TaxTMI 
TaxTMI 
2018 (6) TMI 497
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....ts on account of assigning, networking planning and negotiation of off-shore contract supply in India and if yes then to what extent and basis thereof; and lastly, the question of notional interest on delayed consideration received for supply of equipment and software, is taxable in the hands of the assessee as interest from vendor financing. Before we proceed with the issues which have been remanded back by the Hon'ble High Court to be decided afresh, it would be apposite to deliberate upon the brief facts and background in a succinct manner as culled out from the order of the Hon'ble High Court as well as the material placed on record. Brief facts and background: 2. The assessee, i.e., Nokia Networks OY (formerly known as Nokia Telecommunications OY), is a company incorporated under the laws of Finland and is engaged in the manufacturing of advanced telecommunication systems and equipments (GSM Equipments) which are used in fixed and mobile phone networks; and trading of telecommunication of hardware and software. In the year 1994 (i.e., on 30.03.1994), assessee had established a Liaison Office (LO) and later on a wholly own subsidiary was incorporated on 23.05.1995, n....
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....- (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) both u/s 9(1)(vi) of the Income-tax Act and under Article 13 of the India-Finland DTAA, holding that software was not sold but licensed to the Indian telecom operators. (c) In addition, income from vendor financing and delayed payment was imputed at Rs. 50,000,000/- for each assessment year on account of specific clause in this regard in the offshore supply contracts. The said income was classified as commercial in....
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....(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?" 6.1 These questions have been decided by the Special Bench vide judgment dated 22.06.2005; however, in so far as the appeal relating to the assessee is considered, the following findings have been given by the Special Bench which finding too has been summarized in the judgment of the Hon'ble High Court in the following manner:- (1) Liaison Office neither constituted a business connection under the Act nor a PE of the Nokia under Article 5 of the India-Finland DTAA, as it merely carried on advertising activities in India. (2) Sale of hardware took place outside India and no income from sale of hardware accrued to Nokia in India. (3) Nokia was not responsible for installation of telecom equipment and Nokia's arrangement with the Indian Telecom Operators did not constitute a works contract. NIPL is a separate cor....
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....okia in India: (a) Network Planning; (b) Negotiations in connection with the sale of equipment; & (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). 7. The substantial question of law admitted by the Hon'ble High Court and the final conclusion/answer given by the Hon'ble Court can be tabulated in the following manner:- Revenue Appeals before Hon'ble High Court (lead case ITA 512/2007) Substantial Question of Law admitted by Hon'ble High Court Conclusions Q1. Whether on a true and correct interpretation of section 9(1 )(i) of the Income-tax Act, the Respondent can be said to have a 'business connection' in India in the form of a Liaison Office? Decided in favour of assessee (Para 23 of HC Order) Q2. Without prejudice, whether the respondent has a 'permanent establishment' in India because....
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....authorities below. The same are: i. Supply contracts between the assessee and various customers. ii. Installation Contracts between the Indian subsidiary and the customers directly. Only two contracts with Modi Telstra and Skycell executed in February and March, 1995 were separate from the supply contracts and installation portion was assigned to the Indian subsidiary with the consent of all concerned. iii. Marketing support Agreements dated 19.4.1996 and 6.11.1997 between the assessee and its Indian subsidiary, and iv. Technical support agreement between Indian subsidiary and the customers. Whereas the marketing support ensures to the benefit of the assessee the technical support ensures to the benefit of the Indian customer, the technical support is in respect of the projects installed and has nothing to do with the supply contract. The consideration accruing or arising under the contracts already assessed in the hands of the Indian subsidiary and there is no adverse action in respect thereof. The technical support agreement referred to supra has not even been referred to by the authorities below in support of any of the allegations. Only general or loose reference....
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....yed payments by the operators in the relevant previous year. 36. Mr. Parasaran, learned ASG appearing for the Revenue could not controvert the aforesaid pleas of Mr. Syali. We find that the aforesaid errors on facts have crept in. It is primarily for the reason that the Tribunal had taken the facts in the case of Ericsson case and on the presumption that those facts were common the case of Nokia as well and the legal questions in the appeals of Nokia were decided therefore the actual inaccuracy has crept in the fact findings of the Tribunal. We find justification in the argument of Mr. Syali that the clear cut impact of such assumptions is evident from the fact that findings (i), (iv), (v) and (vi) are all suppositions in the absence of appreciating that there was a marketing support agreement in operation from 1.1.1996 to the 31-12.1996. Even as per the AO after the later agreement of 1997 there is no allegation made as regards shifting of expenses, no compensation paid to Indian subsidiary, 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 n....
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....e constitutes a permanent establishment of assessee in India? (b) And if the answer to above question is found to be affirmative, then whether any attributes of profits on account of signing, network planning and negotiation of off-shore supply contracts in India could be attributed to such business connection/ permanent establishment. (c) Whether notional interest on delayed consideration of supply of equipment and licensing of software taxable in the hands of assessee as interest from vendor financing. 10. We shall now first take up the key issue, whether the Indian Subsidiary, Nokia India Pvt. Ltd. (NIPL) constitutes PE of Nokia Networks OY in India and/ or whether the said subsidiary would provide business connection in India. First of all, we have to analyse the case of the Assessing Officer. The primary case of the AO qua the Indian subsidiary was that, it constitutes a Dependent Agency Permanent Establishment (DAPE) of the assessee in India. However, the finding of the Assessing Officer is scattered at various places where he has taken into account several facts and has mixed up the entire concept of PE in as much as while holding LO as a PE, at the same length and base....
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....establishment in India in the form of its Indian Office. iii) The assessee has an Indian Subsidiary which is a dependent agent PE. iv) The software has been supplied under a license and it has not been sold and therefore, the income is in the form of 'Royalty'. v) The Indian company has not been compensated properly for the services rendered by it to the assessee company. vi) The value of installation contract in many case is lower than the normal cost of installation as prevalent in the market at that time. 12. In so far as the issue of turnkey/composite contract referred to at various places by the Assessing Officer, the same are no longer matter of adjudication, because they had been made in reference to Modi Telstra contract which have been discussed in the context of LO being PE in India and this matter has attained finality from the stage of the Hon'ble High Court, that is, LO has held to be neither having business connection in India nor having any kind of PE in India in terms of Article 5. 13. However we shall briefly discuss certain facts which has been noted by the Assessing Officer qua the LO in India so as to constitute it as a fixed place in PE but has be....
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.... his employment details in NIPL and the periods as well as designation of his employment are contained at page 369(10) (of the paper book of volume III) which reveals that he has been employed as country manager in LO from 01.02.1994 to 31.12.1994 and thereafter from 01.01.1995 till 13.12.1995 he was not employed with Indian company. He was employed with a NIPL as its managing director from 01.01.1996 to 31.07.1999. Mr. Hannu Karavitra has signed the Modi Telstra contract on behalf of the assessee on 23.03.1995 and Skycell on 17.02.1995 on which point of time he was not employed with NIPL. There is also an observation in the assessment order that he was the country manager of NIPL from 01.02.1994 to 31.12.1994, which fact is divorced from the material facts as NIPL itself came into existence only from 23.05.1995 and hence he could not have been employed with the Indian Company. There is also a reference of assignment letter dated 24.05.1995 signed by Mr. Hannu Karavitra whereby off shores services were assigned to NIPL and at that time he was employed with LO and not with Indian Company. In any case the assignment was from the assessee to the Indian company. The Assessing Officer h....
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....ment has he admitted that NIPL has entered into any kind of supply contract of equipments on behalf of the assessee nor has it made available any place leave alone fixed place to the expatriates (employees of the assessee company). Analysis of the statement of the Managing Director of NIPL shall be dealt in the later part of this order. 15. Now in so far as the facts noted by the AO qua the Indian subsidiary so as to constitute a PE, first of all, Assessing Officer has noted that it is wholly owned subsidiary of assessee and it is a DAPE of assessee. At page 15, Assessing Officer further records that the LO though was opened in 1994, but during the year under consideration, the assessee spent amount of Rs. 3 crores on rent and no salary or perquisite have been charged to the LO which means that employees where compensated by some other entities. He also notes names of some 10 employees of the LO from where he deduced that these were the employees of the LO but salary were being paid through NIPL and it was on paper only that these were shown as separate companies but actually the Indian company was nothing but the extension of the assessee. He further noted that in the accounts of....
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....visiting expatriates would be relevant in deciding the NIPL being a fixed place PE or DAPE of the assessee. Thereafter, the AO refers to a statement of the managing Director of NIPL and from this statement, the AO concludes that from 1.1.1997 rent was also not paid by the LO and the same was taken over by the Indian office (NIPL) and thus he concludes that the Indian company has completely absorbed the cost on behalf of the assessee. From page 21 onwards of the assessment order, the AO highlights his reasons for treating NIPL as DAPE of the assessee, which in sum and substance can be summarised as under:- a) NIPL is a dependent agent as per the provisions of the DTAA. Although it has concluded contracts with various cellular operators for installation and service, it becomes the non-resident responsibility to get the contracts executed by the Indian company. The Assessee has issued guarantee to Indian customers that it will get the contracts executed by NIPL; and assessee has assured that it will not dilute its equity in NIPL less than 51%. b) Contracts provide that installation work will be done by the Indian company and any notice under the installation contracts should also ....
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....nt. In view of the aforesaid reasoning, AO has held NIPL to be PE of assessee in India. Findings of CIT (Appeals): 16. Ld. CIT(A), first of all in the context of assessee having a business connection in terms of Section 5 r.w.s. 9 of the Act had made his observations in paragraph 5.2 of his order, which for the sake of ready reference is reproduced herein below:- "We may now proceed to decide whether income accrued or arose to appellant in India under sec. 5 or it can be deemed that it accrued or arose to it u/s 9, Section 5 speaks of the situs of accrual of income, but it does not provide any guideline to decide the situs. The cases on the issue also do not lay down any firm guidelines. The general proposition is that the place of formation of contract, the place of activities and all other attendant circumstances need to be taken into account for deciding this matter. The place of signing of the contract may not be conclusive of the matter. Similarly, the place of the carrying on the contract may also not be conclusive in this behalf. When we look to assessee's operation in India, it can be said that it sold goods to the Indian operators. It had a branch office in India for....
