Income Tax Appellate Tribunal - Delhi
M/S Nokia Corporation, New Delhi vs Adit, New Delhi on 2 September, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES 'E', NEW DELHI
Before Sh. Bhavnesh Saini, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 1006/Del/2010 : Asstt. Year : 2004-05
ITA No. 1007/Del/2010 : Asstt. Year : 2005-06
ITA No. 1008/Del/2010 : Asstt. Year : 2006-07
ITA No. 5819/Del/2010 : Asstt. Year : 2007-08
Nokia Corporation Vs Asstt. Director of Income Tax,
(Formerly Nokia Networks OY) Circle-2(1), International Taxation,
C/o Tarandeep Singh, F-99, New Delhi
Lajpat Nagar-II,
New Delhi-110024
(APPELLANT) (RESPONDENT)
PAN No. AABCN3748E
ITA No. 1236/Del/2010 : Asstt. Year : 2004-05
ITA No. 1237/Del/2010 : Asstt. Year : 2005-06
ITA No. 1238/Del/2010 : Asstt. Year : 2006-07
Asstt. Director of Income Tax, Vs Nokia Corporation
Circle-2(1), International Taxation, C/o S.R. Batliboi & Co., 4th
New Delhi Floor, Golf View, Tower-B,
Sector Road, Sector-42,
Gurgaon
(APPELLANT) (RESPONDENT)
PAN No. AABCN3748E
Assessee by : Ms. Rashmi Chopra, Adv.
Revenue by : Sh. G. K. Dhall, CIT DR
Date of Hearing: 09.07.2019 Date of Pronouncement: 02.09.2019
2 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010
Nokia Corporation
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
Si nce, the i ssues i nvol ved i n all these appeal s are common , they were heard together and are bei ng di sposed off by common order. G round Nos. 2 & 6 are not presse d.
2. The assessee has rai sed the foll owi ng grounds:
"1. Ba sed on facts and ci rcumstan ces of the case and in law, the learned C ommissioner of Income- tax(Appeals) [hereinafter referre d to as the CIT(A)] has erre d in holding that the income earned by the appellant from supply of telecommunication equipment (comprising of hardwa re and software) t o Indian telecom operat ors is taxa ble 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").
2. Not pressed
3. Without prejudice, ba sed on facts and circumstances of the case and in law, the ld. CIT (A) has erre d in applying gl obal net operating ma rgin of 16.46 percent t o estimate the income from su pply of telecommunication equipment.
4. Without prejudice, ba sed on facts and circumstances of the case and in law, the ld. CIT (A) has erred in not considering the India specific Profit and Loss account furnished by the appellant, which reflected losses incurre d from supplies made to customers in India.
5. Without prejudice, ba sed on facts and circumstances of the case and in law, the ld. CIT (A) has erred in attributing 20 perce nt of the estimated 3 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation income from supply of telecomm unication equipment to the alleged PE in In dia, by completely ignoring the following facts submitted by the appellant:
(a) Supply contracts/purchase orde rs, being high value contracts, we re 'concluded/accepted ' outside India in view of the fact that the 'powe r to conclude ' contra cts vests with the Boa rd of Directors/othe r approving authority off the assessee base d outside India at the registered office of the company in Helsinki (Finland).
(b) No supply contracts were signed in India.
(c) No income can be said to hav e accrued on account of mere signing of contra cts, as uphel d by the Hon'ble Supreme Cou rt i n the case of Ishikawajima Ha rima Heavy Industries Co. Ltd.
(288 ITR 408)
(d) The appellant's role was limited to supply of telecom equipment and it did not have any role in network planning activities undertaken in India.
6. Not pressed
7. Based on facts and circumstances of the case and in law, the ld. CIT (A) ha s e rre d in uphol ding the action of the lea rned asse ssing officer who has arbitra rily imputed Rs 50 ,000,00 0 as income f rom vendor financing and taxed the same in the hands of the appellant in India as business Income, without providing any Justification for Imputation of the said Income and without seeking any information and detail from the appellant nor providing any opportunity to the appellant to contest such addition.
8. Based on facts and circumstances of the case and in law, the learned CIT (A) has erred in relying upon the unfounded allegations made by the learned assessing officer to h old a 'Fixed Place PE' of the appellant in India unde r the provisions of Article 5(1) of the India-Finland Tax Treaty, in respect of 4 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation research & development ('R&D') a ctivities undertaken by Nokia India Private Limited ( Nokia India) in India for the appellant.
8.1 Without prejudice, based on facts and circumstances of the ca se and in law, the leaned CT (A) has erred in applying the profit margin rate of 21.42 percent on the total expenses incurred by Nokia Indi a on R&D a ctivities and attributing 100 % of the same to the alleged PE of the appellant in India.
8.2 Without prejudice, based on facts and circumstances of the case and in law, the learned CIT (A) has e rred in not appreciati ng that an a rm's length payment has been made by the appellant to Nokia Indi a in respect of R &D activities undertaken by Noki a India, which has alrea dy been offered to tax in India by Nokia India.
8.3 Without prejudice, based on facts and circumstances of the case and in law, the learned CIT (A) has erred in not allowing deduction for payments made by the appellant to Nokia India while computing the income from R&D activities undertaken in India.
9. Based on facts and circumstances of the case and In law, the learned CIT (A) has erred In upholding the levy of interest under section 2348 of the Income-tax Act, 1961, thereby ignoring the Judgment of the Hon'ble T ribunal In appellant's ow n case for AY 1997-98 and AY 1998-99."
3. The Revenue has rai sed the foll owing grounds:
"1. On the facts and circumstances of the case, Ld. CIT(A) has erred in attributing onl y 20% of profits t o activity of the PE in India for supply of Hardware.
2. On the facts and circumstance s of the case, Ld. CIT(A) has erred in attributing only 20% of profits of activity of the PE in India for supply of Ope rating Systems Software.5 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010 Nokia Corporation
3. On the facts and circumstance s of the case, Ld. CIT(A) has erred in attributin g the profits on Research & Development (R&D) a ctivities in the same proportion as the proporti on of Global Profits are attributable to ratio of Global R &D Expenses & Globa l Expenses and thus disrega rding th e facts that Global Expenses even contain expenses of the branches where R&D activities are not even carrie d out."
4. The i ssues i n the grounds taken by the assessee as well as the revenue i nvol ved simil ar i ssues. Hence, taken up and adjudi cated together.
5. Bri ef background of the case are that Noki a Corporati on i s a company i ncorporated under the l aws of Finl and and i s engaged in the busi ness of suppl yi ng advanced tel ecommuni cati ons systems and equi pment for use i n fi xed and mobil e phone networks. The assessee has presence i n Indi a i n the form a 100% subsi di ary by the name of Noki a Indi a Pri vate Ltd (hereinafter referred t o as Noki a Indi a). Accordi ng to the assessee its Indi an li ai son offi ce had become defunct after i ncorporati on of the Indi an subsi di ary, Noki a Indi a, i n May 1995 and was cl osed i n January 2002 after obtai ning requi si te approval s from the Reserve Ban k of Indi a. For the rel evant previ ous years the appell ant fil ed i ts returns of i ncome decl ari ng 'Nil ' i ncome. In the assessment orders passed by A0 , the appell ant has been hel d to consti tute a PE i n Indi a and revenues deri ved by the appell ant from foll owi ng sources were taxed in Indi a:
Suppl y of hardware, Suppl y of operati ng system software 6 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Income from Vendor fi nanci ng (Onl y for assessment years 2003-04 to 2006-07); and Income from Re search & Development acti vi ti es (Onl y for assessment years 2004-05, 2005-06 and 2006-07).
Revenues from suppl y of ha rdwa re have been al l ocated at 60 percent of the total suppl y revenues and 100% of the gl obal profi t margi ns earned by the appell ant were attri buted to the PE. Revenues from suppl y of software have been all ocated as 40 percent of the total suppl y revenues and were taxed a s 'royal ty' both under the provi si ons of secti on 9(1)(vi ) of the Act and Arti cl e 13 of the Indi a-Finl and Tax Treaty on a gross basi s. Rs.5,00,00,000/- has bee n imputed as i ncome from vendor fi nanci ng. In respect of R&D acti vi ties, Noki a Indi a's R&D center in Indi a has been held as a fixed pl ace of busi ness for the appel l ant from where R&D acti vity of the appell ant i s carri ed out. An attri buti on of 125% to 130% of profi ts from R&D expenses incurred i n Indi a has been made.
6. Comprehensi vel y the i ssues i s to be adjudi cated i n the case are that
- Whether the appell ant consti tutes a PE i n Indi a, thereby resul ti ng i n taxati on of revenues from suppl y of telecom hardwa re to the Indi an customers
- If the appell ant consti tutes a PE i n Indi a, what i s the quantum of profi ts attri butabl e to such PE i n Indi a
- Whether revenues from suppl y of software are i n the nature of 'royal ty' / 'fees for techni cal servi ces' under the provi si ons of the Act and the Indi a-Finl and Tax Treaty 7 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation
- Whether the assessi ng offi cer has correctl y i mputed the i ncome of Rs 5,00,00,000/- as i ncome from vendor financing (Rel evant for Assessment Years 2003-04 to 2006-07)
- Whether the appel l ant consti tutes a PE i n Indi a on account of R&D acti viti es undertaken i n Indi a under the terms of sub-contracti ng agreement executed between the appel l ant and Noki a Indi a (Rel evant for Assessment Years 2004-05 to 2006-07)
7. The orde rs of the l d. CIT (A) we re mai nl y based on the orde r of the Speci al Bench of ITAT Del hi dated 22.06.2005 i n the case of assessee. Later, the matter reached the Hon'bl e Hi gh Court where the Hon'bl e Hi gh Court has passe d an orde r dated 07.09.2012 25 Taxman 225 deali ng wi th the i ssues. Later, the Speci al Bench was consti tuted foll owing the di recti ons of the Hon'bl e Hi gh Court and the ITAT Speci al Bench, Del hi passed an order dat ed 05.06.2018 65 ITR (T) 23 for the assessment year 1997-98 and 1998-99.
8. Ground Nos. 1 , 3 t o 5 of asse ssee's a ppeal i n ITA Nos. 1006 to 1008/Del /2010, Ground Nos. 2 & 3 of asse ssee's appeal i n ITA No. 5819/Del /2010 and Ground Nos. 1 to 3 of departmental appeal in ITA Nos. 1236 to 1238/Del/2010 deal s wi th exi stence of permanent establi shment i n Indi a.
9. Wi th regard to the PE, the l d. CIT (A) adjudi cated base d on the order of the Speci al Bench of ITAT Del hi dated 22.06.2005. The rel evant part of the order i s as under:
"Taking up the second part of the second question a s to whether the Indian subsidiary of the assessee, 8 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation referred t o as NTPL , can be consi dered as a PE of the assessee in India, we are of the view that having regard of the findings re corded by both the Assessing Officer and the CIT(Appeals), the NTPL can be considere d as a PE. The issue has been dealt with in paragraph 6 .3 of the orde r of the CIT(Appeals) , though in several earlier pa rts of the orde r, there i s scattered reference to this a spe ct of the matter. However, the final decision of the CIT(Appeals) is only in paragraph 6 .3 of his order. A reading of this paragraph shows clearly that wha t the CIT(Appeals) has in mind, as in the case of the A.O., is that NTPL , the Indian subsidiary, is the virtual proje ction of the assessee itself in India, though this idea may not have been prope rly articulated i n the order of the Income-tax authorities. The main point brought out by them is that in respect of the services rendere d by NTPL to the assessee under the "ma rketing agreement", it was compensated on the basis of cost plus 5% which means that in a ddi tion to getting the expenses reimbursed, NTPL will get 5% more. It stands to reason that in respect of the marketing activity, NTPL has no scope for incurring any loss. Nevertheless, its accounts Show s a book loss of Rs. 10 crores (approximately) and even if the depreciati on loss of Rs. 2 croe s i n ignored still the loss is a round Rs. 8 crore s. The question, posed by the Income-tax authorities is : Where from this loss has arisen ? The answe r is that such a loss has arisen only from the installation activity carried out by the NTPL. In other words the installation charges received by NTPL from the cellula r operat or in India were not commensurate with the costs and expenses incurred therefore and that is the reason why such a loss has been incurred. Now the other question i s how does that result in NTPL bei ng regarded as the PE of the assessee company. The answer is that since NTPL is a wholly owned subsi diary of the assessee in India and is consequently in a position to control an d monitor its activities, the install ation charges were directed to be so fixed that they were not commensurate with the services rendered by NT PL. The next question will be why would the assessee do so. We cannot think of any other reason except that 9 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation the part of the price for installation of the GSM equipment was diverted as the price for the supply contract . Whether there is direct evidence or not for this conclusion, or whether it 1s permissible for us even to make such an inference from the circumstances of the case, i s not really material for the present purpose. What it material is that there was ample scope for the assessee to control and monitor the activities of NTPL w hich, it should be remembered i s a l00% subsidia ry of the assessee, in such a manner that NT PL became a virtual projecti on of the assessee company in Indi a. The other point made by the Income-tax authorities was that the assessee even re presented t o t he Indian cellular operat or that it will not dilute its share holding in the Indian subsidiary bel ow 51% w ithout the written permission of the Indian cellular operat ors. This allegation of the Income-tax authorities has not been refuted or proved wrong by the assessee in the course of the proceedings before them or even before us. This also shows th at the distinction between the two corporate entities, namely, the assessee on one hand and NTPL , its 100% subsidiary on the other hand, virtually got blurred with the result that it can be said that when the Indian cellular ope rators were dealing with NTPL in connection with the installation contract and marketing agreement, they were in fact dealing with the assessee itself. We are therefore, the opinion that the test propounded by the Andhra Pra desh High Court in the case of CIT Vs. Vi shakhapatnam Port Trust 144 ITR 146 i s fully answered. We are , therefore, unable to find fault with the CIT(Appeals) for holding that NTPL , the 100% Indian subsidia ry of the assessee, constituted the a sse ssee's PE in India ."
