AI OCR 
TaxTMI 
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2019 (4) TMI 280
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....e Tax (Appeals) -XXIX ("CIT-A") has erred: (a) in upholding the Assessing officer's contention that income earned by the appellant from supply of telecommunications hardware to Indian telecom operators is taxable in India on the basis that the appellant has a Permanent Establishment ("PE") in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement between India and Finland ("India-Finland tax treaty"); (b) in upholding the Assessing officer's contention that income earned by the appellant from supply of software to Indian telecom operators is taxable in India on the basis that such income is in the nature of 'royalty', both under the provisions of the Income-tax Act, 1961 ('Act') and Article 13 of the India-Finland tax treaty; (c) In without prejudice-estimating income from supply of hardware at 18.68 percent of the estimated revenues from supply of hardware (being 70 percent of the total supply revenues); (d) in without prejudice, attributing 50 percent of estimated income from supply of hardware, to activities in India; (e) in without prejudice, not considering the India specific profit and loss account furnished by the appellant, which r....
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....ment supply contract with BPL US West Cellular Limited (signed on October 31, 1998) has been signed by Olli Oittinen as an employee of Nokia India. * The appellant is responsible for installation and acceptance in respect of equipment supply contract with BPL US West Cellular Limited dated October 31. 1998. * Reliance has been placed on the equipment supply contracts/ purchase orders of the following customers to whom no supplies have been made by the appellant during the financial year relevant to the subject assessment year: - Equipment supply contract with Sterling Cellular Limited dated April 20, 1999. - Letter of intent issued by Bharti Airtel; and - Purchase orders raised by Hutch Max. (c) Based on facts and circumstances of the case and in law, the learned CIT-A has erred in observing as follows: * Installation project or supervisory activities of the appellant continued in India for more than six months. * The appellant has assigned the installation project to the Indian subsidiary, but the main responsibility for the project continues to be of the appellant. * Nokia India is only conducting the business of the appellant in India (and not for any ....
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.... for leave to add, alter, amend or vary from the grounds of appeal at or before the time of hearing." (Grounds of appeal no. 2135 for A.Y. 1999-2000 taken for the sake of brevity.) 3. Appellant, Assistant Director of Income Tax (hereinafter referred to as the revenue by filing the present appeal for A.Y. 2002-03 and A.Y. 2003-04 sought to set aside the impugned composite order dated 29.12.2009 passed by Ld. CIT(A) on the identical grounds, inter alia, that "1. On the facts and circumstances of the case, Ld. CIT(A) has erred in attributing only 20% of profits to activity of the PE in India for supply of Hardware. 2. On the facts and circumstances of the case, Ld. CIT(A) has erred in attributing only 20% of profits to activity of the PE in India for supply of Operating Systems Software. 3. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal." 4. Appellant, Assistant Director of Income Tax (hereinafter referred to as the revenue by filing the present appeal for A.Y. 1999-2000, A.Y 2000-01 and A.Y. 2001-02 sought to set aside the impugned composite order dated 25.02.2005 passed by Ld. CIT(A)-XXIX ....
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....lenge. 8. Assessee carried the matter before Ld. CIT(A) by way of filing the appeals who by following order passed by the Ld. CIT(A) in A.Y. 1997-98 and 1998-99, upheld the assessment order to the extent that assessee had carried its business in India through its subsidiary and liaison office on continuous and on regular basis which clearly shows that the assessee had business connection in India as per Section 9(1)(i) of the Act, thus, had PE as per Article 5 of the treaty. 9. Ld. CIT(A) also upheld the findings of the assessing officer that consideration which has been received by the assessee for the license of software in India is clearly liable to be taxed as royalty under the DTAA as well as under Income Tax Act. However, directed the AO to apply net rate of 30% where contract was executed before May 31, 1997 and 20% where contracts were executed after 31st May, 1997 in A.Y. 1999-2000, 2000-01 by partly allowing the appeals. Feeling aggrieved assessee as well as revenue have come up before the Tribunal by way of filing the cross appeals. 10. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders pass....
