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2018 (6) TMI 497

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..... activities of supply contract or any activity from where it can be held that any income has been received or accrued to the assessee in India or through or from any asset in India. NIPL is an independent entity and all its income from India operation is liable for tax in India. So far as the issue of fixed place PE is concerned the same does not get established at all by making to reference of providing of telephone, fax and car facility to the employees of assessee visiting India. As regards allegation that expatriates employees of assessee in India were assisting the NIPL and hence used the office of NIPL, is of no relevance qua assessee’s business, because, the technical expatriates were in India to assist/help NIPL with performance of installation activities of NIPL and not to carry out the business of the assessee which was manufacturing and sale of network equipments. This activity per se cannot be reckoned that the Indian office was being used for the purpose of assessee’s business or assessee was undertaking business in India through fixed place of business -nothing has been brought on record by the AO or ld. CIT-DR that any physical space was made available which can be s .....

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..... to expressed language of Section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arises in India. The marketing activities and installation contract undertaken by NIPL has been on principal to principal basis; and in the case of former agreement between assessee and NIPL, the payment has been made to NIPL on cost plus markup basis which has not been disturbed; and in the later agreement there is an independent contracts by NIPL with Indian customers which has nothing to do with the assessee. The income arising from both the contracts are taxable in the hands of the NIPL in India Since we have already held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts Taxability of interest from Vendor Financing, assessee has not debited the account of any customer with interest which can be treated as income of the assessee. Nowhere has it been held by the Assessing Officer/CIT (A) that such an interest is legally claimable right against the Indian customers in respect of .....

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..... telecommunication of hardware and software. In the year 1994 (i.e., on 30.03.1994), assessee had established a Liaison Office (LO) and later on a wholly own subsidiary was incorporated on 23.05.1995, named as "Nokia India Pvt. Ltd" (herein after referred to as Nokia India or NIPL). During the period when LO was in operation, the GSM equipments manufactured in Finland were sold to Indian Telecommunication operators from outside India on principle to principle basis under independent buyer-seller arrangements as well certain contracts for installation was also entered. After the incorporation of NIPL in May 1995, the installation activities were carried out by the Indian subsidiary under its independent contracts with the Indian Telecommunication operators. The following contracts as culled from the Assessment order were entered by the assessee:- S. No. Name of the customer Date of contract 1. DTL US (West) Telecommunications Services (P) Ltd. 25.06.1996 2. Fascel Ltd. 02.06.19963. 3. Tata Communications Ltd. 15.06.1996 4. Evergrowth Telecom Ltd. 17.10.1996 5. Modi Telestra (India) Ltd. 23.03.1995 6. Skycell Communications Ltd. 17.02.1995 7. Supreme No .....

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..... ayed payment was imputed at ₹ 50,000,000/- for each assessment year on account of specific clause in this regard in the offshore supply contracts. The said income was classified as commercial income and added to the income from sale of equipment and licensing of software and taxed at the rate of 55%. 4.1 Accordingly, the addition was made under the following heads:- (1) Profit on sale of hardware - INR 38,99,98,921 (2) Profit on licensing of software - INR 43,98,48,409 (3) Interest income - INR 5,00,00,000. 5. The finding of the ld. CIT (A) has been summarized by the Hon'ble High court in its judgment in the following manner:- "(i) True intention of the contract of supply was not merely to supply the equipment but was also to install and provide related services by or on behalf of Nokia. (ii) Nokia was held to have its presence in India in the form of the Liaison Office and Indian subsidiary. 'Installation PE' was also affirmed on the basis that Indian Subsidiary did not act independently in discharge of its obligation towards Indian telecom operators. (iii) India specific Profit and Loss statement, duly audited by the Auditors of Nokia, was reject .....

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..... India. (3) Nokia was not responsible for installation of telecom equipment and Nokia's arrangement with the Indian Telecom Operators did not constitute a works contract. NIPL is a separate corporation entity and is also assessed separately for its installation income. (4) However, Nokia was held to have a PE in India in the form of NIPL, on the basis that Nokia virtually projected itself in India through NIPL and Mr. Hannu Karavirta, acted for both. Losses incurred by NIPL and guarantees given by Nokia that it will not 'dilute its shareholding in NIPL below 51% without written permission of Indian Telecom Operators was used as the main basis to hold that Nokia was in a position to control and monitor NIPL's activities. (5) While upholding NIPL as a PE of Nokia, the Special Bench observed that it did not matter that there was no direct evidence for the control of NIPL by Nokia. For purposes of PE, what is relevant is only the perception that NIPL was a projection of Nokia, whether or not in fact and in truth its activities were being controlled/monitored by Nokia. Following discussion ensued on this aspect: - '... We only meant to convey that because of .....

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..... ndia in the form of a Liaison Office? Decided in favour of assessee (Para 23 of HC Order) Q2. Without prejudice, whether the respondent has a 'permanent establishment' in India because of its Liaison Office within the meaning of the relevant provision of DTAA between India and Finland? Q3. Whether any part of the consideration for supply of software stated by the Respondent to be integral to the equipment is taxable as 'royalty' either under section 9(l)(vi) or the relevant provision Decided in favour of assessee (Para 30 of HC Order) Q4. Whether on facts and in law without prejudice, the Tribunal is correct in law in attributing only 20% of the Global Net Operating Profits to the PE in the form of NIPL (Nokia India Pvt. Ltd.) a subsidiary Issue remitted back to AO (Para 31 of HC Order) Q5. Whether on facts and in law interest under section 234B is leviable? Decided in favour of assessee (Para 30 of HC Order) Assessee Appeals before Hon'ble High Court (ITA 1137 & 1138/2007 Q1. Whether on a true and correct interpretation of the relevant DTAAA the Tribunal's reasoning is right in law in holding that NIPL, (the subsidiary of the Appellant) is a permanent establishment? Al .....

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..... ect thereof. The technical support agreement referred to supra has not even been referred to by the authorities below in support of any of the allegations. Only general or loose reference has been made by the Tribunal. The dispute hence only pertains to the consideration under the Supply Agreement entered between the assessee and the various customers. 35. It was the submission of Mr. Syali that although the Tribunal held that with the Indian subsidiary there was a business connection, 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 PE. It was argued that no such income could be attri .....

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..... c. in other words, once there was an agreement the issue only revolved on the nature of the agreement. Once it is accepted that the position in 1997 and 1996 is pari-materia, there will not remain any such allegation. 37. We would like to record that the CIT (A) proceeded on the basis that Indian subsidiary incurred huge loss and the parent assessee was aware of its profitability. The CIT (A) also observed that since NPL was 100% 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 ASG 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 t .....

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..... is scattered at various places where he has taken into account several facts and has mixed up the entire concept of PE in as much as while holding LO as a PE, at the same length and based on same material facts has treated NIPL as a PE of assessee in India. In so far as the LO is concerned he has treated it to be a fixed place PE, however so far as Indian subsidiary is concerned he has treated it to be a DAPE. We shall discuss in brief the relevant observations made by the learned Assessing Officer and analyse his finding with factual clarification and analysis based on material placed on record, which has been extensively referred to during the arguments raised by the parties before us. Findings in the assessment order: 11. At page 2 of the assessment order, Assessing Officer has noted that assessee has supplied hardware and software to the following companies under following contracts:- (a) BPL US (West) Telecommunication Services Pvt. Ltd. 26.06.1996 (b) Fascel Ltd. 2.06.1996 (c) Tata Communications Ltd. 15.06.1996 (d) Evergrowth Telecom Ltd. 17.10.1996 (e) Modi Telstra India Ltd. 23.3.1995 (f) Skycell Communication Ltd. 17.2.1995 (g) Supreme No written .....

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..... f Article 5. 13. However we shall briefly discuss certain facts which has been noted by the Assessing Officer qua the LO in India so as to constitute it as a fixed place in PE but has been also harped upon the department for NIPL also. In the assessment order, the Assessing Officer's observations can be summarised in the following manner:- (a) The LO was opened in 1994; (b) Mr. Hannu Karavirta was the country manager and has signed the accounts of the LO; (c) In the year 1994 he has signed the balance sheet as country manager; (d). He has signed the contracts on behalf of the assessee on 17.2.1995 with Skycell; (e) This clearly establishes that the Indian office (LO) was a permanent establishment of the assessee where employees were signing contracts on behalf of their principals; (f) Same person Hannu Karavirta was the country manager of the LO and subsequently he was the managing director of the Indian subsidiary in 1997-98. This fact proves beyond doubt that the Indian office was not merely a liaison office but a proper office where contracts were signed and terms negotiated; (g) While working in India Hannu Karavirta was receiving salary from assessee; (h) With .....

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..... ssigned to NIPL and at that time he was employed with LO and not with Indian Company. In any case the assignment was from the assessee to the Indian company. The Assessing Officer has further observed that Mr. Hannu Karavitra was representative of the assessee as well as the Country Manager of NIPL from where he has tried to draw an inference that the assessee through its employees constitutes a PE in India. But nowhere Assessing Officer has tried to bring out on record that after he became the managing director he has signed any supply contracts on behalf of the assessee in India. The details of supply installation contracts and after sales services contracts which have also been given at page 19 of the Department's paper book are as under:- Name of customer Supply Installation After sales service Tata Telecommunications Nokia Finland Nokia India Nokia India BPL US Nokia Finland Nokia India Nokia India Evergrowth Telecom Nokia Finland Nokia India Nokia India Modi Teslstra Nokia Finland Nokia India Nokia India Skycell Nokia Finland Nokia India Nokia India Fascel Nokia Finland Nokia India Nokia India From the aforesaid installation contra .....

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..... as on paper only that these were shown as separate companies but actually the Indian company was nothing but the extension of the assessee. He further noted that in the accounts of the LO for the period ending on 31st December, 1995, there was an expenditure of ₹ 5 crore on the LO, but suddenly from 1996 onwards the expenditure has been shifted to the Indian company and the Indian company has not got any compensation for the same. This shows the close business connection between the subsidiary and the assessee. He further observes that during the Assessment Year 1998-99 the assessee had signed a marketing agreement with the Indian company, i.e., NIPL and as a part of this contract, NIPL was to provide consultancy and advisory services as well as commercial and industrial information to the assessee and for coming to this conclusion he has extensively referred to clauses of the said Agreement. He has also observed that Indian company which was reimbursed on cost plus basis (cost plus 5%) was not in accordance with industry norms and was also not based on arm's length principle. While examining the NIPL to be a DAPE of the assessee, he observed that the Indian company provided .....

