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TMI Blog2025 (2) TMI 990X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment and licensing of software was taxable in the hands of the assessee as interest earned from vendor financing? (D) Whether the revenue from supply of software could be classified as royalty or fee for technical services under the Income Tax Act, 1961 [Act] read along with the India-Finland Double Taxation Treaty [DTAA]? 2. Mr. Bhatia and Mr. Mann, learned counsels who appeared for the appellants, had placed for our consideration the following chart which delineates the questions which arise in each of these appeals and also encapsulates details of the AYs to which they pertain. That chart is extracted hereinbelow: - Commissioner of Income Tax, International Taxation-2 vs. Nokia Network OY ITA Nos. 785, 786, 882, 883, 884, 885 and 887 of 2019, 170, 171 and 166 of 2020 & 60 of 2023 S.NO. ITA NO. AY QUESTIONS ARISING FOR CONSIDERATION Whether in the facts and circumstances of the case, the Assessee has a Fixed Place Permanent Establishment in India? Whether in the facts and circumstances of the case, NIPL, which is a wholly owned subsidiary of the Assessee, constitutes DAPE of the Assessee in India? Whether in the facts and circumstances of the case and in law, ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the period in question and while the Liaison Office was still operational, GSM equipment manufactured in Finland was sold to various Indian telecommunication operators from outside India on a principal-to-principal basis under independent buyer-seller arrangements. 6. Post incorporation of NIPL in May of 1995, the installation activities were undertaken by the said entity in terms of independent contracts which it entered into with Indian telecom operators. The details of the contracts which were entered into by the Respondent assessee stand duly captured in paragraph 2 of the judgment of the Tribunal. The assessee, Nokia OY, is stated to have consistently maintained the position that the said installation activities were undertaken by NIPL in terms of separate agreements which it had entered into with Indian telecom operators. The two exceptions to such contracts were those entered into with Modi Telstra (India) Limited and Skycell Communications Ltd. and which were signed prior to the incorporation of NIPL. 7. Undisputedly, Nokia OY did not file any Return of Income for the concerned period taking the position that offshore supplies were not exigible to tax. A return was ulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract having subsequently been assigned to NIPL that could have formed subject matter of taxation. It had further averred that all the equipment supplied by Nokia OY fell in the category of offshore supplies and profits earned from those transactions were thus not taxable in India. According to Nokia OY, it is this which led to the Revenue seeking to discover the existence of a PE. 9. Reverting then to the assessment made by the AO, Nokia OY aggrieved by the same petitioned the Commissioner of Income Tax (Appeals) [CIT(A)] and which came to hold that the Liaison Office constituted a Fixed Place PE of the respondent. Insofar as the connect between Nokia OY and NIPL was concerned, the CIT(A) took into consideration the fact that the latter was a wholly owned subsidiary and it thus being liable to be presumed that the latter was not acting independently. It consequently came to hold that the view of the AO that NIPL constituted a DAPE of the respondent was liable to be affirmed. 10. In the course of consideration of the appeal which came to be taken against the aforesaid decision, the matter came to be referred to a Special Bench of the Tribunal which rendered its judgment on 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, whether or not in fact and truth its activities were being controlled / monitored by the assessee. Our observations are therefore confined to the question of PE. Otherwise, both the assessee and NIPL remain separate corporate entities and NIPL has also been assessed separately for its installation income. Thus the observations in para 274(b) have no relevant to what has been discussed in this paragraph.' (6) Payment for supply of software was not in the nature of royalty because the same was for a copyrighted article and 'not for a copyright. Further, software was held to be integral part of GSM equipment. Payment for supply of software was held not taxable both under the provisions of the Act and under DTAA. (7) Interest income from vendor financing was held to have been correctly added. (8) Following 3 activities were held to have been carried out by NIPL, the PE of Nokia in India: (a) Network Planning; (b) Negotiations in connection with the sale of equipment; & (c) Signing of supply and installation contracts. (9) 20% of the net profit determined on the basis of the global net profit of Nokia (10% towards signing of the contract and 10% towards other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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) Asseessee 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? All these Issues have been remitted back to ITAT (Para 38 of High Court order) Q2. 