TMI Blog2012 (9) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - IT Appeal nos. 359 OF 2005, 1137 and 1138 OF 2006, 503, 505, 506, 512 & 1324 OF 2007, 30 OF 2008 - - - Dated:- 7-9-2012 - A.K. SIKRI, MS. REVA KHETRAPAL, JJ. JUDGMENT A.K. Sikri, Actg. CJ. : 1. Some of these appeals filed by the Nokia Network OY (hereinafter referred to as 'the assessee ') and some filed by the Director of Income-Tax (hereinafter referred as to 'the Revenue') pertain to assessment year 1997-98 and 1998-99. 2. The assessee , a company incorporated under the laws of Finland, is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld as under: ( i ) True intention of the contract of supply was not merely to supply the equipment but was also to install and provide related services by or on behalf of Nokia. ( ii ) Nokia was held to have its presence in India in the form of the Liaison Office and Indian subsidiary. 'Installation PE' was also affirmed on the basis that Indian Subsidiary did not act independently in discharge of its obligation towards Indian telecom operators. ( iii ) India specific Profit and Loss statement, duly audited by the Auditors of Nokia, was rejected on the basis that Profit and Loss statement was not supported by any documents. ( iv ) Profit on sale of equipment (comprising of hardware and software) was arrived at on the basis of net margins disclosed in the global profit and loss accounts of Nokia and 50% of the same was attributed to activities alleged to have been undertaken by Nokia in India. ( v ) Income from vendor financing was held to be rightly computed by the Assessing Officer. ( vi ) Interest under Section 23413 of the Act was, however, deleted. 4. As the appeals were partly allowed, both the parties felt aggrieved by the order of CIT ( A). Thus, appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below 51% without written permission of Indian Telecom Operators was used as the main basis to hold that Nokia was in a position to control and monitor NIPL's activities. (5) While upholding NIPL as a PE of Nokia, the Special Bench observed that it did not matter that there was no direct evidence for the control of NIPL by Nokia. For purposes of PE, what is relevant is only the perception that NIPL was a projection of Nokia, whether or not in fact and in truth its activities were being controlled/monitored by Nokia. Following discussion ensued on this aspect: - "... We only meant to convey that because of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hore supply revenues; Supply and installation contracts together constitute 'works contract'; Attribution of profits to alleged PE: Royalty Levy of interest u/s 234 B 512/2007 1998-99 LO constituted business connection/PE; Taxation of off-shore supply revenues; Supply and installation contracts together constitute 'works. contract'; Attribution of profits to alleged PE; Royalty; Levy of Interest u/s 234B Nokia Appeals 1137/2006 1997-98 NIPL as PE of Nokia; Attribution of profits to alleged PE; Imputed income from vendor financing 1138/2006 1998-99 NIPL as PE of Nokia; Attribution of profits to alleged PE; Imputed income from vendor financing 7. The questions of law on which ITA 512/2007 was admitted would cover all the appeals of the Department, and therefore, we are reproducing those questions hereunder: "1. 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? 2. Without prejudice, whether the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n existence. It was incorporated only later on 23.5.1995. Thereafter, four other agreements were entered into with different cellular operators, namely, Tata, Evergrowth Fasccll, BPL and Supreme. The assessee supplied both the hardware and software to the Indian cellular operators and NIPL, its 100% subsidiary carried out installation work. It was on this basis, the Tribunal remarked that the main question to be considered related to the role of the LO, namely, whether LO could be said to furnish "business connections" to the assessee in India and whether this LO could be treated as constituting a PL of the assessee in India. In so far as issue of "business connection" is concerned, finding 'which is arrived at by the Tribunal is that 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. Reserve Bank of India has not found any vio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent finding has been dealt with in Ishwar Dass Jain v. Sohan Lal, AIR 2000 SC 426. The Supreme Court noted two situations where findings of fact can be interfered with (though under Section 100 of the Code of Civil Procedure which is admittedly pari materia with Section 260A of the Act). The first situation is when material or relevant evidence is not considered which, if considered, would have led to an opposite conclusion, while the second situation in which interference is permissible is where a finding has been arrived at by placing reliance on inadmissible evidence which if it was omitted, an opposite conclusion was possible. Neither of these two situations arises in the present case. Therefore, on the basis of the decision rendered by the Supreme Court, no substantial question of law would arise on the finding of fact arrived at by the Commissioner and the Tribunal. We may add that no contention is urged that the finding of fact is in any manner perverse, which may warrant interference under Section 260A of the Act." 9. Therefore, on the basis of the aforesaid findings, which are final, it is clear that there is no material or evidence on the basis of which it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be chargeable to tax in India. The