TMI Blog2018 (6) TMI 497X X X X Extracts X X X X X X X X Extracts X X X X ..... d or accrued to the assessee in India or through or from any asset in India. NIPL is an independent entity and all its income from India operation is liable for tax in India. So far as the issue of fixed place PE is concerned the same does not get established at all by making to reference of providing of telephone, fax and car facility to the employees of assessee visiting India. As regards allegation that expatriates employees of assessee in India were assisting the NIPL and hence used the office of NIPL, is of no relevance qua assessee’s business, because, the technical expatriates were in India to assist/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 -nothing has been brought on record by the AO or ld. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India to the extent it arises in India. The marketing activities and installation contract undertaken by NIPL has been on principal to principal basis; and in the case of former agreement between assessee and NIPL, the payment has been made to NIPL on cost plus markup basis which has not been disturbed; and in the later agreement there is an independent contracts by NIPL with Indian customers which has nothing to do with the assessee. The income arising from both the contracts are taxable in the hands of the NIPL in India Since we have already held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts Taxability of interest from Vendor Financing, assessee has not debited the account of any customer with interest which can be treated as income of the assessee. Nowhere has it been held by the Assessing Officer/CIT (A) that such an interest is legally claimable right against the Indian customers in respect of interest on delayed credit period on Vendor Financing. Thus, we hold that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works; and trading of telecommunication of hardware and software. In the year 1994 (i.e., on 30.03.1994), assessee had established a Liaison Office (LO) and later on a wholly own subsidiary was incorporated on 23.05.1995, named as Nokia India Pvt. Ltd (herein after referred to as Nokia India or NIPL). During the period when LO was in operation, the GSM equipments manufactured in Finland were sold to Indian Telecommunication operators from outside India on principle to principle basis under independent buyer-seller arrangements as well certain contracts for installation was also entered. After the incorporation of NIPL in May 1995, the installation activities were carried out by the Indian subsidiary under its independent contracts with the Indian Telecommunication operators. The following contracts as culled from the Assessment order were entered by the assessee:- S. No. Name of the customer Date of contract 1. DTL US (West) Telecommunications Services (P) Ltd. 25.06.1996 2. Fascel Ltd. 02.06.19963. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware. Further 30% of the profits so determined were attributed to the PE of Nokia in India. The remaining 30% of the equipment revenues were attributed towards supply of software and the same was taxed as 'royalty' (on a gross basis) both u/s 9(1)(vi) of the Income-tax Act and under Article 13 of the India-Finland DTAA, holding that software was not sold but licensed to the Indian telecom operators. (c) In addition, income from vendor financing and delayed payment was imputed at ₹ 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%. 4.1 Accordingly, the addition was made under the following heads:- (1) Profit on sale of hardware INR 38,99,98,921 (2) Profit on licensing of software INR 43,98,48,409 (3) Interest income INR 5,00,00,000. 5. The finding of the ld. CIT (A) has been summarized by the Hon'ble High court in its judgment in the following manner:- (i) True intention of the contract of supply was not merely to suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to the assessee is considered, the following findings have been given by the Special Bench which finding too has been summarized in the judgment of the Hon'ble High Court in the following manner:- (1) Liaison Office neither constituted a business connection under the Act nor a PE of the Nokia under Article 5 of the India-Finland DTAA, as it merely carried on advertising activities in India. (2) Sale of hardware took place outside India and no income from sale of hardware accrued to Nokia in India. (3) Nokia was not responsible for installation of telecom equipment and Nokia's arrangement with the Indian Telecom Operators did not constitute a works contract. NIPL is a separate corporation entity and is also assessed separately for its installation income. (4) However, Nokia was held to have a PE in India in the form of NIPL, on the basis that Nokia virtually projected itself in India through NIPL and Mr. Hannu Karavirta, acted for both. Losses incurred by NIPL and guarantees given by Nokia that it will not 'dilute its shareholding in NIPL below 51% without written permission of Indian Telecom Operators was used as the main basis to hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITAT to mean revenues arising from supply of hardware and software). 