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....l and supervision of the assessee in regard to conduct of its business. The A. O.'s observation that all the employees and expenditure of the Indian office were shifted to the IC should be taken in the light of these facts. On the basis of those facts, it will not hard to conclude that the assessee carried on business on continuous basis initially through it's LO and later through the IC. In its representation regarding accrual or deemed accrual in India, the appellant as well as the A. O. have mixed up the issues of business connection and PE. We are presently on the issue of business connection or accrual of income to the appellant directly u/s 5(2) and 9. All the facts and circumstances suggest that the assessee carried out business in India, which was not merely preparatory or incidental in nature. The designing of the GSM is not the incidental activity, without which the business of the assessee could have been carried on. In fact it was the heart of the activity but for which even the requirements of Indian operator could not have been listed out. The requirements were worked out on the basis of design and thereafter the equipment was supplied and the software was licensed. T....
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....ubstantial loss and, therefore, it was not properly remunerated for the services rendered by it either in respect of marketing agreement or in respect of installation contract. The IC is a wholly owned subsidiary of the appellant and, therefore, appellant was in the knowledge of prices put on the installation contracts. It had wide experience in this line of business and yet the IC undertook business in a manner that it incurred substantial losses. Therefore, it cannot be said that the transactions between the assesse, the operator, and IC were at arms' length. In fact the agreements by the assessee with the Indian operators on one hand and IC with the Indian operators on the other can be said to have been arranged in a manner that loss would be incurred to the IC. In view thereof, there is reason to hold that the IC constituted the PE of the assessee and observed losses on behalf of the assessee. In the context of these facts, it will be difficult to hold that the assessee and the IC acted independently in so far as their businesses are concerned and it will more appropriate to hold that the IC merely acted at the instructions of the assessee in respect of installation and marketi....
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....t of 10.8%, as mentioned by the Ld. A.O. in the assessment order. Therefore, the net profit is taken at 10.8%. The whole of this profit cannot be attributed to Indian operations as activities regarding manufacture and development of products etc. was undertaken outside India. Therefore, the attributable to operations in India are taken at 5% of the sales to the India parties." 19. The erstwhile Special Bench has held that so far as the LO is concerned, it neither provided any business connection nor constituted a PE of assessee in India, which matter as reiterated above has attained finality from the stage of the Hon'ble High Court. So far as the Indian subsidiary is concerned (NIPL), Special Bench held that same was a virtual projection of the assessee in India and hence, not only afforded a business connection but also constituted assessee's PE in India. On attribution of income, the erstwhile Special Bench has held that only following activities were carried out by assessee's PE in India, viz.,;- ➢ Firstly, network planning; ➢ Secondly, negotiations in connection with sale of equipment; and ➢ Lastly, the signing of supply in installation contract....
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....ontext, Ld. Counsel has relied upon the judgment of Hon'ble Delhi High Court in the case of Linde AG vs. DIT, 365 ITR 1, wherein the Hon'ble High Court has observed that DTAA do not contain any charging provision by virtue of which income tax is levied, because tax is charged by virtue of Section 4 r.w.s. 5 and it is only in the event that assessee is liable to pay tax under the Income Tax Act that the question of examining, whether the assessee is entitled to any benefit under the relevant DTAA would arise. If an income is not liable to tax under the normal provision of the Act then it would not be brought to tax only by virtue of DTAA. He submitted that in the context of the LO, the Hon'ble High Court in the case of the assessee on the issue of offshore supply of telecommunication equipment has held that there is no business connection in India. The same principle and ratio will apply in the case of NIPL also, because so far as the off shore supply of equipment is concerned, NIPL had no role to play at all. He submitted that one of the key allegation of the Revenue had been that one of the employee of the assessee company, Mr. Hannu Karavitra was the country manager o....
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.... of remand by the Hon'ble High Court. He submitted if in the case of LO such activities have not resulted in fixed place of business or PE, then how the same activities could be reckoned that NIPL will constitute a PE of the assessee in India. Thus, the concept of DAPE has to be seen and not the fixed place of PE. In the context of DAPE, he submitted that one of the basic conditions in terms of Article 5(5) is that, the dependent agent has habitually exercised authority to conclude contracts in India in the name of enterprise. Ostensibly from the facts, it is clearly evident that at no point of time NIPL was negotiating or concluding any contract for the supply of equipment in India for the assessee which binds the assessee for honouring such contract. Time and again, the Department has harped upon the fact that the NIPL had an authority to conclude contract which inference has been drawn from two supply contracts signed by one, Mr. Hannu Karavitra who at that time was an employee of LO and after incorporation of NIPL became an employee of the Indian subsidiary who had also signed the installation contracts on behalf of the NIPL. Clarifying this aspect he submitted that the con....
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.... of Article 5(4) r.w.s. Article 5(5) and Article 5(8), the NIPL cannot be reckoned as DAPE. 23. Coming on to the issue of fixed place PE under the Article 5(1), Mr. Deepak Chopra submitted that, first of all, it was never the case of the Department that NIPL constitutes fixed place PE at all; and secondly, even if NIPL has to be seen in the context of Article 5(1), then also on the facts and material on record, it does not constitute a fixed place PE. The reason being that, the essential test which has been laid down now by the Hon'ble Supreme Court in the case of Formula One World Championship Ltd. vs. CIT, reported in 394 ITR 80 (SC), is that the place of the business should be at the disposal of the assessee which is absolutely lacking in the present case. The term 'at the disposal' cannot be merely reckoned as giving an access of a place but such a place should be 'at the disposal' of the enterprise, that is, when the enterprise has the right to use the said place and has control thereupon. No such evidence is brought forth that office of the Indian subsidiary was at the disposal of the assessee qua its activity relating to supply contract. He also drew our attention to va....
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....h was under a 'Service Agreement' signed between the assessee and NIPL on 19.04.1996 and 6.11.1997. He drew our attention to page 137 of the paper book Volume-II and pointed out that the service agreement makes it clear that NIPL was being separately remunerated for such services at cost plus 5% mark up and same was offered to tax in India. Though the Assessing Officer and ld. CIT (A) have held that such a remuneration was on lower side but no material fact has been brought on record that either it is below the market rate or there was any transfer pricing reference for bench marking such a transaction. Once remuneration is at arm's length then such an allegation are baseless qua PE. Hence, this allegation of the Department does not hold any ground. Lastly, he submitted that the onus lies heavily upon the Revenue to show that how the Indian company is a fixed place PE for the assessee and nowhere it has been brought on record or conclusively proven that either there was any fixed place of business in the form of NIPL; or any such space was made available to the assessee which could be said to be at the disposal of the assessee. Again he reiterated the principle laid down by the Hon....
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....ted that this Tribunal needs to analyse the attribution of income only qua the following activities namely:- a) Signing; b) Network planning; and c) negotiation of off-shore supply contracts in India. On these activities he submitted that no income per se has accrued to assessee and these are only preparatory activities. Strong reliance was also placed on to the judgment of the Hon'ble Jurisdictional High Court in case of Ericsson A.B., 343 ITR 470 (Delhi HC), wherein it has been held as follows:- "20. The aforesaid analysis will bring forth, the legal position that the places of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the finding is that property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to....
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...., then there remains no question of attributing profits to any activities alleged to be carried out in India. 28. On the issue of taxability of notional interest on delayed consideration of supply of equipment and licensing of software, Mr. Deepak Chopra submitted that in the assessment order, the AO has made this addition on the assumption that assessee provided credit facilities to its customers and has charged interest on the same. To come to this conclusion AO had relied upon Para 6.9 of the contract between assessee and Modi Telstra to conclude that purchaser were liable to pay interest @ 18% for each day elapsed from the due-date to the actual payment. Hence, the sole ground for making the addition was the existence of this condition in the agreement signed between assessee and some of the Indian Cellular Operators. In appeal before CIT(A), the assessee submitted a certificate (copy appearing at Page 186 of Paper book- Vol II) which clearly states that assessee did not invoice any of its customers during the period 01.04.1996 - 31.03.1998 for any interest for late payment, nor received any such interest. Hence, the said clause was never invoked by the Assessee on any of its ....
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....account in which items are temporarily carried pending their final disposition; it does not appear in financial statements' vide Kohler's Dictionary for Accountants, Third edn. Since the final disposition of the sums in question was uncertain and hung in balance these items were properly carried to 'Interest suspense account' and could not and did not find a place in the financial statement like the profit and loss account. From the mere fact that such interest was charged to the concerned debtors by making debit entries in their respective accounts no inference could be drawn that the assessee had regarded it as accrued income because simultaneously such interest was credited to interest suspense account and not to profit and loss account. The taxing authorities, the Tribunal and the High Court clearly erred in drawing such inference against the assessee. In fact by making the aforesaid entries and treating the three sums in the manner done the assessee must be regarded as having demonstrably shown an intention to treat such interest as its hypothetical and not real income. " Thus, he pointed out that the facts in the case of state bank of Travancore were differe....
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....hen same shall be in the nature of business income and in absence of assessee having any Permanent Establishment in India, nothing can be brought to tax on this account. Arguments on behalf of the Revenue:- 29. Ld. CIT-DR, Mr. T.M. Shiv Kumar arguing on behalf of the Revenue, after narrating entire facts as culled out from the impugned orders and the background of the case, submitted that the assessee company is not only engaged in manufacturing but is also selling GSM equipments and installing them in India for the Indian customers as a part of its overall business in India. Earlier the entire business was done through LO which later on was continued with the subsidiary company, NIPL. Country Manager of LO continued to be the Managing Director of Indian company. There is a complete merger of identity of LO and NIPL which is also borne out from the fact that office of the LO and the office of the Indian company is the same and co-located and all the employees of the LO have been absorbed by the Indian company who now pay for their salary. Even the customers in India have treated the assessee and NIPL as one and the same. Thus, the entire identity got blurred and NIPL is practica....