analysis of the present case on the basis of the ratio of Ishikawajima's (supra) is right inasmuch as:- ( i ) In both the cases the property in the equipment passed outside India and in the assessee's case even the risk passed outside India; ( ii ) In the case Ishikawajima's even though it was to perform onshore services including the erection and commissioning of the equipment supplied by it, nevertheless, the Supreme Court held that no part of the profit on the offshore supply of the equipment was taxable in India as a consequence of the performance of such activities in India. In the assessee's ease the assessee does not perform any service in India in connection with the installation of the equipment or otherwise; ( iii ) the performance of the acceptance test in India was not considered a relevant circumstance whilst determining whether any part of the profit on the offshore supply was chargeable to tax in India in the case of Ishikawajima, so also in the assessee's case. ( iv ) although admittedly a permanent establishment existed in the case of Ishikawajima, nevertheless, the Court held that no part of the profit ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of the Supply Contract per se and de hors the Installation Agreement and Overall Agreement. It is for this reason that his line of argument proceeded on the basis that the three agreements are to be taken to form an 'Integrated business arrangement' between the parties which was governed by the Overall Agreement. As noticed above, this submission proceeded on the basis that the assessee had entered into contracts with cellular operators in India for setting up of GSM system in India, the hardware and software for which was supplied by the assessee, and the installation thereof was also over-seen by the assessee who was to ensure that it was carried out to the satisfaction of Indian buyer in accordance with the terms of the contract. Various charges of Overall Agreement as well as Installation Agreement have been relied upon as already noticed above. Article 15 of the Installation Agreement deals with acceptance test made by the Installation contractor which "includes the integrity of whole system and certificate binds the assessee". Article 17 provides warranties to rectify the defects in both hardware and software provided by the assessee. On this basis it was argued th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Thus, judged from any angle, the sale of machinery, which are "goods" within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India." 18. We may also usefully refer to the judgment of the High Court in Mahavir Commercial Company v . CIT , 86 ITR 147 wherein following principle was enunciated: "Even though the property in the goods may pass to the buyer when the documents are handed over, the buyer may yet retain the right to examine and repudiate the goods but this right generally which a buyer has in c.i.f. contract docs not by itself indicate that the property in the goods has not passed to him. This supposed incongruity was sought to be explained per curiam in Kwei Tek C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the expressed language of Section 9(1) (i) of the Act, which makes the income taxable in India to the extent it arises in India. 21. It will also be pertinent to refer to the judgment of the Supreme Court in Commissioner of Income Tax, Meerut and Am. v . Hyundai Heavy Industries Co. Ltd. 291 ITR 482 wherein the Court held:- "7. A short question which needs to be answered in the present case is what are the profits reasonably attributable to the assessee's PR in India. In order to answer the above question we are required to analyse the scheme of the Act. Under Section 4 of the Act it is the total income of every "person'' which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) of the Act lays down that as far as a non-resident assessee is concerned scope of total income of such an assessee is confined to an income which accrues or arises in India or is deemed to accrue or arise in India and which income is received or deemed to be received by such foreign company. Therefore, it is clear that under the Act, a taxable unit is a foreign company and not its bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign GE in India. The computation of profits in each PE (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the PE are computed as independent units. However, in a case where Government of India has entered into a tax treaty with a foreign county (Korea, in the present case) then in relation to an assessee on whom such tax treaty applies, the provisions of the Act shall apply only to the extent to which the provisions thereof are more beneficial to the assessee. ** ** ** 12. There is one more aspect to be discussed. The attraction rule implies that when an enterprise (GE) sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the GE derives from the sources country - whether through PE or not. It is the act of setting out a PE which triggers the taxability of transactions in the source State. Therefore, unless the PE is set up, the question of taxability does not arise - whether the transactions are direct or they are through the PE. