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TMI Blog2012 (9) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... nt buyer-seller arrangements. Installation activities were undertaken by Indian subsidiary under its independent contracts with Indian telecom operators. Nokia, being a tax resident of Finland, is governed by the provisions of India-Finland Double Taxation Avoidance Agreement. Assessment under Section 143 (3) was completed, in the following manner:- (a) Nokia was carrying on business in India through a Permanent Establishment (PE). Both the Indian Liaison Office and Indian subsidiary were held to constitute a PE of Nokia in India. 'Installation PE' was also constituted on the basis that Nokia had supported Indian subsidiary in discharging its obligation under the installation contracts. (b) 70% of total equipment revenue (comprising of hardware and software) was attributed to sale of hardware and 40% of the same was estimated as income of Nokia from supply of hardware. Further 30% of the profits so determined were attributed to the PE of Nokia in India. The remaining 30% of the equipment revenues were attributed towards supply of software and the same was taxed as 'royalty' (on a gross basis) both u/s 9(1)(vi) of the Income Tax Act and under Article 13 of the India-Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and 2 is in affirmative, what is the income attributable to the PE under Article 7 of the DTAA? (d) Whether income from off-shore supply of equipment can be taxed in India? (e) 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(l)(vi) of the Income Tax Act, 1961 or Article 13 of the DTAA? (f) 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? (g) 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? 5. The ITAT decided appeals of all the assessees by a common judgment dated 22.6.2005. In so far as appeals relating to Nokia are concerned, findings of the Special Bench arc as under: (1) Liaison Office neither constituted a business connection under the Act nor a PE of the Nokia under Article 5 of the India-Finland DTAA, as it merely carried on advertising activities in India. (2) Sale of hard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply of software was held not taxable both under the provisions of the Act and under DTAA. (7) Interest income from vendor financing was held to have been correctly added. (8) Following 3 activities were held to have been carried out by NIPL, the PE of Nokia in India (a) Network Planning; (b) Negotiations in connection with the sale of equipment; and (c) Signing of supply and installation contracts. (9) 20% of the net profit determined on the basis of the global net profit of Nokia (10% towards signing of the contract and 10% towards other two activities) was attributed to the PE in India. This margin was directed to be applied on the Indian sales of Nokia (clarified by the Special Bench of the ITAT to mean revenues arising from supply of hardware and software). 6. It is clear from the above that certain issues are decided in favour of Nokia and some in favour of the Revenue, by the Special Bench. That is precisely the reason for both by the Revenue and Nokia approaching this Court by filing appeals challenging the respective findings which have gone against them. Gist of the issues raised in the appeals filed by both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst question is about the business connection of the assessee in India through the Liaison Office (LO). The necessary facts for determination of this question are 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. It is in this context the question has arisen about the role of the LO and whether such LO can be said to furnish "business connection" to the assessee in India. We may remark that the second question of law about PL is also on the role of said LO namely whether this LO can be said to constitute a PL in India. Therefore, these two questions become inter connected. The findings which arc arri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TT (A) as per which the facts and circumstances suggest that the assessee carried out business in India through its LO. However, this finding was not accepted by the Tribunal on the ground that it was not merely preparatory or incidental in nature, there was nothing on record to show that the LO had something to do with designing activity connected to the GSM. According to the Tribunal, the CIT (A) had made a general statement that the assessee always had the presence of its office, without reference to any material or evidence justifying this conclusion. In fact, concluded the Tribunal, even by law, the LO is prohibited in engaging itself in any business activities in India on behalf of the foreign enterprise, which could be considered to furnish a business connection in India. The entire attempt and focus of Mr. Parasaran, learned ASG was on the order passed by the Assessing Officer as well as CIT(A) on the basis of which it was sought to argue that the aforesaid LO constituted business connection. However, this endeavour is only to dislodge the findings of ITAT, on facts. It could not be satisfactorily explained as to how the finding of ITAT were perverse, finding of facts arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated from this business. The supply contract was different which was with the assessee who is a foreign company. The supply was made from foreign country. The existence of this equipment was at the assessee's factory before dispatch of the equipment as is clear from Clause (8) of the said Agreement. 