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? Q3. Whether prejudice, if the answers to Q.1 & Q.2 are in affirmative, is there any attribution of profits on account of signing, network planning and negotiation of offshore supply contracts in India and if yes, the extent and basis thereof? Q4. Whether in law the notional interest on del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 attributed to PE in India and these aspects were not correctly appreciated by the Tribunal Learned Senior Counsel submitted that the conclusion arrived at by the Tribunal was erroneous as it was based on various factual errors has crept in the orders of the lower authorities. According to him, the factual errors of the orders of the AO were specifically pointed out in the submissions to the CIT (A) and specific grounds were also taken before him which are as under : (i) 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 the Indian office were shifted to 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. (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the Indian subsidiary show that the company incurred huge losses as it was not compensated properly for the installation work carried on by it. In the opinion of the ITAT since it was a wholly owned subsidiary, the assessee would have direct and complete control over the activities of this subsidiary. The learned ASG also conceded that it was not correct. 38. As we find that the order of the Tribunal is based on many factual errors which are even accepted by the Revenue before us, it would be appropriate to refer the matter back to the Tribunal for fresh consideration on the issues as to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anager of NIPL between 01 February 1994 and 31 December 1999 ignoring the indisputable position of NIPL itself having come into existence only in May 1995. 17. The Tribunal further held that there was no material on the basis of which it could have been said that Mr. Hannu Karavitra had signed any supply contracts on behalf of Nokia OY after assuming the office of Managing Director of NIPL. It has in this connection encapsulated the principal contracts entered into between Nokia OY and NIPL in paragraph 13 of its judgment. It is pertinent to note that the aforenoted facts which emerge from the record were not questioned by the appellants before us. 18. Proceeding ahead, the Tribunal at the outset posed for its consideration the question whether NIPL was liable to be viewed as a PE of the respondent assessee by virtue of being a wholly owned subsidiary. It took note of the conclusions of the AO rendered in this respect and who had observed that the wholly owned subsidiary was liable to be viewed as a DAPE. For the purposes of appreciating the issues which arise in this regard, we deem this to be an appropriate juncture to extract Article 5 of the DTAA. It would also be relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person: (a) has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph (4) which, if exercised through a fixed place of business, would not make the fixed place of business a permanent establishment under the provisions of that paragraph; or (b) has no such authority, but habitually maintains in the first-mention State a stock of goods or merchandise on behalf of enterprise. 6. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to reinsurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purpose 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 carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 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 Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the issue of PE and attribution of profits was liable to be answered. These were, in our opinion, correctly identified as being- (a) supply contracts between the assessee and various customers (b) installation contracts entered into between NIPL and customers directly (c) marketing support agreements between Nokia OY and NIPL and (d) the technical support agreement between NIPL and customers. 20. Proceeding ahead, the Tribunal firstly found that the supply of telecom equipment by Nokia OY was on a principal-to-principal basis founded on independent buyer and seller contracts. This becomes evident from a reading of para 39 of the judgment of the Tribunal and which reads as under: - "39. Under this backdrop we would like to briefly recapitulate the relevant facts and the contentions raised by the party. The assessee company Nokia Networks Oy has been incorporated in Finland. At that point of time, it was a leading manufacturer of advance telecommunications systems and equipments (GSM Equipment) which were used in fixed and mobile phone networks. These GSM equipments manufactured by the assessee were sold to the Indian telecom operators from outside India on principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficance. 22. It thereafter reiterated its findings on facts pertaining to the engagement of Mr. Karavitra and held: - "45. First of all, in so far as the allegation that the Country Manager of the LO continued to be the Managing Director of the Indian Company, the same has with reference to one employee, namely, Mr. Hannu Karavitra who was the Country Manager in LO and in that capacity has signed two contracts in the month of February and March, 1995. These contracts 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 lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutes a 'Service PE' and assessee was unable to furnish the details of employees working in NIPL alongwith the details of their duration and therefore, in absence of such details adverse view should be drawn for treating these employees constituting PE in India. The entire thrust of his argument simply whittles down for the reason that firstly, there is absolutely no concept of 'Service PE' in the then existing provision of Article 5; and secondly, other than off-shore supply of equipment, no other activities 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. NIPLis an independent entity and all its income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of equipments of the assessee in India and therefore, NIPL per se by 'force of attraction rule' will constitute a PE, because even if one sale of the assessee is through Indian company then by virtue of this rule as enshrined in Article 7 of India-Finland DTAA, PE will get constituted and there would be a deemed PE in the form of Indian company whose income has to be attributed accordingly. This second part of allegation does not hold ground at all, because; firstly as stated stat in the earlier part of the order, assessee and NIPL have