(Emphasis Supplied).
As I have mentioned above, the facts of the case before me for Assessment Years 2 002-03 to 2006-07 are similar t o the facts before the Honourable Special Bench of the Delhi ITAT f or AY 19 97-98 and 1998-99. Accordingly, relying on the decision of the Honourable Special Bench of the Delhi ITAT, I confirm the action of the assessing officer in this 10 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation regard and uphold that the Nokia India constitutes appellant's PE in India."
10. It was brought t o our noti ce that thi s matter of dependent agent PE, fi xed based PE and att ri buti on of profi ts have been di scussed and stands adjudi cated by the order of the Spe ci al bench of ITAT Del hi dated June 05, 2018. The rel evant porti on of the order i s reproduced hereunder for rea dy reference.
43. The key sequitur and proposi tion which is culle d out from the judgment of the H on'ble Supreme Cou rt is that;
firstly, the fix place should be w here the commercia l 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, st ability productivity and dependence; and lastly, fixed place of the business must be at the disposal of the foreign enterpri se through which it conducts business.
Thus, according to the Supreme Court the 'disposa l test' is pa ramount which needs to be seen while analyzing fixed place PE under Article 5(1). Though in our humble unde rstanding, the test of pe rmanency qua fixed place has been slightly diluted by the Hon'ble Court but not the "disposal test". Again this judgment of Hon'ble Supreme Court has been reiterated and referre d extensively in a subse quent judgment by the Hon'ble Supreme Court in the case of Asstt. DIT v. E-Fund IT Solution (supra) , whe rein the Hon'ble Apex Court ha d quoted e xtensively the same views and commentaries and al so the judgment of Formula One World Champi onship Ltd. and held that there must exist a fixed place in India which is at disposal of foreign enterprise through which they carry on their own business. In tha t case, the In dian 11 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation subsidiary company of the fore ign enterprise wa s rendering su pport se rvices which enabled the foreign enterprise in turn to rende r servi ces to its client an d the outsourcing of w ork t o the In dian subsidia ry wa s held to be not giving ri se to fixed place of PE. Thi s judgment of the Hon'ble Supreme Court nearly clinches the issue before hand i n so far as role of Indian subsidiary while deciding the fix place PE.
44. Now in the light of the aforesaid principle we shall examine the various kinds of contra cts/activities undertaken by the assessee and the facts and material on record, spe cifically with reference to the followin g activities which have been identified by the Hon'bl e High Court while remanding the matter back to the Tribunal.
(a) Signing of contracts;
(b) Network planning;
(c) Negotiation of off-shore contra ct in India.
As discussed ea rlier, the Assessi ng Officer ha s note d that LO was engaged in the activities of network planning, negotiation of contra ct and si gning of contracts, however in the earlier round it has been categori cally held that LO is n ot a PE qua these activities and nowhere there is a categorical an d specific finding by the Assessing Officer or by the ld. CIT(A) in the entire orde r that t here exist any fixed place PE qua the Indian subsidia ry, i.e., NIPL, except for stating that office of the LO and NIPL were co- located, employees of the assesse e were w orking wit h NIPL and therefore , it constituted a fixed place PE. If that reasoning alone is t o be ta ke n into conside ration , then such an interpretation of PE did not found judicia l favour either by the ea rlier Special Bench or by th e Hon'ble High C ourt qua the LO, hence on sam e reasoning and principle , NIPL w ould 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 expat riates we re present in NIPL office wh o were working as an employee of NIPL and we re engaged in the business of NIPL, i.e., installation and marketing a ctivities. The key th rust of the l d. C IT-DR 12 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation before us was that; firstly, Country Manager of LO continued to be the MD of the NIPL; secondly, the identity between LO and NIPL we re blurre d and NIPL was nothing but 'virtual projecti on' of the assessee in India; thirdly, NIPL w as doing m ost of the activities in India like Ma rket Development, liaisioning with customers, technical assistan ce, marketing of products, etc.; fourthly, employees of the assessee company we re seconded to NIPL for installation contract of NIPL, and their salari es were paid by th e 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); la stly, whenever the assessee's employee used t o come to India then NIPL was providing infrast ructure facilities like, telephone, fax, vehicles, etc. which goes to show that there was a place in the form of NIPL which was at the disposal of the assessee.
45. First of all, in so fa r as the allegation that the Country Manage r of the LO continued to be the Managing Dire ctor of the Indian Company, the same has with reference to one employee, namely, Mr. Hannu Karavitra who was the Country Manager in L O and in that capacity has signed t wo contracts in the month of February and March, 19 95. These contract s were signed when NIPL wa s not even in existence. After the incorporation of NIPL on 23.05.1995, n ot a n iota of evidence has been brought on record that Mr. Hannu Karavitra had signed any contract on behalf of the assessee. He w as a Managi ng Direct or of NIPL from 01.01.1996 t o 31.07 .1999 and after he w a s employed with NIPL , he has not signed any supply contracts with the Indian customers. All the installation contracts which have been signed by th e NIPL have been executed by the NIPL independently with the Indian customers on principal to principa l basis an d any income received or accrued thereof, wa s subject to tax in India. During the course of the hearing, it wa s brought to ou r notice that on one assignment letter dated 24.05.199 5 was signed by Mr. Hannu Karavitra whereby on shore se rvices were assigned to NIPL and while working in India he was 13 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation receiving salary from a ssessee only. First of all, Mr. Hannu Karavitra was employed with the LO earlier, prior to the incorporation of NIPL and he was not employed with the Indian company. In any case assignment was from assessee to NIPL and n o authority was being exercised on behalf of the assessee company vis-à-vis the customers. Whether Mr. Hannu Ka ravitra w as representative of the assessee and w as working f or NIPL or was receiving salary from a ssessee, same would have some relevance in the context of 'Servi ce PE', but certainly not while examining the 'fixed pl ace PE'. Even if the arguments sake it is accepted that he was a seconde d employee to NIPL , then also if he had worked unde r the control of NIPL despite lien was maintained with assessee company, then also it does not lead to an inference that assessee company was having any kin d of a PE, leave alone under paragraph 1 of Article 5 . Similarly the allegation has been made by the Assessing Officer as well as strongly contended by th e learned CIT-DR that employees 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 manage d by assessee. This concept perhaps may assume some significance while deciding the concept 'Service PE ' for which reliance was also pla ced by the lea rned CIT-DR on Morga n Stanley and Centrica off-shore Pvt. Ltd, however as per the then existing provision of Article 5 between India and Finland treaty, there wa s no such concept of 'Service PE' pe r 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 ou t by the assessee in India al beit wa s done by its India n subsidiary, provisions of para gra ph 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 C IT (A) that there is any kind of service PE) , then such plea of the learned CIT-DR has no legs t o stand. His core a rgument was on the point that installation activities done through employees of the assessee constitutes a 'Se rvice PE' and asse ssee wa s 14 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation unable to furnish the details of e mployees working in NIPL al ongwith the details of their duration an d therefore, in a bsence of such details adverse view should be drawn for tre ating these employees constituting PE in India. The entire thrust of his argument simply whittles down for the reason that firstly, there is absolutely no con cept of 'Se rvice PE' in the then existing provision of Arti cle 5; and secondly, other than off-shore su pply of equipment, no othe r activities has been carried out by the assessee after the incorporation of the Indian subsidiary NIPL an d this fact has been accepted by th e Hon'ble High Cou rt also. Thus, any activities relating to NIPL unde r the independent contract cannot be re ckoned to constitute a PE in the context of Article 5(1); and even if for argument sake it is accepted that the activities of NIPL were manage d by assessee , then also, it doe s not constitute PE qua activities of supply contract or any activity from where it can be held that any income has been received or accrued to t he assessee in India or through or f rom any asset i n India. NIPL is an independent entity and all its income from Indi a operati on is liable for tax in India.
46. Another set of allegati ons whi ch can said to have some significance is that; whenever the employees of the assessee were visiting India in the context of networking, assigning or negot iation of off-shore supply contract , the employees of NIPL we re either assisting by providing certain administrative support services made available in the form of telephone, fa x and conveyance; or the NIPL was providing technica l and marketing support services to assessee and hence it is assisting in sale of equipments of the assessee in India and therefore , NIPL pe r-se by 'force of attracti on 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 Article 7 of India-Finland DTAA, PE will get constituted and there w ould be a deemed PE in the form of Indian company whose income has to be attributed a ccordingly. This secon d part of allegati on does n ot hold ground at all , because; firstly, as stated in the earlier part of the orde r, assessee and NIPL have e ntered into sepa rate 15 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation marketing and technical support agreements in respect of the projects installed a nd has no correlation with the supply contra ct. This h as been specifically held so by the Hon'ble High Court also in para gra ph 34 reproduced in the earlier pa rt of the orde r; secondly , not only that, f or rende ring these services NIPL wa s compensated with cost plus ma rk up of 5% which though has been a dversely commented by the Assessing Officer and ld. CIT (A) but there has been no determination of ALP under transfe r pricin g mechanism. This inter alia means that the remuneration paid by the assesse e to NIPL for these services has to be re ckoned at arm's length; and lastly, not one off-shore sale ha s happened in India through NIPL and this fact has again been accepted by the Hon'ble High Court in its orde r that no pa rt of off- shore supply wa s concluded in India with any business connection in India as it was i ndependent contract between Assessee and Telecom operators in India. In so far as allegation of administrat ive support service s provided to employees of asse sse e in India for su pply contract by NIPL and hence it leads to fixed place PE , strong reliance has been placed by Ld. CIT-DR on the statement of the then Managing Director, Mr. Simon Bresford. From the relevant statement he had pointed out that how the marketing support services have been provided by the Indian company to the assesse e and also the a dministrative su pport se rvices we re provided by NIPL to assessee . Regarding ma rketin g support services by NIPL to a ssessee we have already discussed a bove that it was done under sepa rate contract and NIPL wa s remunerat ed at arm 's length . In so far as a dministrative facilities being provide d by the NIPL t o the expatri ates coming for signing of contract on behalf of the Nokia Fi nland, he had stated that, administrative support like office support, ca rs, telephones, etc. was being provided by NIPL; an d earlier office of liaison office of NIPL are at the sam e premise in the year 1995. Relying on such statement, ld. CIT-DR has vehemently contended that this material facts itself goes to prove that there is a fixed place PE which was at the disposa l of the assessee. In light of such contention, we have to see whether an y place of business wa s provide d by NIPL t o the 16 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation assessee which can be said t o be at a disposal of the assessee for ca rrying out its business wholly or partly in India. The sequitur of the judgment of Hon'ble Apex Court a s incorporated a bove is that, in order t o ascertain a s to whether an e stabli shment being a fixed place for PE or not is that physically located premise s have to be 'at the disposal of the enterprise s'. Nowhere the disposal test has been diluted by the Hon'ble Apex Court rather it ha s been reiterated at various places not only in the Formula One Worl d Championship judgment but also in the subsequent judgment of E-Fund. As culled out from the certain observati ons of the Assessing Officer as well as the statement of the MD that the employees of the assessee whenever came t o India for the pu rpose of supply contract f or negotiation on network planning, then they were provided administrative services like telephone, fax and conveyance. Now, whether such kind of facilities can at all be treated to be a fixed place of business of the assessee company. Telephon e or fax or a car cannot be reckoned as physically located premise. The word u sed in Article 5(1) i s 'fixed place of business through which business of enterprise is wholly or pa rtly carried out'. A fixed place alludes to some kind of a particular locati on , physically located premise or some place in physical form. Nowhere is it borne out that any kind of physically located premise or a pa rticular locati on was made available to the assessee which was at th e 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 pa rtly carried out. N o such material has been brought on record that any kind of such fixed place was made available. Providin g 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 1 995 and later on L O office has moved out which is also evident from the statement of the Managing Director. Thus, providin g such kind of a dministrative support services t o th e assessee's employees visiting Indi a will not form fixed 17 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation place PE, and therefore, the gre at emphasis by the learned DR on this point is not much of credence as it lacks any further mate rial support or evidence that any physical place was made available which can be said to be at the disposal of the a ssessee for ca rryin g out its off-shore supply contract in India. In fact the entire allegation of fixed place was qua the LO an d never in the context of NIPL by the Assessing Officer. The entire case of the Assessing Officer was that NIPL is a DAPE of the assessee, because all employees of the assessee were either working for the NIPL or NIPL was underta king ce rtain marke ting and technical support services for the assessee. The concept of DAPE w ould be discu ssed in succeeding pa ragraphs. However, so far a s the issue of fixed place PE is concerned the same does not get established at all by making to reference of providing of telephone, fax and car facility to the employees of assessee visiting India. As rega rds allegati on that expatriates employees of a ssessee in India were assisting the NIPL and hence used the office of NIPL, is of n o relevance qua a ssessee 's business, because, th e technical expatriates we re in Indi a to a ssist/help NIPL with performance of installation a ctivities 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 pu rpose of assessee 's business or assessee was unde rtaking business in India through fixed place of business. The test laid down by the H on'ble Supreme Court does n ot ge t satisfied in this case as nothing has been brought on record by the AO or ld. CIT-DR tha t any physical space was made available which can be said to be at the disposal of assessee for asse sse e's own business of supply and sale of equipments.
