2005 (6) TMI 226 - AT - Income Tax

Appeals Outcome: Invalid Notice Nullified, PE Recognized in Some Cases, Software Payments Not Taxed as Royalties.

Motorola Inc., Erksson Radio System AB AND OTHERS. Versus Deputy Commissioner Of Income-tax, Non-resident Circle.

The notice under Section 142(1) was invalid due to time constraints, nullifying related assessments. Ericsson's appeal was allowed, with no PE or business ... Inquiry Before Assessment Issues Involved:1. Validity of Notice under Section 142(1).2. Existence of Business Connection in India.3. Existence of Permanent Establishment (PE) in India.4. Attribution of Income to PE.5. Taxation of Software Payments as Royalty.6. Addition of Notional Interest on Vendor Financing.Summary:1. Validity of Notice under Section 142(1):The notice issued u/s 142(1) was beyond the prescribed time limit and thus invalid. Consequently, the assessments made pursuant to such notices were also invalid.2. Existence of Business Connection in India:- Ericsson: No business connection in India as the Indian company (ECI) did not carry out any activities on behalf of Ericsson.- Motorola: Business connection established through the Indian subsidiary (MINL) which carried out activities of a preparatory or auxiliary character for Motorola.- Nokia: Business connection established through the Indian subsidiary (NTPL) which carried out marketing and technical support activities for Nokia.3. Existence of Permanent Establishment (PE) in India:- Ericsson: No PE in India as the Indian company (ECI) did not provide a right to the employees of Ericsson to use its office as a fixed place of business.- Motorola: Fixed place PE in India through the office of the Indian subsidiary (MINL) as employees of Motorola worked in the office of MINL and were paid perquisites by MINL.- Nokia: No PE in India through the Liaison Office (LO) but PE established through the Indian subsidiary (NTPL) as it carried out significant activities beyond preparatory or auxiliary character.4. Attribution of Income to PE:- Ericsson: No income attributed to PE as there was no PE in India.- Motorola: Income attributed to PE based on the activities carried out in India. The CIT(A) reduced the income to 5% of the sales to Indian parties.- Nokia: Income attributed to PE based on the activities carried out in India. The CIT(A) attributed 5% and 7.9% of the sales to Indian parties for the respective assessment years.5. Taxation of Software Payments as Royalty:- Ericsson, Motorola, and Nokia: Payments for software were not considered as royalties but as part of the sale of the GSM equipment. The software was treated as a copyrighted article and not as a copyright right.6. Addition of Notional Interest on Vendor Financing:- Nokia: Addition of notional interest on vendor financing was justified as the agreement provided for charging interest and there was no evidence to show that the clause was not activated or that the financial position of the cell operators was bad.Conclusion:- Ericsson: Appeal allowed, no PE in India, no business connection, and software payments not taxable as royalties.- Motorola: Appeal partly allowed, fixed place PE in India, income attributed to PE, and software payments not taxable as royalties.- Nokia: Appeals partly allowed, PE established through NTPL, income attributed to PE, software payments not taxable as royalties, and addition of notional interest justified.