entered into separate marketing and technical support agreements in respect of the projects installed and has no correlation with the supply contract. This has been specifically held so by the Hon'ble High Court also in paragraph 34 reproduced in the earlier part of the order; secondly, not only that, for rendering these services NIPL was compensated with cost plus mark up of 5% which though has been adversely commented by the Assessing Officer and Id. CIT (A) but there has been no determination of ALP under transfer pricing mechanism. This inter alia means that the remuneration paid by the assessee to NIPL for these services has to be reckoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the assessee whenever came to India for the purpose of supply contract for negotiation on network planning, then, they were provided administrative services like telephone, fax and conveyance. Now, whether such kind of facilities can at all be treated to be a fixed place of business of the assessee company. Telephone or fax or a car cannot be reckoned as physically located premise. The word used in Article 5 (1) is fixed place of business through which business of enterprise is wholly or partly carried out'. A fixed place alludes to some kind of a particular location, physically located premise or some place in physical form. Nowhere is it borne out that any kind of physically located premise or a particular location was made available to the assessee which was at the disposal of the assessee for carrying out wholly or partly its business through that place. Not only there should be an existence of a fixed place of business but also through that fixed place business of the enterprise should be wholly or partly carried out. No such material has been brought on record that any kind of such fixed place was made available. Providing telephone or fax or conveyance services can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of preparatory and auxiliary services and which forms part of Article 5 (4) of the DTAA. It thus came to conclude that NIPL would not constitute a Fixed Place PE. 27. It then turned its attention to the question of whether a DAPE could be said to have come into existence. As would be evident from a reading of Article 5 (5), the prerequisite for a DAPE to be acknowledged to exist is that of a person, other than an agent of independent status, who acts on behalf of an entity in a Contracting State and has or habitually exercises in that territory an authority to conclude contracts. It in this regard observed: - "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 lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities like marketing and technical support services are concerned, same has been transacted at arm's length as 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 mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r making such an addition was existence of a particular clause in the agreement signed between the assessee and some of the Indian Cellular Operators. The ld. CIT (A) too has confirmed the said addition on the ground that, since the assessee is following a mercantile system of accounting and as per the contract assessee was entitled to receive such interest, and therefore, same should have been accounted for and in support he has relied upon the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). Ld. counsel for the assessee had submitted that the said judgment has already been distinguished in the subsequent judgment of Hon'ble Supreme Court in the case of DCa Bank vs. CIT (supra) and secondly, only the real income can be brought to tax and not something on hypothetical basis, because there has to be corresponding liability to the other party to whom the income becomes due and here such a clause was never enforced by the parties. Already the arguments of both the parties have been incorporated in earlier part of the order; therefore, same is not being discussed again. 61. After considering the relevant finding and rival contentions, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even the conduct of the parties show that such a clause even though may have been agreed upon has never been enforced or acted upon. In such a situation, In our opinion, the amount of interest cannot construe a debt due to the assessee. Further, 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 interest on delayed credit period on Vendor Financing. Thus, we hold that when assessee has neither treated the amount to be legally claimed nor has acknowledged any debt due too on its customer as delayed payment then it cannot be held that any interest accrued to the assessee, and therefore, such a notional charging of interest for each day elapsed from the due date to the actual payment cannot be held to be taxable to the assessee. This proposition has also been now well upheld by Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 259 (SC). Hence, no income can be said to accrue to the assessee on account of delayed payments as neither there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forms part of the Convention, a PE is defined to mean a fixed place of business through which the business of an enterprise may be wholly or partly carried out. Paragraph 2 of Article 5 thereafter spells out categories of establishments which would constitute a PE. 33. It would also be relevant to compare Para 3 of Article 5 as it stood in the relevant AYs as contrasted with how it exists today. A Service PE in terms of Article 5 (3) as it then existed would be deemed to have come into existence either where a building site, construction assembly or installation project were established and continued for a period of more than six months or where such a site incidental to the sale of machinery or equipment came to be set up and such a site continued for a period not exceeding six months. None of these stood attracted to the facts which obtained in the years in question since it was not even the case of the appellants that a building or construction site had in fact come into existence. It was only later that Article 5 came to include the furnishing of services by an enterprise through employees and which is now recognised as a distinctive feature of a Service PE. We, however, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exts and treatises to enable us to obtain a broader perspective on the concept of a permanent establishment. We, however, deem it apposite to additionally notice some of the principles which stand enunciated in Klaus Vogel's seminal work on Double Taxation Conventions [Klaus Vogel on Double Taxation Conventions, Edited by Ekkehart Reimer and Alexander Rust, Wolters Kluwer, 5th edition, 2022.]