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..... t dilute its equity in NIPL less than 51%. b) Contracts provide that installation work will be done by the Indian company and any notice under the installation contracts should also be sent to the assessee. c) All the contracts are signed in India and the employees of the Indian company have attended meetings at the time of finalisation of such contracts and have signed the contracts as witnesses. d) Responsibilities of the assessee in respect of minimisation of container detention charges were taken over by NIPL. e) Assessee has given a 12 month warranty and warranty services were being provided by Indian company's employees. f) Clause 8.2 referred to by him at page 23 of the assessment order refers to an independent arrangement between NIPL and TATA Cellular. j) Expatriate employees of NIPL were responsible for installation work, who were employees of the assessee or its associates and this proves that the assessee was to provide necessary assistance, information, knowledge and expertise to do the installation work. k) NIPL has made a loss and has not been paid any compensation by the assessee and this proves that NIPL was dependent agent of the assessee. l) The I .....

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..... may also not be conclusive in this behalf. When we look to assessee's operation in India, it can be said that it sold goods to the Indian operators. It had a branch office in India for carrying out marketing operations. Its employees came to India with a view to design the GSM and thereafter the contracts for sale of goods and licensing of software were made. The responsibility of the assessee did not stop there. The Indian operator had a right to make visual inspection of the equipment stored in India in appellant's warehouse or the warehouse of IC. The idea was to check whether there was any damage to the goods in the course of transportation. If such a damage was visually noticeable, the appellant was required to replace the damaged goods. This means that the transportation risks in the goods were not passed on to the Indian buyers' at the foreign port. Therefore, the case of Mahabir Commercial Co. is not applicable to the facts of this case. The reason is that in that case that the bill of lading was taken in the name of seller to secure payment. In the instant case, the appellant was responsible for safe passage of the goods in transit and, therefore, it cannot be said that al .....

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..... ts of Indian operator could not have been listed out. The requirements were worked out on the basis of design and thereafter the equipment was supplied and the software was licensed. The assessee always had the presence of its office or the office of IC to aid it in its activities. Thus, it is not a bald case of mere sales. Many more activities were required and done for setting up GSM for Indian operators. Accordingly it is held that income accrued directly to the appellant, u/s 5(2). and it also can be deemed that income accrued to it through its office in India or the office of IC in India." 17. Thereafter in paragraph 6.3 examining the taxability under the DTAA and Indian subsidiary, NIPL is a PE in India, he had made following observations in paragraph 6.3, which again for the sake of ready reference are reproduced herein below:- "6.3 The assessee had also a wholly owned subsidiary in India. It has been pointed out earlier that representation was made to the Indian operators that the assessee would to ensure that the installation contract was carried out fully by the IC, and the assessee would fully support the IC in discharge of its obligations under the contract. Not onl .....

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..... d independently in so far as their businesses are concerned and it will more appropriate to hold that the IC merely acted at the instructions of the assessee in respect of installation and marketing contracts. It was also the case of the assessee that certain averments in Appendix 6 to the effect that Indian subsidiary assumed responsibilities on behalf of the appellant for timely supply of equipment were wrongly made. But no evidence has been filed that the written agreement contained inaccurate statements. We have also seen that the appellant himself has taken up the responsibility on behalf of the subsidiary company and has gone to the extent of holding out that its equity will not be diluted below 51% till installation contract is completed, except with written permission of the Indian operator. This strengthens the view that the assertions of the assessee in the (illegible) not correct. Accordingly, it is held that the Ld. A.O. was right in holding that the appellant had a PE in India through the office of the I.C." 18. Lastly, on the issue of attribution of income from supply of equipment, Ld. CIT (A)'s finding in paragraph 7 is reproduced hereunder:- "7. Coming to the is .....

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..... n India, viz.,;- ➢ Firstly, network planning; ➢ Secondly, negotiations in connection with sale of equipment; and ➢ Lastly, the signing of supply in installation contracts. After considering the nature of activities and citing various judicial precedents the Special Bench was of the view that 20% of the net profit in respect of Indian sales needs to be attributed to PE in the form of NIPL. It was on this final conclusion both assessee and Revenue had gone in appeals before the Hon'ble High Court which have been adjudicated in the manner discussed above and also the issues which have been remitted back to this Tribunal. Arguments on behalf of the appellant/assessee: 20. Before us the learned counsel on behalf of the assessee, Mr. Deepak Chopra submitted that the Hon'ble High Court has directed with specific scope of examination by this Special Bench for the fresh consideration as to whether Indian subsidiary of the assessee would provide business connection or is it's PE in India; and if there is such business connection or PE, then the attribution of profits and that to be only on account of signing, networking, planning and negotiation of off-shor .....

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..... NIPL had no role to play at all. He submitted that one of the key allegation of the Revenue had been that one of the employee of the assessee company, Mr. Hannu Karavitra was the country manager of the LO and was also the Managing Director of the assessee company, who was negotiating the contract for supply of equipments and not only that in the official capacity of representing a NIPL, he has also carried out installation activities. In this regard, he specifically clarified that Mr. Hannu Karavitra was employed as a Country Manager of the LO prior to the incorporation of NIPL in May, 1995 and when he became the employee of NIPL from 1.1.1996 onwards, no such negotiation of supply contract was undertaken by him at all. The two contracts which were signed prior to incorporation of NIPL were done by him on behalf of the assessee in the capacity of Country Manager of LO and now that issue has been set at rest and there is no iota of evidence that after the incorporation of NIPL, he has negotiated any kind of contract for assessee for supply of equipment (i.e., when NIPL came into existence). The installation activities and on shore services assigned to NIPL were carried out by NIPL s .....

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..... O and after incorporation of NIPL became an employee of the Indian subsidiary who had also signed the installation contracts on behalf of the NIPL. Clarifying this aspect he submitted that the contracts which were signed by him earlier only pertained to Modi Telstra India Ltd. and Skycells Communication Ltd. which was prior to the existence of NIPL and after he came into roll of NIPL, he did not sign any contract with any Indian customer for the off-shore supply. He has only signed installation contracts on behalf of the Nokia India. He drew our attention to page 203 of the paper book, where the details of the supply contracts with the Indian customers along with the details of persons signing the same has been provided and from there he pointed out that no such supply contracts were signed by the NIPL. Thus, the basic condition contained in Article 5(5) that the dependent agent has habitually exercises the authority to conclude the contract does not get satisfied on the facts of the present case. Nowhere in the assessment order or in the appellate order there been allegation that NIPL has signed any contract on behalf of the assessee so as to satisfy the condition of Article 5(5). .....

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..... thereupon. No such evidence is brought forth that office of the Indian subsidiary was at the disposal of the assessee qua its activity relating to supply contract. He also drew our attention to various paragraphs appearing in the said judgment and submitted that Hon'ble Apex Court after referring to various commentaries of the eminent international authors and the judicial precedents, have laid down one fundamental principle that to ascertain as to whether an establishment has a fixed place of business or not, is that physically located premises have to be at the disposal of the enterprise. Nowhere the Hon'ble Supreme Court has given up the 'disposal' test while considering the concept of a fixed place PE. The Hon'ble Supreme Court at best has only diluted 'permanency test'. This principle laid down by the Hon'ble Apex Court has been further reiterated and explained in detail in the subsequent judgment by the Hon'ble Supreme Court in the case of ADIT vs. E-fund IT Solution Inc. (2017) 86 taxmann.com 240. 24. In so far as the allegation of the Department that employees of the assessee were carrying out the business of the assessee in India is also misplaced, bec .....

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..... business in the form of NIPL; or any such space was made available to the assessee which could be said to be at the disposal of the assessee. Again he reiterated the principle laid down by the Hon'ble Supreme Court in the case of Formula One World Championship Ltd. case and E-Fund IT Solution and concluded by stating that, when NIPL does not satisfy the test laid down by the Hon'ble Supreme Court for the 'fixed place PE', then it cannot be held that there is any fixed place PE in terms of Article 5(1) of the assessee in India in form of its subsidiary, NIPL. 26. Coming to the issue of attribution of profits to such PE, Mr. Chopra submitted that, if at all it is held that NIPL constitutes a PE in India for the activities of signing, network planning and negotiation of contract, then at the outset it needs to be seen, whether the income arising to assessee from off-shore supply of equipment is taxable under the Act or not; and only if it is taxable under the Act, then only there would arise question about its taxability under the DTAA as DTAA does not contain any charging provision. The articles of the DTAA are only relevant for the allocation of taxing rights in an internat .....

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..... ds were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) supply has to be segregated from the installation and only then would question of apportionment arise having regard to the expressed language of Section 9(1). Relying upon the aforesaid proposition, it was contented before us that firstly, the ratio is squarely applicable in case of the assessee and secondly, in the light of limited scope of remand as directed by the Hon'ble High Court, it is evident that determination of existence or otherwise of permanent establishment is a mere academic exercise as even if it is held to be so there cannot be any attribution for the activities which have allegedly been carried out by the Indian subsidiary in India. 27. Lastly, without prejudice to the aforesaid contentions, Mr Chopra submitted that assessee did not earn any profits from its Indian operations, albeit suffered heavy losses as in the relevant assessment years, the Indian Telecom industry was going through a bad phase and to enter a competitive market place lik .....

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..... during the period 01.04.1996 - 31.03.1998 for any interest for late payment, nor received any such interest. Hence, the said clause was never invoked by the Assessee on any of its customers. The assessee further submitted before the CIT (A) that there was no possibility of recovery of delayed payment and thus, when the recovery of principal itself was doubtful then there was no question of charging or earning interest on the same. The Ld. CIT(A) rejected assessee's submission and held that the fact that it was entitled to receive such interest proves that such interest had actually accrued to the assessee on delay committed by the Purchaser. CIT(A) had also rejected assessee's books of accounts on the ground that being a company it was bound to follow mercantile system of accounting and since was not followed, then its books of accounts cannot be relied upon. Thus, relying on the order of Supreme Court in State Bank of Travancore [1986] 158 ITR 102 (SC), the CIT (A) had confirmed the addition made by the AO. Mr. Chopra submitted that the conclusion drawn by the Ld. CIT (A) is based on incorrect interpretation of the order of Hon'ble Apex Court. In the case of State Bank of Travanco .....

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..... ably shown an intention to treat such interest as its hypothetical and not real income. " Thus, he pointed out that the facts in the case of state bank of Travancore were different than those in the present case to the extent that in the former, the assessee had himself debited the interest to the account of the parties and after that same was carried to suspense account while in the present case the assessee had not even raised invoices for such interest. In such a scenario it cannot be said that interest on delayed payment accrued to the assessee. He also placed reliance on the order of Hon'ble Supreme Court in case of UCO bank vs. CIT [1999] 237 ITR 889 (SC)] wherein the Hon'ble Apex Court had distinguished its order in case of State Bank of Travancore on the ground that the said judgement failed to consider the subsequent circular issued by CBDT which provided that ""interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any reco .....