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.... 1997-98 and A.Y. 1998-99 and as such orders dated 22.06.2005 and 05.06.2008 passed by the Tribunal are not applicable to the present appeals and also filed written submissions which are made part of the appeal files and contended, inter alia, that in the present appeals AO as well as Ld. CIT(A) have categorically held that there exists a fixed placed PE in the form of the premises of the Indian subsidiary which was at the disposal of the assessee, from which the assessee was carrying on its business; that Ld. CIT(A) has held that assessee is having PE under Article 5(2) of the DTAA in the form of "Place of Management", "Office" and "Sales Outlet' as well as under Article 5(3) in the form of "Installation & Supervisory PE" and all these forms of PE do not require a "Geographically Fixed Place" but the activities associated also constitute the "core business" of the assessee. Relevant extract of the written submissions made by Ld. DR for the revenue is as under :- "Mr. Simon Piers Beresford Wylie, MD, NIPL who, in his statement under oath has confirmed as under - "Q.10. What all facilities were provided by Nokia Ltd. to the expats coming for marketing and signing the cont. on beh....
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....at the appellant had PE in India. After considering all the submissions of the appellant and facts of the case my predecessor has held as under : "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 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 operators 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. The assessee always had the presence of its office or the office of Indian company to aid it in its activities. Thus, it is not a bald case of mere sales. Many more activities were required and done for setting up GSM for Indian operators. Accordingly, it is held that income accrued directly to the appellant u/s 5(2), and it also can be deemed that income accrued to it through its office in India or the office of IC in India." It was also held by the CIT(A) that in the above assessment years that under the treaty t....
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.... that the A.O. was justified in rejecting certified accounts. In earlier years the bifurcation of total receipts in the software and hardware was taken as 70% and 30%. During the years under appeals some of the contracts are also continuing contracts and some are fresh purchase orders. The AO has not examined all the bills of supplies to examine the exact appropriation towards the hardware and software. The AO has simply mentioned that the appellant during these years have been making supplies to establish the telecom operators in continuation with their earlier contracts when main and basic equipments were already supplied and the assessee has mainly supplying in the years under consideration is for software for up gradation of system for enhancing the capacity and hardware for expansion of the existing GSM networks. Therefore, he presumed that in these years components of the software will be more than the hardware. However, the AO has not given any detail as to how he has arrived n this bifurcation from the departure of earlier years. On the other hand, the appellant has argued that in case of other telecom vendors software has been considered as 10 to 25% of the total supply. T....
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.... page 12 of the assessment order and para 4.1 at page 6 of the impugned order passed by Ld. CIT(A). AO after discussing the relevant provisions of Indo-Finland treaty reached the conclusion that : "From the above said facts, which have been discussed in the earlier paras of this order and the findings from the contracts and documents submitted by the assessee, it had a fixed placed of business in the form of Nokia's India office and the so called liaison office, both of which were operating from the same premises. The CIT(A) has already upheld that the assessee had a permanent establishment in the form of Nokia India." 22. The Ld. CIT(A) confirmed the finding returned by the AO by returning following findings :- "4.1 In all the years under appeal, the appellant has carried on its business in systematic and continuous manner in India. Simply assigning some of the work of installation to Nokia India (wos) does not mean that the appellant was not carrying on core activities in India. It is the appellant who has assigned some installation project to the Indian subsidiary but the main responsibility is of the appellant only. The installation work is only a part of total project unde....
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....as continued for more than six months. It is immaterial whether employees stayed here or not but the supervisory activity in connection with Installation Project has continued for more than six months. It is the continuance of activity which is the required condition and not the stay of employees. As the installation and supervisory activity has been continued for more than the prescribed period as per treaty, the appellant also had PE as per provisions of article 5(3) of the treaty. 23. Referring to the aforesaid findings of AO as well as Ld. CIT(A) the Ld. DR contended that AO as well as the Ld. CIT(A) have returned categoric findings that their existing a fixed place PE in the form of premises of Indian Subsidiary which was at the disposal of assessee and from which the assessee was carrying on its business. So the office of Nokia India Pvt. Ltd. (NIPL) are fixed place business from which the assessee's business activities were being carried out in India under article 5(1), 5(2) and 5(3) of the DTAA. The Ld. DR for the revenue also contended that the office premises of NIPL were at the disposal of assessee and relied upon statement of Mr. Simon Piers Beresford Wylie, MD, NIPL.....
