TaxTMI 
TaxTMI 
2025 (2) TMI 990
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....he assessee? (C) Whether interest from delayed consideration of supply of equipment and licensing of software was taxable in the hands of the assessee as interest earned from vendor financing? (D) Whether the revenue from supply of software could be classified as royalty or fee for technical services under the Income Tax Act, 1961 [Act] read along with the India-Finland Double Taxation Treaty [DTAA]? 2. Mr. Bhatia and Mr. Mann, learned counsels who appeared for the appellants, had placed for our consideration the following chart which delineates the questions which arise in each of these appeals and also encapsulates details of the AYs to which they pertain. That chart is extracted hereinbelow: - Commissioner of Income Tax, International Taxation-2 vs. Nokia Network OY ITA Nos. 785, 786, 882, 883, 884, 885 and 887 of 2019, 170, 171 and 166 of 2020 & 60 of 2023 S.NO. ITA NO. AY QUESTIONS ARISING FOR CONSIDERATION Whether in the facts and circumstances of the case, the Assessee has a Fixed Place Permanent Establishment in India? Whether in the facts and circumstances of the case, NIPL, which is a wholly owned subsidiary of the Assessee, co....
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.... was also engaged in the trading of telecommunication hardware and software. 5. In 1994, Nokia OY is stated to have established a Liaison Office and which was followed by the incorporation of a fully owned subsidiary, NIPL on 23 May 1995. According to the Respondent, in the period in question and while the Liaison Office was still operational, GSM equipment manufactured in Finland was sold to various Indian telecommunication operators from outside India on a principal-to-principal basis under independent buyer-seller arrangements. 6. Post incorporation of NIPL in May of 1995, the installation activities were undertaken by the said entity in terms of independent contracts which it entered into with Indian telecom operators. The details of the contracts which were entered into by the Respondent assessee stand duly captured in paragraph 2 of the judgment of the Tribunal. The assessee, Nokia OY, is stated to have consistently maintained the position that the said installation activities were undertaken by NIPL in terms of separate agreements which it had entered into with Indian telecom operators. The two exceptions to such contracts were those entered into with Modi Telstra (Ind....
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.... interest income. Nokia OY assailed the view so taken asserting that equipment supply contracts with at least two of the Indian telecom operators were signed even before NIPL had been incorporated and consequently it was only the installation activities undertaken pursuant to the original equipment supply contract having subsequently been assigned to NIPL that could have formed subject matter of taxation. It had further averred that all the equipment supplied by Nokia OY fell in the category of offshore supplies and profits earned from those transactions were thus not taxable in India. According to Nokia OY, it is this which led to the Revenue seeking to discover the existence of a PE. 9. Reverting then to the assessment made by the AO, Nokia OY aggrieved by the same petitioned the Commissioner of Income Tax (Appeals) [CIT(A)] and which came to hold that the Liaison Office constituted a Fixed Place PE of the respondent. Insofar as the connect between Nokia OY and NIPL was concerned, the CIT(A) took into consideration the fact that the latter was a wholly owned subsidiary and it thus being liable to be presumed that the latter was not acting independently. It consequently came to....
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....ssessee in India. We have in fact clarified in the same paragraph that what matters is that there was scope for previewing the assessee's soul in the body of NIPL and that it did not matter that there was no direct evidence for the control of NIPL by the assessee. For purposes of PE, what is relevant is only the perception that NIPL was a projection of the assessee, whether or not in fact and truth its activities were being controlled / monitored by the assessee. Our observations are therefore confined to the question of PE. Otherwise, both the assessee and NIPL remain separate corporate entities and NIPL has also been assessed separately for its installation income. Thus the observations in para 274(b) have no relevant to what has been discussed in this paragraph.' (6) Payment for supply of software was not in the nature of royalty because the same was for a copyrighted article and 'not for a copyright. Further, software was held to be integral part of GSM equipment. Payment for supply of software was held not taxable both under the provisions of the Act and under DTAA. (7) Interest income from vendor financing was held to have been correctly added. ....