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..... company who now pay for their salary. Even the customers in India have treated the assessee and NIPL as one and the same. Thus, the entire identity got blurred and NIPL is practically a virtual projection of assessee in India. He submitted that Assessing Officer has extensively discussed the agreement between the NIPL and the assessee which is appearing at page 16 of the assessment order, wherein as per the contract the NIPL was not only providing marketing and consultancy services but as well as commercial and industrial information to assessee in the field of market development, liaisioning with customers, providing information and technical assistance to the customers in India and marketing of the products of assessee in India. This goes to show that NIPL was doing varieties of activities for the assessee in India. Drawing our attention to page 369(1) to 369(11) of paper book Volume III, he pointed out that employees of the assessee were seconded to NIPL by the assessee or were working in NIPL, which shows the assessee's presence in all the activities of NIPL. Not only that, most of the salary too was paid by the assessee and only the perquisites were given by the Indian Company .....

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..... hich services has been provided by NIPL. Even it is proved that one sale of the assessee is through Indian company, then it will attract "force of attraction rule" under Article 7 of the India Finland DTAA. Thereafter, he referred to various clauses of the agreement entered into between the assessee and NIPL with regard to various kinds of responsibilities and obligations carried out by both the parties. He further referred to the statement of one, Mr. Simon Piers Beresford Wylie, MD of NIPL which AO had recorded during the course of assessment proceedings on 14.02.2000. Further drawing our attention to question nos. 8, 9 and 10, he pointed out that NIPL was carrying out the marketing activities for the assessee and also administrative support like office staff, cars, telephones, etc. which were provided by the Indian company to the assessee. It was because of loading of such expenditure that the Indian company was having huge losses despite that arrangement between the assessee and Indian company was cost plus 5% mark up. Apart from that, one important fact he pointed out that as per the arrangement, the assessee was not to dilute the equity of share of 50% of NIPL which shows tha .....

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..... clarified that these expatriates were not on the rolls of NIPL. In Ques. No. 10 of the above referred statement, Mr. Simon Piers Beresford Wylie was asked as to what were the facilities provided by NIPL to the expatriates coming in India for marketing and signing contracts on behalf of Nokia Finland. It was affirmed by him that administrative support of office, cars, telephone was provided by NIPL to the expatriates of the assessee. The relevant extract of the statement is as under:- "Q.10. What all facilities were provided by Nokia Ltd. to the expats coming for marketing and signing the cont. on behalf of Nokia Ltd. Finland? Ans. Administrative support like office support, cars, telephone etc. is provided by Nokia Limited. This statement is also corroborated by the memorandum of the meeting placed by the assessee in its paper book. Further, the office place of the assessee and the Indian subsidiary company were the same. This fact was recorded in the statement as question no. 15 and also confirmed by the assessee in its memorandum dated 15-02-2000 recording the minutes of the statement taken on oath. The same is for sake of ready reference is reproduced here: "Q 15. Are .....

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..... iary activity. These activities performed through the fixed place provided by NIPL construed the core activity of the assessee and thereby create a PE of the assessee. He reiterated that the details regarding the name and duration of stay of the expatriates in India were asked repeatedly by the Assessing Officer from the assessee however despite reminders the assessee did not furnish these details and he again drew our attention to page no. 38 of the assessment order for Assessment Year 1998-99. He submitted that, if the overall gamut of the facts and evidences is to be analyzed it will go to show that assessee performed income generating activities of marketing, contract negotiations, network planning, etc., by NIPL which was at its disposal. There was a virtual projection of the assessee in India through NIPL which clearly establishes not only a business connection in India as well as establishment of PE in India in the form of its subsidiary NIPL. The NIPL being a subsidiary of assessee in India and consequently it has a position to control and monitor its activities. He also referred to certain paragraphs of earlier Tribunal order and drew our attention specifically to paragrap .....

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..... ived and it was a notional income which was added by the Assessing Officer cannot be accepted, because as per the agreement between the assessee and the customers the interest would accrue to the assessee and the contract provided that charging of interest on vendor financing and outstanding payment. The assessee company which is following mercantile system of accounting, therefore, the agreement in force during the year has to be taken into consideration and the contention of the assessee that the said clause was non operative cannot be accepted. Interest income was to be recognized on accrual basis and therefore, the Assessing Officer has rightly held that it is a part of the total income. Thus, he strongly relied upon the order of the Assessing Officer as well as the ld. CIT (A). 34.1 In sum and substance his arguments on PE can be summarized in the following manner:- ➢ Assessee's employees were stationed in India and provided services in India, which is evident that expatriates deputed were on payroll Nokia Ltd. ➢ Various expatriate employees visited India to provide services regarding supply of equipments, for which NIPL provided administrative support, like .....

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..... certain facts which have been highlighted in the following manner:- i. The Indian subsidiary was executing contracts on behalf of the appellant through its employees. ii. All the contracts with the operators were signed in India. iii. The employees of Indian Office (LO) were compensated by some other entity. iv. From 1996 onwards all the expenses of Indian office were shifted to the Indian subsidiary. v. The employees of the Indian office were responsible for execution of the contracts with operators. vi. No compensation was paid to IC for marketing and support services prior to 1997. vii. PSC was set up in India to supervise the supply contract with TATA. viii. Certificate of acceptance was signed by Indian subsidiary on behalf of the appellant. ix. The appellant has accepted that the license of customized software is not sale, but royalty, and x. The appellant has actually earned interest from Vendor financing and on account of delayed payments by the operators in the relevant previous year. 36. After noting the aforesaid facts, Hon'ble High Court observed that the finding of fact by the Special Bench specifically with regard to point nos. i, iv, v and vi .....

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..... rk 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 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. If yes, to what extent and basis thereof. Likewise, the question of notional interest on delayed consideration of supply of equipment and liaisioning of software taxable in the hands of assessee as interest from vendor financing would be considered afresh. The appeals of the assessee are thus disposed of with the aforesaid direction remitting the case rack to the Tribunal for fresh consideration on these issues." 37. From the findings and observation appeari .....

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..... t and technical support agreement have already been assessed in the hands of Indian subsidiary and there is no adverse action in respect thereof. ➢ Thirdly, there were various factual errors which has crept in the order of the lower authorities which has been highlighted by the Hon'ble High Court and the learned Additional Solicitor General appearing on behalf of the Revenue had not controverted this fact that these error do have crept in. Most of such erroneous assumptions of facts have been highlighted by the Hon'ble High court that they are based on presumptions and suppositions. ➢ Fourthly, there was no basis for drawing inference that transaction between the assessee and the Indian subsidiary did not occur at arm's length and there is no evidence to support that the losses of the assessee have been absorbed by the Indian company. ➢ Fifthly, another important fact which has been observed by the Hon'ble High Court in paragraph 37 is that the Tribunal has considered NIPL to be PE of the assessee being subsidiary as it is the virtual projection of the company in India and further accounts of the Indian subsidiary show that the company had inc .....

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..... f installation activity and other connected activities, assessee had established a Liaison Office on 30th March, 1994. Two such agreements were signed between the assessee (through LO) and Indian Cellular Operators viz., Modi Telstra India Ltd. on 30.03.1995 and Skycell Communication Ltd. on 17.02.1995. These contracts were signed by the assessee during the period when there was a LO of the assessee in India. Later on a wholly own subsidiary in the name of Nokia India Pvt. Ltd. was incorporated on 23.05.1995. After the incorporation of NIPL, all the contracts for installation were either assigned or separately entered by the NIPL with the customers. Marketing Support Agreement was also entered in the year 1996 and 1997 between the assessee and NIPL for providing marketing services to assessee for whom NIPL was compensated with cost plus markup. Technical support agreement had also been entered by the NIPL with the Indian customers in respect of projects installed again on principal to principal basis. However, the off-shore supply contract of GSM equipments between the assessee and Indian customers continued to be done by the assessee. In the light of the facts and background discu .....

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..... cle, the term 'permanent establishment' shall be deemed not to include - ( a ) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise ; ( b ) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; ( c ) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpo.se of processing by another enterprise ; ( d ) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise ; ( e ) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities, solely of a preparatory or auxiliary character in the business of the enterprise. (5) Notwithstanding the provisions of paragraphs (1) and (2), where a person - other than an agent of an independent status to whom paragraph (7) applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a perma .....

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..... e which are specifically not deemed to be PE and once such exclusion which would be relevant for the purpose of our case is clause (e), which provides for maintenance of fixed place of business solely for the purpose of ---------------,being activities, solely of a preparatory or auxiliary character in the business of the enterprise; ➢ Para 5 further excludes certain kinds of agent of enterprise that if the business is carried out on through the agents then it is deemed to have a PE, if he undertakes any of the activities as described in clauses (a) and (b). Here the crucial term which has been emphasized is that he habitually exercises in that state an authority to conclude contracts in the name of the enterprise; ➢ Para 6 carves out specific activity of the agent with regard to the insurance business; and ➢ Paragraph 7 provides that an enterprise shall not be deemed to have a PE simply because it carries out the business through agent of an independent status if such an agent is acting in the ordinary course of business, except that if such an agent is devoted wholly or almost wholly on behalf of that enterprise, then it is not reckoned to be as an inde .....

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..... cept of fixed place PE in the case of NIPL. Accordingly, we are proceeding with adjudication of the fixed place PE qua NIPL. In para (1) of Article 5, one of the crucial terms used is 'fixed place of business through which the business of an enterprise is wholly or partly carried on'. The word 'through' assumes a great significance, because it enlarges the scope of a fixed place in as much as where no fixed premises may belong to an enterprise but even if a particular space is made available at its disposal then such place is reckoned to be place of business under this paragraph. Now it is well accepted principle that if an enterprise has a certain specified place at its disposal which is used for its business activities, then it is sufficient to constitute a place of business even though such availability of space to an enterprise may not give it any legal right to use that place. The entire concept of fixed pace PE under Article 5(1) under the OCED model convention had come up for consideration before the Hon'ble Apex Court in the case of Formula One World Championship Ltd. vs. CIT (supra). Their Lordships have threadbare discussed the concept after referring to various com .....

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..... has also been referred extensively by the Hon'ble Court and observed that the word 'through' in the Article 5, emphasis is that the place of business will only qualify, only if the place is at the disposal of the enterprise. Referring from Klaus Vogel, the Hon'ble Court observed that the enterprise will not be to use the place of business as an instrument for carrying out its business unless it controls the place of business to a considerable extent. Though hasten has been added that there are no absolute standard for the modalities and intensity of control. The disposal is the power to use the place of business directly. Further the Hon'ble Court is also referred to OECD commentary on Model Tax convention in the following manner:- " 33) OECD commentary on Model Tax Convention mentions that a general definition of the term 'PE' brings out its essential characteristics, i.e. a distinct "situs", a "fixed place of business". This definition, therefore, contains the following conditions: - the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment. - this place of business must be "fixed", i.e. it must be e .....

