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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 ..... e preceding clauses, would still not qualify as a PE if the overall character of such activities were found to be of a preparatory or auxiliary character. Tribunal has committed no error in answering the questions posited in favour of Nokia OY. Undisputedly, the issue of the Liaison Office constituting a PE had come to be settled in the first round of the litigation which ensued before the Tribunal and came to be ultimately affirmed by the 2012 judgment of this Court. The broad questions on which this Court remanded the matter to the Tribunal stood confined to NIPL and its interrelationship with Nokia OY. Whether NIPL constituted a PE appears to have been principally answered in light of it being the wholly owned subsidiary of Nokia OY? - Article 5(8) bids us to bear in mind that the mere control of an entity by a parent or a holding company would not be determinative of whether a PE exists. A subsidiary or an entity which is substantially controlled by another would still have to meet the test prescribed by Paras (1), (2), (3), (5) and (6) of Article 5 before it can be said to constitute a PE. We are also of the firm opinion that the question of PE is not liable to be answered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other provisions comprised in Article 5 of the DTAA. We also concur with the minority opinion when it held that the appellants had failed to establish the existence of a DAPE. It has, however, in this respect observed that while the view expressed in the previous round, stricto sensu, may not have been wholly accurate or tenable, the question of PE would still be liable to be answered basis the essence of the arrangement between Nokia OY and NIPL as was discerned by the AO and the CIT(A). The second aspect which appears to have weighed upon the minority was the commitment towards technical support as held out by Nokia OY as well as its assurance against dilution of its interest in NIPL. All this, according to the minority, amounted to a virtual performance guarantee and ultimately concerned with "furtherance of the business interests of the assessee company in India, as much, if not more, for its own economic and business interests." It is this underlying theme and line of reasoning which then breathes through the entire opinion. The minority then proceeds to notice and apply the principle of alter ego companies as being pertinent to the issue of PE. However, the alter ego t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the questions as posited in the negative and against the appellants. X X X X Extracts X X X X X X X X Extracts X X X X ..... nd which with the consent of learned counsels appearing for respective sides was designated as the lead appeal. 4. ITA No. 786 of 2019 was concerned with a common order passed by the Tribunal for AYs 1997-98 and 1998-99. From the disclosures made in that order, we gather that Nokia Networks OY [Nokia OY], the respondent assessee, was a company incorporated under the laws of Finland and engaged in the manufacture of advanced telecommunication systems and equipment. The GSM equipment manufactured was used in relation to fixed and mobile phone networks. Nokia OY was also engaged in the trading of telecommunication hardware and software. 5. In 1994, Nokia OY is stated to have established a Liaison Office and which was followed by the incorporation of a fully owned subsidiary, NIPL on 23 May 1995. According to the Respondent, in 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erators. (c) In addition, income from vendor financing and delayed payment was imputed at Rs. 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%." 8. Basis the aforesaid conclusions, the AO proceeded to make additions under the head of profit on sale of hardware, profits on licensing of software as well as interest income. Nokia OY assailed the view so taken asserting that equipment supply contracts with at least two of the Indian telecom operators were signed even before NIPL had been incorporated and consequently it was only the installation activities undertaken pursuant to the original equipment supply 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 discove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the close connection between the assessee and NIPL, it was possible to look upon NIPL as a "virtual projection" of the assessee in India. We have in fact clarified in the same paragraph that what matters is that there was scope for previewing the assessee's soul in the body of NIPL and that it did not matter that there was no direct evidence for the control of NIPL by the assessee. For purposes of PE, what is relevant is only the perception that NIPL was a projection of 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble High Court (lead case ITA 512/2007) Substantial Question of Law admitted by Hon'ble High Court Conclusions Q1. Whether on a true and correct interpretation, of section 9(1)(i) of the Income Tax Act, the Respondent can be said to have a business connection in India 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 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 earned 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 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 erro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transactions which were entered into by Nokia OY, we deem it apposite to note that the said individual, the Tribunal has found, was employed as a Country Manager in the Liaison Office between 01 February 1994 and 31 December 1994. It has further been found on facts that Mr. Hannu Karavitra was subsequently employed in NIPL between 01 January 1996 and 31 July 1999 and whereafter he is stated to have assumed the office of its Managing Director and functioned as such between the period 01 January 1996 to 31 July 1999. The Modi Telstra and Sky Cell contracts were signed on 23 March 1995 and 17 February 1995 and thus undisputedly at a time when he was