. While explaining the "control" test which would be determinative for the purposes of acknowledging the existence of a place of business under the sufficient command of an entity situate in one of the contracting States, the learned author observes as under: "110. For all types of business activities, control can be based on legal titles or factual circumstances. Legal control might be derived from ownership or any other right, including equitable rights under common law if the respective right conveys factual mastery of a place of business to the taxpayer enterprise. Such rights are perfect where the taxpayer enterprise is the legal proprietor of the place of business. Likewise, the position of the taxpayer as a tenant, a lessee (leaseholder, even in cases of short-term lease) or even a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as a substantive filter either. While early draft Model Conventions contained the condition that the fixed POR should have a productive character, this requirement was never adopted by the OECD Model (see No. 35 OECD MC Comm. on article 5). None of the current MCs provide a specific productivity test. It follows that place of business may constitute a permanent establishment even if they perform activities which mainly or exclusively expenditures to show for. 137. Likewise, the 'carrying-on' requirement does not imply an activity in the sense of an active and visible work. It includes even stand-by services and omissions. This gains significant relevance where the omission is profitable (e.g., in the case of a place of business earning money in the source State simply by fulfilling, for whichever period of time, a non-competition agreement relating to the territory of that State). 138. However, a diffuse passivity which equals a (temporal or lasting) suspension of the activities which the place of business has been designed for may indicate that the place of business is not 'permanent'. For details, see supra m. No. 87 et seq. 139. Thirdly, the phrase 'through which' indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness has become irrefutable. Even stronger than the English amendment ('through which' instead of 'in which'), the corresponding modification of the French text ('par l'intermediaire de laquelle' instead of 'ou') has stressed the functional integration of the place of business in the business. 144. The OECD MC Comm. has weakened the meaning of 'through' since 2003. The Commentary holds the view that the requirement of a functional integration is met as soon as the taxpayer exercises the business in a fixed place of business which is at his disposal (No. 20 OECD MC Comm. on article 5 (added on January 28, 2003)). This is the reason for the characterisation of the famous painter example (i.e., the fictitious case of a painter who, for two years, spends three days a week in the large office building of its main client) as a service permanent establishment. In substance, the view of the OECD MC Comm. limits the meaning of 'through' to the first two instead of all three semantic aspects required by article 5 (1) OECD MC (supra m. No. 135 et seq. and 139 et seq.)." xxxx xxxx xxxx 86. The principles pertaining to fixed place permanent establishment were more lucidly explained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as 'at the disposal' of the enterprise when the enterprise has right to use the said place and has control thereupon.... Taking cue from the word 'through' in the article, Vogel has also emphasised that the place of business qualifies only if the place is 'at the disposal' of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, 'disposal' is the power (or a certain fraction thereof) to use the place of business directly.... Organization for Economic Co-operation and Development commentary on Model Tax Convention mentions that a general definition of the term 'permanent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that enterprise.... As per article 5 of the Double Taxation Avoidance Agreement, the permanent establishment has to be a fixed place of business 'through' which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in article 5 (2), by way of an inclusion. Article 5 (3), on the other hand, excludes certain places which would not be treated as permanent establishment, i.e., what is mentioned in clauses (a) to (f) as the 'negative list'. A combined reading of sub-articles (1), (2) and (3) of article 5 would clearly show that only certain forms of establishment are excluded as mentioned in article 5 (3), which would not be permanent establishments. Otherwise, sub-article (2) uses the word 'include' which means that not only the places specified therein are to be treated as permanent establishments, the list of such permanent establishments is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are : (a) existence of a fixed place of business; and (b) through that place business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced at the "disposal" of an enterprise for the purposes of the use of its business activities would be sufficient. The Supreme Court significantly observed that for the purposes of recognizing the existence of a fixed place permanent establishment, no formal legal right to use need be discerned or proven. It was thus held that as long as it is a space in an establishment or premises placed at the constant "disposal" of the enterprise, it would satisfy the test of a fixed place permanent establishment as contemplated under articles 5 (1) and 5 (2)(a)-(k) of the Double Taxation Avoidance Agreement. 