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..... g and therefore do not constitute a fixed place of business through which the business of that enterprise is carried on (depending on the circumstances, however, paragraph 5 could apply to deem a permanent establishment to exist). (b) Second example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g. a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company will constitute a permanent establishment of his employer, provided that the office is at his disposal for a sufficiently long period of time so as to constitute a "fixed place of business" (see paragraphs 6 to 6.3) and that the activities that are performed there go beyond the activities referred to in paragraph 4 of the Article. (c) The third example is that of a road transportation enterprise which would use a delivery dock at a customer's warehouse every day .....

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..... enterprise is wholly or partly carried out. 67) We are of the firm opinion, and it cannot be denied, that Buddh International Circuit is a fixed place. From this circuit different races, including the Grand Prix is conducted, which is undoubtedly an economic/business activity. The core question is as to whether this was put at the disposal of FOWC? Whether this was a fixed place of business of FOWC is the next question. We would like to start our discussion on a crucial parameter viz. the manner in which commercial rights, which are held by FOWC and its affiliates, have been exploited in the instant case. For this purpose entire arrangement between FOWC and its associates on the one hand and Jaypee on the other hand, is to be kept in mind. Various agreements cannot be looked into by isolating them from each other. Their wholesome reading would bring out the real transaction between the parties. Such an approach is essentially required to find out as to who is having real and dominant control over the Event, thereby providing an answer to the question as to whether Buddh International Circuit was at the disposal of FOWC and whether it carried out any business therefrom or not. T .....

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..... aries and also the judgment of Formula One World Championship Ltd. and held that there must exist a fixed place in India which is at disposal of foreign enterprise through which they carry on their own business. In that case, the Indian subsidiary company of the foreign enterprise was rendering support services which enabled the foreign enterprise in turn to render services to its client and the outsourcing of work to the Indian subsidiary was held to be not giving rise to fixed place of PE. This judgment of the Hon'ble Supreme Court nearly clinches the issue before hand in so far as role of Indian subsidiary while deciding the fix place PE. 44. Now in the light of the aforesaid principle we shall examine the various kinds of contracts/ activities undertaken by the assessee and the facts and material on record, specifically with reference to the following activities which have been identified by the Hon'ble High Court while remanding the matter back to the Tribunal. (a) Signing of contracts; (b) Network planning; (c) Negotiation of off-shore contract in India. As discussed earlier, the Assessing Officer has noted that LO was engaged in the activities of network planning .....

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..... ts were signed when NIPL was not even in existence. After the incorporation of NIPL on 23.05.1995, not an iota of evidence has been brought on record that Mr. Hannu Karavitra had signed any contract on behalf of the assessee. He was a Managing Director of NIPL from 01.01.1996 to 31.07.1999 and after he was employed with NIPL, he has not signed any supply contracts with the Indian customers. All the installation contracts which have been signed by the NIPL have been executed by the NIPL independently with the Indian customers on principal to principal basis and any income received or accrued thereof, was subject to tax in India. During the course of the hearing, it was brought to our notice that on one assignment letter dated 24.05.1995 was signed by Mr. Hannu Karavitra whereby on shore services were assigned to NIPL and while working in India he was receiving salary from assessee only. First of all, Mr. Hannu Karavitra was employed with the LO earlier, prior to the incorporation of NIPL and he was not employed with the Indian company. In any case assignment was from assessee to NIPL and no authority was being exercised on behalf of the assessee company vis-à-vis the customer .....

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..... ities has been carried out by the assessee after the incorporation of the Indian subsidiary NIPL and this fact has been accepted by the Hon'ble High Court also. Thus, any activities relating to NIPL under the independent contract cannot be reckoned to constitute a PE in the context of Article 5(1); and even if for argument sake it is accepted that the activities of NIPL were managed by assessee, then also, it does not constitute PE qua activities of supply contract or any activity from where it can be held that any income has been received or accrued to the assessee in India or through or from any asset in India. NIPL is an independent entity and all its income from India operation is liable for tax in India. 46. Another set of allegations which can said to have some significance is that; whenever the employees of the assessee were visiting India in the context of networking, assigning or negotiation of off-shore supply contract, the employees of NIPL were either assisting by providing certain administrative support services made available in the form of telephone, fax and conveyance; or the NIPL was providing technical and marketing support services to assessee and hence it is as .....

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..... nistrative support like office support, cars, telephones, etc. was being provided by NIPL; and earlier office of liaison office of NIPL are at the same premise in the year 1995. Relying on such statement, ld. CIT-DR has vehemently contended that this material facts itself goes to prove that there is a fixed place PE which was at the disposal of the assessee. In light of such contention, we have to see whether any place of business was provided by NIPL to the assessee which can be said to be at a disposal of the assessee for carrying out its business wholly or partly in India. The sequitur of the judgment of Hon'ble Apex Court as incorporated above is that, in order to ascertain as to whether an establishment being a fixed place for PE or not is that physically located premises have to be 'at the disposal of the enterprises'. Nowhere the disposal test has been diluted by the Hon'ble Apex Court rather it has been reiterated at various places not only in the Formula One World Championship judgment but also in the subsequent judgment of E-Fund. As culled out from the certain observations of the Assessing Officer as well as the statement of the MD that the employees of the asses .....

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..... ing to reference of providing of telephone, fax and car facility to the employees of assessee visiting India. As regards allegation that expatriates employees of assessee in India were assisting the NIPL and hence used the office of NIPL, is of no relevance qua assessee's business, because, the technical expatriates were in India to assist/help NIPL with performance of installation activities of NIPL and not to carry out the business of the assessee which was manufacturing and sale of network equipments. This activity per se cannot be reckoned that the Indian office was being used for the purpose of assessee's business or assessee was undertaking business in India through fixed place of business. The test laid down by the Hon'ble Supreme Court does not get satisfied in this case as nothing has been brought on record by the AO or ld. CIT-DR that any physical space was made available which can be said to be at the disposal of assessee for assessee's own business of supply and sale of equipments. 47. Now coming to the paragraphs 2, 3 and 4 of Article 5, it is not the case of any one that the NIPL constitutes any kind of PE under these provisions. Albeit if one goes by clause (e) .....

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..... ise on behalf of the enterprise, then he is deemed to be DAPE. From the material facts discussed in detail herein above are that the entire contract supply of off-shore equipments has been done by the assessee outside India and no activity relating to off-shore supply has been performed in India. There is no material fact on record that NIPL has negotiated or concluded any contract of supply of equipment on behalf of the assessee which binds the assessee. The title of the goods supplied is directly passed on to the customers in India and NIPL neither undertakes any negotiation process nor assist in delivery of goods. Under a DAPE the character of the agent can be said to be determined; firstly, his commercial activities for the enterprise is subject to instruction or comprehensive control; and secondly, he does not bear the entrepreneurial risk. The agent must have sufficient authority to bind enterprise's participation in the business activities and the agent involves the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is the authorization to act on behalf of somebody else so much as to conclude the contracts. Here the NIPL .....

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..... ssee has been carried out by NIPL and the employees if at all were for the NIPL's activities in India for which it is liable to tax in India. Further, for the purpose of this clause also, if activities are of preparatory and auxiliary in nature, then again the same will not satisfy the threshold of DAPE. The Assessing Officer has also referred to the fact that in the accounts of LO for the period ending 31st December, 1995, there was an expenditure of ₹ 5 crores which suddenly from the year 1996, got shifted in the Indian company and from there he draws an inference that Indian company has not received any compensation for the same from assessee and this shows the close business connection between the NIPL and the assessee. This observation again is of no consequence, because when the Indian company came into existence in May, 1995 operations of the LO were slowly scaled down and there was no was requirement of the LO and the employees of the LO were transferred to the Indian Company w.e.f. June 1995. In so far as the allegation of the Assessing Officer that NIPL is a dependent agent, we find that nowhere he has brought on record that NIPL had any authority to conclude contra .....

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..... oyees of the assessee, only proves that assessee provided necessary assistance, information, knowledge and expertise to do the work. This observation of AO only goes to prove that that expatriates employees deputed in NIPL are in connection with the installation contracts executed by NIPL and since there is no concept of 'Service PE' in India, therefore, nothing turns around on such observation. Thus, on the facts and material on record, we hold that there is no DAPE within the scope and terms of Article 5(5) of the treaty. 50. Admittedly, paragraph 6 of Article 5 is not applicable. Paragraph 7 of Article 5 deals with 'agent of independent status.' Independence of an agent has to be both legal as well as economic independence. Legal independence has to be seen from the context, whether the agent's commercial activities for his principal are subject to detailed instructions or comprehensive control by the principal or not; or to what extent the agent exercises freedom in the conduct of his business on behalf of principal; or the agent's scope of authority is affected by limitations on the scale of business which may be conducted by the agent. Economic independence has to be seen fr .....

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..... discussed in detail in foregoing paras, hence no profit can be attributed from these activities as held by the Hon'ble High Court. Even if NIPL is held to be; subject to significant control with respect to the manner in which work is to be carried out; is subject to detail instructions from the assessee as to the conduct of work; is exercising less freedom in the conduct of business on behalf of assessee; seeking approval from the assessee for the manner in which the business is to be conducted; etc., then all such control if at all could be only in relation to the contracts carried out by the NIPL in India to ensure technical quality of the contact work done. When there is absolutely no income generated to the assessee from installation contract work done in India by the NIPL, then all such comprehensive control does not have much relevance. Article 5(7) will apply only when some of the activities of the foreign enterprise are done by an agent wholly or almost wholly on behalf of that enterprise. Here the crucial test is that activities of the assessee must be carried out through the agent wholly and almost wholly for the assessee. When installation activity is not carried out by .....

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..... mitted that have been referred and relied upon by the Hon'ble Supreme Court in the case of Formula One (supra) also. First of all, the concept of 'virtual projection' has to be seen in the context of any of the ingredient of PE enshrined in Article 5. Hon'ble Andhra Pradesh High Court while explaining the concept of fixed place PE, observed that the PE postulates existence of a substantial element of enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. Such a fixed place should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country to the soil of another country. The concept of 'virtual projection' flows from the fixed place itself or with any other parameters of establishment of PE under Article 5. This concept alone is not relevant but has to be seen in relation to fixed place or any other concept of PE. The Hon'ble Supreme Court while coming to the conclusion in paragraph 76, held that not only Buddh International Circuit was a fixed place where the commercial or economic activity of conducting Formula One Championship was carrie .....