47. Now coming t o the paragra phs 2, 3 and 4 of Article 5, it is not the case of an y one that the NIPL constitutes any kind of PE under these provisions. Albeit if one goes by clause (e) of Paragraph 4 of Article 5, where it has been ca tegorically provide d that the PE shall not be dee med to include a maintenance of a fixed place of bu siness solely either;
18 ITA Nos. 1006 to 1008, 1236to 1238 & 5819/Del/2010 Nokia Corporation
a) for the purpose of advertising; b) for the supply of information or for scientific research; c) bein g activities solely of a preparat ory or an auxiliary character in the business of the enterprise. This clause clearly excludes any a ctivities solely for prepa ratory or auxiliary in nature and if one goes by scope of remand by the Hon'ble High Court, i.e., t o see, whether signing, networking planning and negotiation constitutes a PE and also whether profits can be attri buted to such activities, then such kind of an activity ostensibly falls within the scope and realm of prepa rat ory or auxiliary in nature, because mere signing, planning and negotiation or networking before supply of goods, a re preliminary activities and therefore, unde r this all pervasi ve exclusion clause there cannot be any PE which can be deemed either in terms of Paragra phs 1, 2 and 3 of Article 5. Under the present DT AA if activities a re in the nature of prepa ratory and auxiliary cha ract er, 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 unde r Article 5(1), then such a place cannot be reckoned a s PE, because the activities ca rrie d out f rom such a place are in the nature of preparatory and auxiliary . Accordingly, in te rms 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 purel y pertaining to network plannin g, negotiation and signing of contracts bef ore off-shore supply of (GSM) equipments and sale of goods have been made off- shore outside India .
48. Coming to the Dependent Age nt PE as provided i n paragraph 5 of Article 5, the key considerati on for holding an agent to be a deemed PE is that, a person/enterprise wh o is not an a gent of independent status is acting in a contracting state (here in this case India) on behalf of an enterprise of othe r contracting state (here Finland) in respect of any activities where he habitually exercises an authority t o conclude contracts on behalf of th e enterprise; or if he has no such authority, but habitu ally maintains stock of goods or merchandise which he regularly delivers 19 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation goods or merchandise on behalf of the enterprise, then he is deemed to be DAPE. From the material facts discussed in detail herein above are that the entire contract supply of off-shore e quipments has been done by the assessee outside In dia and no activity relating to off-shore supply has been performed in India. There is no material fact on record that NIPL has negotiated or concluded any contract of supply of equipment on behalf of the assessee which binds the assessee. The title of the goods supplied i s di rectly passed on t o the cust omers in In dia and NIPL neither undertakes any negotiation process nor assist in delivery of goods. Under a DAPE the character of the agent can be said t o be dete rmined; firstly, his commercial activities for the enterprise is subject t o instruction or comprehensive control; and secondly , he does not bear the entreprene urial risk. The agent must have sufficient authority to bind enterprise 's participati on in the business activities and the agent involves the enterprise to a pa rticular extent in the business activities. Thus, the qualified character of the agency is the authorization to act on behalf of somebody else so much as t o conclude the contra cts. Here the NIPL neither has any authority to conclude contracts for supply nor any of t he orde rs ha s bee n booked by NIPL which can be said to be binding upon the assessee. NIPL is an indepen dent entity carrying out activities of installation, technical support se rvices for the equipments installed are being carried out on principal to principal basi s independently with Indian customers; and ma rketing su pport agreement is a n independent agreement with the a ssessee for which i t is remunerated at a rm's length and none of it s activities even remotely rela te to supply of equipments, leave alone habitually exercising any authority to conclude contra ct. La stly, it bears its own entrepreneurial risks.
49. We shall in brief examine various allegati ons of the AO, which has been ha rped u pon by the Ld. CIT- DR also t o contend that there is some kind of PE in the form of DAPE. Fi rst of all, Assessing Officer a s discussed in the earlier part of this orde r has time and again referred t o the employment details of Mr. Hann u 20 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Karavitra which we have alrea dy clarified that he wa s the employee of the assessee as Country Manager in LO till the time NIPL was not incorporated and afte r the incorporation of NIPL , he became the Managing Director and his pe riod and design ation of empl oyment is contained in pa ge 369 (9 to 11 ) of the pape r book, from where it is seen that he w a s Managing Di rector between 01.01.1996 to 31.07.1999. It has already been clarified that once the said employee came int o rolls of NIPL, he has not signe d a ny contract with any Indian customer for off-shore supplies but has signed installation contract s on behalf of the NIPL . All th e details of supply cont racts are contained at page 20 3 of the paper book which al so giv es the details of the persons signing it and none of the supply contract ha d been signed by any employee of NIPL. Thus, the basi c condition contained in Article 5 (5) does n ot stan d satisfied at all. The contract which has been signed by NIPL is installation which cannot be reckoned DAPE , because assessee in India has not carried out any installation activities on its own . In so far a s the allegation of the Assessing Officer that NIPL was in complete control of the assessee and was subject t o its instruction. This again in our opinion is not a relevant consideration at all for a creation of a DAPE as discussed a bove, be cause none of the supply activities of the assessee has been carried out by NIPL and the employees if at all w ere for the NIPL 's activities in India for which it is li able to tax in India . Further, for the purpose of this clause also, if activities are of preparatory and auxiliary in nature, then again the same will not sati sfy the threshold of DAPE. The Assessing Officer has also referred to the fact that in the accounts of LO for the peri od ending 31st December, 1995, there w as an expenditure of Rs.5 crores which su ddenly from the year 1996, got shifted in the Indian company and from there he draws an inference that Indian company has not received any compensation for the same from assessee and this shows the close business connection between the NIPL and the assessee. This observation again is of n o consequence, beca use when the Indian company came into existence in May, 1995 operation s of the LO were slowly scaled dow n and there was no 21 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation was requirement of the LO and the employees of the LO were transferred to the Indi an Company w.e .f . June 1995. In so far as the allegat ion of the Assessing Officer that NIPL is a depen dent agent, we find that nowhere he has brought on record that NIPL had any authority to conclude contracts relating to supply of equipments on behalf of the asse ssee. The Managin g Director in his statement in answer to question no.9 has clearly stated that network pl anning was a service which could be provided by NIPL; however he categori cally emphasized that it is pre-bid exercise which was only exercised to request for quotation . Nowhere it has been sai d in the statement that NIPL in anyway had authority to conclude contract on behal f of the assessee . In so fa r as the other allegation of the Assessing Officer which has been discussed in the earlier pa rt that, NIPL has concl uded contra cts with cellular operat ors for installation services and it becomes responsi bility of assessee to get the contracts executed by the NIPL; and further assesse e had issued guarantee to the Indian customers that it will get the contract s executed by NIPL , again has n o significance for dete rmination of DAPE, because such a contention of the Assessing Officer may have bee n relevant for composite contra ct si tuation which is not the consideration in the present case and does not have any bearing whatsoever in this matter. Even otherwise also a ssisting in performance of th e installation services of NIPL doe s not ma ke India n Company DAPE of assessee under Article 5(5); and revenues from installation is any way being taxed in India. Coming to an other allegation that all the contracts we re signed in India and employees of the Indian company have attended meeting at the time of finalization of such contracts as w itnesses, 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 th e warranty and guarantee services provided by NIPL 's employee were m onitore d by assessee and for the installation work done by Indian company, some kin d of note regarding installation contracts were sent t o 22 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation the assessee. This objection ha s no relevance for determination of PE , because, fi rstly, it would have been of some relevance in the case of composite contract situation; and secon dly, managing or providing gua rantee by assessee does not yield any income to the assessee, albeit to NIPL, which is taxed in India. Lastly, in so far as the expatriates of NIPL were responsible for installation w ork were employees of the assessee, only proves that assessee provide d necessary assistance, informati on, knowledge an d expertise to do the work. This observation of AO only goes to prove that that expatriate s employees depute d in NIPL are in connection with the installation contracts executed by NIPL and since there is no concept of 'Service PE' in India , therefore, nothing turns around on such observati on. Thus, on the fact s and material on record, we hold t hat there is no DAPE within the scope and terms of Article 5(5) of the treaty.
50. Admittedly, paragraph 6 of Article 5 is not applicable. Pa ragraph 7 of Article 5 deals with 'a gent of independent status.' Independe nce of an agent has to be both legal as well as e con omic independence . Legal independence has t o be see n from the context , whether the agent's commercia l activities for his principal a re subject t o detail ed instructions or comprehensive cont rol by the pri ncipal or n ot; or t o what extent the agent exercises freedom in the conduct of his business on behalf of principal; or th e agent's scope of authority is affected by limitations on the scale of business which may be conducted by the agent. Econ omic independence h as to be seen f rom the context as t o what extent the agent bea rs th e 'entrepreneuri al risk" or "business risk" and a gent's activities are n ot integrated with those of the principal; and whether the agent acts exclusively for the principal. The tests for determining the independent status has to be see n from what kind of activities is being ca rrie d out by the agent for his principal. Here in this case , first of all we have t o borne in mind that installation activity carried out by NIPL is not generating any revenue or income for the assessee in India albeit any incom e from such activity 23 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation is already subje ct to tax in India. The off-shore supply contract is ca rried out by assesse e on FOB basi s from Finland and as discussed in fore going paragraphs NIPL is carrying out various onsh ore activities, like installation activity, marketing a nd technical support services, which fact ha s been cl early highlighted by the Hon'ble High Court in para 34, that these activities have nothing to do with su pply cont ract. The consideration accruing or a rising under the contra cts undertaken by NIPL is al ready assessed in the hands of NIPL in India and there is n o adverse inference in this respect. The dispute as highli ghted by the Hon'ble High Court only pertains to the consideration under the Supply Agreement entered between the assesse e and the various customers. Qua the supply contract nothing is being pe rforme d by t he NIPL in In dia a s agent of the assessee. None of the onshore activities of NIPL can be said t o be devote d wholly and almost wholly on behalf of the asse ssee, because , the contracts unde rtaken an d signed by NIPL in India are independent and on principal to principal ba sis with the Indian customers and assessee has not signed any kind of installation contra ct 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 tw o contracts which were signed ea rlie r prior t o the incorporation of NIPL were sepa rate an d assigned to it and income from such installation has been shown in the hands of NIPL in India. There is n o income whatsoever from install ation activities has been earned by the assessee in India or can be attributed either directly or indirectly through NIPL. Insofar as othe r activities like ma rketing and technical support services a re concerned, same has bee n transacted at arm 's length a s di scussed in detail in foregoing pa ras, hence no profi t can be attributed from these activities as held by the Hon'ble High Court. Even if NIPL is held t o be; subject to significant control with respect t o the manner in which work is t o be carried out; is subject to detail instructions from the assessee a s to the conduct of work; is exercisin g less freedom in the conduct of business on behalf of assessee; seeking approval f rom the assessee for the manner in which the business is to be conducted; etc., 24 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation then all such control if at all coul d be only in relation to the contracts ca rrie d out by the NIPL in India t o ensure technical quality of the contact work done. When there is absolutely no income generated t o th e assessee f rom installati on contract work done in Indi a by the NIPL, then all such comprehensive control doe s not have much relevance. Article 5(7) will apply only when some of the activities of the foreign enterprise are done by an agent wholly or almost wholly on behalf of that enterprise. Here th e crucial test is that activities of the assessee must be carried out through the agent wholly and almost whol ly for the assessee . When installation activity is not carrie d out by the assessee in India and is done by NIPL on principal t o principal basis with the customers then there is no question of examining the inst allation activity for purpose of PE. The activity carried out by the assessee through an agent in India woul d be key factor for examining PE. Thus, provision of paragraph 7 of Article 5 will also not apply.
