2012 (9) TMI 409 - HC - Income Tax

Liaison Office(LO) and Indian subsidiary - assessee is a company of Finland - Whether the Liaison Office of Nokia constitutes a PE in India under Article 5 of the DTAA ? - Whether NIPL constitutes a PE in India under Article 5 of the DTAA? - Held that:- The assessee had opened this LO in India on 30.3.1994 Two agreements were signed between the assessee on the one hand and Indian Cellular Operators on the other hand viz. Modi Telestra (I) Ltd. and Skycell Communication Ltd. on 23.3.1995 and 17.2.1995 respectively. When these contracts were signed, the assessee subsidiary viz. NIPL was not in existence. As this company was incorporated on 23.5.1995 after that date four other agreements were entered into with different cellular operators. The assessee supplied both the hardware and software to Indian Cellular Operators and its subsidiary namely NIPL carried out installation work.

The LO has not carried out any business activity for the assessee in India and that its role has been only to assist the assessee in the preliminary and preparatory work. It is further found by the ITAT that as per the rules of the Reserve Bank of India itself, a LO is not permitted to carry out any business activity for a foreign enterprise. Its activities are closely mentioned by the Reserve Bank of India - The Income-tax authorities would appear to have also held that the LO carried out marketing activities for the assessee in India but for this finding, there is no evidence and none of the contracts which have been brought on record indicate that the LO has carried out any marketing activities' - there was nothing on record to show that the LO had something to do with designing activity connected to the GSM - thus it is clear that there is no material or evidence on the basis of which it could be said that the LO can afford a business connection to the assessee in India. For same reasons, we are of the view that LO cannot be constituted as Permanent Establishment of the assessee in India - in favour of assessee.

Taxability on income from off-shore supply of equipment - Held that:- That the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractual parameters, as per article 21.1 of the Supply Contract, the only consequence would be that the Cellular Operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused due to the acceptance test not being complied with, Article 19 of the Supply Contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India - Overall Agreement does not result the income accruing in India. The execution of an overall agreement is prompted by purely commercial considerations as the India Cellular Operator would be desirous of having a single entity that he could liaise with - in favour of assessee.

Consideration for supply of equipment and licensing of software - 'royalty' u/s 9(l)(vi) of the Income Tax Act, 1961 or Article 13 of India-Finland DTAA - Held that:- In order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work - Section 2 (o) of the Copyright Act makes it clear that a computer programme is to be regarded as a 'literary work'. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract - in favour of assessee.

Business connection of NIPL subsidiary of the assessee company engaging itself in activities to support the assessee's main activities - Held that:- NIPL could be considered PE of assessee in India being subsidiary as it is the virtual projection of the company in India. Further, the accounts of the Indian subsidiary show that the company incurred huge losses as it was not compensated properly for the installation work carried on by it. In the opinion of the ITAT since it was a wholly owned subsidiary, the assessee would have direct and complete control over the activities of this subsidiary - Refer the matter back to the Tribunal for fresh consideration on the issues as to whether the subsidiary of the assessee would provide business connection or is Permanent Establishment and even if it is so, is there any attributes of profits on account of signing, under working, planning and negotiation of off-shore supply contracts in India.