not even employed with NIPL. The Tribunal further pertinently noted that the AO appears to have proceeded under the mistaken assumption of Mr. Hannu Karavitra being the Country Manager 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of facilities solely for the purpose of storage or display of goods or merchandise belongings to the enterprise; (b) the main tern 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 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 permanent establishment in the first-mentioned Contracting State in respect of any activities which that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies are carried on; and (i) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term 'permanent establishment' likewise encompasses: - (a) A building site or construction, installation or assembly projector supervisory activities in connection therewith only if such site, project or activities last more than six months. (b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within the country for a period or periods aggregating more than 183 days within any 12 month period. 4. Notwithstanding the preceding provisions of this Article, 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 enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. 8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. 19. The Tribunal before proceeding to rule on this aspect firstly identified the four principal contracts which merited examination and in the context of which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we shall endeavor to examine whether the assessee company has any kind of business connection or permanent establishment in India either in terms of Section 9(1) of Income Tax Act; and/ or under Article 5 of then India-Finland DTAA." 21. This set the stage for it to consider the aspect of PE. The Tribunal notes that the aforesaid question was liable to be answered in the context of signing of contracts, network planning and negotiation of offshore contracts in India. It firstly bore in consideration the assertion of the Revenue that it was the Liaison Office which was engaged in activities of network planning, negotiation and signing of contracts. However, it held that once and in the first round of litigation itself, the Liaison Office was found as not constituting a PE at all, those aspects would clearly pale into insignificance. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Morgan Stanley and Centrica off-shore Pvt. Ltd, however as per the then existing provision of Article 5 between India and Finland treaty, there was no such concept of 'Service PE' per se except for certain activities mentioned in clause (a) and (b) of Paragraph 3 of Article 5, which ostensibly are not applicable at all. Since none of the on-shore activities are carried out by the assessee in India albeit was done by its Indian subsidiary, provisions of paragraph 3 of Article 5 will also not attract. Once there is no concept of 'Service PE' (though there is no allegation by the Assessing Officer or CIT (A)that there is any kind of service PE), then such plea of the learned CIT-DR has no legs to stand. His core argument was on the point that installation activities done through employees of the assessee constitutes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining whether a Fixed Place PE had come into existence. The Tribunal in this context also rested its decision on the judgments of the Supreme Court in Formula One World Championship Ltd. v. CIT [(2017)15 SCC 602] and ADIT v. E-Fund IT Solution [(2018) 13 SCC 294]. This becomes evident from a reading of paragraph 46 which reads thus: - "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 the NIPL were either assisting by providing certain administrative support services made available in the form of telephone, fax, conveyance; or the NIPL was providing technical and marketing support services to assessee and hence it is assisting in sale 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sist/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 Id. 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" 26. It then proceeded further to observe that the peripheral activities and administrative assistance which was extended by NIPL would fall within the meaning 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of the onshore activities of NIPL can be said to be devoted wholly and almost wholly on behalf of the assessee, because, the contracts undertaken and signed by NIPL in India independent and on principal to principal basis with the Indian customers and assessee has not signed any kind of installation contract with the Indian customers for which it could be said that the installation activity of NIPL was wholly and almost wholly on behalf of the assessee. The two contracts which were signed earlier prior to the incorporation of NIPL were separate and assigned to it and income from such installation has been shown in the hands of NIPL in India. There is no income whatsoever from installation activities has been earned by the assessee in India or can be attributed either directly or indirectly through NIPL. Insofar as other activities 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving broadly noticed the conclusions which were rendered by the Tribunal with respect to Fixed Place PE and DAPE, it would be pertinent to briefly advert to its conclusions on the aspect of vendor financing and which the Tribunal has answered in the following terms:- "60. Now coming to the last issue of taxability of interest from Vendor Financing ,we find that the Assessing Officer in his order has made the addition on the ground that assessee provided credit facilities to its customers for which it should have charged the interest on the same. For coming to this conclusion, he has referred to one clause given in paragraph 6.9 of the contract between the assessee and Modi Telstra to conclude that purchaser were liable to pay interest @180/0 for each day elapsed from the due date of actual payment. Thus, the only reason for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Chaamanbhai, (1965) 56 ITR 42, CIT vs. Shoorji Vallabhdas and Co, (1962) 46 ITR 144 (SC) and Godhara Electricity Company Ltd. Vs. CIT, 225 ITR 746. Further, the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore, reported in (1986) 158 ITR 102 (SC) which has been relied upon by the ld. CIT (A), has not been treated to be correct enunciation of law by the Hon'ble Supreme Court in the case of Godhara Electricity Company Ltd. v/s. CIT (supra) and UCO Bank v/s. CIT (supra). Here in the present case, the assessee itself has not treated the amount of interest to be due from any of the telecomm operators either recognised as a debt or as a legal claim. 