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....me employee constitutes a PE not only in the context of Service PE but also PE under Article 5(5) and 5(1). In support, of this contention he strongly relied upon the ratio in the judgment of Hon'ble Supreme Court in the case of DIT vs. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 and Delhi High Court judgment in Centrica India Offshore vs. CIT, reported in (2014) 364 ITR 336 (Del). 30. The Installation Contracts immediately after the incorporation of Indian Company has also been signed by same person, Mr. Hannu Karavitra. Not only that, whenever the assessee's employee use to come, then the NIPL was providing infrastructure facilities like telephone, fax, vehicles, etc., to the assessee's employee by the Indian company. This fact itself goes to show that there was a place in the form of Indian company which was at the disposal of the assessee. In any case, initiation of the contract required very technical details which required expatriates and not only for the marketing but also for installation, which services has been provided by NIPL. Even it is proved that one sale of the assessee is through Indian company, then it will attract "force of attraction rule" under Article 7 ....
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....i ("DCIT") on February 14, 2000, in connection with the summons notice issued under section 131 of the Income Tax Act, 1961." by Mr. Simon Piers Beresford Wylie, Managing Director of Nokia Limited 30. He also referred to the following questions and answers which have been incorporated in the assessment order:- "Q. no.8- During 1995 and 1996, when most of the contracts were signed, how was marketing carried out by the Indian company? Ans. The DCIT was informed that the contracts entered into between Nokia Finland and Indian customers during 1995 and 1996 were complex infrastructure projects The DCIT was informed that the contracts entered into between Nokia Finland and Indian customers during 1995 and 1996 were complex infrastructure projects that required services of specialized people. Thus, Nokia Finland therefore, utilized marketing services of specialized expatriates of NIPL, administrative support in the form of office space, telephone and faxes etc. which was provided to them by NIPL. It was clarified that these expatriates were not on the rolls of NIPL. In Ques. No. 10 of the above referred statement, Mr. Simon Piers Beresford Wylie was asked as to what were the faci....
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....d to them by Nokia Limited. It was again clarified that these expatriates are not on the rolls of Nokia Limited." "Q. no. 11. Were you paying any salary, reimbursements, perquisites etc, to employees of Nokia Finland who were here for short assignments? Ans. They informed the DCIT that Nokia Limited did not pay any salary, reimbursement or perquisite etc, to the employees of Nokia Finland who were here on short assignments." 31. Thus, Ld. DR submitted that the aforesaid statement of the Managing Director corroborated by the memorandum dated 15.02.2000, clearly establishes the fact that assessee was carrying out negotiations, network planning and marketing of its business through the fixed place in the form of NIPL. The provision of office place, vehicles, telephone, etc. also suggests that premise of NIPL was at the disposal of the assessee to carry out a part of its business in India. Taking part in contractual negotiation, carrying out network planning cannot be construed as preparatory or auxiliary activity. These activities performed through the fixed place provided by NIPL construed the core activity of the assessee and thereby create a PE of the assessee. He reiterate....
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....he ld. CIT (A) has taken the global net profit of 10% by taking 5% of total sales attributed in India, whereas the Special Bench of the Tribunal has taken 20% of the network and the profit which is to be attributed. So far as the contention of the learned counsel that huge losses have been incurred by the Indian entity as well as Indian operation of the assessee, he submitted that, the same is not verifiable from the books of account, because details of sales were not provided to the Assessing Officer. Thus, such a contention could not be accepted what could be the proper attribution he relied upon following decision. (i) Royals Royce Plc vs. DIT; ITA Nos. 495, 496, 497/2008 and other appeals (Delhi High Court) (ii) Arrow Electronics India Ltd. vs. Addl. DIT, ITA. Nos. 209 & 210/ Bang/ 2001 (ITAT Bangalore Bench). 34. Lastly, coming to the issue of taxation of interest income from vendor financing and outstanding payments, Ld. CIT-DR submitted that assessee's claim that interest income was never received and it was a notional income which was added by the Assessing Officer cannot be accepted, because as per the agreement between the assessee and the customers the interest woul....
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.... of the relevant DTAA the Tribunal's reasoning is right in law in holding that NIPL, (the subsidiary of the Appellant) is a permanent establishment? 2. Whether the Tribunal was right in law in holding that a perception of virtual projection of the foreign enterprise in India results in a permanent establishment? 3. Without prejudice, if the answers to Q.1 & Q.2 are in affirmative, is there any attribution of profits on account of signing, network planning and negotiation of offshore supply contracts in India and if yes, the extent and basis thereof? 4. Whether in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of assessee as interest from vendor financing? has remanded the matter to the Tribunal with certain observations. While adjudicating the aforesaid issues, the Hon'ble High Court had first of all noted certain errors which had crept in the earlier order of the Special Bench specifically with regard to the certain facts which have been highlighted in the following manner:- i. The Indian subsidiary was executing contracts on behalf of the appellant through its employees. ii. All t....
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....on 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 ASG 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 ITAT since it was a wholly owned subsidiary, the assessee would have direct and complete control over the activities of this subsidiary. ....
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....or arising under the contracts already assessed in the hands of the Indian subsidiary and there is no adverse action in respect thereof. The technical support agreement referred to supra has not 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. Thus, the scope of dispute has been identified with reference to supply of equipment agreement between the assessee and the various buyers in India. ➢ Secondly, the Hon'ble High Court has also observed that marketing support agreements ensures benefit of the assessee whereas the technical support ensures benefit of the Indian customers which is in respect of project installed and has nothing to do with the supply contract. Already the consideration accruing, arising under installation contract, marketing support agreement and technical support agreement have already been assessed in the hands of Indian subsidiary and there is no adverse action in respect thereof. ➢ Thirdly, there were var....
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.... respect to:- (i) Assigning of contracts; (ii) Network planning (wrongly mentioned in the judgment as under working); (iii) Negotiation of off-shore supply in India. 39. Under this backdrop we would like to briefly recapitulate the relevant facts and the contentions raised by the party. The assessee company, Nokia Networks Oy has been incorporated in Finland and it is tax resident of Finland. At that point of time, it was a leading manufacturer of advance telecommunications systems and equipments (GSM Equipment) which were used in fixed and mobile phone networks. These GSM equipments manufactured by the assessee were sold to the Indian telecom operators from outside India on principal to principal basis under independent buyer-seller arrangements. These facts have been noted by the Hon'ble High Court also in paragraph 2 of its judgment and are also borne out from the order of the authorities below. Apart from supply of the equipments there were also installation contracts and for this purpose of installation activity and other connected activities, assessee had established a Liaison Office on 30th March, 1994. Two such agreements were signed between the assessee (through....
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....ncludes especially - (a) a place of management; (b) a branch ; (c) an office ; (d) a factory.; (e) a workshop ; (f) a mine, a quarry or any other place of extraction of natural resources ; (g) a warehouse ; and (h) premises used as a sales outlet or for receiving or soliciting orders. (3) The term 'permanent establishment', also includes - ( a ) a building site, a construction, assembly or installation project or supervisory activity in connection therewith, but only where such site, project or activities continue for a period of more than six months ; ( b ) a building site, a construction, assembly or installation project or supervisory activity being incidental to the sale of machinery or equipment, where such site project or activity continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery or equipment. (4) Notwithstanding the preceding provisions of this Article, the term 'permanent establishment' shall be deemed not to include - ( a ) the use of facilities solely for the purpose of storage or display of goods or merchandise b....
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....pendent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he shall not be considered an agent of an independent status within the meaning of this paragraph. (8) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company or a permanent establishment of the other." Ergo, the above article provides: ➢ Para1 of the Article defines the permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried out; ➢ Para 2 and 3 give instances and illustration of places which are treated as PE; ➢ Para 4 provides exclusion of certain activities and the place which are specifically not deemed to be PE and once such exclusion which would be relevant for the purpose of our case is clause (e), which provides for mainten....
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....n the context of LO. The relevant portion of paragraph 36 for the sake of ready reference is reproduced hereunder:- "Before the contract was signed a number of expatriates came to India, stayed in India and carried out the network planning. They were also involved in negotiating the same with various customers and were interacting with them on regular basis. This was not possible without the assessee having a fixed place of business from which it carried out these operations. This fixed place of business was the liaison office together with office of the Indian company. This fact has been confirmed by the Managing Director of the Indian company that the expats who were coming to India were provided administrative support like office, telephone, fax and at times conveyance." ➢ Secondly, even the Special Bench had proceeded to determine the issue of NIPL constituting a fixed place PE in India; and ➢ Lastly, even the ld. CIT (A) in the impugned order though in the context of LO had also mixed up the concept of fixed place PE in the case of NIPL. Accordingly, we are proceeding with adjudication of the fixed place PE qua NIPL. In para (1) of Article 5, one of th....
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...."28. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be 'at the disposal' of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purpose of the project would not suffice. The place would be treated as 'at the disposal' of the enterprise when the enterprise has right to use the said place and has control thereupon. 28. .... 29. According to Philip Baker, the aforesaid illustration confirm that the fixed place of business need not be owned or leased by the foreign enterprise, provided that is at the disposal of the enterprise in the sense of having some right to use solely for the purpose of the project undertaken on behalf of the owner of the premises." Further, the commentary of Klaus Vogel has also been referred extensively by the Hon'ble Court and observed that the word 'through' in the Article 5, emphasis is that the place of business will only qualif....
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....PE are: a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise. 35) The OECD commentary gives as many as four examples where location will not be treated at the disposal of the enterprise. These are: (a) the first example is that of a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer's premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a fixed place of business through which the business of that enterprise is carried on (depending on the circumstances, however, parag....
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....6) As per Article 5 of the DTAA, the PE has to be a fixed place of business 'through' which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5(2), by way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE, i.e. what is mentioned in clauses (a) to (f) as the 'negative list'. A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the word 'include' which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (i) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out. 67) We are of the firm opinion, and it cannot be denied, that Buddh International Circuit is a fixed place. From this c....