7. The substantial question of law admitted by the Hon'ble High Court and the final conclusion/answer given by the Hon ble Court can be tabulated in the following manner:- Revenue Appeals before Hon 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 customers. Whereas the marketing support ensures to the benefit of the assessee the technical support ensures to the benefit of the Indian customer, the technical support is in respect of the projects installed and has nothing to do with the supply contract. The consideration accruing or arising under the contracts already assessed in the hands of the Indian subsidiary and there is no adverse action in respect thereof. The technical support agreement referred to supra has not even been referred to by the authorities below in support of any of the allegations. Only general or loose reference has been made by the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the argument of Mr. Syali that the clear cut impact of such assumptions is evident from the fact that findings (i), (iv), (v) and (vi) are all suppositions in the absence of appreciating that there was a marketing support agreement in operation from 1.1.1996 to the 31-12.1996. Even as per the AO after the later agreement of 1997 there is no allegation made as regards shifting of expenses, no compensation paid to Indian subsidiary, etc. in other words, once there was an agreement the issue only revolved on the nature of the agreement. Once it is accepted that the position in 1997 and 1996 is pari-materia, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n? Or whether the same constitutes a permanent establishment of assessee in India? (b) And if the answer to above question is found to be affirmative, then whether any attributes of profits on account of signing, network planning and negotiation of off-shore supply contracts in India could be attributed to such business connection/ permanent establishment. (c) Whether notional interest on delayed consideration of supply of equipment and licensing of software taxable in the hands of assessee as interest from vendor financing. 10. We shall now first take up the key issue, whether the Indian Subsidiary, Nokia India Pvt. Ltd. (NIPL) constitutes PE of Nokia Networks OY in India and/ or whether the said subsidiary would provide business connection in India. First of all, we have to analyse the case of the Assessing Officer. The primary case of the AO qua the Indian subsidiary was that, it constitutes a Dependent Agency Permanent Establishment (DAPE) of the assessee in India. However, the finding of the Assessing Officer is scattered at various places where he has taken into account several facts and has mixed up the entire concept of PE in as much as while holding LO as a PE, at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claim that its income arising from offshore supply of hardware and software were not taxable in India since there was no PE of the assessee in India, he has proceeded with following premise:- i) In fact the project was turnkey project and the assessee has divided these contracts for its own convenience and to avoid its taxability in India. ii) Nokia Telecommunications OY has a permanent establishment in India in the form of its Indian Office. iii) The assessee has an Indian Subsidiary which is a dependent agent PE. iv) The software has been supplied under a license and it has not been sold and therefore, the income is in the form of Royalty . v) The Indian company has not been compensated properly for the services rendered by it to the assessee company. vi) The value of installation contract in many case is lower than the normal cost of installation as prevalent in the market at that time. 12. In so far as the issue of turnkey/composite contract referred to at various places by the Assessing Officer, the same are no longer matter of adjudication, because they had been made in reference to Modi Telstra contract which have been discussed in the context of LO b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the visiting expatriate employees of the assessee; (l) Hannu Karavirta signed contracts on behalf of the assessee as well as the Indian company as he was the country manager of NIPL from 1.2.1994 to 31.12.1994 and Managing Director of NIPL 1.1.1996 to 31.7.1999. In so far as the employees details of Mr. Hannu Karavitra which has been extensively referred to by the learned Assessing Officer, we find that his employment details in NIPL and the periods as well as designation of his employment are contained at page 369(10) (of the paper book of volume III) which reveals that he has been employed as country manager in LO from 01.02.1994 to 31.12.1994 and thereafter from 01.01.1995 till 13.12.1995 he was not employed with Indian company. He was employed with a NIPL as its managing director from 01.01.1996 to 31.07.1999. Mr. Hannu Karavitra has signed the Modi Telstra contract on behalf of the assessee on 23.03.1995 and Skycell on 17.02.1995 on which point of time he was not employed with NIPL. There is also an observation in the assessment order that he was the country manager of NIPL from 01.02.1994 to 31.12.1994, which fact is divorced from the material facts as NIPL itself ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a PE by the earlier Special Bench and also confirmed by the high Court, ostensibly the same does not have any relevance while deciding the issue of PE qua the Indian subsidiary (NIPL). 14. Learned Assessing Officer has also extensively quoted the statement of the Managing Director recorded by him that administrative support services were provided to the visiting expatriates of the assessee, but as clarified by the Ld. Counsel before us that same has reference in the context of the position after 1996 when the marketing agreement was signed between the assessee and NIPL. One of the main contentions of the Ld. Counsel has been that NIPL only provides support services, like telephone, fax, conveyance, etc. The copy of the statement of the MD of NIPL has been placed by the learned CIT-DR in the paper book filed before us at pages 20 to 24 and from there it has been tried to canvass before us that, nowhere in the said statement has he admitted that NIPL has entered into any kind of supply contract of equipments on behalf of the assessee nor has it made available any place leave alone fixed place to the expatriates (employees of the assessee company). Analysis of the statement