The Assessing Officer says my Indian subsidiary is my alter ego, so the whole turnkey contract is taxable here. Does an alter-ego finding by itself make offshore supply income taxable in India?
No. The Delhi High Court held that even if the assessee were treated as an alter ego of the group, no part of the consideration for equipment manufactured and delivered outside India was chargeable in India. Clause (a) of Explanation 1 to section 9(1)(i) embodies a principle of apportionment, so only income reasonably attributable to operations carried out in India is taxable, and the equipment passed to the buyer abroad on FCA terms. There was no material that the Indian entity habitually concluded contracts for the assessee or held stock for delivery on its behalf, so the dependent agent Explanations were not satisfied. The appeals were allowed.
Decided by the High Court (High Court of Delhi - S. Muralidhar and Vibhu Bakhru, JJ.) on 2016-05-04, reported as ITA Nos. 666, 667, 669, 671, 672, 673 and 689 of 2014, assessment years 2003-04 to 2005-06 and 2008-09; [2016] 69 taxmann.com 47 (Delhi); [2016] 241 Taxman 464 (Delhi); [2016] 386 ITR 353 (Delhi); [2016] 288 CTR 283 (Delhi). It bears on section 9(1)(i), section 9, section 234B of the Income Tax Act 1961, in Assessment & Scrutiny and Residence & Treaty Benefit matters.
Turnkey and offshore supply assessments usually start with the Department building a case that the Indian company is a shadow or alter ego of the foreign supplier, and then treating that finding as sufficient to tax the whole contract. This judgment separates the two questions. Even on the assumption that the veil could be lifted, the charge still has to be located: section 9(1)(i) with Explanation 1(a) taxes only what is reasonably attributable to Indian operations, and a supply completed abroad produces nothing to attribute. Lifting the veil is therefore not a route around the apportionment principle. The judgment is also a careful statement of what evidence a dependent agent case actually needs, namely habitual conclusion of contracts or maintenance of stock for delivery, rather than the general closeness of the group companies.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee was incorporated in Delaware and was a tax resident of the United States. It was incorporated one day before Nortel India executed three contracts with Reliance Infocom for an optical fibre network: an equipment contract, a services contract and a software contract. The equipment contract was assigned to the assessee immediately. The equipment was manufactured by Nortel Canada and Nortel Ireland and shipped directly to Reliance on FCA terms from outside India, so that title and risk passed abroad. Nortel India performed the installation, commissioning and testing under the separate services contract. The assessee supplied the equipment at about half the price at which it had bought it and returned trading losses, and Nortel Canada guaranteed performance. The Assessing Officer treated the assessee as a shadow company with no real substance, held that it had a permanent establishment in India through Nortel India and through the liaison office of Nortel Canada, and attributed fifty per cent of the profit on the equipment supply to India. The Tribunal upheld that approach and the assessee appealed.
The court allowed the appeals and set aside the orders below. It held that the assessee had no permanent establishment in India and that no part of its income from the supply of equipment was chargeable to tax in India, so the question of attributing profits did not arise. The reasoning proceeded on the footing that even if the finding that the assessee had no independent substance were accepted, the result would be the same. Clause (a) of Explanation 1 to section 9(1)(i) postulates apportionment: only income that can reasonably be attributed to operations carried out in India is deemed to accrue or arise here. The equipment was manufactured outside India and delivered outside India on FCA terms, and none of the operations that produced the income from that supply took place in India. On Explanations 2 and 3 to section 9(1)(i) and on Article 5 of the India-United States treaty, the court found no material that Nortel India habitually exercised authority to conclude contracts on behalf of the assessee or of Nortel Canada, or that it maintained a stock of goods from which deliveries were regularly made on their behalf. Parties were left to bear their own costs.
The court's first move was to decline to let the veil-piercing question decide the appeal. It accepted that a corporate form may be disregarded where a company has no real substance and exists only to avoid tax, but held that the enquiry was unnecessary here, because even on the assumption most favourable to the Revenue the charge could not be located in India. That is the ratio worth carrying away. Section 9(1)(i) deems income to accrue in India through a business connection, but clause (a) of Explanation 1 confines what is deemed to accrue to so much of the income as is reasonably attributable to the operations carried out in India. The court therefore asked which operations produced the income from the equipment supply. Manufacture was in Canada and Ireland. Delivery was on FCA terms at an airport outside India, so title and risk passed abroad. Nothing in the chain that produced that particular income happened here, and apportionment of nothing yields nothing. The court then took the dependent agent route separately, because a business connection can also be established through Explanations 2 and 3 and through Article 5 of the treaty. On the record it found no evidence that Nortel India habitually concluded contracts for the assessee; Nortel India had negotiated the Reliance contracts for itself, and had performed the services contract in its own right. Nor was there evidence of a stock of goods held in India from which deliveries were regularly made on the assessee's behalf. With no permanent establishment and nothing attributable to Indian operations, the attribution of fifty per cent of the profit had no foundation.
