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Suppl y of hardware, Suppl y of operati ng system software 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.

- 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)

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 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:

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 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.