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....ough or from any business connection in India. But, since the main mandate of the direction of the Hon'ble High Court as well as the key arguments of the parties before us including the case of the department mostly revolves around the question whether assessee had any permanent establishment in the form of NIPL in terms of Article 5 or not, therefore, we will take up the issue of PE first 41. We shall now deal with the concept of fixed place of PE' which has been harped upon by the Id. CITDR at great length and has been objected to by the learned counsel that it was never the case of the department either by the Assessing Officer or by the Id. CIT(A) that the assessee had a fixed place of business in terms of Article 5(1), albeit the entire case of the Revenue was that NIPL is a DAPE in terms of Article 5(5). Despite Ld. Counsel's objection we would like to proceed with the applicability of the fixed place PE' in the case of the assessee, because; Firstly, there is a reference by the Assessing Officer in paragraph 36 of its order though it was more in the context of LO. The relevant portion of paragraph 36 for the sake of ready reference is reproduced hereunder....
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....Vishakhapatnam Port Trust [1983] 1441TR 146/15 Taxman 72, wherein the Hon'ble High Court had laid down a very important proposition which is reproduced hereunder: " 26. Special bench also extracted the key findings of case cited as formula One World Championship Ltd. [2017] 394 ITR 80 (SC) which are as under :- "43. The key sequitur and proposition which is culled out from the judgement of the Hon'ble Supreme Court is that; Firstly, 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 Co....
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....a the LO, hence on same reasoning and principle, NIPL would also cannot be reckoned as fixed place PE. Be that as may be, one of the key arguments by the Revenue before us is that foreign expatriates were present in NIPL office who were working as an employee of NIPL and were engaged in the business of NIPL, i.e., installation and marketing activities. The key thrust of the Id. CIT-DR before us was that; firstly, Country Manager of LO continued to be the MD of the NIPL; secondly, the identity between LO and NIPL were blurred and NIPL was nothing but 'virtual projection' of the assessee in India; thirdly, NIPL was doing most of the activities in India 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 asses see's employee used to come to India then NIPL was providing infrastructure....
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.... of the NIPL were mostly belonging to the assessee company as some of the expatriates/ technical persons were working on installation contract of NIPL for which activities, salaries were paid and managed by assessee. This concept perhaps may assume some significance while deciding the concept 'Service PE' for which reliance was also placed by the learned CIT- DR on Morgan Stanley and Centrica off-shore Pvt. Ltd, however as per the then existing provision of Article 5 between India and Finland treaty, there was no such concept of 'Service PE' per se except for certain activities mentioned in clause (a) and (b) of Paragraph 3 of Article 5, which ostensibly are 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 ass....
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.... and has no correlation with the supply contract. This has been specifically held so by the Hon'ble High Court also in paragraph 34 reproduced in the earlier part of the order; secondly, not only that, for rendering these services NIPL was compensated with cost plus mark up of 5% which though has been adversely commented by the Assessing Officer and Id. CIT (A) but there has been no determination of ALP under transfer pricing mechanism. This inter alia means that the remuneration paid by the assessee to NIPL for these services has to be reckoned at arm's length; and lastly, not one off-shore sale has happened in India through NIPL and this fact has again been accepted by the Hon'ble High Court in its order that no part of offshore 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....
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....ere is it borne out that any kind of physically located premise or a particular location was made available to the assessee which was at the disposal of the assessee for carrying out wholly or partly its business through that place. Not only there should be an existence of a fixed place of business but also through that fixed place business of the enterprise should be wholly or partly carried out. No such material has been brought on record that any kind of such fixed place was made available. Providing telephone or fax or conveyance services can ever be equated with fixed place. Even the co-location of earlier LO office and the Indian subsidiary company was only in the initial year of 1995 and later on LO office has moved out which 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....
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.... and also whether profits can be attributed to such activities, then such kind of an activity ostensibly falls within the scope and realm of preparatory or auxiliary in nature, because mere signing, planning and negotiation or networking before supply of goods, are preliminary activities and therefore, under this all pervasive exclusion clause there cannot be any PE which can be deemed either in terms of Paragraphs 1, 2 and 3 of Article 5. Under the present DTAA if activities are in the nature of preparatory and auxiliary character, then same have been specifically excluded from being treated as PE. Hence, even if for the argument's sake it is accepted that there can be some kind of fixed place under Article 5(1), then such a place cannot be reckoned 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. ....