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. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were liable to be tried afresh was also not contested. We do so observe in light of the Tribunal having, in our considered opinion, correctly appreciated the findings which had come to be returned by the Special Bench in the first instance as well as the judgment of this Court rendered in 2012. It has thus correctly found that the aspect pertaining to the Liaison Office constituting a PE was one which stood duly laid to rest. It also held, and in our view correctly, that the solitary issue insofar as PE was concerned would be whether NIPL could be viewed as either constituting a Fixed Place PE or a DAPE. 32. For the purposes of evaluating the challenge which stands raised in these batch of appeals, it becomes pertinent to firstly notice the provisions made in Article 5 of the DTAA. As that Article presently stands and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions including the locus classicus on the subject being the decision of the Andhra Pradesh High Court in Commissioner of Income Tax vs. Visakhapatnam Port Trust [1983 SCC OnLine AP 287] and where for the first time the expression 'virtual projection' appears. 37. We had an occasion to review the entire body of precedent which has come to evolve over the years on the subject of Fixed Place PE in our decision in Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax (International Taxation) and Others [2024 SCC OnLine Del 4065] and relevant parts whereof are extracted hereinbelow: - "67. Mr. Datar had with his characteristic erudition and clarity not only sketched out the well-recognised principles governing the question of a permanent establishment, he had also placed for our consideration various academic texts 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the enterprise of the taxpayer. Such functional integration contains several aspects which need to be carefully distinguished from one another. Their common denominator, however, is the type and degree of proximity of the place of business to, or even identification with, the taxpayer's paramount economic activity. 135. The first function of the term 'through' is to make it clear that the taxpayer has to control the permanent establishment (see supra m. No. 106 et seq. for details). 136. Secondly, functional integration presupposes that the taxpayer 'wholly or partly carrie(s) on' his business (article 5 (1) OECD MC; the OECD MC Comm. uses the verb 'carried out' synonymously (No. 35 OECD MC Comm. on article 5)). However, like 'business' and 'enterprise' (cf. supra m. No. 27 et seq.), these words do not function 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 perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulate a different meaning of 'through', as opposed to 'in' or 'at'. For all of these reasons, we do see a substantial difference between both terms. 142. It follows that on the one hand, the activities mentioned in article 5 (1) of the Organization for Economic Co-operation and Development and UN MC need no longer be carried on 'in' or 'at' the place of business. In this respect, the 1977 change of article 5 (1) of OECD MC has enlarged the scope of the permanent establishment definition. Especially if one thinks of an activity as a human behaviour, one can now (unlike before 1977) easily subsume unmanned facilities under the permanent establishment definition (see supra m. No. 45 and see, e.g., No. 127 OECD MC Comm. on article 5). 143. On the other hand, the requirement of an instrumental character of the place of business 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilled : (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) permanent establishment must be a fixed place of business, i.e., a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, permanent establishment must have three characteristics : stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on... The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be 'at the disposal' of the enterprise. For this purpose, it is not necessary that the premises 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain location where it carries on its business, that would also constitute a permanent establishment. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute permanent establishment are : a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constituting a fixed place of business. They are: (a) a place which stands placed at the "disposal" of an enterprise; and (b) The establishment answering the characteristics of stability, productivity and dependence. 88. The expression "disposal" was explained to mean a right to use a place and exercise "control" thereupon. "Control" was explained further to mean the place of business being at the "disposal" of an enterprise and which may have use of the same to a considerable extent. It was further observed that the test of place of business being under the "control" of a foreign enterprise would be met even though the said premises may not be directly owned or taken by way of lease or on rental basis. In Formula One World Championship Ltd., the Supreme Court observed that even a certain amount of space which may be placed 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 es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co 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." 