity to contest the levy. But the levy itself cannot be struck down as invalid.

65. The contention that the judgment of the Supreme Court in Kalyankumar Ray’s case was rendered while dismissing a Special Leave Petition under Article 136 of the Constitution and not in a Civil Appeal as in the case of Ranchi Club Ltd. and, therefore, it is not a binding judgment under Article 141 of the Constitution of India is, with respect, not acceptable. In Daryao Vs. State of UP AIR 1961 SC 1457, it was held that if the SLP is dismissed in limine without passing a speaking order then such dismissal cannot be treated as creating a bar of res judicata. It was further held that in the absence of a speaking order, it would not be easy to decide all the factors which weighed in the mind of the Court and the makes it difficult and unsafe to hold that such a summary dismissal is a dismissal on merits. These observations themselves suggest that if an SLP is dismissed by giving reasons and by passing a speaking order then it would create a bar of re judicata. We may notice few judgments in this regard. In Union of India Vs. All India Services Pensioner’s Association & Another AIR 1988 SC 501, he Central Administrative Tribunal did not

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apply an order of the Supreme Court passed in an SLP on the ground that the order was not passed while dismissing an appeal. Disapproving the decision of the CAT, a Division Bench of the Supreme Court held as under:

“With great respect to the Tribunal, it should be stated that the way in which it has tried to ignore the decision of this Court in the Andhra Pradesh State Govt. Pensioner’s Association’s case AIR 1986 SC 1907 (supra) is not correct…………… The first ground relied on by the Tribunal not to follow the said decision in that it had been rendered by this Court while dismissing the same SLPs. This is a wholly untenable ground. The SLPs were not dismissed without reasons. This Court had given reason for dismissing the SLPs. When such reasons are given, the decision becomes one which attracts Article 141 of the Constitution which provides that the law declared by the Supreme Court shall be binding on all the Courts within the territory of India”

The judgment of the Supreme Court was applied by the Bombay High Court in the case of Miss Kamla Khushaldas Technandani Vs. O.D. Mohindra & Others 240 ITR 796. In the case of Appellate Authority Govt. of India Vs. Naresh M. Mehta 200 ITR 773, a Division Bench of the Madras High Court noted that the judgment of the Supreme Court in Tanvi Trading & Credits P. Ltd. 191 ITR 307, though rendered under Article 136 of the Constitution of India in an SLP, specifically held that “the High Court was right in its conclusion” and, therefore, it means that the judgment of the High Court had been affirmed by the Supreme Court and thus the judgment of the Supreme Court had been affirmed by the Supreme Court and thus the judgment of the Supreme Court, though rendered under Article 136 of the Constitution, would amount to a binding declaration of law. In V.M. Salgaocar & Bros Pvt. Ltd. Vs. CIT 243 ITR 383, a judgment which was cited before us on behalf of the assessee in support of the contention that a judgment of the Supreme Court rendered under Article 136 of the Constitution doe not amount to declaration of the law since it was not rendered in a Civil Appeal, the Supreme Court noted it earlier judgment in the case of SC Emp9yee Welfare Association Vs. Union of India AIR 1990 SC 334 in which the distinction between the dismissal of an SLP in a summary manner without given reasons and by a non-speaking order on the order had and dismissal by giving reasons and by a speaking order on the other hand was brought out. At page 392 of 243 ITR the following paragraph form the judgment of the Supreme Court in the case of SC Employees Welfare Association (supra) has been extracted:

“Different considerations apply when a special leave petition under article 136 of the Constitution is simply dismissed by saying “dismissed”, and an appeal provided under article 133 is dismissed also with the words “the appeal is dismissed”. In the former case it has been laid down by this Court that when a special leave petition is

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dismissed this court doe not comment on the correctness or otherwise of the order form which leave to appeal is sought. But what the court means is that it doe not consider it to be a fit case for exercise of its jurisdiction under article 136 of the Constitution. That certainly could not be so when an appeal is dismissed though by a non-speaking order. Here the doctrine of merger applies. In that case, the Supreme Court uphold the decision of the High Court or of the tribunal form which the appeal is provided under clause (3) of the article 133. This doctrine of merge does not apply in the case of dismissal of a special leave petition under article 136. When an appeal is dismissed the order of the High Court is merged with that of the Supreme Court. We quote the Following paragraph from the judgment of this court in the case of the Supreme Court Employee’s Welfare Vs Union of India, AIR 1990 SC 334; 1989 4 SCC 187 (at page 344 of AIR 1990 SC):

“22. It has been already noticed that the special leave petitions filed on behalf of the Union of India against the said judgments of the Delhi High Court were summarily dismissed by this Court. It is now a well settled principle of law that when a special leave petition is summarily dismissed under article 136 of the Constitution, by such dismissal this court doe not lay down any law, as envisaged by Article 141 of the Constitution, as contended by the learned Attorney-General. In India Oil Corporation Ltd. Vs. State of Bihar 1987 167 ITR 897; 1986 4SCC 146; AIR 1986 SC 1780, it has been held by this court that the dismissal of a special leave petition in limine by a non-speaking order, does not justify any inference that, by necessary implication, the contentions raised in the special leave petition on the merits of the case have been rejected the Supreme Court. It has been further held that the effect of a non-speaking order of dismissal of a special leave petition without anything more indicating the grounds or reasons of its dismissal must, by necessary implication, be taken to be the Supreme Court had decided only that it was not a fit case where special leave should be granted. In Union of India Vs. All India Services Pensions Associations 1988 2 SCC 580; AIR 1988 SC 501, this court had given reasons for dismissing the special leave petition. When such reasons are given, the decision becomes one which attracts article 141 of the Constitution which provides that the law declared by the Supreme Court shall be binding on all the courts within the territory of India. It, therefore, follows that when no reason is given, but a specific leave petition is dismissed simpliciter, it cannot be said that there has been a declaration of law by this court under article 141 of the Constitution.”

Thus, in the very judgment cited before us by the assessee, the distinction between an SLP being dismissed without reasons and an SLP being dismissed by giving elaborate reasons has been recognized. The former is not binding under Article 141 of the Constitution whereas the latter is.

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66. We must notice one more judgment of the Supreme Court on the effect of dismissal of an SLP by a speaking order in G. Hunhayammed & Others Vs. State of Kerala & Another 245 ITR 360. At page 375 of the report, the Supreme Court laid down the law in this regard asunder:

“A petition for leave to appeal to this court may be dismissed by a non-speaking order or by a speaking order. Whatever be the phraseology employed in the order of dismissal, if it is a non-speaking order, i.e., it does not assign reasons for dismissing the special leave petition it would neither attract the doctrine of merge so as to stand substituted in place of the order put in issue before it nor would it be a declaration of law by the Supreme Court under article 141 of the Constitution for three is no law which has been declared. If the order of dismissal be supported by reasons then also the doctrine of merge would not be attracted because the jurisdiction exercised was not an appellate jurisdiction but merely a discretionary jurisdiction refusing to grant leave to appeal. WE have already dealt with this aspect earlier. Still the reasons stated by the court would attract applicability of article 141 of the Constitution if there is a law declared by the Supreme Court which obviously would be binding on all the courts and tribunals in India and certainly the parties thereto. The Statement contained in the order other than on points of law would be binding on the parties and the court or tribunal, whose order was under challenge on the principle of judicial discipline, this court being the apex court of the country. No court or tribunal or parties would have the liberty of taking or canvassing any view contrary to the one expressed by his court. The order of the Supreme Court would mean that it has declared the law and in the light the case was considered not fit for grant of leave. The declaration of law will be governed by article 141 but still, the case not being one where leave was granted, the doctrine of merge doe not apply. The Court sometimes leaves the question of law open. Or it sometimes briefly lays down the principle, may be, contrary to the one laid down by the High Court and yet would dismiss the special leave petition. The reasons given are intended for purposes of article 141. This is s done because in the event of merely dismissing the special leave petition, it is likely that an argument could be advanced in the High Court that the Supreme Court had to be understood as not to have differed in law with the High Court”.

The above observations of the Supreme Court show that there is a distinction between the doctrine of merge, where a judgment of the High Court is affirmed in appeal by the Supreme Court though by a non-speaking order or an order without assigning any reasons and the declaration of law governed by Article 141 of the Constitution contained in an order of the Supreme Court dismissing an SLP under Article 136 of the Constitution by giving reasons and by passing a speaking order. From the judgment, it is clear to us that even in an order dismissing a SLP, there could be a declaration of law which is governed by Article 141 of the Constitution.

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The contention advanced before us on behalf of the assesses was that the judgment of the Supreme Court in Kalyankumar Ray’s case, though it gave reason for its conclusion, was nevertheless a judgment passed under Article 136 of the Constitution of India and, therefore, it cannot be considered to be of equal force as that of a judgement rendered by the Supreme Court in a Civil Appeal, albeit without reasons, in which case the judgment of the High Court merges with that of the Supreme Court. In the light of the distinction made by the Supreme Court in the case of Kunhayammed & Others (supra) between the theory of merge on the one hand and the binding nature of the declaration of the lay under Article 141, on the other hand, we are unable to accept the contention on behalf of the assessee as correct. In other words, even in an order dismissing the SLP under Article 136 of the Constitution and thereby exercising its discretionary power, the Supreme Court in a given case could give reasons and such reasons if they contain a declaration of the law, would be binding on all the courts and tribunals in India and, therefore, no court or tribunal will have the liberty of taking a contrary view. This precisely is the position with regard to the judgment of the Supreme Court in the case of Kalyankumar Ray. There, it has been held that –

(a) section 143(3) does require that no only the total income, but also the amount payable thereon should be determined by an order in writing;

(b) form no. ITNS 150 is a form for determination of tax payable and when it is signed and initialed by the AO, it is an order in writing by him determining the tax payable within the meaning of S. 143(3); and

(c) therefore, there is no reason why this form which has been approved by the AO should not be treated as part of the assessment order in the wider sense in which the expression is understood in the context of S. 143(3).

This, in our humble understanding, is a declaration of the law. It follows therefrom that if form ITNS 150 specifies the section under which the interest is charged, it is as if the assessment order itself has specified the particular section under which interest is charged. The conclusion that follows from this is that the requirement that the assessment order should contain a direction to charge interest specifying the section under which interest is charged stand satisfied. This declaration of the law does not appear to have been brought to the notice of the Patna High Court in Ranchi Club Ltd. Vs. CIT, 222 ITR 45 (supra) which was affirmed in appeal by the Supreme Court in 247 ITR 209. This aspect of the matter, coupled with the fat that a five judge Bench of the Supreme Court in CIT vs. Anjum M.H. Ghaswala (supra) had

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examined the character of the interest payable u/s 234A, 234B & 234C and has held that the interest chargeable under these provisions is mandatory in nature, persuade us to take the view that the levy of interest in the cases before us satisfied all the requirements of the law and is perfectly valid.

67. In the light of the above discussion, we are unable to accept he contention that the judgment of the Supreme Court in Kalyankumar Ray’s (supra) does not have binding effect under Article 141 of the Constitution.

68. The above discussion of ours after examining the implications of all the judgments on the point cited before us also takes care of the contentions advanced before us on behalf of the assessee that even if the interest u/s 234A to 234C is to be considered as mandatory in nature as held by the Supreme Court in Ghaswala’s case (supra, it does not relieve the AO of the obligation to specify the section under which the interest is charged and to mention the same clearly in the assessment order. This condition i.e. the particular section under which it is charged being mentioned, is satisfied in the cases before us by the assessment forms i.e. from No. ITNS 150 in which the particular section (i.e. section 234A & 234B) has been mentioned, the amount of interest calculated and shown and the forms also having been initiated and dated by the same AO who computed the total income in the assessment order.

69. With regard to the judgment of the Punjab & Haryana High Court in Vinod Khurana Vs. CIT & Another 253 ITR 578 it was submitted that the decision was based on the judgement of the Supreme Court in Kalyankumar Ray’s case (supra), without appreciating the true import and effect of the judgment of the Supreme Court. For the reasons already stated by us, we are unable to uphold the submission.

70. It was then argued that the “judgment-decree” theory propounded by the Patna High Court in Ranchi Club Ltd. 222 ITR 44 (supra) has not been considered by the Punjab & Haryana High Court in Vinod Khurana (supra). This theory presupposes that the assessment order proper, i.e. the order in which the total income is computed, and for No. ITNS 150 which is the “assessment form” in which the calculations of the tax and the interest and the net sum payable are shown, are separate and distinct, an assumption which is not valid in view of the law declared by the Supreme Court in Kalyankumar Ray (Supra) to the effect that the “assessment form” (from No. ITNS – 150) is to be treated as part of the assessment order in the wider sense in which the expression has to be understood in the context of S. 143(3). Another argument put forth was that if the specific section is not mentioned and a vague direction to charge interest is given in the assessment order proper it will put the office of the AO in considerable difficulty and confusion and may place on

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them the responsibility to apply he relevant section, which would be against the law. The answer to this is also provided in Kalyankumar Ray (supra) when the Supreme Curt observed that the Form No. ITNS – 150 is to be signed or initialed by the AO as a mark of approved. It is thus ultimately the AO who is in law responsible for what is stated in the said form, be it the section under which the interest is charged or the arithmetical calculations. Several situations were cited as illustrations in the course of the augment to how that important issued relevant for charging interest may all for determination by the AO and thee cannot be left to the office of the AO. For instance, the due date for filling the return of income may first have t be fixed. Under Explanation 2 to S. 139(1), it was pointed out, it may have to be seen if the assessee, if it is a firm, is subject to the audit u/s. 44AB or if there are working partners/non working partners and so on, which will determine what is the due date for filing the return. Another example cited was that of a person being treated as the agent of non-resident by order dated 31.12.97; in such a case, the AO has to first decide if the due date can be taken as 31.7.97 as is normally done; he has to then decide the question as to form which date interest can be charged u/s. 234A. the point sought to be made was that all such intricate questions will have to be necessarily determined by the AO and he cannot possibly leave them to the office staff. All these examples certainly drive home the point taken, to the extent that reasons have to be spelt out for the levy of interest. But we cannot accept the contention that if reasons are not furnished, the levy should be struck down as invalid. The repeat, since the levy is mandatory the moment default has occurred the liability arises. If the AO has not furnished the reasons all that can be directed is to establish the default and an opportunity should be afforded to the assessee to show that there is no default. We have earlier referred to the judgment of the Supreme Curt in State of Haryana Vs. Hari Ram Yadav (supra) where it had held that a suspension order cannot be quashed merely because the satisfaction of the Governor has not been recited in the suspension order, because the conditions precedent is that the satisfaction should have been reached as a matter of fact and not that the satisfaction should have been recited in the order. Similarly, it is the occurrence of the default as a fact that gives rise to the liability to pay interest; if the reasons are not recited in the assessment order, it only affect the procedural aspect – the rules of natural justice – which can be cured by directing he parties to establish their rival position. There may be quite a simple case, where the return of income was filed on the due date itself, say 31.7.97. The AO mistakenly takes the date as 30.11.97 and interest u/s. 234A in charged. This is of course invalid since in fact there was no default. But, that has to be established and on whom the burden lies is laid down in the judgment of the Supreme Court cited above. So also, where a return is field on 30.11.97, where the due date is 31.7.97, but the AO does not charge interest. Just because he has not stated anything in the assessment order or in the

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form No. ITNS-150 regarding interest us. 234A, in he light of the legal position propounded in Ghaswalla’s case (supra), can it be said that the assessee did not commit any default and interest liability did not arise? The answer in our opinion in sin the negative. We must however confess that the question of default may not be a simple one and the assessee may take up several contentions to deny that he had defaulted. In fact we shall presently refer to the arguments of Mr. Dastur, learned counsel for Ericsson, in support of this claim that there was no such default as would attract S. 234B. The contention of the Mr. Sharma, the leaned counsel for the department that the application of mind by the AO is reflected in the assessment order itself and that the rive which the assessee may taken regarding his obligations (re: filing of return payment of advance-tax etc) is not relevant is, with respect to widely stated. The liability of the assessee and the default must be demonstrated in the assessment order objectively, not subjectively.

There should be an adjudication of the issue by the AO in a fair manner. That is possible only if he heard the assessee and gives reasons for his decision. If he has not done so, it would be open to the appellate authorities to direct him to do so. We have to bear in mind that interest is compensatory – the assessee is asked to compensate the Government for unlawfully withholding or delaying payment of taxes of filing of return – and one the default on the part of the assessee is already established, it shall be paid.

71. On merits, argument were put forth on behalf of Ericsson with regard to the liability to pay interest u/s. 234B. They run as follows S234B is attracted only where advance tax is not paid despite an obligation to pay advance-tax are outlined in S. 209. Under Section 209(1)(d), the tax estimated to be payable on the current income shall be reduced by the amount of tax which would be “deductible” or “collectible” at source during the previous year under any provision of the Act. Even if the assessee is answerable in respect of the income (which is in dispute in the appeal) it is entitled not to pay the advance-tax because the tax is “deductible” by the payer, though not actually deducted by him., It tax if not so deducted, the department is entitled to treat the payer as in default u/s. 201(1), The department cannot seek to recover the interest from him u/s. 201(1A). Therefore, the department cannot sake to recover the interest form the assessee and enjoy double advantage. The interest is essentially compensatory in nature and no double advantage can be permitted.

72. In support of the above arguments, reliance was placed on the following order of Tribunal:

1. Sedco Forex International Drilling Inc. Vs. DCIT, 72 ITD 415 (Del)

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2. Asia Satellite, 85 ITD 110 (at para 10.1) (Del)

3. ACIT Vs. Rheinbraun (order of the Mumbai Bench of the Tribunal –copy filed)

73. The above arguments were also adopted by the other two assessee:

74. The arguments show that the assessee are denying their liability to pay interest on the ground that they have not committed any default which would attract S. 234B. According to them, they are not liable to ay the advance tax. This contention has not been raised before the AO obviously because the assessee have not been given an opportunity to do so. It is a very important contention which gods to the root of the matter and merits serious consideration. The CIT(A) appears to have dealt with the issue relating to the interest on two aspects. In the case of Nokia in para 10 of his order, he has deleted the levy of interest u/s. 234B on the ground that all the payments to the assessee were liable for deduction of tax at source u/s. 195 and, therefore, the assessee was not liable to pay advance tax. He has followed the order of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. (supra). As regard the levy of interest u/s. 234A, he has relied on the judgment of the Supreme Court in the case of CIT vs. Ranchi Club Ltd. (supra) where the judgment of the Patna High Court in which it was held that the interest was leviable on the assessee as per the return and not as per the assessment order was upheld. The CIT(A) in till connection noted that the assessee filed a nil return. In the case of Motorola he has given the same decision in para 11 of his order. In the case of Ericsson also, he has taken the same view in para 10 of his order. So far as the interest u/s. 234A is concerned, it is seen the explanation (4) to the said Section which provided that the tax on the total income as determined on regular assessment shall, for the purposes of computing the interest payable u/s. 140A, be deemed to be tax on the total income as declared in the return, has been omitted with retrospective effect from 1.4.1989. The judgment of the Supreme Court in CIT Vs. Ranchi Club Ltd. (SC) was rendered on the basis of Explanation (4 to S.234A which has now been omitted from the Act with retrospective effect. In view of the change in the law with retrospective effect the interest shall be computed on the basis of the tax determined on regular assessment and no on the basis of the tax payable on the basis of the return. The CIT(A) has also held that sine there is no direction in the assessment order to charge interest, on the basis of the aforesaid judgement of the Supreme Court, interest has to be deleted. We have already seen that such a view cannot be accepted. We have given reasons therefore. With regard to S. 234B, here the view of the CIT(A) is on the basis of the judgment of the Supreme Court cited above. This view of the CIT(A) for the reasons already stated cannot be upheld. The CIT(A) has also examined the merits of the assessee’s claim that they are not liable to pay the advance tax and in the absence of any liability

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there is no default and hence no interest is chargeable u/s. 234B. On this aspect, no strong grounds have been made out on behalf of the department to doubt the correctness of the view taken by the Delhi & Mumbai Benches of the Tribunal in the orders cited supra. The language of S. 209(1)(d) of the Act supports the assessee contentions. All the payments made to the assessee are tax deductible at source (even assuming that they are taxable) as rightly held by the CIT(A) and also contended before us. In that case, having regard to the provisions of S. 201(1) & 201(1A) to which our attention was drawn on behalf of the assessee, the assessee cannot be held to have committed default in paying the advance tax. They are entitled to take into account the tax which is deductible by the payer, though not actually deducted. Consequently, there is no liability to pay interest. The decision of the CIT(A) to cancel the interest u/s. 234B is upheld on merits. AS regard the interest u/s. 234A, the matter is restored to the file of the AO in all the three cases so that a proper adjudication can be made with regard to the applicability of the section so that both sides will have an opportunity of putting forth their respective stands clearly.

75. In the case of Ericsson, it was also pointed out that the notice of demand u/s. 156 is not dated. However, two different demand notices were field before us during the hearing, one of which is dated 28.3.2000 which is the same date as the assessment order and the other does not bear the date. The assessment year as well as he total sum demanded are the same in both the notices, namely, Rs. 69,39,70,769. Both the copies have been field on behalf of the assessee. Since one of them bears the date, the argument that the demand notice is not dated losses force or factual basis. Even if it is assumed that the demand notice is not dated, we are of the view that the defect can be ignored in the light of Rs. 292B of the Act, because the demand notice is in substance and effect in conformity with the intent and purpose of the Act. It is in conformity with form No. ITNS 150 which has been signed by the same AO and which also bears the date 28.3.2000 which is the same as the assessment order. This form also contains the break up of the tax as well as the interest. The interest amount has been shown separately u/s 234A & 234B. In view of the this, there is not merit in the contention that since the demand notice is not dated, the judgment of the Punjab & Haryana High Court (supra) is not applicable. We may clarify that no such contention was canvassed on behalf of the other two assesses, namely, Nokia & Motorola, since in both the cases the demand notices are dated.

76. Some emphasis was placed on the order of the Delhi Bench of the Tribunal in the case of V.V. Industries Vs. ACIT 2003 78 TTJ (Del) 758. In this order all the judgments of the Supreme Court, namely, CIT Vs. Ranchi Club Ltd. Kalyankumar Ray Vs. CIT and CIT Vs. Anjum M.H. Ghaswala (all cited supra) have been considered as also the judgment of the Punjab & Haryana High Court in the case of

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Vinod Khurana (supra) and it was held that in the absence of any direction in the assessment order in charging the interest and any indication in the notice of demand about the figure of interest. The levy cannot be upheld. A reading of para 13 of the Tribunal’s order shows that there was not even an observation or a direction for charging interest in the assessment order. Para 17 of the Tribunal’s order shows that even in the notice of demand, there was not mention of any interest figure. The Tribunal has noted in this paragraph that nothing was brought to their notice about any calculation sheets having been provided to the assessee since no copy thereof was filed by the assessee, nor was the assessment record produced before them for verification despite a specific direction to the effect. Para 19 of the order of the Tribunal shows that the judgment of the Supreme Court in Kalyankumar Ray’s case was held inapplicable because the assessment order and the demand notice did not contain a word about the levy of interest. In the present case, the assessment order shows “charge interest” in the case of Ericsson & Motorola and “charge interest as per law” in the case of Nokia, though the specific section under which the interest is charged is not mentioned in the body of the assessment orders in all the three cases. Further, the specific section under which interest is charged is mentioned in the form ITNS – 150 in all the three cases. Thus, there is a factual difference between the present cases and the case of V.V. Industries (supra). Even otherwise, a perusal of para 22 of the Tribunal’s order shows that the Bench has taken the view that Anjum M.H. Ghaswala’s case (supra) pertains to the powers of Settlement Commission to waive o reduce interest and does not overrule Ranchi Club Ltd. (supra) which is direct decision on the point at issue. We have earlier given reasons as to why we are unable to take, with respect, such a simplistic view of the matter. We have also given our reasons as to why the law declared by the Supreme Court in the case of Kalyankumar Ray (supra) though in an order dismissing an SLP under Article 136 of the Constitution, is equally binding on us. In this view of the matter, we are unable to approve the reasoning contained in para 22 of the order of the Tribunal in the case of V.V. Industries.

77. Our attention was also drawn to the judgment of the jurisdiction High Court in CIT Vs. Insilco Ltd. 2003 179 TR 214. In this case, the Hon’ble High Court admitted an appeal by the department against the order of the Tribunal deleting the interest u/s. 234B on the ground that the assessee was under a bona fide belief that its income was not chargeable to tax. The appeal was admitted on the ground that substantial question of law was involved. By the same judgment, the Hon’ble High Court was pleased to refuse admission to the appeal of the department against the order of the Tribunal for another year I the same assessee’s case., deleting the interest charged u/s. 234B on the ground that the assessment order did not mention the specified section under which the interest is to be levied. We are unable to give effect to the

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argument of the assessee based on the judgment for the reasons stated by us earlier and in the light of the judgments of the Supreme Court in the case of Kalyankumar Ray and Anjum M.H. Ghaswala (supra).

78. To summarise the findings as regard the appeals before us, we hold that

(a) the issue relating to levy of interest u/s. 234A is restored to the AO in all the three cases with the direction contained in paragraph 74 of our order;

(b) with regard to levy of interest u/s. 234B, the same is held rightly deleted by the CIT(A) in tall three cases.

79. As regard the legal question posed before the Special Bench, we hold that the levy of interest under sections 234A to 234C cannot be held to be invalid merely on account of there being no specific direction in the assessment order or on the ground that the section under which the interest is levied is not specified in the body of the assessment order, provided that the assessment form in ITNS-150 contains a specific reference to the section under which the interest is charged, the calculations are shown under the relevant columns and the said form is signed as initialed by the same AO who signed the assessment order and is also dated.

80. We now proceed to dispose of the cross-appeals assessee-wise.

ERICSSON (ARGUMENTS)

Whether any income accrues in India.

81. The basis contention of Mr. G.C. Sharma, the learned counsel for the revenue was that the entire income accrued in India u/s. 5(2) and section 9(1)(i) of the I.T. Act. while admitting that the onus is on the revenue to show that the income accrued in India, he contended that one this burden is discharged the onus shifts to the assessee to show that no income accrued in India. In this background, the first contention of Mr. Sharma was that the supply contract, the installation contract and the business promotion agreement have all to be read together and if so read, the conclusion would be inescapable that all of them are inseparable, intertwined and impinge on each other, with the result that they have to be viewed as one integrated whole, which in turn would men that the whole object of the parties is to execute a works contract and it s not a case of a mere sale of goods. The works contract theory put forward by Mr. Sharma was supported by him with reference to the judgment of the Supreme Court in Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh 2000 6 SCCC 579. He further submitted that the agreements should be looked at from the business point of view of the cellular operators and the

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requirement of the operators in India. What the cellular operators wanted under the agreements is to set up a GSM Cellular Exchange in the site approved by the Department of Telecommunications (DOT). The cellular operator is not interested in the hardware alone or in the software alone. He is interested in the system as a whole and not merely the system in the abstract, but a system which is properly installed by the installation contractor. It is in this view of the matter that Mr. Sharma contended that the three contracts put together amounted to a works contract and not a mere sale of goods. In this connection, he also submitted that by disintegrating the entire works contract into three separate agreements namely the supply contract, the installation contract and the business promotion agreement, the parties have attempted to evade tax and, therefore, it would be open to the income-tax authorities to lift the veil of the transaction on the strength of the judgment of the Supreme Court in the case of Mc Dowell and Co. Ltd. Vs. Commercial Tax Officer 154 ITR 148 and what the object of the parties in splitting a single transaction into three parts. Mr. Sharma in this connection strongly relied on the overall agreement which is a tripartite agreement entered into on the same days as the other three agreements between the assessee, the cellular operators and the installation contractor which provided for proper coordination of the supply and installation contracts. According to them, this overall agreement clearly shows that all the transactions constituted s single integrated transaction.

82. With reference to section 9(1)(i) of the Act, Mr. Sharma submitted that the connection between the cellular operator sin India and the assessee constituted a business connection since what links them with each other is the purchase of the GSM Cellular system. In this regard he pointed out that the Indian company which is a party to the business promotion agreement is a hundred percent subsidiary of the assessee company and, therefore, there is a direct business connection and, therefore, the income directly arose to the assessee is India. According to him, whatever is the tax implication of the connection, it was certainly a business connection. According to Mr. Sharma, the connection can arise out of a series of transactions between the generator of the income and the recipient therefore. If the activity which produced the income is located in India, the source of the income is also in India, and thus the income accrues or arises also in India. Mr. Sharma at this juncture pointed out that in the case of Motorola and Nokia, the assessee did not raise the contention that there is no business connection and, therefore, the income did not accrue or arise in India. He also relied on the findings of the CIT(A) at page 39 of his order. In connection with the accrual of income in India, Mr. Sharma strongly relied on the judgment of the Supreme Court in 20th Century Finance Corpn. Ltd. Vs. State of Maharasthra 119 STC 182. He drew out attention to paragraphs 21, 25 and 28 of the judgment of drive home the point that though there

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is no fixed yardstick to ascertain the situs of the sale, still the place where the contact of sale is concluded could be taken as the situs of the sale. In the present case the contention of the revenue is that the sale of the GSM cellular system was concluded in India, where the contract was signed on 2.7.1996 and, therefore, the situs of the sale was in India and consequently the income arose to the non-resident assessee in India.

83. Mr. Sharma also filed written submissions titled “Ericsson Radio System Case – brief facts of the case” in which all his contentions on all the points in issue were briefly summarized.

Permanent establishment:

84. At the outset, we may clarify that while referring to the DTAAs, Mr. Sharma had taken the DTAA with USA as the example since this DTAA was involved in the case of Motorola and his references to the various articles of the DTAA with USA will have to be read as references to the corresponding articles in the DTAAs with Sweden (in the case of Ericsson) and Finland (in the case of Nokia).

84.1. Mr. G.C. Sharma’s main contention was that the assessee’s case rested on the ground that there was no Permanent establishment (PE) within the meaning of Article 5 of the DTAA. The significant of the issue relating to PE lies in the fact that if there is no PE in India, Article 7 of the DTAA cannot apply and the assessee will not be liable to tax on the business profits. On the other hand, if it is established that the assessee has a PE is India, then Article 7 of the DTAA is attracted and profits to the extent they are attributable to the PE are taxable in India. With this preface he referred to the relevant Articles in the DTAA starting with Article 5 wherein he emphasized on the word trough to submit that if the operations are carried out through a PE in India, the business profits would be taxable in India. He further submitted that even if the operations are partly carried out through a PE in India, then also business profits would be taxable.

84.2 Advancing his arguments further, it was submitted that a “fixed place” means an identifiable place from which business is carried on. It was submitted that varying on of business was not a single act but a series of activities and this very concept was also reflected in Article 7 of the DTAA. He then reference to Article 5.2 of the DTAA and pointed out that it was an inclusive definition and the exclusions were provided in Article 5.3 and it is for the assessee to show that it fall within the exclusionary article. He referred to clause (k) of Article 5.2 which included a ”site” in the definition of PE and submitted that the site where the work was carried out by the assessee becomes a PE in India. Likewise he referred to clause (e) of Article 5.3 which refers

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to a marketing office a s PE and in this connection he referred to the Market Support Agreement to show that the assessee did fall within clause (e) of Article 5.3 and had a marketing office in India. It was not possible to accept that even without a marketing office they carried on business in India on such scale. He extensively referred to the written submissions filed by him in this connection especially page 3 thereof, where the judgment of the Italian Supreme Court in a similar matter has been referred to. His submission was that the facts before the Italian Supreme Court were similar to the facts of the present case and in that case the concept of group PE has been expounded by the Italian Supreme Court. In the present case also, the assessee was s subsidiary company of LME Sweden, the installation contractor, namely, ECI is also a subsidiary of LME, and hence his point was that the assessee satisfied the concept of group PE as per the decision of the Italian Supreme Court. Thus, the assessee had a PE in India.

84.3 Mr. G.G. Sharma also submitted that there is a reference to the assessee’s country manage in India in the supply contract. The contrary manager’s residence in India would meet the requirements of a PE as per the DTAA. In this connection he strongly relied on the ruling of the Authority for Advance Ruling AAR in the case of Sutron Corpn. Vs. DI 138 Taxman 87 (2004).

84.4 Mr. Sharma also referred to the fact that the argument relating to PE in the present case are the same as those in the case of Motorola and that the may be taken as having argued the question of PE on all its four aspects namely: (i) service PE, (ii) Installation PE, (iii) Fixed lace PE and (iv) Group PE. In this regard he referred to group PE as including the agency PE also. He also filed written submissions in the case of Ericsson.

85. Mr. Dastur, while starting his reply to Mr. G.C. Sharma’s arguments, raised a preliminary objection by referring to the ground taken by the Revenue. He referred to ground No. 1(i) in the appeal filed by the Department and pointed out that as per the ground there was a contract between the assessee and the Indian Cellular operators for installation. He clarified that this was factually incorrect as there was no agreement at all between the assessee and the cellular operator for installation. The agreement with the cellular operator was only for the supply of the system. He further clarified that the assessee in the present case, namely, Ericsson Radio Systems AB (ERA for short) is a subsidiary of a Swedish Company called “LME”. Another subsidiary of LME, namely, Ericsson Telephone Corpn. India AB (EFC for short) had a branch in India upto June, 1996 i.e. for a period for there month and with this branch the assessee had marketing agreements for the period of three months. There is another Indian company known as “Ericsson Communication Ltd. (ECI for short) which acted as marketing and installation contractor for nine months.

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This company is also stated to be a subsidiary of LME. In a nutshell, for the first three months, the assessee had a marketing agreement with EFC and for the remaining nine months it had an agreement with ECI. The installation contract was between ECI and the cellular operator. It was also pointed out that EFC and ECI both were assessed to tax in India for the income earned by them respectively from the marketing and installation contracts thus on the ground it was contended by Mr. Dastur that the first found taken by the revenue was misconceived. However, he submitted that even assuming that the ground actually referred to supply agreement, then also he was ready to argue that there can be no PE in India.

85.1 Referring to ground No. 1(ii) he raised a preliminary objection that it refers only to a fixed place of business, though Mr. Sharma had argued the cases on all the four aspects which eh could not have argued within the scope of the ground raised. In this connection he submitted that mere user of the place does not give rise to PE and if the assessee’s employee went to EFC’s office that per se does not become a PE. According to him a place should be available to and should be at the disposal of the assessee. As an illustration, he pointed out that if rooms were permanently booked in a particular hotel, it may be called a fixed place of business but if the rooms were booked in different hotels at different points of time, then it would not give rise to a fixed place of business. It was then submitted that if fixed tables were at the disposal of the assessee employees in the office of the Indian associate, then it would be a fixed place PE. The CIT(A) has held that the assessee had no fixed PE and the onus was on the revenue to show that the findings of the CIT(A) was wrong and that this onus has not been discharged.

85.2. With the above preliminary objections, Mr. Dastur started with the facts of the case stating that the assessee had entered into contracts with 10 cellular operators in India. One contract was for the sale of hardware and software and which is called the supply contract with the cellular operators in India. The second contract, known as installation contact was between the cellular operators and the branch (EFC) for the first three months and between the cellular operators and the ECI for the remaining nine months. He took the supply contract entered into with JT Mobiles (Cellular operator) as the representative case as was done by the income tax authorities themselves. AT the outset, it was pointed out that this contract was for the supply or hardware and software for a total consideration of US dollars 15,466,862. It was specifically pointed out that it was a total supply contract, predominantly for the supply of hardware, and software was also included in it to make the hardware work. Then the referred to the various clauses of the supply contract. Our particular attention was drawn to clause 13 of the contract to show that the title and risk in the GSM system was to pass outside India at Sweden when they were delivered to the carried at Swedish Port. He referred to the relevant provisions of the Sale of Goods

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Act, 130 to show that the intention of the parties should govern as to when the title and risk passed in the goods. The time and place when the title and risk in the goods passed can be inferred from the terms of the contract, conduct of the parts and the surrounding circumstances as per section 19(2) of the Sale of Good Act. However, in the present case there was no necessity for such an inference as the agreement itself was very specific as to when the title and risk were to pass. It was pointed out by him that the Project manager referred to in the supply contract was situated outside India and the Project Manager referred to in the installation contract was to be at the sit in India. Referring to clause 18 of the contract it was submitted by Mr. Dastur that the acceptance test did not determine the passing of the property in view of clause 13 of the contract. Mr. Dastur referred to the other clause of the supply contract such as those dealing with financing of the software (clause 20), warranties (clause 21), additional orders (clause 26), termination of the contract (clause 31), notices to be issued (clause 36), export etc. (clause 40.3), to contend that the supply contract is a complete and self-functioning contract of sale and though there is an overall agreement which coordinates the supply and installation contracts, that was only a sort of a memorandum of understanding and the ultimate and enforceable effective contract was only the supply contract.