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....ising any authority to conclude contract. Lastly, it bears its own entrepreneurial risks. 49.We shall in brief examine various allegations of the AO, which has been harped upon by the Ld. CIT-DR also to contend that there is some kind of PE in the form of DAPE. First of all, Assessing Officer as discussed in the earlier part of this order has time and again referred to the employment details of Mr. Hannu Karavitra which we have already clarified that he was the employee of the assessee as Country Manager in LO till the time NIPL was not incorporated and after the incorporation of NIPL, he became the Managing Director and his period and designation of employment is contained in page 369 (9 to 11) of the paper book, from where it is seen that he was Managing 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 contrac....
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.... cellular operators for installation services and it becomes responsibility of assessee to get the contracts executed by the NIPL; and further assessee had issued guarantee to the Indian customers that it will get the contracts executed by NIPL, again has no significance for determination of DAPE, because such a contention of the Assessing Officer may have been relevant for composite contract situation which is not the consideration in the present case and does not have any bearing whatsoever in this matter. Even otherwise also assisting in performance of the installation services of NIPL does not make Indian Company DAPE of assessee under Article 5(5); and revenues from installation is any way being taxed in India. Coming to another allegation that all the contracts 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....
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....m such activity is already subject to tax in India. The off-shore supply contract is carried out by assessee on FOB basis from Finland and as discussed in foregoing paragraphs NIPL is carrying out various onshore activities, like installation activity, marketing and technical support services, which fact has been clearly highlighted by the Hon'ble High Court in para 34, that these activities have nothing to do with supply contract. The consideration accruing or arising under the contracts undertaken by NIPL is already assessed in the hands of NIPL in India and there is no adverse inference in this respect. The dispute as highlighted by the Hon'ble High Court only pertains to the consideration under the Supply Agreement entered between the assessee and the various customers. Qua the supply contract nothing 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....
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.... of the other contracting states or which carries on the business in other state, whether through a PE or otherwise shall not of itself constitutes either company or a PE of other. This inter alia means that if the NIPL, i.e., an Indian company is controlled by assessee who is resident of Finland, then this by itself will not constitute a PE. Thus, a subsidiary cannot be reckoned to constitute PE merely because it is controlled by a foreign enterprise. In other words simply because NIPL is a subsidiary and is controlled by assessee it will not be treated as a PE. Even the OECD and UN Model Conventions clarify that mere existence of foreign enterprise's subsidiary in a source state should not give rise to foreign enterprise's PE in the source state. The reason being that the existence of a subsidiary does not by itself, 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 foreig....
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....hakapatnam Port Trust, it was in relation to fixed place. The concept of virtual projection does not mean that even without a fixed place, virtual projection itself will lead to an inference of a PE. If on a facts there is no establishment of a fixed place and disposal test is not satisfied, then virtual projection itself cannot be held to be a factor for creation of a PE. Thus, the concept of virtual projection brought in by the AO will not lead to any kind of establishment of PE. In so far as allegation of the department that employees of assessee were responsible for all the activities, it has been already dealt by us that if at all it may have some bearing or relevance when examining Service PE, which was absent in the then prevalent DTAA. Thus, we hold that there is no PE within the terms of Article 5 of India Finland DTAA. " 28. Special bench of Tribunal vide order dated 22.06.2005 (SB-I) also decided the issue of business connection of the assessee in India with respect to PE observed that the issue of "business connection" becomes academic. But special bench - II vide order dated 05.06.2018 have returned categoric findings qua existence of business connection of the asses....
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....ase. 58. Apart from the judgment of Hon'ble Delhi High Court in the case of assessee as discussed above, we find that, Hon'ble High Court in Nortel Network India International Inc. (supra) somehow on similar set of facts has reiterated the same principle. Before that the relevant facts in the said case were as under:- The assessee was incorporated in the USA and was a tax resident of the USA. The assessee was a part of the N group which was stated to be a leading supplier of hardware and software for global system for mobile communication cellular radio telephone systems. The assessee was a step-down subsidiary of N, a company incorporated in Canada. N(C) also had an indirect subsidiary in India N (I). N (I) negotiated and entered into three contracts with R, namely, optical equipment contract, optical services contract and the software contract on June 8, 2002. On the same date, N (I) entered into an agreement assigning all rights and obligations to sell, supply and deliver equipment under the equipment contract to the assessee. R and N(C) were also parties to the assignment contract and in terms thereof N(C) guaranteed the performance of the equipment contract by the ....