of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts and meeting their customer during the network survey and planning which cost was absorbed by NIPL and nothing was charged from the assessee. The AO has further observed that employees of the Indian office were providing marketing services during the year and were also responsible for execution of the entire contract. He also held that the employees of the Indian company were accompanying the expatriate employees during the meetings with the customers. This fact particularly assumes great significance as the assessee has been strongly contending that it was the expatriate employees of the assessee who were visiting India for negotiations and signing of contracts and the Hon ble High Court too while remanding the matter had directed this Tribunal to determine the PE exposure in respect of NIPL for signing, network planning and negotiation of contracts. Such an observation of the AO that these activities were being done by the visiting expatriates would be relevant in deciding the NIPL being a fixed place PE or DAPE of the assessee. Thereafter, the AO refers to a statement of the managing Director of NIPL and from this statement, the AO concludes that from 1.1.1997 rent was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Indian company as a nominee of the assessee. n) On page 30 of the order the AO held that the contention of the assessee that title has outside India cannot be accepted. o) Assessee has provided project steering committee to monitor. p) Acts of the Indian company are binding on the assessee. q) Another important factor is the person who has signed the contracts on behalf of the Indian company and the assessee on 25.6.1996, that is, he has signed between NIPL and BPL US (West) and the same person has signed a letter dated 24.5.1995 assigning the contract on behalf the assessee to NIPL. The installation contract dated 23.3.1995 between Modi Telstra and assessee has been signed by the same person. He was the authorised signatory of both the LO as well as the Indian company; r) The Indian company has worked wholly and exclusively for the assessee and provided installation services to customers whom the assessee had supplied equipment. In view of the aforesaid reasoning, AO has held NIPL to be PE of assessee in India. Findings of CIT (Appeals): 16. Ld. CIT(A), first of all in the context of assessee having a business connection in terms of Section 5 r. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritten by the assessee to Tata, in which the assessee guaranteed the due and timely discharge and performance, in accordance with the service contract of the IC, of all obligations and liabilities of the IC. Not only that, it also confirmed its plan and intention to provide all assistance to IC in the event that it should be required at any time, in another letter reproduced on pages 8 9 of the order. The assessee had also undertaken that so long as the agreement remains not performed, the stake of the assessee in the IC will not be reduced below 51% without the written permission of the Indian operator. In this letter it was also held out that the assessee has already provided or will provide to the IC with all specialist resources, skill, training, documentation and technical assistance, it may from time to time require in order to meet its commitments. These letters clearly show that not only the IC was a wholly owned company but it was under close control and supervision of the assessee in regard to conduct of its business. The A. O. s observation that all the employees and expenditure of the Indian office were shifted to the IC should be taken in the light of these facts. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order in case of the IC was filed. According to this order the company incurred book loss of about ₹ 10 crore. Even if the depreciation of about ₹ 3 crore is ignored then the loss before depreciation would about ₹ 8 crore. The IC had two streams of income, namely, commission from the assessee under the marketing agreement and installation charges from the Indian operators. The case of the assessee was that in respect of marketing agreement, the IC was compensated on cost plus 5% basis, which was claimed to be reasonable. If this argument is taken to be correct, then it can be said that the loss occurred on account of installation contracts. In other words, it lends credence to the A.O. s assertion that the IC was not properly remunerated under the contracts, guaranteed by the appellant and a part of money that it ought to have got was diverted as sale proceeds of the equipment. Nonetheless, even if this argument is rejected, the fact is that the IC incurred substantial loss and, therefore, it was not properly remunerated for the services rendered by it either in respect of marketing agreement or in respect of installation contract. The IC is a wholly owned subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing through a bad phase in that period and Indian operators were incurring heavy losses. The assessee was a new entrant in this highly competitive market and it had to make significant initial investment for gaining market share. Copies of P L a/c for Indian tax purposes for financial years 1996-97 and 1997-98 were filed in the paper book as item 6 of section 3. This showed a loss of U.S. dollars 2,37,52,669 for the year ended 31.3.97. The sales were shown at U.S. Dollars 1,57,51,991 . On the face of it, there appears to be something wrong with the P L a/c as direct costs were shown at U.S. Dollar 2,10,24,054. This is in the context worldwide gross profit of 28.7%. This P L a/c was not substantiated with any documents. Therefore, it is held that these accounts are not reliable for the purpose of computing income from sale of hardware. Accordingly, assistance