85.3. Mr. Dastur next took us through the installation contract which is at page 42 of the paper book no. 1. Briefly he took us through the various clauses of this contract such as clause 5 which defined the scope of the contract clause 7 which mentioned the price of installation at US $ 3,048,263, which according to him constituted a substantial portion of the overall contract price of US $ 15,466,862, clause 10 which referred to transportation, clause 14 which referred to the project control and clause 15 which referred to the acceptance and clause 19 which referred to assignment of the contract. Referring to the price of the installation contract, it was submitted that it was a negotiated price. This point was highlighted by Mr. Dastur against the allegation of the revenue that more price was deliberately attached to the supply contract because the income arising therefrom was not taxable in India. It was also pointed out that the installation contractor was assessed on this income in India. Copies of relevant assessment orders are placed on record. Referring to clause 15 which dealt with the acceptance test, Mr. Dastur submitted that the dates of acceptance is subsequent to the passing of the title and therefore is irrelevant for the purpose of determining when ten where the title passed and further that the assessee continued to be liable even for the acceptance test as referred to in clause 18 of the supply contract.

85.4. Mr. Dastur referred to the “marketing and business promotion agreement” entered into between EFC and the assessee (page 63 of paper book No. 1) and to the various services which are to be rendered by EFC under this agreement and

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submitted that a combined reading of all them would show that EFC was not responsible for the various acts and services which it had to render under the agreement. He also submitted that the terms of the agreement were very restrictive in nature and indicated the parameters within which the branch (EFC) had to operate.

85.5. Mr. Dastur thereafter made a reference to the “overall agreement” which has also been entered into on 2.7.1996 between the assessee, ECI and JTM. The preamble to the agreement stated that the primary purpose of the overall agreement was to ensure better coordination between the parties and the security of the cellular operators. The overall agreement, it was contended, was a sort of memorandum of understanding but no consideration was payable thereunder. Such an agreement, according to Mr. Dastur would have most probably been entered into even if the installation of the equipment was to be done by an Indian Company. In response to a query form the Bench as to whether JTM had a right, under the overall agreement to terminate the installation contract, Mr .Dastur answered in the affirmative and drew out attention to clause 25.1.1 and clause 25.1.2 of the installation contract. This clause provided for termination of the two contracts namely the supply contract and the installation contract separately which was a pointer to his earlier contention that these agreements were not one but they were quite independent. His submission was that ht overall agreement doe sin no way affect the assessee’s liability to tax. He drew our attention also to instruction No. 1829 dated 21.3.1989 issued by the Central Board of Direct Taxes (copy filed at page 81 of the paper book No.1) which recognized the practice of the parties in such contracts to enter into an overall agreement for better coordination.

85.6. On the basis of the above facts, Mr. Dastur formulated two basis propositions which according to him are fundamental to the resolution of the case. The first proposition was whether any income accrued to the assessee under the provisions of section 5(2) and section 9(1) of the Income-tax Act, 1961 and if the answer to this question is in the affirmative, whether the DTAA between Indian and Sweden does in any way mitigate the tax liability. On word of caution was also administered by him to the effect that the DTAA is not an exemption claimed by the assessee form the tax liability and that it was only an alternative scheme of taxation, alternative to the Income-tax Act. and the fact that the assessee relies on the provisions of the DTAA to mitigate its tax liability does not mean that it is claiming any exemption and, therefore, the burden is on it to show that it is entitled to the exemption. On the other hand it is for the revenue, according to Mr. Dastur, the demonstrate that even under the provisions of DTAA the assessee is liable to tax. The entire case, according to him must be approached on these premises.

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85.7 With reference to the supply contract which forms the basis for determination of the question as to whether the provisions of section 5(2) or section 9(1)(i) of the Act applies to the assessee, Mr. Dastur drew out attention to the basic operations carried out by the assessee in India. This fact assumes importance because U/s. 9(1)(i), a business connection has to be established and even if a business connection is established, under clause (a) of Explanation 2 below the above section, the tax liability of the assessee is limited to the operations carried out by it in India. Therefore, it is very essential that the nature of the assessee’s operations in India are first ascertained. According to Mr. Dastur –

(a) There was no manufacture of any equipment in India,

(b) There was no sale of any equipment in India;

(c) There was no research activity carried out in India;

(d) The installation of the equipment, though in India, is not carried out by the assessee. The income from the installation contract has been taken into account in the case of the installation contractor and assessed in its hands.

(e) The marketing and business promotion activity which is carried on in India is not carried out by the assessee but is carried out either by the branch EFC or by ECI, the Indian company, which are entitled separate form the assessee. The income from this activity has been assessed in their respective hands.

Therefore, it was contended by Mr. Dastur that since no operations were carried out in India by the assessee, no income accrued to it either u/s. 5(2) or no income was deemed to accrue to the assessee u/s. 9(10 of the Act.

86. Turning to the DTAA between India and Sweden Mr. Dastur drew out attention to Article 7 thereof which provided for the determination of the business profits. Under this Article, the business profits of a foreign enterprise and taxable in India only if the enterprise has a PE in India. Further, even if the foreign enterprise has a PE in India, the business profits that are taxable in is hands are only those which are attributable to that PE in India.

86.1 Mr. Dastur submitted that it would be his endeavour to show that the assessee was not liable to tax in India either under the Income-tax Act or under the DTAA.

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86.2 Mr. Dastur thereafter took us through the relevant part in the order of the CIT(Appeals) where the provisions of section 5(2) and section 9(1) have been discussed by him. In fact the assessee had field a cross objection against this part of the order of the CIT(A) but Mr. Dastur submitted that the would also support the ultimate decision of the CIT(Appeals) to the effect that there is no PE in India under Rule 27 of the ITAT Rules by also challenging his decision in respect of the above mentioned provisions of the Act. His first contention was that section 5(2)(b) speaks of deemed accrual. According to him no income actually accrued in India in favour of the assessee and the only question is whether there is any deemed accrual because apart of the operation of the assessee were allegedly carried on in India. In this connection he submitted that it is necessary that a substantial part of the assessee’s activities have to be in India and some stray activity in India cannot enable the income-tax authorities to hold that some income accrued the assessee in India. In support of this proposition the referred to several authorities which we may notice presently.

86.3. The first decision to which our attention was drawn was the decision of the Andhra Pradesh High Court in CIT Vs. Hindustan Shipyard Ltd. 109 ITR 158 in which it was held that the mere giving of a guarantee is not a normal incidence of sale, that merely because the employees of the foreign enterprise served in India, did not result in any business connection in India and that such an arrangement was merely incidental to the supply of the equipment and further that a mere purchase and sale in India is not sufficient to hold that income accrued in India. The next decision referred to was that of the Andhra Pradesh High Court in Bharat Heavy Plate & Vessels Ltd. Vs. Addl. CIT 119 ITR 986 in which it was held that a FOB sale (free on board) by the foreign company at the European port amounted to a sale outside the country and not a sale in India. In Addl. CIT Vs. Skoda Export, Praha 172 ITR 358, the Andrha Pradesh High Court held that no profits accrued in India on sale of machinery outside India even though it might be part of the business connection. In this case, the test of predominance of the object of the contract was adverted to. In CIT Vs. Energomach Exports 232 ITR 448, the Karnataka High Court held that no business connection can be inferred merely because the foreign company deputed its employee in connection with the contract for supply of equipment. The highlight of this decision is that there were two agreements, one for supply and installation of the equipment, and another entered into on the same day for deputing employee to supervise the installation of the equipment. But despite this no business connection was found to be established. In CIT Vs. Gulf Oil (Great Britain) Ltd. 108 ITR 874 the Bombay High Court held that even if the foreign company acts through its subsidiary in India, no business connection could be inferred. Mr. Dastur laid much stress on the judgment of the Madras high court in CIT Vs. Anamallais Timber Trust Ltd. 18

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ITR 33 and Annamalais Timber Trust & Co. Vs. CIT 41 ITR 781. In the first of these decision, the question examined was with reference to pure accrual of income in a case where the contract of sale was signed in India. It was held that a very small portion of the income did accrue in India because the contract was signed in India. In the second decision, the Madras High Court held that only 10% of the profits may be apportioned to the trading operations carried on a British India, in a case where the negotiations in respect of the contract took place in British India and the contract was also concluded in British India. Relying on this decision, it was submitted by Mr. Dastur that in the present case even this much of profit, if considered as having accrued in India, would be excessive because under the marketing and business promotion agreement between the assessee and ECI/EFC, the assessee was not bound by the opinion of ECI/EFC and it (assessee) was the sole authority to scrutinize the officer and decide the buyer or buyers No authority was given to either EFC & ECI to choose the buyer or buyers and conclude the contracts with them Mr. Dastur, therefore, submitted that even 10% of the profits cannot be said to have accrued in India, even applying the second of the judgment of the Madras High Court referred to above.

86.4 In DCIT Vs. Taikisha ltd. 52 TTJ 594, the Delhi Bench of the tribunal held that the sale of equipment was completed in Japan despite the fact that the assessee in that case had a PE in India. In this order, at para 8 at page 59 of the report, the argument of the revenue that the contract was a works contract was considered and negated. It was also held in this order that the performance guarantee given by the foreign company in connection with the supply of equipment was a normal incidence of such contracts. In Dy. CIT Alcatel 47 ITD 275, the Delhi Bench of the tribunal held that just because the foreign company rendered support services through an establishment in India, it did not amount to a PE in India. In that case though thee was no specific clause in the agreement relating to passing of tile, the Tribunal inferred that title passed to the Indian company in the foreign country itself from the fact that the insurance premium was paid b the India company. With reference to this part of the order, M. Dastur Pointed out that in the present case there is no need to draw such an inference because clause 13 of the supply contract expressly stated that both title and risk in respect of the GSM cellular system passed at the same time at the Swedish Port. In support of this contention, Mr. Dastur drew out attention to sections 18 and 26 of the Sale of Goods Act and also to the INCOTERMS, 1990.

86.5. The next point urged by Mr. Dastur was that Mr. G.C. Sharma, who argued the appeal on behalf of the income-tax authorities was wrong in construing the supply contract, the installation contract and the overall agreement together and drawing the conclusion that the intention of the parties, as manifested on a combined reading of all the three documents, together, is that the assessee should execute a works

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contract for the cellular operators, the work contract being the setting up of the GSM Cellular system. His preliminary objection was that this is a new case made out by the Department at the stage of the tribunal which should not be permitted. Nevertheless, he proceeded to meet the objection on merits. He pointed out firstly that the A.O himself has not made a single assessment combining the profits of the supply contract and the installation contract. The installation profits have been assessed in the hands of the different entity namely the Installation Contractor, which according to Mr. Dastur, nullifies the works contract theory put forward by Mr. Sharma, Similarly, he pointed out that the business promotion profits have been assessed separately in the hands of the EFC/ECI, which also weakens the argument of Mr. Sharma that the assessee had executed a works contract for the cellular operators. In this behalf, he filed copies of the assessment years 1997-98 to 2001-02 a well as the assessment orders of Ericsson Telephone Corpn. A.B. for the assessment year 1997-98. He pointed out that these assessments have attained finality and what has been done in these assessments cannot be undone now merely by putting forward the theory of works contract at this late stage. He further submitted that the result of accepting this new argument would be to assessee the entire profits in the hands of the assessee which would amount to double taxation, the installation profits and the business promotion profits having already been assessed in the hands of the separate entitled as mentioned above. He drew out attention to the judgment of the Delhi High Court in CIT Vs. R.Dalmia 135 ITR 346 and that of the Supreme Court in CWT Vs. K.N. Shanmughasundaram 232 ITR 354 in which it has been held that double taxation of the same income should be avoided.

86.6. With regard to the merits of the work contract theory, Mr. Dastur submitted that the judgment of the Supreme Court in Hindustan Shipyard Vs. State of Andhra Pradesh (supra), cited by Mr. Sharma was rendered in an entirely different context. He drew out attention particularly to para 14 of the judgment in which the relevant principle t the applied for the purpose of finding out whether the contract is a works contract have been stated. Mr. Dastur further submitted that all the tests laid down in this judgment have been answered positively in the assessee’s case thereby negating the works contract theory. In the alternative, Mr. Dastur submitted that even if it is assumed for the sake of argument that the theory of works contract applies to the present case, only those profits which are attributable to the India operations of the assessee can be assessed.

86.7. With reference to the argument of Mr. Sharma, the learned counsel for the revenue, to the effect that the assessee has attempted to disintegrate the composite works contract into three parts namely the supply contract, the instllation contract and the business promotion agreement and thereby adopted a game plan to evade

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taxes lawfully due to the Indian government, Mr. Dastur protested that there was no such attempt on the part of the assessee to evade any taxes payable in India under the Income-tax Act. He submitted that the profits of the installation contract as also the profits under the business promotion agreements have suffered tax, though in the hands of separate entitled and this itself showed that there was no attempt toe evade any taxes. Strong reliance was placed by him on the judgment of the Supreme Court in UOI & Anr Va. Azadi Bachao Andolan & Anr. 263 ITR 706 at page 755, 762. He pointed out that in this case the ruling of the Supreme Court in Mc Dowell’s case has been considerably watered down, and it was been held that so long as transaction is legally valid, its economic effects are not to be looked into. He pointed out that a mere reference to the rule of McDowell does not carry the case of the revenue further, unless some evidence or material is brought forth in support of the claim of tax evasion.

86.8. Referring to Mr. Sharma’s strong reliance on the judgment of the Supreme court in 20th Century Finance Corpn. Vs. State of Maharashtra (supra) Mr. Dastur submitted that the question before the Supreme Court was whether it was competent for a state government to impose sales-tax on the transfer of the right to use any goods for any purpose and further whether it was competent for the state Government to legislate on this subject. These questions have nothing to do with the question that is to be decided in the present case. In the cited judgment, the Supreme Court was not concerned with the pure concept of sale as defined in the Sale of Goods Act, 1930 but as concerned only with “deemed sales” as per the definition in the state enactments. The “transfer of the right to use” goods was deemed by the state enactments, by making necessary amendments to the definition of the word “sale”, to be a sale so that he stage government could impose sales tax on such transfer. In the present case, according to Mr. Dastur we are not concerned with any deemed sale and out attempt is to find out whether the sale of the equipment took place within or without India. It is only the pure concept of sale of goods that is applicable for consideration and the statutory fiction of deeming a transfer of certain rights over the goods as a sale has no relevance or applicability. What is to be determined is whether in the classical sense thee was a sale of the equipment within or without India.

86.9 Thus according to Mr. Dastur, thee was no accrual of income as per section 5(2) and 9(1) of the income Tax Act, there was no business connection, thee was no operation in India and so no income was taxable in India.

87. Having thus completed the argument based on the provisions of the Income-tax Act, Mr. Dastur proceeded to put forth his submission based on the DTAA between India and Sweden, which are in the alternative. In other words, he submitted that if

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the arguments based on the provisions of the Income-tax Act are not acceptable, then the arguments based on the applicability of the DTAA would come up for consideration.

87.1 Before proceeding to put forth his detailed and elaborate submission, Mr. Dastur prefaced them by pointing out that the double tax treaties jointly constitute a separate regime of taxation and that they should not be construed as a proviso to the Income-tax Act or as an exemption provisions. In this submission, the burden is still on the A.O. under the double tax treaty and it is for him to prove, even under the treaty, that a particular receipt is taxable. It is only thereafter that the burden would shift to the assessee to point out to any provisions of the treaty under which the receipt does not become taxable.

87.2. With the above preface, Mr. Dastur proceeded to put forth the following submissions with reference to the double tax treaty between India and Sweden. A copy of the entire Treaty is placed at page 83 onwards of the paper book No. 1. He briefly took us through the relevant clauses of the treaty which have an impact on the controversy arising in the present appeals. He first referred to Article 7 which speaks of business profits. Under this Article, the business profits of the Swedish enterprise is taxable in India only if it has a PE in India. The importance of having a PE is that even if a sale is completed in India and is, therefore, taxable under the Income-tax Act, it can be taxed in the hands of the Swedish enterprise only if it has a PE in India. Article 5.1 speaks of what a PE is Broadly a PE is the fixed place where the business of the Swedish enterprise is carried on. The business should have been carried on through the PE, and PE should be a place available to the assessee as a matter of right and shall always be at its disposal. It is for the income-tax department to establish that the Swedish enterprise has a fixed place of business in India available to its as a mater of right and is at its disposal and which thus amount to a PE. A mere averment that the Swedish enterprise has an associated enterprise in India, without anything more, is no sufficient to establish that it is a PE. Article 5.2, which defines PE is an inclusive definition and brings within its fold various forms that a PE may take. However, the condition is that all these forms or places that are said to be used as PE must be that of the assessee. Article 5.2 talks about an “installation PE” but here the condition is that such installation should have been carried on for more than six months continuously in order that the site of installation can be treated as an Installation PE Article 5.4 describes what is not a PE. Article 5.5(a) defines an “Agency PE”. Mr. Dastur raised a preliminary objection as to the applicability of Article. He submitted that the grounds of appeal taken by the Department refers only to the existence of a fixed place PE and not to nay other form of PE including an Agency PE and, therefore, it is not open to the Department to urge before the Tribunal that the assessee had an agency PE in India. That would involve

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investigation into the facts which should not be permitted at the stage of the tribunal. Nonetheless he proceeded to submit that the assessee did not even have an Agency PE in India as alleged by the income-tax department. Referring to the department’s claim that the assessee did have an Agency PE in India, Mr. Dastur submitted that in order that ECI may be construed as the Agency PE of the assessee (as contended by the Department), the following conditions should be fulfilled by ECI:

(i) ECI must be acting for the assessee in India;

(ii) ECI must have authority to conclude contracts on behalf of the assessee;

(iii) ECI should habitually exercise the authority to conclude contracts; and

(iv) The mere authority to negotiate contracts on behalf of the assessee would not amount to an authority to conclude contracts. The term “conclude” according to Mr. Dastur means that the Agency PE should be authorized to take independent decisions with regard to the business of the assessee.

87.3. Referring to page 64 of the Paper Book No. 1 (Marketing and Business Promotion Agreement), Mr. Dastur pointed out that under this Agreement ECI cannot bind the assessee is any manner whatsoever and if that is so, it cannot be said the ECI had the authority to conclude any contract in India for the assessee. A person, who does not have authority to bind another, can never be considered the agent of the latter. In this connection he pointed out that in the written submissions filed by Mr. GC Sharma, the learned counsel for the Department, it has been stated that the assessee’s employee had come to India to negotiate the contract. If it is the Department’s case that it is the employees of the assessee who had come to India to negotiate the contract, it cannot be postulated that ECI was habitually exercising the authority to conclude the contracts. Mr. Dastur also pointed out from the various terms of the Marketing and Business Promotions Agreement that ECI had a very limited authority to act on behalf of the assessee. He filed a list of persons who actually signed the contracts, with the ten cellular operators and pointed out that neither the branch nor ECI had signed any of them.

87.4. Coming back to the double tax treaty, Mr. Dastur referred to Article 5.6 which says that Article 5.5 will not apply if the person who is alleged to be the agent of the foreign enterprise in India is acting as an agent with an independent status and in the ordinary course of his business. In other words, if the person alleged to be the agent of the Swedish enterprise himself is carrying on a business of acting as an agent in his own status, he cannot be construed as an Agency PE merely because he also acts for the Swedish enterprise in the course of this independent business. However,

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this is subject to the condition that in the course of his business, the agent should not be wholly and exclusively acting for the Swedish enterprise. In this connection, Mr. Dastur drew out attention to the finding of the CIT(Appeals) that ECI is financially dependent on the asssesse and submitted that it must be shown further that ECI also had the authority to conclude contracts on behalf of the asessee under Article 5.5(a) and mere financial dependence on the assessee is not sufficient to constitute ECI as the Agency PE. Assuming the worst scenario, it was submitted that even if Article 5.5(a) is found to be applicable and it is assumed for the sake of argument that the EFC/ECI has signed the contracts in India, without admitting that there is any evidence to show that the contracts were signed in India, what can be taxed ultimately is only a small portion of income of the assessee attributable to the signing of the agreements in India, which at best can only be 10% of the profits arising from the Marketing and Business Promotion agreements apply the ratio of the judgment of the Madras High Court in Annamalais Timber Trust & Co. Vs. CIT 41 ITR 781.

87.5. Mr. Dastur then took us through the relevant case law and the views of learned authors expressed in their treatises about the applicability of double tax treaties. We may notice them very briefly. The first decision is that of CIT Vs. Vishakahapatnam Port Trust 144 ITR 146, a judgment of the Andhra Pradesh High Court in which it has been held the PE postulates the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. In connection with Article 5.1 of the DTAA with Sweden, Mr. Dastur referred to the OECD Convention, extracts from which were filed in the case law Paper book. The commentary says that in order to constitute a fixed place PE, there should be a distinct situs “in India” and that the word “fixed” refers to a distinct place with a certain degree of permanence. It further says that the foreign enterprise should be able to walk into the place of its own right and not by permission. In this connection, Mr. Dastur pointed out that the fact that the assessee’s employees from Sweden at times sat in the office of the ECI, while in India, does not satisfy this conditions, namely, that they should be able to work in an sue the premises of their own right and not by permission. The permission of ECI would have been necessary for the assessee’s employees to use the premises of ECI and that does not constitute a fixed place PE of the assessee. The burden was on the Department to show the existence of a right on the part of the assessee to use the premises whenever it wished and for whatever duration, which has not been discharged in this case.

87.6 Reference was made to certain portions of Phillips Bakers book on international Double taxation Treaties where he has expressed the view that in determining the

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existence of a PE, it must be ensured that the enterprise has a right to occupy the premises though it may not either own the premises or have taken it on rent. Thus the crucial question for determining the PE is whether the premises could be occupied as of right. Mr. Dastur submitted that the CIT(A) in the present case has recorded a finding to the effect that the assessee has no fixed place of business with a right to use the same and in the light of this findings and the view of the learned author, the assessee cannot be considered to have a PE in India.

87.7. With regard to Article 5.5 of the double tax treaty with Sweden, Mr. Dastur drew our attention to Klaus Vogel’s classic Treaties on the Double Taxation Avoidance Agreements where the author has expressed his view with regard to the determination of the existence of agency PE. He cited the ruling of the Authority for Advance Ruling AAR in TVM Ld. Vs. CIT 237 ITR 230 in which the Authority has ruled that what is essential to be ascertained, in determining whether thee is an Agency PE or not, is to examine what has been actually done by the entity which is alleged to be the agency PE and that one should not be bound by what is written in the agreement between the parties. Reference was made also to the order of the Calcutta Bench of the Tribunal in Graphite India ltd. 86 ITD 384 at page 396 wherein a view has been expressed that in interpreting the DTAA, OECED Model is relevant and should be looked into and if the OECD Model of the Treaty is adopted in the Treaty which falls of interpretation without change, the Commentary on OECD Model is normally to be followed.

87.8. Our attention was also drawn to Article 5.7 of the double tax treaty which says that subsidiary companies of the foreign enterprise do not automatically become a PE in India. This was reference to the possible argument that ECI which is another subsidiary of LME of which the assessee company is also a subsidiary, could be construed as a PE in India of the assessee. Though the article speaks of a direct subsidiary of the foreign enterprise and not to a subsidiary of the holding company of the foreign enterprise, this argument was addressed by way of an answer to the possible argument.

87.9. Turning to the order of the CIT(A), Mr. Dastur assailed the conclusion of the CIT(Appeals) that since the supply contract was entered into in India, income accrues to the assessee in India within the menaing of Section 5(2)(b) and section 9(1) of the IT. Act. He referred to the detailed written submissions field by the assessee before the CIT(Appeals), a copy of which is placed at page 36 of Paper books No. 2 in which the assessee has challenged the incorrect facts and assumptions made by the AO in connection with the existence of a fixed PE of the assessee in India. He submitted that the ultimate decision of the AO that the

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assessee has a fixed PE in India is also a mere assumption not based on any facts, which has been rightly over-turned by the CIT(A).

88. Turning now to the question of permanent establishment and the findings of the CIT(A) and the arguments of Mr. G.C. Sharma, learned Sr. Counsel for the Department. Mr. Dastur strongly relied on the findings of the CIT(A) in paragraphs 8.1 and 8.3 to 8.6 of hi order and submitted that no arguments were advanced by Mr. Sharma against those findings and, therefore, they must be taken as correct. He also submitted that all the findings of the CIT(A) were based on evidence and facts and so long as no material is product on behalf of the Department to disturb those findings, the ultimate conclusion of the CIT(A) that the assessee did not have a fixed place PE in India, shall not be disturbed. With this preface, Mr. Dastur proceeded to refer to some of the authorities strongly relied on by Mr. Sharma to demonstrate how those authorities do not apply to the facts of the present case. We shall make a brief reference to these arguments.

88.1. The first decision strongly relied on by Mr. Sharma with reference to the question of PE was that of the AAR of Advance Ruling A.No. 8 of 1995, In re 223 ITR 416. Mr. Dastur submitted that the facts of this case were different from the facts of the present case. In the cited case, the subsidiary of the foreign enterprise had no independent business activities but it was set up only to aid the Swiss company and hence practically it was a branch of the foreign enterprise. In the present case, ECI acted as an independent contractor and was not dependent in any manner upon the Swedish company (i.e. the assessee) The ECI, which is the installation company in the present case, was doing the installation work independently without any connection with the assessee and the profits derived therefrom had been also taxed in its hands separately. Thus it cannot be said that ECI is a PE of the assessee on the strength of the cited judgment.

88.2. Sutron Corpn. Vs. Director of Income-tax 138 Taxman 87 AAR was a case cited by Mr. Sharma. In that case the AAR recorded a finding that there is a fixed place PE of the foreign enterprise in India. This findings was recorded on the basis of certain facts. In the present case, there are no such facts, according to Mr. Dastur, as would lead to a similar conclusion. There are also no facts to establish a business connection between the assessee and ECI so that it can be said that ECI is carrying out some of the business activities of the assessee in India and could hence be described as a fixed place PE of the assessee.

88.3. Mr. Dastur then took up for consideration the judgment of the Italia Court of Cassation, a copy of which has been placed at page 55 of the case law paper book filed by Mr. G.C. Sharma. He pointed out that whatever has been observed by the

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court in connection with clause 5.5 of the Italian – German DTAA already exists in clause 5.6 of the Indo-Sweden DTAA and the question for consideration would be whether this clause of the Indo-Sweden Agreement is applicable to the present case and that the conditions mentioned therein have been satisfied. It was thus contended that a mere reference to the Italian judgment would not advance the case of the revenue and that it is further required to be factually established that the conditions necessary for applying clause 5.6 of the Indo-Sweden DTAAA are present . This exercise, it was contended, has not been done by the Department. Referring to the written submissions filed by Mr. Sharma titled Ericsson” in which submissions have been made on the basis of the Italian Court’s decision vis-à-vis group PE, Mr. Dastur submitted that whatever has been claimed in the written submissions are only abstract propositions and not based on any facts. Such abstract propositions, about which nobody can have any quarrel, amounts to putting the cart before the horse, according to Mr. Dastur.

88.4. Mr. Dastur further drew out attention to paragraph 24 of the OECD Commentary, a copy of which is placed at page 109 of paper book No.1 and read out the relevant portions thereof. He also drew out attention to paragraph 33 of the OECD Commentary which is at page 111 of the said paper book wherein it has been mentioned that it is necessary for the revenue to establish that the enterprise in one state had expressly given authority to the entity in the other state to conclude contracts on its behalf and unless this is present, the entity in the other site, in which the income is alleged to arise, cannot be considered as the Agency PE. According to Mr. Dastur, in view of the authoritative OECD Commentary, which is frequently referred to in judgments and orders relating to controversies arising regarding the interpretation of double tax treaties, the judgment of the Italian Court of cassation does not assist the revenue in the present case and it totally irrelevant and out of context.

89. Mr. Dastur next invited our attention to the detailed reply filed by the asessee before the CIT(Appeals), a copy of which is at page 34 onwards of paper book No. 2 According to him this reply is a compendious one dealing with all aspects of the matter as below:

(i) Upto page 43 Deals with Software,

(ii) Upto pages 44 to 50 Deal with permanent establishment,

(iii) Upto pages 51 to 62 Accrual of income and section 9(1),

(iv) Pages 63 to 69 Quantum of profit;

(v) Pages 70 to 87 Software payments,

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(vi) Pages 88 to 90 Charge of interest u/s. 234B and 234C

(vii) Pages 91 to 95 Sec 142 (1) notice.

89.1 Mr Dastur also filed a "Note" which in brief pointed out the mistakes or incorrect statements or observations said to have been made by mr. G.C. Sharma is his statement field titled "Ericsson Radio System's case".

90. With regard to the quantum of income assessed, Mr. Dastur referred to page 4 of paper book No. 1 where the percentages are referred to and explained before us, how the application of 21% to determine the income of the assessee is arbitrary. He referred to Rule 10(ii) of the Income-tax Rules nd submitted hat the profits under his provisions may be arrived at by the following formula:

World Profit X Indian Profit

-------------

Indian sales

He further submitted that while applying the rule, the provisions of section 44C are not to be applied.

90.1 Mr. Dastur referred to the Circular No. 23 dated 23.7.1969 Pages 82a to 82d of the paper book No. 1) It says that in the assessment of profits occurring though an agency PE, allowance shall be made for the express incurred, including the agent’s commission in making the sale. If the commission fully represents the value of the profit attributable to the agent’s services, it should prima facie extinguish the assessment. Based on this circular, it was contended that even if 10% is assessed as profits arising to the assessee for signing contracts in India, on the basis of the judgement of the Madras High Court in Annamalia’s Timber Trust (supra), the ECI having been paid commission of 18%, the assessment would get extinguished.

91. Before concluding his arguments on this issue, Mr. Dastur submitted that the case of Ericsson arises out of the facts which are different from the facts in the case of Motorola which was also heard by the Special bench and, therefore, the broad claim of Mr. G.C. Sharma that his argument in the case of Motorola on this issue may be adopted in the case of Ericsson also, should not be accepted, especially in the absence of anything to show specific instances of similarity between the two cases.

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92. Mr. G.C. Sharma learned counsel for the Income-tax Department in his rejoinder to the argument, of Mr. Dastur in the appeal filed by the Department, Submitted with regard to the preliminary objection raised by Mr. Dastur against ground No. 1 not raising the question as to whether the contract for installation can be interpreted as a works contract and, therefore, it is not open to the Department to make submissions on his aspect, contended that the ground of appeal No. 1 may be read in a modified form to omit reference to clauses (i) and (ii) of the ground. He further submitted that if the reference to these clauses are omitted then the ground will be all pervasive in nature and it would be open to the revenue to raise the question that the contract is a works contract. His submission was not very seriously contested by Mr. Dastur and, therefore, we have permitted Mr. G.C. Sharma to address arguments on all aspect of the matter, more so having regard to the importance of the issue and the submissions of Mr. Dastur that he would also make submissions contesting on merits this point made by Mr. G.C. Sharma, though not formally raised in the ground.

93. In the above background we may proceed to note the submissions made by Mr. Sharma. He first submitted that it is of significance that all the contracts were signed in Bangalore and on the same day i.e. 2nd July, 1996 and this is a pointer to the fact that the installation contract and the supply contract had necessarily to be read together. He drew our attention to clause (1) of the supply contract and pointed out that the word used there was “contractor” and posed a question as to why the word “supplier” was not used, which should have been the normal course, if it was merely a supply contract. He also pointed out that the “installation contract” referred to in the supply contract was also entered into on the same day. The word “site” appearing in the supply contract refers to the installation contract. His attempt was thus to show that all the contracts are integrated and have to be read together. He further pointed out that in all the contracts the common word used was ”system” which means both the hardware and the software. Thus there are cross references between the supply contract and the installation contract and on has to be necessarily read with the other. He also drew out attention to the scope of the contract which refers to the system being installed on a turn key basis which means that the entire project is a turn key project. According to Mr. Sharma a turn key project cannot be disintegrated into a supply contract and installation contract and both have to be treated as an integrated whole. He also pointed out that under the contract the amount was not payable immediately and the payment was linked with the progress of the work. If the price is linked with the progress of he work, it is a clear pointer to the fact that it is a works contract or a turn key project. There was also reference to “interface” in the supply contract at many places, which meant that there has to be a connection between the supply, and the installation contracts. Clause 17 of the supply contract referred to “project” which again meant the whole contract including the installation.

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Clause 18.1 stated that the acceptance test shall be done by the installation contractor. According to Mr. Sharma the reference in the supply contract to the acceptance test being done by the installation contractor clearly established the close nexus between the supply and installation agreements and proved clinchingly that both are one and the same, divided only for purposes of income-tax.

94. Mr. Sharma thereafter referred to the installation contract and submitted that this was also entered into on 2.7.1996, the same day as the supply contract. The preamble to the installation contract referred to the hardware and software “belonging” to JTM. The question posed by Mr. Sharma was that on the very day the contract was entered into, it cannot be said that either the hardware or the software belonged to JTM. According to him this showed that the hardware and software were owned by JTM on 2.7.1996 itself which again was a pointer to the integrated nature of the two contracts. Mr. Sharma further pointed out that in the installation contract as well as in the supply contract, most of the definitions are common and identical. The scope of the installation contract (Clause 5) also referred to the turnkey basis of the contract as in the case of the supply contract. The effective date of the installation contract was made dependent on the progress of the work which again was similar to the supply contract where the price was not payable immediately but was to be paid on the basis of the progress of the work. Even the responsibility matrix referred to in the installation contract is the same as in the supply contract. In short, Mr. Sharma’s attempt was to point out that all the important definitions and clauses in both the contracts were substantially the same, which fortified his argument that both the contracts are one integrated whole.

95. Mr. Sharma then referred to the overall agreement which was also entered into on the same day as the supply and installation contracts i.e. on 2.7.1996 and at the same place, namely, Bangalore. The only argument raised by Mr. Sharma on the basis of the overall agreement was that this also has to be read along with the supply and installation contracts since they were all entered into on the same day and at the same place, showing clearly the intention of the parties themselves to treat all the three aspects of the work as an integrated whole or as a turn key project.

96. Referring to the marketing and business promotion agreement Mr. Sharma made a brief submission that this took in the rendering of services by way of promoting sales but agreed that it was not for concluding the sales as the Indian company (ECI) did not have the authority under this agreement to conclude the sales on behalf of the assessee.

97. Mr. Sharma thereafter contended that if all the three contracts are to be treated as one integrated whole or as referring to a turn key project, the question would arise

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as to where did the income therefrom accrue. According to him the income accrued in India because of two reasons: (i) the works were executed in India and (ii) the contracts were all signed in India. In support of this plea he strongly relied on the judgment of the Supreme Court in the case of 20th Century Finance Corpn. (supra) and reiterated his submission that the place of execution of the contracts determined the situs of the sale and consequently the place of accrual of the income.

98. Mr. Sharma, the learned counsel for the department, next submitted that there was a business connection in this case and nothing but the business connection as indicated by all the agreements. He explained that the business connection is also established by the fact that the consumer in India, when he uses the cell phone, the call is routed through the cell operator and the cell operator has a close connection with the assessee in the sense that it is the assessee who provides the income to the cell operator by allowing the cell operator to use the system for the purpose of facilitating the calls. Thus the connection between the assessee and the consumer, through the cell operator, is established. This, according to Mr. Sharma, is a business connection within the meaning of section 9(1)(i) of the I.T.Act. He further explained that by this connection, the installation or he marketing company does not earn any income on regular basis and, therefore, the revenue has treated their income separately and assessed in the respective hands. So what the revenue is seeking is only to tax the income arising from the supply contract.