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....lly exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1) (i) of the Act, no part of Assessee's income 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. 47. As noticed earlier, there seems to be no dispute that the title to the equipment passed in favour of Reliance overseas. However, the AO, CIT (A) and ITAT did not consider the same to be relevant as according to them, the equipment continued to be in the possession of the "Nortel Group" till its final acceptance by Reliance. In our view, even if it is accepted that the equipment supplied overseas continued to be in possession of Nortel India till the final acceptance by Reliance, the same would not imply that the As....
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....ortel Canada. Even if it is accepted that certain activities were carried on by Nortel India on behalf of the Assessee or Nortel Canada, unless the conditions of paragraph 5 of Article 7 of the Indo-US DTAA is satisfied, it cannot be held that Nortel India constituted a fixed place of business of the Assessee or Nortel Canada. 70. The AO has further alleged that the offices of Nortel LO and Nortel India were used as a sales outlet. In our view, this finding is also unmerited as there is no material which would support this view. The facts on record only indicate that Nortel India negotiated contracts with Reliance. Even assuming that the contracts form a part of the single turnkey contract, which include supply of equipment - as held by the authorities below - the same cannot lead to the conclusion that Nortel India was acting as a sales outlet. 71. The AO's conclusion that there is an installation PE in India, is also without any merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee or ....
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....e Delhi High Court clearly clinches the issues in hand, both on the point of taxability u/s. 9(l)(i) and also in the context of PE. Thus, respectfully following the ratio laid down in aforesaid judgment of Hon'ble High Court in the case of assessee as well as in the case of Nortel, we hold that income of the assessee from off-shore supply of equipments in pursuance of supply contract cannot be brought to tax in India. " 75. The AO has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Companies. In the present case, there is no material on record which would indicate that Nortel India habitually exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances 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. 76. The CIT (A) as well ....
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....ssment order that there is a PE in case of NIPL. The Ld. DR also referred to the findings returned by Ld. CIT(A) in the para 4.1 of the impugned order which are as under :- "4.1 In all the years under appeal, the appellant has carried on its business in systematic and continuous manner in India. Simply assigning some of the work of installation to Nokia India (wos) does not mean that the appellant was not carrying on core activities in India. It is the appellant who has assigned some installation project to the Indian subsidiary but the main responsibility is of the appellant only. The installation work is only a part of total project undertaken by the appellant. Nokia India is only conducting the business of the appellant and not of any other concern. Therefore, it is not undertaking the work is ordinary cause of its business. The installation work is inextricably linked with the total project of designing, supplying, installation, operations, after sales service and warranty. As pe n:e annexure to the assessment order of A.Y. 1999-00 and 2000-200lit is clear that in the contract with BPL US West, the responsibility of the appellant are well defined in all the activities of the p....
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....l bench vide order dated 05.06.2018 that AO as well as CIT(A) in A.Y. 1997-98 & A.Y. 1998-99 have not given categoric finding that are existed a fixed place PE qua NIPL, whereas in the instant case AO / CIT(A) have given categoric finding in para 4.10 of assessment order and para 4.1 of impugned order passed by ld. CIT(A). 33. However, when we read the order passed by special bench 05.06.2018 in totality question raised by Ld. DR has been duly replied by extensively dealing with the arguments raised by Ld. DR with regard to existence of fixed place PE in the form of NIPL and has given categoric finding that there is nothing on record to show that the premises of NIPL were at the disposal of assessee as the same were for ancillary and auxiliary activities and thus could not go to establish fixed place PE of the assessee in India. This issue has been duly discussed in para 43 of the order passed by special bench dated 05.06.2018. Relevant findings of special bench-II with regard to NIPL are extracted for ready perusal as under :- "46. Now in the light of the aforesaid principle we shall examine the various kinds of contracts/activities undertaken by the assessee and the facts and m....
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....ates were in India to assist/help Nokia India Pvt. Ltd. with performance of installation activities of Nokia India Pvt. Ltd. and not to carry out the business of the assessee which was manufacturing and sale of network equipments. This activity per se cannot be reckoned that the Indian office was being used for the purpose of the assessee's business or the assessee was undertaking business in India through fixed place of business. The test laid down by the hon'ble Supreme Court does not get satisfied in the case as nothing has been brought on record by the Assessing Officer or the learned Commissioner of Income-tax- Departmental representative that any physical space was made available which can be said to be at the disposal of the assessee for the assessee's own business of supply and sale of equipments." 36. Moreover, the issue that "NIPL does not constitute a fix place PE of the assessee as held by special bench-II" vide order dated 05.06.2018, has already been challenged by the revenue in appeal before the Hon'ble High Court in which following question of law has been framed "2.1 Whether on facts and circumstances of the case and in law, Ld. ITAT erred in holding that NIPL d....
