TaxTMI 
TaxTMI 
2012 (9) TMI 409
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....tors from outside India on a principal to principal basis, under independent buyer-seller arrangements. Installation activities were undertaken by Indian subsidiary under its independent contracts with Indian telecom operators. Nokia, being a tax resident of Finland, is governed by the provisions of India-Finland Double Taxation Avoidance Agreement. Assessment under Section 143 (3) was completed, in the following manner:- (a) Nokia was carrying on business in India through a Permanent Establishment (PE). Both the Indian Liaison Office and Indian subsidiary were held to constitute a PE of Nokia in India. 'Installation PE' was also constituted on the basis that Nokia had supported Indian subsidiary in discharging its obligation under the installation contracts. (b) 70% of total equipment revenue (comprising of hardware and software) was attributed to sale of hardware and 40% of the same was estimated as income of Nokia from supply of hardware. Further 30% of the profits so determined were attributed to the PE of Nokia in India. The remaining 30% of the equipment revenues were attributed towards supply of software and the same was taxed as 'royalty' (on a gross basis....
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....r NIPL constitutes a PE in India under Article 5 of the DTAA? (c) If the answer to Question No. 1 and 2 is in affirmative, what is the income attributable to the PE under Article 7 of the DTAA? (d) Whether income from off-shore supply of equipment can be taxed in India? (e) Whether any income forming part of the consideration for supply of equipment and licensing of software integral thereto is taxable as 'royalty' under Section 9(l)(vi) of the Income Tax Act, 1961 or Article 13 of the DTAA? (f) Whether on facts and in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of Nokia? (g) Whether interest under Section 234B of the Act can be levied on Nokia, being, a non resident when TDS provisions applied to the sums in question and tax due had not been deducted at source? 5. The ITAT decided appeals of all the assessees by a common judgment dated 22.6.2005. In so far as appeals relating to Nokia are concerned, findings of the Special Bench arc as under: (1) Liaison Office neither constituted a business connection under the Act nor a PE of the Nokia under A....
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....for a copyrighted article and 'not for a copyright. Further, software was held to be integral part of GSM equipment. Payment for supply of software was held not taxable both under the provisions of the Act and under DTAA. (7) Interest income from vendor financing was held to have been correctly added. (8) Following 3 activities were held to have been carried out by NIPL, the PE of Nokia in India (a) Network Planning; (b) Negotiations in connection with the sale of equipment; and (c) Signing of supply and installation contracts. (9) 20% of the net profit determined on the basis of the global net profit of Nokia (10% towards signing of the contract and 10% towards other two activities) was attributed to the PE in India. This margin was directed to be applied on the Indian sales of Nokia (clarified by the Special Bench of the ITAT to mean revenues arising from supply of hardware and software). 6. It is clear from the above that certain issues are decided in favour of Nokia and some in favour of the Revenue, by the Special Bench. That is precisely the reason for both by the Revenue and Nokia approaching this Cou....
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....perating Profits to the PE in the form of NIPL (Nokia India Pvt. Ltd) a subsidiary of the Respondent? 5. Whether on facts and in law interest under Section 234B is leviable?" QUESTION NO. 1 & 2: 8. First question is about the business connection of the assessee in India through the Liaison Office (LO). The necessary facts for determination of this question are that the assessee had opened this LO in India on 30.3.1994 Two agreements were signed between the assessee on the one hand and Indian Cellular Operators on the other hand viz. Modi Telestra (I) Ltd. and Skycell Communication Ltd. on 23.3.1995 and 17.2.1995 respectively. When these contracts were signed, the assessee subsidiary viz. NIPL was not in existence. As this company was incorporated on 23.5.1995 after that date four other agreements were entered into with different cellular operators. The assessee supplied both the hardware and software to Indian Cellular Operators and its subsidiary namely NIPL carried out installation work. It is in this context the question has arisen about the role of the LO and whether such LO can be said to furnish "business connection" to the assessee in India. We may remar....
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....or this finding, there is no evidence and none of the contracts which have been brought on record indicate that the LO has carried out any marketing activities'. The Tribunal, in the process, also noted the findings of CTT (A) as per which the facts and circumstances suggest that the assessee carried out business in India through its LO. However, this finding was not accepted by the Tribunal on the ground that it was not merely preparatory or incidental in nature, there was nothing on record to show that the LO had something to do with designing activity connected to the GSM. According to the Tribunal, the CIT (A) had made a general statement that the assessee always had the presence of its office, without reference to any material or evidence justifying this conclusion. In fact, concluded the Tribunal, even by law, the LO is prohibited in engaging itself in any business activities in India on behalf of the foreign enterprise, which could be considered to furnish a business connection in India. The entire attempt and focus of Mr. Parasaran, learned ASG was on the order passed by the Assessing Officer as well as CIT(A) on the basis of which it was sought to argue that the aforesaid ....