89. The principles governing fixed place permanent establishment were again spelt out and enunciated by the Supreme Court in Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7 SCC 1.] and Samsung Heavy Industries Co. Ltd. [DIT (International Taxation) v. Samsung Heavy Industries Co. Ltd., (2020) 426 ITR 1 (SC); (2020) 7 SCC 347.] In Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7 SCC 1.], and where the following pertinent observations came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the context of a fixed place permanent establishment, the Supreme Court held (page 18 of 426 ITR): "A recent judgment of this court, namely, Asst. DIT v. E-Funds IT Solution Inc., concerned itself with the India-US Double Taxation Avoidance Agreement with similar provisions. Dealing with what was referred to as a 'fixed place', permanent establishment, this court held (SCC p. 310, para 16 and page 51 of 399 ITR): "The Income-tax Act, in particular section 90 thereof, does not speak of the concept of a permanent establishment. This is a creation only of Double Taxation Avoidance Agreement. By virtue of article 7(1) of the Double Taxation Avoidance Agreement, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were permanent establishments in India, in which event their business income, to the extent to which it is attributable to such permanent establishments, would be taxable in India. Article 5 of the Double Taxation Avoidance Agreement set out hereinabove provides for three distinct types of permanent establishments with which we are concerned in the present case : fixed place of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment .... Though it was pointed out to Income-tax Appellate Tribunal that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the assessee, the Income-tax Appellate Tribunal chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of article 5 (1) of the Double Taxation Avoidance Agreement, as the Mumbai project office cannot be said to be a fixed place of business through which the core business of the assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai project office, on the facts of the present case, would fall within article 5 (4)(e) of the Double Taxation Avoidance Agreement, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us." 91. When we test the stand taken by the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on any evidence which could have possibly compelled us in acknowledging that a fixed place permanent establishment had come into being." 38. On a more jurisprudential level, a Full Bench of our Court in Hyatt International Southwest Asia Ltd. Vs. Additional Director 2024 SCC OnLine Del 6546 had while expounding upon the basic concepts underlying a PE had enunciated the legal position in the following terms: - "40. The Commentary on the United Nations Model Double Taxation Convention between Developed and Developing Countries 202114 while explaining the concept of a PE makes the following pertinent observations: - 7. It could perhaps be argued that in the general definition some mention should also be made of the other characteristic of a permanent establishment to which some importance has sometimes been attached in the past, namely that the establishment must have a productive character, i.e. contribute to the profits of the enterprise. In the present definition this course has not been taken. Within the framework of a well-run business organisation it is surely axiomatic to assume that each part contributes to the productivity of the whole. It does not, of course, follow in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for each other's activities related to that project even though they may share the overall output from the project or the remuneration for the activities that will be carried on in the context of that project. In such a case, it would be difficult to consider that a separate enterprise has been set up. Although such an arrangement would be referred to as a "joint venture" in many countries, the meaning of "joint venture" depends on domestic law and it is therefore possible that, in some countries, the term "joint venture" would refer to a distinct enterprise. 43. In the case of an enterprise that takes the form of a fiscally transparent partnership, the enterprise is carried on by each partner and, as regards the partners' respective shares of the profits, is therefore an enterprise of each Contracting State of which a partner is a resident. If such a partnership has a permanent establishment in a Contracting State, each partner's share of the profits attributable to the permanent establishment will therefore constitute, for the purposes of Article 7, profits derived by an enterprise of the Contracting State of which that partner is a resident (see also paragraph 56 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights. Once the DTAA confers an independent identity upon the PE, it would be wholly erroneous to answer the question of taxability basis either the activities or profitability of the parent or the entity which seeds and sustains the PE. 43. The Contracting State in which this imagined entity is domiciled and undertakes business thus becomes identified as an independent profit or revenue earning center which is liable to be taxed. Once such an entity is found to exist in one of the Contracting State, it is viewed as a unit which contributes to the economic life of that State and thus be liable to tax. It is these basic precepts which convince us to debunk the theory of taxation in the source State being dependent upon a global profit or taxation being subject to income or profit having been earned at an entity level. 