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..... CIT(A) that facts of the case under consideration are similar to A.Y. 1997-98, 1998-99 by the assessee is concerned it is contended by Ld. AR for the assessee that this stand was taken by the assessee only to show that the cases under consideration were on stronger footing as during the year under assessment assessee has only entered into "standalone supply contracts" and there was no turnkey contracts. This contention of the Ld. AR for the assessee appears to be sustainable because ground no. 2 on factual matrix has been taken by the assessee on without prejudice basis. 42. It is further contended by Ld. DR for the revenue that none of the contracts under which supplies have been made to the customers are turnkey contracts. To repel this argument, Ld. AR for the assessee contended that in the case before Special Bench II there were only issue as to turnkey contracts viz Modi Telstra and Skycell Communication Ltd. and the rest of the contracts were merely supply contracts. 43. When we examine the aforesaid contention of Ld. DR for the revenue and Ld. AR for the assessee in the light of the findings returned by Special Bench II. It is held by referring to the order of Hon'ble Hi....
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....dance agreement if activities are in the nature of preparatory and auxiliary character, then same have been specifically excluded from being treated as permanent establishment. Hence, even if for the argument's sake it is accepted that tlliere can be some kind of fixed place under article 5(1), then such a place cannot be reckoned as permanent establishment, because the activities carried out from such a place are in the nature preparatory and auxiliary. Accordingly, in terms of article 5(4), there could not be any fixed place permanent Establishment under article 5(1) because the activities of the assessee in India were purely pertaining to network planning, negotiation and signing of contracts before offshore supply of (GSM) equipments and sale of goods have been made off shore outside India." 46. So in view of the findings returned by Special Bench extracted above the contention raised by Ld. DR is not sustainable because Special Bench has categorically held that under all pervasive exclusion clause there cannot be any permanent establishment which can be deemed either in terms of paragraph 1, 2 and 3 of Article 5 of the DTAA. 47. Furthermore to repel the argument address....
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....f the expression 'Permanent Establishment'. Paragraph 3 begins with a non-obstante clause- "Notwithstanding the preceding provisions of this Article". Thus, the exclusions provided under paragraph 3 would override the provisions of paragraph 1 & 2 of Article 5 of the DTAA. In other words, even if a place of business squarely falls within the definition of paragraph 1 of Article 5 and is specifically listed in paragraph 2 of the said Article, the same would, nonetheless, not be construed as a PE of an enterprise, if it falls within any of the exclusionary clauses contained in sub-paras (a) to (e) of paragraph 3 of Article 5 of the DTAA." 48. In view of the matter we are of the considered view the contention of the Ld. DR that Special Bench has only considered PE under Article 5(1) and the same was rejected on ground of nonsatisfaction of "disposal test" is not tenable because it is settled principle of law that Article 1 and 2 are complementary to each other and Special Bench has held that when preliminary conditions laid down under Article 1 are not satisfied there is no question of being a PE under any of the sub clauses of paragraph 2. 49. Ld. DR for the revenue by rel....
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.... it constituted a fixed place permanent establishment. If that reasoning alone is to be taken into consideration, then such an inter pretation of permanent establishment did not found judicial favour either by the earlier Special Bench or by the hon'ble High Court qua the liaison office, hence on same reasoning and principle, Nokia India Pvt.. Ltd. would also cannot be reckoned as fixed place permanent establishment." So in view of the matter we are of the considered view that the contention raised by Ld. DR is not sustainable. 51. It is further contended by Ld. DR for the revenue that customers only know one Nokia India who has an office at Manipalpur and entered with this office for supply, installation and commissioning, warranty etc." Ld. DR has raised this question before SB-II and has been duly replied with by holding that aforesaid allegation does not go to establish the existence of assessee's PE in India. 52. Ld. DR for the revenue further contended that the assessee has not furnished the list of its own employees visiting India and their total period of stay including the purpose of visits in India; that nominal salary to the seconded employees is paid by NIPL and....