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....er. In so far as these two questions are concerned, they are decided in the negative. The other three agreements namely installalion, marketing and supply wore within Indian company and taxes have been paid on the income generated from this business. The supply contract was different which was with the assessee who is a foreign company. The supply was made from foreign country. The existence of this equipment was at the assessee's factory before dispatch of the equipment as is clear from Clause (8) of the said Agreement. 11. In view of our detailed discussion in ITA 504/2007 and other connected matters decided on 23.12.2011, qua Ericsson, these contracts cannot be treated ay composite contracts. 12. In order to decide the issue at hand, let us recapitulate some of the salient features. The assessee is a foreign Company. Its activities involved supply of hardware and software as well as installation and commissioning of the two and also after sale services. It entered into agreements with various Cellular Operators and entered into three contracts with them namely (1) Overall Agreement, (2) the Supply Agreement and (3) the Installation Agreement. 13. In the present case, we....
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.... existence of the overall responsibility clause was held to be irrelevant in Ishikawajima's case and likewise the overall agreement executed in the assessee's case should not make any difference to the taxability of the equipment supplied; (vii) giving the nomenclature of a turnkey project or works contract is not relevant in determining whether any profit arising from the supply o| equipment pursuant to such contract was chargeable to tax in India; (viii) the Supreme Court relied upon Instruction No. 1829 to come to the conclusion that the existence of an overall responsibility clause was not material in determining the tax liability arising from the offshore supply of equipment and as the said instruction continues to be in force for the assessment year relevant to the present appeals, the existence of an overall agreement should make no difference to the taxability of the equipment supplied by the assessee. 14. We may add that Section 19 of the Sale of Goods Act makes it clear that property in goods passes when the parties intend it to pass and in the present case, the intention of the parties is manifested in Article 13 of the supply contract and the provis....
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.... that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractual parameters, as per article 21.1 of the Supply Contract, the only consequence would be that the Cellular Operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused due to the acceptance test not being complied with, Article 19 of the Supply Contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. In Skoda Export (supra), the Andhra Pradesh High Court dealt with this issue in the following manner:- "We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the: sale of machinery was completed outside India; According to him, the sale was completed o....
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....ty passes conditionally whether the ownership left in the seller is the reversionary interest in the property in the event of the conditions subsequent operating to restore it to him. In any case where the performance of some condition is imposed upon the buyer but is not made a condition of the transfer of the property, the property once passed is not retested in the seller by the buyer's subsequent default." 19. Thus, Overall Agreement does not result the income accruing in India. The execution of an overall agreement is prompted by purely commercial considerations as the India Cellular Operator would be desirous of having a single entity that he could liaise with, a fact which even the Board has noted in its Instruction No. 1829 dated 21st September, 1989. Although Instruction number 1829 stands withdrawn by virtue of Circular No.7/2008 dated 22^nd October, 2009, such withdrawal can have no retrospective effect and the principle laid down in Instruction No. 1829 must continue to govern the assessment for the relevant year. 20. The aforesaid analysis will bring forth, the legal position that the places of negotiation, the place of signing of agreement or formal acceptance t....
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....ing to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet etc. (hereinafter called as "PE of foreign enterprise"). It is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE"), it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Income-tax Act does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Section 44BB, 44BBA,44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise arc required to be computed under normal accounting principles and in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprise's taxable business profits in India involves an art....
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....lace outside India. Similarly, in the present case, there was no allegation made by the Department that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the PE. In the present case, we are concerned with assessment years the 1987-88 and 1988-89. Therefore, we arc not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that profits attributable to the Korean Operations was not taxable in view of Article 7 of CADI." 22. Therefore, Mr. Syali would be justified in his submission that even in a composite contract off-shore supply is to be segregated. On the contrary, here the endeavour of the Department is to club different contract as one which is clearly impermissible in the facts of this case. Fo....
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....r or is to be located in India or control or possession of it has to be with the payer. Similarly, doubts have been raised regarding the meaning of the term processed. Considering the conflicting decisions of various courts in respect of income in nature of royalty and to restate the legislative intent, it is further proposed to amend the Income Tax Act in following manner:- (i) To amend Section 9(1)(vi) to clarify that the consideration for use or right to use of computer software is royalty by clarifying that transfer of all or any rights in respect of any right, property or information as mentioned in Explanation 2, includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. (ii) To amend section 9(1)(vi) to clarify that royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly b....
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....& 2 in favour of the assessee and against the Revenue. 24. We may remark here that the Tribunal has held that the NIPL constitutes business connection within the meaning of Section 9 (1)(i) of the Act as it is a 100% subsidiary of the assessee company and by engaging itself in activities to support the assessee's main activities. However, even when such a business connection is found in the form of NIPL the contention of the assessee was that no income had accrued from such business connection and, therefore nothing was taxable in India and this contention is accepted by the Tribunal. We have mentioned this fact to put the record straight. Otherwise, in this question we are only concerned with LO as business connection as well as PE in India which we do not find to be so. QUESTION OF LAW NO. 3 & 5 25. This aspect has already been discussed in detail by us in DIT v. Ericsson, 343 ITR 370 which reasoning equally applies to these cases. The relevant portion of the said judgment is reproduced below: "55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-T....
