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2018 (6) TMI 497 - AT - Income TaxPE In India - Fixed place of PE OR service PE - subsidiary of the Appellant - Liaison Office - business connection in India - Whether on a true and correct interpretation of section 9(1 )(i) the Respondent can be said to have a business connection in India in the form of a Liaison Office? - India- Finland DTAA - Held that - There is absolutely no concept of Service PE in the then existing provision of Article 5; and secondly, other than off-shore supply of equipment, no other activities has been carried out by the assessee after the incorporation of the Indian subsidiary NIPL and this fact has been accepted by the Hon ble High Court also. Any activities relating to NIPL under the independent contract cannot be reckoned 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 managed by assessee, then also, it does 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 the assessee in India or through or from any asset in India. NIPL is an independent entity and all its income from India operation is liable for tax in India. So far as the issue of fixed place PE is concerned the same does not get established at all by making to reference of providing of telephone, fax and car facility to the employees of assessee visiting India. As regards allegation that expatriates employees of assessee in India were assisting the NIPL and hence used the office of NIPL, is of no relevance qua assessee s business, because, the technical expatriates were in India to assist/help NIPL with performance of installation activities of NIPL and not to carry out the business of the assessee which was manufacturing and sale of network equipments. This activity per se cannot be reckoned that the Indian office was being used for the purpose of assessee s business or assessee was undertaking business in India through fixed place of business -nothing has been brought on record by the AO or ld. CIT-DR that any physical space was made available which can be said to be at the disposal of assessee for assessee s own business of supply and sale of equipments. In terms of Article 5(4), there could not be any fixed place PE under Article 5(1) because the activities of the assessee in India were purely pertaining to network planning, negotiation and signing of contracts before off-shore supply of (GSM) equipments and sale of goods have been made off-shore outside India. Here the crucial test is that activities of the assessee must be carried out through the agent wholly and almost wholly for the assessee. When installation activity is not carried out by the assessee in India and is done by NIPL on principal to principal basis with the customers then there is no question of examining the installation activity for purpose of PE. The activity carried out by the assessee through an agent in India would be key factor for examining PE. Thus, provision of paragraph 7 of Article 5 will also not apply. The exception given in Article 5(8) to a company controlled by a foreign enterprise or its subsidiary answers most of the allegation made by the Department that NIPL being a subsidiary of the assessee itself will provide status of a PE. Concept of virtual projection brought in by the AO will not lead to any kind of establishment of PE. In so far as allegation of the department that employees of assessee were responsible for all the activities, it has been already dealt by us that if at all it may have some bearing or relevance when examining Service PE, which was absent in the then prevalent DTAA. Thus, we hold that there is no PE within the terms of Article 5 of India Finland DTAA. Where any income accrues or arises to a non-resident through or from any business connection in India where all the operations are not carried out in India only such income will be chargeable to tax in India as can be attributed to the operations carried out in India. In light of these provisions and facts of the case, we will analyse the rival contentions of the parties and the judicial proposition highlighted before us in this regard. In the present case, the goods were manufactured outside India and even the sale has taken place outside India and once this fact is established even in those cases where there is a one composite contract supply has to be segregated from installation and only then would question of apportionment arise having regard to expressed language of Section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arises in India. The marketing activities and installation contract undertaken by NIPL has been on principal to principal basis; and in the case of former agreement between assessee and NIPL, the payment has been made to NIPL on cost plus markup basis which has not been disturbed; and in the later agreement there is an independent contracts by NIPL with Indian customers which has nothing to do with the assessee. The income arising from both the contracts are taxable in the hands of the NIPL in India Since we have already held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts Taxability of interest from Vendor Financing, 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 period on Vendor Financing. Thus, we hold that when assessee has neither treated the amount to be legally claimed nor has acknowledged any debt due too on its customer as delayed payment then it cannot be held that any interest accrued to the assessee, and therefore, such a notional charging of interest for each day elapsed from the due date to the actual payment cannot be held to be taxable to the assessee. - Decided in favour of the assessee.
Issues Involved:
1. Existence of business connection or permanent establishment (PE) in India. 2. Attribution of profits to the PE. 3. Taxability of notional interest on delayed consideration for supply of equipment and software. Analysis: Existence of Business Connection or Permanent Establishment (PE) in India: - The Tribunal examined whether Nokia India Pvt. Ltd. (NIPL), the Indian subsidiary of Nokia Networks OY (the assessee), constituted a business connection or a PE in India. - The Tribunal noted that NIPL provided administrative support to the visiting expatriate employees of the assessee and was involved in marketing and technical support activities for the assessee. - The Tribunal found that these activities were not conducted at arm's length, as the compensation (cost plus 5% markup) did not even cover the interest element for the period of expenditure and reimbursement. - The Tribunal also observed that the assessee provided performance guarantees and undertakings to customers, ensuring control over NIPL’s operations, which indicated a close business connection. - The Tribunal concluded that NIPL acted as a virtual projection of the assessee in India, performing core business functions and rendering vital services without adequate compensation, thereby constituting a PE under Article 5(1) of the India-Finland DTAA. Attribution of Profits to the PE: - The Tribunal considered whether any profits could be attributed to the signing, networking, planning, and negotiation of offshore supply contracts in India. - It was determined that these activities were core marketing functions and technical support functions vital to the business of selling equipment. - The Tribunal referred to judicial precedents, such as the Rolls Royce case, which allocated 35% of global profits to marketing functions. - The Tribunal concluded that 3.75% of the total sales of the equipment in India could be reasonably allocated to the PE for these specified activities. Taxability of Notional Interest on Delayed Consideration: - The Assessing Officer had added notional interest on delayed consideration for supply of equipment and software, assuming that the assessee charged interest on delayed payments as per the contract terms. - The Tribunal noted that there was no evidence that the assessee had invoiced or received any interest for delayed payments. - It was emphasized that income cannot be taxed on a notional basis if it has not actually accrued or been received by the assessee. - The Tribunal held that since the assessee did not recognize any interest income and there was no corresponding liability on the part of the customers, the notional interest could not be taxed. Conclusion: - The Tribunal held that NIPL constituted a PE of the assessee in India under Article 5(1) of the India-Finland DTAA. - It attributed 3.75% of the total sales of the equipment in India to the PE for the specified activities. - The Tribunal ruled that the notional interest on delayed consideration could not be taxed as it did not actually accrue or was received by the assessee.
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