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.... the fix place should be where the commercial and economic activity of the enterprise is carried out; ➢ secondly, such a fix place acts as a virtual projection of the foreign enterprise; ➢ thirdly, PE must have three characteristics, stability productivity and dependence; and ➢ lastly, fixed place of the business must be at the disposal of the foreign enterprise through which it conducts business. Thus, according to the Supreme Court the 'disposal test' is paramount which needs to be seen while analyzing fixed place PE under Article 5(1). Though in our humble understanding, the test of permanency qua fixed place has been slightly diluted by the Hon'ble Court but not the "disposal test". Again this judgment of Hon'ble Supreme Court has been reiterated and referred extensively in a subsequent judgment by the Hon'ble Supreme Court in the case of ADIT vs. E-Fund IT Solution (2017) 86 taxmann.com 240, wherein the Hon'ble Apex Court had quoted extensively the same views and commentaries and also the judgment of Formula One World Championship Ltd. and held that there must exist a fixed place in India which is at disposal of foreign enterprise thr....
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....like Market Development, liaisioning with customers, technical assistance, marketing of products, etc.; fourthly, employees of the assessee company were seconded to NIPL for installation contract of NIPL, and their salaries were paid by the assessee, therefore, through these employees PE gets constituted and in support he strongly relied upon the judgment of Morgan Stanley and Centrica India off-shore Private Ltd. (supra); lastly, whenever the assessee's employee used to come to India then NIPL was providing infrastructure facilities like, telephone, fax, vehicles, etc. which goes to show that there was a place in the form of NIPL which was at the disposal of the assessee. 45. First of all, in so far as the allegation that the Country Manager of the LO continued to be the Managing Director of the Indian Company, the same has with reference to one employee, namely, Mr. Hannu Karavitra who was the Country Manager in LO and in that capacity has signed two contracts in the month of February and March, 1995. These contracts were signed when NIPL was not even in existence. After the incorporation of NIPL on 23.05.1995, not an iota of evidence has been brought on record that Mr. Hannu Ka....
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....re not applicable at all. Since none of the on-shore activities are carried out by the assessee in India albeit was done by its Indian subsidiary, provisions of paragraph 3 of Article 5 will also not attract. Once there is no concept of 'Service PE' (though there is no allegation by the Assessing Officer or CIT (A) that there is any kind of service PE), then such plea of the learned CIT-DR has no legs to stand. His core argument was on the point that installation activities done through employees of the assessee constitutes a 'Service PE' and assessee was unable to furnish the details of employees working in NIPL alongwith the details of their duration and therefore, in absence of such details adverse view should be drawn for treating these employees constituting PE in India. The entire thrust of his argument simply whittles down for the reason that firstly, there is absolutely no concept of 'Service PE' in the then existing provision of Article 5; and secondly, other than off-shore supply of equipment, no other activities has been carried out by the assessee after the incorporation of the Indian subsidiary NIPL and this fact has been accepted by the Hon'ble High Court also. Thus, ....
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....ts order that no part of off-shore supply was concluded in India with any business connection in India as it was independent contract between Assessee and Telecom operators in India. In so far as allegation of administrative support services provided to employees of assessee in India for supply contract by NIPL and hence it leads to fixed place PE, strong reliance has been placed by Ld. CIT-DR on the statement of the then Managing Director, Mr. Simon Bresford. From the relevant statement he had pointed out that how the marketing support services have been provided by the Indian company to the assessee and also the administrative support services were provided by NIPL to assessee. Regarding marketing support services by NIPL to assessee we have already discussed above that it was done under separate contract and NIPL was remunerated at arm's length. In so far as administrative facilities being provided by the NIPL to the expatriates coming for signing of contract on behalf of the Nokia Finland, he had stated that, administrative support like office support, cars, telephones, etc. was being provided by NIPL; and earlier office of liaison office of NIPL are at the same premise in the ....
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....ich is also evident from the statement of the Managing Director. Thus, providing such kind of administrative support services to the assessee's employees visiting India will not form fixed place PE, and therefore, the great emphasis by the learned DR on this point is not much of credence as it lacks any further material support or evidence that any physical place was made available which can be said to be at the disposal of the assessee for carrying out its off-shore supply contract in India. In fact the entire allegation of fixed place was qua the LO and never in the context of NIPL by the Assessing Officer. The entire case of the Assessing Officer was that NIPL is a DAPE of the assessee, because all employees of the assessee were either working for the NIPL or NIPL was undertaking certain marketing and technical support services for the assessee. The concept of DAPE would be discussed in succeeding paragraphs. However, so far as the issue of fixed place PE is concerned the same does not get established at all by making to reference of providing of telephone, fax and car facility to the employees of assessee visiting India. As regards allegation that expatriates employees of asses....
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....ned as PE, because the activities carried out from such a place are in the nature of preparatory and auxiliary. Accordingly, in terms of Article 5(4), there could not be any fixed place PE under Article 5(1) because the activities of the assessee in India were purely pertaining to network planning, negotiation and signing of contracts before off-shore supply of (GSM) equipments and sale of goods have been made off-shore outside India. 48, Coming to the Dependent Agent PE as provided in paragraph 5 of Article 5, the key consideration for holding an agent to be a deemed PE is that, a person/enterprise who is not an agent of independent status is acting in a contracting state (here in this case India) on behalf of an enterprise of other contracting state (here Finland) in respect of any activities where he habitually exercises an authority to conclude contracts on behalf of the enterprise; or if he has no such authority, but habitually maintains stock of goods or merchandise which he regularly delivers goods or merchandise on behalf of the enterprise, then he is deemed to be DAPE. From the material facts discussed in detail herein above are that the entire contract supply of off-shor....
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....Director between 01.01.1996 to 31.07.1999. It has already been clarified that once the said employee came into rolls of NIPL, he has not signed any contract with any Indian customer for off-shore supplies but has signed installation contracts on behalf of the NIPL. All the details of supply contracts are contained at page 203 of the paper book which also gives the details of the persons signing it and none of the supply contract had been signed by any employee of NIPL. Thus, the basic condition contained in Article 5(5) does not stand satisfied at all. The contract which has been signed by NIPL is installation which cannot be reckoned DAPE, because assessee in India has not carried out any installation activities on its own. In so far as the allegation of the Assessing Officer that NIPL was in complete control of the assessee and was subject to its instruction. This again in our opinion is not a relevant consideration at all for a creation of a DAPE as discussed above, because none of the supply activities of the assessee has been carried out by NIPL and the employees if at all were for the NIPL's activities in India for which it is liable to tax in India. Further, for the purpose ....
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....racts were signed in India and employees of the Indian company have attended meeting at the time of finalization of such contracts as witnesses, is again of no consequence either for the purpose of fixed place PE or DAPE, because for the fixed place, disposal test needs to be satisfied; and for DAPE, authority to conclude contracts which is binding on the assessee needs to be seen. Next objection of AO is that the warranty and guarantee services provided by NIPL's employee were monitored by assessee and for the installation work done by Indian company, some kind of note regarding installation contracts were sent to the assessee. This objection has no relevance for determination of PE, because, firstly, it would have been of some relevance in the case of composite contract situation; and secondly, managing or providing guarantee by assessee does not yield any income to the assessee, albeit to NIPL, which is taxed in India. Lastly, in so far as the expatriates of NIPL were responsible for installation work were employees of the assessee, only proves that assessee provided necessary assistance, information, knowledge and expertise to do the work. This observation of AO only goes to pr....
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....othing is being performed by the NIPL in India as agent of the assessee. None of the onshore activities of NIPL can be said to be devoted wholly and almost wholly on behalf of the assessee, because, the contracts undertaken and signed by NIPL in India are independent and on principal to principal basis with the Indian customers and assessee has not signed any kind of installation contract with the Indian customers for which it could be said that the installation activity of NIPL was wholly and almost wholly on behalf of the assessee. The two contracts which were signed earlier prior to the incorporation of NIPL were separate and assigned to it and income from such installation has been shown in the hands of NIPL in India. There is no income whatsoever from installation activities has been earned by the assessee in India or can be attributed either directly or indirectly through NIPL. Insofar as other activities like marketing and technical support services are concerned, same has been transacted at arm's length as discussed in detail in foregoing paras, hence no profit can be attributed from these activities as held by the Hon'ble High Court. Even if NIPL is held to be; subject to ....
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....f, constitute that subsidiary company is a PE of its Parent entity, on the principle that, for the purpose of taxation, a subsidiary company constitutes an independent legal entity in the source state. This has been held so by the Hon'ble Apex Court in the case E-Fund IT Solutions. Thus, the exception given in Article 5(8) to a company controlled by a foreign enterprise or its subsidiary answers most of the allegation made by the Department that NIPL being a subsidiary of the assessee itself will provide status of a PE. 52. In so far as the argument of the learned CIT DR that Indian subsidiary is a virtual projection of the assessee as employees of Assessee Company were practically performing all kinds of work, and therefore, it has to be treated as a permanent establishment of assessee. In support of such a concept of virtual projection, strong reliance has been placed on the judgment of the Hon'ble Andhra Pradesh High Court in the case of CIT vs. Vishakapatnam Port Trust (supra) which the learned CIT DR submitted that have been referred and relied upon by the Hon'ble Supreme Court in the case of Formula One (supra) also. First of all, the concept of 'virtual projection' ....
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....ll deal with issue of whether assessee had any kind of a business connection in India in the form of NIPL. Though this issue has become slightly academic in view of our above finding, because even if it is held that assessee had a business connection in India, then also under the treaty provisions, if there is no PE in terms of Article 5, then no income can be attributed to India under Article 7. The Hon'ble High Court while remanding the matter back to the Tribunal in terms of paragraph 38 has also directed to examine as to whether the subsidiary of the assessee would provide business connection or is Permanent Establishment. Thus, for the sake of completeness, we shall discuss in brief, whether the assessee was having any kind of business connection in India or not. The provision of Section 5 of the Income Tax Act defines the scope of total income and sub section (2) reads as under:- "(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or a....
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....g of any cinematograph film in India." The provisions of section 9(l)(i) of the Act clearly provide that income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India shall be taxable in India if they come within the meaning of income deemed to accrue or arise in India as explained in Section 9 of the Act. Thus, where any income accrues or arises to a non-resident through or from any "business connection" in India where all the operations are not carried out in India only such income will be chargeable to tax in India as can be attributed to the operations carried out in India. In light of these provisions and facts of the case, we will analyse the rival contentions of the parties and the judicial proposition highlighted before us in this regard. 54. Before us, regarding the existence of business connection, Mr. Deepak Chopra relied upon the judgment of Hon'ble Supreme Court in the case of CIT vs. R. D. Aggarwal and Co. and Another, reported in (1965) 56 ITR 20 (SC) an....