99. Mr. Sharma’s next argument was with reference to the operations carried out in India by the assesse under all the three contracts. The first operation was to conduct a network survey in India. Secondly, the act of signing the contracts in India also amounts to an operation in India. Thirdly, the assessee undertook overall responsibility for the successful implementation of the project which was to be executed in India. Fourthly, the assessee stood guarantee for the due performance of all the three contracts under the overall agreement. Fifthly, the assessee appointed agents for marketing the products in India whose remuneration depended on sales. Lastly, the situs of the sale, as already explained earlier, was in India. Since all these operations were in India, the profits attributable thereto were assessable in India u/s 9(1)(i), explanation (a), which says that the income of the business deemed to accrue or arise in India shall be that part of the income as is reasonably attributable to the operations carried out in India.

100. Mr. Sharma thereafter proceeded to distinguish the five judgments which were heavily relied upon by Mr. Dastur, the learned counsel for Ericsson. The first judgment is the case of Annamalai Timber Trust & Co. (41 ITR 781) (Mad). He pointed out that in that case there was a simple contract and, therefore, the High Court upheld the Tribunal’s conclusion that 10% of the income may be attributable to

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the signing of the contract in India, considering the signing in India to be an operation carried out in India. However, in the present case it is not a simple contract as in the cited case but there are number of contracts and complex operations are to be performed in India and, therefore, a simple 10% of the income cannot be attributed to the business operations in India.

100.1. The second case cited by the assessee was Hindustan Shipyard Ltd. A.P. (supra) He submitted that the facts in this decision were completely different from the facts of the present case.

100.2. As regards the judgment of the A.P. High Court in Bharat Heavy Plate & Vessels Ltd. (supra), Mr. Sharma submitted that this case is of no assistance to the assessee but on the contrary assisted the revenue on the point of business connection.

100.3. As regards CIT vs. Energomach Exports (supra), a judgment of the Karnataka High Court cited on behalf of the assessee, Mr. Sharma submitted that unlike in the cited case, in the present case, the assessee is interested in the installation contract as well as in the companies to whom installation and marketing contracts were given and, therefore, there is business connection.

100.4. With regard to Dy. CIT vs. Alcatel (supra), which is an order of the Delhi Bench of the Tribunal, it was submitted that the decision is based on the fact that all the agreements in that case were separate and distinct, whereas in the present case they are to be read with each other as one integrated whole and if so read the ratio of the order will not be applicable. He further pointed out that the decision of the Delhi Bench was based on two concessions made on behalf of the assessee and further as para 41 of the said order shows, the question largely depended on the nature of the operations that were carried out in India. In the present case, however, according to Mr. Sharma since all the operations are carried out in India, the ratio of the order of the Delhi Bench is not applicable.

100.5. With reference to the other cases cited on behalf of the assessee Mr. Sharma submitted that he need not discuss them as none of them matches the colour of the assessee’s case.

101. Mr Sharma thereafter contended that there was a permanent establishment of the assessee (Ericsson) in India. In this connection, he heavily relied on the findings recorded by the A.O. and also his own written submissions on this issue. He broadly stated that the assessee, sitting in Sweden, could not have possibly carried out all its activities in India and discharged the overall responsibility under the overall contract

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unless it has a permanent establishment in India. He submitted that one has to look at the probabilities of the case also, as laid down by the supreme Court in the case of Durga Prasad More (82 ITR 540), the probability in this case being that unless there is a permanent establishment in India, the assessee could not have discharged its overall responsibility under the agreements.

102. Mr. Sharma thereafter proceeded to address the issue of the computation of income or the attribution of income to the PE. He referred to the findings recorded by the A.O. in paras 78 and 79 of the assessment order. He pointed out that the assessee has not filed any working of the profits attributable to the PE. He also pointed out that the A.O. has only computed the profits arising out of Indian operations which were an unsatisfactory exercise undertaken by him. In the submission of Mr. Sharma, the question of attribution of income to the PE can be restored to the A.O. by laying down certain guiding principles as to how the income of the PE should be attributed with particular reference to the CEBDT Circular No.23 dated 23.7.1969. Mr. Sharma submitted that it is not applicable to the present case because (i) there was no agent in India, and (ii) the contracts were signed in India. As regards the CBDT Instruction No.1829 dated 21.9.1989, he submitted that this was also not applicable to the present case because (a) the instruction applies only to power projects, (b) the instruction is only an administrative act of the income-tax department and (c) the A.O. is not bound by it.

DECISION

103. We have very carefully considered the questions of “business connection” and “permanent establishment”. The assessee company is incorporated in Sweden and is a 100% subsidiary of Telefonaktriebolaget L.M. Ericsson (LME for short). It is one of the leading suppliers of telecommunication equipment comprising of both, hardware and software. There is another company by the name Ericsson Telephone Corporation India AB, also incorporated in Sweden and a subsidiary of LME. It has a branch in India and for short this company will be referred to as EFC. There is a third company by the name of Ericsson Communication Ltd. (ECI for short) and this was incorporated in India.

104. The assessee company had entered into agreements with ten cellular operators in India for supply of hardware and software during the relevant year, hereinafter referred to as the Supply Contract. EFC had entered into installation contracts with the various cellular operators. These contracts remained with EFC for a period of three months upto June, 1996. subsequently, on the incorporation of ECI, these contracts were assigned to ECI from July, 1996 onwards. The Assessing Officer was of the view that the income of the assessee was taxable in India, both, under the

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Income-tax Act, 1961 as well as under the treaty between India and Sweden. His reasons for coming to this conclusion can be summarized as follows:

(i) Before the contract was signed in India, a number of employees of the assessee company and of associate companies visited India to do the network survey and to negotiate the terms of contract.

(ii) The contracts were signed in India and the supplier (assessee) was responsible for the delivery till the port in India.

(iii) The assessee has a dependent agent PE in the form of EFC and ECI.

(iv) The assessee has a fixed place of business in the form of a branch as well as in the form of ECI.

EFC was held to be a dependant agent PE on the ground that (a) the overall contract clearly established the full responsibility of the assessee for supply, erection and after sales services which was signed in Bangalore on 2.7.1996; (b) the installation contract and supply contract were signed on the same day; (c) EFC had neither the infrastructure nor the expertise to do the installation work and hence, the technical expertise was provided by the assessee or by LME; (d) EFC was economically dependent on the assessee company in so far as that the share capital had been invested by the parent company of the assessee company and that it had earned revenues from the companies to whom supplies were made by the assessee company; (e) the expatriates who came to India used the premises of EFC and also other infrastructural facilities, (f) a perusal of the contract entered into by the assessee showed that the assessee had taken the responsibility of installation also. Almost the same reasons were assigned for holding ECI also a dependent agency PE of the assessee. The Assessing Officer held the acceptance test certificate as the most important document which had to be signed by the representative of the assessee also. Further, according to the Assessing Officer, the assessee itself had told the various customers that it had a full fledged presence in India and such a presence, according to the Assessing Officer, was not possible without a fixed place of business. This was substantiated by the fact that the contracts were signed in India, the responsibility to supply the equipment upto the ports in India, replacement of defective parts, guarantee of successful completion of installation work etc. were of the assessee and hence it had a fixed place PE in India. The assessee tried to meet all the contentions of the Assessing Officer without any success.

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105. The CIT (Appeals) considered the elaborate submissions of the assessee and discussed the issues at length. He observed that all the agreements were entered into India and were tobe governed by Indian laws. After considering the various clauses of the agreements, he observed that it was not a case of single sale or not a case of a series of unconnected sales. The agreement was to put in place the GSM system for the use of the cellular operators. The agreement took into account that contractors will install the equipment and software and their tests will determine the acceptability or otherwise of the supplies made by the assessee for setting up GSM system. In fact, according to the CIT (Appeals), admittedly, the acceptance test was a milestone for payments in so far as that the payments were to start after the acceptance test. The CIT (Appeals) further observed that the Installation Contract was inextricably linked with the supply contract in so much so that the tests carried out by the contractor were binding on the assessee. Only they were to be carried out by two separate persons who were in full knowledge of the work to be performed by either of them. Based on these facts, coupled with the fact that the supply agreement was preceded by network survey, planning and marketing, client discussions and succeeded by monitoring of the supplies, client discussions and control of accounts receivable, the CIT(Appeals) held that income accrued and arose in India under sections 5 and 9 of the Act. He distinguished the cases of Mahabir Commercial Co. (86 ITR 417) and DCIT v. Alcatel (47 ITD 275). However, in arriving at the conclusion that income accrued in India, the CIT (Appeals) heavily relied on the judgment of the Supreme Court in the case of 20th Century Finance Corporation Ltd. and Another vs. State of Maharashtra (119 STC 182). Relying on this judgment, The CIT(Appeals) observed that the situs of sale has to be determined on a number of factors including the formation of contract and acts done under the contract. According to him the situs of sale would be the place where the property in goods passes, i.e. where written agreement transferring the right to use is executed.

106. In view In view of the above findings, the CIT(Appeals) was of the view that the issue regarding applicability of section 9(1)(i) need not be decided. However, since the issue was raised before him, he proceeded to examine whether the assessee had any business connection in India or not. He held the following cases to be inapplicable to the facts of the present case:

(1) CIT vs. R.D. Agarwal & Co. 56 ITR 20 (SC)

(2) Carborandum Co. vs. CIT-108 ITR 335 (SC),

(3) VDO Techometer werke West Germany vs. CIT 117 ITR 804 (SC),

(4) CIT vs Toshoku Ltd – 125 ITR 525 (SC),

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(5) CIT vs Gulf Oil (Great Britain) Ltd. – 108 ITR 714 (Bom.)

While rejecting the applicability of the above judgments, the CIT (Appeals) observed that in the present case, the assessee had signed agreements in India with the installers and cellular operators in India for setting up the GSM system in India for the latter, prior to which a number of activities had been carried out in India, the contractors worked for the promotion of assessee’s equipment in India, assessee’s employees came to India for long stays, the contractors’ activities were wholly devoted to the business of the assessee, and therefore, the assessee had business connection in India, through and from which income is deemed to accrue or arise to it.

107. With regard to the issue whether the assessee had a PE in India, the CIT(Appeals) observed that it cannot be said that various concerns were formed purely with a view to avoid or evade tax in India. They were not mere paper companies having no business purpose in India and hence, the assessee and the contractors were held to be separate persons and that the office of the contractors cannot be taken to be the office of the assessee, particularly in view of the fact that the Assessing Officer was not able to specify as to which and how many employees of the assessee stayed in India for full year and used the contractor’s office for conducting assessee’s business. Thus, it was held that the assessee had no fixed place PE in India. The CIT(Appeals) also held that the installation projects cannot constitute a PE for the assessee in view of (a) Board’s Circular No. 1829 with regard to power projects, and (b) the contractors had been assessed separately on the income earned by them. The CIT (Appeals) further held that the contractors had no authority to conclude any contract on behalf of the assessee, and hence they did not constitute a dependent PE also. In the final analysis, the CIT(Appeals) held that the assessee did not have any PE in India, the necessary consequence of which was that the assessee was liable to tax on its business profits in Sweden and not in India.

108. In conclusion, the CIT(Appeals) held that:

(a) the assessee had a business connection in India and hence, income accrued to it in India;

(b) however, since the assessee had no permanent establishment in India under Article 5 of the DTAA between India and Sweden, its business income of Rs. 33,99,69,471 was not taxable in India.

109. Section 5 of the Act describes the scope of total income, Sub-section (2) of section 5 provides that in case of a non-resident, the total income will include.

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(a) all income which is received or is deemed to be received in India, or

(b) all income which accrues or arises or is deemed to accrue or arise to him in India.

110. Section 9 of the act provides for the incomes which shall be deemed to accrue or arise in India. The Assessing Officer and the CIT(Appeals) held that income was deemed to have accrued to the assessee in India on account of business connection in India, and therefore, we straight go section 9(1)(i) of the Act.

111. The main contention of the CIT(Appeals) and the learned counsel for the revenue is that all the contracts were integrated into each other and since they all were executed in India, income is deemed to have accrued in India. In this connection, heavy reliance has been placed on the judgment in the case of both Century Finance Corpn. Ltd (supra) Hence, it would be advantageous, at the outset, to consider the said judgment. In this case, the Supreme Court was concerned with the power of State Legislatures to levy sales tax on the transfer of right to use (underline by us) and goods envisaged under clause (29A)(d) of the Article 366 of the Constitution on the premise that goods put to use are located within their States. The brief facts leading to this controversy were that the petitioners carried on business of leasing diverse equipments. According to them, they entered into Master Lease Agreements with the lessee. The Master Lease Agreement provided that order for individual equipment will be placed by the petitioners at the instance of lessees and that the equipment to be leased will be dispatched by the manufacturers or supplier concerned to the locations specified in the lease. The petitioners disbursed the value of equipment to the suppliers and, at the instance of the petitioners, the suppliers delivered the equipment to the lessees at the specified locations for use. According to the petitioners, one transaction of transfer of right to use goods was subjected to sales tax by more than one State. Some states levied tax on the petitioners, merely because the goods were found to be located in their States at the time of execution of contract which had taken place outside the State. Some States levied tax when the goods were delivered in their State for use in pursuance of agreement of transfer executed outside their States and some States taxed such transactions of deemed sales on the premise that agreements for transfer of right to use had been executed within their States. The question, therefore, that arose for consideration of the court were, whether a State can levy sales tax on transfer of right to use goods merely on the basis that the goods put to use were located within its State irrespective of the facts that – (a) the contract of transfer of right to use had been executed outside the State; (b) sale had taken place in the course of an inter-state trade; and (c) sales were in the course of export or import into the territory of India.

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112. While dealing with the above questions, the court took note, in para 21 of its judgment, of the fact that they were not dealing with actual sales but were dealing with deemed sales as mentioned in clause (29A) of Article 366. It also took note of the fact that the situs of sale could only be fixed either by the appropriate Legislature or by judge made law, and that there were no settled principles for determining the situs of sale. Further the court was conscious of the fact that it was concerned with the deemed sales as mentioned in sub-clause (d) of clause (29A) of Article 366, i.e. on the transfer of the right to use any goods for any purpose. Thus, keeping in view the fact that they were dealing with deemed sales in the form of leasing transactions wherein the events in the entire chain took place in several States, and the fact that these several States had sought to levy sales-tax on the basis of one of the events taking place within the State, the Supreme court proceeded to resolve the controversy as to which State is entitled to levy tax. Since the Court was in search of the taxable event on the transfer of right to use the goods, it opined that the transfer of right was sine qua non for the right to use any goods. Thus, the situs of taxable events was held to be the agreement which legally transferred the right to use goods. In other words, if the goods were available irrespective of the fact where the goods were located and a written contract was entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods.

113. As contrasted with the above, in the present case, we are not concerned with:

(1) the powers of the States, under the Constitution, to levy sales-tax;

(2) deemed sales;

(3) leasing transaction where the event in the entire chain took place in various states.

In the present case, we are concerned with actual sales and the accrual of the income therefrom. Viewed in the above backdrop, the judgment in the case of 20th Century Finance Corpn. (supra) cannot help the revenue and cannot help us also to resolve the controversy which is before us. Consequently, the repeated emphasis of the CIT (Appeals) that income accrued in India because the contracts were signed in India, cannot be accepted because this conclusion is based on a judgment (20th Century Finance Coprn.) which has no applicability to the facts of the case. As a matter of fact, the issue will have tobe approached on the basis of the provisions of Sale of Goods Act to which we shall advert a little later. Before that it would be pertinent to deal with the works contract theory put forward by Mr. Sharma on behalf

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of the revenue. In connection with this argument, Mr. Sharma heavily relied on the judgment of the Supreme Court in the case of Hindustan Shipyard Ltd. (supra).

114. In this case, the assessee was engaged in building ships for different ship owners under orders placed by them. The assessee was claiming it tobe a works contract and not a contract for sale, thereby claiming exemption from sales tax under the Andhra Pradesh General Sales-tax, Act, 1957. One of the clauses in the contract deed provided that the property in the vessel was to pass to the buyer with the payment of the first installment of price. However, the Supreme Court observed that one is not to be guided by the face value of the language employed; one has to ascertain the intention of the parties. The Court took note of a clause in the contract whereby the insurance cover was tobe obtained by the builder, the policy or policies being taken out in the joint names of the builder and the owner. A pertinent thing noted by the Court was that the loss or damage, if any, occasioned to the vessed before delivery to the owner was to be suffered by the builder which would not have been so if the property in the vessel had already stood passed to the owner. Thus, it was held that for all practical purposes the property in the vessel continued to remain with to remain with the builder and passed to the owner only (i) on satisfactory completion of the work, (ii) on the vessel coming into existence in a deliverable state, and (iii) satisfaction of the owner as to the vessel being seaworthy and also having been built up to the satisfaction of the owner in accordance with the terms and conditions of the contract. The Court held that it was not the meaning of an individual recital or the inference flowing from any term or condition of the contract read in isolation but an overview of the contract wherefrom the nature of the transaction covered thereby has to be determined.

115. Based on the above observations of the Supreme Court, it was the contention of Mr. Sharma that the cellular operators were not interested merely in buying the equipment, but the ultimate aim was to see that the equipment was properly installed and that it worked satisfactorily. To see that it worked satisfactorily, it was the responsibility of the assessee as per the overall agreement and hence, as mentioned by the CIT (Appeals), acceptance test was the milestone on reaching which, payment was to be made to the supplier, i.e. the assessee. In this sense, it was contended by Mr. Sharma that all the contracts were integrated, on the whole it was a works contract and hence the situs of the sale was where the contract was executed, which in this case was India. It is quite ironical that the revenue, in order to prove that the contract in the present case was a works contract, has relied on the judgment in which the claim of the assessee that it was a works contract, was negatived by the Court. Be that as it may, we appreciate the purport of Mr. Sharma’s argument that it is the real intention of the parties which matters and not mere recitals in the agreement. Sections 18 to 24 of the Sale of Goods Act (SOG Act for

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short) contain rules for ascertaining the intention of the parties in this regard. Let us examine them.

116. Section 118 of the SOG Act provides that no property in the goods is transferred to the buyer unless and until the goods are ascertained. It is nobody’s case here that the goods in question were unascertained goods. Section 19(1) of the SOG Act provides that in case of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Section 19(2) provides that for the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Section 19(3) provides that unless a different intention appears, the rules contained in section 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. We now proceed to examine the contracts in the present case in the light of these provisions.

117. The supply contract is entered into between the assessee and the cellular operator (JT Mobiles is taken as an illustrative case). The installation contract is entered into between IT Mobiles and ‘EFC’ which is the branch of another Swedish company but belongs to the LME, group, i.e. the same group to which the assessee company belongs. The preamble to the supply contract gives expression to the willingness of the parties to sell and buy the GSM equipment, comprising of the hardware and licensing of application software Likewise, the preamble to the installation contract expresses the desire of JT Mobile to avail the services of the installation contractor to install the GSM equipment belonging to it and the installation contractor expresses the desire to provide its services to JT Mobiles. Nothing turns on this. Clause 5 in both the agreements spell out the scope of the respective contracts. Much had been said on behalf of the revenue that though the supplier has apparently only supplied the system, but the same has been supplied on a turn-key basis. The argument therefore, was that the supplier was also involved and interested in the installation and hence the agreements have to be construed in an integrated manner to mean a works contract. Interestingly, in both the agreements, the word ‘turn-key’ has been used. In other words, the supply contractor is to deliver the system on turn-key basis and the installation contractor is to install the system on turn-key basis. It is commonly known that any turn-key project would involve:

(i) planning and design, (ii) supply of permanent equipment, (iii) civil works and (iv) installation, testing and commissioning of the equipment. It is not uncommon that in execution of such large projects, the above work may be handled by a consortium of companies and for that matter, separate agreements will have to be entered into to

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carry out each of the works described above. Under each agreement, each contractor will be responsible for his part of the job. But obviously, each contractor will be interested in the successful implementation of the entire project. Certain projects are so specialized that the main equipment for it are not available off the shelf. They may have to be tailor-made for the customer, but the one who makes the equipment would obviously be interested to see that it is ultimately commissioned to the satisfaction of everyone. It is in this sense, that the word ‘turn-key’ is used in both the agreements, albeit loosely. But there is no reason to conclude that all agreements should be construed as one to regard it as a works contract.

118. The, the price payable under each agreement, terms of payment and performance guarantee to be provided by each contractor are according to their respective responsibilities under the agreement. As per clause 12 of the Installation Contract, it is the responsibility of the installation contractor to perform the installation. The supply contractor is in no way connected with the installation plan. JT Mobiles’ undertakings under both the agreements are materially different. We are told that the project Manger under the Installation Contract is to be at the site of installation. Supply Contract provides that Acceptance Test shall be carried out by the Installation Contractor in accordance with the terms and conditions stipulated in the installation contract. The Supply Contract, of course, also provides that the acceptance test carried out by the Installation Contractor shall be binding on the Supply Contractor. However, this needs to be appreciated in its proper context. Earlier, we have mentioned that in such specialized equipments, the supplier also will be concerned about its proper functioning. The malfunctioning of the equipment may be due to either some defect in the equipment itself or due to faulty installation. So far as defect in installation is concerned, then as per clauses 15.6 and 15.7 of the installation contract, it is the responsibility of the installation contractor to remove that defect. It is only for some defect in the equipment that the supply contractor will be responsible. This also explains as to why the project personnel of the supply contractor need not be on site. The fact that the supply contractor is not responsible for faulty installation shows the difference between the situation in the present case and the situation in the case of Hindustan Shipyard Ltd. (supra) wherein the assessee was responsible for any damage to the vessel even after the property had passed to the buyer. Further, the “Delays” clause in both the agreements makes the respective contractors responsible for delays on their part, i.e. to deliver the equipment or to install the equipment as the case may be. In no way, one contractor can be held responsible for the delay on the part of the other contractor in performing his part of the contract. Clause 21 in the supply contract and clause 17 in the installation contract provide for the respective warranties, and are to the same effect as they are with regard to other clauses. Further, as per clause 20 of the installation

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contract, it is the installation contractor who has to provide training to the personnel of JT Mobiles. The supply contractor is in no way concerned about such training. Again, the Termination Clause (clause 31.2 in the supply contract and clause 25.2 in the installation contract) in both the agreements clearly show that one contractor is in no way concerned with the termination of the other contract, meaning thereby that if JT Mobiles terminates, say, the supply contract, still it may continue with installation contract and vice versa. This indicates that all the contracts need not be considered as one whole contract nor does it indicate that it is a works contract Further, in case of supply contract, if any notice is required to be sent, the same will have to be sent at the Swedish address of the supply contractor. On the other hand, in case of installation contract, the notice will have to be sent to the Indian address of the installation contractor.

119. Having considered the main clauses of the two agreements, we come to the most important clause of title and risk. Clause 13.1 provides that the risk of loss and damage to the system, the Spare Parts, the Testing equipment and the Documentation, shall pass to JT Mobiles when delivered to the carried at the port of shipment in Sweden to the city of India. Clause 13.2 provides that the title to hardware, spare parts and test equipment shall pass to JT Mobiles when delivered to the carrier at the port of shipment in Sweden. Reverting back to the provisions of SOG Act, the basic rules regarding transfer of property in goods are contained in section 20 to 24. Section 20 provides that where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. It is not in dispute that the seller (i.e. the supply contractor) had to do nothing to ascertain the price or that the goods wee sent on approval basis. Therefore, the provisions of sections 21 to 24 of the SOG Act are not applicable. Section 20 provides that the property in the goods passes to the buyer when the contract is made. However, section 19(3) provides that the rule in section 20 will apply only if there is no different intention. The intention of the parties in the case of Ericsson is that the title will pass when the goods are delivered at the port of shipment in Sweden. Thus, at the first instance it can be said that the sales are completed outside India. However, as provided in sec. 19(2) of the SOG Act and also as held in the case of Hindustan Shipyard Ltd. (supra), this simple recital in the agreement may not be enough to infer the real intention. Regard has to be had to the terms of the contract, the conduct of the parties and the circumstances of the case. In this connection, we have already analyzed the various clauses of the supply contract and the installation contract. Nowhere from the said analysis can it be inferred that the intention of the parties was something else than what is stipulated in clause 13 of the supply agreement. Nothing

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has been brought on record to show that the conduct of the parties was contrary to what is stipulated in clause 13 of the agreement. There is no circumstance which points to the contrary. The goods in question were specific and ascertained, it was an unconditional sale and the parties intended that the title will pass outside India and they have not done anything or not acted contrary to the declared intention. As per section 26 of the SOG Act, the risk, prima facie, passes with the property unless otherwise agreed. In the present case, the parties have agreed that the risk will also pass at the time of delivery to the carrier. Thus, both risk as well as title, have passed simultaneously outside India and therefore, we hold that sales of GSM equipment by Ericsson to the cellular operators were completed outside India

120. From the analysis of the various clauses in the two contracts, we have also concluded that all agreements put together cannot be termed as works contract. At this juncture, we may refer to the Marketing Agreement as well which was entered into between the assessee and the Indian branch of Ericsson Telephone Corporation India AB (FEC) for a period of three months and between the assessee and Ericsson Communications Pvt. Ltd. (ECI) for the remaining period of none months. On perusal of both the agreements we find that the Indian Counterpart (be it EFC or ECI) is to render services to the Swedish company, i.e. the assessee, only on broad lines, viz. (a) promotion of the products of the assessee in India, and )(b) provision of information on business opportunities in India for the assessee in relation to its products. Further, it is specifically provided inter alia, that the Indian counterpart has no role to play as a mediator between the assessee and any Indian buyer, it cannot bind the assessee in any manner while promoting its products in India and that the final terms of contract for sale of products with an Indian buyer will be decided by the assessee only. It is also stipulated that nothing in the agreement shall create or shall be deemed to create any relationship of agency partnership or joint venture between the parties. Moreover, nothing has been broought on record to show that the parties have acted otherwis. The Indian counterpart has neither exercised nor habitually exercised any authority to conclude any contracts on behalf of the assessee. Neither the party to the marketing agreement, nor the installation contractor maintained any stock of goods. The CIT (Appeals) has given a categorical finding to this effect in para 8.5 of his order. Further, neither of the parties has secured or habitually secures any orders for the assessee. If that be the case, how can the three agreements be read as one integrated document and how can it be treated as a works contract-we simply fail to understand. One of the arguments of Mr. Sharma was that by disintegrating the works contract into three separate agreements the parties have attempted to evade tax and, therefore, it would be open to the income-tax authorities to lift the veil of the transaction on the strength of the judgment in the case of Mcdowell (supra). This argument runs counter to the unchallenged finding of the

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CIT(Appeals) (para 8.3 of his order) that it cannot be said that the various concerns wee formed purely with a view to avoid or evade tax in India. As regards the applicability of the Mcdowell judgment, we can do no better than quote the observations of their Lordships of the Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (263 ITR 706) at page 760:

“It thus appears to us that not only it the principle in duke of Westminister’s case (1936) AC 1 (HL); 19 TC 490 alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of Mcdowell’s case (1985) 154 ITR 148 (SC).”

121. Before concluding the issue relating to “Business Connection”, it will not be out of place to refer to the Overall Agreement on which also much emphasis was placed by Mr. Sharma. This agreement is between the assessee, the installation contractor and JT Mobiles. The preamble to this agreement, inter alia, states that the supply contractor and the installation contractor have agreed to act in a coordinated manner. Clause 2 of the agreement provides that the supply contractor shall have overall responsibility. Clause 5.5 of the agreement provides that in the event that the installation contractor terminates his contract, the supply contractor shall locate the new installation contractor. Clause 6 of the agreement provides that the overall agreement shall prevail over the other contracts. Mr. Sharma had stressed on all these points to contend that nothing more was required to show that it was a works contract. In our view, nothing turns on the overall agreement. It needs to be appreciated that the arrangement by way of an overall agreement is nothing new and has been invoked in such contracts. When different entities are working for the ultimate commissioning of the project, the India buyer, or for that matter any buyer, needs tobe instilled with confidence that the project will ultimately take off and be on stream as desired. For this, an overall responsibility needs to be fixed. Ultimately, the installation contractor has to install the equipment supplied by supply contractor. In that case we see no reason as to why the two should not work in a coordinated manner. In fact, it is of utmost necessity. But merely because they are working in a coordinated manner, the separate contracts do not lose their sanctity and enforceability and the parties to the respective contracts remain bound by the terms and conditions of those contracts. Board’s Instruction No.1829 dated 29.9.1989 supports this contention. The said Instruction, of course, pertains to power projects, but the principles apply to all big projects with equal force. Considering the terms of the contracts in the present case in the light of the above Instructions, no payment accrues either to the supply contractor or to the installation contractor under the overall agreement. The overall agreement is to ensure supervision and to guarantee performance of all the contracts in a coordinated manner. Therefore, there is no

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force in the argument that the overall agreement supports the work contract theory. The said instructions of the Board, of course, also states that various contracts should not be clubbed together unless they are undertaken by the same foreign company. In the present case, one of the allegations of the revenue is that the supply contractor, the installation contractor (EFC) and the Indian company (ECI) with which marketing agreement was entered into, all belong to the same LME Group of Companies and hence all the contracts should be clubbed together. We are not agreeable to this proposition for the reasons that follow.

122. Firstly, in our view, Instruction No.1829 speaks of clubbing the contracts together only if they are undertaken by the same foreign company. In the present case, contracts are not undertaken by the same company. All the three companies are separate independent entities. Merely because they belong to the same group, they do not become one entity Moreover, there is no evidence to show that one is dependent on the other either financially or in any other manner. Secondly, it is the finding of the CIT(Appeals) that various group concerns have been formed for the purpose of business and have been doing business independently as per their instruments of incorporation. This finding is not challenged by the revenue. Thirdly, the department has also recognized their independent status by assessing the Indian company (ECI) as well as the branch of the foreign company (EFC) separately. Assessment orders in the case of ECI for assessment years 1997-98 to 2001-02 are placed on record. Intimation under section 143(1)(a) in the case of EFC for the assessment year 1997-98 is also placed on record. In the assessment order for the assessment year 1997-98 in case of ECI, it is mentioned that the company is engaged in the business of telecommunications. It is further mentioned that the company is involved, inter alia, in the assembly, installation and construction of telephony networks and also in providing different information technology (software) solutions. Moreover, its income in respect of the installation contracts is assessed in its hands. Further, evidence that it is an independent entity is reflected from the assessment order for the assessment year 1998-99 wherein it is mentioned that the company has set up a unit in software technology park at Bangalore and has claimed its income of Rs. 91,39,921 as exempt under section 10A of the Act. Thus, in view of these facts, there is no reason to treat the three contracts as one works contract.

123. In the final analysis, we hold that:

(a) the three companies, viz. Ericsson Radio Systems AB (ERA, the assessee), Ericsson Telephone Corporation (India)AB (EFC) through its branch in India and Ericsson Communications Ltd. (ECI) are three independent entities doing business independently,

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(b) the three contracts, viz. the supply contract, the installation contract and the marketing and and business promotion agreement are separate and independent contracts and are not to be treated as one integrated works contract despite the overall agreement;

(c) the assessee had no business connection in India,

(d) the sales of GSM Mobile Telephone system by the assessee to the cellular operators in India took place outside India; and hence,

(e) no income, accrued to the assessee in India from the sale of GSM Mobile Telephone System to various cellular operators in India.

PERMANENT ESTABLISHMENT

124. The next issue we take up for consideration is whether the assessee had a permanent establishment (PE) in India. At the outset, it may be mentioned that the CIT (Appeals) has held that the assessee has no PE in India. This decision of the CIT (Appeals) is challenged by the revenue on two grounds:

(a) that the contracts for installation of GSM Cellular Network between the assessee and Indian operators were signed in India.

(b) That the number of employees of the assessee and other associate companies visited India and during their visits used infrastructural facilities of Indian operators and the Indian subsidiary.

So far as the first ground is concerned, the installation contract was not between the assessee and the Indian cellular operators. It was between the Indian branch of Ericsson Telephone Corporation India AB for a period of first three months and between the cellular operators and Ericsson Communications Ltd. for the remaining nine months. Therefore, the ground raised is misconceived and is liable to be dismissed for that reason alone. Nonetheless, we shall adjudicate on the issue presuming that what the revenue meant was supply contract and not the installation contract. In fact, Mr. Dastur had no objection to our proceeding on that basis and had also addressed arguments which we have adverted to earlier. As regards the second ground, the CIT (Appeals) has concluded that the assessee has no PE in India on any count, that is, either fixed place PE or Agency PE etc. The revenue has challenged the decision of the CIT(Appeals) only on one ground. Hence, actually we ned not go into the other grounds on which the CIT (Appeals) held that there is no PE. However, elaborate submissions were made in respect of all the reasons and hence we will deal with those reasons also, but briefly. Before proceeding, it may be

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mentioned that we have kept in mind the basic contention of Mr. Dastur that DTAA is only an alternative tax regime and not an exemption regime. Therefore the burden is first on the revenue to show that the assessee has a taxable income under the DTAA and then the burden is on the assessee to show that its income is exempt even under DTAA.

125. Article 5 of the DTAA explains the express “Permanent Establishment” (PE). The Assessing Officer has partially reproduced this article in his order to the extent considered necessary by him. However, it appears that he has reproduced the said article from the new treaty which came into force from 25.12.1997. For the purposes of this appeal, since the accounting year ended on 31.3.1997, we shall be referring to the earlier treaty which was entered into vide Notification No. GSR 380(E) dated 27.3.1989 and which is given at page 83 of assessee’s paper book-1. The Assessing Officer has held as follows:

1. That there is a dependent agent PE in the form of EFC (for 3 months).

2. That there is a dependent agent PE in the form of ECI (for 9 months).

3. That there is a PE in the form of a branch providing fixed place of business to the assessee.

4. That the office of ECI is a fixed place of business for the assessee company.

5. That the employees of the assessee company were coming to India and signing contracts and wee staying in India and using various facilities which clearly showed that the assessee had a fixed place of business.

126. The arguments of the Assessing Officer for arriving at the above conclusions can be summarized as follows:

1. That the overall agreement placed full responsibility on the assessee for supply, erection and after sales services.

2. That the supply contract and the installation contract were signed on the same day.

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3. That either EFC or ECI had no technical expertise and permanent employees of LME came to India for installation.

4. That both, EFC and ECI were economically dependent on the assessee in so far as that the share capital in the companies was contributed by LME and commission income was earned from the assessee only by these two companies.

5. That the assessee had complete control over the management, affairs and functioning of its associates.

6. That the facilities of EFC and ECI were utilized by the employees coming to India.

7. That the assessee was responsible for the installation of the equipment.

8. That the Acceptance. Text Certificate was signed by the installation contractor on behalf of the assessee.

9. That various employees came to India for networking, discussion and negotiations.

10. That the Indian company maintained stocks on behalf of the assessee.

11. That the carriage and insurance for the equipment was the responsibility of the assessee and goods were delivered at a port in India.

12. That the contract was complete when acceptance test was carried out and was successful.

13. That the overall responsibility of the assessee under the Overall Agreement was not a matter of comfort but it was an overall guarantee provided by the assessee.

14. That the judgment of the Supreme Court in the case of Mahabir Commercial Co Ltd. vs. CIT (86 ITR 417) was not applicable to the facts. Instead, according to him, the judgment of the Supreme Court in the case of Performing Right Society Ltd. (106 ITR 11) was applicable.

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127. We now turn to the provisions contained in Article 5 of the DTAA. Article 5.1 state that the term “Permanent Establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The thrust of the Assessing Officer’s contention has been that since the employees of the assessee and/or LME came to India frequently and since the Indian company (ECI) provided facilities to these employees, the office of ECI constituted a fixed place of business for the assessee. The OECD commentary on Double Taxation refers to a “fixed place” as a link between the place of business and a specific geographical point. It has to have a certain degree of permanency. It is emphasized that to constitute a “fixed place of business”, the foreign enterprise must have at its disposal certain premises or a part thereof. Phillip Baker in his Commentary on Double Taxation Conventions and International Tax Law (3rd edition) states that the nature of the fixed place of business is very much that of a physical location, i.e. one must be able to point to a physical location at the disposal of the enterprise through which the business is carried on. On the other hand, possession of a mailing address in a state without an office, telephone listing or bank account-has been held not to constitute a permanent establishment. Further, the fixed place of business need not be owned or leased by the foreign enterprise provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises.

