2019 (4) TMI 280 - AT - Income Tax

Income accrued in India - supply of telecommunications hardware to Indian telecom operators - royalty income from supply of software on a gross basis - India-Finland DTAA - existence of PE in India - HELD THAT - Contention of the Ld. DR is not tenable that the facts of the year under considerations are distinguishable from A.Y. 1997-98, 1998- 99 because issue that the assessee has a fix place PE in the NIPL office and DAPE in the form of NIPL has already been dealt with by the Special Bench II as is evident from a question of law framed by Hon ble High Court on the findings returned by the Tribunal in SB II holding that NIPL did not constitute a fix place PE of the assessee. When the revenue has failed to prove that there exists PE of the assessee these grounds raised by the revenue have become infructuous being consequential in nature. Taxability of interest from vendor financing - assessee has not treated the amount to be legally claimed nor has acknowledged any debt due to its customer as delayed payment no income can be said to accrue to the assessee on account of delayed payment as neither there was any corresponding liability on any of the debtors nor the assessee had claimed any entitlement on such an interest. So AO/CIT(A) have erred in imputing ₹ 50,000,000/- as income from vendor financing for the purpose of taxability in the hands of assessee in India as business income. In view of what has been discussed above, we are of the considered view that following the decision rendered by SB-1 and SB-II which is applicable to the facts and circumstances of the cases at hand on account of identical facts, existence of fixed place PE of assessee in India is not established, consequently appeals filed by the assessee allowed.

Summary

Issues Involved:
1. Taxability of income from supply of telecommunications hardware and software.
2. Attribution of income to Permanent Establishment (PE) in India.
3. Classification of software income as 'royalty'.
4. Acceptance of India-specific profit and loss account.
5. Levy of interest under section 234B of the Income Tax Act.
6. Validity of the order passed by the CIT(A).

Detailed Analysis:

1. Taxability of Income from Supply of Telecommunications Hardware and Software:
The assessee, a company incorporated in Finland, engaged in supplying hardware and software for GSM systems, contested the taxability of its income in India. The Assessing Officer (AO) held that the income from hardware and software supplied to Indian telecom operators was taxable in India due to the existence of a Permanent Establishment (PE). The CIT(A) upheld this view, attributing income from hardware and software to the PE in India.

2. Attribution of Income to Permanent Establishment (PE) in India:
The AO and CIT(A) attributed a portion of the income from hardware and software supplies to the PE in India. The CIT(A) modified the AO’s ratio of hardware and software income from 60:40 to 70:30 and attributed 50% of the net income from hardware to the PE. The Special Bench of the Tribunal, following previous orders and the Delhi High Court’s decision, held that the assessee did not have a PE in India. The Tribunal concluded that the activities carried out by the Indian subsidiary, Nokia India Pvt. Ltd. (NIPL), were preparatory and auxiliary, and thus, did not constitute a PE under Article 5 of the India-Finland DTAA.

3. Classification of Software Income as 'Royalty':
The AO classified the income from software as 'royalty' under the Income Tax Act and the India-Finland tax treaty, subjecting it to tax in India. The CIT(A) upheld this classification but directed the AO to apply a net rate of 30% for contracts executed before May 31, 1997, and 20% for contracts executed after that date. The Tribunal, however, following the Special Bench’s decision, held that the income from software could not be taxed as 'royalty' since the assessee did not have a PE in India.

4. Acceptance of India-Specific Profit and Loss Account:
The AO rejected the India-specific profit and loss account submitted by the assessee, citing the lack of separate books of accounts for Indian operations and unverified vouchers. The CIT(A) upheld this rejection. The Tribunal, referencing the Special Bench’s findings, noted that the AO and CIT(A) had relied on earlier years' orders, which were overturned by the Special Bench, thereby questioning the rejection of the India-specific accounts.

5. Levy of Interest under Section 234B of the Income Tax Act:
The CIT(A) upheld the levy of interest under section 234B, which was contested by the assessee. The Tribunal, considering the Special Bench’s ruling that the assessee did not have a PE in India, implied that the levy of interest under section 234B was not justified.

6. Validity of the Order Passed by the CIT(A):
The assessee challenged the validity of the CIT(A)’s order, alleging it was void ab initio and violated natural justice. The Tribunal, aligning with the Special Bench’s decision, found that the CIT(A) had erred in its conclusions, thereby invalidating the order to the extent it upheld the AO’s findings.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, setting aside the CIT(A)’s orders and dismissing the revenue’s appeals. The Tribunal concluded that the assessee did not have a PE in India, and thus, the income from hardware and software supplies could not be taxed in India. The Tribunal also ruled against the classification of software income as 'royalty' and the levy of interest under section 234B, providing relief to the assessee.