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....a 'permanent establishment' in India because of its Liaison Office within the meaning of the relevant provision of DTAA between India and Finland? Q3. Whether any part of the consideration for supply of software stated by the Respondent to be integral to the equipment is taxable as (royalty' either under section 9(l)(vi) or the relevant provision Decided in favour of assessee (Para 30 of HC Order) Q4. Whether on facts and in law without prejudice, the Tribunal is correct in law in attributing only 20% of the Global Net Operating Profits to the PE in the form of NIPL (Nokia India Pvt. Ltd.) a subsidiary Issue remitted back to AO (Para 31 of HC Order) Q5. Whether on facts and in law interest under section 234B is leviable? Decided in favour of assessee (Para 30 of HC Order) Asseessee Appeals before Hon'ble High Court (ITA 1137 & 1138 / 2007) Q1. Whether on a true and correct interpretation of the relevant DTAAA the Tribunal's reasoning is right in law in holding that NIPL, (the subsidiary of the Appellant) is a permanent establishment? All these Issues have been remitted back to ITAT (Para 38 of High Court order) Q2. Whether t....
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....not go into the issue of how much income can be attributed to the activities earned out in India because that analysis was only made in respect of the subsidiary constituting a PE. Even though a business connection exists, if there is no income accruing or arising directly or indirectly through or from that business connection in India, nothing can be taxed in the hands of the assessee. It was the argument of Mr. Syali that Section 90 (2) of the Act clearly stipulates that the treaty regime can be opted if it is more beneficial to the assessee and, therefore, it was necessary to ascertain as to whether any income was attributable to the PE. It was argued that no such income could be attributed to PE in India and these aspects were not correctly appreciated by the Tribunal Learned Senior Counsel submitted that the conclusion arrived at by the Tribunal was erroneous as it was based on various factual errors has crept in the orders of the lower authorities. According to him, the factual errors of the orders of the AO were specifically pointed out in the submissions to the CIT (A) and specific grounds were also taken before him which are as under : (i) The Indian subsidiary wa....
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....bsidiary 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. The learned ASG also conceded that it was not correct. 38. As we find that the order of the Tribunal is based on many factual errors which are even accepted by the Revenue before us, it would be appropriate to refer the matter back to the Tribunal for fresh consideration on the issues as to....
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..... It has further been found on facts that Mr. Hannu Karavitra was subsequently employed in NIPL between 01 January 1996 and 31 July 1999 and whereafter he is stated to have assumed the office of its Managing Director and functioned as such between the period 01 January 1996 to 31 July 1999. The Modi Telstra and Sky Cell contracts were signed on 23 March 1995 and 17 February 1995 and thus undisputedly at a time when he was not even employed with NIPL. The Tribunal further pertinently noted that the AO appears to have proceeded under the mistaken assumption of Mr. Hannu Karavitra being the Country Manager of NIPL between 01 February 1994 and 31 December 1999 ignoring the indisputable position of NIPL itself having come into existence only in May 1995. 17. The Tribunal further held that there was no material on the basis of which it could have been said that Mr. Hannu Karavitra had signed any supply contracts on behalf of Nokia OY after assuming the office of Managing Director of NIPL. It has in this connection encapsulated the principal contracts entered into between Nokia OY and NIPL in paragraph 13 of its judgment. It is pertinent to note that the aforenoted facts which emerge f....
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....the main tern of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities, solely of a preparatory or auxiliary character in the business of the enterprise. 5. Notwithstanding the provisions of paragraphs (1) and (2), where a person - other than an agent of an independent status to whom paragraph (7) applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person: (a) has and habitually exercises in that ....
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.... (i) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term 'permanent establishment' likewise encompasses: - (a) A building site or construction, installation or assembly projector supervisory activities in connection therewith only if such site, project or activities last more than six months. (b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within the country for a period or periods aggregating more than 183 days within any 12 month period. 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 belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise b....
