TMI Blog2010 (2) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taxed under the Income-tax Act, 1961 having regard to Art.7.2 of the DTAA. - The applicant is not required to withhold tax under Section 195 of the Income-tax Act while making remittance to Laird USA as it has not derived any income chargeable to tax in India. - 793/2008 - - - Dated:- 18-2-2010 - PRESENT Mr. Justice P.V. Reddi (Chairman) Mr. J. Khosla (Member) Name address of : M/s Laird Technologies India Private Limited, the applicant Plot No.1, Nokia Telecom SEZ, SIPCOT Industrial Park, Phase IIIA(1), NH4, Sriperumbudur, Kancipuram, Tamil Nadu. Commissioner concerned: Commissioner of Income Tax-I, Chennai. Present for the Applicant: Dr.Anita Sumanth, Advocate, Mr.Rajan Vora, CA, Mr.Amit Kumar Baid, CA, Mr.A.J.Majumdar, E Y Advocate, Present for the Department: Mr.D.Ravindran, CIT, Chennai-I, Mr.S.D. Kapila, Advocate, Spl.course, Mr.R.R.Maurya, Advocate RULING (By Hon'ble Chairman) 1. This application for advance ruling under section 245Q(1) of the Income-tax Act, 1961 has been filed by an Indian Company, namely, Laird Technologies (P) Ltd., which is a group company of Laird Plc, U.K. The applicant's holding Company is Laird Technologies, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn its rights and obligations under the Agreement. The applicant would not have any right under the Agreement after the expiry of 5 years unless the agreement is extended on mutually agreed terms. The consideration of USD 5,300,000 payable by Laird India (the applicant) to Laird USA shall be paid within 30 days of 'invoice' by means of wire transfer to the account of Laird USA maintained at Wachovia Bank, NA. It is the case of the applicant that the said amount receivable by Laird USA under the terms of the Assignment Agreement is not taxable in India either under the Income-tax Act or under the DTAA [Double Taxation Avoidance Agreement between India and USA.] 2. The applicant submits that the consideration under the Agreement would be received by Laird USA outside India, the PPA and the Assignment Agreement have been executed outside India and further the capital asset that inheres in PPA is located and transferred outside India. Therefore, there is no taxable income either on accrual or receipt basis in India. The applicant points out that Laird USA would not trigger a business connection in India so as to attract Section 9(1)(i) of the Income-tax Act as no business activity i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business connection between Laird USA and the applicant within the meaning of Section 9(1)(i) of the IT Act and in the absence of the permanent establishment of Laird USA in India. It is contended that the applicant is not acting as an agent of Laird USA in any capacity and the applicant would supply the products to Nokia India on a principal to principal basis and not on behalf of Laird USA. 4.1 In order to contend that the rights flowing to Laird USA as per the PPA represent a capital asset held by Laird USA, the applicant's counsel has drawn our attention to Section 55(2)(a) of the Act occurring in the Chapter on 'Capital Gains' and the proviso to Section 28 (va). Section 28 enumerates various items of income which shall be regarded as profits and gains of business or profession. Section 55 of the Act while defining the expression 'cost of acquisition of a capital asset' specifically recognizes that "right to manufacture, produce or process any article or thing" or "right to carry on any business" as capital assets. These words were introduced by the Finance Acts of 1997 and 2002. In the definition "cost of any improvement" (vide Section 55(2)(b)) also, the same expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and/or cancellation of purchase orders shall be as agreed upon in Appendix-4 (vide cl.7). The Agreement continues to be effective until terminated in accordance with the Agreement and the Agreement shall be governed by and construed in accordance with Finnish law (cl.27.1). Cl.26.1 stipulates that "neither party shall assign any of its rights or obligations under this Agreement without prior written consent of the other party." The clauses relating to insurance, warranty, product liability are also found in the Agreement. 6.2 We may now refer to the terms of the Assignment Agreement in brief. The Agreement as noticed earlier was executed by the parties namely Laird Technologies Inc, USA and Laird Technologies India (P) Ltd. (the applicant) on 17th December, 2007. In the recital portion of the Agreement, it is stated: (B) LT India is proposed to be engaged in the business of manufacture and supply of products for the electronics industry. LT India is pursuing opportunities to establish relationships with other major electronics manufacturers in India. (C) Laird uses its knowledge, contacts and expertise to negotiate manufacturing and supply arrangements with Nokia Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e solely by Laird. 2.6 In the event of significant variations in the volumes as stipulated in Annexure 2 of the Agreement, LT India will have the right to renegotiate the terms with Nokia India. 