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2019 (9) TMI 304 - AT - Income TaxPE in India - Income accrued in India - taxation of revenues from supply of telecom hardware to the Indian customers - HELD THAT - Since, the matter of PE stands adjudicated in favour of the assessee, in the absence of any change in the material facts, following the earlier order of this Tribunal 2018 (6) TMI 497 - ITAT DELHI , we hereby hold that the assessee do not have a PE within the terms of Article 5 of India-Finland DTAA. Thus, this ground of appeal of the assessee is allowed. Taxability of revenue from supply of software - whether the consideration towards the software portion of the equipment is in the nature of royalties under Article 13 of India-Finland DTAA? - HELD THAT - Regarding the taxability of revenue from supply of software, the ld. CIT (A) held that since software is an integral part of the telecom hardware and software supply has been made pursuant to the contract in respect of which a PE has been upheld, software is effectively connected to the PE and should be dealt with as the business profits' in accordance with provisions of Article 7. In view thereof, there is no need to segregate the payments for software from other business receipts from supply of telecom hardware. Sale of hardware took place outside India and hence no income from sale of hardware accrued to Nokia in India. The issue of royalty on the software has been held in favour of the assessee based on the order in the case of DIT Vs Ericssion AB 2011 (12) TMI 91 - DELHI HIGH COURT . It was held that these payments cannot be said to be in the nature of royalty either as per the Indian Income Tax Act or DTAA and hence cannot be held to be taxable. It was held that what was sold was a GSM which consisted both hardware as well as the software and hence they cannot be taxed under two different articles Taxability of the notional interest /vendor financing on delayed consideration for supply of equipment and licensing of software - HELD THAT - No income can be said to accrue to the assessee on account of delayed payments as neither there was any corresponding liability on any of the debtors nor assessee had claimed any entitlement on such an interest. Accordingly, this issue is also decided in favour of the assessee Taxability of revenue from R D activities undertaken in India - HELD THAT - Fixed place PE do not exist as the right to use test or the disposal test is not satisfied. The appeal of the assessee on this ground is allowed.
Issues Involved:
1. Existence of Permanent Establishment (PE) in India. 2. Attribution of profits to PE in India. 3. Taxability of revenues from supply of software as 'royalty'. 4. Imputation of income from vendor financing. 5. Existence of PE on account of R&D activities in India. 6. Levy of interest under section 234B of the Income-tax Act, 1961. Detailed Analysis: 1. Existence of Permanent Establishment (PE) in India: The primary issue was whether the appellant constituted a PE in India under Article 5 of the India-Finland DTAA. The CIT(A) and the Special Bench of ITAT Delhi had previously held that the Indian subsidiary, Nokia India, constituted a PE of the appellant in India. The Tribunal referred to the order of the Special Bench of ITAT Delhi dated June 05, 2018, which emphasized that a PE must have characteristics such as stability, productivity, and dependence, and there must be a fixed place at the disposal of the foreign enterprise. The Tribunal concluded that Nokia India did not constitute a PE of the appellant in India as there was no fixed place of business at the appellant's disposal. 2. Attribution of Profits to PE in India: The CIT(A) had attributed 20% of the profits to the PE in India. However, the Tribunal, following the order of the Special Bench of ITAT Delhi dated June 05, 2018, concluded that no profits could be attributed to the PE in India as the appellant did not have a PE in India. The Tribunal held that the activities carried out by Nokia India were independent and not attributable to the appellant. 3. Taxability of Revenues from Supply of Software as 'Royalty': The CIT(A) held that the software supplied along with the hardware was an integral part of the telecom equipment and should be taxed as business profits under Article 7 of the DTAA. The Tribunal, referring to the Special Bench order and the Delhi High Court judgment in the case of Ericsson AB, concluded that the payments for software were not in the nature of royalty as it was for a copyrighted article and not for the copyright itself. Therefore, the entire receipts from the supply of telecom equipment, including hardware and software, were to be treated as business income and not royalty. 4. Imputation of Income from Vendor Financing: The CIT(A) upheld the addition of ?5,00,00,000/- as income from vendor financing based on an agreement clause that provided for charging interest on delayed payments. However, the Tribunal, following the Special Bench order dated June 05, 2018, held that no income could be imputed on a notional basis as there was no evidence of interest being charged or received. The Tribunal emphasized that income tax is levied on real income and not on hypothetical income. 5. Existence of PE on Account of R&D Activities in India: The CIT(A) held that Nokia India constituted a fixed place PE for the appellant in respect of R&D activities. However, the Tribunal, referring to the Delhi High Court judgment in the case of Adobe Systems Incorporated, concluded that the right to use test or the disposal test was not satisfied. The Tribunal held that the premises used for R&D activities were not at the disposal of the appellant, and therefore, there was no fixed place PE. 6. Levy of Interest under Section 234B of the Income-tax Act, 1961: The CIT(A) upheld the levy of interest under section 234B. However, the Tribunal, in view of the decisions on other grounds in favor of the assessee, deemed the adjudication on this issue as academic and refrained from addressing it. Conclusion: The Tribunal allowed the appeals of the assessee on the grounds of the existence of PE, taxability of software, taxability of notional interest, and R&D activities. The appeals of the revenue were dismissed. The levy of interest under section 234B was deemed infructuous.
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