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....in that State through a broker, general commission agent or any other agent of an independent 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 will 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 a permanent establishment of the other. 19. The Tribunal before proceeding to rule on this aspect firstly identified the four principal contracts which merited examination and in the context of which the issue of PE and attribution of profits was liable to be answered. These were, in our opinion, correctly identified as being- (a) supply contracts between the assessee and various customers (b) installation contracts entered into between NIPL and customers directl....
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....ne by the assessee. In the light of the facts and background discussed in detail in the foregoing paragraphs, we shall endeavor to examine whether the assessee company has any kind of business connection or permanent establishment in India either in terms of Section 9(1) of Income Tax Act; and/ or under Article 5 of then India-Finland DTAA." 21. This set the stage for it to consider the aspect of PE. The Tribunal notes that the aforesaid question was liable to be answered in the context of signing of contracts, network planning and negotiation of offshore contracts in India. It firstly bore in consideration the assertion of the Revenue that it was the Liaison Office which was engaged in activities of network planning, negotiation and signing of contracts. However, it held that once and in the first round of litigation itself, the Liaison Office was found as not constituting a PE at all, those aspects would clearly pale into insignificance. 22. It thereafter reiterated its findings on facts pertaining to the engagement of Mr. Karavitra and held: - "45. First of all, in so far as the allegation that the Country Manager of the LO continued to be the Managing Director of....
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.... 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 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 employee....
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....ive support services would not meet or qualify the test of 'at the disposal of' and which is essential for the purposes of examining whether a Fixed Place PE had come into existence. The Tribunal in this context also rested its decision on the judgments of the Supreme Court in Formula One World Championship Ltd. v. CIT [(2017)15 SCC 602] and ADIT v. E-Fund IT Solution [(2018) 13 SCC 294]. This becomes evident from a reading of paragraph 46 which reads thus: - "46. Another set of allegations which can said to have some significance is that; whenever the employees of the assessee were visiting India in the context of networking, assigning or negotiation of off-shore supply contract, the employees of the NIPL were either assisting by providing certain administrative support services made available in the form of telephone, fax, conveyance; or the NIPL was providing technical and marketing support services to assessee and hence it is assisting in sale of equipments of the assessee in India and therefore, NIPL per se by 'force of attraction rule' will constitute a PE, because even if one sale of the assessee is through Indian company then by virtue of this rule as enshrined in ....
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....emently contended that this material facts itself goes to prove that there is a fixed place PE which was at the disposal of the assessee. In light of such contention, we have to see whether any place of business was provided by NIPL to the assessee which can be said to be at a disposal of the assessee for carrying out its business wholly or partly in India. The sequitur of the judgment of Hon'ble Apex Court as incorporated above is that, in order to ascertain as to whether an establishment being a fixed place for PE or not is that physically located premises have to be 'at the disposal of the enterprises'. Nowhere the disposal test has been diluted by the Hon'ble Apex Court rather it has been reiterated at various places not only in the Formula One World Championship judgment but also in the subsequent judgment of E-Fund. As culled out from the certain observations of the Assessing Officer as well as the statement of the MD that the employees of the assessee whenever came to India for the purpose of supply contract for negotiation on network planning, then, they were provided administrative services like telephone, fax and conveyance. Now, whether such kind of facil....
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.... hence used the office of NIPL, is of no relevance qua assessee's business, because, the technical expatriates were in India to assist/help NIPL with performance of installation activities of NIPL 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 assessee's business or 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 this case as nothing has been brought on record by the AO or Id. CIT-DR that any physical space was made available which can be said to be at the disposal of assessee for assessee's own business of supply and sale of equipments" 26. It then proceeded further to observe that the peripheral activities and administrative assistance which was extended by NIPL would fall within the meaning of preparatory and auxiliary services and which forms part of Article 5 (4) of the DTAA. It thus came to conclude that NIPL would not constitute a Fixed Place PE. 27. It then turned its attention to the question of whethe....