128. Reverting to the facts in the case of Ericsson, it is not in dispute that the assessee has no office in India, either owned or leased. The allegation against it is that it used ECI’s office for its own purposes and that ECI provided facilities to the employees of the assessee whenever they visited India. However, the revenue has failed to establish that ECI had made certain space available to the assessee at its disposal. In other words, there is nothing to indicate that whenever any employee of the assessee visited India, he could straightway walk into the office of ECI and occupy a space or a table Merely because ECI allowed the visiting employees to use certain facilities occasionally, it cannot be said that the assessee had at its disposal, as a matter of right, certain space which could be characterized as a fixed place of business. A travel agency in Paris had made an office available to the German company from time to time, and the manager of the German company had a flat in Paris. The Administrative Court of Appeal of Paris held that the German Tourstik Service reported in (1998) 1 I.T.L.R. 857), travel agency did not have a PE in France (Societe France). As against this, the Brussels Court of Appeal has held that a German resident engaged in the transportation of vehicles had a PE in Belgium as he had an office 3 m by 6 m at his disposal on the premises of his principal supplier in Belgium, together with telephone and telex, where the German and his tour

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employees worked (KH v. Belgium (1995) 3 R.G.F. 100). The assessee’s case is akin to that of the German travel agency in the first mentioned case and not to the German resident in the second mentioned case. Therefore, in the light of this discussion, it cannot be said that the assessee had a PE in India as envisaged in Article 5.1 of the DTAA.

129. Article 5.2 of the DTAA specifically includes the following in the definition of the term “permanent Establishment”.

(a) a place of management,

(b) a branch,

(c) an office,

(d) a factory,

(e) a workshop,

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources,

(g) a warehouse in relation to a person providing storage facilities for others,

(h) premises used as a sales outlet or for receiving or soliciting orders, and

(i) an installation or structure used for the exploration of natural resources.

Out of the above there is neither any finding nor even an allegation that the assessee has any of the above locations in India, except perhaps, the one mentioned in item (h), i.e., premises used as a sales outlet or for receiving or soliciting orders. This allegation is on the basis of the Marketing Agreement entered into by the assessee with ECI. However, while dealing with the issue of business connection earlir, we have already held that nothing really turns on it. ECI has no authority to conclude any contract on behalf of the assessee and none of its actions can bind the assessee. When such is the arrangement, it cannot be said that the premises of the ECI were being used by the assessee for its business or that it really did some business from the said premises. Therefore, under Article 5.2 also it cannot be said that the assessee had a PE in India.

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130. As per Article 5.3 of the DTAA, the term “Permanent Establishment” encompasses a building site, a construction assembly or installation project or the like or supervisory activities in connection therewith where such site, project or activity continues for a period of six months. In the present case, the assessee (Ericsson) had entered into contracts with ten different cellular operators for the supply of GSM equipment. Thus, ten systems were to be installed by the installation contractor. In that case, as per the OECD commentary, the period of six months has to be considered separately for each installation. It was argued that under the overall agreement, since the assessee had the overall responsibility for the commissioning of the project, the installation site constituted a PE for the assessee in India. However, no evidence is led by the revenue to show whether any installation site continued for a period exceeding six months. The second limb of Article 5.3 is that if the project or supervisory activity, being incidental to the sale of equipment, continues for a period of less than six months, then the installation site will become a PE only if the charges for the project or supervisory activity exceed 10 per cent of the sale price of the equipment. For the sake of argument, if we accept the revenue’s contention that the assessee was responsible for the installation of the equipment, either on account of its employees being present or under the overall agreement no charge have been paid to the assessee under any agreement either by the installation contractor or by the cellular operator. In fact, it has been one of the main contentions of Mr. Dastur that no income accrues from the overall agreement and this argument is in consonance with the Board’s instruction No. 1829 also. Thus, though the primary responsibility of installation was that of the installation contractor, the fact remains that no income accrued to the assessee in India from the overall agreement for overseeing the installation of the equipment. Therefore, under Article 5.3 of the DTAA also, the assessee cannot be said to be having a permanent establishment.

131. We now deal with Article 5.5 and 5.6 of the DTAA which pertain to Agency PE Simply stated, Article 5.5 provides that where a person other than an independent agent is acting on behalf of the foreign enterprise in the other country, then the foreign enterprise shall be deemed to have a PE in that other country. As mentioned, Article 5.5 speaks of a person other than an independent agent. Hence, first it would be necessary to determine whether ECI is an independent agent for which we shall have to go to Article 5.6 of the DTAA. Article 5.6 provides that if a broker, commission agent or any other agent is working for a foreign enterprise in the ordinary course of his business, then such an independent agency shall not constitute a PE for the foreign enterprise. However, if the activities of such an agent are devoted wholly or almost wholly for the foreign enterprise or for enterprises

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subject to the same common control, then such an agent shall be considered a dependent agent. However, in such a case, provisions of clause 5.5 will apply.

132. Even though in para 122 we have held that all the three companies are of independent status notwithstanding that they belong to the same group, if we assume for the sake of argument that ECI is subject to the same common control as the assessee as both are subsidiaries of LME and that all its activities are devoted to the assessee, yet it will not become an Agency PE for the assessee because (a) it has not, and does not habitually exercise, in that State (in India) and authority to conclude contracts on behalf of the assessee (Ericsson) or (b) it does not habitually maintain in India a stock of goods or merchandise from which it regularly delivers goods or merchandise on behalf of the assessee. While dealing with the issue of “Business Connection”, we have given a categorical finding that ECI has no role to play as a mediator between the assessee and any buyer. It cannot bind the assessee in any manner while promoting its products in India and that the final terms of contract for sale of products with an Indian buyer will be decided by the assessee only. We have also held that ECI has neither exercised nor habitually exercises any authority to conclude any contracts on behalf of the assessee. It is also found that ECI does not maintain any stock of goods. Mr. Dastur has placed on record a copy of the communication dated 19.1.2000 from ECI to the Assessing Officer to the effect that if there is any defective part, the same is sent to ERA at Sweden for repair or replacement. This signifies that ECI does not maintain any stock of goods on behalf of the assessee and nothing is brought on record to controvert this claim of the assessee. Details are also placed on record to show that each of the ten contracts entered into by the assessee for supply of GSM System, was signed by the officials of the assessee. Thus, it is evident that ECI had no authority to conclude the contracts on behalf of the assessee. In fact, the Assessing Officer himself has admitted at page 40 of his order that the employees of the assessee company came to India for planning and negotiations and concluded the contracts in India, neither EFC nor ECI had any role to play so far as conclusion of supply contracts were concerned Prof. Dr. Kalus Vogel, in his treatise on Double Taxation Conventions, states that this question must be decided not only with reference to private law but must also take into consideration the actual behaviour of the contracting parties. An approach relying solely on aspects of private law (the law of contracts) would make it easily possible to prevent an agent from being deemed a PE even where he is engaged most intensively in the enterprise’s business. He would be allowed only to negotiate contracts up to the point when they were finalized and ready to be signed, but the final signature, to satisfy the proprieties, would be reserved to someone from the enterprise’s headquarters in the other contracting state. Such a formal split-up of business responsibilities on the one hand and legal authority on the other, is

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considered to constitute a case of “tax circumvention” where substance should prevail over form. A PE should, therefore, be deemed to exist irrespective of what the formal arrangements were. In the present case, there is no finding that either EFC or ECI wee instrumental or even participated in the negotiations with the cellular operators. Thus, even the conduct of the parties, on which Dr. Klaus Vogel lays emphasis, do not go to suggest in any way that EFC or ECI could be impressed with a stamp of permanent establishment for the assessee in India. The Assessing Officer has laid much stress on a number of employees of the assessee coming to and staying in India for long periods and making use of the facilities of EFC and ECI. However, as fund by the CIT (Appeals), there are no details to support this claim of the Assessing Officer. In the absence of any details, it cannot be held that the assessee had a PE an India.

133. In the case of CIT vs. Hindustan Shipyard Ltd. (109 ITR 158), the Andhra Pradesh High Court observed that whether it is goods that are supplied or services that are rendered, the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territories. The commonness of interest may be by way of management control or financial control or by way of sharing of profits. It may also come into existence in some other manner. But there must be something more than a mere transaction of sale and purchase between principal and principal. Applying these principles of “real and intimate connection” to the facts of the case before them, their Lordships held that though the Polish company had agreed to render certain limited services, those services were connected with the effective fulfillment of the contract of sale and were merely incidental to the contract, usually included in all such contracts, by way of guarantee of the efficient working of the products sold.

134. In the case of Ericsson, its main and primary interest ended once to GSM system was sold to the cellular operators. The responsibility of installing the system was not of the assessee. The responsibility it had under the overall agreement was akin to that of the Polish company in the case of Hindustan Shipyard Ltd (supra). No income accrued to the assessee either from the overall agreement or from the installation agreement or from the marketing and business promotion agreement. Thus, it cannot be said that the assessee had any permanent establishment in India. Further since the transaction did not create an “intimate connection” between the assessee and EFC or ECI, the latter cannot be regarded as PE in India for the assessee.

135. The decision of the Delhi Bench of the Tribunal in the case of Dy. CIT vs. CIT Article (47 ITD 275) clinches the issue in favour of the assessee. In this case, the Government of India through ITI, a Government Undertaking, entered into four

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different agreement on 28.7.1982 with the assessee – a non-resident French company, for the development and manufacture of electronic digital telephone switching equipment in India. The assessee – company, bound by the agreements, had to send French Engineers very often. It therefore, thought it fit that there should be some arrangement in India for organizing the reception of such engineers, helping them in their customs clearance, their transportation, accommodation, maintenance of their residential buildings, making travel arrangements, providing facilities like telephone, telex, accounting, secretarial and other assistance. To achieve this, the assessee company entered into an agreement with an Indian company called Mekaster Consultants P. Ltd. (MCPL) on 5.4.1983 for providing, what are described as support services to the French engineers. MCPL was, however, not authorized or empowered to transact any business in the name or on account of CIT Alcatel. In consideration of the support services, MCPL was to receive a lumpsum of Rs. 60 lacs for the calendar year 1983. Thereafter, the lumpsum was to be revised twice a year by mutual agreement to reflect the volume of the services actually rendered. The attempt of the department was to treat MCPL as the PE of the assessee company in India and inter alia, to tax the profit arising from the sale of equipment made to the Government of India, though the same was delivered in France FOB French Port.

136. Almost identical arguments wee advanced by the Department in that case as they are advanced before us, viz. (a) all the agreements should be seen as only one agreement, (b) it was like a works contract, (c) it was a turnkey contract, (d) title in the goods was not passed to the Indian party at France, (e) that acceptance certificate was the key to the supply contract, (f) that the assessee had a business connection in India and (g) that the assessee had a PE in India. The Tribunal rejected all the arguments of the department except that about PE in India, But the argument regarding PE came to be accepted on account of the concession made on behalf of the assessee.

137. Adverting to the facts in the case of Ericsson, there is no such agreement as was with MCPL in the case of Alcatel for support services. The employees of Ericsson merely came to India for negotiations and to conclude the contracts, in the course of which EFC/ECI extended their facilities but not enough to constitute a PE and hence the conduct of the parties was also not a pointer in that direction. Further, in the case of Alcatel (supra), despite thee being a concession about PE, profit arising from the sale of equipment was held to be not taxable in India as the sale was completed outside India. Similar is the case of Ericsson, albeit on a stronger footing insomuch so that it has no PE in India. Acceptance test is also no criterion because even if the test is negative, the title in the goods is not to revert back to the supplier as is held in the case of Alcatel (supra) As regards works contract, all

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contracts to be regarded as one, overall agreement etc., we have already dealt with in detail in the earlier part of the order. To the same effect is the judgment of the Andhra Pradesh High Court in the case of Addl. CIT vs. Skoda Export, Praha (172 ITR 358). Thus, we hold that no income accrued to the assessee (Ericsson) in India as it had no permanent establishment in India which could give rise could give rise to business profits taxable in India.

Royalty

138. The Ground No.5 in the appeal of Ericsson is that the payment made by the assessee for the use of software in the equipment does not amount to royalty and that the Income-tax authorities were not justified in treating the payment as royalty. The arguments advanced by Mr. Dastur in respect of this ground are adverted to in the following paragraphs.

139. The main argument advanced was that the software is to make the equipment which is known as the hardware, work and, therefore, the payment therefore cannot be viewed as a royalty for the use of software as such. The payment is part of the payment made for the entire equipment. In support of this argument, attention was drawn to page 22 of paper book No.1 which is the Supply Agreement which defines the word “systems” as including the software also. In fact it says that the system includes hardware and software “forming the entire GSM Mobile Telephone System”. It was submitted that the payment for the software was not similar to a pharmaceutical company obtaining a formula and paying royalty for the same. In recital No. 2 of the agreement at page 20 of the paper book No.1, the software is referred to as “application software”. This only means that the hardware and software constitute one integrated telephone system. It was clarified that the word “license” was used in connection with the payment for software only because the software was given to the assessee with certain restrictive conditions and from the mere use of that word, it cannot be inferred that the payment was similar to a license fee and hence royalty. The software was given to the assessee in perpetuity and so long as the system was to be operated by the assessee, the software would also be operated as part of the system.

140. In support of the above argument, Mr. Dastur drew our attention to certain clauses in the supply agreement. Clause 7.1 defines the word “price” as the total price fixed for the system as a whole. It was clarified that annexure-V to the supply contract did show separate price for the software but that was only for the purpose of paying customs duties to the Indian government. Clause 13 provided that the risk in the software passes simultaneously with the hardware. Clause 20.1 provided that the software would be available for the exclusive use of JTM but without the right of

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commercial exploitation. JTM can use the software only for working the GSM mobile telephone system and not otherwise. Clause 20.4 provided for the passing of information about the software to the employees of JTM on “need to know basis” Certain other restrictions are also imposed by this clause, such as having a back-up if the main software failed. Clause 20.5 provided that JTM may transfer the software but only if the hardware is also transferred. Clause 20.7 coined the expression “inseparable package”, to refer to the GSM mobile telephone system suggesting that the hardware and the software cannot be operated without each other. Clause 26 provided that the hardware and software would go together, both having been “purchased” by JTM. The JTM could purchase additional software by a separate contract of sale and all the supplies of software were actually transactions of purchase and sale only, though as mentioned earlier, the initial supply of software was referred to as “license” only because of certain restrictions. But the title in the software was to be that of J.T. Mobiles only, and had the word “license” been used in the classical sense then it would have been obligatory on the part of JTM to return the software. That not being the case, it was contended that the amount paid to wards software cannot be termed as “royalty”. Moreover, the so called license was not also granted under intellectual property rights.

141. Mr. Dastur then proceeded to refer to section 9(1)(vi) of the Income-tax Act which provides for the source rule of taxability of income by way of royalty. The A.O. has relied on the second proviso which takes within the purview of the definition of deemed income, the income by way of royalty in respect of computer software, the supply by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

141.1 Clause (v) of Explanation 2 to Section 9(1)(vi) says that royalty means consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. The Assessing Officer’s stand, relying on the second proviso to section 9(1)(vi), is that the software supplied by the assessee along with the hardware is not covered by any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986, of the Government of India and, therefore, the payment made by JTM would be considered as royalty under the main provision. The argument of Mr. Dastur, the learned counsel for Ericsson is two fold. It is firstly contended that computer software is protected by the copyright law of India and Section 2(o) of the Copyright Act, 1957 defines “literary work” to include computer programmes. Tables and compilations including computer

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databases. The computer programmes are not capable of being protected by patent. Once it is so classified, it is not permissible to treat it as forming part of clause (i) or (iv) of explanation 2 to Section 9(1)(vi) and consequently it cannot be brought to tax within these clauses. Secondly, it is contended that the claim of the A.O. that the second proviso to section 9(1)(vi) provides an exemption only in respect of specific software acquired under the prescribed scheme and any software which is not covered under the scheme is taxable as royalty, is untenable in law. It is submitted that the exemption to specific software which is covered by the scheme mentioned in the proviso is only by way of abundant caution and it does not necessarily imply that software which is not covered by the scheme is covered within the purview of section 9(1)(vi). It is contended that it is a well settled principle of law that something which is carved out as an exception in the provision, without including the same in the main section, does not necessarily mean that such item is covered by the main provision, Support for this argument is taken with reference to the following decisions:

1. CIT vs. Madurai Mills Co. Ltd. 89 ITR 45 (SC)

2. CIT vs. United Western Bank Ltd. 259 ITR 312 (SC)

3. International Instruments Pvt. Ltd. vs. CIT 133 ITR 283 (Kar.).

4. Meteor Satellite Ltd. vs. ITO 121 ITR 311 (Guj)

5. CIT vs. Copies Vulcan Inc. 167 ITR 884 (Mad)

6. CIT vs UCO Bank 32 ITR 688 (SC)

7. CIT vs T.P. Sidhwa 133 ITR 840.

141.2 Mr. Dastur thereafter proceeded to address arguments with reference to the DTAA between India and Sweden, a copy of which has been placed at page 83 of paper book No.1. Article 13.3 of the DTAA defines royalty to mean payment of any kind received as consideration for the “use or right to use” any copy right of literary, artistic or scientific work including cinematographic film, films or video tapes for use in connection with television or model, plan, secret formula or process for use or right to use any industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. It is pointed out firstly that the definition of royalty in the DTAA is narrower than the one given in the Income-tax Act as the term “similar property” is absent in the definition given in the DTAA.

141.3. The second difference between the Income-tax Act and the DTAA so far as definition of “royalty” is concerned I that as per the DTAA the consideration is “for

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use or right to use” and does not mention any lump sum consideration as is mentioned by the Act. The argument is that under the DTAA it follows that the amount of royalty would vary with the use whereas in the case of a lump sum consideration, it is not linked with the use and is payable irrespective of whether it is used or not. One may not use it because of various reasons such as new technology replacing the old etc. Nevertheless the lump sum consideration would be payable. Another argument advanced on the basis of phraseology of Article 13.3 of the DTAA is this. The Article refers to consideration for the use or right to use “any copyright of literary, artistic or scientific work” (underlining ours). The word “of is’ is not found between the words “copyright” and and the words which follow, namely, “literary, artistic or scientific work” appearing in clause (v) of Explanation 2 to Section 9(1)(vi). It is argued that the word “of’ should be read between the words “copyright” and the words which follow, namely, “literary, artistic or scientific work…” appearing in clause (v) to Explanation 2 Section 9(1)(vi).

141.4. Turning to Article 13.5 or the DTAA, it was pointed out by Mr. Dastur that royalty can be considered as business income if it is “effectively connected with a permanent establishment” in India. In this connection, our attention was drawn to pages 42 to 46 and 65 to 68 of the assessment order in which the A.O., in support of his stand that the payment for the software should be considered as royalty received by the assessee, has held that since the assessee has a permanent establishment in India, the amount of royalty is to be assessed as business income in the hands of the assessee @ 30%.

141.5. Mr. Dastur referred to the order of the CIT(A) on this aspect. There were two broad premises which formed the basis of the conclusion of the CIT(A). The first premise is that the software supplied to JTM is loaded on to the hand set of the ultimate user. Mr. Dastur pointed out that this is a wholly erroneous premise, challenged in ground No. 9 specifically taken before the Tribunal. He referred to page 208 of paper book 2 which is a certificate given by Reliance Telecom Cellular Operator denying that any part of the software is loaded to the hand set of the customer. The second premise of the CIT(Appeals) was that the payment of royalty depended on the number of customers of the cellular operators. Clarifying this aspect, Mr. Dastur submitted that the software supplied by the assessee is equipment specific and had a specified installed capacity which cannot be expanded and it was not hand set specific or sim card specific. He drew our attention to page 206 of paper book No.2 and also to paragraph 2.2 onwards of page 71 of paper book No.2.

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141.6 We shall now proceed to refer to the submissions and propositions put forth by Mr. Dastur on the question of royalty. The following three broad submissions were put forth by him:

i). The payment is not “royalty” u/s 9(1)(vi) read with Explanation 2(v) or under the DTAA.

ii) There is no independent supply of software by the assessee; what is supplied is the hardware (GSM Mobile telephone equipment) and the wherewithal to make the hardware function. Therefore, the sale of software is part of the sale of hardware and not independent of it.

iii) Assuming the first two submissions noted above are not correct, the third submission is that the question for consideration would be whether the assessee has given any copyright or transferred any right in a copyright or has given the use of copyright or whether the assessee has supplied a copy righted article.

141.7. According to Mr. Dastur it has to be first ascertained as to under which part of the Explanation 2 to section 9(1) (vi) should the payment be settled. His submission was that if at all, the payment has to be slotted under clause (v) of the Explanation, which specifically deals with such a payment. In this regard, he contended that if the payment falls within a specific provision, that provision must be applied and only if it does not fall thereunder, can the general provision be resorted to. Accordingly, he contended that where the explanation contained a specific slot for “copyright” the clauses which applied to “similar property” cannot be said to include copyright. Therefore, if at all, only clause (v) of explanation 2 can be invoked.

141.8. In support of the general proposition that where there is a specific provision dealing with a particular type of payment, the general provision cannot be considered applicable, Mr. Dastur referred to the following judgments:

1. CIT vs. UCO Bank 32 ITR 688 (SC).

2. Meteor Satellite Ltd. vs. ITO 121 ITR 311 (Guj)

3. CIT vs. Copes Vaulcan Inc. 167 ITR 884 (Mad),

4. CIT vs. T.P. Sidhwa 133 ITR 840

141.9 . Mr. Dastur then proceeded to consider the various clauses of Explanation – 2 and pointed out that they do not cover the payment with which we are concerned in the present appeal. Clause (i) refers to transfer of rights or granting license in

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respect of a patent, invention, model, design, secret formula or process or trade mark or similar property. But software supplied did not fall under any of these items. Clause (ii) refers to the importing of any information concerning the working of, or the use of a patent, invention, etc. etc. Since the assessee by supplying the software does not impart any information, this clause is also not applicable. Clause (iii) refers to the use of any patent, invention etc. Since clause (i) which refers to transfer of rights in such items, is not applicable, there is no question of clause (iii) being applicable. Clause (iv) which refers to imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill is also not applicable because the software supplied by the assessee was not supplied for the purpose of imparting any such information. Clause (iva) was introduced only w.e.f 1.4.2002 and hence not relevant for the year under appeal. Clause (vi) refers to rendering of services in connection with the activities referred to in sub clauses (i) to (iv) and (v). Since sub-clauses (i) to (iv) are not attracted to the present case, clause (iv) is also consequently not attracted.

141.10. The only clause which, if at all, can be applied to the present case, according to Mr. Dastur is clause (v). Even this clause is not applicable and in support of this stand Mr. Dastur put forth the following propositions.

141.11. The first proposition put forth was whether the assessee would make payment if the software was not linked to something else? The answer according to him is to be in the negative because a person would never acquire or pay for the software alone or which was to be used as a stand alone equipment. The second proposition was that the payment was in order to obtain the system and not to obtain the software as such. It was a part of obtaining of the whole system and the payment was not a consideration for any of the items mentioned in clauses (i) to (v) of Explanation 2. The third proposition was that, assuming that the purchase of software was to be considered separately, then could it be said that the payment was for transfer of any right in a copyright or that was it for any license in respect of a copyright. At this juncture, he gave an illustration of a publisher who gives to another person a right to print copies and sell. According to Mr. Dastur, this would amount to granting of license and will fall u/s 9(1) (vi) of the Act. But if software is given, not per se as software but to make hardware work, then the consideration paid cannot be said to be for software alone. In that case, the payment would not amount to royalty. Reiterating his argument, it was submitted that as per the agreement, there was really no separate transaction for software. The purpose was to acquire the whole system for a lump sum price and that software was specified separately in the annexure only for the limited purpose of paying customs duty. In support of this contention, Mr. Dastur relied on the decision of the Supreme Court in the case of CIT vs. Mugneeram Bangur & Co. 57 ITR 299. He further contended by referring to

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pages 205 and 207 of paper book 2, that the assessee had accounted for the amount received for software under the head “Net Sales” in its books of account and that the Indian operator (RPG Cellular Services Ltd.) had accounted it as a capital asset in its books of account and though the entries were not determinative, they showed as to how the parties had acted. In support of these contentions, Mr. Dastur on the following decisions:

CIT vs. Klayman Porcelains Ltd. 229 ITR 735

CIT Vs. Neyveli Lignite Corpn. Ltd. 243 ITR 459

CIT vs. Sundwiger Emfg and Co. 262 ITR 110 and

Lucent Technologies Hindustan Ltd. vs. ITO 82 TTJ 163

141.12. Having referred to these decisions, Mr. Dastur contended that even if the payment falls within the bare wording of section 9(1) (vi), one has to see what the consideration is paid “for”. It has to be for the things mentioned in clause (v) of Explanation 2 and the submission was that the consideration was for the system as a whole. The payment may fall within the “bare bones” of the provision, but not within the “soul” thereof. Elaborating further his arguments, Mr. Dastur submitted that if a foreign publisher gives a right to sell books in India, then is it a right “in respect of any copyright? According to him, the test is, what is it that a person can do when he has a copyright? Thus the question for consideration was what exactly is copyright. Since the term “copyright” is not defined in the Income-tax Act, nor in the DTAA, he referred to the provisions of the Copyright Act, 1957.

141.13 Reference was made to section 14(a) wherein the rights which are generally available are listed. On the other hand, section 14(b)(ii) mentions a right which is available only to the owner of a computer programme. It was submitted that only the person who has the copyright can sell or hire it. The question, therefore, posed by him was whether J.T. Mobiles had any of the rights mentioned in section 14(a) or 14(b) of the Copyright Act. If J.T. Mobiles did not have any of these rights then J.T. Mobiles did not have a copyright. To show that J.T.M did not have any of those rights, he referred to the Supply Agreement and referring to clause 20 of the said Agreement, it was claimed that J.T. Mobiles had a “non-exclusive” right which was different from an “exclusive right” mentioned in section 14 of the Copyright Act. Clarifying this provision, it was submitted that whereas Ericsson had an exclusive right, J.T. Mobiles did not have. In other words the essence of copyright is with the holder thereof (Ericsson in the present case) who can do anything with respect to it in the public domain whereas the licensee of the copyright (JTM in the present case)

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cannot do so. As per clause 20.4(b) of he Supply Agreement, J.T. Mobiles cannot store or make copies of the software except for back-up purposes. Section 14(a)(i) of the copyright Act permitted a holder a the copyright to store or make copies for reproduction. Section 52(1)(aa) of the Act permitted the licensee of the copyright to store or make copies of the software only for back up or archival purposes, which would not be considered as an infringement of the copy right. Reading these provisions together, the position that emerges is that merely because J.T.M. could store or make copies of the software only for back up or archival purposes, it cannot be said that it has got the copyright in the software. All that it has got is only a copyrighted article in the form of the software. The fact that J.T.M. cannot license or sell the software, is also incorporated in clause 20.4(d) of the Supply Agreement. In contrast, u/s 14(b) (ii) of the Copyright Act, the holder of the copyright can license or sell the copy right.

141.14. Mr. Dastur thus contended that the provisions of the Copyright Act read together with the various clauses of the supply contract showed that what JTM had obtained was only a copyrighted article in the form of a software but none of the incidents of a copyright itself. Therefore, there is no transfer by the assessee of any right, including a license, in respect of a copy right. Therefore, clause (v) of Explanation 2 to Section 9(1) (vi) does not apply.

142. Mr Dastur thereafter proceeded to address arguments on the basis of the DTAA. He first pointed out that in Article 13.3 of the DTAA, the word used is only “use” of the copyright. Significantly, this article does not use the word “license” with reference to the copyright. In this aspect it differs from clause (v) of Explanation 2 to section 9(1)(vi). Having prefaced his arguments as above, he proceeded to advert to the OECD Commentary (relevant extracts filed in the paper book) on the Model Convention. Mr. Dastur admitted that the views expressed in the commentary are not binding but they have persuasive value. Article 12 of the model convention deals with royalty. Paragraphs 12 and 14 of the commentary contain the views expressed in relation to Article 12 and its applicability. The gist of the commentary is that in order to constitute royalty, the payment must be;

(a) for commercial exploitation of the software and if it is for the own use of the payer, in his hardware, the payment cannot amount to royalty.

(b) The earning of the income should be traceable only to the software in which case it will be considered as royalty, whereas if it is traceable to the hardware, it will not amount to royalty but will amount to business

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income under Article 7. Business income can be assessed in India only if the non resident has a PE in India.

142.1. Paragraph 17 of the commentary provides for the apportionment of a payment between business income and royalty. This position, however, does not apply in India as per the views expressed in several authorities complied in the paper book and, therefore, we are not concerned with the apportionment.

142.2. Mr. Dastur next referred to the opinion expressed by the Internal Revenue Service, USA, extracts from which are compiled at pages 136 to 202 of the paper book No.2. Here also it was admitted by Mr. Dastur that the opinion is not binding but has persuasive value. In this opinion, the distinction between copyright rights on one hand and a copyrighted article on the other hand, has been brought out fully and clearly. The contention on the basis of the opinion was that in the present case what JTM and other cellular operators have obtained is only a copyrighted article in the form of a software and not copyright rights. Reliance was also placed on pages 202 and 204 of paper book No.2 which is the learned author Du Troit’s commentary in which similar views have been expressed.

101. Mr. Dastur referred to the decision of the Bangalore Bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO (82 TTJ 163) to emphasis the difference that had been brought out in the said decision between copyright and a copyrighted article. It was submitted by him that one cannot have a copyright without a copyrighted article, but one can have a copyrighted article without a copyright. In the present case, the software was stated to be only a copyrighted article and not a copyright. According to Mr. Dastur, the test to be applied is to ask the question whether the Indian company could have exercised any of the rights of the holder of the copyright (the Swedish company). According to him the answer is in the negative. This contention was elaborated by Mr. Dastur with reference to the extracts from Iyengar’s Copyright Act, 6th Edition.

142.4. Mr. Dastur next pointed out with reference to Article 13.3 of the DTAA that JTM cannot be said to be “using” the software. He contrasted the software with a secret formula, which certainly can be stated to be “used” by the person who has acquired it. In the present case the software has been acquired by JTM only to exploit the hardware and the payment was for the hardware. Therefore, in his submission, it is not a case of “use” or “right to use” the software per se within the meaning of the Article. It was further submitted that there was no obligation on the part of JTM to return the software as it was a perpetual license granted to it as per the supply agreement. Since there was no obligation to return the software, therefore, the payment could not be said to be for the use of software but it was for

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acquiring it. In support of this contention, he referred to para 15 and 16 of the OECD Commentary at page180 of the paper book. According to this commentary of the price is paid for acquiring the ownership of the Article, it cannot be said to be a royalty. Assuming that the copyrighted article was the same as acquiring a copyright as contented by the Department, then also the payment cannot be termed as a royalty because it was not a payment for the mere right to use and still it would mean that the copyright rights are acquired by the payer. Therefore, Article 13 of the DTAA would not be applicable.

142.5. It was, however admitted by Mr. Dastur that if the Department is right in its contention, then the payment will be caught within the mischief of Explanation 2, clause (v) of Section 9(1)(vi) of the I.T.Act because it uses a wide expression namely “transfer of all or any rights” and is not restricted to a mere “use” or “right to use”. However, he clarified that his contention is that the Department is not right in its contention to treat it as a copyright.

142.6. The next contention of Mr. Dastur was that a lump sum payment (as royalty) may fall within Article 7 of the DTAA as well as Explanation 2 to Section 9 (1)(vi) of the Act since lump sum consideration has been expressly mentioned in the Article and the Act. However, Article 13 of the DTAA does not refer to lump sum consideration. It refers only to “payment for use” and since as already contended this is not a payment for use of the copyright, even this Article is not applicable.

142.7. It was submitted by Mr. Dastur that by its very nature and as specified in Section 14 of the Copyright Act, it is a right, something in abstract. However, when the software is imported in chattel form, according to Supreme Court, it is goods and attracts customs duty. According to him, then the question arises whether it can be a copyright and “goods” at the same point of time. According to him the answer has to be in the negative. He pointed out that copyright is an Intellectual Property Right (IPR) which when imported in a chattel form becomes goods. In support of this contention he referred to the decision of the Supreme Court in the case of ACC Ltd. Vs. Commission of Customs 128 ELT 21 and also to the case of State bank of India vs. Collector of Customs Bombay (115 ELT 597).

143. Mr. Dastur summed up his arguments with regard to the taxability of the royalty payment as follows;

(1) No copyright right was given within the meaning of section 14 of the Copy Right Act and, therefore, it does not fall u/s 9 (1)(vi) of the Income-tax Act or under the relevant provisions of the DTAA. The software is “goods”.

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(2) The consideration paid is not “for” the copyright right but it is for the “system” as a whole.

(3) The consideration is not paid for the software per se and, therefore, it is not in any case royalty.

(4) The consideration paid is a lump sum consideration. Though section 9(1)(vi) of the Act ropes in the lump sum consideration, Article 13 of the DTAA does not do so.

(5) If at all, there is only a transfer of a copyrighted article. There is no consideration paid for “use” of a copy right. Therefore, Article 7 of the DTAA would apply and not. Article 13.

(6) However, in order to attract Article 7, the assessee should have a PE in India. Since it has not been established that the assessee has a PE in India, nothing is chargeable even under this Article of the DTAA.

(7) Even assuming but not admitting that there is a PE in India, Article 7 would apply, on the Assessing Officer’s own admission (in page 46 of the assessment order). Therefore, only what is attributable to the PE is taxable in India and not the entire payment made for the software. Factually it has been established by the assessee that nothing is attributable to the PE and, therefore, nothing is taxable in India.

144. With reference to the additional ground of appeal taken by the assessee in its cross objection, Mr. Dastur submitted that it raised the issue of the rate of tax which is a purely legal issue requiring no investigation into the facts and, therefore, prayed that the same should be admitted. On merits, he submitted that the amendment made in the Finance Act, 2004 will have to be considered and for the purpose of

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examining the same, the matter may be restored to the Assessing Officer, if it is considered necessary. He further relied on an order of the Mumbai Bench of the Tribunal in the case of Deca Overseas (ITA No. 3604/Bom/94 dated 27.2.2004) and filed a copy thereof.

145. Mr. G.C Sharma, the learned senior counsel for the Department raised the following points in support of the Department’s case:

(1) All the three contracts are integrated and cannot be segregated.

(2) The preamble to the supply contract makes a distinction between the hardware purchased and the use of “application software”.

(3) The word “license” as defined in section 30 of the Copyright act is a grant of authority to exercise a particular right. It gives only a limited right in the use of the copy right. The supply contract in the present case gives such an authority to JTM. There is, therefore, no need to refer to section 14 of the Copyright Act which refers to an exclusive right being granted.

(4) Referring to various clauses of the supply agreement such as clause 20.1.20.2, 20.5, 30.1 and 30.2 etc., Mr. Sharma submitted that all these clauses contain terms which are opposed to the concept of sale and, therefore, it cannot be said that the software was sold to JTM or other Cellular operators. It was merely licensed to them and the payment therefore was rightly taxed as royalty.

(5) Granting a license by the author of a copyright only means granting a limited right i.e. for the use for the purpose for which it is given and not for anything else.

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(6) Any interest granted in respect of a copyright which is a proprietary right means a right to use a copyright.

(7) The sale of a computer programme contained in a software is a sale of a copy right by itself.

(8) If the assessee exercised its right to sell the software, it would amount to a copy right within the meaning of section 14 of the Copyright Act.

(9) Clause 20.5 of the Supply Contract authorizes JTM to sell the system and along with it the software itself. The copyright is vested in the software programme and when the JTM sells software, the assessee also sells the copy right therein.