90. Morgan Stanley and Co. Inc. was followed by the Supreme Court in Samsung Heavy Industries Co. Ltd. and where and 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 establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A reading of the aforesaid judgments makes it clear that when it comes to 'fixed place' permanent establishments under double taxation avoidance treaties, the condition precedent for applicability of article 5 (1) of the double taxation treaty and the ascertainment of a 'permanent establishment' is that it should be an establishment 'through which the business of an enterprise' is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. What is equally clear is that the maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under article 5. Also, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded to or appear to have been borne in consideration before arriving at the conclusion that the Indian establishment constituted a fixed place permanent establishment. xxxx xxxx xxxx 94. We also take note of the judgment in Formula One World Championship Ltd. [Formula One World Championship Ltd. v. CIT (International Taxation), (2017) 394 ITR 80 (SC); (2017) 15 SCC 602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).] and where it was significantly observed that a permanent establishment must qualify and meet the tests of stability, productivity and dependence. Of equal significance were the observations which explained the phrases "at the disposal of" and "through". Tested on the aforesaid precepts also, the impugned notices and the reasons set out for initiating action under section 147/148 woefully fail to rest 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 enunci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise is legally set up as a company, partnership, sole proprietorship or other legal form. Different enterprises may collaborate on the same project and the question of whether their collaboration constitutes a separate enterprise (e.g. in the form of a partnership) is a question that depends on the facts and the domestic law of each State. Clearly, if two persons each carrying on a separate enterprise decide to form a company in which these persons are shareholders, the company constitutes a legal person that will carry on what becomes another separate enterprise. It will often be the case, however, that different enterprises will simply agree to each carry on a separate part of the same project and that these enterprises will not jointly carry on business activities, will not share the profits thereof and will not be liable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of a conglomerate or an entity which may have many arms or independent functional units situate in various fiscal jurisdictions. Any entrepreneurial activity which gives rise to income or profit thus becomes liable to be taxed at source irrespective of the ultimate recipient or owner of that income. Source here would mean the location which gives rise to the accrual of profits or income or which is the location where the same arises. The PE principle thus enables the assignment of tax to the State which constitutes the source. The PE concept thus creates a functional relationship and connect between the principal entity and the place of business whose activities give rise to the income or profit. It is this fictional creation of an independent economic center in a Contracting State which informs the allocation of taxing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he PE being liable to be viewed as an independent center of revenue. 46. The identifiable parts of Article 7 not only restrict the right of one of the Contracting States to tax, it also provisions for the extent to which a tax may be imposed by that State. This becomes evident from it freeing a trans-border entity from the specter of a tax liability if it does not have a PE in the introductory part of that covenant. It then proceeds to restrict the impost by adopting the principle of attribution. It thus constructs an objective criterion for identification of a PE and when a foreign enterprise with sufficient economic presence would become subject to tax. All of the above, convinces us to hold against the argument of a PE not being taxable on an independent evaluation being misconceived." 39. In Progress Rail (supra), we 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other hand, generally corresponds to an activity that is carried on to support, without being part of, the essential and significant part of the activity of the enterprise as a whole. It is unlikely that an activity that requires a significant proportion of the assets or employees of the enterprise could be considered as having an auxiliary character.... 69. (Collect information) The second part of sub-paragraph (d) relates to a fixed place of business that is used solely to collect information for the enterprise. An enterprise will frequently need to collect information before deciding whether and how to carry on its core business activities in a State. If the enterprise does so without maintaining a fixed place of business in that State, sub-paragraph (d) will obviously be irrelevant. If, however, a fixed place of business 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or enterprise (1) while it constitutes the core business of enterprise (2). 305. The amount of value added by either enterprise is the same, and so is the potential tax revenue in the source State. An absolute standard suggests equal treatment of cases (1) and (2). 