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..... all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. '' First requirement is whether any income is deemed to have been received in India to non-resident. Here on the facts of the case this clause may not be applicable, because undisputedly the title of the goods of the GSM equipments supplied by the assessee has been transferred outside India and the payments have also been received by the assessee outside India. Secondly, coming to the provisions of subsection 2(b) which deals with accrual of income or deemed accrual of income, the provision of Section 9 has to be seen as it stood at the relevant time which read as under: "Income deemed to accrue or arise in India. 9 (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [* * *] or through the transfer .....

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..... on, Mr. Deepak Chopra relied upon the judgment of Hon'ble Supreme Court in the case of CIT vs. R. D. Aggarwal and Co. and Another, reported in (1965) 56 ITR 20 (SC) and submitted that mere performance of some activities in the Indian Territory does not afford a business connection of foreign company in India. What is important to examine here is that the trading activities within the territories should be linked with the trading activities carried on outside the taxable territories. Here, in this case, he submitted that the activity in question is the off-shore supply of equipment for which relevant trading activities are procuring of raw materials, manufacture of finished goods, sale and delivery of goods, which all have been carried out outside India. Only the marketing activities which have been performed by the Indian Company is somehow relevant, but for that there is a separate agreement between the assessee and NIPL and already income arising there from to the Indian company has been offered to tax in the hands of NIPL. The activities performed by NIPL only led to making of offers by the customers in the taxable territories to purchase goods manufactured by the non-reside .....

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..... ot enough to trigger taxability in India in respect of off-shore supply of telecomm equipment to Indian customers because there must be same activity carried out in India relating to the off-shore supply. 55. On the other hand, learned CIT-DR has reiterated the same set of arguments that right from negotiation of contract to supply was undertaken through employees of the assessee either independently or through NIPL and the entire marketing activities for such sale has been done through NIPL. Hence, it constitutes a business connection in India. 56. We have heard the rival contentions made by the parties and also material placed on record. First of all, we find that the Hon'ble High Court in the context of LO has held that there is no material or evidence on the basis of which it can be said that LO can offer a business connection to assessee in India and it does not constitute PE of the assessee in India. The same reason ostensibly applies to NIPL also, as the terms and conditions of supply contract continues as spelled out in para 17 of the judgment remains the same. Further, the Hon'ble High Court in paragraph 13 has noted that income which has been earned by the asses .....

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..... nce of the overall responsibility clause was held to be irrelevant in Ishikawajima's case and likewise the overall agreement executed in the assessee's case should not make any difference to the taxability of the equipment supplied; (vii) giving the nomenclature of a turnkey project or works contract is not relevant in determining whether any profit arising from the supply of 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." In paragraph 15, the Hon'ble Court has further observed that no doubt the contract in question was signed in India but it may not be a relevant circumstance to determine the taxability of such an income and for this proposition they have referred the judgment of .....

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..... which has not been disturbed; and in the later agreement there is an independent contracts by NIPL with Indian customers which has nothing to do with the assessee. The income arising from both the contracts are taxable in the hands of the NIPL in India. Thus, the finding and the ratio of the Hon'ble High Court would apply mutatis mutandis though rendered in the context of LO will also apply in the case of NIPL as qua the supply contract there is no material change in any case. 58. Apart from the judgment of Hon'ble Delhi High Court in the case of assessee as discussed above, we find that, Hon'ble High Court in Nortel Network India International Inc. (supra) somehow on similar set of facts has reiterated the same principle. Before that the relevant facts in the said case were as under:- The assessee was incorporated in the USA and was a tax resident of the USA. The assessee was a part of the N group which was stated to be a leading supplier of hardware and software for global system for mobile communication cellular radio telephone systems. The assessee was a step-down subsidiary of N, a company incorporated in Canada. N(C) also had an indirect subsidiary in India N (I). .....

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..... ably attributable to operations carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of Assessee's income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India. 44. There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1) (i) of the Act, no part of Assessee's income could be brought to tax under the Act. It is only when a non-resident Assessee's income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. xxx xxx xxx xxx xxx xxx 47. As noticed earlier, there seems t .....

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..... t the disposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had acted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices of Nortel India constituted a fixed place business PE of the Assessee or Nortel Canada. Nortel India is an independent company and a separate taxable entity under the Act. There is no material on record which would indicate that its office was used as an office by the Assessee or Nortel Canada. Even if it is accepted that certain activities were carried on by Nortel India on behalf of the Assessee or Nortel Canada, unless the conditions of paragraph 5 of Article 7 of the Indo-US DTAA is satisfied, it cannot be held that Nortel India constituted a fixed place of business of the Assessee or Nortel Canada. 70. The AO has further alleged that the offices of Nortel LO and Nortel India were used as a sales outlet. In our view, this finding is also unmerited as there is no material which would support this view. The facts on record only indicate that Nortel India negotiated contracts with Reliance. Even assuming that the contracts form a part of the single turnkey contract, which include supply of .....

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..... rmining the Arm s Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee." This judgment of Hon'ble Delhi High Court clearly clinches the issues in hand, both on the point of taxability u/s. 9(1)(i) and also in the context of PE. Thus, respectfully following the ratio laid down in aforesaid judgment of Hon'ble High Court in the case of assessee as well as in the case of Nortel, we hold that income of the assessee from off-shore supply of equipments in pursuance of supply contract cannot be brought to tax in India. 59. Since we have already held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts. Accordingly, the i .....

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..... nce the benefit of credit period given to the customers has neither accrued to the assessee nor acknowledged by the other person, then it cannot be said that interest on notional basis should be calculated for the purpose of taxation. Otherwise, it is a well settled proposition that income cannot be generated, actual or accrued if no income has actually been accrued or received to the assessee. There has to be some income which has resulted to the assessee and even though in books, entries have been made about hypothetical income which does not materialized at all cannot be brought to tax. The income tax is levy on real income, i.e., the profits arrived on commercial principles. Assessee must have received or acquired a right to receive the income before it can be taxed. In other words, there must be a debt owed to it by somebody if it is to be taxed on accrual basis unless a debt has been created in favour of the assessee by somebody it cannot be said that income has accrued to it or it has a right to receive the income. This proposition has been well settled by Hon'ble Supreme Court in the case of E. D. Sassoon Co. Ltd. Vs. CIT, (1954) 26 ITR 27 (SC), CIT vs. Ashokbhai Chaama .....

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..... s decided in favour of the assessee and against the Revenue. Order pronounced in the open Court on 5th June, 2018. ---- Sd/xx Sd/xx (PRAMOD KUMAR) (N.K. SAINI) (AMIT SHUKLA) (ACCOUNTANT MEMBER) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) DATED: 05th June, 2018 PKK: Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR Assistant Registrar My separate note attached Sd/xx Pramod Kumar Accountant Member IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI SPECIAL BENCH 'A', NEW DELHI [Coram: N K Saini AM, Pramod Kumar AM and Amit Shukla JM] ITA Nos. 1963 and 1964/Del/2001 Assessment years: 1997-98 and 1998-99 Nokia Networks OY, Finland ……………...........Appellant [PAN: AAACS0343R] Vs Joint Commissioner of Income Tax Non Resident Circle, New Delhi ………….……......Respondent ORDER Per Pramod Kumar: 1. I have my reservations on the views expressed in the draft order, so far as the questions of existence of a business connection and permanent establishment of the assessee company and the profit attribution thereto is concerned. These issues were d .....

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..... ary. The Assessing Officer noted that the assessee company had opened its India liaison office in 1994, with Mr Hanu Karavitra as its country manager, and the same Mr Karnavitra was later Managing Director of the Nokia India Pvt Ltd- assessee's wholly owned subsidiary in India. The Assessing Officer also noted that "Indian office was not merely a liaison office but was a proper office where contracts were signed and terms were negotiated" and that "while working in India, Mr Karavitra was receiving salaries from the assessee company also". The Assessing Officer took note of the role played by the assessee company in he operations of Indian subsidiary, and then discussed the contents of certain contracts to highlight that awarding of technical support services contracts, in respect of the equipment supplied by the assessee company, involved a specific undertaking to the end customer to the effect that "as long as any part of the commitments under the technical support agreement remain outstanding, we will continuously and diligently monitor business affairs of Nokia India with the aim of ensuring that the company at all times is in a position to meet its commitments to you" and that .....

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..... r the due and timely discharge and performance, in accordance with the said services contract, of all the obligations and liabilities of Nokia India arising from and pursuant to the said services contract. This guarantee constitutes an independent and legally valid undertaking in your favour. We represent to you that it is duly approved by the Directors, Nokia Telecommunications OY 3. The Assessing Officer was of the view that the above arrangement shows that the Indian subsidiary of the assessee company is a permanent establishment of the assessee company. His reasoning, as set out at page 21 of the assessment order for the assessment year 1997-98, was as follows: (a) The Indian subsidiary company is a dependent agent of the assessee company because (a) even though the Indian subsidiary company has concluded contracts with various cellular companies for installation of equipment and services, the entire responsibility rests with the assessee company; (b) the assessee company has given written guarantee to the effect that it will be responsible for proper discharge of obligations by the Indian subsidiary; and (c) the assessee company has even given undertaking that, except wit .....

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..... assessee company to incur costs on behalf of the Indian company". It was noted that "the Indian company has not been paid any compensation by the foreign company during the year". He thus concluded that, for this reason, it is clear that the Indian subsidiary is acting as a dependent agent of the assessee company. (e) The Assessing Officer then noted that the Indian subsidiary was "economically dependent" on the assessee company, as "all its shares are held by Nokia Telecommunications OY and all its receipts are from contracts executed by it for supplies made by Nokia Telecommunications OY" and as "there is total control over the management and affairs of Nokia Telecommunications Pvt Ltd since its is a 100% subsidiary and further the foreign company is giving guarantee on behalf of Indian that they (the assessee company) will see to it that contracts are properly executed" 4. Having so analysed the facts of the case, the Assessing Officer proceeded to form his opinion about these arrangements, at page 25 of the assessment order for the assessment year 1997-98, as follows: In the light of the aforesaid facts, it is clear that the Indian company is nothing but an extension of .....

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..... business from which it carried out these operations" and "this fixed place of business was the liaison office together with Indian company". It was also noted that the visiting staff of the assessee company were given all the administrative support at this location, that "the Indian company was maintaining stocks of spare parts for replacement under the warranty period" and that "the Indian company provided the helpline facility for any type of problems accruing to the customer". He then referred to certain dates and the signatories of the contracts, an aspect on which facts have been set out fairly elaborately in the lead order, and I, therefore, need not really supplement the same. Suffice to say that conclusion of the Assessing Officer was that the assessee company had a PE in India, and then, after taking note of the fact that gross profit of the assessee company was 40.87% in 1997 and 39.4% in 1996, the Assessing Officer adopted 40% as the gross profit earned by the assessee for the assessment year 1997-98. The net sales, converted into INRs, being ₹ 146,61,61,361, the gross profit was worked out at ₹ 41,05,25,180 by assuming that hardware sale was 70% of total sal .....