11. In view of our detailed discussion in ITA 504/2007 and other connected matters decided on 23.12.2011, qua Ericsson, these contracts cannot be treated ay composite contracts. 12. In order to decide the issue at hand, let us recapitulate some of the salient features. The assessee is a foreign Company. Its activities involved supply of hardware and software as well as installation and commissioning of the two and also after sale services. It entered into agreements with various Cellular Operators and entered into three contracts with them namely (1) Overall Agreement, (2) the Supply Agreement and (3) the Installation Agreement. 13. In the present case, we arc concerned with the income earned by the assessee as a result of supply of hardware and software licence under the Supply Agreement. If this Supply Agreement is taken as standalone Agreement, the facts on record show that such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) giving the nomenclature of a turnkey project or works contract is not relevant in determining whether any profit arising from the supply o| equipment pursuant to such contract was chargeable to tax in India; (viii) the Supreme Court relied upon Instruction No. 1829 to come to the conclusion that the existence of an overall responsibility clause was not material in determining the tax liability arising from the offshore supply of equipment and as the said instruction continues to be in force for the assessment year relevant to the present appeals, the existence of an overall agreement should make no difference to the taxability of the equipment supplied by the assessee. 14. We may add that Section 19 of the Sale of Goods Act makes it clear that property in goods passes when the parties intend it to pass and in the present case, the intention of the parties is manifested in Article 13 of the supply contract and the provisions of Article 15 in no manner militate against such intention. Further, there is nothing in the conduct of the parties which would suggest that the express provisions of Article 13 have been given a go by. 15. No doubt, the contract in question wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. In Skoda Export (supra), the Andhra Pradesh High Court dealt with this issue in the following manner:- "We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the: sale of machinery was completed outside India; According to him, the sale was completed only in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but is not made a condition of the transfer of the property, the property once passed is not retested in the seller by the buyer's subsequent default." 19. Thus, 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, a fact which even the Board has noted in its Instruction No. 1829 dated 21st September, 1989. Although Instruction number 1829 stands withdrawn by virtue of Circular No.7/2008 dated 22nd October, 2009, such withdrawal can have no retrospective effect and the principle laid down in Instruction No. 1829 must continue to govern the assessment for the relevant year. 20. The aforesaid analysis will bring forth, the legal position that the places of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the properly in the goods passes. In the present case, the finding is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled as "PE of foreign enterprise"). It is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE"), it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Income-tax Act does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Section 44BB, 44BBA,44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise arc required to be computed under normal accounting principles and in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprise's taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India. 8. The Indian Income-lax Act, 1961 is concerned only with the profits earned in India and, therefore, a method is to be found out to ascertain the profits arising in India and the only wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned with assessment years the 1987-88 and 1988-89. Therefore, we arc not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that profits attributable to the Korean Operations was not taxable in view of Article 7 of CADI." 22. Therefore, Mr. Syali would be justified in his submission that even in a composite contract off-shore supply is to be segregated. On the contrary, here the endeavour of the Department is to club different contract as one which is clearly impermissible in the facts of this case. For the same reasons, the LO cannot be treated as PE of the assessee in India. 23. It will be of relevance to point out that Section 9 of the Act has been amended vide finance Act, 2012. The following provisions have been added to Section 9 of the Act vide sub-Section (b) of Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, it is further proposed to amend the Income Tax Act in following manner:- (i) To amend Section 9(1)(vi) to clarify that the consideration for use or right to use of computer software is royalty by clarifying that transfer of all or any rights in respect of any right, property or information as mentioned in Explanation 2, includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. (ii) To amend section 9(1)(vi) to clarify that royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly by the payer; (c) The location of such right, property or information is in India (iii) To amend section 9(1)(vi) to clarify that the term "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. However, even when such a business connection is found in the form of NIPL the contention of the assessee was that no income had accrued from such business connection