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2010 (2) TMI 124 - AAR - Income TaxLaird USA has negotiated an arrangement with Nokia to manufacture and supply products to Nokia Corporation globally. On 25th June 2003 a Product Purchase Agreement (PPA) has been executed by and between Nokia Corporation Finland and its affiliates on the one part and the Laird USA and its affiliates on the other part. The PPA inter alia covers the supply of products in relation to Nokia s manufacturing requirements in India - The applicant states that as per the agreement it would act in an independent status and supply the products to Nokia India at its own risk and obligations. The applicant asserts that no agency relationship is intended or created between the applicant and Laird USA and moreover the applicant s business is not confined to Nokia India only. Held that The answer broadly is in the negative. The amount of consideration received by Laird USA from the applicant is in the nature of business profit that has accrued or arisen in India. However as the recipient Laird USA has no permanent establishment in India the same is not liable to be taxed under the Income-tax Act 1961 having regard to Art.7.2 of the DTAA. - The applicant is not required to withhold tax under Section 195 of the Income-tax Act while making remittance to Laird USA as it has not derived any income chargeable to tax in India.
Issues Involved:
1. Taxability of the amount receivable by Laird USA under the Assignment Agreement in India. 2. Extent and year(s) of taxability if the amount is taxable in India. 3. Requirement for the applicant to withhold tax under Section 195 of the Income-tax Act while making remittance to Laird USA. Detailed Analysis: Issue 1: Taxability of the Amount Receivable by Laird USA in India The applicant contended that the amount receivable by Laird USA under the Assignment Agreement is not taxable in India. They argued that the consideration was received outside India, the agreements were executed outside India, and the capital asset (PPA) was located and transferred outside India. Therefore, there is no taxable income in India. Additionally, Laird USA does not have a business connection or permanent establishment (PE) in India, and hence, the profits are not liable to be taxed in India under Article 7 of the DTAA. Issue 2: Extent and Year(s) of Taxability if the Amount is Taxable in India The applicant argued that if the amount is considered taxable, it should be treated as business profits. However, since Laird USA does not have a PE in India, the profits cannot be taxed in India. Issue 3: Requirement for the Applicant to Withhold Tax Under Section 195 The applicant contended that since the amount receivable by Laird USA is not taxable in India, they are not required to withhold any tax under Section 195 of the Income-tax Act while making the remittance. Judgment Analysis: Analysis of the Agreements The Product Purchase Agreement (PPA) between Nokia Corporation and Laird USA included terms for the global supply of products. The Assignment Agreement between Laird USA and the applicant assigned all rights and obligations under the PPA concerning supplies to Nokia India to the applicant. Revenue's Contentions The Revenue argued that the applicant is an affiliate of Laird USA and thus, a party to the PPA. They also contended that the PPA did not confer any legal rights to Laird USA, and the Assignment Agreement was invalid without Nokia's consent. Additionally, they argued that the consideration paid to Laird USA should be treated as business profits and taxed in India. Authority's Findings The Authority found that the applicant is not an affiliate of Laird USA as per the definition in the PPA. The PPA created legally enforceable rights and obligations. However, the assignment of obligations requires a novated tripartite agreement, which was not present. The letter from Nokia Corporation consenting to the assignment was not relied upon due to doubts about its authenticity and authority. Despite the invalid assignment, the consideration received by Laird USA was deemed business profits. However, since Laird USA does not have a PE in India, the profits are not taxable in India under Article 7 of the DTAA. Conclusion 1. Question 1: The amount of consideration received by Laird USA is in the nature of business profits that accrued in India. However, since Laird USA has no PE in India, it is not liable to be taxed under the Income-tax Act, 1961, considering Article 7.2 of the DTAA. 2. Question 2: Not applicable due to the answer to Question 1. 3. Question 3: The applicant is not required to withhold tax under Section 195 while making remittance to Laird USA as it has not derived any income chargeable to tax in India. The ruling was pronounced on February 18, 2010, by the Authority for Advance Rulings.
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