of Rule 10 of the I.T. Rules is taken to compute profit on the basis of global accounts. The global accounts showed net profit of 10.8%, as mentioned by the Ld. A.O. in the assessment order. Therefore, the net profit is taken at 10.8%. The whole of this profit cannot be attributed to Indian operations as activities regarding ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of assessee having any kind of business connection in India, he strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Nortel Network India International Inc. vs. DIT (2016) 386 ITR 353, for the proposition that even it is assumed that there existed the business connection of assessee in India in view of the Explanation to Section 9(1), then also, no portion of the profits from off-shore supply could be brought to tax in India giving the fact that no activity of off-shore supply was carried out in India. He further referred and relied upon the judgments of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT (2007) 288 ITR 408 (SC); and CIT vs. Hyundai Heavy Industries Company Ltd. (2007) 291 ITR 482 (SC). Relying on these judgments, he submitted that if the taxability does not arise under the domestic law, i.e., under the provision of Income Tax Act itself, then there is no requirement to examine the provisions of DTAA. In this context, Ld. Counsel has relied upon the judgment of Hon'ble Delhi High Court in the case of Linde AG vs. DIT, 365 ITR 1, wherein the Hon'ble High Court has observed that DTAA do no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out in India so as to hold that assessee had any business connection in India in the name of NIPL. Thus, he submitted that under the domestic law itself nothing can be brought to tax. 21. Without prejudice, he submitted that, in so far as the issue whether there is an existence of a PE in the form of NIPL, the scope of inquiry and examination in terms of Article 5 of DTAA should be confined only to the issue of existence of DAPE, because the entire case of the Assessing Officer vis- vis NIPL is that, it is dependent agent of assessee and it was in the context of LO that he has held that assessee had a fixed place of business and hence it is a fixed PE in India. In the context of a NIPL there was no such allegation of the Assessing Officer that it constituted a fixed place for off-shore business of the assessee in India. In so far as fixed place of PE qua the LO, he reiterated that same now cannot be raked up in the present proceedings which is in pursuance of the directions and the scope of remand by the Hon'ble High Court. He submitted if in the case of LO such activities have not resulted in fixed place of business or PE, then how the same activities could be reckoned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration for the creation of PE under Article 5(5). Further clause (i) of Article 5(5) provides that where the activities of the agents are restricted to the activities listed in Article 5(4), it would not create a DAPE. Thus, where the activities of assigning of contracts, network planning and negotiation of off-shore contracts has been held to be preparatory and auxiliary in nature, then it cannot said to have satisfied the threshold of being DAPE under Article 5(5). Even otherwise also, he submitted that the concept of virtual projection has no place while determining the DAPE under Article 5(5). 22. In so far as the contention of the Revenue that NIPL is 100% subsidiary of assessee and therefore, it is a PE of assessee in India, he submitted that Article 5(8) of the India- Finland DTAA specifically provides that mere control over the subsidiary does not result in creation of a PE. Simply because assessee is having a subsidiary in India will not ipso facto constitute a PE. Thus, in terms of Article 5(4) r.w.s. Article 5(5) and Article 5(8), the NIPL cannot be reckoned as DAPE. 23. Coming on to the issue of fixed place PE under the Article 5(1), Mr. Deepak Chopra submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that they were working completely under the control and supervision of NIPL. The designation of these employees clearly point out they were technical personnel engaged in the activity of installation which was undertaken by NIPL as an independent contractor. Nowhere is it borne out from the record that any of the employees of the NIPL were involved in any manner in the matter of either negotiating the supply contract or sale of off-shore equipments. The clarification regarding Hannu Karavitra had already been given by him in detail and reiterated that nowhere after he became the employee of NIPL; he had assisted or carried out any function for the assessee qua negotiation of contracts, networking or supply of equipments. 25. Again with regard to the allegation made by the Assessing Officer that NIPL was undertaking marketing and after sale services on behalf of the assessee, Mr. Deepak Chopra submitted that the said services were performed by NIPL under a separate and independent contract which was under a Service Agreement signed between the assessee and NIPL on 19.04.1996 and 6.11.1997. He drew our attention to page 137 of the paper book Volume-II and pointed out that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has a permanent establishment in India and that too only to the extent that such profits arise out of the activities performed by such PE in India. In the present case when assessee does not have a PE in India, then the basic test for attributing business income remains unsatisfied in the instant case. The activities that are now alleged to have been carried out by Nokia India are the same as in the case of the LO which have been held to be preparatory by the Hon ble Court. Even if it is assumed that the income arising from offshore supply of equipment, wherein transfer