There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that even if the assessee were treated as an alter ego of the group, no part of the consideration for equipment manufactured and delivered outside India was chargeable in India. Clause (a) of Explanation 1 to section 9(1)(i) embodies a principle of apportionment, so only income reasonably attributable to operations carried out in India is taxable, and the equipment passed to the buyer abroad on FCA terms. There was no material that the Indian entity habitually concluded contracts for the assessee or held stock for delivery on its behalf, so the dependent agent Explanations were not satisfied. The appeals were allowed. This was decided by the High Court (High Court of Delhi - S. Muralidhar and Vibhu Bakhru, JJ.) and bears on section 9(1)(i), section 9, section 234B of the Income Tax Act 1961. It is reported as ITA Nos. 666, 667, 669, 671, 672, 673 and 689 of 2014, assessment years 2003-04 to 2005-06 and 2008-09; [2016] 69 taxmann.com 47 (Delhi); [2016] 241 Taxman 464 (Delhi); [2016] 386 ITR 353 (Delhi); [2016] 288 CTR 283 (Delhi). Turnkey and offshore supply assessments usually start with the Department building a case that the Indian company is a shadow or alter ego of the foreign supplier, and then treating that finding as sufficient to tax the whole contract. This judgment separates the two questions. Even on the assumption that the veil could be lifted, the charge still has to be located: section 9(1)(i) with Explanation 1(a) taxes only what is reasonably attributable to Indian operations, and a supply completed abroad produces nothing to attribute. Lifting the veil is therefore not a route around the apportionment principle. The judgment is also a careful statement of what evidence a dependent agent case actually needs, namely habitual conclusion of contracts or maintenance of stock for delivery, rather than the general closeness of the group companies. If it applies to you, the first step is this: Fix the place where title and risk pass in the supply contract - the delivery term and the shipping documents did the work here.
The assessee was incorporated in Delaware and was a tax resident of the United States. It was incorporated one day before Nortel India executed three contracts with Reliance Infocom for an optical fibre network: an equipment contract, a services contract and a software contract. The equipment contract was assigned to the assessee immediately. The equipment was manufactured by Nortel Canada and Nortel Ireland and shipped directly to Reliance on FCA terms from outside India, so that title and risk passed abroad. Nortel India performed the installation, commissioning and testing under the separate services contract. The assessee supplied the equipment at about half the price at which it had bought it and returned trading losses, and Nortel Canada guaranteed performance. The Assessing Officer treated the assessee as a shadow company with no real substance, held that it had a permanent establishment in India through Nortel India and through the liaison office of Nortel Canada, and attributed fifty per cent of the profit on the equipment supply to India. The Tribunal upheld that approach and the assessee appealed. The matter was decided on 2016-05-04 by the High Court (High Court of Delhi - S. Muralidhar and Vibhu Bakhru, JJ.). On those facts the High Court held as follows. The court allowed the appeals and set aside the orders below. It held that the assessee had no permanent establishment in India and that no part of its income from the supply of equipment was chargeable to tax in India, so the question of attributing profits did not arise. The reasoning proceeded on the footing that even if the finding that the assessee had no independent substance were accepted, the result would be the same. Clause (a) of Explanation 1 to section 9(1)(i) postulates apportionment: only income that can reasonably be attributed to operations carried out in India is deemed to accrue or arise here. The equipment was manufactured outside India and delivered outside India on FCA terms, and none of the operations that produced the income from that supply took place in India. On Explanations 2 and 3 to section 9(1)(i) and on Article 5 of the India-United States treaty, the court found no material that Nortel India habitually exercised authority to conclude contracts on behalf of the assessee or of Nortel Canada, or that it maintained a stock of goods from which deliveries were regularly made on their behalf. Parties were left to bear their own costs.
The court's first move was to decline to let the veil-piercing question decide the appeal. It accepted that a corporate form may be disregarded where a company has no real substance and exists only to avoid tax, but held that the enquiry was unnecessary here, because even on the assumption most favourable to the Revenue the charge could not be located in India. That is the ratio worth carrying away. Section 9(1)(i) deems income to accrue in India through a business connection, but clause (a) of Explanation 1 confines what is deemed to accrue to so much of the income as is reasonably attributable to the operations carried out in India. The court therefore asked which operations produced the income from the equipment supply. Manufacture was in Canada and Ireland. Delivery was on FCA terms at an airport outside India, so title and risk passed abroad. Nothing in the chain that produced that particular income happened here, and apportionment of nothing yields nothing. The court then took the dependent agent route separately, because a business connection can also be established through Explanations 2 and 3 and through Article 5 of the treaty. On the record it found no evidence that Nortel India habitually concluded contracts for the assessee; Nortel India had negotiated the Reliance contracts for itself, and had performed the services contract in its own right. Nor was there evidence of a stock of goods held in India from which deliveries were regularly made on the assessee's behalf. With no permanent establishment and nothing attributable to Indian operations, the attribution of fifty per cent of the profit had no foundation. In the words reproduced by the source cited on this page: "There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf."
