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2012 (9) TMI 409 - HC - Income TaxLiaison Office(LO) and Indian subsidiary - assessee is a company of Finland - Whether the Liaison Office of Nokia constitutes a PE in India under Article 5 of the DTAA ? - Whether NIPL constitutes a PE in India under Article 5 of the DTAA? - Held that - The assessee had opened this LO in India on 30.3.1994 Two agreements were signed between the assessee on the one hand and Indian Cellular Operators on the other hand viz. Modi Telestra (I) Ltd. and Skycell Communication Ltd. on 23.3.1995 and 17.2.1995 respectively. When these contracts were signed, the assessee subsidiary viz. NIPL was not in existence. As this company was incorporated on 23.5.1995 after that date four other agreements were entered into with different cellular operators. The assessee supplied both the hardware and software to Indian Cellular Operators and its subsidiary namely NIPL carried out installation work. The LO has not carried out any business activity for the assessee in India and that its role has been only to assist the assessee in the preliminary and preparatory work. It is further found by the ITAT that as per the rules of the Reserve Bank of India itself, a LO is not permitted to carry out any business activity for a foreign enterprise. Its activities are closely mentioned by the Reserve Bank of India - The Income-tax authorities would appear to have also held that the LO carried out marketing activities for the assessee in India but for this finding, there is no evidence and none of the contracts which have been brought on record indicate that the LO has carried out any marketing activities - there was nothing on record to show that the LO had something to do with designing activity connected to the GSM - thus it is clear that there is no material or evidence on the basis of which it could be said that the LO can afford a business connection to the assessee in India. For same reasons, we are of the view that LO cannot be constituted as Permanent Establishment of the assessee in India - in favour of assessee. Taxability on income from off-shore supply of equipment - Held that - That the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractual parameters, as per article 21.1 of the Supply Contract, the only consequence would be that the Cellular Operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused due to the acceptance test not being complied with, Article 19 of the Supply Contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India - Overall Agreement does not result the income accruing in India. The execution of an overall agreement is prompted by purely commercial considerations as the India Cellular Operator would be desirous of having a single entity that he could liaise with - in favour of assessee. Consideration for supply of equipment and licensing of software - royalty u/s 9(l)(vi) of the Income Tax Act, 1961 or Article 13 of India-Finland DTAA - Held that - In order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work - Section 2 (o) of the Copyright Act makes it clear that a computer programme is to be regarded as a literary work . Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract - in favour of assessee. Business connection of NIPL subsidiary of the assessee company engaging itself in activities to support the assessee s main activities - Held that - NIPL could be considered PE of assessee in India being subsidiary as it is the virtual projection of the company in India. Further, the accounts of the Indian subsidiary show that the company incurred huge losses as it was not compensated properly for the installation work carried on by it. In the opinion of the ITAT since it was a wholly owned subsidiary, the assessee would have direct and complete control over the activities of this subsidiary - Refer the matter back to the Tribunal for fresh consideration on the issues as to whether the subsidiary of the assessee would provide business connection or is Permanent Establishment and even if it is so, is there any attributes of profits on account of signing, under working, planning and negotiation of off-shore supply contracts in India.
Issues Involved:
1. Whether the Liaison Office of Nokia constitutes a PE in India under Article 5 of the DTAA? 2. Whether NIPL constitutes a PE in India under Article 5 of the DTAA? 3. If the answer to Questions 1 and 2 is affirmative, what is the income attributable to the PE under Article 7 of the DTAA? 4. Whether income from off-shore supply of equipment can be taxed in India? 5. Whether any income forming part of the consideration for supply of equipment and licensing of software integral thereto is taxable as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 or Article 13 of the DTAA? 6. Whether on facts and in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of Nokia? 7. Whether interest under Section 234B of the Act can be levied on Nokia, being a non-resident when TDS provisions applied to the sums in question and tax due had not been deducted at source? Detailed Analysis: Issue 1 & 2: Whether the Liaison Office (LO) and NIPL constitute a PE in India under Article 5 of the DTAA? The Tribunal found that Nokia Networks OY, a company incorporated in Finland, opened a Liaison Office (LO) in India on 30.3.1994. The LO was involved in preparatory and auxiliary activities such as advertising and did not engage in any business activities. The ITAT concluded that the LO did not constitute a business connection or a PE in India under Article 5 of the India-Finland DTAA since it only carried out advertising activities and there was no evidence of it transacting any business on behalf of Nokia. Regarding NIPL, the Tribunal held that NIPL constituted a PE of Nokia in India. The Tribunal reasoned that Nokia projected itself in India through NIPL, and Mr. Hannu Karavirta acted for both entities. The Tribunal observed that it did not matter whether there was direct evidence of control by Nokia over NIPL; what mattered was the perception that NIPL was a projection of Nokia. Issue 3: What is the income attributable to the PE under Article 7 of the DTAA? The ITAT attributed 20% of the net profit determined on the basis of the global net profit of Nokia to the PE in India. This margin was applied to the Indian sales of Nokia, which included revenues from the supply of hardware and software. Issue 4: Whether income from off-shore supply of equipment can be taxed in India? The Tribunal concluded that the sale of hardware took place outside India and no income from the sale of hardware accrued to Nokia in India. The Supreme Court's judgment in Ishikawajima-Harima Heavy Industries Ltd. v. DIT was referenced, which held that no part of the profit arising from the supply of equipment outside India would be chargeable to tax in India. The property in goods passed to the buyer outside India where the equipment was manufactured. Issue 5: Whether any income forming part of the consideration for supply of equipment and licensing of software integral thereto is taxable as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 or Article 13 of the DTAA? The Tribunal held that the payment for the supply of software was not in the nature of 'royalty' because it was for a copyrighted article and not for a copyright. The software was an integral part of the GSM equipment and could not be used independently. Therefore, the payment for the supply of software was not taxable both under the provisions of the Act and the DTAA. Issue 6: Whether on facts and in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of Nokia? The Tribunal upheld the addition of interest income from vendor financing, holding that it was correctly added. Issue 7: Whether interest under Section 234B of the Act can be levied on Nokia, being a non-resident when TDS provisions applied to the sums in question and tax due had not been deducted at source? The Tribunal held that interest under Section 234B of the Act could not be levied on Nokia, being a non-resident, as TDS provisions applied to the sums in question and tax due had not been deducted at source. Conclusion: The High Court dismissed the appeals of the Revenue, agreeing with the ITAT's findings that the LO did not constitute a PE in India and that the income from off-shore supply of equipment was not taxable in India. The Court also remitted the issue of whether NIPL constituted a PE and the attribution of profits to the PE back to the Tribunal for fresh consideration. The Court upheld the Tribunal's decision that the payment for the supply of software was not in the nature of 'royalty' and that interest under Section 234B could not be levied on Nokia.
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