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....ween 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 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 h....
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....nclude contracts in the name of Nokia OY. It is these principal findings which stand reflected in the judgment handed down by the Tribunal. 29. Having broadly noticed the conclusions which were rendered by the Tribunal with respect to Fixed Place PE and DAPE, it would be pertinent to briefly advert to its conclusions on the aspect of vendor financing and which the Tribunal has answered in the following terms:- "60. Now coming to the last issue of taxability of interest from Vendor Financing ,we find that the Assessing Officer in his order has made the addition on the ground that assessee provided credit facilities to its customers for which it should have charged the interest on the same. For coming to this conclusion, he has referred to one clause given in paragraph 6.9 of the contract between the assessee and Modi Telstra to conclude that purchaser were liable to pay interest @180/0 for each day elapsed from the due date of actual payment. Thus, the only reason for making such an addition was existence of a particular clause in the agreement signed between the assessee and some of the Indian Cellular Operators. The ld. CIT (A) too has confirmed the said addition on th....
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....asis unless a debt has been created in favour of the assessee by somebody it cannot be said that income has accrued to it or it has a right to receive the income. This proposition has been well settled by Hon'ble Supreme Court in the case of E. D. Sassoon Co. Ltd. Vs. CIT, (1954) 26 ITR 27 (SC), CIT vs. Ashokbhai Chaamanbhai, (1965) 56 ITR 42, CIT vs. Shoorji Vallabhdas and Co, (1962) 46 ITR 144 (SC) and Godhara Electricity Company Ltd. Vs. CIT, 225 ITR 746. Further, the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore, reported in (1986) 158 ITR 102 (SC) which has been relied upon by the ld. CIT (A), has not been treated to be correct enunciation of law by the Hon'ble Supreme Court in the case of Godhara Electricity Company Ltd. v/s. CIT (supra) and UCO Bank v/s. CIT (supra). Here in the present case, the assessee itself has not treated the amount of interest to be due from any of the telecomm operators either recognised as a debt or as a legal claim. Even the conduct of 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 ....
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.... Tribunal and which represent its understanding of issues which stood settled in the first round of litigation and questions which no longer survived as well as those which were liable to be tried afresh was also not contested. We do so observe in light of the Tribunal having, in our considered opinion, correctly appreciated the findings which had come to be returned by the Special Bench in the first instance as well as the judgment of this Court rendered in 2012. It has thus correctly found that the aspect pertaining to the Liaison Office constituting a PE was one which stood duly laid to rest. It also held, and in our view correctly, that the solitary issue insofar as PE was concerned would be whether NIPL could be viewed as either constituting a Fixed Place PE or a DAPE. 32. For the purposes of evaluating the challenge which stands raised in these batch of appeals, it becomes pertinent to firstly notice the provisions made in Article 5 of the DTAA. As that Article presently stands and forms part of the Convention, a PE is defined to mean a fixed place of business through which the business of an enterprise may be wholly or partly carried out. Paragraph 2 of Article 5 thereaft....
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....ed Place PE. 36. The question of when a fixed place PE can be said to have come into being, is no longer res integra and is one which has come to be settled by a series of decisions including the locus classicus on the subject being the decision of the Andhra Pradesh High Court in Commissioner of Income Tax vs. Visakhapatnam Port Trust [1983 SCC OnLine AP 287] and where for the first time the expression 'virtual projection' appears. 37. We had an occasion to review the entire body of precedent which has come to evolve over the years on the subject of Fixed Place PE in our decision in Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax (International Taxation) and Others [2024 SCC OnLine Del 4065] and relevant parts whereof are extracted hereinbelow: - "67. Mr. Datar had with his characteristic erudition and clarity not only sketched out the well-recognised principles governing the question of a permanent establishment, he had also placed for our consideration various academic texts and treatises to enable us to obtain a broader perspective on the concept of a permanent establishment. We, however, deem it apposite to additionally notice some of the prin....
