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2025 (2) TMI 990 - HC - Income TaxFixed Place Permanent Establishment (PE) in India - taxability the existence of a PE and attribution of income - whether NIPL would constitute a PE of Nokia OY? - whether the Liaison Office could be treated as a PE? - HELD THAT - In Progress Rail 2024 (5) TMI 1417 - DELHI HIGH COURT on occasion to examine what would constitute preparatory and auxiliary activities expressions found in Para 4 (f) of Article 5 and which stipulates that as long as the activities undertaken could be said to be preparatory or auxiliary the establishment would not be liable to be construed as constituting a PE. Clause (f) of Para 4 thus provides that a maintenance of a fixed place of business even if it be for the undertaking of any of the activities stipulated in the preceding clauses would still not qualify as a PE if the overall character of such activities were found to be of a preparatory or auxiliary character. Tribunal has committed no error in answering the questions posited in favour of Nokia OY. Undisputedly the issue of the Liaison Office constituting a PE had come to be settled in the first round of the litigation which ensued before the Tribunal and came to be ultimately affirmed by the 2012 judgment of this Court. The broad questions on which this Court remanded the matter to the Tribunal stood confined to NIPL and its interrelationship with Nokia OY. Whether NIPL constituted a PE appears to have been principally answered in light of it being the wholly owned subsidiary of Nokia OY? - Article 5(8) bids us to bear in mind that the mere control of an entity by a parent or a holding company would not be determinative of whether a PE exists. A subsidiary or an entity which is substantially controlled by another would still have to meet the test prescribed by Paras (1) (2) (3) (5) and (6) of Article 5 before it can be said to constitute a PE. We are also of the firm opinion that the question of PE is not liable to be answered on the basis of a perception of virtual projection. The DTAA does not leave this seminal issue to be decided on the basis of individual estimations or impressions. It lays in place certain empirical standards which must be borne in mind when answering the question whether a PE exists. Issues of virtual projection and functional integration are liable to be answered on an appreciation of facts as may be found to exist. It is here that the precepts propounded by learned scholars such as the use and maintenance of a place of business the place being at the disposal of an enterprise or being liable to be viewed as an operating asset of the enterprise itself assume significance. What however needs to be emphasized is that these are aspects which cannot possibly be left to depend upon the tenuous thread of fluctuating perceptions impressions and mutable beliefs. Article 5 thus bids us to answer the question of PE based on measurable evidence and the objective benchmarks incorporated therein. The exercise to ascertain whether a PE exists is thus founded on evidence-based standards rather than a theory or mere surmise. We consequently find ourselves unable to countenance the perception test which was propounded by the Tribunal in the earlier round of litigation. When tested on the standards consistently recognized by courts it becomes apparent that the appellants had woefully failed to establish that NIPL or its premises could be recognised to be a PE when tested on the mandated criterion of either a Fixed Place or a Dependent Agent PE. Having gone through the copious material which was examined and evaluated by the Tribunal we have no hesitation in affirming its view insofar as Fixed Place PE is concerned. We also find ourselves unconvinced of the arguments advanced by the appellants before us in their attempt to question the correctness of its conclusions insofar as DAPE is concerned. The reasons underlying our conclusion are set out hereinafter. Examining the minority opinion - It becomes pertinent to note that the learned Member has in our opinion correctly noted that there is no general presumption in law that a subsidiary can never be acknowledged to be a PE. This since Article 5(8) itself merely states that the said factor alone shall not be determinative of the PE question. The covenant thus clearly obliges us to evaluate the facts based on the other provisions comprised in Article 5 of the DTAA. We also concur with the minority opinion when it held that the appellants had failed to establish the existence of a DAPE. It has however in this respect observed that while the view expressed in the previous round stricto sensu may not have been wholly accurate or tenable the question of PE would still be liable to be answered basis the essence of the arrangement between Nokia OY and NIPL as was discerned by the AO and the CIT(A). The second aspect which appears to have weighed upon the minority was the commitment towards technical support as held out by Nokia OY as well as its assurance against dilution of its interest in NIPL. All this according to the minority amounted to a virtual performance guarantee and ultimately concerned with furtherance of the business interests of the assessee company in India as much if not more for its own economic and business interests. It is this underlying theme and line of reasoning which then breathes through the entire opinion. The minority then proceeds to notice and apply the principle of alter ego companies as being pertinent to the issue of PE. However the alter ego test was subjected to the caveat of it being found that the resident company had no significant independent activity of its own. The minority then also culled out a distinction between an associated PE (and which it chose to describe as a direct PE) and an unassociated PE ( indirect PE as per the minority). In our opinion the reasoning so adopted clearly seeks to blur the distinction which the law seeks to draw between associated enterprises and which may legitimately enter into transactions inter se and which would satisfy the arm s length test. The agency PE which is contemplated in Article 5 (5) is concerned with a person who acts on behalf of an enterprise and undertakes activities specified in clauses (a) (b) and (c) thereof. Such an agent must and in light of the textual construct of Article 5 (5) be one who acts on behalf of in the name of and for the enterprise itself . The minority thus in its attempt to conflate a Fixed Place PE with DAPE has merely confounded two distinct issues. It has thus chosen to ignore the primordial conditions of virtual projection and premises at the disposal of an enterprise being found to exist so as to constitute a PE. We may only observe that a parent or a holding company would invariably be expected to have an interest and concern in the working of an overseas subsidiary. This essentially represents its right of oversight supervision and protection of shareholder interest. However the exercise of those powers does not denude the subsidiary of its independent economic existence. Ultimately it would have been imperative for the appellants to have established that NIPL was an enterprise through which Nokia OY was operating and carrying on its own business and that the former was no more than an adjunct of Nokia OY itself. The mere fact that Nokia OY held out an assurance in respect of a fledgling venture in its formative years fails to convince us to hold that the former constituted its PE. The assurances were clearly not liable to be viewed as being evidence of Nokia OY using NIPL as a vehicle for its own enterprise. Insofar as the issue of software is concerned it was fairly conceded that the same would be liable to be answered against the appellants in light of the judgment of the Supreme Court in Engineering Analysis Centre of Intelligence Private Limited 2021 (3) TMI 138 - SUPREME COURT Answer the questions as posited in the negative and against the appellants.