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....that the Cellular Operator would be entitled to call upon the assessee to cure 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 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............" Finally, he strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Nortel Networks India International Inc. vs. DIT, (2016) 386 ITR 353 (Del) and submitted that this judgment squarely clinches the issue in favour of the assessee and strongly relied upon paragraph 43 to 47 of the said judgment. Relying upon the aforesaid judgment, he submitted that mere existence of a business connection it is not enough to trigger taxability in India in respect of off-shore supply of telecomm equipment to Indian customers because there must be same activity carried out in India relating to the off-....
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....ny service in India in connection with the installation of the equipment or otherwise; (iii) the performance of the acceptance test in India was not considered a relevant circumstance whilst determining whether any part of the profit on the offshore supply was chargeable to tax in India in the case of Ishikawajima, so also in the assessee's case. ( iv) although admittedly a permanent establishment existed in the case of Ishikawajima, nevertheless, the Court held that no part of the profit arising from the supply of the equipment was chargeable to tax in India as the permanent establishment had no role to play in the transaction sought to be taxed as it look place abroad, whilst in the case of the assessee, it has been found as a fact by both the appellate authorities that no permanent establishment existed; (v) the mere signing of the contract pursuant to which the supply was made in India, in both cases does not result in giving rise to a tax liability in India; (vi) the 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 differ....
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....as to be segregated from installation and only then would question of apportionment arise having regard to expressed language of Section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arises in India. 57. Whence in the concept of LO already a categorical finding has been given by the Hon'ble High Court that supply of off-shore equipment which has been done outside India cannot be held to be taxable in India, then the same principle and proposition would also be applicable in the case of NIPL also, because, so far as the supply contracts are concerned there is absolutely no change in the facts and circumstances as even after the NIPL is incorporated in May, 1995, the offshore supply equipment and the supply contract remained the same. The marketing activities and installation contract undertaken by NIPL has been on principal to principal basis; and in the case of former agreement between assessee and NIPL, the payment has been made to NIPL on cost plus markup basis which has not been disturbed; and in the later agreement there is an independent contracts by NIPL with Indian customers which has nothing to do with the assessee. The income arising from bo....
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....e structure of the assessee and proceeded on the basis that its identity was the same as N(C). On the issue, whether the appellant had a PE, both fixed place PE and DAPE in India in the terms of liaison office Nortel Canada and also in terms of subsidiary Nortel Network India Pvt. Ltd. which carried out installation services, Hon'ble High Court observed and held as under:- "It is apparent from the plain reading of Section 9(1) of the Act that all income which accrues or arises through or from any business connection in India would be deemed to accrue or arise in India. In CIT v. R.D. Aggarwal & Co.: (1965) 56 ITR 20 (SC), the Supreme Court observed that business connection would mean "a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business". However, by virtue of Explanation 1 to Section 9(1) of the Act, only such part of the income which is reasonably attributable to operations carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and deliver....
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....chargeable to tax under the Act and therefore, under the fact where there is offshore supply of equipments nothing can be held to be taxed in India in terms of Section 9(1). In fact, in the finding of the Hon'ble High Court in paragraph 69 to 72, it has been held that the Indian subsidiary of Nortel and LO will not constitute a PE. For the sake of ready reference, paragraphs 69 to 72 are reproduced hereunder:- 69. The AO, CIT (A) and ITAT have held that the office of Nortel India and Nortel LO constituted a fixed place of business of the Assessee. As pointed out earlier, we find no material on record that would even remotely suggest that Nortel LO had acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf. Thus, it is not possible to accept that the offices of Nortel LO could be considered as a fixed place of business of the Assessee. In so far as Nortel India is concerned, there is also no evidence that the offices of Nortel India were at the disposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had acted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices....
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....where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained. 74. The CIT (A) as well as the ITAT has proceeded on the basis that the Assessee had employed the services of Nortel India for fulfilling its obligations of installation, commissioning, after sales service and warranty services. The ITAT also concurred with the view that since employees of group companies had visited India in connection with the project, the business of the Assessee was carried out by those employees from the business premises of Nortel India and Nortel LO. In this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm s Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, c....
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....T (supra) and secondly, only the real income can be brought to tax and not something on hypothetical basis, because there has to be corresponding liability to the other party to whom the income becomes due and here such a clause was never enforced by the parties. Already the arguments of both the parties have been incorporated in earlier part of the order; therefore, same is not being discussed again. 61. After considering the relevant finding and rival contentions, we find that, it has not been brought on record that in any of the contract the assessee had charged any interest on delayed payment or providing any credit facilities to its customers or any customer has paid any such amount for each day elapsed from the due date to the actual payment. Once none of the parties have either acknowledged the debt or any corresponding liability of the other party to pay, then it cannot be held that any income should be taxed on notional basis which has neither accrued nor received by the assessee. Whence the benefit of credit period given to the customers has neither accrued to the assessee nor acknowledged by the other person, then it cannot be said that interest on notional basis should....
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....yed payment then it cannot be held that any interest accrued to the assessee, and therefore, such a notional charging of interest for each day elapsed from the due date to the actual payment cannot be held to be taxable to the assessee. This proposition has also been now well upheld by Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 259 (SC). Hence, no income can be said to accrue to the assessee on account of delayed payments as neither there was any corresponding liability on any of the debtors nor assessee had claimed any entitlement on such an interest. Accordingly, this issue is also decided in favour of the assessee. 62. The aforesaid findings and conclusions given in respect for the A.Y. 1997-98, will apply mutatis mutandis in the appeal for the A.Y. 1998-99 year, as exactly similar facts and issues are permeating in this year also. 63. In the result, all the issues which have been remanded back by the Hon'ble High Court to this Tribunal stands decided in favour of the assessee and against the Revenue. Order pronounced in the open Court on 5th June, 2018. ---- Sd/xx Sd/xx (PRAMOD KUMAR) (N.K. SAINI) (AMIT SHUKLA) (ACCO....
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....the business of manufacturing and trading of telecommunication hardware and software. There is no dispute that the assessee is entitled to the benefits of India Finland Double Taxation Avoidance Agreement [(1985) 152 ITR (St) 57; Indo Finnish tax treaty, in short], as it then stood. During the relevant period, the assessee had a liaison office in India as also a wholly owned subsidiary by the name of Nokia India Private Limited. In 1997-98 and 1998-99, the assessee is said to have executed, and received payments for, seven contracts for sale to equipment to, namely,- BPL West Telecommunication Services Pvt Ltd, Fascel Limited, Tata Communications Ltd, Evergrowth Telecom Limited, Modi Telstra India Ltd, Skycell Communications Ltd and Supreme. The Assessing Officer was of the view that "the assessee has a permanent establishment in India". He was of the view that the assessee company had a PE in the form of its India office and it's Indian subsidiary. The Assessing Officer noted that the assessee company had opened its India liaison office in 1994, with Mr Hanu Karavitra as its country manager, and the same Mr Karnavitra was later Managing Director of the Nokia India Pvt Ltd- assesse....
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....he installation work and after sales services are carried out by the same company". The Assessing Officer also referred to a letter dated 15th June 1996 addressed by the assessee company to Tata Communications Limited wherein a mention is made about the company's guarantee and comfort letter in respect of services rendered by the Nokia India Pvt Ltd. This guarantee and the comfort letter, inter alia, states as follows: This is to confirm that we, Nokia Telecommunications OY, a company duly registered and existing under the laws of the Republic of Finland, are fully aware that you have awarded a contract to Nokia Telecommunications Pvt Ltd (Nokia India) for installation, testing and commissioning of GSM Digital Cellular Mobile Telephone Network of Tata Telecommunications Ltd and for the performance of various other services and activities in connection therewith (the service contract). We, the undersigned company, hereby guarantee in your favour the due and timely discharge and performance, in accordance with the said services contract, of all the obligations and liabilities of Nokia India arising from and pursuant to the said services contract. This guarantee constitutes an ind....
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.... carry out the necessary work to identify and locate the defect. The supplier agrees to provide the technical assistance reasonably required for such fact finding work upon request or the supplier will procure that an affiliate of the supplier will provide such assistance to the purchaser under such terms and conditions as my be mutually agreed between the said affiliate and the purchaser under a technical support agreement. Infact an attempt was thus made to demonstrate that the technical support arrangement was an integral part of the arrangement between the assessee company and the end buyer and that it could not be considered in isolation with assessee's business. (d) It was also noted that "expatriate employees of the Indian company (Nokia India), who were responsible for installation work etc, were employees of the assessee company or its associated enterprises" The Assessing Officer was of the view that "there was no reason for the assessee company to incur costs on behalf of the Indian company". It was noted that "the Indian company has not been paid any compensation by the foreign company during the year". He thus concluded that, for this reason, it is clear that the....
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....ount of closely related commercial activity. It was then observed that, in any case, the assessee also had a fixed place of business in India. It was noted that "the local office, which was opened in March 1994, was in fact providing a fixed place of business for assessee in marketing its products", that "infact, this office provided an interface between the customer and the assessee company" and that "this office was collocated with Indian company and all the expenditures may have been shifted to the Indian company, whereas the activity (of the assessee company) was carried through this office". It was also noted that "before a contract was signed, a number of expatriates would came to India, stayed in India and carried out network planning" and "they were also involved in negotiating the deal with various customers and were interacting with them on regular basis" which would not have "been possible without the assessee having a fixed place of business from which it carried out these operations" and "this fixed place of business was the liaison office together with Indian company". It was also noted that the visiting staff of the assessee company were given all the administrative ....
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....or. In view of these representations and the counter undertakings given by the assessee and the IC, it cannot be said that the IC acted independently in discharge of its obligations under the contracts. In the course of appellate proceedings a copy of the order in case of the IC was filed. According to this order the company incurred book loss of about Rs. 10 crore. Even if the depreciation of about Rs. 2 crores is ignored, than the loss before depreciation would about Rs. 8 crore. The IC had two streams of income, namely, commission from the assessee under the marketing agreement and installation charges from the Indian operator. The case of the assessee was that in respect of marketing agreement, the IC was compensated on cost plus 5% basis which was claimed to be reasonable. If this argument is taken to be correct, then it can be said that the loss occurred on account of installation contracts. In other words, it lends credence to the AO's assertion that the IC was not properly remunerated under the contracts, guaranteed by the appellant and a part of money that it ought to have got was diverted as sale proceeds of the equipment. Nonetheless, even if this argument is rejected, t....