146. With reference to Explanation 2 to section 9(1)(vi) of the Income-tax Act, Mr. Sharma submitted that it includes lump sum consideration for utilizing any of the rights mentioned in various clauses. This, according to Mr. Sharma, would amount to a price being charged by the owner of the IPR. Clause (i) or (iii) or (v) of Section 9(1) may apply in these circumstances. An IPR may be taken in by the words “similar property” appearing in clause (i) and (iii) of section 9(1). Therefore, any consideration for the transfer of rights or for use of IPR can be taxed as royalty. What is stated in all the clauses of Explanation (2) below section 9(1)(vi) are different species of IPRs. Clause (v) clearly applies to the case because it specifically mentions “copyright”. According to Mr. Sharma even a limited interest in a copyright can be a license, the payment for the use of which may amount to royalty. So far as double taxation agreement is concerned, Mr. Sharma pointed out that in Article 13.3 far as double taxation agreement is concerned, Mr. Sharma pointed out that in Article 13.3 which contains a definition of royalties, “any kind” of payment is included which obviously includes a lump sum payment and, therefore, it is not correct to say that the lump sum payment is taken in only under the provisions of the Act and not the provisions of DTAA. The computer programme embedded in the software is a literary or scientific work and the “use of copyright” must be construed as the use of a copyrighted article. If so construed the license to use a copyrighted article, to a limited extent, amounts to use of copy right. Mr. Sharma submitted that the article (of

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DTA) must be reasonably and practically construed without being too technical. He also relied on the Note filed by him before the Bench under the heading “Motorola Royalty Issue”.

147. Strong reliance was placed by Mr. Sharma on paragraph 9.1 at page 34 of the order of the CIT (Appeals). He pointed out that though the hardware is the subject of sale, the software was the subject of a license. He, however, conceded that the second proviso to section 9(1)(vi) of the Act does not apply to this case. As regards the order of the Bangalore Bench in the case of Lucent Technologies (supra), Mr. Sharma submitted that it is distinguishable on facts.

148. In his reply in the appeal of M/s Ericsson Mr. Dastur contended as follows:

(a) A license granted by Ericsson to the cellular operators will amount to right in respect of a copyright, only if the cellular operator can exercise any of the rights mentioned in section 14 of the Copyright Act and if the cellular operator cannot exercise such rights, then the license cannot be in respect of a copyright right. This idea is expressed in section 30 of the Copyright Act itself.

(b) In the present case almost all the rights mentioned in section 14 of the Copyright Act have been excluded.

(c) Only if M/s Ericsson gives a right to JTM or other cellular operators to sell or hire the software, can it be said that a copyright has been given and only then can the payment therefore amount to royalty (S.14 (b) (ii) of Copyright Act).

(d) It is not in all cases that one need to have the copyrighted article with him in order to exercise a copyright right. For example a listener of a speech can memorise a speech and reproduce it from memory in a different place though he may not have the speech with him in printed form. This is only an exception to the general rule that one cannot have the copyright right without the copyrighted article. But the corollary, namely, that because you have the copyrighted article you also have the copyright in it, is not true.

(e) The answer to Mr. Sharma’s argument that the words “similar property” are used in clause s(i) and (iii) of explanation 2 to section 9(1) (vi) is two-fold. Since copyright has been specifically dealt with in clause (v) of the Explanation, it cannot be said that clauses (i) and (iii)

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also apply to copyright. When a particular thing is specifically dealt with in one of the clauses, it stands excluded from the sweep of the other clauses. The second answer is that the words “similar property” are not used in Article 13.3 of the DTAA and hence in any event if at all the term “copyright” is included in the expression “similar property” then it would be out of DTAA.

(f) The supply contract does not confer upon JTM and other cellular operators the right to sell the software alone. The right given is the right to sell the hardware. Necessarily the software will be part of the system installed in it and it will therefore go alongwith the hardware on sale. However, it will be subject to all the restrictions under which JTM or other cellular operators were placed under the supply contract and the purchaser will not get a better right. Even the purchaser from JTM or other cellular operator will be subject to the same restrictions as mentioned in the supply agreement.

(g) With regard to the Note filed by Mr. Sharma under the heading “Motorola Royalty Issue”, the following submissions were made by Mr. Dastur:

(1) The consideration paid for the software is not dependent on the number of customers of JTM or other cellular operators as is erroneously assumed in the Note.

(2) Under the Indian Law, computer programme is a literary work (Sec.2 (o) of Copyright Act).

(3) The examples given in page 2 of the Note actually are in favour of the assessee’s contention and do not support the Department.

(4) None of the rights mentioned in section 14 of the Copyright Act, with reference to the software, has been given to JTM or the other cellular operators.

(5) The Note itself very fairly and rightly recognizes the distinction between a copyright right and a copyrighted article.

The above are the broad submissions made by both the sides in the case of M/s. Ericsson.

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149. The Assessing Officer, at the outset, referred to the preamble to the agreement between the assessee and the cellular operator from which it was gathered that the assessee had licensed the software and the customer had the right to use the software. Referring to the other clauses of the contract, it is stated by the Assessing Officer that the risk and title passed to the customer in the case of hardware but not in the case of software. He specifically referred to clause 18 of the agreement and observed that the right of the buyer was restricted in the following manner:

(a) Buyer can use it for own operation and maintenance of the system and not otherwise.

(b) Buyer has no title or ownership rights.

(c) It is a trade secret of the contractor and is subjected to confidentiality.

(d) Buyer cannot make it available to any person other than its employees.

(e) It cannot make copies.

(f) Buyer can neither license nor sell nor alienate or part with its possession.

On account of the above restrictions, the Assessing Officer held that it was not a sale as per Sale of Goods Act but it was a limited right to use the software and hence the payment for the same was in the form of royalty. He observed that the software had been developed for the specific use of the customer and was not available off the shelf. Distinguishing between hardware and software, the Assessing Officer observed that whereas hardware had been sold to the customer, software was licensed to the customer. According to him software was something abstract and intangible. Therefore, the Assessing Officer held that the payment made for licensing of software had to be taxed as royalty. Further, according to him, since the assessee had a PE in India, the same had to be taxed as business profits at a flat rate of 30% as provided in the Act.

150. The CIT (Appeals) concurred with the Assessing Officer to hold that payment for software was royalty, for the reasons that follow. Firstly, according to him, though there was a single agreement for the sale of GSM equipment, in substance, they were two agreements, one for the sale of hardware and the other for the licensing of software, in so much so that the consideration for software was separately specified in the agreement. Since the agreement specifically provided for the licensing of the

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software, the CIT(Appeals) was of the view that such licensing amounted to transfer of copyright and not merely transfer of copyrighted article as was the contention of the assessee. Interpreting the supply agreement, the CIT(Appeals) was of the view that the consideration for license of software depended upon the number of customers of the cellular operator. According to him, a part of the software was loaded on to the handset of the subscribers depending upon their requirements. It was because of this loading of a part of the software that the subscriber was able to get connectivity. He strengthened this view of his by stating that the preamble to the supply contract stated that the assessee wished to provide supply of GSM Mobile telephone system and application software. Thus on this reasoning, the CIT(Appeals) held the payment made for software to be royalty Since he has also held that there was no PE of the assessee in India, the payment for software was taxable as royalty under Article 13 of the DTAA.

151. We have considered the detailed contentions of both the parties. We have already held that the assessee has no PE in India and, therefore, it cannot be taxed as business profits under Article 7 of the DTAA. However, the CIT(A) has held it to be taxable under Article 13 of the DTAA. The basic premise on which the CIT(A) has rested his decision is that the software supplied by the assessee was loaded on to the handset of the mobile subscriber and that the consideration for use of the said software depended upon the number of customers of the operator. This is factually wrong. Actually, the software supplied by the assessee is, what can be termed as installed capacity. In other words, the system supplied by the assessee, comprising of the hardware and the software, can handle a particular number of subscribers. If the number of subscribers go beyond the installed capacity, then the cellular operator has a right, under clause 26 of the supply agreement, to purchase additional hardware and software.

152. Further, the finding of the CIT(Appeals) to the effect that the software is partly loaded on to the handsets of the subscribers, has been specifically challenged by the assessee in ground No.9. Added to this is a certificate issued by Reliance Telecom, a cellular operator, a copy of which is at page 208 of Paper Book No.II, in which it has been denied that a part of the software has been loaded on to the handsets of the subscribers. It is no doubt true that this certificate has been filed only before the Tribunal for the first time, but it is equally true that the allegation of the income-tax authorities that a part of the software is loaded on to the handsets of the subscribers has not been established on the basis of any material brought on record. Therefore, even if the certificate is to be ignored as having been filed for the first time before us, the allegation of the Department, not having been established, the premise on which the decision of the CIT(A) is based, does not exist. In addition, it is common knowledge that handset which is purchase by the subscriber from the market

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contains several functions which perhaps the income tax authorities had in mind when they state that a part of the software itself is loaded on to the handsets. It is common knowledge that a person may purchase and brand of handset from the market and still have access to mobile telephony of a different company which belies the belief of the income-tax authorities that a part of the software supplied by the assessee is loaded on to the handset with the subscriber. At our instance, the learned counsel for the assessee filed a brief Note explaining the Network, SIM Card and the Handset. The Note is in the form of questions and answers from which we find the following aspects:

(1) That the handsets are not necessarily manufactured by the GSM system supplier. For example the assessee Ericsson does not manufacture handsets. Philips, Samsung, Alcatel, Panasonic, BenQ etc. are manufacturers of handsets. The handset software merely enables the handset to function and interact with the mobile telephony network, to whichever company it may belong. It also contains various functions such as mailbox, phonebook, games, messaging.

(2) SIM card is manufactured by different companies and contains the IMSI number stored therein, based on the information provided by the cellular operator. These companies supply SIM cards to various cellular operators in India.

(3) Network, SIM card and the handsets are independent components and they are not inter dependent. An example is that of “Roaming access”. Under this system, the subscriber of a particular network, say HUTCH, has a freedom of connecting into any other network of a different cellular operator, say BPL, while roaming to another city (if authorized) within the country or outside the country. The above referred network can be of two different cellular operators, having different hardware and software supplied by two different GSM system suppliers.

153. To illustrate the example further, let us take the case of roaming access between Bombay and Delhi. A Bombay subscriber of Hutch network (supplied by Ericsson) traveling or roaming to Delhi has a freedom to select and use any of the following networks which are operational in Delhi:

Network Supplier of GSM system

Airtel Ericsson

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Hutch Siemens & Motorola

Idea Nokia

In the above example, the subscriber using the handset of any manufacturer (Samsung, Philips, Alcatel, etc.) in combination with SIM card of any manufacturer (Gemplus, Schlumberger) can select any of the accessible network of his choice while he is in Delhi for making and receiving calls. This clearly indicates that the cellular operator does not transfer or load any part of the software (comprised in the GSM) system) on to the SIM card or the handset of the subscriber. This establishes that the software supplied by the assessee (Ericsson) to the cellular operator is installed on the hardware and no part of it is loaded on the SIM card or the handset of the subscriber.

154. It was further clarified that the manufacturer of handset in the name” Ericsson” is different from and has nothing to do with the assessee before us. It was also clarified that the software supplied by the assessee is equipment specific and not SIM card specific or handset specific. Reference was made to page 206 of the Paper book No.II which is a certificate given by the assessee company to this effect. Reference was also made to paragraph 2.2 of the written submissions made before the CIT(A), a copy of which is at pages 34 to 95 of Paper book No.II. In this paragraph the assessee has stated that the software supplied by it enables the functioning of the equipment and enables the cellular operators to provide connectivity and other related services to the subscribers. It is to confirm this that the certificate filed at page 206 of the paper book was filed before the CIT(A) in the course of the appeal proceedings. The rejection of these claims made by the assessee does not appear to us to be based on cogent reasons or any evidence or material brought on record to prove the contrary.

155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payments is really for a copyrighted article, then it only represents the purchase price of the article and therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue.

156 We must look into the meaning of the word “copyright” as given in the Copyright Act, 1957 Section 14 of this Act defines “Copyright” as “the exclusive right subject to

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the Provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely:

(a) in the case of a literary, dramatic or musical work, not being a computer programme,-

(i) to reproduce the work in any material form including the storing of it in any medium by electronic means:

(ii) to issue copies of the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public;

(iv) to make any cinematograph film or sound recording in respect of the work;

(v) to make any translation of the work;

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b) in the case of a computer programme,-

(i) to do any of the acts specified in Cl. (a);

(ii) to sell or give on commercial rental for sale or for commercial rental any copy of the computer programme;

Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental,

(c) in the case of an artistic work,-

(i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two-dimensions of a three-dimensional work;

(ii) to communicate the work to the public;

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(iii) to issue copies of the work to the public not being copies already in circulation;

(iv) to include the work in any cinematograph film;

(v) to make any adaptation of the work;

(vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clause (i) to (iv);

(d) in the case of cinematograph film,-

(i) to make a copy of the film, including a photograph of any image forming part thereof;

(ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions;

(iii) to communicate the film to the public;

(e) in the case of a sound recording,-

(i) to make any other sound recording embodying it;

(ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions;

(iii) to communicate the sound recording to the public.

Explanation – For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.”

It is clear from the above definition that a computer programme mentioned in clause (b) of the section has all the rights mentioned in clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15.1.200. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in sub-clause (ii) of clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in clauses (a) and (b) of section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be

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characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the assessee.

157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title “License”, says that JTM is granted a non-exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation.

158. Secondly, under the definition of “copyright” in section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the assessee is expressly stated in clause 20.1 as a “non exclusive restricted license”. This means that the supplier of the software, namely, the assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the public domain is totally prohibited, which is evident from the use of the words in article 20.1 of the agreement, “restricted” and “not otherwise”. Thus JTM has a very limited right so far as the use of software is concerned. It need no repetition to clarify that JTM has not been give any of the seven rights mentioned in clause (a) of section 14 or the additional right mentioned in sub-clause (ii) of clause (b) of the section which relates to a computer programme and, therefore, what JTM or any other cellular operator has acquired under the agreement is not a copyright but is only a copyrighted article.

159. Clause 20.4 of the supply contract with JTM is as under:

20.4 In pursuance of the foregoing JT MOBILE shall:

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(a) not provide or make the Software of Documentation or any portions or aspects thereof (including any methods or concepts utilized or expressed therein) available to any person except to its employees on a “need to know” basis;

(b) not make any copies of Software or documentation or parts thereof, except for archival backup purposes;

(c) when making permitted copies as aforesaid transfer to the copy/copies any copyright or other marking on be Software or Documentation.

(d) Not use the Software or Documentation for any other purpose than permitted in this Article 20, Licence or sell or in any manner alienate or part with its possession.

(e) Not use or transfer the Software and/or he Documentation outside India without the written consent of the Contractor and after having received necessary export or re-export permits from relevant authorities.

This clause places stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellular operator cannot make the software or portions thereof available to any person except to its employees and even with regard to employees it has to be only on a “need to know basis” which means that even the employees are not to be told in all its aspects. What the assessee can do is only to tell the particular employees what he has to know about the software for operational purposes. The cellular operator has been denied the right to make copies of the software or parts thereof except for archival backup purposes. This means that the cellular operator cannot make copies of the software for commercial purposes. This condition is plainly contrary to section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. We may also notice section 52(1)(aa) of the Copyright Act which lists out certain acts which cannot be considered as infringement of copyright. The particular clause permits the making of copies or adaptation of a computer programme by the lawful possessor of the copy and the computer programme in order to utilize the public programme for the purpose for which it was supplied or to make backup copies purely as a temporary protection against loss, destruction or damage. Therefore, merely

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because the cellular operator has been permitted to take copies just for backup purposes, it cannot be said that it has acquired a copyright in the software.

160. Clause 20.4(c) makes it mandatory for the cellular operator, while making copies of the software for backup purposes, to also mark the copies software with copyright or other marking to show that the rights of the assessee are reserved. This is one more indication that what the cellular operator acquired is not a copyright.

161. Clause 20.4(d) says that the cellular operator cannot use the software for any other purpose than what is permitted and shall not also license or sell or in any manner alienate or part with its possession. This has to be read with clause 20.5 which says that the license can be transferred, but only when the GSM system itself is sold by the cellular operator to a third party. This in a way shows that the software is actually part of the hardware and it has no use or value independent of it. This restriction placed on the cellular operator (not to license or sell the software) runs counter to section 14(b) (ii) of the Copyright Act which permits a copyright holder to sell or let out on commercial rental the computer progrmme. For this reason also it cannot be said that JTM or any cellular operator acquired a copyright in the software.

162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what he has acquired cannot be considered as a copyright. In that case, it can only be said that he has acquired a copyrighted article. A small example may clarify the position. The purchaser of a book on income-tax acquires only a copyrighted article. On the other hand, a recording company which has recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein.

163. We may now briefly deal with the objections of Mr. G.C. Sharma the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyngar’s Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point:

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“(h) Copyright is distinct from the material objects, copyrighted:

It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public” (underline is ours). The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma’s objection cannot be accepted.

164. It is not necessary, therefore, to consider the alternative argument of Mr. Dastur, namely, that even assuming that the Department is right in saying that if you have the copyrighted article, you also have the copyright right therein, still it would mean that the copyright rights are transferred (acquired by JTM) and it would not be a case of merely giving the right to use an consequently Article 13 of the DTAA would not apply. Mr. Dastur, however, was fair enough to concede that if the Department is right in saying that if you have the copyrighted article, you also have the copyrighted rights, then clause (v) of Explanation 2 below Section 9(1) of the Income-tax Act will apply because this clause ropes in “transfer of all or any rights” and is not restricted to “use” or “right to use”, the copyright. However, he added that since the basic proposition of the Department has been demonstrated to be wrong, clause (v) of Explanation 2 below Section 9(1) is not an impediment to accepting the assessee’s contention.

165. We may also usefully refer to the Commentary on the OECD Model Convention (dated 28.1.2003) which is of persuasive value and which throws considerable light on the character of the transaction and the treatment to be given to the payments for tax purposes. Paragraph 14 of the Commentary, a copy of which was filed in Paper book No. V is relevant

COMMENTARY ON ARTICLE 12 – PAPER BOOK V

“14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights

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transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example into the user’s computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program into the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program into the computer’s hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7.”

166. We may also usefully refer to the proposed amendments to the regulations of the internal Revenue Service (IRS) in the USA. Again these regulations may not be binding on us but they have a persuasive value and throw light on the question before us, namely the difference between a copyright right and a copyrighted article. These regulations have been placed at pages 136 to 157 of Paper book No.II. The actual regulations as well as the explanatory Note explaining the object and the purpose of the proposed regulations have also been given. In paragraph 1 of the Note title “Background”, it has been stated that the proposed regulations require that a transaction involving a computer programme may be treated as being one of the four possible categories. Two such categories are the transfer of copyright rights and the transfer of a copyrighted article. The U.S. regulations distinguished between transfer of copyright rights and transfer of copyrighted article based on the type of rights transferred to the transferee. Briefly stated, if the transferee acquires a copy of a computer programme but does not acquire any of the rights identified in certain sections (of the U.S. Regulations), the regulation classified the transaction as the Transfer of a copyrighted article. Paragraph 3 of the Explanatory Note says that if a transfer of a computer programme results in the transferee acquiring any one or more of the listed rights, it is a transfer of a copyright right.

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167. Paragraph 4 says that if a person acquires a copy of a computer programme but does not acquire any of the four listed copyright rights, he gets only a copyrighted article but no copyright.

168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are:

(a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending.

(ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme

(iii) The right to make a public performance of the computer programme.

(iv) The right to publically display the computer programme.

169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a computer or in any other medium.

170. So far as the transfer of copyrighted articles and copyright rights are concerned, the regulation goes on to say (page 148 of the paper book) that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred . Several examples have been given below these regulations to find out whether a particular transfer is a transfer of a copyright right or a transfer of a copyrighted article.

17.1 The Commentary of “Charl P. du TOIT” on this question has been placed at pages 202 to 204 to Paper book No.II. The Commentary is titled “Beneficial ownership of royalties in Bilaterial Tax Treaties.” He has opined that articles such as Books and Records are copyrighted articles and if they are sold, the user does not obtain the right to use any significant rights in the underlying copyright itself, which is what should determine the characterization of the revenue as sale proceeds rather

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than royalties. He has further opined that consideration relating to sale of software can amount to royalty only in limited circumstances.

172. For the above reasons, we are of the view that the payment by the cellular operator is not for any copyright in the software but is only for the software as such as a copyrighted article. It follows that the payment cannot be considered as royalty within the meaning of Explanation 2 below section 9(1) of the Income-tax Act or Article 13.3 of the DTAA with Sweden.

173. We may now proceed to consider the further question as to whether the payment was “for” the software as such. In this connection, it must be clarified that the payments for the hardware and software were in a lump sum and there was no separate consideration mentioned for the hardware and the software. It is the Department which has split the consolidated payment into two-payment for hardware and payment for the software. In our opinion, since the parties to the contract have not agreed upon a separate price for the hardware and the software, it is not open to the income-tax authorities to split the same and consider a part of the payment for software, to be treated as royalty. We may refer to the Commentary on the Model Tax Convention on Income and Capital, dated 28.1.2003. This Commentary is on the OECD Model of DTAA. Paragraphs 15 & 16 of the Commentary throw light on a situation similar to the one arising in the present case. These paragraphs are as follows:

“15. Where consideration is paid for the transfer of the fully ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving:

- exclusive right of use during a specific period or in a limited geographical area;

- additional consideration related to usage;

- consideration in the form of a substantial lump sum payment.

16. Each case will depend on its particular facts but in general such payments are likely to be commercial income within Article 7 or a capital gains matter within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership or rights has been alienated in full or in part, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation

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cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency.

174. The observations made in the above Commentary, which though are not binding but are of persuasive value, show that where the price is paid for acquiring the ownership of the article itself, it cannot be termed as "royalty". To this extent the above observations do support the contention of the assessee that since the payment is only for the copyrighted article, it cannot be considered as royalty.

175. Coming to the question of splitting of the consolidated price paid in a lump sump, we need to refer to the Bill of Entry for import which is placed in Paper Book No. V filed by the assessee. This bill of Entry for home consumption shows that a price has been separately mentioned for the software. This was sought to be explained on behalf of the assessee that since the software was also being imported alongwith the hardware, there had to be a separate value placed against the software for purposes of assessing the customs duty and it is only for this limited purpose that a value was placed on the software. The argument was that from this it does not follow that the parties themselves agreed for a separate price for the software. Reference was made to the judgment of the Supreme Court in the case of CIT vs. Mugneeram Bangur & Co. 57 ITR 299. The ratio of this decision is that where the parties have agreed for a lump sum consideration for an undertaking as a whole, without placing separate values for each of the items which go to make up the undertaking, merely because certain values are placed separately in the schedule to the contract, it does not follow that the parties had agreed also for the price payable for each of those items. The contract remains a contract of sale of the undertaking as such for a lump sum consideration. This ratio is applicable to the present case, in our opinion. It is not in dispute that the contract did not mention separate price for the hardware and the software. It is only the cellular operator, who is the importer of the GSM system as a whole, who placed a value on the software for purposes of paying import duties. The import duty is charged @ plus 2% on the value placed on the software. There is no evidence to show that the assessee was party to the fixation of the value for software for custom duty purposes. At any rate what was being imported is the GSM cellular system as a whole which included both the hardware and the software. The software was specific to the hardware and will not work in any other equipment. The certificate to this effect has already been referred to by us, which was filed before the CIT (A). In such circumstances, it is not possible to infer, merely on the basis of the Bill of Entry and the custom duty payment on the software, that a separate consideration was agreed to between the parties for supply of the software.

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176. In CIT vs. Sundwiger EMFG & Co. and Ors 262 ITR 110, there were two agreements between the non resident and the Indian company, one for supply of capital equipment and another for provision of technical services to supervise the installation of the capital equipment. On a conjoint reading of the contracts, it was held by the Andhra Pradesh High Court that both the contracts constituted one and the same transaction and cannot be read in isolation of the other. It was observed that the services rendered by the experts and the payments made for the services were part and parcel of the sale consideration and could not be severed and treated separately as income of the non resident company for services rendered by it in erection of the machinery. It must be noted that despite separate contracts being entered into between the parties, it was held that both constituted a single transaction. This ratio applies to the present case a fortiori. In the present case there is only one supply contract which includes the supply of both the hardware (GSM Cellular equipment) and the software which is part of the hardware. A single lump sum consideration is mentioned in the contract. Therefore, there is all the more reason to hold that the lump sum payment cannot be segregated into two, namely, one for the hardware and another for the software.

177. The judgment of the Madras High Court in CIT vs. Neyveli Lignite Corpn. Ltd. 243 ITR 459 also reiterates the aforesaid principle. In that case the price paid by the assessee to the supplier was a total contract price covering all stages involved in the supply of machinery from the state of design to the stage of commissioning. It was held that the information concerning the working of the machine was incidental to the supply, as the machinery was tailor made for the buyer. Unless the buyer knows the way in which the machinery has been put together, the machinery cannot be maintained in the best possible way and repaired when occasion arises. It was, therefore, held that the contract cannot be split to spell out a separate payment for the information concerning the design and the working of the machine which can be treated as royalty u/s 9 of the income-tax Act. The ratio of this judgment applies to the present case.

178. To the same effect is the ratio laid down by the judgment of the Andhra Pradesh High Court in CIT vs. Klayman Porcelains Ltd. 229 ITR 735 where a kiln was to be set up by the foreign company. The Income-tax authorities treated the amount paid by the Indian company as payment for technical drawings and hence royalty. The Tribunal held that the amount so paid was for the capital asset supplied from abroad for a price. The decision was upheld by the High court.

179. In CIT vs Mitsui Engg. And Shipbuilding Co Ltd. 259 ITR 248, it was held by Delhi High Court that it was not possible to apportion the lump sum consideration as for design on the one part and for engineering, manufacturing, shop testing and

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packaging, on the other. It was, therefore, held that the transfer of designs would not fall within explanation 2 below Section 9(1)(vi) of the Income-tax Act.

180. The above judgments support the proposition put forth by the assessee before us that the payment was not made for software separately and hence cannot be treated as royalty.

181. In two of the recent judgments rendered by the Supreme Court, it has been held that though information technology is generally regarded as an intangible asset but the moment such technology is put on a media, whether paper or cassettes or disc or any other thing, then what is supplied becomes a chattle and the chattel becomes goods liable to customs duty. We may refer to Associated Cement Co. Ltd vs. Commissioner of Customs (2001) 128 ELT 21. The contention before the Supreme Court, adverted to in paragraph 12 of the judgment, was that the knowledge though valuable was intangible and the media on which it has been recorded was only a vehicle of transmission incidental to the main transaction and cannot be considered as sale of goods. This contention was rejected by the Supreme Court, by referring to section 12 of the Customs Act which imposed duty on goods imported into India. According to section 2(22)(e) of the Customs Act, goods include “any other kind of movable property”. The Court observed that the definition of “goods” is so worded that all tangible moveable articles will be goods for the purpose of the Act, including any media whether in the form of books or computer discs or cassettes which contain information technology or ideas. In paragraph 30, the Supreme Court observed that though it is true that the technical advice or information technology is an intangible asset, but the moment the information or advice is put on a media, whether paper of disc or any other thing, what is supplied becomes a chattel and customs duty is attracted.

182. Seveal earlier judgments have been noticed in this judgment, one of which is State bank of India vs. Collector of Customs, Bombay (115 ELT 597 (SC). In this case, the State Bank had imported computer software and manuals and it was held that these were goods on which import duty was payable. There is also reference to judgments of the English & American Courts. In St. Albens City and District Council vs. International Computers Ltd. (1996) 4 All.E.R 481, it was held that a computer programme on a disc should be regarded as goods.

183. Similarly, in Advert systems Ltd. Vs. Unisys Corpn. 925 F. 2d 670 (3rd Cir 1991), the Court in the United States held that computer software was goods. The following observations of the United States Court are relevant, which wee approvingly cited by the Supreme Court in Tata Consultancy Services v. State of A.P. (2004) 271 ITR 401 (SC) ( @ page 418):-

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“Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An 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 ‘goods’. But when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a goods, but, when transcribed as a book, it becomes a goods.

The a computer 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, movable and available in the market place. The fact that some programs may be tailored for specific purposes need not alter their status as ‘goods’ because the Code definition includes ‘specially manufactured goods”

The judgment of the Supreme Court in the case of Associated Cement Co. Ltd. (supra) was rendered by a Bench consisting of three learned Judges which has subsequently been followed by a Bench consisting of five learned judges in the case to Tata Consultancy Services vs. State of Andhra Pradesh (supra).

184. In view of the foregoing discussion, we hold that the software supplied was a copyrighted article and not a copyright right, and the payment received by the assessee in respect of the software cannot be considered as royalty either under the Income-tax Act or the DTAA .

185. Attribution of income: We had held, inter alia, that (a) the assessee has no PE in India and (b) that there is no business consideration in India. Therefore, the question of attributing any income to either of these does not really arise. However, we have found that all the contracts were signed in India and hence a question may arise as to whether any income could be attributed to such activity. In our view, no income can be so attributed because either by way of business connection or because of the PE, what ae to be taxed are only business profits. Since there is a DTAA (between India and Sweden), as per the well-established position in law that the DTAA shall prevail over the provisions of the Act, the business profits, even if accruing to the assessee by way of signing of the contracts in India, would not be taxed because the assessee has no PE in India as required by Article 5 read with Article 7 of the DTAA.

186. To sum up our decision in the case of Ericsson:

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Assessee’s appeal: (ITA No.815/Del/2001).

Ground Nos. 1 – 4: The notice u/s 142(1) has been issued beyond the limitation period and hence invalid. Consequently, the assessment is invalid.

Ground Nos. 5,7, to 9: The amounts received by the assessee for the software cannot be assessed as “royalty” either under the Income-tax Act or under the DTAA.

Ground No.6: The assessee has no “business connection” in India and hence no income accrued u/s 9(1)(i) of the Income-tax Act.

Department’s Appeal (ITA No. 1798/Del/2001)

Ground No.1: The CIT(A) was right in holding that assessee did not have a PE in India.

Ground No. 2: Consequently, the CIT (Appeals) was also right in holding that the income from the supply of software is not taxable as business income.

Ground No.3: the CIT (Appeals) did not err in deleting the interest charged under section 234B, on merits. The levy of interest under section 234A is however, restored to the Assessing Officer with the directions contained in para 74.

C.O. (By assessee) (No.60/Del/01)

Ground Nos.1-3: The CIT (Appeals) was not right in holding that the assessee had a business connection in India from which income was deemed to accrue or arise in India under section 5(2) of the Income-tax Act in respect of the supply of GSM cellular equipment to Indian cell operators.

In the result, the appeal and cross objection of the assessee are allowed and the appeal of the Department is partly allowed.

MOTORALA (A.Y. 1997-98) ARGUMENTS:

187. The appeal for Motorola relates to assessment year 1997-98 for which year the revenue is also in appeal. At the outset, Mr. Syali, the learned counsel appearing for Motorola, stated that in case of each mobile operator, there were essentially two contracts namely the supply contract and the installation contract. His first submissions was that no part of the installation contract was taxed in the hands of the assessee. The revenue arising from the installation contracts stood assessed in the hands of the Indian company to whom the supply of equipment was made. In all,

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the assessee had entered into contracts with seven different parties. The A.O. framed his order by referring to the contract with Sterling whereas the CIT(Appeals) had referred to the contracts with Sterling as well as with Usha. The parties agreed that these two contracts are representative of all the contracts entered into by the assessee.

188. Now turning to the grounds in the appeal and the arguments of both sides, the first ground relates to the validity of assessment on the ground of limitations in connection with the issue of notice u/s 142(1) of the Act. This issue has been dealt with in detail above while dealing with the case of Ericsson. There we have also narrated in detail the arguments of Mr. Syali and hence the same need not be repeated here.

189. Ground Nos. 2 to 4 cover the basic question which was referred to the Special Bench and ground Nos. 5 to 8 are stated by Mr. Syali to be not grounds by themselves, in the sense that no relief has been asked for in these grounds but they only challenge the various findings of fact recorded by the Income-tax authorities in relation to ground nos. 2 to 4.

190. Mr. Syali first took up ground No.2 which relates to the existence of a permanent establishment of the assessee in India. In this connection, he read out the order of the CIT(Appeals) in detail. It was submitted by him that the CIT(Appeals) had categorically held in his order that there was neither a service PE nor an installation PE nor an agency PE belonging to the assessee in India. In this connection he referred to pages 24 , 25, 26,30 and 31 of the order of the CIT(A). The CIT(Appeals), however, had held that the assessee had a fixed place PE in India in the form of office of the Indian company. It was contended that against the findings of the CIT(A) that there is no service PE or installation PE or Agency recorded by the Commissioner, the revenue is not in appeal and hence what survives is only whether the assessee had a fixed place PE in India. It was submitted that assessment years 1995-96 and 1996-97 were the initial assessment years of the assessee for which no action was taken against the assessee. It was only for the first time during the year under consideration that the assessee was called upon to file its return of income by issue of notice u/s 142(1) of the Act. So for as the Indian company was concerned, it was stated to be an independent economic entity which had been separately assessed since its incorporation in 1989. The income returned by the Indian company included income from installation contracts and it was assessed in its hands as such. Mr. Syali referred in detail to the reasoning of the CIT(A) at page 24 of his order to hold that there was a fixed place of PE in India. To counter this reasoning, Mr. Syali referred to the various clauses of the agreement entered into by the assessee with Sterling. The main contention by referring the the various clauses

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of the agreement was that the contract could not be frustrated except for the want of DOT compliance. Another main argument of his was that the title in the goods had passed outside India, though the risk in the goods was to pass in India. But according to him the passing of the risk in India cannot frustrate the title in the goods. Elaborating further on this aspect, he referred to certain provisions of the Sale of Goods Act in particular, the provisions of sections 4,15, 16, 26 read with 40 and 39 were referred to. Controverting the contention of the revenue that since the risk in the goods had passed in India, so that title also passed in India, it was contended that all the conditions implied in sections 15 and 16 of the Sale of Goods Act had been complied with. Referring to the provisions of sections 26 and 40 of the Sale of Goods Act which referred to the risk interior to sale and risk following the sale respectively, it was argued that both were different and independent of the title in the goods. Referring to section 39 of the Sale of Goods Act, it was submitted that there was no right of disposal after the goods were handed over to a named carrier and where the goods were described, delivery was effected, documents were given to the carrier at the time of delivery and lastly when 70% of the consideration had been paid by the time the goods were handed over to the carrier, nothing remain to complete the same. Thus the sale was completed outside India. It was submitted by Mr. Syali that merely because certain services were to be provided in India, it did not mean that the sales were completed in India. According to him the acceptance test also was not the criteria. The services which were to be rendered in India wee merely obligations incidental to the sales and not “de hors” the sales. Therefore, if they were incidental to sales, they cannot constitute a separate source for a PE in India. Again reverting to the aspect of passing of risk, it was argued that merely because the risk was to pass in India, it did not make the sale a conditional sale. In this connection, he referred to clause 13.1 of the contract and pointed out that the nature of risk described therein was only a loss on account of damage in which case the equipment was to be replaced but the contract was not to be repudiated.

191. Referring to the Supreme Court decisions in the case of H.E.H. Nizam’s Religious Endowment Trust vs. CIT, A.P. (59 ITR 582) and in the case of Parimisetti Seetharamma vs. CIT, AP (57 ITR 532), it was contended that though the onus was on the assessee to show that its income was exempt, the initial onus was on the Department to show that there was some income earned by the assessee. No conjectures or surmises could be permitted to conclude that the assessee had earned any income. It was also submitted that there was no negative onus on the assessee to show that there was no income. In this connection, a decision of the Supreme Court in the case of M.S. Bose vs. K.S. Gandhi & Ors (1991) 2 SCC 716 was referred to.