2.7 In the event the volume of the sales to Nokia from LT India pursuant to the Supply Contract, exceed the volumes indicated in Annexure 2 of the Agreement, then LT India shall pay Laird an additional consideration to be mutually agreed upon by the Parties. The Parties will also mutually agree upon the terms and payment of such additional consideration separately. 2.8 Alternatively, in the event the volume of sales is lower than that stipulated in Annexure 2, then Laird shall pay LT India a consideration as may be mutually agreed upon between Parties at a later date. 2.9 LT India would not be entitled to assign or divulge with the rights and obligations under this agreement. 2.10 LT India shall not have any right under the agreement after the expiry of five years. The Contract can be extended by the parties at an additional consideration and terms mutually agreed upon. The volumes to be shipped to Nokia India by LT India yearwise is mentioned in Annexure-2. The other p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he element of control as per the definition is lacking. The jointness of control in respect of Laird USA and Laird India vesting in some other party is also missing. True, in Annexure-2 to the application, it is stated that Laird USA is a unit of Laird Plc. and that the applicant is "Laird Plc.'s first manufacturing facility in India". In the letter dated 24/2/2009 addressed by Laird USA to Nokia Corporation, Finland, the applicant is referred to as "our operating Indian subsidiary". These expressions used in a very broad and loose sense do not operate as estoppel against the applicant to contend that it is not an affiliate of Laird USA, going by the definition of 'affiliated company'. The use of such words does not automatically lead to the interpretation sought to be placed by the counsel for Revenue. The fact that Laird Plc, UK is the ultimate holding Company of Laird US and the applicant-Company and both of them are a part of the organizational structure of Laird Plc. UK and known as Laird group companies in a broad sense, does not make the applicant an 'affiliate' of Laird USA. 7.1 It is then contended that there is no provision in the PPA which can be said to have granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to choose with whom he will contract, and no-one is obliged to accept the liability of a person other than the one with whom the contract is made. It was observed in Tolburst vs. Associated Portland Cement Manufacturers by the Court of Appeal (1900-03, AuER 386): Neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor onto those of another without the consent of the contractee." (at p.972) 9.1 Further, in the case of Khardah Company Ltd. vs. Raymon Co. (AIR 1962 SC 1810), the Supreme Court observed : "An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. As a rule, obligations under a contract cannot be assigned except with the consent of the promise and then it is a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment, e.g, as in the case of goods covered by personal licences. .." 9.2 Apart from the legal position enunciated above, cl.26.1 of the PPA in specific terms lays down: "Neither party shall assign any of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fe to act on the letter of 24th Feb.,2009 (filed after the case was partly heard) and draw an inference therefrom that Nokia Corporation has consented to or ratified the Assignment Agreement. As rightly pointed out by the learned counsel for the Revenue, the Assignment Agreement as such has not been enclosed with the letter. In the letter, there is a bare reference to Laird USA's assignment of the right for supply of products to Laird India (applicant). It is not known whether Nokia Corporation has been apprised of all the terms of the Agreement including the obligations that are passed on to the applicant. There is no explanation as to why this letter of 24th Feb. 2009 (signed by Nokia's Director on 3rd April, 2009) has seen the light of the day only in October, 2009. Further, it is not known whether the Director (Mechanics components) who signed for and on behalf of Nokia Corporation is authorized to give such consent. There is not even the seal of Nokia Corporation beneath the signature of the Director. For all these reasons, we are not inclined to place reliance on this letter. We shall therefore proceed on the premise that there is no valid assignment in the eye of law. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no escape from the conclusion that the income is in the nature of business profits received by Laird USA. In fact, it is the case of the applicant itself that if the transaction is not in the nature of capital gain, the amount paid to Laird USA could be regarded as business profits. Therefore, treating the same as business profits, the next question is whether it is liable to be taxed in India. The answer to that question depends on whether Laird USA - the recipient of consideration has business connection in India in terms of Section 9(1)(i) of the Act or Laird USA has a 'Permanent Establishment' in India within the meaning of the DTAA. 12. In view of our finding on the 'permanent establishment', there is no need to discuss the issue of 'business connection'. 