44. The identity which attaches to a PE for the purposes of ascertainment of a taxing liability cannot possibly be doubted bearing in mind the succinct observations of the Supreme Court in Morgan Stanley and where their Lordships without a degree of equivocation acknowledged the distinction that is liable to be drawn between a PE with respect to income earned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also had on occasion to examine what would constitute 'preparatory' and 'auxiliary' activities, expressions found in Para 4 (f) of Article 5, and which stipulates that as long as the activities undertaken could be said to be preparatory or auxiliary, the establishment would not be liable to be construed as constituting a PE. Clause (f) of Para 4 thus provides that a maintenance of a fixed place of business, even if it be for the undertaking of any of the activities stipulated in the preceding clauses, would still not qualify as a PE if the overall character of such activities were found to be of a preparatory or auxiliary character. In Progress Rail, we had while dealing with the meaning liable to be ascribed to these twin expressions held: - "69. Proceeding further to deal with the concepts of "preparatory" and "auxiliary" services and which are intended to remove a place of business which may otherwise fall within the meaning of a permanent establishment and which phraseology is mirrored in article 5 (3)(e) of the India-USA Double Taxation Avoidance Agreement, Klaus Vogel's work has the following instructive passages: "59. (Determination of the activity's character) I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness is maintained solely for that purpose, sub-paragraph (d) will be relevant and it will be necessary to determine whether the collection of information goes beyond the preparatory or auxiliary threshold. Where, for example, an investment fund sets up an office in a State solely to collect information on possible investment opportunities in that State, the collecting of information through that office will be a preparatory activity. The same conclusion would be reached in the case of an insurance enterprise that sets up an office solely for the collection of information, such as statistics, on risks in a particular market and in the case of a newspaper bureau set up in a State solely to collect information on possible news stories without engaging in any advertising activities : in both cases, the collecting of information will be a preparatory activity." 70. Speaking in greater detail on the aspect of "preparatory" and "auxiliary" functions, the author observes: "303. Already before the 2017 Update to the OECD MC, all of the activities listed in article 5 (4)(a) to (f) of OECD and UN MC had to be preparatory or auxiliary (infra m. No. 304 et seq.). This followed from the us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld deny a permanent establishment in case (1), and assume a permanent establishment in case (2). This view is shared by No. 60 of OECD MC Comm. on article 5 as well as by most authors. 307. It seems to your author, however, that the strict and exclusive application of relative standards would not do justice to cases where an enterprise of type (1) above (supra m. No. 283) is so large that place of businesses which, from an absolute perspective, are respectable entities with valuable assets, a considerable number of employees and full-fledged bureaucratic and administrative facilities of their own, just seem to be small, preparatory or auxiliary from the perspective of the company's headquarters. If they are still the biggest employer in a given municipality, it is hardly justified from the viewpoint of fiscal equivalence to exempt such place of businesses under article 5 (4) of OECD and UN MC. 308. It follows that a combined approach is most appropriate. While relative standards apply at the outset (supra m. No. 304), absolute standards require a second filter: The activities of a place of business qualify as being 'of a preparatory or auxiliary character', as compared t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from a reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing Information Technology enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a permanent establishment stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5 (1) is not attracted.... There is one more aspect which needs to be discussed, namely, exclusion of permanent establishment under article 5 (3). Under article 5 (3)(e) activities whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cter'.... The Black's Law Dictionary defines the word 'auxiliary' to mean as 'aiding or supporting, subsidiary'. The word 'auxiliary' owes its origin to the Latin word 'auxiliarius' (from auxilium meaning 'help'). The Oxford Dictionary defines the word 'auxiliary' to mean 'providing supplementary or additional help and support'. In the context of article 5 (3)(e) of the Double Taxation Avoidance Agreement, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the assessee. In the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character - an activity which aids and supports the assessee in carrying on its main business. In view of the above, the activity of the assessee's project office in Mumbai would clearly fall within the exclusionary clause of article 5 (3)(e) of the Double Taxation Avoidance Agreement and, therefore, cannot be construed as the assessee's permanent establishment in India." 102. When tested on the aforesaid principles, it becomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amination, found that the Indian subsidiary was concerned primarily with securing orders for the petitioner. This, in the light of the said clause using the expression "wholly or almost wholly for the enterprise". Clause (c) not only alludes to aspects of an enterprise being exclusively concerned with working for the fulfilment of the business interests of another, it would also have to be additionally proven that it does so "habitually". 