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..... 72 of the order are extracted for ready perusal as under :- "As regards allegation that expatriates employees of the assessee in India were assisting the Nokia India Pvt. Ltd. and hence used the office of Nokia India Pvt. Ltd., is of no relevance qua the assessee's business, because, the technical expatriates were in India to assist/help Nokia India Pvt. Ltd. with performance of installation activities of Nokia India Pvt. Ltd. and not to carry out the business of the assessee which was manufacturing and sale of network equipments. This activity per se cannot be reckoned that the Indian office was being used for the purpose of the assessee's business or the assessee was undertaking business in India through fixed place of business." 57. Further more when the revenue has challenged the order passed by Special Bench II in case of assessee for 1997-98 and 1998-99 before the Hon'ble High Court the question of law on this issue has been framed which is extracted as under :- "2.1 Whether on facts and circumstances of the case and in law, Ld. ITAT erred in holding that NIPL did not constitute a fixed place PE of the assessee, without appreciating the fact that NIPL is a virtual proje....
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....e on payroll Nokia Ltd. * Various expatriate employees visited India to provide services regarding supply of equipments, for which Nokia India Pvt. Ltd. provided administrative support, like telephone, cars etc. * Setting up of GSM network is very complex and technical project which was carried out by highly skilled employees of the assessee company sent to the India from time to time. * Supply contacts and related agreements were signed in India by the employees of the assessee. * The services claimed to have been provided by the Nokia India Pvt. Ltd. both to the assessee and to cellular operators were in fact provided by expatriates of the assessee and Nokia India Pvt. Ltd. did not reimburse the salary. Details of expatriates and their salary paid in foreign currency were pointed out to before us. * Responsibility and liability for all the services provided to the customers in India was with the assessee. * Heavy reliance on the judgments of Morgan Stanley (Supreme Court) and Centrica (Delhi hon'ble High Court) (supra). * Identity of Nokia India Pvt. Ltd. and the assessee merged into one due to above factors and hence it acted as "virtual projection" of forei....
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....erest from Vendor financing and on account of delayed payments by the operators in the relevant previous year. 38. After noting the aforesaid facts, the hon'ble High Court observed that the finding of fact by the Special Bench specifically with regard to point Nos. (i), (iv), (v) and (vi) are purely based on assumption which are completely divorced from the facts for arriving to the conclusion on Nokia India Pvt. Ltd. being permanent establishment." So, the contention raised by Ld. DR that facts of the case under consideration are distinguishable from A.Y. 1997-98 and 1998-99 are not sustainable. 63. In A.Y. 1999-2000 and 2001-02, the revenue has challenged the modification made by Ld. CIT(A) in the assessment order to the extent of hardware ratio of 70:30 as against 60:40 made by the AO and has also challenged the finding of the CIT(A) in restricting the attribution to 50% of the profit from supply of hardware in A.Y. 2002-03 and 2003-04. The revenue has also challenged the finding of Ld. CIT(A) in attributing 20% of profits to activity of the PE in India for supply of hardware and attributing 20% of profits to activity of PE in India for supply of operating system software. ....
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.... The learned Commissioner of Income-tax (Appeals) too has confirmed the said addition on the ground that, since the assessee is following a mercantile system of accounting and as per the contract the assessee was entitled to receive such interest, and therefore, same should have been accounted for and in support he has relied upon the judgment of the hon'ble Supreme Court in the case of State Bank of Travancore (supra), learned counsel for the assessee had submitted that the said judgment has already been distinguished in the subsequent judgment of the hon'ble Supreme Court in the case of UCO Bank v. CIT (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. 63. 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 inte....
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.... the parties show that such a clause even though may have been agreed upon has never been enforced or acted upon. In such a situation, in our opinion, the amount of interest cannot construe a debt due to the assessee. Further, the assessee has not debited the account of any customer with interest which can be treated as income of the assessee. Nowhere has it been held by the Assessing Officer/Commissioner of Income-tax (Appeals) that such an interest is legally claimable right against the Indian customers in respect of interest on delayed credit period on vendor financing. Thus, we hold that when the assessee has neither treated the amount to be legally claimed nor has acknowledged any debt due too on its customer as delayed 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 the hon'ble Supreme Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC). Hence, no income can be said to accrue to the assessee on account of delayed payme....