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..... it lends credence to the AO's assertion that the IC was not properly remunerated under the contracts, guaranteed by the appellant and a part of money that it ought to have got was diverted as sale proceeds of the equipment. Nonetheless, even if this argument is rejected, the fact is that the IC incurred substantial loss and, therefore, it was not properly remunerated for the services rendered by it either in respect of marketing agreement or in respect of installation contracts. The IC is a wholly owned subsidiary of the appellant and, therefore, appellant was in the knowledge of prices put on the installation contracts. It had wide experience in this line of business and yet the IC undertook business in a manner that, it incurred substantial losses. Therefore, it cannot be said that the transactions between the assessee, the operators, and IC were at arms length. In fact the agreements by the assessee with the Indian operators on one hand and IC with the Indian operators on the other can be said to have been arranged in a manner that loss would be incurred in the IC. In view thereof, there is reason to hold that the IC constituted the PE of the assessee and observed losses on beha .....

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..... are. Accordingly, assistance of Rule 10 of the I.T. Rules is taken to compute profit on the basis of global accounts. The global accounts showed net profit of 10.8% as mentioned by the Ld. AO in the assessment order. Therefore, the net profit is taken at 10.8%. The whole of this profit cannot be attributed to Indian operations as activities regarding manufacture and development of products etc. was undertaken outside India. Therefore, the profits attributable to operations in India are taken at 5% of the sales to the Indian Parties. 6. Aggrieved by the stand so taken by the CIT(A), assessee carried the matter in appeal before this Tribunal, and, in the first round of proceedings, a coordinate special bench of the Tribunal concluded, in a rather brief operative portion of the order on this point, as follows: Taking up the second part of the second question as to whether the Indian subsidiary of the assessee, referred to as NTPL, can be considered as a PE of the assessee in India, we are of the view that having regard of the findings recorded by both the AO and the CIT(A), the NTPL can be considered as a PE. The issue has been dealt with in para 6.3 of the order of the CIT(A), th .....

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..... mbered, is a 100 per cent subsidiary of the assessee, in such a manner that NTPL became a virtual projection of the assessee-company in India. The other point made by the IT authorities was that the assessee even represented to the Indian cellular operators that it will not dilute its share holding in the Indian subsidiary below 51 per cent without the written permission of the Indian cellular operators. This allegation of the IT authorities has not been refuted or proved wrong by the assessee in the course of the proceedings before them or even before us. This also shows that the distinction between the two corporate entities, namely, the assessee on one hand and NTPL, its 100 per cent subsidiary, on the other hand, virtually got blurred with the result that it can be said that when the Indian cellular operators were dealing with NTPL in connection with the installation contract and marketing agreement, they were in fact dealing with the assessee itself. We are therefore, of the opinion that the test propounded by the Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust (supra) is fully answered. We are, therefore, unable to find fault with the CIT(A) for hold .....

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..... ncurred huge loss and the parent assessee was aware of its profitability. The CIT(A) also observed that since NPL was 100% 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 ASG 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". 9. It was in this backdrop of these factual errors, as noted by Their Lordships, that Hon'ble Delhi High Court refer .....

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..... between the assessee and the Indian subsidiary did not occur at arm's length" but it was argued before Their Lordships that "there was no basis for drawing such inference and at the time of arguments, the learned ASG conceded that there was no evidence to support that losses were absorbed by the Indian company" [These are errors in the nature of error of not appreciating incorrectness of the findings of the CIT(A) which, as learned ASG agrees, are not based on any material ] - The conclusion arrived at by the special bench "was erroneous as it was based on various factual errors which has crept in the orders of the lower authorities (emphasis supplied by me now)"……..and "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 (emphasis supplied by me now) which are as under:- (i) The Indian subsidiary was executing contracts on behalf of the appellant through its employees. (ii) All the contracts with the operators were signed in India. (iii) The employees of Indian Office (LO) were compensated by some other entity. (iv) From 1996 onwards all the expe .....

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..... t out in above. What has been thus pointed out by Their Lordships are errors in reasoning adopted by the Special Bench, and the fact that, in the light of these errors, the conclusions arrived at by the Special Bench are required to be revisited. However, by no stretch of logic, these observations can be construed as a decision on merits, in favour of the assessee, and reversal of the findings of the Special Bench. To this extent, perceptions of the learned counsel for the assessee, on the implications of Hon'ble High Court's judgment is not correct. Except for the mistakes so specifically pointed out by Their Lordships, all the issues are left open for adjudication and determination. It is in the backdrop of this factual scenario that the questions to be decided by this bench, so far as the existence of the permanent establishment and profit attribution thereto is concerned, are as follows: (a) Whether, on the facts and in the circumstances of this case, the subsidiary company of the assessee, namely Nokia India Pvt Ltd (NIPL), would constitute business connection or permanent establishment of the assessee company, i.e. Nokia OY, Finland; (b) In the event of NIPL being held t .....

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..... nce of permanent establishment under the basic rule is concerned, Hon'ble High Court has comprehensively decided the issue in favour of the assessee, and all that can, therefore, be examined is whether or not the assessee company had a DAPE (dependent agent permanent establishment) by way of the Indian subsidiary (i.e. Nokia India Pvt Ltd). 14. I do not share the perceptions of the learned counsel. Undoubtedly, Hon'ble Delhi High Court has pointed out an error of omission (i.e. not dealing with quantification of PE profit attribution), certain errors of misconception of facts (i.e. mixing up facts of Ericson with the facts of this case, proceeding on the basis that since NIPL was a wholly owned subsidiary, the assessee will have direct and complete control over the subsidiary and proceeding on the basis that there was evidence to support the plea that losses of the Indian subsidiary were absorbed by the assessee company) and the error of reaching erroneous conclusions on the basis of factual errors in the orders of the AO which were duly pointed out to the CIT(A). Yet, none of these errors, either on standalone basis or taken together, cannot lead us to the conclusion that the fin .....

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..... s PE of a company fiscally domiciled in the treaty partner jurisdiction. Clearly, therefore, while there is no bar on the subsidiary of a foreign company being treated as a PE of the parent company, mere existence of the subsidiary of a company resident in the treaty partner country would not imply that such a foreign enterprise has a PE in India. Going even by the OECD Commentary (which has been adopted in the UN Commentary as well), with which I have some issues on this point and I will discuss that in detail a little later, there can be situations in which a subsidiary can be a permanent establishment of the parent company, and even vice versa. The following extracts from the current OECD Commentary will throw light on the same: 115. It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by the subsidiary company is managed by the parent company does not constitute the subsidiar .....

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..... n personnel. In that case, the place where those services are provided is not at the disposal of the latter company and it is not the business of that company that is carried on through that place. That place cannot, therefore, be considered to be a permanent establishment of the company to which the services are provided. Indeed, the fact that a company's own activities at a given location may provide an economic benefit to the business of another company does not mean that the latter company carries on its business through that location: clearly, a company that merely purchases parts produced or services supplied by another company in a different country would not have a permanent establishment because of that, even though it may benefit from the manufacturing of these parts or the supplying of these services. 15. It will, therefore, be wholly inappropriate to proceed on the basis that just because Their Lordships have observed that the Special Bench was incorrect in proceeding on the basis that merely because the NIPL was a wholly owned subsidiary, the assessee had direct and complete control over the activities of subsidiary, we have to now proceed on the basis that NIPL canno .....

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..... sions of the Tribunal being vitiated by incorrectness of findings in the orders of the authorities below is no different either. No doubt, as pointed by Their Lordships, the conclusions arrived by the Tribunal "was erroneous as it was based on various factual errors which has crept in the orders of the lower authorities"……..and "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", but then that's not the end of the road for the case of the Revenue. Their Lordships noted that "the order of the Tribunal is based on many factual errors" but then referred the matter back to the Tribunal "for fresh consideration on the issues as to whether the subsidiary of the assessee …….is Permanent Establishment…". What essentially implies is that the Tribunal has to take a fresh call on this question, and, while doing so, the conclusions of the Tribunal must not be vitiated by the factual mistakes that it had committed in the first round of proceedings. In the light of the discussions above, it is also clear that typically subsidiary companies, by default, do no .....

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..... that "as long as any part of technical support agreement are not performed, we shall not dispose of our ownership of Nokia India Pvt Ltd below 51% without your prior written permission". He was of the view that in the light of this position, "the assessee company has a permanent establishment in India in the form of its Indian subsidiary, which is a dependent agent permanent establishment". It is on the basis of this reasoning that the Assessing Officer, in the immediately succeeding paragraph, concludes that "the Indian company is nothing but an extension of the foreign company", that "the Indian company was providing the marketing support and coordination on behalf of the foreign company" and that these factors, along-with other facts of the case, make it clear "that the incorporation of Indian company was a veil to avoid the taxability of the foreign company on profits earned through the supplies made by the assessee company". Essentially, therefore, unmistakable pointer of the Assessing Officer is that the Indian subsidiary company of the assessee, because of the activities carried out by the subsidiary and the manner in which these activities are carried out, constitutes perma .....

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..... t be said that the IC acted independently in discharge of its obligations under the contracts. ……………….. In the context of these facts, it will be difficult to hold that the assessee and the IC acted independently in so far as their businesses are concerned and it will more appropriate to hold that the IC merely acted at the instructions of the assessee in respect of installation and marketing contracts. …………... We have also seen that the appellant himself has taken up the responsibility on behalf of the subsidiary company and has gone to the extent of holding out that its equity will not be diluted below 51% till installation contract is completed, except with written permission of the Indian operator. This strengthens the view that the assertions of the assessee in the matter are not correct. Accordingly, it is held that the ld. AO was right in holding that the appellant had a PE in India through the office of the IC. 19. The findings of the CIT(A), which are called into question in appeal before us, adopt and approve the same reasoning as was adopted by the Assessing Officer and come to the conclusion that th .....

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..... r dealing with international taxation matters. Given these ground realities, it would perhaps only be appropriate not to be pedantic and hyper technical in our approach and concentrate on the substance of the findings of the Assessing Officer and natural corollaries thereof. 21. The first question that I must, however, deal with is whether the assessee can be said to have a business connection in India. 22. The expression 'business connection' is not a defined expression under the statute but observations made by Hon'ble Supreme Court's landmark judgment in the case of CIT Vs R D Agarwal & Co [(1965) 56 ITR 20 (SC)] give ample guidance about its connotations: ……….The expression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression "business connection" and its precise connotation is vague and indefinite. The expression "business connection" undoubtedly means something more than "business". A business connection …….involves a relation between a business carried on by a non-resident which yields profits .....