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192. Mr. Syali’s next argument was that the salaries of the expatriates wee paid by the assessee (Motorola) and the perquisites were provided by the Indian company. In the assessment of the Indian company, there was no disallowance of the perquisites which gives rise to the inference that those perquisites were paid by the Indian company to the expatriates only for the purpose of its own business. It was also pointed out that the assessee furnished a list of expatriates to the Assessing Officer (page 13 and 14 of the paper book) containing the service agreement with the expatriates and the details of their visits to India which were very short. The contention is that if the employees who were paid by the Indian company under the sale/purchase agreement, were performing the work of the assessee company as alleged by the A.O., there was no need for the assessee to send more and more expatriates in India on short visits. Thus even the preponderance of probabilities in relation to the visits of the expatriates to India was in favour of the view that they performed the work only of the Indian company and not the assessee company. Thus even on this ground, it cannot be stated that there was a fixed place PE of the assessee in India. It was pointed out in this connection that the A.O. failed to make any enquiries, which he could have, with the Reserve Bank of India as to why the expatriates came to India. It was pointed out that the expatriates ae required to fill up a statutory form under the relevant immigration rules which could have been verified by the A.O. in order to find out the purpose of their visit. Having omitted to do so, his conclusion that the expatriates came to India only to work for the assessee company is a surmise and a factually incorrect conclusion. No assessment can be made on the basis of surmise which does not satisfy the requirement of section 143(3) that an assessment shall be made only on the basis of “materials” gathered by the Assessing Officer. In support of these submissions, reliance was placed on the following authorities:

1. DCIT vs. Acatel 47 ITD 275 (Del),

2. Albright & Wilson Ltd. Vs. ITO 19 ITD 125

3. ITO Vs. Vine Chemicals Ltd. 5 ITD 91

193. Mr. Syali thereafter very strongly relied on the judgment of the Andhra Pradesh High Court in the case of CIT, AP.I vs. Vishakapatnam Port Trust 144 ITR 146. According to him the important feature of this judgment is that it was held that in order that a foreign company may be said to have a PE in India, there must be evidence to show that it had “projected itself in India”. The further feature of this judgment was that after the supply of the parts, by the foreign company, whatever takes place in India in connection with the supply, or sale, cannot amount to the existence of a PE. In the present case, the guarantee was given by the assessee

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company (page 303 of paper book No.4) and the warranties were given by the Indian company to cover “coverage and services” (page 366 of paper book No.4). The argument made out was that the guarantee given by the assessee is only for the sale of the equipment and nothing beyond and all the other. Warranties are those of the Indian company. These facts attract the ratio of the judgment of the Andhra Pradesh High Court and applying the ratio, it cannot be held that the foreign company projected itself in India.

194. Mr. Syali then referred to provisions of the DTAA between India and USA. According to him, two types of PE were envisaged under the DTAA-(a) where part of the enterprise was functioning in India, and (b) where there was a legally separate entity which was acting as an agent of the foreign enterprise. In the present case, according to him, there was no business at all carried out by the American company in India and as held by the CIT(Appeals) there was no agency PE in India also. He emphasized on Article 5.3 (c) of the DAA and stated that the assessee puts its case on this Article which would apply even if it is held that there is a fixed place of business. Referring to Article 7, it was contended that though the term “attributed” was a wider term than the term “derived”, yet for the purposes of this provision of the DTAA, they were equivalent. It was submitted that all the preparatory or auxiliary services prior to the formation of the supply contract were carried out by the Indian company under clause 1.1(1) to (5) of the agreement (page 146 of paper book No.2) for which it was remunerated under the agreement by the foreign company at “cost plus 5%” and thus the Indian company having been compensated for the services, it is impossible to hold that the assessee had a permanent establishment in India in the form of the Indian company.

Ground No.3 – Supply of software.

195. With regard to this ground, the crux of the issue, according to Mr. Syali is whether the licensing of the software gives rise to income by way of “business profits” under Article 7 of the DAA or to “royalties” under Article 12 of the DTAA. This issue has been discussed in pages 31 to 37 of the order of the CIT(A). The software is supplied with the hardware. The main ground on which the CIT(A) has held that the payment amounts to income by way of royalties is that the software is used by the subscribers to the cell phone or in other words by the public at large and it is for this use that the amount is paid to the assessee company and, therefore, it is taxable as royalties. This view of the CIT(Appeals) is challenged by Mr. Syali on behalf of the assessee. According to him the exhibit ‘F’ which is in relation to the supply of software, a copy of which is placed at Page 347 of paper book No.4, is part of the purchase agreement and thus the software and the hardware cannot be separated and go with each other. The views of the CIT(Appeals) that whenever a cell phone

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subscriber uses the phone he also uses the software is incorrect and in this connection strong reliance was placed by him on the judgment of the Madras High Court in Sky Cell Communications Ltd. And Anr vs. DCIT 251 ITR 53. On the basis of this decision, it is contended that the cell phone user merely makes uses of the service made available to him and he is not in any way concerned with the actual working of the equipment. The finding of the CIT(Appeals) to the effect that the payment made in respect of the software is based on the number of cell phone subscribers is erroneous. The CIT(Appeals) has placed reliance on the ruling of the AAR in P.No. 30 of 1999 in re 238 ITR 296 in support of his conclusion. Mr. Syali pointed out that this judgment has been considered in the order of the Bangalore bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO 82 TTJ 163. Finally, he referred to the suggestions made to revise the OECD Commentary on this aspect and it was contended that the doctrine of updated construction as referred to in the judgment of the Supreme Court in the case of Poddar Cements Ltd. 226 ITR 625 should be invoked.

Ground No.4.

196.1 This ground deals with the attribution of profits to the PE and and is taken without prejudice to ground No.2 which challenges the view of the Income-tax authorities that the assessee has a PE in India. The argument is that even if it is held by the Tribunal that there is a PE in India, there is no material on the basis of which any income can be attributed to the PE and, therefore, nothing is taxable as the assessee’s income. Reference is made to paragraph 10 at page 45 of the order of the CIT(A) where this issue has been dealt with by him. It is submitted that the complete accounts were placed before the A.O. and the CIT(Appeals) and that the assessee merely expressed its inability to produce a country wise breakup of the operative profits, which has been made much of by the departmental authorities. It is submitted that the method adopted by the CIT (Appeals). Purported to be under Rule 10(ii) of the Income-tax rules, is arbitrary because specific data is available on the basis of which it can be established that no income can be attributed to the PE even if one is assumed to exist. For instance it is submitted from page 316 of Paper book No.4, that the assessee received US $1,27,691 for training the personnel of the Indian company. When such specific data is available, it is not proper for the Income-tax authorities to arbitrarily estimate 40% of the sales as income of the permanent establishment.

196.2. The next submission is that the profits attributable to the PE are those profits which are “derived” from operations of the PE. Any income which is derived from a source which is outside India cannot be attributed to the PE since the source is outside India, and has nothing to do with the PE in India. For example the warranty

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income has its source in the sale of equipment. Even then no income can be said to have arisen because warranties were part of the sales which took place outside India and in fact there were no operations carried out by the assessee in India. The effective source is the sale of equipment which has taken place out of India. According to Mr. Syali, the obligations of the assessee under the agreement were only four:

(i) training of the personnel of the Indian company in India under Article 4.10 of the agreement.

(ii) To send employees to India to sort out any problems in relation to DOT or malfunctioning.

(iii) Warranty in relation to the equipment,

(iv) Synchronization of the critical path network (CPN).

Mr. Syali submitted that it was not clear from the order of the Income-tax authorities that which out of the above obligations, do they consider as resulting in income which can be said to be derived” from the PE in India. Further, at any rate, the estimate of 40% of the revenues as income attributable to the PD is arbitrary and excessive.

197. Mr. Syali thereafter submitted that there are guidelines as to the basis on which income may be attributed to a PE in the following authorities at which he placed strong

i) CIT vs. Ahmadbhai Umarbhai (48 ITR 472) S.C. (in this case it was held that the attribution of income to the manufacturing activity should be greater than the attribution to the saie).

ii) Annamalai Timber Trust & Co. vs. CIT 41 ITR 781 (Mad). (in this case only 10% of the income was attributed to the PE).

iii) CIT vs. Bertram Scott Ltd. 31 Taxman 444 Cal (10% attributed to PE).

198. The learned counsel for the assessee also referred to the relevant clauses in the DTAA with Vietnam, Malaysia and Indonesia which are countries where the assessee had no operations but had appointed agents under certain agreements to whom it had paid a commission of 4% to 10% which may give a broad indication that nothing beyond 10% can be attributed to PE, if at all.

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199. Mr. G.C.Sharma, the learned counsel for the revenue, controverted the submissions made on behalf of the assessee. We have referred in detail to his arguments while dealing with the case of Ericsson and, therefore, there is no need to reproduce them here because the arguments were substantially the same as he made in the case of Ericsson. However, only one thing needs to be mentioned specifically i.e. that Mr. Sharma pointed out that while addressing arguments on behalf of the assessee initially Mr. Syali, the learned counsel for the assessee, had not raised any arguments on the basis of “business connection”.

200. In his reply Mr. Syali, the learned counsel for the assessee first sought to contend that Rule 27 of the Tribunal Rules cannot be invoked in the case of Motorola in favour of the Department so as to permit them to raise the issue of the Agency PE, Service PE and installation PE. It may be recalled that the CIT(A) has held in the case of Motorola that the foreign company (assessee) does not have an Agency PE or Service PE or Installation PE. He has held that the assessee has a fixed place PE in India and no other type of PE. The objection of Mr. Syali was that the findings of fact cannot be disturbed by the department by invoking Rule 27 because the rule can be invoked only if the respondent accepts the finding of fact but seeks relief on some other aspect of the matter. According to Mr. Syali, each PE is separate and has a different tax implication and if the department is allowed to invoke rule 27 and contend that there is either an Agency PE or Service PE or an installation PE, the assessee may ultimately be a worse off which cannot be permitted under Rule 27. In support of this submission he cited the following authorities:

1. Chaudhary Sahu vs. State of Bihar AIR 1982 SC 98

2. Indira Bala Krishna 39 ITR 546 (SC) at 550.

3. Bansari and Ors vs. Ram Phal AIR 2003 SC 1989. (para 21 of the judgment).

201. In response to the argument of Mr. Sharma that the transaction is in fact a works contract masquerading as a sale of equipment, Mr. Syali objected that this was a new plea and even the A.O. has not taken such a plea. On merits he submitted that this is not a works contract as was made out because all the seven contracts which the assessee entered into with the Indian Cellular Operators, are not the same and each is different from the other. In this connection he pointed out to ground No.9 of the assessee’s appeal where this has been clarified by the assessee. It was, therefore, submitted that there is no factual basis to contend that all the three agreements have to be considered as a whole and an inference of works contract should be drawn. He further pointed out that nowhere in the contracts has it been

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mentioned that it is a turn-key or works contract, that there was no such person as a Project Manager which would normally be the case if the contract is on turn-key basis or is a works contract, that the employees of the assessee came to India on short visits only to supervise whether the equipment was being properly installed and from all these it was clear that it is not possible to treat all the three agreements as a whole and conclude that it is a turn key project or a works contract. Mr. Syali referred in this connection to page No.295 of the paper book where the definition of “GSM Cellular System” does not include a works contract. The definition of “subsidiary includes only that entity which provides services or materials in connection with the supply contract and has nothing to do with the separate supply contract, a copy of which is at page 353. The IOS Agreement a copy is at page 360 shows that “Motorola India” does not refer to the assessee company at all. All these features of the contracts would show that there is no basis for the allegation that the contract is a turn key project or a works contract.

202. Referring to the written submissions, filed Mr. G.C. Sharma, on which considerable reliance had been placed by him wile making his submissions on behalf on behalf of the Department, especially to para 9(1) of pages 14 and 15 thereof, the learned counsel for the assessee submitted that this paragraph contains factually incorrect statements. It was particularly pointed out that the assessee company did not undertake the installation contract though under clause 4.11 of the purchase agreement, a copy of which is at page 301 of paper book No.4, it stood guarantee for due and faithfully performance of the purchase agreement. The guarantee, according to Mr. Syali is only a secondary contract.

203. Referring to the warranties and acceptance under the contracts, it was submitted by Mr. Syali for the assessee that under clause (vi) of the contract at page 303 of Paper book No.4, the warranties are only for SFE and FNE, which are certain equipment of the cellular system, though the assessee supplied many other materials under the sale agreement. This warranty is only for defects in material and workmanship. Mr. Syali invited us to contract this feature with the warranty given under the installation contract (page 366 of paper book No.4) which is a coverage warranty which is undertaken by the installer i.e. Motorola India Ltd. As a functional test. He thus argued that there was no dovetailing between several contracts and if a contract is severable it goes against theory of works contract. He further referred to clause 21 of the installation agreement (page 370 of paper book No.4) and clause 25 of the Supply agreement (page 312 of paper Book No.4) in support of his claim that the contracts were severable and cannot be read as an integrated whole.

204. Turning to the provision in relation to warehousing of the equipment, Mr. Syali submitted that it is not relevant to find out if all the contracts amount to a works

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contract. The warehousing, according to the relevant clauses of the agreement (page 308 of paper book No.4) is not the responsibility of the assessee at all. If the equipment were to be sent before the DOT site is ready, only then the warehousing of the equipment will be the responsibility of the assessee.

205. In support of the argument that the three different contracts cannot be read as an integrated whole to contend that they constitute a works contract, Mr. Syali relied on the following authorities:

1. State of Rajasthan vs man Industrial Corpn. AIR 1969 SC 1245.

2. Vanguard Rolling Shutters vs. S.T. Commissioner AIR 177 SC 1505,

3. Hindustan Aeronautical Ltd. AIR 1984 SC 744.

It was submitted that in these judgments, several criteria were laid down to find out whether certain contracts could be regarded as constituting a works contract and none of these criteria is satisfied in the present case. It was pointed out that it has been held specifically that if there is a separate contract for transfer of title (in the equipment) for a price and property passes therein, that cannot be considered as a works contract. In the present case, according to Mr. Syali this test satisfied and, therefore, the theory of works contract should not be accepted.

206. Turning to the question of tax avoidance or evasion, a point which was raised by Mr. Sharma on behalf of the Department, Mr. Syali submitted that u/s 91 and 92 of the Evidence Act, o oral evidence may be admitted by the Court which is contrary to the averments contained in a written document and that a written contract cannot be ignored and a different contract between the parties be spelt out by the Court. Mr. Syali in this connection referred to the following authorities:

1. Re Poly Pack International PLC (in Admn.) (1996) 2 All ER. 433.

2. CIT vs. Motor & Gen. Stores Ltd. 66 ITR 692 (SC).

3. CIT Vs. B.M. Kharwar 72 ITR 603 and

4. ITO Vs. Shriram Bearings Ltd. 1964 ITR 419 (Cal) affirmed in 224 ITR 724 (SC).

It was submitted on the basis of the above authorities that it is the legal substance of the transaction and not the economic substance that has to be examined. It was also pointed out that the CIT(A) in the present case has found that the A.O. has not

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raised the question of tax avoidance or evasion, but till the Department seeks to raise the plea before the Tribunal which should not be permitted.

207. With regard to the judgment of the Italian Court of Cassation in the case of Phillip Moris, Mr. Syali pointed out to certain portions of the judgment where the legal principles laid down by the lower court were affirmed by the Italian Supreme Court and the decision ultimately went in favour of the revenue in that case only because of the facts. It was pointed out that the legal principles to be adopted are in no way different in India in the case of double tax agreement.

208. So far as “business connection” is concerned, Mr. Syali raised a few submissions though he did not specifically answer the point raised by Mr. Sharma that this aspect of the matter had not been argued by him originally. Be that as it may, the submission of Mr. Syali with reference to para (c) of page 4 of the written submissions of Mr. G.C. Sharma was that the assessee was not responsible to set up the GSM system which was done by a separate installer, that the assessee’s obligation was only to supply the equipment for the GSM system and it merely stood guarantee for the due and faithful performance of the installation and from this it cannot be inferred that there was any business connection between the assessee and India. He submitted that there were no other operations which were carried on by the assessee company in India and in order that anything is taxable on the basis of business connection, there should be not only a business connection but there should also be certain operations carried out by the foreign company in India and unless such operations are pointed out by the Income-tax authorities, no income can be taxed merely on the basis of a theoretical business connection. In this connection, Mr. Syali strongly relied on the judgment of the Supreme Court in the case of Carborandum Co. 108 ITR 335. He emphatically denied that the subsidiary in India (Motorola India Ltd.) was the agent of the assessee.

209. As regards the question of “royalty”, the only argument of Mr. Syali was that the payment was not linked at all to the number of subscribers and on this aspect as well as on other features, the facts of Motorola were the same as the facts in the case of Ericsson.

210. Coming to the aspect of “attribution of income” to the PE, Mr. Syali submitted that when the A.O. had made the attribution he had 4 PEs in mind. However, ultimately only one PE was upheld by the CIT (Appeals) and hence at the most 10% of the sales can be attributed to Indian operations. Even that would not make the income taxable according to Mr. Syali because almost 15% of commission was paid Further it was pointed out that as per the overall global accounts, the assessee had earned profits only to the extent of 33% and hence there was no basis to adopt the

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rate of 42% of profit in cellular products. There was no warrant for the A.O. to increase the profit from 33% to 42%. Therefore, even if 33% is taken, considering the fact that it involved the manufacturing of high tech. Products, research in these products, trial runs etc. which activities were all out of India and when the sales were also outside India, nothing can be deemed to have accrued as income to the assessee in India. If at all some income has to be attributed, at best it can be 10% as was in the case of Annamalai Timber Trust co. (supra) i.e. 3.3% of global profits. If 15% is already paid then the liability of the assessee stood extinguished. No separate profit was required to be attributed as regards supply of software because it was integrated with the hardware. Even if this argument was rejected, then as per Article 12.6 of DTAA read with Article 7.5, since there are no assets and activities of the assessee in India, nothing can be said to have been “derived” from those assets or activities. Therefore in any event no income was taxable in the hands of the assessee.

211. In the department’s appeal in the case of Motorola, the first ground relates to attribution of appropriate profits to the PE. In this connection, the main contention of Mr. Sharma was that the A.O. had applied rule 10(i) of the Income-tax rules for the purpose of attribution. On the other hand, the CIT(Appeals) had applied Rule 10(ii) for the apportionment of appropriate profits. According to Mr. Sharma Rule 10(iii) permitted the assessing authorities to make apportionment as may be deemed suitable. Therefore, his argument was that there was no standard formula for applying any particular rule and while applying Rule 10(ii) CIT(A) did not consider the ratio of the receipts. Therefore, Rule 10(i) as applied by the A.O. was quite fair but ultimately since there was no standard formula, he left this matter to the Bench.

212. The second ground in the department appeal relates to the levy of interest under section 234A and 234B and the arguments in this connection are the same as they were in the case of Ericsson.

213. in the appeal by the Department, so for as first ground is concerned, Mr. Syali appearing for the assessee submitted that section 9(1)(i) used the word “attributable” in explanation (a) below the section. He emphasized that the word used was not “derived” which is of wider import and, therefore, a strict interpretation of the principles of attribution is called for. The situs of the sale of the equipment was not in India and this also has to be kept in mind while attributing any income to the PE. According to him Rule 10 cannot go beyond the provisions of section 9(1)(i). The CIT(A) was wrong in his interpretation of rule 10(ii) Rule 10 does not take care of the language of explanation 2(a) below section 9. Therefore, according to Mr. Syali whatever is determined under Rule 10(ii) has to be further apportioned to the Indian operations under the provisions of Explanation 2(a) below section 9. It is necessary

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to clarify here that both the parties are aggrieved by the apportionment made by the CIT(A) by invoking Rule 10(ii) whereas the Department wants apportionment made by the AO to be restored. The assessee wants that the apportionment made by the CIT(A) by invoking Rule 10(ii) though correct in principle, the CIT(A) was wrong in his interpretation of the Rule which does not take care of the language used in Explanation 2(a) below section 9.

214. At this juncture, the Bench called upon the learned counsel for the assessee to explain the working of Rule 10(ii) of the Income-tax rules by giving concrete examples so that the point made may be appreciated better. Mr. Farooq Irani, the learned counsel appearing for Motorola alongwith Mr. Syali, lucidly explained, with illustrations, as to how the Rule actually work and also explained the rule with reference to the decision of the Supreme Court in the case of CIT vs. Ahmedbhai Umarbhai (supra). We shall refer to his explanation of the rule at the appropriate juncture.

MOTOROLA DECISION

215. The first ground in the assessee’s appeal relates to the validity of the notice issued u/s 142(1) of the Income-tax Act on 3.11.1999 and the validity of the assessment made in consequence thereto. According to the assessee the notice ought to have been issued on or before 31.3.1998 which is the last date of the assessment year concerned or alternatively that it should have been issued at any rate on or before 31.3.1999, which is the expiry of the period of one year from the end of the assessment year, within which period the assessee has been given the right to file a return u/s 139(4). The contention is that since the notice has been issued beyond both the above dates, it is invalid as also the assessment made pursuant thereto. In short the contention is substantially the same as that taken by the assessee in the case of Ericsson. While disposing of this contention in the case of Ericsson, we have elaborately given reasons for our decision which is to the effect that the notice ought to the issued before the close of the relevant assessment year. We have discussed the facts of Ericsson as well as the facts of Motorola while dealing with this contention. There is, therefore, no need to repeat them in detail here. For the reasons given in the case of Ericsson, we hold that the notice issued in the case of Motorola u/s 142(1) is beyond the time prescribed by law. Hence both the notice as well as the assessment made pursuant thereto are invalid. Accordingly, ground No.1 is allowed.

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216. The above ground is sufficient to dispose of the entire appeal of Motorola in ITA No.2455/Del/2001. However, for the sake of completeness and since important issues are involved in the appeal and also in deference to the elaborate arguments addressed before us by both the sides, we would prefer to given our decision on all the grounds raised by the assessee as we have done in the case of Ericsson. Accordingly we proceed to consider the other grounds raised by the assessee in this appeal.

217. The 2nd ground relates to the question of Permanent Establishment According to the Assessing Officer, the assessee had a PE in India as follows:

1) Fixed place PE in the form of the Indian company namely Motorola India Ltd. (MINL),

2) Installation PE,

3) Service PE, and

4) Dependent Agent PE.

Though the A.O. held that the assessee had PEs in India as above, on appeal, the CIT (Appeals) has held that the assessee had only fixed place PE, within the meaning of Article 5.1 of the DTAA between India and U.S. He has held that the assessee cannot be said to have the other 3 types of PEs as held by the A.O. The Department has accepted this position and has not taken any ground against this finding of the CIT (Appeals) in its appeal No. ITA 2516/Del/2001. Therefore, the question which remains for our consideration arises only in the assessee’s appeal wherein in ground No.2, the assessee has challenged the finding of the CIT(Appeals) that there is a fixed place PE in India in the form of the office of MINL in India. We address ourselves to this question and proceed to consider the same in the following paragraphs.

218. Article 5.1 of the DTAA says that “for the purposes of this convention the term “permanent Establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.” In the present case the finding of the CIT (Appeals) is to the effect that the office of the Indian company, namely, MINL functions as the fixed place of business of the assessee. In support of this finding, the CIT (Appeals) has held that the assessee periodically sent its employees to MINL, that these employees were paid perquisites by MINL though the salary was paid by the assessee, that the perquisites were not reimbursed by the assessee to MINL, that the employees were under the control of the assessee and

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that they undertook activities on the part of the appellant also through the office of IC”. By IC, the CIT (Appeals) means the Indian Company which is MINL. The CIT (Appeals) has in the alternative held that MINL was technically dependent upon the employees of the assessee and also economically dependent on the assessee because no salaries were paid by it to the employees seconded by the assessee to it. He, therefore, held that the assessee had a fixed place PE in India “in the form of the office of the IC.” The CIT (Appeals) has also recorded a finding that the assessee undertook sales and connected activities through MINL’s office in India within the meaning of Article 5.2. He has, however, held that it will not be a service PE as contended by the A.O. Thus it appears that the only definite finding of the CIT (Appeals) is that the assessee had a permanent establishment in India in the form of the office of MINL in India and thus had a PE within the meaning of Article 5.1 of the DTAA. We are assuming that the entire Article 5.2 has been rules out by him.

219. The contention of the assessee very briefly is that in order to satisfy the conditions of Article 5.1, the business of the U.S company has to be carried on in India through its employees but if the employees carry on the business of other companies, then the office of the other companies cannot be considered as the PE of the U.S. company. In other words the learned counsel for the assessee drew our attention to the observation of the CIT(Appeals) towards the end of para 6.4 at page 25 of the order in which he has recorded a finding that the employees sent by the assessee to India undertook activities on the part of “the appellant also” (underline ours) through the office of MINL and submitted that the finding really means that the assessee’s employees were not only attending the work of MINL in India but also attending to the activities of the assessee which is not sufficient to attract Article 5.1 Considerable emphasis was placed on the use of the word “also” in the above sentence of the CIT(Appeals). In other words what the assessee contends is that its employees should exclusively work for the assessee only so that the office of MINL could be considered as a fixed place PE of the assessee in India.

220. It is a little difficult to accept the above submission on the facts of the present case. The employees were paid salaries by the assessee company and, therefore, prima facie it would appear that they worked only for the assessee company in India. They have also used the office of the MINL in India to carry on the work of the assessee company and thus there is a projection of the assessee company in India in the office of MINL which makes the latter a fixed place PE. The fact that the employees of the assessee were paid perquisites by MINL and that these perquisites were not disallowed in the assessment of MINL from which it was contended that the Department itself accepted that the employees work for MINL is not conclusive. It seems to us that an employee is normally allowed perquisites only in the place where he actually stays and works and it may be for such a practical reason that it

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was arranged between the assessee and MINL that the latter would pay the perquisites to the assessee’s employees, while the salaries would be paid by the assessee itself.

221. The further argument that it the employees paid by MINL in connection with the purchase agreement were carrying on only the assessee’s activities in India, then there was no need for the assessee to send more persons to India periodically, is based on the theory of preponderance of probabilities and not on any facts. It cannot, therefore, be accepted without further evidence. It was further argued before us that the A.O. has omitted to make enquiries with the Reserve bank of India and other concerned statutory authorities as to the purpose for which the expatriate employees came to India and in this connection, it was pointed out that the expatriates are required to fill up the statutory form showing the purpose of their visit which could have thrown much light on the subject. These aspects have not been gone into by the A.O, no doubt but the mere deficiency in the line of enquiry cannot take the assessee’s case further. The fact remains that the salaries were paid by the assessee and the employees also came and worked in the office of MINL in India, enjoyed perquisites from MINL without any disallowance in the hands of MINL and thus there is prima facie material to show that the office of MINL could be considered as a projection of the assessee in India.

222. A question may arise as to how the position in the case of Motorola is different from the factual position in the case of Ericsson where we have held that the Indian company (ECI) cannot be considered as the fixed place PE of Ericsson in India. It may be recalled that in the case of Ericsson, the argument was that the employees of Ericsson, Swedish company, had no right to enter the office of ECI in India for the purpose of carrying out the activities of the Swedish company. It was only the facility offered by ECI to the employees of Ericsson gratis that they could enter the office of ECI for the work of Ericsson. That did not create any right in favour of the employees of Ericsson to enter the office of ECI as they pleased for the purpose of carrying out the activities of Ericsson. Nor did it create any impression in the minds of the business customers of Ericsson in India that the office of ECI could be viewed as a projection of Ericsson’s activities in India. There was also no allegation in the case of Ericsson to the effect that the employees of Ercisson worked for ECI also so that it could be said that they could, as a matter of right, enter the office of ECI and thereafter could perform some of the activities of Ericsson also. In the case of Motorola, however, the case has proceeded on the basis of an admitted position that the employees of Motorola have worked both for Motorola as well as MINL. There is no denial by Motorola that its employees has a right to enter the office of MINL in India either for the purpose of working for MINL or for the purpose of working for Motorola. This also finds support from the fact, which we consider crucial, that MINL

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provided perquisites to the employees of Motorola whereas Motorola paid the salaries. This arrangement creates an impression that for that part of the work carried out by the employees of Motorola for Motorola, they were paid salaries by Motorola and for that part of the work which they performed for MINL, they were paid perquisites by MINL. Such an arrangement cannot be considered to be unusual and strengthens the claim of the A.O. that the employees has some sort of a right to enter the office of MINL and the business customers of the assessee in India could also look upon the office of MINL as a projection in India of Motorola. It is also worth noting that the A.O. has relied on the fact that MINL was being reimbursed by Motorola on the basis of “cost plus 5% thereof’ which covers even the perquisites given by MINL to the employees. This factual position throws doubt even on the claim of the assessee that the perquisites were paid to the employees of Motorola only for their work for MINL and that is why in the assessment of MINL, the perquisites were not disallowed. The fact that the entire expenses incurred by MINL were being reimbursed on cost plus 5% basis strengthens the case of the Department that the employees did work only for the assessee in India.. The unguarded observation of the CIT (Appeals) towards the end of paragraph 6.4 of his order at page 25 thereof that the employees of the assessee undertook activities on the part of “the appellant also”, which has been made much on behalf of the assessee before us, does not take the case of the assessee any further. From the fact that the entire expenditure incurred by MINL was reimbursed by Motorola on cost plus 5% basis it could even be inferred, as was done by the A.O, that the employees took no part in the activities of MINL. Be that as it may and without feeling the need for examining the issue in more detail, we are satisfied that there was a projection of the assessee in India in the form of the place of business of MINL and thus there was a fixed place PE of the assessee in India within the meaning of Article 5.1 of the DTAA between India and U.S.

223. The alternative argument of the learned counsel for the assessee was that even if we were to hold that there is a fixed place PE within the meaning of Article 5.1, the maintenance of such a fixed place of business was only for “other activities which have a preparatory or auxiliary character, for the enterprise” within the meaning of Article 5.3 (e) of the DTAA and, therefore, under the negative deeming provisions thereof, the office of MINL cannot be deemed to be a fixed place of assessee’s business. Article 5.3 says that “notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include” the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. The contention of the assessee is that the activities carried on by MINL for Motorola are of preparatory or auxiliary

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character. Reliance is placed on clause (1) to (5) of Article 1.1 of the Services Agreement entered into on 1.4.1996 between the assessee and MINL. The nature of the obligation of MINL have been elaborated in these clauses as under:

“Article I Duties MINL

1.1 MINL undertakes the obligation to perform the following services (the “Services”) in India to MINC and its affiliated companies (hereinafter referred to jointly as “Motorola”):

(1) Engage in market survey, industry analysis, economy evaluation, development of business opportunity, investment, joint venture and technology cooperation and interface with potential business partners and with local government agencies on industrial policy and regulations.

(2) Provide product information and training to distributors and OEMs, assist distributors to provide potential equipment users with technical and price information, ensure that distributors meet warranty obligations, and maintain technical standards consistent with the high quality, reliability and state of art technology of Motorola equipment, assist distributors to make technical presentations to potential users, act as an interface between Motorola and end users in dealing with issues of technical performance of equipment, selection of equipment or price of equipment.

(3) Develop market opportunities for Motorola products and services by introducing Motorola products and services and by providing product and service information to potential customers and partners in liaison and support of Motorola and provide warranty and after sales services in connection with the products sold.

(4) Engage in sourcing and procurement activity on behalf of Motorola for raw materials or components to be incorporated or used in conjunction with products manufactured on a world wide basis.

(5) Corporate finance and Accounting Services.”

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On the basis of above clauses in the Services Agreement, it is contended that the activities of MINC are only preparatory or auxiliary in character and, therefore, the office of MINL in India cannot be deemed to be a fixed place PE of the assessee.

224. we se force in the contention, taken in the alternative. The activities described in the clauses of the Services Agreement do show that they are basic operations to be carried out by MINL before the business actually starts such as market survey, industry analysis, economy evaluation, furnishing of product information, ensuring distributorship and their warranty obligation, ensuring technical presentations to potential users, development of market opportunities, providing services and support information, procurement of raw materials for Motorola and accounting and finance services etc. These are by all means only activities of preparatory or auxiliary character before the commencement of actual business of Motorola in India. These activities cannot be considered as activities in the course of the carrying on of the business by Motorola in India, but they are anterior thereto. This is also made clear by Article 7 of the Services Agreement which says that the agreement shall remain in force only upto 31.3.1997. The duration of the agreement itself is strong indication of the fact that the activities are prior to the commencement of business activities and are only basic or preparatory in nature. MINL has to perform these activities only for a period of one year. Once the agreement comes to an end there is no obligation on the part of MINL to perform the above activities, In these circumstances, we hold that the office of MINL in India is a fixed place PE of the assessee in terms of Article 5.1 of the DTAA but cannot be deemed to be so by virtue of Article 5.3 (e) of the DTAA. Ground No.2 is accordingly allowed.

225. The next ground namely ground No.3 relates to the characterization of the revenues relatable to the supply of software. The Income-tax authorities have held the payment to be royalty within the meaning of Section 9(1)(vi) of the Act and have brought the same to tax accordingly @ 30% on gross basis. The total value of the software has been taken in the assessment at U.S. Dollars 6.33 million which converted into Indian rupees comes to Rs.22,88,29,500. the tax thereon at 30% has been computed at Rs.6,86,48,850.

226. Basically the rival contentions are substantially the same as in the case of Ericsson which we have dealt with earlier. According to the Department, royalties have to be assessed under Article 12 of the DTAA. If they are to be taxed as business profits under Article 7, the existence of a PE of Motorola in India is essential. We have already seen that the assessee does not have a PE in India within the meaning of Article 5. Therefore, the question for consideration is only whether Article 12 can be applied and the royalties be taxed in the hands of the assessee on gross basis @ 30?% as has been done by the Income-tax authorities.

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The facts are substantially the same as in the case of Ericsson. There is no substantial difference, except cosmetic differences, in the wording of the agreements entered into between the assessee and the cellular operators. It was common ground between the parties that this is so. Therefore, the decision which we have rendered in the case of Ericsson applies squarely to this ground taken by the assessee. Accordingly we hold that he payment for the software cannot be termed as royalties within the meaning of Article 12 of the DTAA.

227. We may however, briefly notice the order of the CIT (Appeals) in the present case since he has worded his order in a slightly different manner In he case of Ericsson, he has held that a part of the software supplied by Ericsson is loaded into the handsets of the subscribers which we found to be factually wrong. In the present case (Motorola) he has held that when a subscriber makes a call through the GSM he makes use of the software of the assessee embedded in the hardware of the cellular operators and without which no connectivity with other persons will be feasible. He has further held hat such use is made without any human intervention on the part of the assessee because after providing connectivity the software of the GSM becomes available to the subscribers of the cellular operators without any intervention on the part of the cellular operator. For these reasons, he has held that “there is a use of the software of the GSM by third parties also, namely, the customers.” In our opinion, this is only a slightly different manner of saying the same thing which the CIT (Appeals) said in the case of Ericsson. Whereas in the case of Ericsson he held that the software is embedded in the handset itself which is used by the subscribers, in the case of Motorola he has held, without expressly giving a finding that the software is loaded on to the handset used by the subscriber, that the subscriber uses the software embedded in the hardware in order to get connectivity. Despite the slight difference in the language or the phraseology employed by the CIT, there is in substance no difference to what he really wants to convey which is that the subscribers used the software supplied by the assessee. We do not see any justification to take a view different from the view taken by us in the case of Ericsson merely because of the difference in phraseology or language employed by the CIT(Appeals) to denote the same thing, namely, that the subscriber uses the software. In the case of Ericsson we had held that the subscriber merely gets connectivity by using the facilities provided in the handset and that finding applies equally to the present case. In this connection, we may briefly notice one or two authorities which were cited before us. The first decision is that of the Bangalore Bench of the Tribunal in the case of Lucent Technologies vs. ITO 82 TTJ (Bang) 163. This case was cited because it has dealt with the decision of the Authority for advance Ruling in the case of ‘Y’ reported in 238 ITR 296, which has been relied on by the CIT(appeals) in the present case. We have gone through this decision where

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it has been held that both the software and the hardware constitute and integrated equipment and that one cannot function without the help of the other. The order refers to the decision of the AAR cited above and has referred to the argument of the assessee in that case that the payment cannot be considered as royalty because it has been made not for a copyright but for a copyrighted article.

228. The next decision cited before us was that of the Madras High Court in the case of Skycell Communications Ltd. And Anr. Vs. Dy. CIT & Ors. 251 ITR 53. This case is important since it throws light on certain basic principles involved. In that case the Madras High Court was concerned with the expression "fees for technical services" used in Section 194J read with Explanation 2 below Section 9(1)(vii) of the Income-tax Act. The Petitioner before the High Court was engaged in the business of providing cellular mobile telephone facility to subscribers. The payments made to them by their subscribers were held by the Chief CIT to constitute fees for technical services provided by the assessee to them and he directed that the firms and companies which subscribed to the petitioner's network had to deduct tax at source on the payments made by them to the petitioner. The contention of the petitioner was that when the subscriber subscribed to the mobile telephone facility provided by it, the subscriber was actually obtaining a service for a fee and such fee cannot by any stretch of imagination be considered as fees for technical services. It was contended that the subscriber obtained the mobile telephone facility and he was not interested in knowing how that service was provided to him and that what were all the technical fetures or steps involved in such service being provided to him. This case, with great respect, lays down very basic principles regarding the nature of the payment made by the subscribers to mobile operator. A very clinching example given is that of a person who hires a taxi to move from one place to another. The Hon'ble High Court held that the person who hires the taxi pays for the taxi service as such and is not concerned with the technical operation or each and every part of the Taxi. It was held that the person hiring the taxi was not paying the taxi fare as fees for having any technical service rendered to him. It would be better to reproduce the relevant portion of the judgment (page 57 & 58):

"In the modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service.