51. Lastly, coming to paragraph 8 of Article 5, it clearly states that mere fa ct that company which is a resident of a contra cting status controls or i s controlled by a com pany which is resident of the othe r contracting states or which ca rrie s on the business i n other state, whether through a PE or othe rwise shal l not of itself constitutes either company or a PE of other. This inter alia means that if the NIPL, i.e., a n Indian company is controlled by assessee who i s resident of Finland, then this by itself will not constitute a PE . Thus, a subsidia ry cannot be reckone d to constitute PE merely because i t is controlled by a foreign enterprise. In other w ords simply be cause NIPL is a subsidiary and is controlled by assessee i t will not be t reated a s a PE. Eve n the OECD and U N Model C onventions cla rify that mere existence of foreign enterprise's subsidia ry in a source st ate shoul d not give rise to foreign enterprise's PE in the source state. The reason being that the existence of a subsidiary does not by itsel f, constitute that subsidiary company is a PE of its Parent entity, on the principle that, for the purpose of taxation, a subsidiary com pany constitutes an independent legal 25 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation entity in the source state. This h as been held so by the Hon'ble Apex Court in the case E-Fund IT Solutions. Thus, the exception giv en in Article 5(8) to a company controlled by a forei gn enterprise or it s subsidiary answers m ost of the allegation made by th e Department that NIPL being a subsidiary of the assessee itself will provide status of a PE.
52. In so far as the argument of the learned CIT DR that Indian subsidiary is a virtual projecti on of the assessee as empl oyees of Assessee Company were practically performing all kinds of work, and therefore , it has to be treated as a perman ent establishment of assessee. In su pport of such a concept of virtua l projection, st rong reliance has been placed on the judgment of the Hon'ble Andh ra Pradesh High C ourt i n the case of CIT v. Vishakapatna m Port Trust (supra) which the learned CIT DR submitted that have been referred and relied upon by the Hon'ble Suprem e Court in the case of Formula One (supra) also. First of all, the concept of 'virtual projection' has to be seen in the context of any of the ingredient of PE enshrine d in Article 5. Hon'ble Andhra Prade sh High Court while explaining the concept of fixed place PE, obse rved that the PE postulates existence of a substantial element of enduring or pe rmanent nature of a foreign enterpri se in another country which can be attributed to a fixed place of business in that country. Such a fixed place should be of such a nature that it would amount to a virtual projecti on of the foreign enterprise of one country to the soil of an other cou ntry. The concept of 'virtual proje ction' fl ows from the fixed place itself or with any other parameters of establishment of PE under Article 5. This concept alon e is not relevant but has to be seen in relation to fixed place or any other concept of PE. The Hon 'ble Supreme C ourt whil e coming to the conclusi on in pa ra graph 76 , held tha t not only Buddh Internati onal Circuit was a fixed place where the commercial or economic activity of conducting Formula One Champi onship was ca rrie d out, but one could clea rly discern that it was a virtual projection of a foreign enterprise, namely, Formul a One on the soil of this country. All the characteristic of the fixed place PE including the physical location 26 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation and disposal test stood satisfied. The concept of virtual projecti on cannot be in vacuum dehors any other parameters of PE. In other words, virtual projection is in relation to either fixed place or in relation to any other parame ters or con ditions envisaged in Article 5. As in the case of Vishakapatnam Port T rust, it was in relation to fixe d place. The concept of virtual proje ction doe s not mean that even without a fixed place, virtual projection itself will lead to an inference of a PE. If on a fact s there is no est ablishment of a fixe d place and disposal test is not satisfied, then virtual projecti on itself cannot be held to be a factor for cre ation 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 fa r as allegation of t he department that employees of assessee were responsible for all the activities, it has been already de alt 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 hol d that there is no PE within the terms of Article 5 of India Finland DTAA.
53. Now we shall deal with issue of whether assesse e had any kind of a business conne ction in India in the form of NIPL. Th ough this issue has become slightly academic in view of our above finding, because even if it is held that assessee had a bu siness connection in India, then also unde r the treaty provisions, if there i s no PE in terms of Article 5, the n no income can be attributed to India under Article 7. The Hon 'ble High Court while remanding the matter back t o the Tri bunal in terms of paragraph 38 has also directed to examine as to whether the subsidia ry of the assessee w ould provide business connection or is Permanen t Establishment. Thus, for the sake of completeness, we shall discuss in brief, whether the assessee was having any kind of business connection in India or not . The provision of Se ction 5 of the Income-tax Act defines the scope of total income and su b secti on (2) reads as under:--
"(2) Subject to the provisions of this Act, the tota l income of any previous year of a person wh o is a 27 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation non-resident includes all incom e from whatever source de rived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is dee med to a ccrue or arise to him in India during such year.'' First requirement is whether any income is deemed to have been received in India to non-resident. Here on the facts of the case this cl ause may not be applicable, because undisputedly the title of the goods of the GSM equipments supplied by the assessee has been transferred outside India and the payments hav e also been received by the asse ssee outside India .
Secondly, coming t o the provisi ons of su b secti on 2(b) which deals with accrual of incom e or deemed a ccrua l of income, the provision of Secti on 9 has to be seen as it stood at the relevant time which read as under:
"Income deemed to accrue or a rise in India. 9 (1) The following incomes sh all be deemed t o accrue or arise in India:--
(i) all income accruing or arising, whether directly or indi rectly, through or f rom any business connection in India , or th rou gh or from any property in India, or through or f rom any asset or source of income in India, [* * *] or through th e transfer of a capital asset situate in India.
Explanation-- For the purposes of this clause --
(a) in the case of a business of which all the operati ons are n ot carried out in India, the income of the business deemed under thi s clause to accrue or arise in India shall be only such part of the income as i s reasona bly attributable to th e operati ons carried out in India;
(b) in the case of a non-resident , no income shall be deemed t o accrue or arise in India to him through or from ope rations which are confined t o 28 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation the purchase of goods in India for the purpose of export;
(c) in the case of a n on-residen t, being a pe rson engaged in the business of running a news agency or of publishing newspape rs, ma gazines or journals, no income shall be deemed to a ccrue or arise in India to him through or f rom activities which are confined to the collection of news and views in India for transmissi on out of India
(d) in the case of a non-resident, being --
(1) an individual who is not a citizen of India ; or (2) a firm which does not have any partner who is a citizen of India or who is residen t in India; or (3) a company which does not have any shareholde r who is a citizen of India or wh o is resident in India, no income shall be deemed t o accrue or a rise in India to such individual, firm or company through or from operati ons which are confined to the shooting of any cinematograph fil m in India."
The provisions of section 9(1)(i) of the Act clearly provide that income accruing or arising, whether directly or indi rectly, through or from any business connection in India , or th rough or from any prope rty in India, or through or from any asset or sou rce of income in India, or through the transfer of a capital asset situated in India shall be taxable in India if they come within the meaning of income deemed to a ccru e or a rise in India as explained in Section 9 of the Act . Thus, where any income a ccrues or a rises t o a non- resident through or from any "business connection" in India where all the ope rations are not ca rried out i n India only such income will be chargeable t o tax in India as can be attributed to th e operati ons ca rrie d out in India. In light of these provisions and facts of the case, we will analyse the rival contentions of the 29 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation parties and the judicial proposition highlighted before us in this regard.
54. Before us, regarding the ex istence of business connection, Mr. Dee pak Ch opra relied upon the judgment of Hon 'ble Supreme C ou rt in the case of C IT v. R. D. Agga rwal and C o. [1965] 56 ITR 20 (SC) and submitted that mere pe rformance of some activities in the Indian Territ ory does not afford a bu siness connection of foreign com pany in India. What is important to examine here is that the trading activities within the territories should be linked with the trading activities carried on outside the taxable territories. Here , in this case, he submitted that the activity in question is the off-shore supply of equipment for which relevant trading activities are procuring of raw materials, manufacture of finished goods, sale and delivery of goods, which all have been carrie d out outside India. Only the marketing activities which have been pe rformed by th e Indian C ompany i s somehow relevant, but for that there is a separat e agreement between the assessee and NIPL and alrea dy income arising there from to the Indian company has been offered to tax in the hands of NIPL. The activities performed by NIPL only led to making of offers by the customers in the taxable territorie s to purchase goods manufactured by the non-resident which latter was not obliged to acce pt. Thus, in view of the principle laid down by the Hon 'ble Supreme C ourt in the case of R.D. Aga rwal and Co. (supra) he submitted that no business connection can be sai d to exist in the present case. The conce pt of agency as en visaged in the scope of business connection u/s.9(1)(i) of the Act wa s introduced by the Finance Act , 20 03 and hence woul d not be a pplicable to the a ssessment years unde r consideration. Without prejudice , he submitted that how much portion of the profits whatsoever from the off-shores supply can be taxed in India is moot point. Regarding the agreements for contracts of supply of goods sold to the customers on CIP/FCA basis, h e submitted that Hon'ble High C ourt in assessee's ow n case had given a very categorical finding that taxable event, i.e., transfer of title took place outside India , in support paragraph 17 of the judgment was relie d 30 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation upon which is quite relevant hence for the sake of ready reference is reproduced hereunder:--
"17. We find that the terms of contract make i t clear that acceptance test is not a material event for pa ssing the title and risk i n the equipment supplied. It is because of the re ason that even if such test found out that the system did n ot conform to the contractual pa rameters, as per a rticle 21.1 of the supply contract, the only consequence would be that the Cellular Operator would be entitled to call upon the assessee to cure defect by repairing or replacing the defective part. If there was delay caused due t o the acceptance test not bein g complied with, Article 19 of the Supply Cont ract provided for damages. Thus, the taxable event took place outside India with the passi ng of the propert y from seller to buyer and acceptance was not determinative of this factor. Th e position might have been different if the buyer had the right t o reject the equipment on the failure of the acceptance test carried out in India............"
Finally, he strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Norte l Networks India International Inc. v. DIT [2016] 386 ITR 353/241 Taxman 464/69 taxmann.com 47 and submitted that this judgment squ arely clinches the issue in favour of the assessee and strongly relied upon paragraphs 43 to 47 of the said judgment . Relying upon the aforesaid judgm ent, he submitted that mere existence of a business connection it i s not enough to trigger taxa bility in India in respect of off-shore supply of telecom m equipment to Indian customers because there must be same activity carried out in India relating to the off-shore supply.
55. On the other hand, lea rned C IT-DR has reiterate d the same set of arguments that right from negotiation of contract t o supply was undertaken through employees of the assessee eith er independently or through NIPL and the entire marketing activities for 31 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation such sale has been done throu gh NIPL. Hence, it constitutes a business connection in India.
56. We have heard the rival contentions made by the parties and also material place d on record. First of all, we find that the Hon'ble High Court in the context of LO has held that there is no material or evidence on the basis of which it can be said that LO can offer a business connection to asse ssee i n India and it doe s not constitute PE of the assessee in India. The same reason ostensibly applies to NIPL also, as the term s and conditions of supply contract continues as spelle d out in para 17 of the judgment remains the same. Further, the Hon'ble High Court i n paragraph 13 ha s noted that income which has been earned by the assessee is a result of suppl y of softwa re an d hardwa re license under the suppl y agreement and i f supply agreement is taken on standalone basis then such supplies under this agreement were made outside India. The prope rties and goods h as passe d on t o the buyers under the supply contra ct outside India whe re the equipment was manufactured and for coming t o this conclusion, the Hon'ble High Court has referre d and relied upon the judgment of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (su pra) that such agreement would not be taxable in India and no profit arising from supply of equipment outside India would be chargeable to tax in India. The Hon'ble C ourt has even drawn the parallel s from the ratio of the said judgment of the Hon'ble Supreme Court in the following manner:--
"(i) In both the case s the property in the equipment passed outsi de India and in the case even the risk passed outsi de India;
(ii) the case Ishikawajima's even though it was to perform onshore se rvices includin g the erection and commissioning of the equipment supplied by it , nevertheless, the Supreme Court held that no part of the profit on the offshore supply of the equipment was taxable in India as a consequence of the performance of such activities in India. In th e assessee's case the a ssessee doe s not perform an y 32 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation service in India in connection with the installation of the equipment or otherwise;
(iii) the performance of the a ccept ance test in Indi a was not conside red a relevant circumstance whilst determining whether any part of the profit on the offshore supply was charge able to tax in India in the case of Ishikawajima, so also in the assessee's case.
