TaxTMI 
TaxTMI 
2010 (2) TMI 124
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....g international supplier of custom-designed electronic components and solutions to the global electronic industry. The applicant is Laird Plc's first manufacturing facility in India. It is located within the Nokia Spl. Economic zone at Sriperumbedur near Chennai. It is, inter alia, engaged in the business of designing and manufacturing antenna and battery packs for the mobile phone industry. It has business dealings with leading electronic manufacturers in India such as Nokia, Sony Ericssion. The applicant has also set up a Corporate Research laboratory in Bangalore. 1.1 Laird Technologies Inc, USA with its headquarters in St.Louis (Laird USA) which is a unit of the Laird Group Plc, England, is stated to be a globally known designer and manufacturer of Antennae, EMI, data communications etc. Laird USA has manufacturing plants and technical support operations in the US and various other countries. Laird USA is a 'tax resident' of USA. 1.2 Laird USA has negotiated an arrangement with Nokia to manufacture and supply products to Nokia Corporation globally. On 25th June, 2003 a Product Purchase Agreement (PPA) has been executed by and between Nokia Corporation, Finland, and its af....
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....r, Laird USA has no 'permanent establishment' in India within the definition of Art. 5 of DTAA and the profits are therefore not liable to be taxed in India in view of the specific provision contained in Art. 7 of the DTAA. The applicant contends that having regard to the above features, the payments to the non-resident (Laird USA) being not chargeable to tax in India, the applicant is not required to withhold any tax under section 195 of the Act. 3. The following questions are framed by the applicant for the purpose of seeking advance ruling from this Authority: 1. Given the facts and circumstances of the case, whether the amount receivable by Laird USA as per the Assignment Agreement is taxable in India having regard to the provisions of the Act and the Double Taxation Avoidance Agreement between India and USA ('the DTAA')? 2. If the answer to Question no. (1) above is in the affirmative, then, to what extent and in which year(s) would the receipt be taxable in the hands of Laird USA in India having regard to the provisions of the Act and the DTAA? 3. If the answer to Question Number (1) above is negative, i.e, the amount receivable by Laird USA is not taxable in Indi....
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....f Section 28 makes it clear that any sum received "on account of transfer of the right to manufacture or produce or process any article or thing or right to carry on any business chargeable under the head Capital Gains" is not chargeable to income-tax under the head "profits and gains of business." 5. The learned counsel for the Revenue, while not disputing the proposition that if the transfer of a capital asset of the nature contemplated in Section 55(2)(a) of the Act and the receipt of consideration had taken place outside India, the capital gains tax need not be paid in India, has endeavoured to demolish the sanctity and validity of the Assignment Agreement. 6. For the purpose of appreciating the respective contentions, it is necessary to refer to the main features and terms of the two Agreements. 6.1 The Product Purchase Agreement (PPA) was entered into between Nokia Corporation Finland including its affiliate companies (described as 'buyer') and Laird Technologies, a Delaware Corporation, on behalf of itself and its affiliates (collectively Laird Technologies). The Agreement contains the terms and conditions "which apply globally to all sale and purchase of products" ....
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....h an arrangement that inter alia covers the supply of products in relation to Nokia's manufacturing requirements in India ("Nokia India"). (D) Laird is desirous of assigning its rights and obligations in connection with supply to Nokia India under the Supply Contract for a period of five years in favour of LT India and LT India is desirous of acquiring all the rights and obligations of Laird under the Supply Contract in connection with supply to Nokia India for a period of five years on and subject to the terms and conditions referred in point number (2) below. The expression 'supply contract' is defined to mean as any arrangement or agreement for the supply of products by Laird to Nokia and its affiliates. Clause (2) which is the operative part of the Agreement bears the caption "Assignment of the Supply contract". The relevant clauses are as follows: 2.1 Laird hereby irrevocably assigns all its legal and beneficial rights, title and interest, obligations and duties, in and in relation to the supplies to Nokia India as per the Supply Contract in favour of LT India absolutely, which LT India hereby accepts (the "Assignment"). 2.2 LT India shall act in its own capacity a....