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..... nsaction is not enough to establish a business connection 24. Let me, in the light of this legal position, turn to the facts of this case. There is no dispute that the IC (i.e. Indian subsidiary company/ NIPL) was providing administrative support to the visiting expatriate employees of the assessee company. In the course of recording of statement of the Manging Director of IC, a specific question was put to him and the question was "what all facilities were provided by Nokia Ltd to the expatriates coming for marketing and signing the contracts on behalf of Nokia Finland" in response to which it was stated that "administrative support like office support, cars, telephone etc are provided by Nokia Ltd". As stated in the statement of facts before the CIT(A), "though it was stated that, during the course of assessment proceedings, that service agreement was effective from January 1, 1997, prior to which marketing was done by Nokia Finland directly, we stand corrected that an agreement (dated April 19, 1996) did exist for the provision of services before 1997 and the payment of ₹ 7,16,00,000 was made by Nokia Finland to Nokia Limited pursuant to invoice no. 61084 dated December .....

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..... "the NTPL has valuable knowledge, expertise and experience and possess extensive information and has, at its disposal, the necessary infrastructure and sufficient skilled personnel to provide services in the nature of consultancy and advisory services as well as commercial and industrial information to NYC OY", all that the company has is less than one year legal existence (the company was incorporated on 23th May 1995 and the agreement was claimed to have been signed on 19th April 1996) at its disposal when this agreement was signed, and the entire expertise, experience and knowledge is predominantly dependent on the expatriate employees of the assessee company working for this Indian subsidiary at the operational level as also at the top management level. The agreement was signed, on behalf of the subsidiary, by the then Managing Director of the Indian company who was also an employee of the assessee company and wearing two different hats at the same point of time, one as Country Manager- India of the assessee company, and the other, as Managing Director of the IC. The persons actually rendering these expert services were also the employees of the assessee company, though wearing .....

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..... . When a subsidiary in rendering services to its parent company, without its own business interests as the essence of arrangement to render the services, this selfless rendition of services, by itself, leaves nothing to imagination. The commercial entities inherently work for commercial interests- if not its own, for the commercial interests of someone else closely associated with such entities, as, for example, parent companies. In view of this analysis, in my considered, the subsidiary can be reasonably inferred to be acting for the benefit of the parent company. If the money consideration for these services was to be essence of the arrangements, someone sitting at the helm of affairs would have at least known about the fact of, if not quantum of, money consideration. These arrangements of the assessee with its Indian subsidiary were on a continuous basis and integral to its main business interests in India. It is also important to note that the assessee company was selling high value complex infrastructure project and in all the cases of its sale of these projects, the erection contract and after sale service contract was awarded to IC. As to the nature of these business transac .....

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..... ects in India. As I have noted earlier also, the assessee company has also given a specific undertaking to the customers to the effect that "as long as any part of the commitments under the technical support agreement remain outstanding, we will continuously and diligently monitor business affairs of Nokia India with the aim of ensuring that the company at all times is in a position to meet its commitments to you" and that "as long as any part of technical support agreement are not performed, we shall not dispose of our ownership of Nokia India Pvt Ltd below 51% without your prior written permission". On a realistic note, the role played by these undertakings and arrangements cannot be ignored in the association of the IC with the customers of the assessee company. One cannot be so naïve so as to ignore the role played by the assessee company is ensuring business for its subsidiary and the role played by the subsidiary in furtherance of the business interests of the assessee company. These two entities, even though hypothetically and legally independent of each other, have carried out their respective business activities in tandem with each other. On these facts, the work done .....

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..... ndeed have a business connection in India by way of its Indian subsidiary which was acting in a manner which was, at the minimum, as much, even if not more, for the furtherance of the business interests of the assessee company in India as much, if not more, for its own economic and business interests. As I hold so, I must also point out that just because the manner in which the assessee company has acted is in its own interests, even if we hypothetically assume so, it does not cease to be a business connection for its parent company because a business connection, to quote the words of Hon'ble Supreme Court in R D Agarwal's case (supra), "may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business" of the non-resident. That is precisely what the IC, at the minimum, does in the present case. I donot share the perception of the majority that "the marketing activities and installation contract undertaken by NIPL has been on principal to principal basis; and in the case of the former agreement between assessee and NIPL the payment has been made to NIPL on cost plus basis whic .....

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..... y Their Lordships, was this. The assessee before Their Lordship was a US based company (Nortel USA, in short), which was a step down subsidiary of Nortel Network Limited Canada (Nortel Canada, in short). Nortel Canada, through a network of companies based in Luxemburg, the Netherlands and Mauritius, had a subsidiary in India by the name of Nortel Network India Ltd (Nortel India, in short). Nortel Canada also had a liaison office in India. On 8th June 2002, Nortel India negotiated three separate contracts with Reliance India Ltd (RIL, in short) - namely Optical Equipment Contracts, Optical Services Contract and Software Contract, and, on the same date- with Nortel Canada and RIL being parties to the arrangement, assigned the equipment contract to the Nortel USA. Nortel Canada guaranteed the performance of equipment contract by Nortel USA. On these facts, the case of the Assessing Officer was that Nortel USA was a shadow company of Nortel Canada and was inserted as an intermediary only to avoid taxes, and that "in substance, the contracts were performed by Nortel Canada along with its LO and Nortel India, who acted in unison to identify, negotiate, appraise, secure, execute, manufact .....

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..... A to RIL could not be brought to tax in India. Interestingly, however, it was not even the case of the income tax authorities that Nortel India was acting as an extension of Nortel USA who was assessee in this case. That fact takes it out of comparability with the present case. The guarantee for performance of Indian subsidiary was given by Nortel Canada and not the assessee in this case which was Nortel USA. There could not have been, therefore, any consideration attributable to Nortel USA for the services rendered in India by Nortel India. It was on these facts that Hon'ble High Court observed that "if it is accepted that the assessee (i.e. Nortel USA) has received only the consideration for equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of assessee's income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India". There can be no quarrel with this proposition, not only in law as this is the binding law for us, but even on the first principles because this is exactly what the unambiguous scheme of the Act is. In sharp contrast with this case before Their Lordships, in whi .....

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..... herefore, if someone is to proceed on the basis that since the conditions of the Explanation 2 to Section 9(1)(i) are not fulfilled, there cannot be a business connection at all, it will almost be like saying that when there is no DAPE, there cannot be a PE at all. DAPE is only a particular type of the PE, just as much as Explanation 2 definition, which is parallel to Article 5(5) definition is most tax treaties, is a particular type of the business connection. The observations made by Their Lordships in the above paragraph are in the particular context before Their Lordships in a situation in which the general scope of section 9(1)(i) was held to be inadmissible on the particular facts of the case in the immediately preceding paragraph, and these observations cannot be construed as authority for the proposition that when the condition under Explanation 2 to Section 9(1)(i) are not satisfied in any fact situation, even if the provisions of Section 9(1)(i) are satisfied in general, there cannot be a business connection at all. 34. In my humble understanding, therefore, Hon'ble jurisdictional High Court's judgment in the case of Nortel Network (supra) cannot be viewed as an authorit .....

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..... st address is whether the assessee, on account of its Indian subsidiary i.e. Nokia India Pvt Ltd, can be said to have a PE in India in terms of the provisions applicable Indo Finnish tax treaty. 38. As I proceed to deal with the question as to whether the Indian subsidiary of the assessee company can be treated as its PE and analyse facts of the case in that light, I must first discuss, in some detail, as to under what circumstances can normally a subsidiary be treated as PE of the parent company. 39. 'The Law & Practice of Tax Treaties- An Indian Perspective' by Nilesh Modi (Second Edition, 2014; ISBN-13: 978-81-8473-531-4; at page 447), refers to, what it considers to be, "true test for constitution of a PE" by the subsidiary, in respect of a foreign company, as "whether: • The business of the foreign enterprise is carried out by its local affiliate; or • The local affiliate is the alter ego of the foreign enterprise or, speaks his masters voice only or, is a mere façade; or • The foreign enterprise carries on a business in State S, using the premises or personnel, of its local subsidiary". 39. The reference to 'alter ego' of the foreign enterprise, .....

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..... creation of a permanent establishment as long as it is of enduring and permanent character and it is attributed to a fixed place of business in the source jurisdiction. If such a virtual projection of the foreign enterprise is by way of a subsidiary, which is nothing but an alter ego company of the nonresident parent company, that too would also result in creation of a permanent establishment. 40. Such alter ego companies without any significant and independent activities in their own right have always been, by default, treated as permanent establishments of their parent companies. One ruling, rendered by the Authority for Advance Ruling over two decades back, illustrates this point. In the case of ABC In Re (Application No. P- 8) [(1997) 223 ITR 416 (AAR)], the Authority for Advance Ruling, speaking through Justice S Ranganathan- one of the most illustrious former Presidents of this Tribunal, who later adorned high judicial officers including that as a judge of Hon'ble Supreme Court, had observed that it "is of the opinion that the subsidiary will have to be considered to be a permanent establishment of ABC unless it has significant independent activities on its own or on behalf .....

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..... ds recognition in a rather recent judicial precedent in India. In the case of Ansaldio Energia SPA Vs CIT [(2009) 310 ITR 337 (Mad)], Hon'ble Madras High Court had an occasion to deal with a case in which the assessee, a foreign company, was engaged in the business of selling and setting of power plants, and this foreign company ensured the installation contract being given, by the buyer of power plant i.e. Neyveli Lignite Corporation Ltd (NLC) to its Indian subsidiary, namely Ansaldo Services Pvt Ltd (ASLP). It was in this context that Hon'ble High Court had observed as follows: 15. Let us look at this contract…………... The assessee, and not NLC, selected ASPL to execute Contract Nos. III & IV. Therefore, though NLC (i.e. the Indian customer) entered into Contract Nos. III and IV with ASPL (i.e. the Indian subsidiary) it was only at the instance of the assessee (i.e. the foreign enterprise and the parent company). ASPL was the assessee's subsidiary company. At least as far as this Project was concerned ASPL (i.e. the Indian subsidiary) is virtually the 'assessee's presence' (i.e. virtual presence of the foreign enterprise and the parent .....

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..... State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself (Emphasis supplied by me now) constitute either company or a permanent establishment of the other" but that does not mean that a subsidiary of the assessee company cannot be held to be its PE at all. The underlying rationale of this provision is the presumption about independence of the principal and subsidiary in day to day operations and management of their business as separate entities but once this presumption is demolished, the very raison d'etre for exclusion of subsidiaries from being permanent establishments of the overseas parent companies and vice versa ceases to hold good. Explaining this point, Arvid A Skaar, in his book "Permanent Establishment- Erosion of a Tax Treaty Principle (South Asian Reprint Edition, 2009; ISBN: 978-81-89960- 81-0; at page 540), observes as follows: The treaty based protection of related companies recognizes the legal independence of related companies for tax purposes as a material reality until the opposite is proved [OECD Comm. 1977 art. 5 no. 39; cf. Debatin, Systematik IV, in Korn/Debatin, 1 Doppelbese .....