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When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering a technical service to the person who uses the automobile. similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway or the airline for having used it for traveling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider, for having used the bus. the electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the Revenue.

Satellite Television has become ubiquitous, and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments made to the cable operator."

With reference to a subscriber to cellular phone service, the Hon'ble High court held as under:

"When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station.

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All that he wants is the facility of using the telephone when he wishes to and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as "technical service" for the purpose of section 194J of the Act."

The above judgment clearly brings out the fallacy in the reasoning adopted by the CIT (Appeals) in the present case. The subscriber to the mobile telephone service pays for the service as a whole and he is not concerned with whether he gets the connectivity through the hardware or through the software or what are the technical aspects or steps involved in obtaining the connectivity. Therefore, the conclusion of the CIT (Appeals) that the subscriber paid for the use of the software is, with respect, misconceived.

229. For the above reasons, we hold that the payment for the software cannot be taxed under Article 12 of the Indo – U.S. DTAA as royalties. The ground is allowed.

Ground Nos. 5 & 6.

230. We may now take up for consideration ground Nos. 5 & 6 of the appeal under the heard "accrual of income" and "business connection" respectively. The Income-tax authorities, with reference to these grounds, have discussed the assessee’s contracts with Sterling Cellular Ltd. And Usha Martin Telecom Ltd. They have not discussed the terms of the other contracts and the appeals also proceeded on the basis that these two agreements are representative of all the agreements which the assessee entered into with various cellular operators. These two agreements were made in January and March, 1995. it was common ground between the assessee and the Department before us that the agreements in substance contained the same terms and conditions as in the case of Ericsson. Our decision is also based on this common ground. We have already held in the case of Ericsson that there is no business connection in India, on an examination of the various agreements entered into in that case. Since admittedly the terms and conditions of the agreements are substantially the same in he case of Motorola also, the same decision would hold goods.

231. The only question which was argued before us in respect of these two grounds is whether the fact that in the case of Motorola, the risk in the GSM equipment was to pass in India delivery though the title to the equipment passed in USA, would make any difference to the position and would result in the consequence that the assessee can be held to have a business connection in India. Under clause 13.1 of

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the agreement between the assessee and sterling Cellular Ltd. Admittedly the title to the equipment passed outside India. Under the same clause, the risk passed in India. The finding of the CIT(Appeals) in paragraph 8.1 of his order to the effect that the property in the equipment also passed in India at site and not in America is not borne out by the contract entered into between the parties. As rightly contended on behalf of the assessee, this finding is contrary to the factual position. The contention of the assessee is that the passing of the risk in India on delivery is a wholly irrelevant or immaterial consideration while deciding the question as to whether there was a business connection. According to the assessee so long as the title or property passed outside India, irrespective of whether the risk continued to be with the assessee, no business connection can be established and, therefore, no income can be deemed to accrue or arise in India, within the meaning of section 9(1)(i) of the Income-tax Act. Our attention in this connection was drawn to the relevant provisions of the Sale of Goods Act, 1930 where a distinction has been made between the passing of the title and the passing of the risk. A reading of section 26 and 40 of the aforesaid Act shows that the passing of the title and the passing of the risk need not be simultaneous; they can be effected at different points of time. Section 26 says that the goods remain at the seller’s risk until the property therein is transferred to the buyer, but the parties can agree to the contrary with the result that even before the title to the goods passes, the buyer can undertake the risk. The section father says that when the property in the goods is transferred to the buyer, the goods are at he buyer’s risk whether delivery has been made or not. This, of course, is subject to section 40 which deals with ask where goods are delivered at a distant place as in the present case. This section says that where the seller agrees to deliver the goods at his own risk at a place other than where they were then sold, the buyer shall normally take any risk of deterioration in the goods necessary incident to the course of transit. So far, this is in conformity with section 26 which says that after the property in the goods is transferred, the goods are tat the buyer’s risk. However, section 40 further says that it is open to the parties to agree that even where the property in the goods have passed, the seller may undertake the risk of deterioration in the goods necessarily incident to the course of transit. This is what the parties in the present case have undertaken in the sense that though the title to the GSM equipment passed in USA, the risk continued to remain with the assessee(seller) and the risk passed to the cellular operator only on delivery in India. Therefore, the result is that merely because the risk passed in India, it cannot be said that he sale took place in India. Therefore, no income can be said to have arisen in India.

232. So far as the signing of the contracts is concerned, in the present case also they were all signed in India as in the case of Ericsson. The contention of the Department based on the judgment of the Supreme Court in 20th Century Finance

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Corpn. (supra) that income accrued in India on account of the signing of the contracts in India has been considered by us in the case of Ericsson and we have held that mere signing of the contracts in India does not give rise to any income in India. In the present case also the CIT(Appeals) has heavily relied on the judgment of the Supreme Court cited above and the assessee has specifically challenged the applicability of the decision to its case. This judgment has been considered by us in detail while deciding the case of Ericsson and for the same reasons, we hold that this judgment cannot be of any assistance to the Department to contend that income accrued in India on account of the signing of the contracts in India.

233. Similarly, the question as to the impact of the Acceptance Test on the accrual of income in India has been considered by us while deciding the case of Ericsson. The Department in the case of Motorola also has relied on the fact that Acceptance Test to be carried out in India makes the sale conditional and the sale gets completed only after the Test is accepted and the sale gets complete only in India and, therefore, income accrues or arises in India out of the sale of the equipment. We have discussed this point also while deciding the case of Ericsson and therein e have noted that in case the GSM equipment does not pass the Acceptance Test, the sale is not repudiated and the assessee is liable to replace the equipment in order to conform to the standard set by DOT. In other words what in effect we have held is that the sale was outside India and the assessee’s responsibility continued there-under which includes replacement of the equipment under the same ale contract. In line with our view taken in the case of Ericsson, we hold that in the present case also, where the terms of the contract are the same, the fact that the GSM equipment has to pass the Acceptance Text does not mean that the sale is completed only in India.

234. On behalf of the assessee another contention raised before us was that u/s 39 of the Sale of Goods Act wherein pursuant to a contract of sale, the seller is authorized or required to send the goods to the buyer, the delivery of the goods to a carrier whether named by the buyer or not, for the purpose of transmission to the buyer is prima facie deemed to be a delivery of the goods to the buyer. It was submitted that in the present case sub-section (1) of Section 39 is satisfied. Our attention was drawn to the written submissions filed before the CIT(Appeals) (dated 15.2.2001 at page 102 to 113 of paper book No.1) and it was pointed out that the assessee had contended in these written submissions that the bills of lading are in the name of the customer (not the assessee) and the assessee did not reserve any right of disposal over the equipment. Further almost 70% of the price of the equipment was payable on delivery of the equipment to the carrier. Thus substantially the contract of sale was concluded outside India. The results that as held by the Supreme Court in the case of Mahabir Commercial Co. Ltd. Vs. CIT,

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W.B. (1972) 86 ITR 471, the property in the goods passes once the documents are tendered by the seller to the buyer or his agent as required under the contract. All this has happened outside India and thus the sale itself got completed outside India. Whatever obligations which the assessee ad to undertake in India were only incidental to the sale which took place outside India. These facts also go to show that the sale is completed outside India.

235. Ground No.6 in the appeal is that the CIT (Appeals) erred in holding that there was a business connection in India within the meaning of Section 9(1)(i) of the Income-tax Act and, therefore, any income accruing through such business connection should be brought to tax in India. We have already held, while discussing the question of PE of the assessee in India, that the Indian company, namely, Motorola India Ltd. (MINL) carried out certain preparatory and auxiliary activities in India for the assessee. We also held that there was a virtual projection of the assessee in India through the Indian company and thus there was PE in India. However, by virtue of Article 5.3 of the DTAA, we further held that just because the Indian company carried out certain preparatory and auxiliary Activities, its office cannot be considered as the PE of the assessee in India. This was because of the deeming provision in the aforesaid Article. However, the fact remains that certain activities of a preparatory and auxiliary character were carried out by MINL in India for the assessee. The further finding of ours that there was a virtual projection of the assessee in India through the office of MINL also remains, though because of the deeming provision of Article 5.3 we had to hold that the office of the Indian company cannot be considered as the PE of the assessee. These facts, though they are insufficient to hold, because of the deeming provisions of Article 5.of the DTAA, that there is a PE in India, they are, in our opinion, sufficient to hold that there is a business connection in India through which income can be deemed to accrue to the assessee. These facts do not get obliterated just because of the deeming provision relating to PE. Moreover, there is no such deeming provision in the case of business connection in section 9(1)(i) of the Act to the effect that these activities are not sufficient to constitute a business connection. Therefore, we have to hold that there is a business connection in India.

236. Here again it would be appropriate to distinguish our decision in the case of Ericsson with regard to business connection. In that case we have held that there is no business connection in India. The reason for our view is that the Indian company in the case of Ericsson (ECI) did not carry out any activities on behalf of Ericsson. Nor was there any evidence or finding by the Income-tax authorities to show that ECI carried out any activities on behalf of the assessee,. In the case of Ericsson, we have also held that business connection cannot braise merely because the employees of Ericsson came to India. That finding holds goods in the case of

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Motorola also. In other words merely because the employees of Motorola visited India it cannot be said that there is a business connection. However, the ground on which we are holding that there is a business connection in the case of Motorola is that the Indian company namely MINL carried out several activities on behalf of the assessee and notwithstanding that those activities were of a preparatory or auxiliary character, they are sufficient to establish a business connection in India. We may also clarify that the finding given by us in the case of Ericsson namely that the mere signing of the contracts in India does not give rise to any business connection holds good in the present case also. Just because the contracts in the Case of Motorola were signed in India, it cannot be said that there was a business connection. To reiterate the only ground for our conclusion that there is a business connection is our finding that there was a virtual projection of the assessee in India through the Indian company (MINL) and that the Indian company was actually carrying out activities of a preparatory and auxiliary character for the assessee. This ground is accordingly dismissed.

237. The question of attribution of income may now be considered. We have, for reasons stated earlier, held that there is "business connection" between the assessee and India within the meaning of section 9(1)(i) of the Income-tax Act. We have also held that the assessee has a fixed place PE in India in the form its Indian subsidiary, viz., MINL. When both the Income-tax Act and the DTAA (with USA) apply, according to Circular No.333 of 2.4.1982 and the judgment of the Supreme Court in CIT vs. P.V.A.L Kulandagan Chettiar (267 ITR 657), the DTAA shall prevail. In that case, thee is no scope for applying section 9(1)(i) of the Act and consequently to consider whether any income is required to be attributed to the "business connection" in terms of Explanation 1(a) below the section. We have to attribute income only to the PE in India. However, we have held that there is no PE because of the deeming provisions of Art. 5.3 (e) of the DTAA which says that if the PE is carrying on only activities of a preparatory and auxiliary character, it shall not be deemed to be a PE. In this view of the matter, there is no scope for attributing any income to the so-called PE. We may add that we have taken a similar view in para 212 in the case of Ericsson.

238. To sum up our findings, we hold that:

Assessee’s appeal: (ITA No. 2455/Del/2001)

Ground No.1: The notice issued u/s 142(1) is invalid since it is issued beyond the period of limitation and consequently the assessment is also invalid.

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Ground No. 2: The CIT (Appeals) was not right in holding that thee is a PE of the assessee in India.

Ground No. 3: The CIT (Appeals) erred in holding that the amounts received by the assessee for the supply of software shall be assessed as "royalties". They are not so assessable, either under the Income-tax Act or under the DTAA.

Ground No.4: There is no scope for attributing any profits, in the absence of any PE in India. This decision is consequential to our decision in respect of Ground No.2.

Ground No. 5: The CIT (Appeals) was wrong in holding the the sale of the GSM equipment took place in India and income accrued to the assessee in India u/s 5(2).

Ground No.6: The CIT (Appeals) was right in holding that there is a "business connection" in India u/s 9(1)(i) of the Act. However, no income can be assessed on account of the business connection because the DTAA prevails over the Act.

Ground Nos. 7-8: In view of our decisions in respect of the earlier grounds, no separate decision is considered necessary.

Department’s appeal (ITA No. 2516/Del/2001).

Ground No.1: In view of our decision in the assessee’s appeal that there is no PE in India, this ground does not survive. It is dismissed.

Ground Nos. 2 & 3: These grounds relate to the levy of interest under sections 234A and 234B. As held in para 74 (supra) the issue relating to section 234A is restored to the Assessing Officer with the same directions and the levy of interest u/s 234B is held rightly deleted by the CIT(Appeals)

239. Both the appeals are thus partly allowed.

NOKIA (assessee's appeals 1997-98 and 1998-99) ARGUMENTS

240. In these appeals, we are concerned with an assessee company which is resident of Finland and, therefore, the Indo-Finland Agreement for Avoidance of Double Taxation is applicable. There are cross appeals for both the years. In the assessee’;s appeals, five issues arise for consideration. The first issue is whether the assessee has business connection in India. The second issue is whether there exist a PE of the assessee in India in the shape of its liaison office and or its subsidiary company. The third issue is if there is a PE, what is the income attributable to it for the purpose of the Income-tax Act. The forth issue is with regard

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to the taxation of the payment for the supply of software, whether the same is to be taxed as royalty income of the assessee. The fifth issue which is a new issue which has not arisen in the case of Ericsson or Motorola, is the interest income arising out of what is called "vendor financing".

241. Before proceeding to examine these issues in detail a few point of clarification may be recorded. In this appeal, there is no issue relating to the validity of notice u/s142(1) and the consequential assessment. The ground specifically taken in the assessee’s appeal in relation to the alleged violation of the rules of natural justice was not pressed at the time of the hearing. With regard to the question of "business connection" though an ground is taken in the assessee’s appeals, Mr. Syali the learned counsel for the assessee contended that he would merely restrict the case to saying that no operations were carried on by the assessee in India. In the light of this statement, it is not necessary for us to examine the question of business connection in detail. In disposing of these appeals, we have taken note of the written submissions title "facts in brief" which were separately filed by the assessee. These written submissions were also explained before us in the course of the arguments.

242. Taking up the contract entered into between the assessee and Tata as representative of all the contracts involved in the present case, Mr. Syali submitted firstly that the assessee did not undertake any obligation beyond the obligation to supply the equipment. All the other obligations which were undertaken by the assessee were all related only to the supply of equipment and not beyond. Both the title and the risk in the equipment passed simultaneously in Helsinki, Finland i.e. outside India though the delivery of the equipment was to be in India. Dealing with clause 6.1 and clause 6.3 of the supply agreement, it was submitted that the income-tax authorities were not justified in saying that these two clauses were inconsistent with each other in the sense that the risk though professed to be transferred outside India actually was transferred only in India as the assessee was liable to bear the transport damage under clause 6.3, it was submitted that though these two clauses may seem at first blush to be inconsistent with each other, the clause 6.3 is actually to be construed only as a proviso or in other words only as embodying a concession made by the assessee that it would undertake only a small part of the entire risk related to the supply of the equipment namely damage arising out of transport. This concession cannot be equated with the assumption of the entire risk in relation to the delivery of the equipment. According to Mr. Syali the undertaking of the risk in respect of the transport damage was only a warranty of the contract and not a condition. Dealing with clause 18 of the contract which provided for a Project Steering Committee (PSC) a clause on which heavy reliance had been placed by the income-tax authorities, it was pointed out that this clause was not activated in this year and even if it is activated, it is only for the purpose of the supply contract and

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not for any other purpose. It was further pointed out that this clause was absent in the other agreements entered into between the assessee and the cellular operators and was a peculiar feature only in the contract with Tata. It was pointed out that clause 19 which was termination clause stated that termination was possible only in respect of that part of the contract which was yet to be performed and that the entire contract cannot to repudiated as made out by the Department. Clause 20.5 of the agreement which was again strongly relied upon by the Department spoke only of relationship of vendor and vendee between the assessee and the cellular operator and nothing more. Referring to Appendix 9 to the agreement, it was submitted that there was only a limited responsibility on the part of the assessee vis a vis the installation contract and the primary responsibility therefore rested on the installer only. The power of the assessee to supervise the installation was only incidental to the supply of equipment and it did not mean that the assessee was fully responsible also for the installation.

243. Referring to the contention of the Department that the contract should be construed as a works contract, Mr. Syali drew our attention to the provisions of the Sale of Goods Act, 1930. Section 5 of the Act stated that the title in respect of the goods can pass independent of the delivery thereof and both had no connection with each other. Under section 25 of the said Act, there can be no reservation of the "right of disposal" over the equipment. Consistent with this provision, the assessee had not reserved any right of disposal over the equipment, once the title and risk had passed. In this connection he referred to a judgment of the Madras High Court in the case of State of Madras vs. Ramalingam AIR 1956 (Madras) 695 and submitted that there was an exhaustive discussion of the subject in this case. Referring to the letter of assignment (a copy of which is at page 343 of paper book No.3) in this case Mr. Syali drew our attention to the judgment of the Supreme Court in the case of raymond (AIR 1962 SC 1810) and to page 22 of the written submissions filed by him. It was submitted that though the contract was assigned to Nokia Pvt. Ltd. (NPL), the assignment letter made it clear that NPL was to act as an independent contractor, however, subject to the condition that the assessee would continue to be liable for the performance of NPL. Thus the assessee continued to be liable under the supply contract as if it was executing the same.

244. According to Mr. Syali, the question whether there wa a sale of goods; in the context of a works contract, has to be understood not in a popular sense but only in the legal sense as held by the Supreme Court in State of Madras vs. Gannon Dunkerly & Co. (Madras) Ltd. (9 STC 353). Reference was also made to the judgment of the Supreme Court in the case of Govt. of Andhra Pradesh vs. Guntur Tobacco AIR 1965 SC 1396 where the relevant tests were laid down in para 18 and

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it was held in para 28 that the burden to show that it was a contract of sale and not a works contract was on the revenue.

245. Turning to the question of PE, the brief submission made by Mr. Syali after taking us through his written submissions was that the Indian company had been taxed in respect of the income from the installation contract thereby recognizing the position that it is responsible only for the installation and cannot be treated in any way as the agent of the assessee company. Therefore, the Indian company cannot be regarded as the PE of the assessee company. He invited our attention to page 497 to 513 of the OECD Commentary and to page 507 and 508 of the case law paper book.

246. As regards the question of attribution of income to the PE, there was some overlapping of the arguments made by Mr. Syali in the sense that the points which he made while referring to the contract with Tata are also equally applicable to the question of attributing of income in the sense that since the assessee was responsible only for the supervision of the supply contract which is a limited responsibility inter woven with the fact of sale and cannot be separated, it cannot be said that a separate PE can be created only due to the limited responsibility of supervision and that income arose therefrom. The liaison office also cannot be construed as a PE because it is statutorily prohibited by the Reserve Bank of India from earning any income and our attention in the connection was invited to page 25 onwards of the written submissions. As regards the applicability of Rule 10 of the Income-tax Rules, it was submitted that this Rule is subservient to Article 7.2 of the DTAA which conceived of a functionally separate enterprise which deals with the assessee at arm's length. In the present case thee was no functionally separate enterprise in India which dealt with the assessee at arms length and so far as the supervision of the installation contract is concerned, the argument was that supervision is not an economically significant activity of the PE and, therefore, it is impossible to concede a PE merely for supervision. It was further submitted that at any rate the cell operator had paid 63% as customs duty which in a way indicates that the supervision element on the equipment was embedded in the supply price itself and hence negligible Reliance was also made on the Indian profit and loss account prepared by the assessee (page 151 of paper book No.2) which was duly certified by the Chartered Accountants. It was submitted that these accounts were India specific and the A.O. should have accepted the same especially when there is a presumption that certified accounts are true. Reliance was placed on the judgment of the Andhra Pradesh High Court in the case of CIT vs. Navabharat Ferro Alloys Ltd. 244 ITR 261, which reconciled the earlier two judgments of the same Court in the case of CIT vs. Hindustan Shipyard Ltd. 109 ITR 158, and Bharat Heavy Plate & Vessels Ltd. Vs. Addl. CIT 119 ITR 986. It was finally argued that at any rate even if

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separate charges are assumed to have been levied for the activity of supervision, attribution of 46% to the activity is arbitrary and too high.

Vendor financing Scheme-Can national interest be added?

247. Ground No.4 in the assessee’s appeal for the assessment year 1997-98 (ITA No. 1963) is directed against the addition made for notional interest on the credit facilities extended by the assessee to the cell operators. The agreement between the assessee and the cell operators provided for the charging of interest of 18% on such credit facilities. However, the assessee did not raise any invoice for the interest, nor were any entries made in the books of account for the interest. The A.O. as well as the CIT(A) have relied on the agreement to make the addition for notional interest. The relevant findings of the CIT(Appeals) are contained in paragraph 9 of his order. The audited statement is at page 152 of paper book No.II Relying on the written submissions made before the CIT (Appeals) (page 80 of paper book No.I read with page 186 of paper book II), it was submitted before us on behalf of the assessee that if the parties have agreed not to charge or pay interest then it is not for the income-tax authorities to make a new contract for them and add interest on that basis. Reliance was also placed on AS-9 relating to revenue recognition. It was submitted that though this accounting standard has not been notified, it has great persuasive value and no revenue should be recognized in reality nothing has arisen. Reliance was also placed on the judgment of the Punjab & Harayana High Court in CIT vs. Ferozepur Finance (P) Ltd. 124 ITR 619 and that of the Calcutta High Court in CIT vs. Balarampur Commercial Enterprises Ltd. 262 ITR 439. It was thus contended that the addition is opposed to the theory of real income.

Mr. G.C. Sharma, the learned senior counsel for the Income-tax Department, prefaced his arguments with the following general propositions:

(a) The most important question to be decided is whether the assessee had a PE in India.

(b) The question of transfer of title is not “germane” to decide the question of the existence of PE.

(c) The real question to be decided is:

“Is there a fixed place of business in India through which the non-resident carried on business?”

(d) The provisions of the Sale of Goods Act are also irrelevant.

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(e) The only relevant question is as regards the apportionment or attribution of the income to the PE, if it is found that there is a PE.

(f) Passing of title in the GSM equipment is only a “legal event” and it is different from the “operations of business”.

(g) The judgment of the Supreme Court in the case of State of UP and Anr vs. UOI And Anr. 130 STC 1 is a very important decision which has to be kept in mind while deciding the issue.

(h) According to him the decision in the case of Genon Dunkerly (9 STC 353) is no longer a good law after the insertion of clause (29A) in Article 366 of the Constitution.

249. Mr. Sharma thereafter proceeded to address his arguments on the various issues that arose for consideration. He first submitted that Nokia India pvt. Ltd. could not have had any expertise in installation of a GSM Cellular System because it was incorporated only on 23.5.1995 and immediately entered into the contract with the assessee for installation. The Basic issue as to whether this was a works contract in reality and truth but disintegrated for purposes of income-tax has to be answered having the background of Nokia India Pvt. Ltd. in mind. Skycell & Modi according to Mr. Sharma also fell clearly in this category, because the assessee first contracted with both for supply of equipment and installation thereof, but later on assigned the installation part of the contract to Nokia India Pvt. Ltd., the Indian company. So, according to Mr. Sharma three basic issues arose for consideration, which are:

(a) What is the business of the assessee?

(b) Whether there is a PE in India? And

(c) The computation part of the income

According to him, the business of the assessee was to set up a cellular telephone system in India and worldwide. The object was to putting up a working system and, therefore, it constituted a works contract. According to Mr. Sharma, it could not be envisaged that a cellular operator would buy the system without any provision for connectivity and this further strengthened the view that it was a works contract.

250. Taking the purchase agreement dated 17.2.1995 between the assessee and Sky Cell, a copy of which is placed at page 1793 of paper book No. IV(d), Mr. Sharma pointed out that the most important aspect of this contract is the installation part which will be at the site. He pointed out that the scope of the agreement is to

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“deliver, install and commission” the GSM equipment. The installation part of the contract was subsequently assigned to the Indian company namely Nokia India Pvt. Ltd. which is nothing but a 100% subsidiary of the assessee. The argument of Mr. Sharma was that if initially a contract is capable of being construed as a works contract, the subsequent assignment of a part of the contract to another entity would be immaterial and does not alter indivisible character of the original contract, more so when the assignment is to a subsidiary or an affiliate company which is nothing but a subsidiary of the assessee itself. Mr. Sharma in this connection drew our attention to the fact that the word “affiliate” is defined in the agreement.

251. Mr. Sharma then submitted that the contracts with Modi & Skycell were signed by Hannu Karavirta and since this person was in India, the natural presumption is that all the contracts between the assessee and the cell operators were signed only in India.

251.1. As regards the question of assignment of the installation part of the contract, he pointed out that the assignment was to a subsidiary company of the assessee, which company, to quote Mr. Sharma’s words was entirely in “my hands” meaning thereby that the subsidiary was fully under the control of the assessee. Therefore, despite the arguments advanced on behalf of the assessee based on the theory of novation of contract, it still remain in truth and fact the same as the original agreement. The suggestion was that the assignment has to be ignored or that it must be taken as if the assessee company, notwithstanding the assignment, did not alter the character of the original contract. It is like a sub-contract especially when it is assigned to a subsidiary or an affiliate of the Indian company which was a 100% subsidiary of the assessee company doing no other business. On this point Mr. Syali for the assessee intervened to clarify that Mr. Hannu Karavirta had signed only the Indian contract with BPL. Mr. Sharma further pointed out that Mr. Karavirta assigned the contract on 31.5.1995 and became the employee of the assignee company namely Nokia Telecom Pvt. Ltd. on the very next day i.e. 1.6.1995 which clearly showed that the supply of the equipment and installation were all part of the same arrangement and cannot be segregated.

251.2. With regard to the contracts with BPL and Modi, the same arguments were advanced by Mr. Sharma. His broad submission was that all the contracts have to be construed in the same manner since they were all entered into at the same time.

252. Referring to the “Agreement for Services” dated 19.4.1996, a copy of which is at page 137 of paper book No.II, it was submitted by Mr. Sharma that the Indian company namely Nokia Telecom Pvt. Ltd. could not have gained expertise in such a short time from the date of its incorporation which is 23.5.1995 which showed that

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the installation work was also to be done in truth and substance only by the assessee company.

253. Mr. Sharma then proceeded to deal with the agreement between the assessee and Tata, a copy of which is placed at page 828 of the paper book No. IV-B. He submitted that a perusal of the agreement would show the following features:

i) The object of the contract is to install and run the GSM Cellular equipment from the view point of both the parties.

ii) The affiliate company is a company controlled by the assessee and, therefore, it is in effect the assessee which is involved in the operations regarding both the supply and the installation of the equipment.

iii) The site where the equipment had to be installed is very important.

iv) According to Appendix IX to the contract (pages 1182 and 1183 of the above paper book) the responsibilities of both the companies were to be divided amongst them with reference to the “installation”, “coordination”, “integration” etc. and the use of these expressions unmistakably showed that it was the assessee company which was responsible ultimately for the installation of the equipment.

v) There is a very important clause in the contract under the head “Nokia’s overall responsibilities” which also includes the installation. The supports the argument in (iv) above.

vi) The clauses relating to the payment of “consideration” by inference or natural presumption, also imply that the consideration includes consideration for the responsibility undertaken by the assessee in connection with the installation of the equipment.

vii) The responsibilities of Nokia, the assessee company which are listed in the clauses appearing at pages 1187 to 1189 are connected to the installation site and these clauses show that most of the operations necessary for implementation of the system were to be undertaken and carried out by the assessee company, which is denoted as “N”. Similar clauses appear at page 1192 and 1193 also.

viii) The installation contract at page 1219 of the paper book is only a bifurcation of the responsibilities relating to the installation of the

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equipment which were undertaken by the assessee under the supply contract itself.

254. The clauses in the services contract (installation) indicate that the purpose of this agreement is the same as is mentioned in appendix IX in the Supply Contract.

255. Turning his attention to the arguments advanced with regard to the existence of a PE of the assessee in India, Mr. Sharma pointed out that the liaison office (LO) undertook the work of collecting all the cell operators at the same place to sign the contracts on the same day, to collect information, to negotiate etc. These facts indicated that the LO itself constituted a PE in India; Referring to the contention of the assessee that the LO was not permitted to carry out any commercial activity in India, Mr. Sharma relied upon the order of the CIT(Appeals) and submitted that he has duly met with this argument of the assessee. Mr. Sharma also drew our attention to paras 4.18, 4.19, 6.1, 6.2 and 6.3 of the CIT(Appeals) order in support of his arguments about the existence of a PE in India.

256. Coming to the question of attribution of income to the PE, Mr. Sharma referred to Article 7.3 of the DTAA between India and Finland. He submitted that under this Article, the computation of the income attributable to the PE shall be in accordance with the Indian law, which includes Rule 10 of the Income-tax Rules. Rule 10 has to be read with Explanation (a) to Section 9(1)(i) of the Income-tax Act under which in the case of a business of which all the operations are not carried out in India, the income deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. He contested the argument advanced on behalf of the assessee on the interpretation of the above statutory provisions and submitted that these provisions do not admit of a further adjustment of the income for “such part of the income as is reasonably attributable to the operations carried out in India”. He referred to the order of Delhi Bench of the Tribunal in the case of Iraqi Airways vs. IAC 23 ITD 115 (Paragraph 34).

257. On the question of attribution of income to the PE, Mr. Salil Gupta, the learned Dr. placed certain arguments before the Bench for consideration. He referred to the profit and loss account at page 151 of the paper book No.II, which is for India and submitted that the same was prepared under the cash system of accounting which is not valid under Indian Law since a company, under Companies Act, 1956 is obliged to prepare its accounts on the mercantile system of accounting. He pointed out further that the CIT(Appeals) has recorded a finding in paragraph 7 of its order that the profit and loss account has not been substantiated and while doing so, has not endorsed the finding of the A.O. that the loss shown by the assessee cannot be accepted in any case. However, his finding is that the assessee was adopting the

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mercantile system of accounting which according to Mr. Salil Gupta is an erroneous finding, as is clear from the profit and loss account itself. If the mercantile system of accounting is super imposed over the profit and loss account will have to be adjusted for receivables as well as payables, thus the figures given in the profit and loss account at pages 151 & 152 of the Paper Book No.II will have to be adjusted. The figures as given in the profit and loss account are not reliable and, therefore, the A.O. was justified in rejecting the loss. The learned D.R. also submitted that there was no evidence for the incurring of the research and development costs and A & G and in this behalf relied on the order of Mumbai Bench of the Tribunal in the case of Micoperi SPA, Milano 82 ITD 369.

258. Mr. Syali, the learned counsel for the assessee, in his reply submitted as follows. He pointed out that his argument that the contracts of supply and installation are separate and independent based on the judgments of the Supreme Court in the case of Ganon Dunkerly (supra) and Guntur Tobacco (supra) have not been met by the Income-tax Department. According to him the judgment of the Supreme Court in 20th Century 130 STC 1 does not over rule the earlier judgments in Ganon Dunkerly and Guntur Tobacco (supra) and that they still hold the field even after the 46th amendment to the Constitution of India. Elaborating this he drew our attention to paragraphs 12 to 17 of the judgment of the Supreme Court in the case of 20th Century (supra) and pointed out that what was the subject matter of consideration by the Supreme Court in this case was the expression “deemed sale” and that this concept of “deemed sale” has not been imported or incorporated into the Income-tax Act by any amendment. Thus he submitted that the contracts were separate and cannot be read as an integrated whole.

259. Turning to the arguments of the revenue with regard to the agreements between the assessee with Tata & Skycell, Mr. Syali reiterated that the effect of the assignment amounted to a novation of the contracts and even factually the Indian company, which was the assignee has executed the installation and the assessee company had nothing the do with if. He filed a chart showing the contract, dates, signatories to the same etc. and contended that there was no overlapping of the responsibilities of Hannu Karavirta. With regard to the agreement with Tata (Annexure 6 & 9), Mr. Syali submitted that the worst scenario could be that both the annexures are identical indicating the same responsibilities but it should always be remembered that factually it was the Indian company which discharged the responsibility for installation for which it was remunerated and taxed and that nothing turned on the fact that the Indian company was a 100% subsidiary of the assessee. The Indian company had been separately assessed to tax in respect of the remuneration for installation. Even in the assessment order. The A.O. himself had admitted (page 3) that the installation was done only by the Indian company. He

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drew our attention to pages 249 to 254 and 255 to 263 of paper book No.III where the assessment orders of the Indian company for A.Y. 1997-98 and 1998-99 respectively have been filed.

260. With reference to the argument of Mr. Sharma for the Department that the Indian company did not possess any expertise in installation of the GSM equipment, our attention was drawn by Mr. Syali to pages 353 and 364 of paper book No.III which indicated the expertise of the Indian company. As regards the liaison of L.O. being considered as PE of the assessee company, Mr. Syali submitted that the L.O. did not carry on any business, as required by Article 5.1 of the DTAA so that it can be considered as a PE. He pointed out that there is prohibition by the Reserve Bank of India on the L.O. from carrying on any business in India. Thus the L.O. cannot be treated as PE as contended by the Department.

261. With regard to the question of attribution of income to the PE, Mr. Syali submitted that Article 7.3 of the DTA does not bring in “en masse” Rule 10 of the Income-tax Rules as part thereof. The effect of this Article, according to him, was that only those expenses that are allowed under the Income-tax Act will be allowed as deduction while attributing the income. Rule 10 was not a provision for allowing any expenses and, therefore, this Rule was not applicable. With regard to the order of Delhi Bench of the Tribunal in the case of Iraqi Airways (supra) cited by the Department, Mr. Syali submitted that in that case it was common ground between the parties that Rule 10 did apply and, therefore, the order cannot be construed as an authority supporting the contention of the Department that Rule 10 is applicable in all cases.

262. With reference to the arguments of Mr. Salil Gupta, the learned D.R., Mr. Syali pointed out from page 152 of Paper Book No.III that full details of the receivables were given to the Income-tax authorities and that the A.O. could have added them and recast the profit and loss account and that without doing so, he was not justified in rejecting the loss declared therein. He drew our attention to the audit report where the auditors have said that cash system of accounting was followed in order to give a “true and fair view” (taking into account the irrecoverable) and normally this audit report should have been accepted and acted upon. As regards the allow-ability of A&G and R&D expenses and other similar expenses incurred outside India, mr. Syali submitted that there was no prohibition on allowing them as deductions. According to Mr. Syali the claim was also justified because it was germane to the manufacturing activity of the assessee company. He sought to distinguish the order of the Mumbai Bench in the case of Micoperi (supra) on the ground that in that case the assessee did not furnish the requisite details despite being asked. In the present case no details were asked for and, therefore, the said decision is not applicable.

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263. We now take up the Department’s appeals for the assessment year 1997-98 and 1998-99. The arguments of the revenue were the same as in the other case of Motorola and Ericsson. The Department’s appeals are with regard to the assessment of royalty of software licensing, attribution of income to the PE and the validity of the levy of interest under section 234A and 234B. In respect of all these three issues Mr. Sharma Stated that his arguments are the same as in the other cases.

264. In the Department’s appeals, the argument of Mr. Syali for the assessee were also the same in respect of the validity of levy of interest. He was directed by the Bench to file a copy of the form No. ITNS-150. With regard to the attribution of income to the PE he submitted that the AO has ignored this aspect all together. As regards the assessment of the consideration for software licensing as royalty, he adopted the same arguments as in the other two cases on this question but briefly added that; (a) the software was specifically connected to the hardware and integrated into the same and was thus a copyrighted article, (b) if it is held that there is a PE in India, then the consideration for the software licensing will be part of business profits of the assessee company under Article 7 of the DTAA and not royalty; and (c) the Australian Court’s decision placed at pages 176 to 184 of paper book No.II, especially the observations at pages 179 to 182 clearly supported the assessee’s case on this question.