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....herever necessary. 7. Firstly, it is contended by the learned counsel for Revenue that Laird USA and the applicant are 'affiliates', being 'sub-subsidiaries' of Laird Plc., UK and therefore the applicant shall be deemed to be a party to the PPA. As noted earlier, PPA was entered into between Nokia Corporation including its affiliated companies and Laird Technologies US (Delaware Corporation) on behalf of itself and its 'affiliates'." The applicant, it is pointed out, is one of its affiliates and therefore the question of assignment of rights and obligations under the PPA to its affiliate does not arise. The expression 'affiliated company' has been defined in PPA, though the word 'affiliate' as such is not defined. However, the definition of affiliated company can as well be applied to the expression 'affiliate'. 'Affiliated Company' is defined to mean "any other entity controlled by, or under control with, a Party. For purposes of this definition, "control" shall mean the direct or indirect ownership of fifty (50) percent or more of the shares or interests which are entitled to vote for the directors of an entity or the equivalent, for as long as such entitlement subsists, or wh....
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....ufacture and supply any of Laird's products to Nokia Corporation. According to the Revenue's counsel, the PPA only casts a host of obligations upon Laird USA without any consideration flowing to it and any legal right derived by it. In the absence of any legal right accruing to Laird USA under the PPA, there is no question of assignment of any rights in favour of the applicant. Hence, no asset can be said to have been transferred to the applicant outside India. This contention does not also appeal to us. The provisions in the PPA would unmistakably indicate that legally enforceable contractual rights and obligations are created in relation to the manufacture and delivery of certain products. It cannot be construed to be a one-sided Agreement casting only obligations on one party without conceding any rights. The fact that under cl.5.3 it is stated that Nokia "shall not have any minimum ordering and/or purchase commitment for products" or the declaration that the global and other forecasts are not offers to purchase products and are not binding on the buyer, has not reduced the PPA to the level of a non-binding informal arrangement between the parties. The Agreement shall be read as....
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....greement without prior written consent of the other party." 10. It is the case of the applicant that the Assignment Agreement had the seal of approval of Nokia Finland. In this context the applicant has placed before this Authority at the time of hearing a letter dated 24th February, 2009 addressed by Laird USA to Nokia Corporation Finland and it reads thus: Dear Sirs Re Laird Technologies India Pvt Ltd ("Laird India") Assignment Agreement In connection with the audit of Laird India, we have been requested by our auditors Messrs Ernst & Young for confirmation of Laird Technologies Inc's assignment of the right for supply of product to Nokia India to our Indian operating subsidiary, Laird India. We enclose the Product Purchase Agreement (PPA) between Nokia Corporation and Laird Technologies Inc. ("Laird USA"), dated 25 June 2003 and the Letter of Intent signed between Nokia India Private Limited and Laird USA dated 16 May 2006. Clause 26.1 of the PPA requires written consent from yourselves regarding the aforementioned assignment. The Letter of Intent implies this consent but we have been requested to obtain written confirmation to satisfy the clause. We would b....
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....ded by the applicant that apart from the consent letter, the conduct of Nokia India accepting supplies from the applicant "since the last 1½ years" substantiates the case of the applicant that the Assignment Agreement was ratified by Nokia Corpn. The delivery challans relating to August, 2009 in respect of "replacement materials" and the first sale invoice raised in February 2008 are filed to establish the factum of supplies of antennae to Nokia India. The mere fact that Nokia India was accepting the goods from Laird India (the applicant) does not lead to the necessary inference that it was being done pursuant to the approval of assignment by Nokia Corporation in April, 2009. The probability is that supplies of goods by the applicant could only be pursuant to an informal understanding and a local arrangement between the applicant and Nokia India. 11.1 In the absence of valid assignment backed up by an express or necessarily implied consent of Nokia Corporation (which was a party to the PPA), the contention of the applicant that there was legal transfer of capital asset and that the consideration shall be deemed to be the capital gain cannot be accepted. However, the fact remain....