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..... nder article 5(1); that was not, however, the case in the pre transfer pricing legislation era. To this extent, in my view, departure from the convention OECD approach, which is rightly questioned by Arvid A Skaaar and implied rejected by our own Authority for Advance Ruling, is fully justified. Of course, the vital question is whether there is anything to prove that there is "independence of the related companies" and whether "the opposite was proved". In the post transfer pricing legislation era, the determination of arm's length price fortifies the "independence of related companies" and nullifies the impact of the intra AE association. That situation is materially different from the situation in pre transfer pricing legislation era, particularly when there is clear prima facie evidence, as in this case- as discussed earlier in this order, that the transactions were not at arm's length in the sense that the reimbursement mark-up was not even equal to interest factor for the time period involved in incurring the expenditure and reimbursement of the same, and that there were certain risks assumed by a party which were not rewarded at all. The presumption of independence is thus cl .....

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..... question of de legeal ferenda vs de lege lata from the point of view rejecting or accepting OECD commentary on this point; the OECD approach does not anyway provide legal basis for treaty interpretation in India and it is only as persuasive as any other relevant aid to interpretation of the tax treaties. I donot, therefore, concur with the OECD theory, if it can be construed to be that OECD approach permits only subsidiary being treated as a PE only under article 5(5). 51. In Philip Baker's book on Double Taxation Conventions, there is an interesting discussion about the nature of the permanent establishments, which is beautifully captured, with approval, in paragraph 24 of Hon'ble Supreme Court's judgment in the case of Formula One World Championship Ltd (supra) as follows: Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control - an office, branch, etc., to which he gives his own description as an 'associated perman .....

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..... he disposal tests are to be satisfied vis-à-vis the foreign enterprise. These twin tests are not really relevant, vis-à-vis foreign enterprise, for the second category, i.e. unassociated or indirect PEs, which has been described by Hon'ble Supreme Court, taking a clue from Baker's work, by observing that "the second type (of a PE) is an agent, though legally separate from the (foreign) enterprise, nevertheless who is dependent on the (foreign) enterprise to the point of forming PE". The only other category of PE visualized is a construction or installation site being regarded as PE under certain circumstances. If a subsidiary, considered to be a permanent establishment on account of, to borrow the expression employed by the AAR, not having "significant independent activities on its own or on behalf of persons other than ..(foreign parent company)…and unconnected with it" is to fit in these three types of PEs, it can only fit in the second category i.e. unassociated permanent establishment or as indirect permanent establishment, and that is the category for which the requirement of fixed place of business and disposal test vis-à-vis the foreign enterprise .....

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..... on'ble Supreme Court's judgment in the case of Formula One (supra), in the case of 'indirect PEs' or 'unassociated PEs' as a subsidiary PE inherently is, such a disposal test can only be satisfied qua the agent who acts as proxy of the assessee in conducting the business. When business activities are through an agent, representative or proxy, the disposal test cannot be taken up qua the principal. There is no conceptual justification for the confining the role of the subsidiary as a PE under article 5(5) and denying the status of PE under the basic rule, i.e. under article 5(1), when business of the parent foreign enterprise is being carried partly through a fixed place, though at the disposal of such subsidiary- in a capacity as agent, representative or proxy. The theory of 'disposal test' vis-à-vis the foreign enterprise remains confined to only the 'associated PEs', or 'direct PEs' as I put it, and cannot extend to the subsidiary PEs or, for that purpose, any other 'unassociated PE' or 'indirect PE'. To this extent, I am of the view that the approach adopted in the OECD Model Commentary, which is accepted in the UN Model Commentary as well, is not a legally acceptable pos .....

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..... it must amount to the virtual projection of the foreign enterprise as well. His suggestions is, which have been accepted by the majority, that "the concept of virtual projection does not mean that even without a fixed place, virtual projection will lead to an inference of PE" and that "the concept of virtual projection cannot be in vacuum dohors any other parameter of the PE". It is on the basis of this reasoning that he contends that since the conditions precedent for existence of a fixed place PE, i.e. right to disposal, stability and productivity, are not satisfied, there cannot be a PE even if there is a virtual projection of the foreign enterprise by the NIPL. 56. This line of reasoning proceeds on the fallacious assumption that the concept of "virtual projection" has the same ramifications whether it is in respect of, to use the expression employed by Baker, "associated permanent establishment" (direct PE) and in respect of "unassociated permanent establishment" (indirect PE). No doubt, when the virtual projection theory is applied in terms of "associated PEs" (or, as I would prefer to put it- "direct PEs"), the disposal test must be met, but this position cannot hold good .....

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..... ould clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country (all emphasis supplied by me now)". While reading this sentence, the importance of expression "not only", and the preceding discussions on the basis rule PE, cannot be ignored, and, if that is taken into account, logical conclusion is that it was a case in which the conditions precedent for basic rule PE were satisfied, and, in addition, it met the virtual projection test as well. Its almost like saying "whichever way one looks at it, it constitutes a PE nevertheless". This statement cannot read in the condition of 'virtual projection' as a sine qua non for the existence of basic rule PE. It is not, and it cannot be, the case of the assessee that even though all the preconditions of basic rule PE are satisfied, whatever constitutes PE cannot be treated as a basic rule PE because it does not amount to "virtual projection" of the foreign enterprise. To me, this is clearly an incongruous result. In any case, judgments of Hon'ble Supreme Court cannot be read like a statute and cannot be interpreted as answering the questions which did not even fall .....

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..... at the mark-up on reimbursements was far less than interest compensation for the period of incurring the expenditure and receiving reimbursements for the same and that certain functions and risks assumed by the foreign enterprise were completely unrewarded. In the backdrop of these facts, and when I bear in mind the oft quoted words of Hon'ble Supreme Court, in the case of Sun Engineering Works (supra), that "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by this Court". When Their Lordships themselves observe that application of arm's length prices by the transfer pricing authorities was "a relevant and an important fact", it would not really be possible that the observations made in that case will, by default, apply on a fact situation in which not only the transfer pricing provisions were not applicable and thus arm's length price were not the basis of assessment income but there were clear indicators about the transactions being not an arm's length basis. In my humble understanding, the question whether the same .....

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..... is one more factor to be borne in mind. The underlying presumption of the path taken by another special bench of equal strength in the first round of proceedings, was that the basic rule PE tests, as canvassed by the commentary, are not necessarily the tests to decide whether there is a "virtual projection" or not, in a situation in which the transactions between the related are not at arm's length, and when virtual projection can be held de hors these tests, it will be a PE nevertheless. This approach is clear from the fact that the coordinate special bench held the IC to be PE of the assessee company only on the basis of twin factors of transactions not being at arm's length and virtual projection of the foreign enterprise. Even though this approach was specifically in challenge before Hon'ble Delhi High Court, in question no. 2 i.e. "Whether the Tribunal was right in law in holding that a perception of virtual projection of the foreign enterprise in India results in a permanent establishment?", Their Lordships have, without expressing any opinion on the same, remitted the matter for reconsideration on factual aspects. As a matter of fact, the question framed by the assessee for .....

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..... undertakes performance guarantee and commitment not to dilute the shareholding below 51%, so as to ensure the control over operations and resultant agreed performance level to the IC's customers, but the assessee company is not at all rewarded for these functions and risks at all. Such an arrangement cannot, therefore, be justified on the commercial considerations at all. It may also be mentioned that the services for which, the IC is so inadequately rewarded that if the IC was to park its funds employed in this activity in a fixed deposit with any Indian bank, it would have earned much more than what it has earned under this agreement, the IC has rendered a number of services, in marketing support function. These services are listed at page 2 and 3 of the agreement dated 19.4.1996, a copy of which is placed before the bench in the paperbook filed by the learned Departmental Representative. 62. In effect thus the entire marketing and administrative support work is done by the assessee in India, through the Indian subsidiary and without adequate arm's length consideration, at a fixed place in India. This is carrying on the business of the assessee in India through a fixed place of .....

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..... nd the IC is a PE for this reason as well. 64. An equally undisputed position is that all the installation work generated for the IC is on account of specific approval of the assessee company. The work done by the IC is thus entirely in the control of the assessee company and the work being obtained by the IC is entirely at the mercy of the assessee company. The people at the operational level in the IC also include a number of expatriates on deputation, secondment or assignment from the assessee company. The role of the assessee company was omnipotent in all the operations of the IC, and it was not only because of the ownership of the IC but also because of the business module adopted by the assessee company. There is also no dispute that the installation and other post sale services rendered by the IC were complementary to the core business operations of the assessee company. The IC, in substance and in effect, was acting as a proxy of the assessee company's interest in performance of commercial activities as well. Viewed thus, the office of the IC is a PE of the foreign enterprise which constitutes the fixed place of business through which the business of the assessee company i .....

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..... ces can be treated at par with marketing services rendered by the assessee, through its PE, in India. As has been discussed earlier, all the crucial marketing and support functions have been rendered by the Indian PE, by way of the IC, and the IC has not been adequately compensated for the same. There are judicial precedents to hold that 35% of the overall profits on sale can be attributed to the marketing function. In the case of Rolls Royce plc Vs DCIT [(2011) 339 ITR 147 (Del)], while upholding the stand of this Tribunal in allocating 35% of global profit to the marketing function, Their Lordships have observed as follows: We are in agreement with the aforesaid view of the Tribunal. While restricting the attribution to 35 per cent, the reason given by the Tribunal was that profit attributed to manufacturing activity and research and development activities, i.e., 50 per cent and 15 per cent respectively had to be excluded. Thus the expenses on research and development were already taken care of when remuneration @ 35 per cent was attributed to marketing activities in India on which global profits was apportioned and there was no question of setting off the research and developm .....

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..... or the purpose of computing profits attributable to the specified functions of the PE. My conclusions: 71. In view of the above discussions, I hold that the assessee company had a PE in India, by way of the premises and existence of its Indian subsidiary Nokia India Pvt Ltd, and that the profit attributable to the specified operations of this PE are 3.75% of total sales of the equipment in India. In the result, while I uphold the action of the CIT(A) in principle, I marginally reduce the quantum of profits attributable to the PE. As against profit @ 5% of sales held to be attributable to the Indian PE, I hold the profit on 3.75% of sales to be attributable to PE in respect of the specified activities. 72. In the result, in my considered view, the plea of the assessee against the existence of business connection and the existence of permanent establishment is to be rejected, and plea of the assessee on the attribution of profit is to be partly accepted in the terms indicated above. 73. To this extent, even as I humbly bow to the majority so far results of these appeals are concerned, I disassociate myself with the order as finalized by the majority. Save on the above points, I .....

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