306. However, the ordinary meaning of both 'preparatory' and 'auxiliary' requires the identification of a point of reference. One may say that the absolute standards are based on an analysis of the function of the core activity in relation to the entire chain of economic value added. It is more convincing, however, to apply relative standards in the sense that the value added is considered on a micro rather than a macro level, that is, that the core activity should be compared to the entirety of all activities exercised by the enterprise. This relative view would 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 (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts are subject to approval by the head office or another permanent establishment." xxxx xxxx xxxx 98. That takes us then to further test the stand as struck by the respondents and to examine the correctness of their conclusion that the activities undertaken by the Indian subsidiary could not be said to be of a "preparatory" or "auxiliary" character. The decision of 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.], while explaining the meaning to be ascribed to support services and activities of a "preparatory" or an "auxiliary" nature enunciates the legal position in the following terms (page 425 of 292 ITR): "In our view, the second requirement of article 5 (1) of the Double Taxation Avoidance Agreement is not 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on 'Double Taxation Conventions, Third Edition', he states that 'It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character'.... 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 artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. The issue of a habitual or recurrent exercise of authority does not arise at all since we have already found that an "authority to conclude contracts" never stood conferred. Suffice it to observe that there is not an iota of evidence which may have even remotely justified article 5 (4)(a) being invoked. 112. Similar is the position which emerges when the case as set up against the petitioner is examined on the anvil of article 5 (4) (c) of the India-USA Double Taxation Avoidance Agreement ((1991) 187 ITR (Stat) 102). This would have required the respondents to have established or found, as a matter of fact, that the Indian subsidiary was engaged or created solely for the purpose of securing orders for the petitioner. Clause (c) of article 5 (4) would have been attracted if the respondents had, even on a prima facie examination, 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 anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g viewed as DAPE, it would have been incumbent upon the appellants to have established that the LO was acting on behalf of Western Union Financial Services and that its functions fell within the four corners of clauses (a), (b) and (c) of Article 5 (4). For the purposes of being held to be a dependent agent, it was incumbent for the appellants to establish that such an entity habitually exercised an authority to conclude contracts. It could have also been proved by the appellants that the LO habitually secured orders for Western Union Financial Services. However, none of these conditions are met in the facts of the present case. In the absence of these conditions being found to exist, it would be wholly incorrect in law for the LO to be classified as a DAPE. 57. Regard must be had to the fact that Article 5 (4) introduces 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', wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answered on an appreciation of facts as may be found to exist. It is here that the precepts propounded by learned scholars such as the use and maintenance of a place of business, the place being at the disposal of an enterprise or being liable to be viewed as an operating asset of the enterprise itself assume significance. What, however, needs to be emphasized is that these are aspects which cannot possibly be left to depend upon the tenuous thread of fluctuating perceptions, impressions and mutable beliefs. Article 5 thus bids us to answer the question of PE based on measurable evidence and the objective benchmarks incorporated therein. The exercise to ascertain whether a PE exists is thus founded on evidence-based standards rather than a theory or mere surmise. We consequently find ourselves unable to countenance the perception test which was propounded by the Tribunal in the earlier round of litigation. 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 Agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions comprised in Article 5 of the DTAA. 50. We also concur with the minority opinion when it held that the appellants had failed to establish the existence of a DAPE. It has, however, in this respect observed that while the view expressed in the previous round, stricto sensu, may not have been wholly accurate or tenable, the question of PE would still be liable to be answered basis the essence of the arrangement between Nokia OY and NIPL as was discerned by the AO and the CIT(A). The first issue which was thus identified by the Member was that of business connection. According to the Member, the "unmistakable thrust" of the findings of the AO and the CIT(A) would inevitably lead one to answering the business connection question in favour of the Revenue. According to the minority, the slew of services and expertise which 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 suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o bear in mind that Article 5 (5) speaks of an agent who acts not for itself but principally in furtherance of the business interest of the enterprise. We fail to comprehend how NIPL could have been possibly recognised as carrying on the business of Nokia OY when the revenue generated by the former was admittedly being taxed in its hands and recognised as income accruing to it. The fact that both Nokia OY and NIPL were acting in discharge of independent contractual obligations does not appear to have been a point of contestation at all. We also bear in mind the consistent stand of the assessee who had gone in great detail to explain the nature of the onshore activities undertaken by NIPL as distinct and separate from the offshore supplies affected by Nokia OY. The minority has thus chosen to yet again proceed on the basis of 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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