It was decided by the High Court on 2016-05-04 and is reported as ITA Nos. 666, 667, 669, 671, 672, 673 and 689 of 2014, assessment years 2003-04 to 2005-06 and 2008-09; [2016] 69 taxmann.com 47 (Delhi); [2016] 241 Taxman 464 (Delhi); [2016] 386 ITR 353 (Delhi); [2016] 288 CTR 283 (Delhi). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 9(1)(i), section 9, section 234B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The court allowed the appeals and set aside the orders below. It held that the assessee had no permanent establishment in India and that no part of its income from the supply of equipment was chargeable to tax in India, so the question of attributing profits did not arise. The reasoning proceeded on the footing that even if the finding that the assessee had no independent substance were accepted, the result would be the same. Clause (a) of Explanation 1 to section 9(1)(i) postulates apportionment: only income that can reasonably be attributed to operations carried out in India is deemed to accrue or arise here. The equipment was manufactured outside India and delivered outside India on FCA terms, and none of the operations that produced the income from that supply took place in India. On Explanations 2 and 3 to section 9(1)(i) and on Article 5 of the India-United States treaty, the court found no material that Nortel India habitually exercised authority to conclude contracts on behalf of the assessee or of Nortel Canada, or that it maintained a stock of goods from which deliveries were regularly made on their behalf. Parties were left to bear their own costs. It arises in Assessment & Scrutiny and Residence & Treaty Benefit matters, on section 9(1)(i), section 9, section 234B of the Income Tax Act 1961, and was decided by High Court of Delhi - S. Muralidhar and Vibhu Bakhru, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Meet the alter ego case on its own footing, but also argue in the alternative that even if it succeeds the apportionment principle leaves nothing to tax on the offshore leg. Ask the Assessing Officer to point to material of habitual conclusion of contracts on your behalf or stock maintained for delivery, and record it if none is produced. Keep the offshore supply, installation and software contracts and their pricing properly documented and separately performed, because the enquiry is contract by contract.
Still good law. The Supreme Court condoned delay and granted leave against this judgment on 3 April 2017 in SLP (C) CC No. 6501 of 2017, tagging it with Civil Appeal No. 6102 of 2015. On 13 September 2021 the resulting civil appeals, including Civil Appeal Nos. 8743 of 2017 and 4841 of 2017, were dismissed as withdrawn after the assessee settled the disputes under the Direct Tax Vivad se Vishwas Act, 2020 and paid the dues. The High Court judgment therefore stands undisturbed, but it was never affirmed on the merits by the Supreme Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The input record said leave was granted on 4 May 2017 and that the point remains pending in the Supreme Court. The Supreme Court's own orders show leave granted on 3 April 2017 and the appeals dismissed as withdrawn on 13 September 2021 on settlement under the Vivad se Vishwas scheme, so the matter is no longer pending. The input also listed section 92; the judgment turns on section 9(1)(i) and Articles 5 and 7 of the India-United States treaty, with a separate question on interest under section 234B, and I have listed the sections accordingly. The judgment was read in the reproduction on Indian Kanoon rather than on the Delhi High Court's own site, and I did not separately read the disposal of the section 234B question. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The court allowed the appeals and set aside the orders below. It held that the assessee had no permanent establishment in India and that no part of its income from the supply of equipment was chargeable to tax in India, so the question of attributing profits did not arise. The reasoning proceeded on the footing that even if the finding that the assessee had no independent substance were accepted, the result would be the same. Clause (a) of Explanation 1 to section 9(1)(i) postulates apportionment: only income that can reasonably be attributed to operations carried out in India is deemed to accrue or arise here. The equipment was manufactured outside India and delivered outside India on FCA terms, and none of the operations that produced the income from that supply took place in India. On Explanations 2 and 3 to section 9(1)(i) and on Article 5 of the India-United States treaty, the court found no material that Nortel India habitually exercised authority to conclude contracts on behalf of the assessee or of Nortel Canada, or that it maintained a stock of goods from which deliveries were regularly made on their behalf. Parties were left to bear their own costs.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I hold a Mauritius TRC. Can the department still deny me treaty relief on the capital gains?
Can interest under ss.234A, 234B and 234C be waived?
Must you deduct tax on every payment to a non-resident, just to be safe?
I hold a valid TRC. Can the AO go behind it and reopen my assessment for lack of substance?