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....on 'through' specifies the functional relation between the place of business and the activities of the taxpayer. This relation can be described best by the notion of a functional integration of the place of business in the enterprise of the taxpayer. Such functional integration contains several aspects which need to be carefully distinguished from one another. Their common denominator, however, is the type and degree of proximity of the place of business to, or even identification with, the taxpayer's paramount economic activity. 135. The first function of the term 'through' is to make it clear that the taxpayer has to control the permanent establishment (see supra m. No. 106 et seq. for details). 136. Secondly, functional integration presupposes that the taxpayer 'wholly or partly carrie(s) on' his business (article 5 (1) OECD MC; the OECD MC Comm. uses the verb 'carried out' synonymously (No. 35 OECD MC Comm. on article 5)). However, like 'business' and 'enterprise' (cf. supra m. No. 27 et seq.), these words do not function as a substantive filter either. While early draft Model Conventions contained the condition that the fixed POR should have a product....
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....se' on the other, in one and the same sentence in the initial phrase of article 5(4.1) of Organization for Economic Co-operation and Development and UN MC, proves how careful and attentive the 2017 Models have been drafted. This dualism is another good reason to stipulate a different meaning of 'through', as opposed to 'in' or 'at'. For all of these reasons, we do see a substantial difference between both terms. 142. It follows that on the one hand, the activities mentioned in article 5 (1) of the Organization for Economic Co-operation and Development and UN MC need no longer be carried on 'in' or 'at' the place of business. In this respect, the 1977 change of article 5 (1) of OECD MC has enlarged the scope of the permanent establishment definition. Especially if one thinks of an activity as a human behaviour, one can now (unlike before 1977) easily subsume unmanned facilities under the permanent establishment definition (see supra m. No. 45 and see, e.g., No. 127 OECD MC Comm. on article 5). 143. On the other hand, the requirement of an instrumental character of the place of business has become irrefutable. Even stronger than the English amendment ('through which....
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....nder certain circumstances. In the first type of permanent establishment, i.e., associated permanent establishments, primary requirement is that there must be a fixed place of business through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled : (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) permanent establishment must be a fixed place of business, i.e., a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, permanent establishment must have three characteristics : stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on... 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 ....
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....premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a permanent establishment. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute permanent establishment 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 t....
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....non-resident FOWC is liable to pay tax in India on the income it has earned on this soil." 87. As per the Manual on the Organization for Economic Co-operation and Development Model Tax Convention, and the precedents rendered on the subject, there are two basic conditions which are spelt out and which must be fulfilled for acknowledging a permanent establishment being existent and constituting a fixed place of business. They are: (a) a place which stands placed at the "disposal" of an enterprise; and (b) The establishment answering the characteristics of stability, productivity and dependence. 88. The expression "disposal" was explained to mean a right to use a place and exercise "control" thereupon. "Control" was explained further to mean the place of business being at the "disposal" of an enterprise and which may have use of the same to a considerable extent. It was further observed that the test of place of business being under the "control" of a foreign enterprise would be met even though the said premises may not be directly owned or taken by way of lease or on rental basis. In Formula One World Championship Ltd., the Supreme Court observed t....
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.... In our view, the second requirement of article 5 (1) of the Double Taxation Avoidance Agreement is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting the AAR to give its ruling. It is clear from a reading of the above Agreement/ application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing Information Technology enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a permanent establishment stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5 (1) is not attracted." 90. Morgan Stanley and Co. Inc. was fo....
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....he two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place permanent establishment and the High Court judgment (DIT v. E-Funds IT Solution); is, therefore, correct on this score " A reading of the aforesaid judgments makes it clear that when it comes to 'fixed place' permanent establishments under double taxation avoidance treaties, the condition precedent for applicability of article 5 (1) of the double taxation treaty and the ascertainment of a 'permanent establishment' is that it should be an establishment 'through which the business of an enterprise' is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. What is equally clear is that the maintenance of a fixed place of business which is of a preparatory or auxiliary character in the....