41. The aforesaid precepts which we had recognized as being pertinent to and determinative of whether a Fixed Place PE or DAPE could be said to have come into existence also find resonance in our judgment in Director of Income Tax, International v. Western Union Financial Services Inc [2024 SCC Online Del 8913] and where we had held as follows: - "49. For the purposes of being acknowledged as a PE, the said office would have had to qualify the provisions of sub-paras 1 and 2 of Article 5. It would thus have to be held to be a 'fixed place 'through which the business of the enterprise was being wholly or partly carried out. In order to constitute a Fixed Place PE, it would have to satisfy the tests of virtual projection, a takeover of the premis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a legal fiction in cases where it be found that the enterprise has an agent which is acting on its behalf in the other Contracting State. The first limb of Article 5 (4), when met, gets coupled to the legal fiction embodied in para 4 and which is "shall be deemed to have a permanent establishment". However, of crucial significance is the use of the word 'if', which precedes clauses (a), (b) and (c) and thus being indicative of the clear intent of the contracting parties of recognizing the existence of a DAPE only if one of those were also met. The appellants have not relied on any evidence or material which may have even remotely established the criterion of either clauses (a), (b) or (c) being satisfied by the LO" 43. When tested on the aforenoted foundational principles, we have no hesitation in holding that the Tribunal has committed no error in answering the questions posited in favour of Nokia OY. Undisputedly, the issue of the Liaison Office constituting a PE had come to be settled in the first round of the litigation which ensued before the Tribunal and came to be ultimately affirmed by the 2012 judgment of this Court. The broad questions on which this Court remanded the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption test which was propounded by the Tribunal in the earlier round of litigation. 46. When tested on the standards consistently recognized by courts, it becomes apparent that the appellants had woefully failed to establish that NIPL or its premises could be recognised to be a PE when tested on the mandated criterion of either a Fixed Place or a Dependent Agent PE. Having gone through the copious material which was examined and evaluated by the Tribunal, we have no hesitation in affirming its view insofar as Fixed Place PE is concerned. 47. We also find ourselves unconvinced of the arguments advanced by the appellants before us in their attempt to question the correctness of its conclusions insofar as DAPE is concerned. The reasons underlying our conclusion are set out hereinafter. 48. It becomes pertinent to note that the Tribunal has in unequivocal terms found that NIPL was pursuing an independent line of business with Indian telecom operators. The appellants have abjectly failed to prove that NIPL stood conferred with the authority to bind or conclude contracts on behalf of Nokia OY. Insofar as installation activity was concerned, it was found that NIPL was not generating an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was provided by Nokia OY to its Indian subsidiary would lead one to the definitive conclusion that NIPL was created to "artificially block creation of PE if the realities of actual operations was not to be vitiated by these projections and devices." 51. The second aspect which appears to have weighed upon the minority was the commitment towards technical support as held out by Nokia OY as well as its assurance against dilution of its interest in NIPL. All this, according to the minority, amounted to a virtual performance guarantee and ultimately concerned with "furtherance of the business interests of the assessee company in India, as much, if not more, for its own economic and business interests." It is this underlying theme and line of reasoning which then breathes through the entire opinion. 52. The minority then proceeds to notice and apply the principle of alter ego companies as being pertinent to the issue of PE. However, the alter ego test was subjected to the caveat of it being found that the resident company had no significant independent activity of its own. The minority then also culled out a distinction between an associated PE (and which it chose to describe as a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a "perception of virtual projection" as opposed to what the DTAA expects, namely, a conclusion on facts. 56. The minority opinion then attempts to overcome the judgments in Formula One World Championship and E Funds by significantly observing that the virtual projection test need not be met if the "basic rules" concerning a PE are satisfied. This is ex facie contrary and flies in the face of an entire body of precedent which has evolved on the subject. We find ourselves unable to appreciate how "virtual projection" and the host of attendant tests propounded by courts do not themselves constitute the grundnorm. This Court, in its humble understanding, is unable to conceive of a more cardinal or foundational prerequisite and which would overshadow or eclipse the tests as propounded by courts and noticed above. 57. Not stopping here, the minority further observes that the earlier ruling of the Special Bench on core issues had remained untouched and thus seeks to read our 2012 judgment as being confined to mere factual mistakes. This, in our respectful consideration, was a wholly convoluted reading of the judgment handed down by this Court and this alone being sufficient to outright ..... X X X X Extracts X X X X X X X X Extracts X X X X
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