(iv) although admittedly a permanent establishment existed in the case of Ishi kawaji ma, nevertheless, the Court held that no part of the profit arisin g from the supply of the equipment was chargea ble to tax in India as the permanent est ablishment had no role t o play in the transa ction sou ght to be taxed a s it look place abroad, whilst in the case of the assessee, it has been f ound as a fact by both the appellate authorities that no permanent establishment existed;
(v) the mere signing of the con tract pu rsuant t o which the supply was made in India, in both case s does not result in giving rise to a tax liability in India;
(vi) the existence of the overall responsibility clause was held to be irrelevant in Ishikawajima's case and likewise the overall agreement executed in the assessee's case should not make any difference to the taxability of the equipment supplied;
(vii) giving the nomenclature of a turnkey project or w orks contract is n ot releva nt in determining whether any profit arising f rom the supply of equipment pursuant to such contract wa s chargeable to tax in India;
(viii) the Supreme Court relied upon Instruction No. 1829 to come to the conclusion t hat the existence of an overall responsibility clause was not mate rial in determining the tax liability arising from the offshore supply of equipment and as the said instruction continues to be in force for the 33 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation assessment year relevant to the present appeal s, the existence of an overall agreement should make no difference to the taxability of the equipment supplied by the assessee."
In paragraph 15, the Hon'ble Court has further observed that no doubt the contract in question was signed in India but it may not be a relevant circumstance to determine the taxability of such an income and for this proposition th ey have referred the judgment of Hon 'ble Andh ra Prade sh High Court in th e case of Skoda Export v. Addl. CIT [1983] 143 ITR 452/[1984] 17 Taxman 256. Finally in paragraph 17 a s incorporate d above, Hon'ble High Court ha s categori cally said that the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test is not the determinative of this factor an d further refe rring t o the judgment of Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC), held that overall agreement does not result the income accruing in India and t he execution of a n overall agreement is prom oted by purely commercial considerations as India Cellular Operat or w ould be desirous of having a single entity that could liaise with. Thus, it was conclude d that the place of negotiation, the place of signing of agreement or formula acceptance there of or ove rall responsibility of the assessee are relevant circu mstances. Since the transaction i s relating to the sale of goods, the relevant factor and determinative factor would be a s to where the property in good passes and in th e present case, the finding is that the property has passed on high seas. In the present case, the goods were manufactured outside India and even the sal e has taken place outside India a nd once this fact is established even in those cases where there is a on e composite contract supply has to be segregated from installation and only then would question of apportionment arise having re gard to expresse d language of Section 9(1)(i) of th e Act, which make s the income taxable in India to the extent it arises i n India.
34 ITA Nos. 1006 to 1008, 1236to 1238 & 5819/Del/2010 Nokia Corporation
57. Whence in the concept of LO already a categori cal finding has been given by the Hon'ble High Court that supply of off-shore e quipment w hich has been done outside India cannot be held t o be taxable in In dia , then the same principle and proposition would also be applicable in the case of NIPL also, because , so fa r a s the supply contracts a re conce rne d there is absolutely no change in the fa cts and circumstances as even after the NIPL is incorporate d in May, 1995, the off shore supply equipment and the supply contract remained the same. The marketing activities and installation contract unde rtaken by NIPL has been on principal to principal basis; and in the case of former agreement between assessee and NIPL , the payment has been made to NIPL on cost plus marku p basi s which has not been disturbed; and in the late r agreement there is an indepen de nt contracts by NIPL with Indian customers which has nothing to do with the assessee. The income arising from both the contracts are taxable in the ha nds of the NIPL in India. Thus, the finding and the ratio of the Hon'ble High Court would a pply mutatis mutandis though rendered in the context of LO will also apply in the case of NIPL as qua the supply contract the re is n o material change in any case.
58. Apa rt from the ju dgment of Hon'ble Delhi High Court in the case of assessee as discussed above, we find that, Hon'ble High Court in Nortel Network Indi a International Inc. (supra) someh ow 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 state d to be a leadin g supplier of hardware and softwa re for global system for mobile communication cellula r ra dio teleph one systems. The assessee was a step-down subsidia ry of N, a company incorporated in Canada. N(C) also had an indirect subsidia ry in In dia N (I) . N (I) negotiated and entere d into three contra cts with R , namely, optical equipment contract, optical service s contract and the softwa re contract on June 8, 2002 .35 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010 Nokia Corporation On the same date, N (I) entered i nto an a greement 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) gua ranteed the pe rformance of th e equipment contract by the assessee (assignee). In terms of the assignment con tract, R place d purchase orde rs dire ctly on the assessee and also made all payments for the equipment supplied directly to the assessee. The equi pment supplied t o R was manufactured by N(C) and another grou p entity in Ireland. The same was invoiced by the assessee directly to R and consideration for it was received directly by the assesse e. The Assessin g Officer held that income arose t o the a ssessee i n India and w as a ssessa ble. T he Commissione r (Appeals): held that keeping in view the facts of the case, 50 per cent, of the assessee's estimated profits could be att ributed to the permanent establishment in India. This was upheld by the Tribunal. The Income-tax authoriti es concluded that the assessee w as a shadow com pany of N(C) an d both the companies we re esse ntially a singular entity. In other words the Income-tax authorities disrega rded the corporate structure of the assesse e and proceeded on the basis that it s identity was the same as N(C).
On the issue, whether the appellant had a PE, both fixed place PE and DAPE in India in the terms of liaison office Nortel Canada an d also in terms of subsidiary Nortel Network India Pv t. Ltd. which carried out installation services, Hon 'ble High Court obse rved and held as under:--
'It is appa rent from the plain reading of Section 9(1) of the Act that all income which accrues or arises through or from any business connection i n India would be deemed t o accrue or a rise in India . In CIT v. R.D. Aggarwal & Co.: (1965) 56 ITR 20 (SC), the Supreme Cou rt observ ed that business connection w ould mean "a rel ation between a business carried on by a non-re sident and some 36 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation activity in the taxable territ ories which are attributable dire ctly or indi rectly to the earnings, profits or gains of such busine ss". However, by virtue of Explanation 1 to Section 9(1) of the Act , only such part of the income wh ich is reasonably attributable to operati ons ca rrie d out in India woul d be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and delivered oversea s, i t would be difficult to uphold the view that any part of Assessee 's income is chargeabl e to tax under the Act as n o portion of the said income could be attributed to ope rations in India.
44. There is little material on re cord to hold tha t Nortel India habitually exercises any authority on behalf of the Assessee or Nortel C anada to conclude contracts on their behalf. There is also no material on record which w ould indi cate that Nortel Indi a maintained any stocks of goods or merchan dise in India from which goods were regu larly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 t o Section 9(1) (i) of the Act, no part of Assessee 's income could be brought to tax u nder the Act. It i s only when a non-resident Assessee's income i s taxable under the Act that the question whether any benefit under the Double Taxation Avoidance T reaty is required to be examined.
** ** **
47. As noticed e arlier, there seem s to be no dispute that the title to the equipment passed in favour of Reliance overseas. However, the AO, CIT (A) an d ITAT did not consider the same to be relevant as according to them, the equipment continued to be in the possessi on of the " Nortel Group" till its fina l acceptance by Reliance. In our v iew, even if it is accepted that the equipment supplied oversea s continued to be in possession of Nortel India till the final acceptance by Reliance, the same would n ot imply that the Assessee 's incom e from su pply of equipment could be taxed under t he Act. Clause (a) 37 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation of Explanation 1 to Section 9( 1)(i) of the Act postulates the principle of a pport ionment and only such income that can be reasonably attributed to operati ons in India w ould be chargeable t o ta x under the Act . The position in Ish ikawajima-Harim a Heavy Industries (supra) was al so similar. There too, the equipments were supplied overseas and the contract or continued to retain con trol of e quipment and material till the provisional acceptance of th e work or the termination of the contract.' Thus, the Hon'ble High C ourt i n Nortel's case ha s clearly concluded that equipments supplied oversea s cannot be taxed unde r the Act and as pe r clause (a) of Explanation 1 to Section 9(1)(i) which postulates the principle of apportionment, the only such income that can be reasona bly attributed to assessee in India could be cha rgea ble to tax u nder the Act an d therefore, unde r the fact where there is off sh ore supply of equipments nothing can be held to be taxed in India in terms of Section 9( 1). In fact, in the finding of the Hon 'ble High C ourt in para gra phs 69 t o 72, it has been held that the Indian subsidiary of Nortel and LO will not constitute a PE. For the sake of ready reference, paragraphs 69 t o 72 a re reproduce d hereunder:--
69. The AO, CIT (A) and ITAT have held that the office of Nortel India and Nortel LO constituted a fixed place of business of the Assessee. As pointed out earlier, we find no materia l on record that would even remotely sugge st that Nortel LO ha d acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agre ements on their behalf. Thus, it is not possi ble t o acce pt that the offices of Nortel LO could be con sidered a s a fixed place of business of the Assessee. In so far as Nortel India is concerned, there is also no evidence that the offices of Nortel India we re at the di sposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had a cted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices of Nortel Indi a constituted a fixed place busi ness PE of the 38 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Assessee or Nortel Canada . Nortel India i s a n independent company and a sepa rate taxable entity under the Act . There i s no materi al on record which would indicate that its office was used as an office by the Assessee or Nortel Cana da. Even if it i s accepted that certain a ctivities 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 constitu ted a fixed place of business of the Assessee or Nortel Canada.
70. The AO has further alleged t hat the offices of Nortel LO and Nortel Indi a were used as a sale s outlet. In our view, this finding is also unmerited as there is no material which w ould support this view .
The facts on record only indicate that Nortel Indi a negotiated contracts with Reliance. Even assuming that the contracts f orm a pa rt 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 an y merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning an d testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf an d not on behalf of the Assessee or Nortel Canada . Undisputedly, Nortel India was also received the agreed consideration for pe rf ormance of the Services Contra ct directly by Reliance.
72. The finding that Nortel Indi a i s a services PE of the Assessee is also errone ous. Th ere is no material to hold that Nortel India pe rformed services on behalf of the Assessee.
73. The AO has also held that Nortel Indi a constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusi on wa s premised on the finding that Nortel India habitually concludes 39 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation contracts on behalf of the Assessee and othe r Nortel Group Companies. In the present case, there is no materi al on record which w ould indicate tha t Nortel India ha bitually exercises authority t o conclude contracts for the Assessee or Nortel Canada. In order to conclude t hat Nortel Indi a constitutes a Dependent Agent PE, it would be necessary for the AO to n otice at least a fe w instances where contracts had been concluded by Nortel India in India on behalf of other grou p entities. In absence of any such e vidence, this view could not be sustained.
74. The CIT (A) as well as the ITAT has proceede d on the basis that the Assessee had employed the services of Nortel India for fulfilling its obligation s of installation, commissi oning, a fter sales service and warranty services. The ITAT also concurre d with the view that since employees of grou p companies had visited Indi a in connection with the project, the business of the Assessee was carrie d out by those employees from the business premise s of Nortel India and Nortel LO. In this rega rd, it i s relevant to observe that a subsidi ary company is an independent tax entity and its income is chargeabl e to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India w ould have to be ca ptured i n the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm s Length Price in case of related pa rty transactions f or ensu ring that real income of a n Indian Assessee i s charged to ta x under the Act . Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employ ees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considere d as income of the Assessee."
This judgment of Hon'ble Delhi High Court clearl y clinches the issues in hand, both on the point of taxability u/s. 9(1)(i) and also in the context of PE.
40 ITA Nos. 1006 to 1008, 1236to 1238 & 5819/Del/2010 Nokia Corporation Thus, respectfully following the ratio laid down in aforesaid judgment of Hon 'ble High Court in the case of assessee as well a s in the case of Nortel, we hol d that income of the assessee from off-shore supply of equipments in pursuance of supply contract cannot be brought to tax in India.
59. Since we have al ready held that nothing is taxabl e on account of signing, netw ork planning an d negotiation of off shore supply contracts, therefore , there is no question of any attribution of income on account of these activities which are purely related t o supply contracts. Accordingly, the issue of att ribution which has been remanded back by the Hon'ble High Court has become pu rely academic.