13. We shall now address the question whether the applicant had at the relevant point of time a Permanent Establishment in India, because under the DTAA, only the business profits earned through a PE in India and the profits attributable thereto are taxable in India (vide Article 7.1 7.2 of DTAA). The applicant has clarified that Laird USA has no place of business in India and the applicant has never acted fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no LSP was ever appointed or provided by Laird USA and Clause 5 was not invoked. True, no details as regards the pattern of dealings between Laird USA and Nokia India before the applicant came into the picture have been spelt out. Even then, it is not reasonable to draw inference that the business profits representing the consideration paid under the Assignment Agreement is attributable to the PE in the form of LSP, or any other place of business. Thus, going by the facts appearing on record, a fixed place PE of Laird USA can be safely ruled out. 15. Then, we come to the question whether the applicant can be considered to be an agent or dependent agent of Laird USA within the meaning of Article 5.5 of the DTAA which reads as follows:- "An enterprise of a contracting State shall not be deemed to have a PE in the other contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such agent are devoted wholly or almost wholly on behalf of that enterprise and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in para 5 of the LOI, it is stated that the parties shall endeavor to enter into detailed agreements ('final agreements') setting forth the detailed terms and conditions with respect to the subject-matter of LOI. It has been clarified by the applicant that no other agreement was entered into pursuant to LOI and the only relevant agreement is the sublease agreement referred to earlier. The LOI, in our view, does not have a bearing on the question whether the applicant is a dependent agent of Laird USA. The main purpose of LOI was to record an understanding between Laird USA and Nokia India with regard to the provision of land and setting up of a manufacturing facility which will pave the way for regular product supplies to Nokia India. The LOI, it is stated explicitly, is a non binding expression of the intention of parties. From the subsequent events, it is clear that Laird USA has gone out of the picture after Laird India (the applicant) had started manufacturing and supplying the goods. 15.3 The contention of the Revenue that the applicant is wholly dependent on Laird USA for its business of supplies of products to Nokia is not sustainable. It is not elaborated as to how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a from LT India for the reasons stated above, compared with the volumes as indicated in Annexure 2 to the Agreement, Laird agrees to procure from LT India, the necessary products to compensate the deficiency in procurement. Laird shall make good the deficiency in relation to the gross margins that LT India would have earned in supplying the products to Nokia India as per the volume indicated in Annexure 2 to the Agreement." 15.5 It is pointed out by the applicant in its rejoinder filed on 1st October, 2009 that these clauses have not been invoked at any time by either party i.e. Laird USA or the applicant and they have only remained on paper. In any case, these provisions by themselves do not militate against the relationship of principal to principal between Laird USA and the applicant. These provisions meant in the business interests of both the parties to the Agreement cannot be construed to mean that the applicant acts as an agent much less as a dependent agent of Laird USA in supplying the products to Nokia India. It may be mentioned that more or less similar clauses in the deed of assignment were considered by this Authority in ABC Limited, In re (289 ITR 438) and it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactured by it in India. It is contended that Laird USA has received US $ 5.3 million from the applicant for transferring the legal rights accruing to it under the LOI. We find it difficult to accept this contention. First of all, the LOI cannot be construed as an enforceable agreement especially in view of the specific declaration therein that the "LOI constitutes a non-binding expression of the intention of the parties". It is further declared : "nothing contained in this LOI may be construed to create (i) legally binding obligations to Nokia to provide developed industrial land within its SEZ or (ii) legally binding obligation to the supplier to purchase or lease such land or related services." LOI contemplates final agreements to be entered into. However, according to the applicant, no such final agreement was ever entered into as the need did not arise. Therefore, it cannot be said that LOI has conferred on Laird USA any legal rights or interests in respect of the land and infrastructure. The consideration in regard to land and common facilities was paid by the applicant to Nokia India in accordance with the Sub-lease Agreement. The Assignment Agreement only relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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