2025 (2) TMI 990 - HC - Income Tax

Wholly-owned subsidiary does not constitute permanent establishment of foreign parent company under Article 5 DTAA

The Commissioner Of Income Tax - International Taxation -2 Versus Nokia Network Oy, Nokia Corporation (Formerly Known As Nokia Network Oy).

The Commissioner Of Income Tax - International Taxation -2 Versus Nokia Network Oy, Nokia Corporation (Formerly Known As Nokia Network Oy). - ... 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:(A) Whether the assessee had a Fixed Place Permanent Establishment (PE) in India during the concerned Assessment Years (AYs)Rs.(B) Whether Nokia India Private Limited (NIPL), a wholly-owned subsidiary of the assessee, constituted a Dependent Agent Permanent Establishment (DAPE) of the assessee in IndiaRs.(C) Whether interest from delayed consideration of supply of equipment and licensing of software was taxable in the hands of the assessee as interest earned from vendor financingRs.(D) Whether the revenue from the supply of software could be classified as royalty or fee for technical services under the Income Tax Act, 1961, read along with the India-Finland Double Taxation Treaty (DTAA)Rs.2. ISSUE-WISE DETAILED ANALYSISIssue A: Fixed Place Permanent Establishment- Relevant legal framework and precedents: Article 5 of the India-Finland DTAA defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Court referred to precedents like Formula One World Championship Ltd. v. CIT and ADIT v. E-Fund IT Solution.- Court's interpretation and reasoning: The Court concluded that the Liaison Office did not constitute a PE, as previously settled in the first round of litigation. The Tribunal found no evidence that NIPL's premises were at the disposal of Nokia OY for conducting its business.- Key evidence and findings: It was established that NIPL pursued an independent line of business with Indian telecom operators and was not used by Nokia OY to conduct its business.- Application of law to facts: The Court held that the activities of NIPL were preparatory and auxiliary, and thus did not constitute a Fixed Place PE.- Treatment of competing arguments: The appellants failed to establish that NIPL's premises were under the control or disposal of Nokia OY.- Conclusions: The Court ruled that NIPL did not constitute a Fixed Place PE for Nokia OY.Issue B: Dependent Agent Permanent Establishment- Relevant legal framework and precedents: Article 5(5) of the DTAA outlines the requirements for a DAPE, including authority to conclude contracts on behalf of the enterprise.- Court's interpretation and reasoning: The Tribunal found no evidence that NIPL had the authority to conclude contracts on behalf of Nokia OY or that it habitually secured orders for the latter.- Key evidence and findings: The Tribunal noted that NIPL's activities were not devoted wholly or almost wholly to Nokia OY.- Application of law to facts: The Court found that NIPL operated independently and did not act as a DAPE for Nokia OY.- Treatment of competing arguments: The appellants' arguments were dismissed due to lack of evidence showing NIPL's authority to act for Nokia OY.- Conclusions: The Court concluded that NIPL did not constitute a DAPE of Nokia OY.Issue C: Interest from Vendor Financing- Relevant legal framework and precedents: The Court referred to the principle that only real income can be taxed, not hypothetical or notional income.- Court's interpretation and reasoning: The Tribunal found that no real income was generated from vendor financing, as there was no evidence of interest being charged or paid.- Key evidence and findings: The Department failed to prove that Nokia OY charged interest on delayed payments or extended credit facilities.- Application of law to facts: The Court held that the notional interest could not be taxed, as no income had accrued or been received.- Treatment of competing arguments: The appellants' arguments were rejected due to lack of evidence of actual interest income.- Conclusions: The Court ruled that the interest from vendor financing was not taxable.Issue D: Classification of Software Revenue- Relevant legal framework and precedents: The Court referred to the judgment in Engineering Analysis Centre of Intelligence Private Limited v. Commissioner of Income Tax, which clarified the classification of software payments.- Court's interpretation and reasoning: The Tribunal concluded that the revenue from software supply was not royalty, as it was for a copyrighted article, not for a copyright itself.- Key evidence and findings: The software was integral to the GSM equipment, and the payments were not for the use of a copyright.- Application of law to facts: The Court held that the software revenue was not taxable as royalty or fee for technical services.- Treatment of competing arguments: The appellants conceded this issue in light of the Supreme Court's judgment.- Conclusions: The Court ruled that the software revenue was not royalty and was not taxable under the DTAA.3. SIGNIFICANT HOLDINGS- The Court upheld the Tribunal's findings that NIPL did not constitute a Fixed Place PE or a DAPE for Nokia OY.- The Court affirmed that notional interest from vendor financing was not taxable, as no real income was generated.- The Court ruled that software revenue was not taxable as royalty under the DTAA, aligning with the Supreme Court's precedent.- The Court emphasized the importance of objective evidence over perceptions in determining the existence of a PE.