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....erable extent. We recall Vogel describing this particular genre of a permanent establishment as being akin to an "instrument (equalling or resembling an operating asset) for his entrepreneurial activity". The concept of "virtual projection" is concerned with a functional integration between the two units and which would mean an establishment which has been virtually used for all purposes to carry out the paramount business activity of the petitioner. None of these factors are either alluded to or appear to have been borne in consideration before arriving at the conclusion that the Indian establishment constituted a fixed place permanent establishment. xxxx xxxx xxxx 94. We also take note of the judgment in Formula One World Championship Ltd. [Formula One World Championship Ltd. v. CIT (International Taxation), (2017) 394 ITR 80 (SC); (2017) 15 SCC 602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).] and where it was significantly observed that a permanent establishment must qualify and meet the tests of stability, productivity and dependence. Of equal significance were the observations which explained the phrases "at the disposal of" and "through". Tested on ....
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.... enterprises. A permanent establishment may exist, however, if the enterprise which sets up the machines also operates and maintains them for its own account. This also applies if the machines are operated and maintained by an agent dependent on the enterprise. 42. It follows from the definition of "enterprise of a Contracting State" in Article 3 that this term, as used in Article 7, and the term "enterprise" used in Article 5, refer to any form of enterprise carried on by a resident of a Contracting State, whether this enterprise is legally set up as a company, partnership, sole proprietorship or other legal form. Different enterprises may collaborate on the same project and the question of whether their collaboration constitutes a separate enterprise (e.g. in the form of a partnership) is a question that depends on the facts and the domestic law of each State. Clearly, if two persons each carrying on a separate enterprise decide to form a company in which these persons are shareholders, the company constitutes a legal person that will carry on what becomes another separate enterprise. It will often be the case, however, that different enterprises will simply agree to eac....
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....annot be regarded as a closure. If the fixed place of business is leased to another enterprise, it will normally only serve the activities of that enterprise instead of the lessor's; in general, the lessor's permanent establishment ceases to exist, except where he continues carrying on a business activity of his own through the fixed place of business". 42. The concept of a PE is based upon the undertaking of economic activity in a particular State irrespective of the residence of an enterprise and the same being understood to be in the nature of a conglomerate or an entity which may have many arms or independent functional units situate in various fiscal jurisdictions. Any entrepreneurial activity which gives rise to income or profit thus becomes liable to be taxed at source irrespective of the ultimate recipient or owner of that income. Source here would mean the location which gives rise to the accrual of profits or income or which is the location where the same arises. The PE principle thus enables the assignment of tax to the State which constitutes the source. The PE concept thus creates a functional relationship and connect between the principal entity and t....
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....be pertinent to note that a cross-border entity may structure its operations in a manner where it operates in more than one taxing jurisdiction. If it be open for such an entity to assert that its global profits and income are not liable to be taxed on the basis of the source principle, it would be wholly impermissible for it to contend that the income which accrues or arises in the Contracting State is also exempt from tax. In any case, the usage of the phrase "...so much of them as is attributable to the permanent establishment." is a clear indicator of the DTAA warranting the PE being liable to be viewed as an independent center of revenue. 46. The identifiable parts of Article 7 not only restrict the right of one of the Contracting States to tax, it also provisions for the extent to which a tax may be imposed by that State. This becomes evident from it freeing a trans-border entity from the specter of a tax liability if it does not have a PE in the introductory part of that covenant. It then proceeds to restrict the impost by adopting the principle of attribution. It thus constructs an objective criterion for identification of a PE and when a foreign enterprise with su....