265. As regards interest under sections 234A and 234B, Mr. Syali stated that his arguments ere the same as in the other cases.

NOKIA (A.Y.1997-98 & 1998-99.) DECISION

266. There are four appeals in this case, two by the assessee and two by the Department. In fact they are all cross appeals. The grounds taken by the assessee as well as the Department are identical and even where there are minor differences, especially in ground No. 1 taken by the assessee in its appeals for both the years, they are not of any consequence.

Assessee’s appeals.

267. In the assessee’s appeals, the following issues arise for consideration:

i) Is there a business connection in India?

ii) Is there a permanent establishment of the assessee in India in the form of its liaison office or in the form of its 100% subsidiary Nokia India Pvt. Ltd. (hereinafter known as NPL)?

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iii) Is there a sale of hardware by the assessee in India? If so, how much profit can be attributed to such sale for income-tax purposes?

iv) What is the treatment to be accorded for the payments for the supply of software, which the income-tax authorities have assessed as royalty?

v) Are the income-tax authorities right in assessing the interest income on account of vendor financing and delayed payments from the Indian Telecom Operators?

268. We may straightaway clarify that in these appeals, the issue of the validity of the notice u/s 142(1) and consequent validity of the assessment made on the assessee are not in issue though the CIT (Appeals) has decided this against the assessee. We are, therefore, not to decide this issue. At the time of hearing the learned counsel for the assessee stated that the assessee does not wish to press ground No.5 for both the years which is that the orders passes by the departmental authorities are violative of the rules of natural justice.

269. so far as the first issue is concerned, namely, the existence of business connection, the learned counsel for the assessee submitted that he would restrict his case to contending that no operations were carried on by the assessee in India and, therefore, no income was taxable in India u/s 9(1)(i) of the Income-tax Act.

270. Before taking up the issues for consideration, we may briefly notice the facts of the assessee’s case. The assessee, namely, Nokia Networks OY is a company incorporated in Finland and a tax resident thereof. It opened a liaison office (hereinafter referred to as ‘LO’) in India on 30.3.1994. Two agreements were signed between the assessee on the one hand and the Indian Cellular Operators on the other hand namely Modi Telestra (I) Ltd. and Skycell Communication Ltd. on 23.3.1995 and 172.2.1995 respectively. When these contracts wee signed, the assessee’s subsidiary i.e. NPL was not in existence. It was incorporated only later on 23.5.1995. Thereafter, four other agreements were entered into with different cellular operators namely Tata, Evergrowth Fascell, BPL and supreme . The assessee supplied both the hardware and software to the Indian cellular operators and NPL, its 100% subsidiary, carried out installation work.

271. The main question to be considered is about the role of the L.O. The subsidiary questions which arise are:

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(a) whether the LO can be said to furnish “business connection” to the assessee India, and

(b) Whether the LO can be said to constitute a PE of the assessee in India.

Taking up the first question, we are of the view that the LO has not carried out any business activity for the assessee in India and that its role has been only to assist the assessee in the preliminary and preparatory work. By the rules of the Reserve Bank of India, a LO is not permitted to carry on any business activity for a foreign enterprise. Its activities are closely monitored by the Reserve Bank of India. Reserve bank of India has not found any violation of the rules under which permission has been granted to the LO. The LO no doubt has certain staff who have been paid salary and perquisites but there is no evidence to show that they were transacting any business in India on behalf of the assessee. The LO has only carried out advertising activity which cannot by any means furnish business connection. The Income-tax authorities would appear to have also held that the LO carried out marketing activities for the assessee in India but for this finding, there is no evidence and none of the contracts which have been brought on record indicate that the LO has carried out any marketing activities. In paragraph 5.2 of his order, the CIT (Appeals) has stated that the facts and circumstances suggest that the assessee carried out business in India through its LO which was not merely preparatory or incidental in nature and that even the designing of the GSM, which was the heard of the activity, was done by the LO. Though the has not stated as much in terms what he perhaps had in mind is that the LO had something to do with the designing activity connected to the GSM. He has made a very general statement that the assessee always had the presence of its office, meaning thereby the LO to aid it in its activities. He has not, however, referred to any material or evidence on the basis of which he has come to this conclusion. He is also not justified in rejecting the assessee’s argument based on the order of the Special Bench of the Tribunal in the case of Mitsui & Co. Ltd. 39 ITD 59 to the effect that a LO, which by law is prohibited from engaging itself in any business activities in India on behalf of the foreign enterprise, can be considered to furnish a business connection in India. We are, therefore, satisfied that there is no material or evidence on the basis of which it could be said that the LO can afford a business connection to the assessee in India.

272. The next question to be considered is whether the same activities which have been carried on also by the Indian subsidiary namely NPL can constitute business connection within the meaning of section 9(1)(i). In our opinion, they do constitute a

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business connection by virtue of it being a 100% subsidiary of the assessee company and by engaging itself in activities to support the assessee’s main activity. There is a service agreement between NPL and the cellular operator and there is also a technical support agreement between NPL and the cellular operator and there is also a technical support the assessee’s activity of supplying GSM hardware equipment in India and, therefore, it cannot be said that these agreements to do not furnish business connection. There are also marketing agreements between the assessee and NPL dated 19.4.1996 and 6.11.1997, which admittedly operate during the years under consideration. These agreement also afford the business connection in India. We are, therefore, satisfied that a business connection within the meaning of section 9(1)(i) of the Act is established through the Indian subsidiary in India.

273. There is also one more strong reason for holding that there is a business connection in India. This is that all the contracts between the assessee on the one hand and the Indian cellular operator on the other hand, we signed in India, Three such contracts with Modi, BPL and Skycell were signed by one Hammu Karavirta. Mr. Hannu Karavirta was the Country Manager of the Liaison Office in India since the inception of the liaison Office from 1.2.1994. He signed the supply contract with Skycell on 17.2.1995. He also signed the supply contract with Modi Telstra on 23.3.1995. Thee we all signed before 2.5.1995, the date on which Nokia Telecom P Ltd. (“NTPL”), the 100% subsidiary of the assessee company, as incorporated. On 31.5.1995, Karavirta signed the installation part of the contract with Skycell. However on the very same day he assigned these contracts to NTPL and thereafter on the very next day (i.e. 1.6.1995) became an employee of NTPL. On 1.1.1996 he became the Manager Director of NTPL and thereafter signed the installation contract with the cellular operator on behalf of NTPL. The argument of Mr. G.C. Sharma based on these facts was that the contracts were assigned only to the assessee’s 100% subsidiary which was actually under the control of the assessee and through legally speaking the assignment of the contrary may amount to a novation in substance and truth it remains the same in its original form, especially when the person who signed the contract on behalf of the assessee company became the implementer of the installation contracts in is capacity as the employee of NTPL form the very next day. It is significant to note that before 1.6.1995 Hannu Karavirta was representing the assessee company and had also signed the supply contract on its behalf and on or from 1.6.1995 he became the employee of NTPL, the 100% subsidiary of the assessee company and began signing the implementing the installation contracts. It is also significant to note that in respect of Skycell and Modi the assessee contracted with them both for supply and installation of the GSM equipment, but after the incorporation of NTPL, the installation part of the contract was assigned to it. It is also noteworthy that NTPL was incorporated only on23.5.1995 and could have had

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no expertise in installation so that it can take up the installation work. All these facts show a close connection between the assessee and NTPL and since a common person namely Hannu Karavirta was involved with both the companies, the distinction between them got blurred and though they were separate corporate entities, for all practical purpose, once got identified with the order. The NTPL thus afford a live connection amounting to business connection. For the very same reason, NTPL also constitutes a permanent establishment of the assessee in India because the assessee virtually projects itself in India, through NTPL and Karavirta who acted for both.

274. (a) Taking up the first part of the second question as to whether the L.O can constitute a PE of the assessee in India, we are of the view that it cannot. Whatever we have stated as our reason for holing that the L.O. cannot to said to furnish business connection with India, equally applies to the question whether L.O can constitute the PE of the assessee in India. We, therefore, do not consider it necessary to elaborate this point further except to note that the L.O. does not fit into any of the various categories of PE mentioned in Article 5.2 of the DTAA between India and Finland. We, therefore, hold that the L.O. cannot constitute the PE of the assessee in India.

(b) Taking up the second part of the second question as to whether the Indian subsidiary of the assessee, referred to as NTPL, can be considered as a PE of the assessee in India, we are of the view that having regard of the findings recorded by both the AO and the CIT(Appeals), the NTPL can be considered as a PE. The issue has been dealt with in paragraph 6.3 of the order of the CIT(Appeals), though in several earlier parts of the order, there is scattered reference to this aspect of the matter. However, the final decision of the CIT(Appeals) is only in paragraph 6.3 of his order. A reading of this paragraph shows clearly that what the CIT(Appeals) has in mind, as in the case of the A.O., is that NTPL, the Indian subsidiary, is the virtual projection of the assessee itself in India, though this idea may not have been properly articulated in the order of the Income-tax authorities. The main point brought out by them is that in respect of the services rendered by NTPL to the assessee under the “marketing agreement”, it was compensated on the basis of cost plus 5% more. IT stand to reason that in respect of the marketing activity, NTPL has no scope for incurring any loss. Nevertheless, its accounts shows a book loss of Rs. 10 crores (approximately) and even if the depreciation loss of Rs. 2 croes in ignored still the loss is around Rs. 8 crores. The question posed by the Income-tax authorities is: Where from this loss has arisen ? The answer is that such a loss has risen only from the installation activity carried out by the NTPL. In other words the installation charges received by NTPL from the cellular operator in India were not commensurate with the costs and expenses incurred therefore and that is the reason

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why such a loss has been incurred. Now the other question is how does that result in NTPL being regarded as the PE of the assessee company. The answer is that since NTPL is a wholly owned subsidiary of the assessee company. The answer is that since NTPL is a wholly owned subsidiary of the assessee in India and is consequently in a position to control and monitor its activities, the installation charges were directed to be so fixed that they were not commensurate with the services rendered by NTPL. The next question will be why would the assessee do so. We cannot think of any other reason except that the part of the price for installation of the GSM equipment was diverted as the price for the supply contract. Whether there is direct evidence or nor for this conclusion, or whether it is permissible for us even to make such an inference from the circumstances of the case, is not really material for the present purpose. What it material is that there was sample scope for the assessee to control and monitor the activities of NTPL which, it should be remembered is a 100% subsidiary of the assessee, in such a manner that NTPL became a virtual projection of the assessee company in India. The other point made by the Income-tax authorities was that the assessee even represented to the Indian cellular operator that it will not dilute its share holding in the Indian subsidiary below 51% without the written permission of the Indian cellular operators. This allegation of the Income-tax authorities has not been refuted or proved wrong by the assessee in the course of the proceedings before them or even before us. This also shows that the distinction between the two corporate entities, namely, the assessee on one hand and NTPL, its 100% subsidiary on the other hand, virtually got blurred with the result that it can be said that when the Indian cellular operators were dealing with NTPL in connection with the installation contract and marketing agreement, they were in fact dealing with the assessee itself. We are therefore, of the opinion that the test propounded by the Andhra Pradesh High Court in the case of CIT Vs. Vishakhapatnam Port Trust 144 ITR 146 is fully answered. We are, therefore, unable to find fault with the CIT(Appeals) for holding that NTPL, the 100% Indian subsidiary of the assessee, constituted the assessee’s PE in India.

(c) AT this juncture it may be pointed out that the case of Motorola, we have held that the Indian subsidiary of Motorola cannot be considered as a PE but that was because of Article 5.3(e) of the DTAA with USA which provided that the term “Permanent establishment” shall be deemed not to include the maintenance of a fixed place of business solely of the purpose of activities which have a preparatory or auxiliary character for the foreign enterprise. In the present case (Nokia) however the activities of the Indian subsidiary of Nokia, i.e. NTPL, are not of a preparatory or auxiliary character. Therefore, Article 5.4(e) of the data between Indian and Finland, which is similar to Article 5.3 (e) of the DTAA with USA, does not apply and we cannot hold that the NPTL cannot be deemed to be the PE of the assessee. The

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activities of NTPL are something more than preparatory or auxiliary in nature. They do not also fall under any of the other clauses (a) to (d) of Article 53.4 of the DTAA with Finland. We felt the need to explain this aspect of the matter in order to dispel any notion that there may be a contradiction in out conclusions regarding PE between the case of Motorola and the case of Nokia.

275. The third question is whether there is a sale of hardware by the assessee in India and if so how much profit can be attributed to this activity for purpose of Income-tax. The Income-tax Authorities have taken the view that the title in the goods passed in India and, therefore, the sale of the hardware took place in India. We may take up first the contract between the assessee and Tata Communications Ltd., hereinafter referred to as “Tata” for the supply of equipment for the GSM Network. This agreement is dated 15.6.1996. Clause 3 defines the scope of supply of equipment. Under clause 3.1, the assessee is to supply “all of the equipment, spare parts and the special tools and instruments specified in the respective confirmed orders”. This shows that the agreement is for supply of equipment and spares etc. relating to the equipment. Clause 5, which speaks of parts and payments, shows that the price payable is only equipment related and nothing else. Clause 6 is important and it speaks of delivery, title and risk. According to clause 6.1, the title to the hardware “shall pass to the purchaser at the port of shipment in Helsinki, Finland or any other originating port of shipment as the case may Be”. This clause speaks of the passing of the risk also. It says that “risk of loss as regard the hardware shall pass to the purchaser simultaneously with the title at the port of shipment in Helsinki, Finland or any other originating port of shipment, as the case may be” (underline ours). Thus both the tile and the risk in the hardware passed outside India and simultaneously. Clause 6.3 says that the purchaser shall inspect the delivery within 7 calendar days of their arrival in Hyderabad, India and if any transport damage is discovered, the assessee shall effect replacement as soon as reasonably possible. These two clauses read together imply that small part of the risk, namely, the transport damage, alone is t be borne by the assessee. That does not mean that the assessee is to bear the entire risk. Clause 6.3 is only a warranty given by the assessee and not a condition. Clause 8.1 under the head “warranties and spare parts” says that the assessee shall warrant that the hardware will be new and unused except for the testing required under the contract when delivered. The assessee is also bound to promptly remedy all defects found in the hardware within the warranty period. This clause is not inconsistent with clause 6.1, which says that both the title and the risk passed outside India. The mere fact that the assessee warranties that the hardware supplied by it will be new and unused and undertakes to remedy all defects pointed out during the warranty period does not mean that the risk continues to be with the assessee even after the hardware is delivered to the

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cellular operators in India. Clause 8.1 is only in the nature of a warranty. This shall be clear from clause 8.3 which says that if any defect is discovered in the hardware during the warranty period then “the purchaser shall arrange, at its won cost, the returned shipment of the defective part, sub-assembly or unit (if applicable) to facilitate in New Delhi therefore designated by the supplier……” This provision can only be consistent with the position that the property and the risk in the goods have passed outside India as otherwise Tata, the purchaser, cannot be compelled to bear the expenses of returning the defective part.

276. We may now refer to clause 18 of the agreement under the head “Project Steering Committee”. This clause provided for the creation of a Project Steering Committee (PSC) for monitoring the progress of performance of the respective duties and obligations under the supply contract, of the parties. It has been clarified before us on behalf of the assessee that this clauses was not activated during the year and that a similar clauses is absent in the other contracts. It was submitted and in our opinion rightly that this clause which provides for a joint creation of the PSC does not in any manner militate against the contention that the risk and title in the hardware have passed outside India. The duty of the PSC is only to ensure that both the parties to the contract carry out their respective obligations properly.

277. Clause 19 speaks of termination of the supply contact for default. Clause 19.1 clarifies that termination is possible only to such part of the supply contract as remains unperformed, unless it would be manifestly unreasonable to require the terminating party to retain the part performed by the defaulting party. The inability of Tata which is the purchaser, to terminate what has already been fulfilled by the assessee under the contract, is indicative of the fact that the risk and title in the hardware has passed outside India. In other words the hardware has become the property to Tata outside India and thereafter Tats continue to hold the hardware at their own risk and, therefore, no part of the contract prior to the passing of the title and risk could be lawfully terminated by it.

278. The refrain of Mr. G.C. Sharma, the learned Senior counsel for the Department was based on Appendix 9 to the supply contract with Tatas which speaks of Nokia’s overall responsibilities. We have gone through Appendix 9 which is at pages 1182 and 1183 of the contract between the assessee and Tata compiled in a Box file Vol. IV. He referred to page 1183 and submitted that it was clearly provided therein that Nokia will be responsible for the delivery and installation, testing and commissioning of goods as defined in the contract. It was his submission that because Nokia, the assessee, has undertaken the overall responsibility for the installation of the GSM equipment also, the title and risk continue to remain with the assessee and did not pass till the equipment was installed and passed the acceptance test. This argument

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was also taken in support of the contention that the supply contract and the installation together formed a works contract, Neither of these contentions can be accepted. As regards the contention that the contracts constitute a works contract, we have elaborately dealt with the same while disposing of the appeals in the case of Ericsson and, therefore, there is no need to repeat them here. So far as the agreement that the risk and title passed to Tata only after the acceptance test has been satisfactorily carried out is concerned, we are unable to accept the same merely on the basis of the statement made in Appendix 9 to the contract under the heading "Nokia's overall responsibilities". A careful reading of page 1183 shows that Nokia, the assessee, is bound to provide the installation tools and test equipment for the testing teams as agreed in the contract and would also be responsible for the documentation for installation of sites as agreed upon and for the installation supervision. This is obviously because Nokia, having supplied the GSM equipment, would be in a better position and in fact would be more interested in ensuring that the equipment is properly installed. The primary responsibility for installation is that of the installer, which is a separate company independent of the assessee and also assessed separately in respect of the installation income. By merely providing installation tools and testing equipments or the documentation for installation or supervising the installation, it cannot be said that the assessee was primarily responsible for the installation of the equipment and the title and risk in the GSM hardware continued with it till the acceptance test was carried out. We hasten to clarify that our observations in paragraph 274(b) to the effect that the distinction between the assessee and NTPL, its subsidiary, got blurred be understood in the context of our decision with regard to the existence of a PE in India. We only meant to convey that because of the close connection between the assessee and NTPL, it was possible to look upon NTPL as a "virtual projection" of the assessee in India. We have in fact clarified in the same paragraph that what matters is that there was scope for previewing the assessee's should in the body of NTPL and that it did not matter that there was no direct evidence for the control of NTPL by the assessee. For purposes of PE, what is relevant is only the perception that NTPL was a projection of the assessee, whether or not in fact and truth its activities were being controlled/monitored by the assessee. Our observations are therefore, confined to the question of PE. Otherwise, both the assessee and NTPL remain separate corporate entities and NTPL has also been assessed separately for its installation income. Thus the observations in para 274(b) have no relevance to what has been discussed in this paragraph.

279. We may now briefly notice the significance of the "acceptance test". This is referred to in the installation contract dated 15th June, 1996 entered into between Tata Communications Ltd. (Tata) and NTPL. Clause 8 of the installation contract

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speaks of "inspection, testing and acceptance". Briefly speaking it says that the equipment after installation shall be tested by NTPL which is the installation company. The various clauses describe in detail the procedure for testing, notice to be given, aspects to be seen etc. which are not very relevant for our purpose. Clause 8.4 which is relevant for our purpose says that "in the event that the equipment and / or ancillary equipment at the site concerned does not satisfactorily pass the tests, Nokia shall rectify the defects and the procedure referred to above in this Article shall be repeated as many times as is necessary, in order for testing and acceptance to be satisfactorily completed". We may clarify that Nokia, referred to in this clause, is the installer which is NTPL and not the assessee company. The significance of this clause is that it is the installer i.e. NTPL which shall continue to remain responsible for removing the defects in the equipment till the acceptance test is satisfactorily conducted. This clearly excludes the assessee company from any kind of responsibility for malfunctioning or non-functioning of the GSM equipment or for not satisfactorily passing the acceptance test. The conclusion drawn to the contrary by the Income-tax authorities is untenable.

280. We have perused the assessment order for the assessment years 1997-98 and 1998-99. The A.O. has referred only to the supply contract entered into by the assessee with Tata and BPL. No other contract has been adverted to in any detail. We have found that there is no material difference between the terms of the two contracts and that is why we have also referred only to the supply contract with Tata in some detail. In fact even the learned counsel for the assessee has referred only to the supply contract with Tata in some details. Neither of the parties before us has referred to any other supply contract in the course of the arguments.

581. The fourth question is regarding the treatment to be accorded to the payments made to the assessee for supply for software. The AO has assessed the payments as royalties but the CIT(A) has assessed it as business profits on the ground that the assessee has a PE in India in the form of Both “LO” and NTPL. On this point, the parties ar agreed that the nature of payments made by the cellular operators for use of software supplied by the assessee alongwith the hardware is the same as in the cases of Ericsson and Motorola. Only one aspect need to be noticed in this case and that is that in para 8.1 of his order, the CIT(Appeals) has decided that the amount paid for use of the software is to be treated as the commercial income or business profits of the assessee since the assessee had been held by him t have PE in India. However, the nature of the payment had been found by us in the cases of Ericsson and Motorola to be not royalty at all. We have found that the payment is for a copyrighted article and not the copyright right. The same findings holds good sin this case also. Therefore, even Article 13.6 of the DTAA which provides that if the foreign enterprise has a PE in India, the royalties shall be taxed not under Article 13 but as

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business profits under Article 7 of the data will not be attracted. In other words even though we have held that the 100% Indian subsidiary of the assessee, namely, NTPL, constitutes the assessee’s PE in India, the payment for the software cannot be assessed under Article 13 for the reasons that it is not in the nature of royalty. However, a question may arise as to why the payment cannot be assessed as “business profits” under Article 7. The reason is that the software has been held by us to be part of the GSM Cellular Systems as a whole, the sale of which has taken place outside India as held by us earlier.

282. The 5th question is whether the addition of Rs. 5 crores for each of the assessment years 1997-98 and 1998-99 as interest on vendor financing is justified. This issue is discussed in paragraph 9 of the order of the CIT(A) for the assessment year 1997-98.

The brief facts are that the assessee provided credit facilities to the Indian Cell Operators on which interest @ 18% was chargeable as per the agreement. It appears that the facts in this connection were not brought out clearly before the A.O. despite being called upon and, therefore, the A.O., finding that the assessee had not declared any interest in the return, was forced to estimate the interest at Rs. 5 crores for each of the two assessment years. Before the CIT (Appeals), the assessee contended that though there was provision in the agreement to charge interest from the cell operators, it was never activated or acted upon by the parties, that no entries were passed in the assessee’s books of account for the interest, that no invoices for interest were raised against the cell operators and that in these circumstances, the interest cannot be said to have accrued at all and that the A.O. was not justified in estimating and adding the notional interest. Written submissions were also field before the CIT(Appeals) articulating the above points (page 80 of PB No. I read with page 186 of PB No.II). The audited statements placed at page 152 of paper book No. II were also relied upon. The CIT(Appeals), however, rejected the assessee’s submissions and recorded the following findings:

(a) The assessee maintained accounts on the mercantile basis as it was required to under the Companies Act, 1956 under which it was required to do so in respect of its Indian operations.

(b) No evidence was filed by the assessee to show that the financial position of the cell operators was so bad that they could not pay the principal amount or the interest.

(c) There was a defect in the books of account at least to the extent that interest chargeable was not taken credit for.

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On the above findings, the CIT(Appeals) applied the judgment of the Supreme Court in the case of State Bank of Travancore 158 ITR 102 ad held that the interest was rightly added in the assessments.

283. We have considered the facts and the rival contentions but we find no substance in the assessee’s case. The findings of the CIT(Appeals) have not been refuted before us on the basis of any material or evidence. The existence of the clause in the agreement for charging interest @ 18% p.a. is not denied. All that is contended is that the clause was not activated but this contention is without substance because if the agreement is in force then it is in force with all its clauses which includes the charging of interest. It was for the assessee to show on the basis of any evidence or correspondence or subsequent agreement modifying the earlier agreement under which interest was chargeable. This has not been done. The mere fact that no credit was taken in the account books for the interest cannot stop the accrual thereof as the assessee’s income. Even before us no evidence was filed to show that the financial position of the cell operators was bad and that there was an agreement between the parties not to charge interest or not to activate the clause providing for interest. In these circumstances, we uphold the addition for both the years.

284. The only question which remains is that of attribution of the income. There are two aspects of the matter. Under section 9(1)(i) of the Income-tax Act, all income accruing or arising,, whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Explanation 1 clarifies that in the case of a business of which all the operations are not carried out in India. Explanation 1 clarifies that in the case of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If we turn to Article 7 of the DTAA between India and Finland, we find that Article 7.1 says that the profits of an enterprise of a contracting state shall be taxable only in that state, unless the enterprise carries on business in the other contracting state through a PE situate therein. In the enterprise carries on business in the other state through a PE, the profits of the enterprise may be taxes by the State in which the PE is situated, but only so much of the profits as are attributable to the PE. Article 7.2 says that the profits attributable to the PE are those which the PE is expected to make as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. Article 7.3 says that in determining the profits of a PE all expenses incurred for the purposes of the PE, including executive and general administrative expenses are to be allowed as are allowed under the provisions of the domestic law of the contracting

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state in which the PE is situated. The other sub articles are not relevant for our purpose. We have held that the assessee has a business connection in India and, therefore, Article 9 (1)(i) is attracted. We have also held that the assessee has a PE in India in the form of NTPL. The question of attribution of income can, therefore, arise under both the situations namely where there is a business connection and where the assessee has a PE in India. It is, however, a well settled position that the provisions of the DTAA override the provisions of Income-tax Act and if any authority is needed reference may be made to CBDT Circular No. 333 dated 2.4.1982 and the judgment of the Supreme Court referred to in para 263. Therefore, in this case we have to attribute the income to the PE and it is not necessary for us to apply section 9(1)(i) of the Income-tax Act.

285. We have considered the matter of attribution of income to the PE carefully. For the assessment year 1997-98 the Assessing Officer has first bifurcated the value of the total supply of equipment i.e. both hardware and software into 70% for hardware and 30% for software. 70% of the supply value comes to Rs. 102,63,12,952/-. He has estimated the income at 40% thereof which comes to Rs. 41,05,25,180. From this figure he has deducted 5% as permissible expenses u/s 44C of the Income-Tax Act which comes to Rs. 2,05,26,259. The balance of Rs. 38,99,98,921 has been taken as the taxable income from hardware and is taxes @ 55%. A similar procedure has been adopted in the assessment year 1998-99, except that tax has been charged @ 48%. The CIT (Appeals) in paragraph 7 of his order for the assessment year 1997-98 has reduced the income to 5% of the sales to Indian parties. While doing so he has noted that the profit and loss account relating to Indian operations of the assessee is not substantiated with any documents and is, therefore, not reliable for the purpose of computing the income from sale of hardware. He has accordingly taken the assistance of Rule 10 of the Income-tax Rules to compute the profits on the basis of assesses’s global accounts. He has noted that the global accounts showed a net profit of 10.8%. The net profit on Indian sales was, therefore, taken at 10.8% but the CIT (Appeals) held that since the whole of this profit cannot be attributed to the Indian operations as the activities relating to manufacture and development of the products were undertaken outside India, he has ultimately held that the profits attributable to operations in India should be taken at 5% of the sales to the Indian parties. For the assessment year 1998-99, he has taken 7.9% of the sale value considering the fact the net profit on Indian sales was 16.1% as against 10.8% in the preceding year.

286. The Department in its appeals has taken the ground that the CIT(Appeals) was not justified in reducing the income from 40% of the value of the hardware to 5% of the sales to Indian parties. Actually, for the assessment year 1998-99, the ground should be that the CIT(Appeals) was not justified in reducing the income to 7.9%. It

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appears to be a mistake in drafting the ground No. 1. On the other hand the assessee in its appeals has taken up several contentions including the contention that no income can be attributed to the PE at all primarily because whatever expenses that are incurred by it are compensated by the assessee on cost plus basis, that if the expenditure incurred by the PE is taken into account then there will be no income left to be assessed, that there are several activities which do not lead to the existence of the PE and, therefore, they cannot contribute to the revenues of the PE, that no income can be attributed to the supervision because the supervision is only an incident of the sale and does not constitute an operation by itself, that the India specific accounts were wrongly rejected by the CIT (Appeals) and that at any rate the adoption of 5% and 7.9% of the sales to Indian parties is arbitrary and excessive.

287. We have carefully considered the argument raised by the Department as well as the assessee. In the present case it cannot be disputed that the research and development activities and the manufacture of the GSM equipment took place wholly outside India. W have also found, for reasons stated earlier, that the title and risk in the equipment also passed wholly outside India. The only activities which the assessee carried on in India through its PE were:

a) Net work planning,

b) Negotiations in connection with the sale of equipment, and

c) The signing of the supply and installation contracts.

In the case of Ahmadbhai Umarbhar 18 ITR 472, the Supreme Court held that the income attributable to the manufacturing activity should be more then the income attributable to the activity of sale. In the case of Annamalia Timber Trust & Co. Vs. CIT 41 ITR 781, the Madras High Court approved the tribunal’s decision that 10% of the income can be attributed to the signing of the contracts in India. The Calcutta High Court also approved the same percentage as income attributable to the signing of the contracts in India in the case of CIT Vs. Bertram Scott Ltd. 31 Taxman 444. We have kept the principles laid down in these judgments in mind. In the present case, as already noted, in addition to the signing of the contracts in India, the preliminary negotiations for the contracts and the network planning were carried out through the PE. We may clarify here that the network planning activity is different from the activities which are of the preparatory or auxiliary character. In respect of signing of contracts, alone, the income attributed is 10% in the decisions cited above. Two more activities have been carried out by the PE in India and, therefore, we have to attribute a higher income than what was attributed in the decided case.

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The negotiations which ultimately lead to the signing of the contracts may involve more effort on the part of the PE and the signing of the contracts is only the fructification of those efforts. Obviously, therefore, the income attributable to the negotiations part should be more and in addition to the income attributable to the signing of the contracts. Some income has t be attributed to the net work planning also. Taking all these into consideration, we consider it fair and reasonable to attributable 0% of the net profit in respect of the Indian sales as the income attributable to the PE. The following steps are involved in computing the income attributable to the PE.

First the global sales and the global net profit have to be ascertained. From the accounts presented before us as well as before the Income-tax authorities, the global net profit rate has been ascertained at 10.8% and 6.1% by the CIT (Appeals) to which no objection has been taken either side. This percentage has to be applied to the Indian sales and by Indian sales, we means the total contract price for the equipment as a whole and not the bifurcated price which the Assessing officer has referred to in the assessment order. This will also be consistent with out view that the software and the hardware constitute one integrated equipment. The resultant figure would be the net profit arising in respect of the Indian sales. Out of this figure of net profit 20% shall be attributed to the PE to cover the three activities mentioned above. The A.O. is directed to compute the income of the PE as directed above.

288. Only one point remains to be noted. In the initial stage of the argument in the case of Ericsson, Mr. Sharma the learned senior counsel for the Department, pointed out that the assessee has adopted the mutual Agreement procedure and filed an application before the Competent Authority by an application dated 11th march, 2003, and contended that this shows that it was taxable in India. This was opposed by Mr. Dastur the learned counsel for Ericsson. He contended that no argument based on the MAP application would be decisive. He drew out attention to paragraph 9 of the MAP application (filed in the form of a separate paper book and pointed out that the assessee’s prayer therein that income relatable to the supply of the GSM cellular system may be subject to the existence of a PE in India, which was denied by the assessee in the same paragraph. He accordingly contended that no useful purpose would be served by harping on the MAP application. We have gone through the said paragraph of the application under the MAP. Therein, the assessee (Ericsson) has requested the Government of Sweden to represent to the Government of India that income from the supply of the mobile telecommunication systems (including hardware and software) supplied to the Indian Cellular Operator is not taxable in India since Ericsson does not have a PE in India. It has also been stated therein that the payment for the software does not constitute the Government of Sweden to represent to the Government of India to reach an agreement “to the

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extent that any income generated by the Applicant from the supply of the Mobile Telecommunication System i.e. Hardware and Software) to the ICO is Business Profit under Article 7 taxable subject to existence of PE in India, which is not the case here”. It is thus clear that there is no admission on the part of the assessee that the income is taxable in India, as claimed on behalf of the Department. The existence of the PE in India is denied Under Art 7 business profits can be taxes in India only if there is a PE in India. The taxability of the payment for the software is also denied under the terms of the DTAA. Thus, in our opinion, there is no admission in the MAP which would render the appellate proceedings before us academic. Therefore, we hold that the fact that the assessee (Ericsson) has adopted the MAP procedure does not come in the way of the tribunal disposing of the appeal. It needs to be stated that out view is based on the fact that the assessee (Ericsson) has not admitted in MAP that it is taxable in India and its stand before us in the appeal is in conformity with its stand under the MAP. We, however, clarify that we have not examined the question as to what would happen in a case where the assessee admits its taxability under the MAP but wishes to take a completely contradictory stand in the appeal before the Tribunal. The question whether in such a case an assessee can be permitted to pursue its appeal before the Tribunal is a moot question which we leave open, to be decided in an appropriate case. We may add that in the case of Ericsson, after Mr. Dastur pointed out the stand taken by the assessee in its application under the MAP. The matter was fairly not pursued by Mr. Sharma, the learned senior counsel for the Revenue.

289. The assessee’s grounds of appeal are some what argumentative and mixed up and, therefore, we find it difficult to give our decisions ground wise. However, we have culled out the issues and summarized them in para 267. We give our decision on those issue as follows:

i) There is business connection in India.

ii) There is no PE in India in the form of L.O., but there is a PE in the form of the assessee’s 100% subsidiary in India, viz. NIPL.

iii) The sale of hardware took place outside India and, therefore, no income accrued to the assessee in India on the sale.

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iv) The payment made for software is not in the nature of “royalty” and not taxable either under the Act or under the DTAA.

v) The income-tax authorities were justified in assessing the interest income on account of vendor – financing.

290. In the Department’s appeal, the first ground relates to the computation of the income attributable to the operations carried out in India. The department contends that 40% of the sales should be attributed to such operations. In view of our discussion and decision in paragraph 285 to 287, the ground is partly allowed for both the year.

290.2. The second ground relates to the assessment of the payment of software, which the Department wants to assess as “royalties” since we have held that the payments cannot be assessed either as royalties or as business profits, the ground is dismissed.

90.3. The third and forth grounds relate to the levy of interest under sections 234A and 234B. The levy of interest under section 234A is restored to the file of the Assessing Officer with the directions contained in para 74. As regards section 234B, the decision of the CIT (Appeals) on merits is upheld. The third ground is allowed for statistical purposes and the fourth ground is dismissed.

290.4. Thus, all the four appeals are party allowed.

291. We may place on record that we were very ably and assiduously assisted by the learned counsel for both the sides indisposing of the appeal.

292. Summing up the result of the entire order:

A. In the case of Ericsson:

(1) Assessee’s appeal for assessment year 1997-98 in ITA No. 815/Del/01 is allowed;

(2) Department’s appeal for assessment year 1997-98 in ITA No. 1798/Del/01 is partly allowed; and

(3) Assessee’s cross objection in C.O. No. 60/Del/01 is allowed.

B. In the case of Motorola;

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1. Assessee’s appeal for assessment year 1997-98 in ITA No. 2455/Del/01 is partly allowed.

2. Department’s appeal for assessment year 1997-98 in ITA No. 2516/Del/01 is partly allowed.

C. In the case of Nokia For the asst year 1997-98:

1. The assessee's appeal in ITA No. 1963/Del/2001 is partly allowed.

2. The Department’s appeal in ITA No. 2511/Del/2001 is partly allowed.

For the assessment year: 1998-99

1. The assessee’s appeal in ITA No. 1964/Del/2001 is partly allowed.

2. The Department’s appeal in ITA No. 2510/Del/2001 is partly allowed.

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Documents

Netwo… · Web viewin the income tax appellate tribunal. delhi bench 'a' (special bench) i.t.a. no. 2455/del/01 and i.t.a. no. 2516/del/01 (assessment year: 1997-98)