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not - ( a ) The possession or control of such right, property or information is with the payer; ( b )) Such right, properly or information is used directly by the payer; ( c ) The location of such right, property or information is in India. Explanation 6- For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;" The above Explanations have been inserted with retrospective effect from 1.6.1976. The Memorandum explaining the Provisions in the Finance Bill, 2012, in the context of the above provisions states:- "Section 9(1)(vi) provides that any income payable by way of royally in respect of any right, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature depicting the Parliament intention viz; ( i ) the medium through which the software is transferred itself will not affect the taxability of the royalty payments made for the transfer of right to use or actual use of the software in India by a non-resident. ( ii ) It is not necessary that the actual software be transferred to an Indian user or in fact used in India so long as the right to use has been transferred to a resident taxpayer for valuable consideration. He, thus submitted that the question of "copyrighted article" or actual copyright docs not arise in the context of software both in the DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Hunch of the ITAT has dealt with this aspect in its judgment in Gracentac Co. v. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighted article" as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We arc in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. ( supra ). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which arc susceptible to sales tax. liven intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "specially manufactured goods." 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator Unacquiring such property cannot be regarded as a payment by way of royalty. 57. It is also to be borne in, mind that the supply contract cannot be separated into two viz. hardware and software. We would like to refer the judgment of Supreme Court in CIT v. Sundwiger EMFG Co., 266 ITR 110 wherein it was held: "A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in. the present case. 61. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty." 26. Notwithstanding the above, it was the submission of Mr. Parasaran learned ASG that the agreement entered into for the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing is common to Ericsson except to the extent stated in the submissions, and the only submission on Royalty in the said submission is as under: "It is most respectfully submitted that once it is established that there is a business connection and a Permanent Establishment through which the business activities of the company are carried out, and profits are attributable to the same the payments made for software would also form part of the same and there would be no need to deal with the same separately as "royalty" for the purposes of the DTAA or the Income Tax Act. However, in the event this Hon'ble Court is pleads to hold that any of the above criteria are unmet, it is submitted, without prejudice to the other arguments, that the payments made to the Respondent by its Indian customers for the license to use the copyrighted software amount to royalty" 29. Our reasoning given in Ericsson (supra) therefore would apply to this case as well, liven otherwise, we find, as a fact, the assessee had entered into contract for supply of GSM equipment. Responsibility for installation and commissioning of the equipment and provisioning of technical services was untaken by NIPL underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults in a permanent establishment? 3. Without prejudice, if the answers to Q.1 Q.2 arc 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? 4. Whether in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of Assessee as interest from vendor financing?" 34. We may reeapitulate that there are four contracts which have been referred to in the orders of the authorities below. The same are: ( i ) Supply contracts between the assessee and various customers. ( ii ) Installation Contracts between the Indian subsidiary and the customers directly. Only two contracts with Modi Telstra and Skycell executed in February and March, 1995 were separate from the supply contracts and installation portion was assigned to the Indian subsidiary with the consent of all concerned. ( iii ) Marketing support Agreements dated 19.4.1996 and 6.11.1997 between the assessee and its Indian subsidiary and ( iv ) Technical support agreement between Indian subsidiary and the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice were shifted to the Indian subsidiary. ( v ) The employees of the Indian office were responsible for execution of the contracts with operators. ( vi ) No compensation was paid to IC for marketing and support services prior to 1997. ( vii ) PSC was set up in India to supervise the supply contract with TATA. ( viii ) Certificate of acceptance was signed by Indian subsidiary on behalf of the appellant. ( ix ) The appellant has accepted that the license of customized software is not sale, but royalty, and ( x ) The appellant has actually earned interest from Vendor Financing and on account of delayed payments by the operators in the relevant previous year. 36. Mr. Parasaran, learned ASG appearing for the Revenue could not controvert the aforesaid pleas of Mr. Syali. We find that the aforesaid errors on facts have crept in. It is primarily for the reason that the Tribunal had taken the facts in the case of Ericsson case and on the presumption that those facts were common the case of Nokia as well and the legal questions in the appeals of Nokia were decided therefore the actual inaccuracy has crept in the fact findings of the Tribunal. We find justification in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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