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....n of that period being determined by the nature of the core activities of the enterprise. This, however, will not always be the case as it is possible to carry on an activity at a given place for a substantial period of time in preparation for activities that take place somewhere else. Where, for example, a construction enterprise trains its employees at one place before these employees are sent to work at remote work sites located in other countries, the training that takes place at the first location constitutes a preparatory activity for that enterprise. An activity that has an auxiliary character, on the other hand, generally corresponds to an activity that is carried on to support, without being part of, the essential and significant part of the activity of the enterprise as a whole. It is unlikely that an activity that requires a significant proportion of the assets or employees of the enterprise could be considered as having an auxiliary character.... 69. (Collect information) The second part of sub-paragraph (d) relates to a fixed place of business that is used solely to collect information for the enterprise. An enterprise will frequently need to collect informati....
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.... based on a relative standard. For example, consider a comparison of two enterprises : (1) an integrated enterprise which covers many steps in the creation of value (e.g., all steps from agricultural production through the processing of raw materials, further refinement up to marketing, sale and delivery of the goods to final consumers) and (2) a specialised enterprise which focuses on one of these steps only (e.g., on the delivery of goods). Suppose that each enterprise maintains a place of business in a foreign State just for the sake of the delivery of goods. The same activity (the delivery of goods) is ancillary and subordinate for enterprise (1) while it constitutes the core business of enterprise (2). 305. The amount of value added by either enterprise is the same, and so is the potential tax revenue in the source State. An absolute standard suggests equal treatment of cases (1) and (2). 306. However, the ordinary meaning of both 'preparatory' and 'auxiliary' requires the identification of a point of reference. One may say that the absolute standards are based on an analysis of the function of the core activity in relation to the entire chain of economic val....
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....and facilities which an employer makes available in order to accommodate his employees or help them to recreate or spend their idle time. This includes hotels, bedrooms, lounges or restrooms maintained outside the ordinary premises which the employer uses for the purpose of his core business. Similarly, locker rooms and coaches' rooms occupied by a baseball team while playing in venues outside the headquarters of the team do not constitute permanent establishments of the baseball clubs. In contrast, sales activities of a manufacturing company are not of an auxiliary character. If they occur in a fixed place of business, they create a permanent establishment even if the sales contracts are subject to approval by the head office or another permanent establishment." xxxx xxxx xxxx 98. That takes us then to further test the stand as struck by the respondents and to examine the correctness of their conclusion that the activities undertaken by the Indian subsidiary could not be said to be of a "preparatory" or "auxiliary" character. The decision of the Supreme Court in Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 2....
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....Agreement as regards its back office operations." xxxx xxxx xxxx 101. The aspect of whether an Indian establishment was performing functions of a "preparatory" or an "auxiliary" character was considered by this court in National Petroleum Construction Co. v. DIT (International Taxation) [(2016) 383 ITR 648 (Delhi); 2016 SCC OnLine Del 571.], and where it was pertinently observed (page 672 of 383 ITR): "The language of sub-paragraph (e) of paragraph (3) of article 5 of the Double Taxation Avoidance Agreement is similar to the language of sub-paragraph (e) of paragraph (4) of article 5 of the Model Conventions framed by Organization for Economic Co-operation and Development, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on 'Double Taxation Conventions, Third Edition', he states that 'It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote f....
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....in National Petroleum, and where the court had held that while activities undertaken by an entity which is asserted to be a "permanent establishment" may contribute to the productivity of the foreign enterprise, but if those functions be remote from the actual realisation of profits, the tests of a permanent establishment would not be satisfied." 40. Proceeding ahead and while speaking on DAPE, we had in Progress Rail observed: - "111. It is pertinent to recall that in order to fall within the scope of article 5 (4), it was imperative for the respondents to have found that the Indian subsidiary not only stood conferred with the "authority to conclude contracts" but also that it was in fact "habitually" engaged in acting in discharge of that authority. The issue of a habitual or recurrent exercise of authority does not arise at all since we have already found that an "authority to conclude contracts" never stood conferred. Suffice it to observe that there is not an iota of evidence which may have even remotely justified article 5 (4)(a) being invoked. 112. Similar is the position which emerges when the case as set up against the petitioner is examined on the anv....