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....al sale. The view of the ld. Counsels was that the Indian Telecom Industry had been passing through a bad phase in that period and Indian operators were incurring heavy losses. The assessee was a new entrant in this highly competitive market and it had to make significant initial investment for gaining market share. Copies of P&L a/c for Indian tax purposes for financial years 1996-97 and 1997-98 were filed in the paper book as item 6 of section 3. This showed a loss of U.S. dollars 2,37,52,669 for the year ended 31.3.97. The sales were shown at US Dollars 1,57,51,391. On the face of it, there appears to be something wrong with the P&L a/c as direct costs were shown at U.S. Dollar 2,10,24,054. This is in the context worldwide gross profit of 28.7%. This P&L a/c was not substantiated with any documents. Therefore, it is held that these accounts are not reliable for the purpose of computing income from sale of hardware. Accordingly, assistance of Rule 10 of the I.T. Rules is taken to compute profit on the basis of global accounts. The global accounts showed net profit of 10.8% as mentioned by the Ld. AO in the assessment order. Therefore, the net profit is taken at 10.8%. The whole o....
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....does this result in NTPL being regarded as the PE of the assessee-company. The answer is that since NTPL is a wholly owned subsidiary of the assessee in India and is consequently in a position to control and monitor its activities, the installation charges were directed to be so fixed that they were not commensurate with the services rendered by NTPL. The next question will be why would the assessee do so. We cannot think of any other reason except that the part of the price for installation of the GSM equipment was diverted as the price for the supply contract. Whether there is direct evidence or not for this conclusion, or whether it is permissible for us even to make such an inference from the circumstances of the case, is not really material for the present purpose. What is material is that there was ample scope for the assessee to control and monitor the activities of NTPL which, it should be remembered, is a 100 per cent subsidiary of the assessee, in such a manner that NTPL became a virtual projection of the assessee-company in India. The other point made by the IT authorities was that the assessee even represented to the Indian cellular operators that it will not dilute its....
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.... income could be attributed to PE in India and these aspects were not correctly appreciated by the Tribunal". It was also contended before Their Lordships that "various factual errors which has crept in the orders of the lower authorities". Hon'ble High Court, in this background, observed, inter alia, as follows: "Mr. Parasaran, learned ASG appearing for the Revenue could not controvert the aforesaid pleas....... We find that the aforesaid errors on facts have crept in. It is primarily for the reason that the Tribunal had taken the facts in the case of Ericsson case and on the presumption that those facts were common the case of Nokia as well and the legal questions in the appeals of Nokia were decided therefore the actual inaccuracy has crept in the fact findings of the Tribunal...........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....
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....ave direct and complete control over the activities of this subsidiary" [This is an error in the nature of error of misconception of facts by the Tribunal] - The special bench "had taken the facts in the case of Ericsson case and on the presumption that those facts were common the case of Nokia as well and the legal questions in the appeals of Nokia were decided therefore the factual inaccuracy has crept in the fact findings of the Tribunal". [This is an error in the nature of error of misconception of facts by the Tribunal] - The Special bench erred in not appreciating "that the CIT(A) had proceeded on the basis that Indian subsidiary incurred huge loss and the parent assessee was aware of its profitability" and that "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" but it was argued before Their Lordships that "there was no basis for drawing such inference and at the time of arguments, the learned ASG conceded that there was no evidence to support that losses were absorbed by the Indian c....
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....ted conceded not have any material, to the effect that that the losses of the Indian subsidiary were absorbed by the assessee company; (iv) that the Special Bench erred in not appreciating "that the CIT(A) had proceeded on the basis that Indian subsidiary incurred huge loss and the parent assessee was aware of its profitability" and that "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" but it was argued before Their Lordships that "there was no basis for drawing such inference and at the time of arguments, and, finally (v) that the conclusion arrived at by the special bench "was erroneous as it was based on various factual errors which has crept in the orders of the lower authorities" set out in above. What has been thus pointed out by Their Lordships are errors in reasoning adopted by the Special Bench, and the fact that, in the light of these errors, the conclusions arrived at by the Special Bench are required to be revisited. However, by no stretch of logic, these observations can be construe....
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....s I proceed to deal with this aspect of the matter, I must deal with a preliminary issue raised by the learned counsel. He submits that this question regarding existence of PE is to be determined in the light of certain observations made by the Hon'ble High Court. All the findings in the orders of the authorities below, as indeed whole of the order of the Tribunal in the first round, stand disapproved, and, therefore, unless revenue brings out some new material in support of the contention that the assessee had a PE in India, the assessee company cannot be said to have a PE in India. He, nevertheless, accepts that there is no finding by Hon'ble High Court on the existence of the dependent agency permanent establishment, and that is an aspect, therefore, which may be adjudicated upon by the Tribunal now. Learned counsel's basic plea thus is that so far as the issue of existence of permanent establishment under the basic rule is concerned, Hon'ble High Court has comprehensively decided the issue in favour of the assessee, and all that can, therefore, be examined is whether or not the assessee company had a DAPE (dependent agent permanent establishment) by way of the Indian subsidiary....
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....t of the other". All that the principle recognized by Their Lordships, which is also well enshrined in Article 5(8), means is that a subsidiary cannot be said to be PE of the foreign company solely on the ground that it is controlled by a company resident of the other contracting state. The wordings employed in the observations of Their Lordships are different but implications are the same, because once it is concluded that the foreign company has direct and complete control over the activities of a subsidiary, essentially that subsidiary ends up being treated as a permanent establishment of the foreign company on the ground of its being a "wholly owned subsidiary". However, that does not mean that a subsidiary of the assessee company cannot be held to be its PE at all. It is only elementary that there can be, and there are, situations in which a subsidiary can be treated as PE of a company fiscally domiciled in the treaty partner jurisdiction. Clearly, therefore, while there is no bar on the subsidiary of a foreign company being treated as a PE of the parent company, mere existence of the subsidiary of a company resident in the treaty partner country would not imply that such a fo....
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.... each company of the group. Thus, the existence in one State of a permanent establishment of one company of the group will not have any relevance as to whether another company of the group has itself a permanent establishment in that State. 118. Whilst premises belonging to a company that is a member of a multinational group can be put at the disposal of another company of the group and may, subject to the other conditions of Article 5, constitute a permanent establishment of that other company if the business of that other company is carried on through that place, it is important to distinguish that case from the frequent situation where a company that is a member of a multinational group provides services (e.g. management services) to another company of the group as part of its own business carried on in premises that are not those of that other company and using its own personnel. In that case, the place where those services are provided is not at the disposal of the latter company and it is not the business of that company that is carried on through that place. That place cannot, therefore, be considered to be a permanent establishment of the company to which the services are....
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....ting that "that the CIT(A) had proceeded on the basis that Indian subsidiary incurred huge loss and the parent assessee was aware of its profitability" and that "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" and it was argued before Their Lordships that "there was no basis for drawing such inference", this finding cannot come in the way of this Tribunal's holding that there the Nokia India Pvt Ltd was a PE of the assessee company, or even the transactions not being arm's length transactions, as long as it can be so held without any influence of the holdingsubsidiary relationship and rich experience of the assessee company in its line of business. The situation with regard to the conclusions of the Tribunal being vitiated by incorrectness of findings in the orders of the authorities below is no different either. No doubt, as pointed by Their Lordships, the conclusions arrived by the Tribunal "was erroneous as it was based on various factual errors which has crept in the orders of the lower auth....
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....here is total control over the management of affairs of Nokia Telecommunications Pvt Ltd since it's a 100% subsidiary and further (emphasis supplied by me) the foreign company is taking guarantee on behalf of Indian company that they (the foreign company) will see to it that contracts (entered into by the Indian subsidiary company) are properly executed". The Assessing Officer also noted that awarding of technical support services contracts, in respect of the equipment supplied by the assessee company, involved a specific undertaking to the end customer to the effect that "as long as any part of the commitments under the technical support agreement remain outstanding, we will continuously and diligently monitor business affairs of Nokia India with the aim of ensuring that the company at all times is in a position to meet its commitments to you" and that "as long as any part of technical support agreement are not performed, we shall not dispose of our ownership of Nokia India Pvt Ltd below 51% without your prior written permission". He was of the view that in the light of this position, "the assessee company has a permanent establishment in India in the form of its Indian subsidiary....
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....nterdependence and interplay of activities of the assessee company and its Indian subsidiary. This aspect is even more clear from the order of the CIT(A), whose powers are coterminous with that of the Assessing Officer, which, inter alia, states as follows: The assessee had also a wholly owned subsidiary in India. It has been pointed out earlier that representation was made to the Indian operators that the assessee would to ensure that the installation contract was carried out fully by the IC, and the assessee would fully support the IC in discharge of its obligations under the contract. Not only that it was also represented that the assessee will not dilute its activity below 51% in the IC without the written permission of the Indian operator. In view of these representations and the counter undertakings given by the assessee and the IC, it cannot be said that the IC acted independently in discharge of its obligations under the contracts. .................... In the context of these facts, it will be difficult to hold that the assessee and the IC acted independently in so far as their businesses are concerned and it will more appropriate to hold that the IC merely acted at the i....
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....A)'s order, and, in the absence of any specific reference to article 5(5), such a specific reference need be inferred. The unmistakable thrust of the case of the Assessing Officer is that the Indian subsidiary company, on account of the nature of business activities of the Indian subsidiary, and the manner in which these business activities are carried out, constitutes a PE, and we must deal with that. Let us not forget that the point of time when the impugned assessment order was framed was the point of time when Indian economy had just opened its doors to the global businesses and international taxation, as a field of study in India as also as a specialized area of work in the field offices of income tax department, was still in its infancy. It was much later that a separate wing was established for dealing with international taxation matters. Given these ground realities, it would perhaps only be appropriate not to be pedantic and hyper technical in our approach and concentrate on the substance of the findings of the Assessing Officer and natural corollaries thereof. 21. The first question that I must, however, deal with is whether the assessee can be said to have a business co....