60. Now coming to the last issue of taxability of interest from Vendor Financing, we find that the Assessing Officer in his order ha s made the a ddition on the ground that assessee prov ided credit facilities to its cust omers f or which it shou ld have charge d the interest on the same. For comin g to this conclusi on, he has referre d to one clause giv en in paragraph 6.9 of the contract between the assessee and Modi Telstra to conclude that purchaser we re liable to pay interest @18% for ea ch day ela psed f rom the due date of actual payment. Thus, the only reason for ma king such an addition was existence of a particular clause in the agreement signed between the assessee and some of the Indian Cellular Opera tors. The ld. CIT (A) too has confirmed the said addi tion on the groun d that, since the assessee is foll owing a me rcantile system of accounting and a s per t he contract assesse e was entitled to receive such interest, and therefore , same should have been accounte d for and in support he has relied upon the judgment of Hon'ble Supreme Court in the case of State Ban k of Travancore (supra) . Ld. counsel for the assessee had submitted that the said ju dgment has al ready been distinguished in the subsequent judgment of Hon'ble Supreme Court in the case of UCO Bank (supra) and se condly, only the real income can be brought t o tax an d not something on hypothetical basis, because t here has to be corresponding liability to the other party to wh om the 41 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation income becomes due and here such a clause was never enforced by the parties. Al ready the arguments of both the parties have been incorporated in ea rlier pa rt of the order; therefore , same is not being discusse d again.
61. After conside ring the relevant finding and riva l contentions, we find that, it has not been brought on record that in any of the contra ct the assessee ha d charged any interest on delayed payment or providin g any credit facilities to its customers or any custome r has paid any such am ount for ea ch day elapsed f rom the due date to the actual payme nt. Once none of the parties have either acknowledge d the debt or any corresponding liability of the othe r pa rty to pay, then it cannot be held that any income should be taxed on notional basis which has neither accrued nor received by the assessee. Whence the benefit of credit period given to the customers has neit her accrued to the assessee n or ackn owledged by th e other person, then it cannot be said that interest on notional basis shoul d be calculated for the purpose of taxation. Otherwise , it is a well settled proposition th at income cannot be generated, actual or accrued if no income has actuall y been accrued or received to the assessee. There ha s to be some income which has resu lted to the assessee and even though in books, entri es have been made about hypothetical income which does not materialize d at all cannot be brought to tax. Th e income tax is levy on real income, i .e., the profits a rrived on commerci al principles. Assessee must have re ceived or acquired a right to receive the income before it can be taxed. In other words, there must be a debt owed t o it by somebody if it is to be taxed on accrual basis unless a debt has been created in favour of the assessee by somebody it cannot be sai d that income has accrue d to it or it ha s a ri ght to receiv e the income. This proposition has been well settled by Hon'ble Supreme Court in the case of E.D. Sassoon Co. Ltd. v. CIT [1954] 26 ITR 27, CIT v. Ashokbhai Chaamanbha i [1965] 56 ITR 42, CIT v. Shoorji Vallabhdas and C o. [1962] 46 ITR 144 and Godhara Electricity Co. Ltd. v . CIT, [1997] 225 ITR 746/91 Taxm an 351. Further, the judgment of Hon'ble Supreme Court in the case of 42 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation State Bank of T ravancore, (supra) which has bee n relied upon by the ld. CIT (A), has not been treated t o be correct enunciation of law by the Hon'ble Suprem e Court in the ca se of Godha ra Electricity Co. Lt d. (supra) and UC O Ban k (supra). Here in the present case, the assessee itself has n ot treated the amoun t of interest to be due from any of the telecomm operat ors either recognise d as a debt or a s a legal claim. Even the conduct of the parties show that such a clause even though may have been agreed upon ha s never been enforce d or a cted upon. In such a situation, in our opinion, the amount of interest cannot const rue a de bt due to th e assessee. Further, assessee has not debited the account of any customer with interest which can be treat ed as income of the assessee. Nowhere has it been h eld by the Assessing Officer/CIT (A) that such an interest is legally claimable right against the Indian customers i n respect of interest on delayed cre dit period on Vendor Financing. Thus, we hold that when assessee has neither treated the amount to be legally claimed nor has acknowledge d any debt due too on its customer as delayed payment then it cannot be held that any interest accrued to the asse ssee, and therefore, such a notional charging of interest f or each day elapse d from the due date t o the actual payment cannot be held to be taxable t o the assessee. This proposition has also been now well upheld by Hon'ble Suprem e Court in the case of Excel Industries Ltd. (supra) . Hence, no income can be said to accrue to th e assessee on account of delayed payments as neither there was any corresponding lia bility on any of the debtors nor a ssessee had claimed any entitlement on such an interest. Accordingly, this issue is also decided in favour of the assessee.
62. The aforesaid findings and conclusions given in respect f or the A.Y . 1997-98, will apply mutatis mutandis in the appeal for the A.Y. 1998-99 year, as exactly similar facts and issues a re permeating in this year also.
63. In the result, all the issues which have bee n remanded back by the Hon'ble High Court to this 43 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Tribunal stands decided in favour of the assessee and against the Revenue."
11. Si nce, the matter of PE stands adjudi cated i n favour of the assessee, i n the absence of a ny change i n the materi al facts, fol l owing the earl i er order of thi s Tri bunal , we hereby hol d that the assessee do not have a PE withi n the terms of Arti cl e 5 of Indi a-Finl and DTAA. Thus, thi s ground of appeal of the assessee i s all owed.
12. Ground Nos. 4 to 6 of assessee 's appeal i n ITA No. 5819/Del /2010 and Ground No. 2 of de partmental appeal i n ITA Nos. 1236 to 1238/Del /2010 deal s wi th supply of equi pment as hardwa re and soft ware a rbi trari l y basi s and whether the consi derati on towards the softwa re porti on of the equi pment i s i n the nature of royal ti es under Arti cl e 13 of Indi a-Fi nl and DTAA.
13. The orde r of the l d. CIT ( A) on the taxabili ty of the suppl y of hardwa re i n rel ati on to the PE has al ready been di scussed above.
14. Regardi ng the taxabili ty of revenue from suppl y of software, the l d. CIT (A) hel d that si nce software i s an i ntegral part of the tel ecom hardware and software suppl y has been made pursuant to the contract i n respect of whi ch a PE has been uphel d, software i s effectivel y connected to the PE and shoul d be deal t wi th as the "busi ness profi ts' i n accordance wi th provi si ons of Arti cl e 7. In vi ew thereof, there i s no need to segregate the payments for software from other busi ness recei pts from suppl y of tel ecom 44 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation hardwa re. The same vi ew has al so been uphel d by the Honourabl e Speci al Bench of the Delhi ITAT for Assessment Years 1997-98 and 1998-99 wherei n at Para 281 of the orde r, i t has hel d as under:
"The fourth question is regarding the treatment to be accorded t o the payments made to the assessee for supply of software. The AO has assessed the payment s as royalties but the CIT(A) ha s assessed it as business profits on the ground that the a ssessee has a PE in India in the form of Both "LO" and NTPL. On this point, the parties a re agreed that the nature of payments made by the cellular operat ors for use of software supplied by the asse see alongwith the hardwa re is the same as in the cases of Ericsson and Motorola . Only one aspe ct needs to be n oticed in thi s case and that is that in para 8.1 of his order, the CIT (Appeals) has decided that the amount paid for use of the software i s to be t reated as the commercia l income or business profits of the assessee since the assessee had been held by him t o have PE in India . However, the nature of the paym ent had been f ound by us in the cases of Ericsson an d Motorol a to be not royalty at all. We have found that the payment is for a copyrighted a rticle and not the copyright right. Th e same finding holds good in this case also. Therefore , even Article 13.6 of the DTAA which provides that if the foreign enterprise ha s a PE in India, the royalties shall be taxed not unde r Article 13 but as business profits under Article 7 of the DTAA will not be attracted. In other w ords even though we have held that the 100% Indian subsidiary of the assessee, namely, NTPL, constitutes the assessee's PE in India , the payment for the software cannot be asse sse d under Article 15 for the reasons that it is not in the nature of royalty. However, a question may arise as to why the payment cannot be assessed as "business profits under Article 7. The reason is that the software has been held by us to be part of the GSM Cellular Systems as a whole, the sale of which has taken place outside India as held by us earlier."45 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010 Nokia Corporation Accordingly, relying on the decisi on of the Honoura ble Special Bench of the Delhi ITAT, I hold that there is no need to bifurcate the payments from supply of telecommunication system separately into hardwa re and software . The entire receipt s in respect of the contract for Supply of telecom equipment including hardwa re and softwa re shall be treated as business Income."
15. Thi s i ssue has been summari zed in the judgment of Hon'bl e Hi gh Court as under:
"6.1 These questions have been decided by the Special Bench vide judgment dated 22.06.2005; however, in so far as the appeal relating to the assessee is considered, the following findings have been given by the Special Bench which finding too has been summarized in the judgment of the Hon'ble High Court in the following manner:--
(1) Liaison Office neither constituted a business connection under the Act nor a PE of the Nokia under Article 5 of the India-Finland DTAA, as it merely carried on advertising activities in India.
(2) Sale of hardware took place outside India and no income from sale of hardware accrued to Nokia in India. (3) Nokia was not responsible for installation of telecom equipment and Nokia's arrangement with the Indian Telecom Operators did not constitute a works contract.
NIPL is a separate corporation entity and is also assessed separately for its installation income. (4) However, Nokia was held to have a PE in India in the form of NIPL, on the basis that Nokia virtually projected itself in India through NIPL and Mr. Hannu Karavirta, acted for both. Losses incurred by NIPL and guarantees given by Nokia that it will not 'dilute its shareholding in NIPL below 51% without written permission of Indian Telecom Operators was used as the main basis to hold that Nokia was in a position to control and monitor NIPL's activities. (5) While upholding NIPL as a PE of Nokia, the Special Bench observed that it did not matter that there was no direct evidence for the control of NIPL by Nokia. For purposes of PE, what is relevant is only the perception that NIPL was a projection of Nokia, whether or not in fact and in truth its 46 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation activities were being controlled/monitored by Nokia. Following discussion ensued on this aspect:--
'... We only meant to convey that because of the close connection between the assessee and NIPL, it was possible to look upon NIPL as a "virtual projection" of the assessee 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.
(8) Following 3 activities were held to have been carried out by NIPL, the PE of Nokia in India:
(a) Network Planning;
(b) Negotiations in connection with the sale of equipment; &
(c) Signing of supply and installation contracts. (9) 20% of the net profit determined on the basis of the global net profit of Nokia (10% towards signing of the contract and 10% towards other two activities) was attributed to the PE in India. This margin was directed to be applied on the Indian sales of Nokia (clarified by the Special Bench of the ITAT to mean revenues arising from supply of hardware and software).47 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010 Nokia Corporation
7. The substantial question of law admitted by the Hon'ble High Court and the fin al conclusion/answer given by the Hon'ble C ourt can be tabulated in the following manner:--
Revenue Appeals b efore H on'ble High Court (lead case ITA 512/2007) Substantial Question of Law Conclusions admitted by Hon'ble High Court Q1. Whether on a true and correct interpretation of secti on 9(1)(i) of the Income-tax Act, the Respondent can be said to have a 'business connection ' in India in the form of a Liaison Decided in favour Office?
of assessee (Para
Q2. Without pre judice, whether
23 of HC Order)
the respon dent has a
'permanent esta blishment' in
India because of its Liaison
Office within the meaning of the
relevant provisi on of DTAA
between India and Finland?
Q3. Whether any part of the
consideration for supply of
software stated by the
Decided in favour
Respondent to be integral to
of assessee (Para
the equipment is taxable as
30 of HC Order)
'royalty' either under section
9(l)(vi) or the relevant
provisi on
Q4. Whether on facts and in law
without prejudice, the Tribunal
is correct in law in att ributing Issue remitted
only 20% of the Global Net back to AO (Para Operating Profits t o the PE in 31 of HC Order) the form of NIPL (Noki a India Pvt. Ltd.) a subsidiary Q5. Whether on facts an d in law Decided in favour interest under section 234B is of assessee ( Para leviable? 30 of HC Order) Assessee Appeals before Hon'ble High Court (ITA 1137 & 1138/2007 48 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Q1. Whether on a true and correct interpretation of the relevant DTAAA the T ribunal's reasoning is right in law in holding that NIPL, (the subsidiary of the Appellant) is a permanent establishment?
Q2. Whether the T ribunal was right in law in holding that a perception of virtual projecti on of the foreign enterprise in India results in a pe rmanent establishment? All these Issues Q3. Whether prejudice , if the have been answers to Q.1 & remitted back to Q.2 a re in affirmative, is there ITAT (P ara 38 of any attribution of profits on High Court order) account of signing, network planning and negotiation of offshore supply contra cts in India and if yes, the extent and basis thereof?
Q4. Whether in law the notional
interest on delayed
consideration for supply of
equipment and licensing of
software is taxable in the hands
of assessee as intere st from
vendor financing?