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....dia. However, it is fairly clear that Laird USA actively assisted the applicant in setting up the manufacturing facility in India within the framework of the understanding reached between Laird USA and Nokia India (P) Ltd. under the letter of intent dated 16th May, 2006. Nokia India promised Laird USA to provide developed industrial land within its SEZ with all the infrastructural facilities in order to facilitate the setting up of manufacturing plant by Laird USA. Ultimately the manufacturing unit was set up by the applicant but not Laird USA. However, it is on record that an agreement of sub-lease was entered into by the applicant and Nokia India in order to make available a part of the land leased out to it (Nokia India) by SIPCOT. It is also stated by the applicant that the cost of land and other infrastructural facilities was reimbursed to Nokia India. Thus, Laird USA was instrumental in making the developed land available to the applicant within the SEZ of Nokia India. There is nothing on record that Laird USA had any other role to play in the manufacturing and business activities of the applicant thereafter. The applicant emphatically says that Laird USA had no fixed place o....
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....e under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph". 15.1 It is the contention of the applicant that the applicant never acted as an agent much less as a dependent agent of Laird USA. The applicant states that it has been carrying its business operations by itself without any direction or instructions from Laird USA, bearing the risk and responsibility of its business transactions. It is pointed out that the applicant supplies goods to Nokia India not on behalf of Laird USA but on its own and its transactions with Nokia India have been on a principal to principal basis vide clause 2.2 of the Assignment agreement. Further, under the said agreement, the applicant is left free to establish business relationships with other major electronics manufacturers in India (vide clause 2.2). The applicant has averred that it has recruited its own sales personnel for the task. The applicant has reiterated that it is not depending on Laird USA economically nor it has been acting according to instructions or subjected to any form of control by Laird USA from functional point of view. Attention is also drawn to clause 2....
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....s already assigned its rights. As observed earlier, Laird USA which has received valuable consideration for the assignment is bound by it, whether or not it is binding on Nokia Corporation. Once the necessary authorization to manufacture and supply the products to Nokia India has been given by Laird USA, Laird USA cannot carry on the same business in India or interfere with the business carried on by the applicant. It is a different matter if Nokia India - the buyer of the products, objects to the role of the applicant and insists on the manufacture and supply by Laird USA itself in terms of PPA. Apart from the categorical statements made by the applicant, the applicant has also furnished evidence in the form of invoices and delivery challans to establish its independent business relationship with Nokia India. 15.4 The counsel for the Revenue has referred to clauses (2) & (3) of the Agreement and contended that Laird USA continues to have legal commitment in respect of the business operations of the applicant in terms of guarantee of risks of volume of sales. The relevant clauses of the Agreement referred to are: "2.7 In the event the volume of the sales to Nokia from L....
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....s connection' between the non-resident and the Indian company. It was observed thus : "Parties have provided the eventuality in the case of increase in the supply of volume of products as well as decrease in the volume of products. In neither case can it be accepted that the business connection is established." Though the said observations were made in the context of business connection, the same are equally relevant in considering whether the applicant can be regarded as 'dependent agent' having regard to the above terms of the Assignment Agreement. 15.6 The learned counsel for the Revenue also relied on cl.14 read with Appendix 5 of the PPA in regard to 'insurance'. It is pointed out that Laird USA has to provide minimum insurance cover of more than 20 million US dollars "for work outside the United States". In reply to this contention, the applicant has clarified that the cost of insurance is being borne by the applicant itself. The applicant has filed an invoice of Laird Plc. dated 30th June, 2009 under which the "group insurance recharges" from July, 2008 to June, 2009 to the tune of £ 10,413 was charged to the account of the applicant. 16. The Revenue then made a faint....