Delhi ITAT ruling on factors considered for determining PE and taxability of software embedded in supply of equipments

HUAWEI TECHNOLOGIES CO LTD, China v ADIT (ITA Nos.5253/Del/2011, 5254/Del/2011, 5255/Del/2011 & 5256/Del/2011 dated 21/03/2014) – Del ITAT


The assessee, which is a company incorporated in China, is engaged in the business of supplying non-terminal products, i.e., telecommunications network equipment. The assessee had not filed any return of income. During the course of survey undertaken at the office premises of Huawei India, several documents were found and statements of various senior executives were recorded. On the basis of the said documents and statements, the Assessing Officer arrived at the conclusion that the assessee was having Permanent Establishment (PE) in India and the income that has accrued to the assessee from the supply of telecommunications network equipment during the previous year is taxable in India. In view of the above, the AO issued notice under Section 148 of the Income-tax Act, 1961. In response to the notice under Section 148, the assessee filed the return of income on 30th July, 2009 disclosing total income of Rs 82,69,535.

The AO held that the Huawei India constituted a dependent agent PE as per the provisions of the tax treaties and business connection as per the provisions of Explanation 2 to Section 9(1)(i) of the Income Tax Act, 1961.  The AO allocated the receipt from supply of equipment between hardware and software in the ratio of 70% for hardware and 30% for software. In respect of supply of hardware, the AO  estimated operating profit and then attributed 20% towards the PE in India. However, in respect of the supply of software, AO treated the receipt from software as income from royalty and held that as per India-China Tax Treaty, the income from royalty is to be charged to tax at the rate of 10%. The DRP upheld the order of AO and confirmed the additions made.

Tax Authority’s arguments:

  • On the basis of various facts collected during the survey and afterwards, it is clear that the assessee is carrying out the business in India. The business of the assessee in India is being conducted with active involvement of the employees of Huawei India. Such employees of Huawei India along with employees of the assessee have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the assessee with its Indian customers
  • The assessee has given power of attorney in favor of its employees for signing the contracts, conducting negotiation and executing all necessary matters for MTNL project in India.
  • Thus, the business activities of the assessee being conducted from the fixed place of business in India forms the core of selling activities and cannot be termed as of the preparatory or auxiliary character.
  • The employees of Huawei India have habitually secured orders in India, wholly or almost wholly for the assessee. 
  • The various documents in the form of agreements/purchase orders/copies of contracts also proves the active involvement of the employees of Indian company in the conclusion of contracts on behalf of the assessee. Therefore, Huawei India also constitutes the agent other than an agent of independent status of Huawei China. This results into the creation of the dependent agent PE.
  • With respect of attribution: From the agreement with HTL Ltdand the agreement with Sterlite Optical Technologies Ltd, there is mention of separate price for hardware and software. Therefore, it is evident that the supply of hardware and software is separate. 
Assessee’s contentions:
  • Apart from what is declared by it in the return filed in response to notice u/s 148, the assessee’s income has not accrued/arisen in India u/s 5(2) of the Act and the AO has erred in holding that Huawei India is the assessee’s PE as well as the business connection in India. 
  • Further, there was no separate supply of software. Software is embedded with the hardware/equipment and is necessary for the operation of the equipment. The assessee has charged a consolidated price for the supply of equipment which included hardware as well as software both. He, therefore, submitted that the entire receipt from the supply of equipment is to be assessed as business income.  The issue is squarely covered in favour of the assessee by the decision of Hon’ble Jurisdictional High Court in the case of DIT Vs. Ericsson A.B., New Delhi – [2012] 204 Taxman 192 (Delhi) and DIT Vs. Nokia Networks OY – [2013] 212 Taxman 68 


  • Assessee had a taxable income in India which it did not disclose voluntarily but disclosed only after the issuance of notice under Section 148. Thus, it is a clear case where there was escapement of income due to non-filing of return by the assessee.  
  • Various documents found during the course of survey in the form of agreements, purchase orders, copies of contract prove the active involvement of employees of Indian company in the conclusion of contracts on behalf of the assessee. All these facts recorded by the Assessing Officer and upheld by the DRP have not been controverted before us.
  • Further, in relation to separate taxability of hardware and software, after considering the facts of the case and the arguments of both the sides, we are of the opinion that the issue is squarely covered in favour of the assessee by the decision of Hon’ble Jurisdictional High Court in the case of Ericsson A.B. On perusal of the agreement,  there is a consolidated price for the supply of equipment which consists of hardware and software both
  • Moreover, the buyer is granted a non-exclusive, non-transferable and non-sub-licensable license to use the software. It is also clarified that buyer is granted no title or ownership rights or interest in the software. After reading the agreement between the assessee and the buyers, we are of the opinion that the facts in the case of the assessee and the facts in the cases before the Hon’ble Jurisdictional High Court are identical. 
  • Thus, there was only one contract for supply of equipment which included hardware and software both and, therefore, the income from supply of the equipment is to be assessed as business income arising from the assessee’s business connection/PE in India. We, therefore, direct the Assessing Officer to rework out the assessee’s income accordingly.

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