16. From the above, we fi nd that the i ssue of suppl y of hardwa re has been deal t i n poi nt no. 2 at pa ra 6 .1 and suppl y of software whi ch i s i ntegral to the suppl y of hardware an d taxing i t royal ty has been deci ded vi de Questi on No. 3 by the Hon'bl e Hi gh Court of Delhi vi de orde r dated 7 t h Septembe r 2012. It stands adjudi cated that the sal e of hardware t ook pl ace outsi de Indi a and hence no income from sal e of hardware accrued to Noki a i n Indi a. The i ssue of royal ty on the software has been hel d i n favour of the assessee base d on the orde r i n 49 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation the case of (343 ITR 470) DIT Vs Eri cssi on AB. It was hel d that these payments cannot be sai d t o be i n the nature of royal ty ei ther as per the Indi an Income Tax Act or DTAA and hence cannot be hel d to be taxabl e. It was hel d that what was sol d was a GSM whi ch consi sted bot h hardware as wel l as the software and hence they cannot be taxed under two di fferent arti cles. For rea dy reference the rel evant part of the judgment of the Hon'bl e Hi gh Court i s reproduced as under:
"QUESTION OF LAW NOS. 3 & 525. This aspect has already been discussed in detail by us in DIT v. E ricsson A.B. [2 012] 343 ITR 470 / 204 Taxman 192 / [2011] 16 taxmann.com 371 (Delhi) which reasoning equally applies to these cases. The relevant portion of th e said judgment is reproduced bel ow:
"55. Once we proceed on the basis of aforesai d factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DT AA. We have to keep in mind what was sold by the assessee t o the Indi an custome rs was a GSM which consisted both of the ha rdwa re as well as the software, therefore, the T ribunal is right in holding that it was not permissible for the Revenue to assess the same under two different art icles. The softwa re that was loa ded on the hardware did not have any independent existence. The software supply is an integral pa rt of the GSM mobile te lephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such soft ware. The softwa re is embodied in the system and t he revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral pa rt there of. On these facts, it would be useful to refer t o the judgment of the Supreme Court in TATA C onsultancy Services v. State of Andhra Pra desh, 271 ITR 401 , wherein the Apex 50 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Court held that software which is incorporated on a media would be goods an d, there fore, liable to sales tax. Following discussion in this behalf is requi red t o be noted:-
"In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are ve ry wide a nd include all types of movable prope rties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associ ated Cement Companies Ltd.(supra). A software programme may consist of various commands which enable the compute r to pe rform a de signated ta sk. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and ma rketed, it be com es goods, which a re susceptible to sales tax. Even intellectual prope rty, once it is put on t o a media , whet her it be in the form of books or canvas (In case of pa inting) or compute r discs or cassettes, and marke ted would becom e "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such ca ses, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual prope rty and not the media i.e. the pape r or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodi ties" includes both tangible and intangible/incorporea l prope rty which is capable of abstraction, consum ption and use and which can be t ransmitted, t ran sferred, delivered, stored, possesse d etc. The softwa re programmes have all these attributes.
.....................51 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010 Nokia Corporation ...................
29. Our re asoning given in Eri csson A.B. (supra) therefore would apply to this case as well. Even otherwise, we find, as a fact, the assessee had entered into contract f or supply of GSM e quipment. Responsibility for installation and commissi oning of the equipment and provisioning of technical services was untaken by NIPL underta ken its separate contract with Indian customers. This insta llation contract ha s not been entered into between the assessee and Tata . We also find that Clause 19.1 of the supply contra ct between the respondent and T ata has been examined threadba re by the ITAT Special Bench in para 277 to hold that title and risk in the equipment has passe d to Tata outside India and thereaf ter, Tata continues to hold the hardware at their own risk an d therefore , no part of the contract prior to the passing of the title and risk could be lawfully terminated by it. Tata's right to terminate the contract in case of breach of any material condition relates to failure on the pa rt of the respondent t o supply fully functional equipment. Clause 19.1 of the supply contract with Tata does not provide that non-perf ormance of "Acceptance Test" i s a material conditi on for breach of the supply contract and reference placed by the Revenue is factually incorre ct. That contract further re veals that NIPL wa s responsi ble for unde rtaking accept ance test under the terms of its installation cont ra ct with the Indian customers. The fact that Acce pta nce Test was to be done by respon dent's subsidi ary, NIPL has been specifically noted by the ITAT Special Bench in para
279. We are therefore, of the opinion that this submission of the Revenue is factually in correct.
30. Question nos.3 and 5 are accordingly decided in favour of the assessee and against the Revenue."
Thus, thi s ground of appeal of the assessee i s all owed.
17. Ground No. 7 of assessee's appe al i n ITA Nos. 1006 to 1008/Del /2010 and Ground No. 9 of assessee 's appe al i n ITA 52 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation No. 5819/Del /2010 deal s with taxabili ty of the noti onal i nterest /vendor fi nanci ng on del ayed consi derati on for suppl y of equi pment and li censi ng of software.
18. On thi s i ssue, the l d. CIT (A) has uphel d the addi ti on made on the noti onal i nterest @ 18% based on the judgment of Speci al Bench of ITAT Del hi dated 22 n d June 2005. The rel evant part of the l d. CIT (A) i s as under:
"The appellant has submitted t hat the assessing officer has arbitrarily imputed an income of Rs 5,00,00,000/- from vendor financing for each of the Assessment Y ears 2003-04 to 2006-07, without assigning any reasons in his assessment order, Further, as per the appellant while imputing income from vendor financing at Rs 5,00,00,000/- the assessing officer has not provide d any basis for the same. The said income has been considered as "business income" and taxed a t the rate of 4 0 percent (plus surcharge and cess) on the basis that such income is taxable in India a s per provisions of the India-Finland tax treaty.
In my view, this issue does not need any detailed discussion. The mere fact that no credit was taken in the account books for interest cannot stop the accrual thereof as the appellant's income. The Honourable Special Bench of the Delhi ITAT at Para 283 of the orde r has held that i ncome from vendor financing has been rightly impute d since there i s no evidence on record to subst antiate that such interest was not charge d. Para 283 of t he orde r reads as under:
"We have considere d the facts and the rival contentions but we find no Substance in the assessed's case . The findings of the CIT (Appeals) have not been refuted before u s on the ba sis of any material or evidence. The existence of the clause in the agreement for charging interest @ 18% p.a. is not denied. All that is contended is 53 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation that the clause was not activated but this contention is without su bstance because if the agreement is in force then it is in force with all its clauses which includes the chargi ng of interest. It was for the assessee to show on the basis of any evidence or correspon dence or subsequent agreement modifying the earlier agreement under which interest was chargea ble. T his has not been done. The mere fact that no cre dit was taken in the account books for the interest cannot stop the accrual there of as the assessee's income. Even before us n o evidence was filed t o show that the financial position of the cell operators w as bad an d that there was an agreement between the parties not to charge intere st or n ot to activate the clause providing for interest. In these ci rcumstances, we uphold the addition for both the years."
Respectfully, following the decision of the Honourable Spe cial Bench of the Delhi TATAT, I hold that income from vendor financing is taxable in the hands of the appellant. In the absence of details from the appellant, the AO wa s right in estimating this income. Therefore, the addition of Rs. 5,00,00,000/- on this account is upheld for ea ch of the AYs 2003-04 to 2006-07."
19. Much water has fl own subsequent to the order of the Speci al Bench of ITAT on whi ch the l d. CIT (A) reli ed upon. Subsequentl y, post Hi gh Court order in the case of the assessee, a Spe ci al Bench of ITAT Del hi vi de order dated 5 t h June 2018 has deci ded thi s i ssue in favour of the assessee. For ready reference, the orde r of the Speci al Bench of ITAT Delhi dated 5 t h June 2018 i s reproduce d as under:
"60. Now coming to the la st issue of taxability of interest from Vendor Financing, we find that the Assessing Office r in his orde r has made the addition on the ground that asse ssee provi ded cre dit facilities to its custome rs for which it shoul d have charge d the interest on the same. For coming to this conclusion , 54 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation he has referred to one cl ause given in paragraph 6.9 of the cont ract between the assessee an d Modi Telstra to conclude that pu rchase r were liable t o pay interest @18% for each day ela psed from the due date of actual payment. Thus, the only reason for making such an a ddition was existence of a pa rticula r clause in the agreement signed between the assessee and some of the Indian Cellular Ope rators. The ld. CIT (A) 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 assessee w as entitled to receive such interest, and the refore , same should have been accounted for and in support he has relied upon the judgment of H on'ble Supreme C ourt in the case of State Bank of Travancore (supra). Ld. counsel for the assessee had submitted that the said judgment has already been distinguished in the subsequent judgment of H on'ble Supreme C ourt in the case of UCO Ban k (supra) and secondly, only the real income can be brought to tax and not something on hypothetical basis, because t here has to be corresponding liability to the other party to whom the income becomes due and he re such a clause wa s never enforced by the parties. Al ready the arguments of both the pa rties have been incorporated in ea rlie r part of the orde r; therefore , same is not being discussed again .
61. After considering the releva nt finding and rival contentions, we find that, it has not been brought on record that in any of the contract the assessee ha d charged any interest on delayed payment or providing any credit facilities t o its custom ers or any custome r has paid any such amount for each day elapsed from the due date t o the actual payment. Once n one of the parties have either acknowle dge d the debt or any corresponding liability of the other party to pay, then it cannot be held that any income should be taxed on notional basis which has neither a ccrued nor received by the assessee . Whence the ben efit of credit peri od given to the customers has neither accrued t o the assessee nor acknowledged by the other person , then it cannot be said that interest on notional basi s 55 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation should be calculated for the purpose of taxation. Otherwise, it is a well settled proposition that income cannot be generated, actual or a ccrued if no income has actually been accrued or received to the assessee. There has to be some income which has resulted to the assessee and even though in books, entries have been made about hypothetical income which does not mate rialized at all cannot be brough t to tax. The income tax is levy on real income , i.e., the profits arrived on commercial principles. Assessee must have received or acqui red a right to receive the income before it can be taxed. In other words, there must be a debt owed t o it by somebody if it is to be taxed on accrual basis unless a debt has been created in favour of the asse ssee by som ebody it cannot be said that income has accrued to it or it has a right to receive the income. This proposi tion has been well settled by Hon'ble Supreme Court in the case of E.D. Sassoon C o. Ltd. v. CIT [1954] 26 ITR 27, C IT v. Ashokbhai Chaamanbhai [1965] 56 ITR 42, CIT v. Shoorji Vallabhdas and C o. [196 2] 46 ITR 144 and Godhara Electricity Co. Ltd. v. C IT, [1997] 225 ITR 746/91 Taxman 351. Further, the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore, (supra) which has been relied upon by the ld. CIT (A), has not been treated to be correct enunciation of law by the Hon'bl e Supreme Cou rt in the case of Godhara Electricity Co. Ltd. (supra) an d UCO Bank (supra). Here in the present ca se, the assessee itself has n ot treate d the amount of interest to be due from any of the telecomm operat ors eithe r recognise d as a debt or as a le gal 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 am ount of interest cannot construe a debt due to the assessee . Furthe r, 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/CIT (A) that such an interest is legally claimable right against the Indian customers in respect of interest on delayed credit pe riod on Vendor Financing. Thus, we hold that when assessee has neither treated the 56 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation amount to be legally claimed nor has acknowledge d any debt due too on its customer as delayed payment then it cannot be held that any interest accrued t o the assessee, and therefore , such a notional charging of interest for each day elapsed from the due date t o the actual payment cannot be held to be taxable t o the assessee. This propositi on has also been now well upheld by Hon'ble Supreme Court in the case of Excel Industries Ltd. (supra) . Hence, no income can be said to accrue to the assessee on account of delaye d payments as neither there was any correspondin g liability on any of the debtors nor assessee ha d claimed any entitlement on such an interest.
Accordingly, this issue is also deci ded in favour of the assessee."
As a resul t, appeal of the assessee on thi s ground i s all owed.
20. Ground No. 8 of assessee's appe al i n ITA Nos. 1006 to 1008/Del /2010, Ground Nos. 7 & 8 of assessee's appeal i n ITA No. 5819/Del /2010 and Ground No. 3 of departmental appeal i n ITA Nos. 1236 to 1238/Del /2010 deal s with taxabili ty of revenue from R&D activi ti es undertaken i n Indi a.
21. The background of the i ssue i s that Noki a Indi a, the Indi an subsi di ary of the assessee has carri ed out R&D acti vi ties for the assessee duri ng the AYs 2004-05 to 2006-07 i n terms of the "Research and Devel opment Subcontracti ng Agreement". AO i n the assessment orders for these years has hel d that Noki a Indi a consti tutes 'fixed pl aces PE' and 'Dependent Agent PE' of the assessee i n respect of these R&D activi ti es.