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....ctions performed by that LO met the aforenoted tests. However, we find ourselves unable to sustain those submissions bearing in mind the peripheral character of the actual activities which were undertaken by that office." 42. Proceeding to explain the concept of DAPE, we had in Western Union observed: - "56. That then takes us to the argument based on the criterion of DAPE being met under the DTAA. The said contention would have to be evaluated on the basis of Article 5 (4) and which speaks of entities who may be connected with the enterprise in the other Contracting State and not being an agent of independent status. It is only once such entities are found to be acting in the Contracting State on behalf of that enterprise that Article 5 (4) would be attracted. For the purposes of being viewed as DAPE, it would have been incumbent upon the appellants to have established that the LO was acting on behalf of Western Union Financial Services and that its functions fell within the four corners of clauses (a), (b) and (c) of Article 5 (4). For the purposes of being held to be a dependent agent, it was incumbent for the appellants to establish that such an entity habitually ex....
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.... Article 5(8) bids us to bear in mind that the mere control of an entity by a parent or a holding company would not be determinative of whether a PE exists. A subsidiary or an entity which is substantially controlled by another would still have to meet the test prescribed by Paras (1), (2), (3), (5) and (6) of Article 5 before it can be said to constitute a PE. 45. We are also of the firm opinion that the question of PE is not liable to be answered on the basis of a "perception" of virtual projection. The DTAA does not leave this seminal issue to be decided on the basis of individual estimations or impressions. It lays in place certain empirical standards which must be borne in mind when answering the question whether a PE exists. Issues of "virtual projection" and "functional integration" are liable to be answered on an appreciation of facts as may be found to exist. It is here that the precepts propounded by learned scholars such as the use and maintenance of a place of business, the place being at the disposal of an enterprise or being liable to be viewed as an operating asset of the enterprise itself assume significance. What, however, needs to be emphasized is that these ar....
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....ncome derived therefrom had been taxed in its hands and had been found to satisfy the test of arm's length. Regard must also be had to the fact that no transfer pricing reference was ever made in this respect. There was thus no occasion to delve into any further exercise of attribution. 49. That takes us then to the task of examining the minority opinion which came to be penned and which the appellants commended for our acceptance. It becomes pertinent to note that the learned Member has, in our opinion, correctly noted that there is no general presumption in law that a subsidiary can never be acknowledged to be a PE. This since Article 5(8) itself merely states that the said factor alone shall not be determinative of the PE question. The covenant thus clearly obliges us to evaluate the facts based on the other provisions comprised in Article 5 of the DTAA. 50. We also concur with the minority opinion when it held that the appellants had failed to establish the existence of a DAPE. It has, however, in this respect observed that while the view expressed in the previous round, stricto sensu, may not have been wholly accurate or tenable, the question of PE would still be liable ....
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....f an agent contemplated by Article 5 (5) and which is coupled to an authority to conclude contracts or habitually securing orders in the first mentioned State. 54. The agency PE which is contemplated in Article 5 (5) is concerned with a person who acts on behalf of an enterprise and undertakes activities specified in clauses (a), (b) and (c) thereof. Such an agent must and in light of the textual construct of Article 5 (5) be one who acts "on behalf of", "in the name of" and "for the enterprise itself". The minority thus in its attempt to conflate a Fixed Place PE with DAPE has merely confounded two distinct issues. It has thus chosen to ignore the primordial conditions of "virtual projection" and premises at the disposal of an enterprise being found to exist so as to constitute a PE. 55. More fundamentally, it has failed to bear in mind that Article 5 (5) speaks of an agent who acts not for itself but principally in furtherance of the business interest of the enterprise. We fail to comprehend how NIPL could have been possibly recognised as carrying on the business of Nokia OY when the revenue generated by the former was admittedly being taxed in its hands and recognised as i....