1. ISSUES PRESENTED and CONSIDERED
The Court considered the following core legal questions: (A) Whether the assessee had a Fixed Place Permanent Establishment (PE) in India during the concerned Assessment Years (AYs)? (B) Whether Nokia India Private Limited (NIPL), a wholly-owned subsidiary of the assessee, constituted a Dependent Agent Permanent Establishment (DAPE) of the assessee in India? (C) Whether interest from delayed consideration of supply of equipment and licensing of software was taxable in the hands of the assessee as interest earned from vendor financing? (D) Whether the revenue from the supply of software could be classified as royalty or fee for technical services under the Income Tax Act, 1961, read along with the India-Finland Double Taxation Treaty (DTAA)? 2. ISSUE-WISE DETAILED ANALYSIS Issue A: Fixed Place Permanent Establishment - Relevant legal framework and precedents: Article 5 of the India-Finland DTAA defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Court referred to precedents like Formula One World Championship Ltd. v. CIT and ADIT v. E-Fund IT Solution. - Court's interpretation and reasoning: The Court concluded that the Liaison Office did not constitute a PE, as previously settled in the first round of litigation. The Tribunal found no evidence that NIPL's premises were at the disposal of Nokia OY for conducting its business. - Key evidence and findings: It was established that NIPL pursued an independent line of business with Indian telecom operators and was not used by Nokia OY to conduct its business. - Application of law to facts: The Court held that the activities of NIPL were preparatory and auxiliary, and thus did not constitute a Fixed Place PE. - Treatment of competing arguments: The appellants failed to establish that NIPL's premises were under the control or disposal of Nokia OY. - Conclusions: The Court ruled that NIPL did not constitute a Fixed Place PE for Nokia OY. Issue B: Dependent Agent Permanent Establishment - Relevant legal framework and precedents: Article 5(5) of the DTAA outlines the requirements for a DAPE, including authority to conclude contracts on behalf of the enterprise. - Court's interpretation and reasoning: The Tribunal found no evidence that NIPL had the authority to conclude contracts on behalf of Nokia OY or that it habitually secured orders for the latter. - Key evidence and findings: The Tribunal noted that NIPL's activities were not devoted wholly or almost wholly to Nokia OY. - Application of law to facts: The Court found that NIPL operated independently and did not act as a DAPE for Nokia OY. - Treatment of competing arguments: The appellants' arguments were dismissed due to lack of evidence showing NIPL's authority to act for Nokia OY. - Conclusions: The Court concluded that NIPL did not constitute a DAPE of Nokia OY. Issue C: Interest from Vendor Financing - Relevant legal framework and precedents: The Court referred to the principle that only real income can be taxed, not hypothetical or notional income. - Court's interpretation and reasoning: The Tribunal found that no real income was generated from vendor financing, as there was no evidence of interest being charged or paid. - Key evidence and findings: The Department failed to prove that Nokia OY charged interest on delayed payments or extended credit facilities. - Application of law to facts: The Court held that the notional interest could not be taxed, as no income had accrued or been received. - Treatment of competing arguments: The appellants' arguments were rejected due to lack of evidence of actual interest income. - Conclusions: The Court ruled that the interest from vendor financing was not taxable. Issue D: Classification of Software Revenue - Relevant legal framework and precedents: The Court referred to the judgment in Engineering Analysis Centre of Intelligence Private Limited v. Commissioner of Income Tax, which clarified the classification of software payments. - Court's interpretation and reasoning: The Tribunal concluded that the revenue from software supply was not royalty, as it was for a copyrighted article, not for a copyright itself. - Key evidence and findings: The software was integral to the GSM equipment, and the payments were not for the use of a copyright. - Application of law to facts: The Court held that the software revenue was not taxable as royalty or fee for technical services. - Treatment of competing arguments: The appellants conceded this issue in light of the Supreme Court's judgment. - Conclusions: The Court ruled that the software revenue was not royalty and was not taxable under the DTAA. 3. SIGNIFICANT HOLDINGS - The Court upheld the Tribunal's findings that NIPL did not constitute a Fixed Place PE or a DAPE for Nokia OY. - The Court affirmed that notional interest from vendor financing was not taxable, as no real income was generated. - The Court ruled that software revenue was not taxable as royalty under the DTAA, aligning with the Supreme Court's precedent. - The Court emphasized the importance of objective evidence over perceptions in determining the existence of a PE.
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