22. The l d. CIT (A) hel d that si nce the assessee does not have separate a ccounts i n respect of such expenses and revenues rel atabl e to them and determi nati on of profi ts attri butabl e to the PE poses di ffi cul ties. Therefore in terms of Arti cl e 7 57 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation (paragraphs 3 an d 4) of the DTAA, appli cati on of Rul e 10 of IT Rul es, 1962 by the AO i s uphel d. However, as far as the attri buti on rati o of 126% to 130% i s concerned, i t was hel d that the same i n i s excessi ve. From the cal cul ati ons of the AO menti oned above i t i s seen that he has attri buted 100% of the profi ts to R&D acti viti es. Profi t of an enterpri se i s the resul t of vari ous acti vi ti es li ke manufacturi ng, selling and di stri buti on, financing, brandi ng, goodwill , R&D and l ogi sti cs etc. R&D i s thus, one of the acti vi ties amongst several others whi ch resul ts i nto profi ts to the enterpri se. A rati onal basi s of all ocati on of profi ts to R&D w oul d be i n the proporti on R&D expenses to total expenses i .e. i n the year 2004 whi ch has been consi dered as an exampl e, R&D expenses of 3,733 milli on Euros i s about 15.20% of the total expenses of 24,558 milli on Euros of expenses. Therefore, i t woul d be fai r to all ocate 15.20% of the profi ts of the appel l ant (i .e. 716 milli on Euros of a t otal profi t of 4,709 milli on Euros) to the R&D acti viti es for the year 2004. The proporti on of such profi ts to the total R&D expenses woul d then be 1917 i .e. 19.17% (716 milli on Euros di vi ded by total R&D expenses of 3,733 milli on Euros). Thus for the year 2004 the fi gure of attri butabl e profi ts woul d be equal to total expenses i ncurred on R&D acti vi ti es i n Indi a duri ng the year mul ti pli ed wi th the proporti on/ attri buti on rati o of .1917 or 19.17%. Hol di ng thi s, the l d. CIT (A) di rected that AO shoul d cal cul ate wei ghted average of attri buti on rati o by the methodol ogy bel ow:
i ) He shoul d fi rst work out the we i ghted average of attri buti on rati o in accordance wi th the method di scussed above and 58 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation ii ) He shoul d then mul ti ply the expenses i ncurred on R&D i n Indi a i n a parti cul ar AY with the wei ghted attri buti on rati on for that year.
23. Before us, du ri ng the heari ng, the l d. AR argue d that the si mil ar matter has been adjudi cated by the Hon'bl e Hi gh Court of Del hi in the case of Adobe Systems Incorporated 69 taxmann.com 229 vi de order date d 16th May 2016. The l d. DR reli ed on the order of the revenue authori ti es.
24. The bri ef facts of that case are the assessee was a company i ncorporated under the l aws of Del aware i n USA. It provi ded software sol uti ons for network publi shing whi ch i ncl uded web, pri nt, vi deo, wi rel ess and broadban d appl i cati ons. The assessee had a wholl y owned subsi di ary i n Indi a, namel y, Adobe Indi a. Adobe Indi a provi ded softwa re rel ated Research and Devel opment (R&D) servi ces to the assessee and the assessee di d not have any busi ness operati ons i n Indi a. The R&D services rendere d by Adobe Indi a, were pai d for by the assessee on cost pl us basi s in terms of an agreement entered i nto between the assessee and Adobe Indi a.
For rel event years, the Asse ssi ng Offi cer and the TPO acce pted the fees pai d by the assessee on cost pl us 15 per cent basi s as bei ng on ALP and Adobe Indi a's assessment was made accordi ngl y. Subsequentl y, the Assessi ng Offi cer sought to reopen the assessment. The reasons recorded for sai d purpose were that acti vi ties carri ed out by Adobe Indi a were a part of the assessee's core busi ness acti viti es and, consequentl y, Adobe Indi a consti tuted the assessee's PE under arti cl e 5(1) of DTAA. The Assessi ng Offi cer further reasoned that si nce the 59 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation assessee had a PE i n Indi a, a part of the profi t accrui ng to the assessee whi ch was attri butabl e to the activi ti es i n Indi a was chargeabl e to tax under the Act.
25. At thi s juncture, we fi nd that the facts of Adobe Systems Incorporated are si mil ar to the assessee and the i ssue i n questi on before us. The l d. C IT ( A) hel d that there i s fi xed PE i n terms of Arti cl e 5 of DTAA. The premi ses have been used for carryi ng R&D acti vi ti es of the assessee and the assessee ha s pai d for all the costs and facilities. The assessee had control and authori ty to deci de the R&D projects undertaken by Noki a Indi a. The premi ses have been i n control of the assessee. These i ssues have been cl early deal t by the Hon'bl e Hi gh Court i n thei r order. Furthe r, the H on'bl e Hi gh Court has al so taken queue from the order of E-Funds IT Sol uti ons regardi ng the fixed pl ace PE. The reasoni ng of the l d. Assessi ng Offi cer i n the case of Adobe Systems and the order of the Hon'bl e Hi gh Court deali ng wi th the fixed PE i s as under:
"Reasons to believe that income had escaped assessment.
12. In the rea sons recorde d by t he AO for issuance of the impugned notices, the AO had recorded that:
(a) Adobe India develops softwa re for the Assessee for which Adobe India has been compensated on a 'cost plus profit basis'; (b) the ownership of the software developed by Adobe India is the sole property of the Assessee and Adobe India does not retain any intellectual property rights in respect of the software developed by it; (c) t he Assessee ma kes substantial profits by selling the software develope d in India abroa d for which no taxes have been paid by the Assessee in India; (d) Adobe India has been working wholly and exclusively for the Assessee an d 60 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation does not develop softwa re for any other conce rn; and
(e) the Assessee's transaction wi th Adobe India a re not isolated transactions "but a continuous business connection as Adobe India is connected to the Assessee th rough a network of lease lines and othe r technological means".
13. On the basis of the a bove, the AO conclude d that activities carried out by Adobe In dia were a pa rt of the Assessee's core business activities and, consequently, Adobe India constituted the Assessee's PE under Article 5(1) of the Indo-US Double Taxation Avoidance Agreement (DT AA). He also obse rved that in terms of the agreement between Adobe India an d the Assessee, the Assessee was obliged to provide assistance, specifications and supervision and wa s further entitled to audit the facilities of Adobe In dia for maintenance of the requisit e standards. This, according to the AO, indicated tha t the Assessee had a Service PE in In dia in terms of Article 5(2)(l) of the Indo-US DTAA. According t o the AO, Adobe India wa s also a dependent agent of the Assessee and thus, constituted its PE in terms of Article 5(5) of the Indo-US DTAA.
14. The AO reasoned that since the Assessee had a PE in India, a part of the prof it accruing to the Assessee which is att ributable t o the activities in India was chargea ble to tax under the Act.
15. The AO further observed th at the transaction between the Assessee and Adobe India involved transfer of intangibles and m ultiple interrelated transactions which could n ot be e valuated separately for the purposes of determining ALP by any one transaction. The AO also recorde d that development and customisation of softwa re wa s a highly technical job and the same could not be restricted to computation on cost plus basi s. In his view, cost plus basis was n ot a suitable method for intangibles like software se rvices and the Profit Split Method w as applicable in terms of Rule 10B of the Income Tax Rules. Finally, the AO took note of the global profits reported by the Asse ssee and h eld that the same 61 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation should be apporti oned in the ratio of the R&D expenses incurred by the Assessed."
26. The order of the Hon'bl e Hi gh Court deali ng wi th the i ssue above as under:
"32. Para (1) of Article 5 defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partly ca rried on. The term 'fixed place of business' includes premises, facilities, offices which are used by an enterprise for ca rrying on its business. The fixed place must be at the disposal of an enterpri se through which it carrie s on it s business wholly or partly. Al though, the word 'through ' has been interpreted li berally but the very least, it indicates that the particular locati on shoul d be at the disposal of an Assessee for it to carry on its business through it. These attributes of a PE under Article 5(1) of the Indo-US DTAA were elucidated by the Supreme C ourt in Morgan Stanley & C o. Lt d. (supra). In a re cent decision , a Division Bench of this Court in DIT v. E-Funds IT Solut ion [2014] 364 ITR 256/226 Taxman 44/42 taxmann.com 50 (Delhi) reiterated the a bove-stated attri butes; after qu oting from various authors, this Court held that "The term 'through ' postulates that the taxpayer should have the power or liberty to control the place and, hence, th e right to dete rmine the conditions according t o it s needs". In the present case, th ere is no allegati on that the Assessee has any Branch Office or any other office or establishment through which it is carrying on any business other than simply stating that Adobe India's constitutes the Assessee's PE. There is n o evidence that the Assessee ha s a ny right to use th e premises or any fixed place at its disposal. The AO ha s simply proceede d on the basis that the R&D services performed by Adobe India a re an integral pa rt of the business of the Assessee and therefore, the offices of Adobe India re present the Assessee's fixed place of business. Thus, clearly the right to use test or the disposal test is not satisfied f or h olding that the Assessee has a PE in India in terms of Article 5(1) of the Indo-US DTAA.62 ITA Nos. 1006 to 1008, 1236
to 1238 & 5819/Del/2010 Nokia Corporation
33. In E-Funds IT Solution (supra), this Court had expressly negated that an a ssi gnment or a su b- contract of any work t o a subsidia ry in India could be a factor for dete rmining the applicability of Article 5(1) of the Indo-US DTAA. The Court had furthe r expressly held that :
"Even if the foreign entities have saved and reduce d their expenditure by transferring business or bac k office operations to the Indian subsidiary, it would not by itself create a fixed place or location permanent establishment. The ma nner and mode of the payment of royalty or associ ated transactions i s not a test which can be applied to determine , whether fixed place permane nt establishment exists.
Reference to core of auxiliary or preliminary activity is relevant when we apply pa ragraph 3 of Article 5 or when sub-clause (a) to paragraph 4 to Article 5 is under conside ration. The fact t hat the subsidiary company was ca rrying on core activities a s performed by the foreign asse sse e does n ot create a fixed place permanent establishment."
34. Thus, the AO's view that Adobe India constituted the Assessee's PE in term s of paragraph 1 of Article 5 of the Indo-US DTAA is palpa bly erroneous and not sustainable on the basis of the facts as recorded by him.
35. We also find that there is no material to hold that the Assessee's employees constit ute a Service PE in terms of Article 5(2)(l) of the Indo-US DT AA. Th e Assessee has denied that any of its employees has rendered any service in India. T here is no materia l available with the AO that w ould contradict the same . The AO has concluded that the Assessee has a PE in India in terms of Article 5(2)(l) of the Indo-US DTAA, only on the basis that the Assessee has a right to audit Adobe India and that the agreement between the Assessee an d Adobe India entail s that the Assessee would provide specifications, assistance and supervision for the R&D service s procured by the 63 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation Assessee. The said te rms of the agreement do not i n any manner indicate that the Assessee has bee n providing services in India. Clause 5.5 of the agreement referred t o by the AO indicates that the Assessee is authorized t o audit the Indian subsidiary (Adobe In dia), so as to ensu re that Adobe Indi a adheres to the standards requi re d by the Assessee. The same cannot possibly lead to the inference tha t the Assessee has been renderin g services t o Adobe India. The stipulation as to provi de specification and further assistance is only for the purpose of ensurin g that the Assessee procures the service that it ha s contracted f or f rom Adobe India. Such clauses in the agreement cannot lead t o an inference that the Assessee has a PE in India f or ren dering services, that is, a Se rvice PE in terms of Article 5(2)(l) of the Indo- US DTAA. This has also been aut horitatively held by Supreme Court in Morgan Stanley & Co. Ltd. (supra)."
27. Si nce, the matter i s squarel y appli cabl e to the i nstance case, we hereby hol d that fi xed pl ace PE do not exi st as the ri ght to use test or the di sposal test i s not sati sfi ed. The appeal of the assessee on thi s ground i s all owed.
28. Ground No. 9 of assessee's appe al i n ITA Nos. 1006 to 1008/Del /2010, Ground No. 12 of assessee 's a ppeal i n ITA No. 5819/Del /2010 deal s wi th l evy of interest u/s 234B of the Act.
29. In vi ew of the deci si on on the grounds no. 1 to 8.3 i n favour of the assessee, the adjudi cati on on thi s i ssue becomes academi c i n nature and hence we refrai n to do so.
30. In the resul t, appeal s of the assessee on the grounds- a. Exi stence of PE - all owed b. Taxabi lity of the software - all owed c. Taxabili ty of the noti onal i nterest - all owed d. R&D acti vi ti es - all owed 64 ITA Nos. 1006 to 1008, 1236 to 1238 & 5819/Del/2010 Nokia Corporation e. Interest u/s 234B - i nfructuous.
The appeal s of the revenue are di smi ssed.
(Order pronounce d i n the open Court on 02.09.2019) Sd/- Sd/-
(Bhavnesh Saini) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 02/09/2019
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
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