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....es and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." ** ** ** "In Advent Systems Ltd. v. Unisys Corpn., 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at- the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn....
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.... company, which is not connected for the fulfillment of the main contract entered into principal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the learned counsel for the assessee that this separate specification of the hardware/software supply was necessary because of the differential customs duty payable. 59. Be as it may, in order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work. Section 2 (o) of the Copyright Act makes it clear that a computer programme is to be regarded as a 'literary work'. Thus, in order to treat the consideration paid by the cellular operator as royalty, i....
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....27. He also referred to the recent judgment of the Supreme Court in Vodafone BIFV v. Union of India, 345 ITR 1 wherein it is held that the Department must, for the purposes of income tax "look at" the contract in question, that is to say, the intention of the parties must be examined on the basis of the express terms and conditions of the contract and not by giving it an artificial construction or by dissecting the said agreement. It was submitted that the learned Authority for Advance Rulings in Roxar Maximum Reservoir Performance WLL, A.A.R. No. 977/2010 and Alstom transport v. SA, A.A.R. No. 958/2010 has applied the dictum of the Supreme Court in Vodafone in the context of composite contracts to arrive at the conclusion that the said contracts must be interpreted as a whole and not subdivided or dissected as was sought to be done in Ishikawajima. The Court was of the view that the judgment of a three Judge Bench of the Supreme Court's in Vodafone has "overruled" the Ishikawajima judgment of a two-Judge Bench of the Supreme Court. He, thus, contended that applying the tests of the Supreme Court of India in Vodafone, as applied also by the AAR in Roxar and Alstom, it is evident th....
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....ly terminated by it. Tata's right to terminate the contract in case of breach of any material condition relates to failure on the part of the respondent to supply fully functional equipment. Clause 19.1 of the supply contract with Tata does not provide that non performance of "Acceptance Test" is a material condition for breach of the supply contract and reference placed by the Revenue is factually incorrect. That contract further reveals that NIPL was responsible for undertaking acceptance test under the terms of its installation contract with the Indian customers The fact that Acceptance Test was to be done by respondent's subsidiary, NIPL has been specifically noted by the ITAT Special Bench in para 279. We are therefore, of the opinion that this submission of the Revenue is factually in correct. 30. Question nos.3 and 5 are accordingly decided in favour of the assessee and against the Revenue. QUESTION OF LAW NO. 4 31. For the reasons staled in appeals preferred by the assessee, this issue is remitted back to the AC) for fresh consideration. 32. As a result, insofar as appeals of the Revenue arc concerned, these are dismissed. ITA 1137/2006 & ITA 1138/2006 33.....
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....even been referred to by the authorities below in support of any of the allegations. Only general or loose reference has been made by the Tribunal. The dispute hence only pertains to the consideration under the Supply Agreement entered between the assessee and the various customers. 35. It was the submission of Mr. Syali that although the Tribunal held that with the Indian subsidiary there was a business connection, they did not go into the issue of how much income can be attributed to the activities carried out in India because that analysis was only made in respect of the subsidiary constituting a PE. Even though a business connection exists, if there is no income accruing or arising directly or indirectly through or from that business connection in India, nothing can be taxed in the hands of the assessee, It was the argument of Mr. Syali that Section 90 (2) of the Act clearly stipulates that the treaty regime can be opted if it is more beneficial to the assessee and, therefore, it was necessary to ascertain as to whether any income was attributable to the PR. It was argued that no such income could be attributed to PE in India and these aspects were not correctly appreciated ....
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...., etc. in other words, once there was an agreement the issue only revolved on the nature of the agreement. Once it is accepted that the position in 1997 and 1996 is pari materia, there will not remain any such allegation. 37. We would like to record that the CIT(A) proceeded on the basis that Indian subsidiary incurred huge loss and the parent assessee was aware of its profitability. The CIT(A) also observed that since NPL was 100% subsidiary and the assessee had wide experience in this area of business, it is logical that a transaction between the assessee and the Indian subsidiary did not occur at arm's length. Mr. Syali argued that there was no basis for drawing such inference and at the time of arguments, the learned ASCI conceded that there was no evidence to support that losses were absorbed by the Indian company. Again, pertinently, the Tribunal also observed that NIPL could be considered PE of assessee in India being subsidiary as it is the virtual projection of the company in India. Further, the accounts of the Indian subsidiary show that the company incurred huge losses as it was not compensated properly for the installation work carried on by it. In the opinion of the....