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....on of fact and law which has to be determined on the facts and circumstances of each case; (ii) The expression 'business connection' is too wide to admit of any precise definition; however, it has some well-known attributes; (iii) The essence of 'business connection' is existence of close, real, intimate relationship and commonness of interest between the NRC and the Indian person; (iv) Where there is control of management or finances or substantial holding of equity shares or sharing of profits by the NRC of the Indian person, the requirement of principle (iii) is fulfilled; (v) To constitute 'business connection', there must be continuity of activity or operation of the NRC with the Indian party and that a stray or isolated transaction is not enough to establish a business connection 24. Let me, in the light of this legal position, turn to the facts of this case. There is no dispute that the IC (i.e. Indian subsidiary company/ NIPL) was providing administrative support to the visiting expatriate employees of the assessee company. In the course of recording of statement of the Manging Director of IC, a specific question was put to him and the question was "what all f....
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....he said agreement, "the agreement shall be deemed to be effective as from 1.1.1996 and will continue in force until 31.12.1996". No invoice is raised for the quarter ending 31st March 1996, no invoice is raised for the quarter ending 30th June 1996 and no invoice is raised even for the quarter ending 30th September 1996 and yet, without waiting for the 31st December 1996, an invoice is raised on 16th December 1996. All this shows that though there is an agreement on record, since there are no contemporaneous actions in furtherance of this agreement, it inspires little confidence as an ordinary commercial agreement. It is also interesting to note that while in the recitals the agreement states that "the NTPL has valuable knowledge, expertise and experience and possess extensive information and has, at its disposal, the necessary infrastructure and sufficient skilled personnel to provide services in the nature of consultancy and advisory services as well as commercial and industrial information to NYC OY", all that the company has is less than one year legal existence (the company was incorporated on 23th May 1995 and the agreement was claimed to have been signed on 19th April 1996) ....
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....ake a false or incorrect statement and claim that nothing was charged in pre-1997 period. Proceedings, however, on the basis that the assessee had indeed made payments for rendition of these services, and even as we will discuss arm's length nature of these payments a little later, it is certainly beyond doubt that the Managing Director, at the point of time when his statement was being recorded, was not even aware whether or not the IC was being paid any consideration for rendition of support services. That would mean that irrespective of whether or not the payment was made for such support services, the money consideration for such services was certainly not essence of the arrangement. When a subsidiary in rendering services to its parent company, without its own business interests as the essence of arrangement to render the services, this selfless rendition of services, by itself, leaves nothing to imagination. The commercial entities inherently work for commercial interests- if not its own, for the commercial interests of someone else closely associated with such entities, as, for example, parent companies. In view of this analysis, in my considered, the subsidiary can be reaso....
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....pany, hereby guarantee in your favour the due and timely discharge and performance, in accordance with the said services contract, of all the obligations and liabilities of Nokia India arising from and pursuant to the said services contract. This guarantee constitutes an independent and legally valid undertaking in your favour. We represent to you that it is duly approved by the Directors, Nokia Telecommunications OY 27. The services being rendered by the IC to the Indian customers are on the basis of assurances given by the assessee company and it is on the basis of the services rendered by the IC to the Indian customers that the assessee company is selling its infrastructure projects in India. As I have noted earlier also, the assessee company has also given a specific undertaking to the customers to the effect that "as long as any part of the commitments under the technical support agreement remain outstanding, we will continuously and diligently monitor business affairs of Nokia India with the aim of ensuring that the company at all times is in a position to meet its commitments to you" and that "as long as any part of technical support agreement are not performed, we shal....
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....dered by its Indian subsidiary and the Indian subsidiary is able to get these contracts on the basis of assurances given by the assessee company not only with respect to the quality of work done by the Indian subsidiary but also on the basis of a specific assurance that the ownership in India subsidiary, during the currency of arrangements of the assessee company's agreements with the Indian subsidiary, will not be diluted below 51%. All this, at the minimum, shows the interconnection and interdependence of the assessee company and its Indian subsidiary so far as business operations of the assessee company in India are concerned. 28. In my considered view, therefore, the assessee did indeed have a business connection in India by way of its Indian subsidiary which was acting in a manner which was, at the minimum, as much, even if not more, for the furtherance of the business interests of the assessee company in India as much, if not more, for its own economic and business interests. As I hold so, I must also point out that just because the manner in which the assessee company has acted is in its own interests, even if we hypothetically assume so, it does not cease to be a business ....
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....much of emphasis has been placed by the learned counsel, that aspect of the matter is not relevant at this stage for determining the existence of business connection. 29. Let me now briefly touch upon Hon'ble jurisdictional High Court's judgment in the case of Nortel Network India International Vs Director of Income Tax [(2016) 386 ITR 353 (Del)]. Incidentally, this is a case primarily on profit attributable to the business connection rather than existence of business connection itself, and nothing much therefore really turns on this case on the question that I am addressing at present, but let me deal with it nevertheless. 30. In Nortel's case, the factual background, as noted by Their Lordships, was this. The assessee before Their Lordship was a US based company (Nortel USA, in short), which was a step down subsidiary of Nortel Network Limited Canada (Nortel Canada, in short). Nortel Canada, through a network of companies based in Luxemburg, the Netherlands and Mauritius, had a subsidiary in India by the name of Nortel Network India Ltd (Nortel India, in short). Nortel Canada also had a liaison office in India. On 8th June 2002, Nortel India negotiated three separate contracts ....
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....the installation was done under a separate contract" and held that "the assessee through Nortel India and LO approached the customer, negotiated the contract, bagged the contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted" and that "The equipment remained in the virtual possession of Nortel Group till such time the equipment is set up and acceptance test is done." The income in the hands of Nortel USA was thus attributed on the basis of profitability of the Nortel Canada. 31. It was in this backdrop that Hon'ble Delhi High Court held that Nortel USA did not have PE in India and the profit on sale of equipment by Nortel USA to RIL could not be brought to tax in India. Interestingly, however, it was not even the case of the income tax authorities that Nortel India was acting as an extension of Nortel USA who was assessee in this case. That fact takes it out of comparability with the present case. The guarantee for performance of Indian subsidiary was given by Nortel Canada and not the assessee in this case which was Nortel USA. There could not have been, therefore, any consideration attributable to Nortel USA for the servic....
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....e could be brought to tax under the Act. It is only when a non-resident Assessee's income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. 33. It is not, and it cannot be, even the contention of the assessee that when conditions of Explanation 2 to Section 9(1)(i) are not fulfilled, there cannot be a business connection, and, rightly so, since the definition of business connection under this statutory provision is only an inclusive, and not exhaustive definition, to cover the dependent agency situations. The wordings of Explanation 2 are on the same lines as DAPE definition in Article 5(5). Therefore, if someone is to proceed on the basis that since the conditions of the Explanation 2 to Section 9(1)(i) are not fulfilled, there cannot be a business connection at all, it will almost be like saying that when there is no DAPE, there cannot be a PE at all. DAPE is only a particular type of the PE, just as much as Explanation 2 definition, which is parallel to Article 5(5) definition is most tax treaties, is a particular type of the business connection. The observations made by Their Lordships in ....
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....al forum to apply the rulings of Hon'ble Courts above in such a manner so as to enforce the true legal principles emerging from the same, by putting the words and expression used in the ruling in the right perspective and by taking a holistic legal view of the matter. Viewed thus, I am not inclined to treat this as a matter "squarely covered" by the decision of Hon'ble jurisdictional High Court, in the case of Nortel Network (supra), in favour of the assessee. 36. I am, in the light of the above discussions, of the considered view that the assessee had a business connection in India which brings the assessee within the ambit of taxability in India. 37. The next question that I must address is whether the assessee, on account of its Indian subsidiary i.e. Nokia India Pvt Ltd, can be said to have a PE in India in terms of the provisions applicable Indo Finnish tax treaty. 38. As I proceed to deal with the question as to whether the Indian subsidiary of the assessee company can be treated as its PE and analyse facts of the case in that light, I must first discuss, in some detail, as to under what circumstances can normally a subsidiary be treated as PE of the parent company. 39. '....
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....ampionship Limited Vs CIT [(2017) 394 ITR 80 (SC)]. A coordinate special bench of this Tribunal, in the first round of proceedings in this case, has also referred to the virtual projection concept and upheld the existence of the permanent establishment for that reason alone. While the order so passed by the coordinate bench has been remitted to us for fresh adjudication, it has been done so specifically on account of certain factual mistakes creeping in the order and without disturbing the legal principles laid down therein. It is in this backdrop that I believe that virtual projection of the non-resident enterprise into the soil of the source country does result in creation of a permanent establishment as long as it is of enduring and permanent character and it is attributed to a fixed place of business in the source jurisdiction. If such a virtual projection of the foreign enterprise is by way of a subsidiary, which is nothing but an alter ego company of the nonresident parent company, that too would also result in creation of a permanent establishment. 40. Such alter ego companies without any significant and independent activities in their own right have always been, by default....
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....ndian Reprint Edition, 2005; ISBN-13: 978-81- 89960-62-9; at page 353) recognizes a situation in which a PE is created by the parent company's assumption of the economic risk of fulfilment of contract by the subsidiary, and, inter alia, as follows: (The situation is, however, different).....if the parent assumes economic risk of the contract's fulfilment in relation to main customer. In this situation, the parent company and the subsidiary have in fact established a company of which they are partners. This will lead to permanent establishment of the partners if the general pre-conditions are fulfilled 43. This principle also finds recognition in a rather recent judicial precedent in India. In the case of Ansaldio Energia SPA Vs CIT [(2009) 310 ITR 337 (Mad)], Hon'ble Madras High Court had an occasion to deal with a case in which the assessee, a foreign company, was engaged in the business of selling and setting of power plants, and this foreign company ensured the installation contract being given, by the buyer of power plant i.e. Neyveli Lignite Corporation Ltd (NLC) to its Indian subsidiary, namely Ansaldo Services Pvt Ltd (ASLP). It was in this context that Hon'ble High Cour....