and, therefore nothing was taxable in India and this contention is accepted by the Tribunal. We have mentioned this fact to put the record straight. Otherwise, in this question we are only concerned with LO as business connection as well as PE in India which we do not find to be so. QUESTION OF LAW NO. 3 & 5 25. This aspect has already been discussed in detail by us in DIT v. Ericsson, 343 ITR 370 which reasoning equally applies to these cases. The relevant portion of the said judgment is reproduced below: "55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." ** ** ** "In Advent Systems Ltd. v. Unisys Corpn., 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at- the time of the identification for sale". It was held: "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good," but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the learned counsel for the assessee that this separate specification of the hardware/software supply was necessary because of the differential customs duty payable. 59. Be as it may, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artificial construction or by dissecting the said agreement. It was submitted that the learned Authority for Advance Rulings in Roxar Maximum Reservoir Performance WLL, A.A.R. No. 977/2010 and Alstom transport v. SA, A.A.R. No. 958/2010 has applied the dictum of the Supreme Court in Vodafone in the context of composite contracts to arrive at the conclusion that the said contracts must be interpreted as a whole and not subdivided or dissected as was sought to be done in Ishikawajima. The Court was of the view that the judgment of a three Judge Bench of the Supreme Court's in Vodafone has "overruled" the Ishikawajima judgment of a two-Judge Bench of the Supreme Court. He, thus, contended that applying the tests of the Supreme Court of India in Vodafone, as applied also by the AAR in Roxar and Alstom, it is evident that the agreements entered into by the assessee with its Indian customers for setting up a GSM system have to be read as an indivisible whole and cannot be dissected or sub-divided. A submission was made that facts of the present case are slightly different from the case of DIT v. Ericsson, 343 ITR 370 (Delhi) decided on 23.12.2011. 28. It is difficult to accept the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue is factually incorrect. That contract further reveals that NIPL was responsible for undertaking acceptance test under the terms of its installation contract with the Indian customers The fact that Acceptance Test was to be done by respondent's subsidiary, NIPL has been specifically noted by the ITAT Special Bench in para 279. We are therefore, of the opinion that this submission of the Revenue is factually in correct. 30. Question nos.3 and 5 are accordingly decided in favour of the assessee and against the Revenue. QUESTION OF LAW NO. 4 31. For the reasons staled in appeals preferred by the assessee, this issue is remitted back to the AC) for fresh consideration. 32. As a result, insofar as appeals of the Revenue arc concerned, these are dismissed. ITA 1137/2006 & ITA 1138/2006 33. We have already noted above that as per the Special Bench NIPL is treated as PE of the assessee. On this basis, certain profits are attributed to this PR and the Tribunal has computed the income from Vendor Financing. These appeals are preferred by the assessee against those findings which were admitted on the questions of law:- "1. Whether on a true and correct interpretation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection, they did not go into the issue of how much income can be attributed to the activities carried out in India because that analysis was only made in respect of the subsidiary constituting a PE. Even though a business connection exists, if there is no income accruing or arising directly or indirectly through or from that business connection in India, nothing can be taxed in the hands of the assessee, It was the argument of Mr. Syali that Section 90 (2) of the Act clearly stipulates that the treaty regime can be opted if it is more beneficial to the assessee and, therefore, it was necessary to ascertain as to whether any income was attributable to the PR. It was argued that no such income could be attributed to PE in India and these aspects were not correctly appreciated by the Tribunal. Learned Senior Counsel submitted that the conclusion arrived at by the Tribunal was erroneous as it was based on various factual errors which has crept in the orders of the lower authorities. According to him, the factual errors of the orders of the AO were specifically pointed out in the submissions to the CIT (A) and specific grounds were also taken before him which are as under:- (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % subsidiary and the assessee had wide experience in this area of business, it is logical that a transaction between the assessee and the Indian subsidiary did not occur at arm's length. Mr. Syali argued that there was no basis for drawing such inference and at the time of arguments, the learned ASCI conceded that there was no evidence to support that losses were absorbed by the Indian company. Again, pertinently, the Tribunal also observed 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. The learned ASG also conceded that it was not correct. 38. As we find that the order of the Tribunal is based on many factual errors which are even accepted by the Revenue before us, it would be appropriate to refer the matter back to the Tribunal for fresh consideration on the issues as to whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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