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'287 ... Taking all these into consideration, we consider it fair and reasonable to attribute 20 per cent. of the net profit in respect of the Indian sales as the income attributable to the permanent establishment. The following steps are involved in computing the income attributable to the permanent establishment : 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 per cent. and 16.1 per cent. by the Commissioner of Income- tax (Appeals), to which no objection has been taken by either side. This percentage has to be applied to the Indian sales and by Indian sales, we mean 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 our 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 per cent. shall be attributed to the permanent establishment to cover the three activities mentioned above. The Assessing Officer is directed to compute the income of the permanent establishment as directed above.' The Revenue appealed before the hon'ble Delhi High Court against the said Special Bench judgment and the only ground raised by the Department was with regard to the rate of net profit (20 per cent.) applied by the Special Bench and not with regard to the method of taking the net profit rate of the foreign enterprise. The Revenue Department has thus accepted the finding of the Special Bench with regard to the net profit margin method and has allowed that finding to become final. The same method of attribution of profits to the permanent establishment on the basis of the net profit rate of the foreign enterprise has been applied by the Revenue in the cases of three other assessees who were in the same field of business as the appellant, viz., ZTE, Huawei and Nortel. Each of these assessees was engaged in the supply of telecom equipment to Indian telecom operators. The Income-tax Appellate Tribunal order passed in the case of Notel specifically records that in the cases of each of these two assessees, the Revenue had adopted the net profit rate of the foreign enterprise for determining the amount of profit income which was attributable to each enterprise's respective permanent establishment. Hence, applying the said Special Bench judgment to the facts of the present case, as the appellant has global net loss as per its audited accounts, no profit or income can be attributed to the assessee in India.

23. Mr. Kumar also sought to draw support for the aforenoted submissions from paragraphs 11 and 12 of the Commentary on Article 7 of the Model Tax Convention on Income and on Capital- Condensed Version7 dated 17 July 2008 and which read as follows:-

―11. When referring to the part of the profits of an enterprise that is attributable to a permanent establishment, the second sentence of paragraph 1 refers directly to paragraph 2, which provides the directive for determining what profits should be attributed to a permanent establishment. As paragraph2 is part of the context in which the sentence must be read, that sentence should not be interpreted in a way that could contradict paragraph 2, e.g. by interpreting it as restricting the amount of profits that can be attributed to a permanent establishment to the amount of profits of the enterprise as a whole. Thus, whilst paragraph 1 provides that a Contracting State may only tax the profits of an enterprise of the other Contracting to the extent that they are attributable to a permanent establishment situated in the first State, it is paragraph 2 that determines the meaning of the phrase ―profits attributable to a permanent establishment‖. In other words, the directive of paragraph 2 may result in profits being attributed to a permanent establishment even though the enterprise as a whole has never made profits;

13. As indicated in the second sentence of paragraph 1, the profits that are attributable to the permanent establishment are determined in accordance with the provisions of paragraph 2, which provides the meaning of the phrase ―profits that are attributable to the permanent establishment‖ found in paragraph 1. Since paragraph 1 grants taxing rights to the State in which the permanent establishment is situated only with respect to the profits that are attributable to that permanent establishment, the paragraph therefore prevents that State, subject to the application of other Articles of the Convention, from taxing the enterprise of the other Contracting State on profits that are not attributable to the permanent establishment.

13. [Reference to paragraph 2] As indicated in the second sentence of paragraph 1, the profits that are attributable to the permanent establishment are determined in accordance with the provisions of paragraph 2, which provides the meaning of the phrase 'profits that are attributable to the permanent establishment' found in paragraph

1. Since paragraph 1 grants taxing rights to the State in which the permanent establishment is situated only with respect to the profits that are attributable to that permanent establishment, the paragraph therefore prevents that State, subject to the application of other Articles of the Convention, from taxing the enterprise of the other Contracting State on profits that are not attributable to the permanent establishment.