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....for that purpose till the contractual obligations of the subsidiary vis-à-vis its customers are discharged, presumption about independence between parent and subsidiary company, as envisaged in Article 5(7) of the OECD Model Convention which is exactly the same as Article 5(8) of the UN Model Convention- replicated in Article 5(8) of Indo Finnish tax treaty, are nullified by the peculiar circumstances of such arrangements. While Article 5(8) does state that "The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself (Emphasis supplied by me now) constitute either company or a permanent establishment of the other" but that does not mean that a subsidiary of the assessee company cannot be held to be its PE at all. The underlying rationale of this provision is the presumption about independence of the principal and subsidiary in day to day operations and management of their business as separate entities but once this presumption is demolished, the very rai....
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....ance Ruling in the case of ABC In re (supra) when the Authority opined, and I agree with that approach, that it "is of the opinion that the subsidiary will have to be considered to be a permanent establishment of ABC unless it has significant independent activities on its own or on behalf of persons other than ABC and unconnected with it". If the OECD view was to be followed in entirety and in its literal sense, the subsidiary could not have been a PE unless the conditions set out in Article 5(5) were to be satisfied or if the disposal test was not satisfied so as to being the case within ambit of basic rule PE under article 5(1); that was not, however, the case in the pre transfer pricing legislation era. To this extent, in my view, departure from the convention OECD approach, which is rightly questioned by Arvid A Skaaar and implied rejected by our own Authority for Advance Ruling, is fully justified. Of course, the vital question is whether there is anything to prove that there is "independence of the related companies" and whether "the opposite was proved". In the post transfer pricing legislation era, the determination of arm's length price fortifies the "independence of relat....
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....se for functioning in the source country. Even without so providing the place to the foreign enterprise, the subsidiary can nevertheless be an extension or virtual projection of the foreign parent enterprise in the light of manner in which, and predominant object for which, its business activities are carried out, and that is clearly evident from the approach adopted by the AAR in the case of ABC In re (supra). In the light of Hon'ble Supreme Court's guidance extracted earlier, however, the OECD Commentary, or for that purpose any Commentary, does not bind our judicial interpretation, Therefore, it is not even a question of de legeal ferenda vs de lege lata from the point of view rejecting or accepting OECD commentary on this point; the OECD approach does not anyway provide legal basis for treaty interpretation in India and it is only as persuasive as any other relevant aid to interpretation of the tax treaties. I donot, therefore, concur with the OECD theory, if it can be construed to be that OECD approach permits only subsidiary being treated as a PE only under article 5(5). 51. In Philip Baker's book on Double Taxation Conventions, there is an interesting discussion about the n....
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....ther subliminal level, I would rather rephrase these two types of permanent establishments, for the ease of discussions, as "direct permanent establishments" and "indirect permanent establishments". Now, in the light of the observations made by Hon'ble Supreme Court approving the path taken by Philip Baker, the fixed place of business test and disposal test is relevant only for, what I have termed as, 'direct permanent establishments' or what Baker has termed as 'associated permanent establishments'. In other words it is only in the situations of direct PEs or associated PEs that the fixed place of business and the disposal tests are to be satisfied vis-à-vis the foreign enterprise. These twin tests are not really relevant, vis-à-vis foreign enterprise, for the second category, i.e. unassociated or indirect PEs, which has been described by Hon'ble Supreme Court, taking a clue from Baker's work, by observing that "the second type (of a PE) is an agent, though legally separate from the (foreign) enterprise, nevertheless who is dependent on the (foreign) enterprise to the point of forming PE". The only other category of PE visualized is a construction or installation sit....
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....y considered view, there is no dispute that the business of the foreign enterprise was, at least partly, carried out by the IC by the manner, as I have discussed in detail, IC was carrying on its business- as much, if at all, in the interest of the IC as much, even if not more at the minimum, in the interest of the foreign enterprise. The issue really is with respect to disposal test, i.e. the premises being at the disposal, qua the foreign enterprise, but then, for the detailed reasons I have set out earlier, taking things forward from certain observations in Baker's work- which is quoted with approval by Hon'ble Supreme Court's judgment in the case of Formula One (supra), in the case of 'indirect PEs' or 'unassociated PEs' as a subsidiary PE inherently is, such a disposal test can only be satisfied qua the agent who acts as proxy of the assessee in conducting the business. When business activities are through an agent, representative or proxy, the disposal test cannot be taken up qua the principal. There is no conceptual justification for the confining the role of the subsidiary as a PE under article 5(5) and denying the status of PE under the basic rule, i.e. under article 5(1),....
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....the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddha International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country". It is thus contended that, in the esteemed opinion of Hon'ble Supreme Court, in order to be a PE, there has to be a fixed place of business, which satisfied all the tests of the fixed place PE, and it must amount to the virtual projection of the foreign enterprise as well. His suggestions is, which have been accepted by the majority, that "the concept of virtual projection does not mean that even without a fixed place, virtual projection will lead to an inference of PE" and that "the concept of virtual projection cannot be in vacuum dohors any other parameter of the PE". It is on the basis of this reasoning that he contends that since the conditions precedent for existence of a fixed place PE, i.e. right to disposal, stability and productivity, are not satisfied, there ca....
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....l tests vis-à-vis foreign enterprises. 57. I may also point out that Hon'ble Supreme Court has, in the case of Formula One (supra), has not stated, as is being projected, that even in the case of virtual projections by subsidiaries, which was not even the case before Their Lordships, virtual projection must also satisfy the disposal test. Quite to the contrary, what Their Lordships have noted is that the case before Their Lordships was a case in which "Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country (all emphasis supplied by me now)". While reading this sentence, the importance of expression "not only", and the preceding discussions on the basis rule PE, cannot be ignored, and, if that is taken into account, logical conclusion is that it was a case in which the conditions precedent for basic rule PE were satisfied, and, in addition, it met the virtual projection test as well. Its almost like saying "whichever way one looks at it, it cons....
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....ing Officer but was further fortified by the transfer pricing assessments of the parties. In such a situation, there cannot indeed be any occasion for assuming dependence in the parent-subsidiary relationship which is the very foundation of a subsidiary being treated as a PE of the parent company. The backdrop and the context in which the observations were made by Their Lordships cannot therefore, by default, hold good in pre transfer pricing legislation era- particularly when there are clear indicators to the position that the transactions between the parent subsidiary were not at arm's length, that the mark-up on reimbursements was far less than interest compensation for the period of incurring the expenditure and receiving reimbursements for the same and that certain functions and risks assumed by the foreign enterprise were completely unrewarded. In the backdrop of these facts, and when I bear in mind the oft quoted words of Hon'ble Supreme Court, in the case of Sun Engineering Works (supra), that "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it t....
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....such an association would indeed give rise to the place of business in India. By no stretch of logic, these observations can be seen as subscribing to the theory that, as per law settled by Hon'ble Supreme Court, a subsidiary company can never be the PE of the parent non-resident company- as is being canvassed before us. On the other hand, the observations made in Formula One (supra) seem to support the plea that the disposal test is relevant only for 'associated PEs' which are integral part of the non-resident enterprise and are not separate legal entities. 59. There is one more factor to be borne in mind. The underlying presumption of the path taken by another special bench of equal strength in the first round of proceedings, was that the basic rule PE tests, as canvassed by the commentary, are not necessarily the tests to decide whether there is a "virtual projection" or not, in a situation in which the transactions between the related are not at arm's length, and when virtual projection can be held de hors these tests, it will be a PE nevertheless. This approach is clear from the fact that the coordinate special bench held the IC to be PE of the assessee company only on the ba....
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....he Assessing Officer as well. 61. Let us now quickly recapitulate facts of the case. Here is an assessee company which has a subsidiary Indian company, by the name of Nokia India Pvt Ltd (IC), and this IC provides marketing and administration support services on cost plus 5% mark-up basis and the mark-up of 5% is less than adequate inasmuch as it does not even factor for the interest element for the period for which its funds are blocked in incurring the expenses. The IC provides, under approval of the assessee company, installation services for which assessee company undertakes performance guarantee and commitment not to dilute the shareholding below 51%, so as to ensure the control over operations and resultant agreed performance level to the IC's customers, but the assessee company is not at all rewarded for these functions and risks at all. Such an arrangement cannot, therefore, be justified on the commercial considerations at all. It may also be mentioned that the services for which, the IC is so inadequately rewarded that if the IC was to park its funds employed in this activity in a fixed deposit with any Indian bank, it would have earned much more than what it has earned u....
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....cific undertaking to the end customers of the IC that, during the currency of the agreements of the end customers with the IC, the assessee company will not dilute its equity ownership below 51%. There is no separate reward or remuneration for this function and risk as well which is again unjustifiable on commercial considerations. This non arm's length situation also indicates that, as was held in the first round of proceedings, that the distinction between the assessee company and the IC is so blurred that the IC was virtually a projection of the foreign enterprise and the IC is a PE for this reason as well. 64. An equally undisputed position is that all the installation work generated for the IC is on account of specific approval of the assessee company. The work done by the IC is thus entirely in the control of the assessee company and the work being obtained by the IC is entirely at the mercy of the assessee company. The people at the operational level in the IC also include a number of expatriates on deputation, secondment or assignment from the assessee company. The role of the assessee company was omnipotent in all the operations of the IC, and it was not only because of t....
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....ubsidiary of the assessee company also constitutes permanent establishment of the assessee company under article 5(1) of the Indo Finnish tax treaty. We are in agreement with the aforesaid view of the Tribunal. While restricting the attribution 67. That takes me to the question as whether any profits are to be attributed to the signing, networking, planning and negotiations of the offshore supply contracts in India. These are core marketing functions and core support technical functions which are vital to the business of sale of equipment. At the minimum, these services can be treated at par with marketing services rendered by the assessee, through its PE, in India. As has been discussed earlier, all the crucial marketing and support functions have been rendered by the Indian PE, by way of the IC, and the IC has not been adequately compensated for the same. There are judicial precedents to hold that 35% of the overall profits on sale can be attributed to the marketing function. In the case of Rolls Royce plc Vs DCIT [(2011) 339 ITR 147 (Del)], while upholding the stand of this Tribunal in allocating 35% of global profit to the marketing function, Their Lordships have observed as ....