of title took place outside India, is taxable under the Income tax Act and the Indian subsidiary is held to be a Permanent Establishment of the assessee in India, then also no profit can be attributed to PE in India as no activities pertaining to off-shore supply were performed in India. He again placed reliance on the order of the Hon ble High Court wherein while remanding the matter back to this Tribunal it has been specifically directed that this Tribunal needs to analyse the attribution of income only qua the following activities namely:- a) Signing; b) Network planning; and c) negotiation of off-shore supply co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der:- P L for Indian Tax purposes of Nokia Networks OY Equipment Sales to India; 1.4.96-31.3.97 USD 1.4.97-31.3.98 USD Sales 15,751,391 14780144 Direct Costs 21024054 10525700 R D costs 8363925 2704028 A G costs 616910 307170 Sales and Marketing costs 9249171 9857918 BOA advisory financial expenses - 250000 Net Profit (-) 23752669 (-) 8614672 The profit and loss account for the period April 1, 1996- March 31, 1997 and April 1, 1997 March 31, 1998 based on the cash method of accounting give a true and fair view of the profitability of the Indian business of Nokia Networks OY (formerly Nokia Telecommunications OY). May 29, 2000 From the said financials it was strongly contended before us that the assessee suffered significant losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Hon ble Apex Court. In the case of State Bank of Travancore the interest in issue was the interest accruing on sticky advances, i.e., advances considered doubtful of recovery and the account of parties were debited with such interest. In that context the court went on to hold as under:- In other words simply because the assessee has been regularly employing the mercantile system of accounting it would not mean that any hypothetical income which may have theoretically accrued but has not truly resulted to him in the concerned accounting year can be brought to charge and, therefore, the question whether the three sums representing interest on sticky loans had really accrued to the assessee or not would be a matter of substance and cannot be determined by merely having regard to the method of accounting (here mercantile system) adopted by the assessee. Secondly, it will have to be borne in mind that this is not a case where the assessee had ignored or failed to make any entries at all in regard to such interest on advances or loans which had become sticky in its books maintained or mercantile system but it had charged such interest by debiting the accounts of concerned debtors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax in the fourth year and onwards. However, if there is any recovery in the fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure will apply to assessment year 1979-80 and onwards. The Board s Instruction No. 1186, dated 20-6-1978 is modified to this extent. In view of the said Circular, the issue was decided in favour of the assessee. Thus, from the above decision, it becomes clear that the SC order in State Bank of Travancore does not hold the field as far as notional interest is concerned. He further placed reliance on the judgment of Hon ble Supreme Court in the case of CIT vs. Excel industries Ltd. [2013] 358 ITR 295 (SC) and submitted that if the principle laid down in the said judgment is applied then in the present case even if it is accepted that assessee in fact was entitled to such interest, but then there was no corresponding liability on any of the debtors to the extent that assessee did not issue any invoices for such interest. In absence of such corresponding liability to pay, it cannot be said that any income had accrued to assessee on account of delayed payments. Ld. Counsel thus submitted that only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee and only the perquisites were given by the Indian Company, which is evident from the fact that salaries paid was in foreign currency. These seconded employees were employed for installation contract of NIPL. Such an installation through employees of the assessee constitutes a PE in India. During the course of the assessment proceedings, Assessing Officer has specifically required the assessee to submit the employee wise details and who was performing which task, but same was not submitted by the assessee. Even the information of duration of expatriates was also not given. To prove his point he drew our attention to the Departmental paper book at pages 32, 35 and 36, and submitted that specific query by the Assessing Officer was raised to give the details, which assessee could not provide. If the entire gamut of facts and material are taken into consideration, then it could be easily deduced that assessee was having a fixed place business in India for all practical purposes. Again drawing our attention to page 56 of the paper book, he submitted that Mr. Hannu Karavitra had signed the balance sheet of the LO as a Country Manager as on 31st December, 1998. This goes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was not to dilute the equity of share of 50% of NIPL which shows that the Indian company was totally depended upon the assessee. This not only goes to show the nature of dependency of NIPL upon assessee-company but also its control. He further submitted that, Assessing Officer in his order has categorically mentioned that before the contract was signed by the assessee and its customers in India expatriates of the assessee came to India, stayed in India and carried out the network planning. They were also involved in negotiating the terms with various customers and were interacting with them on regular basis, all these activities were done by the assessee using the premises of NIPL, which were at its disposal. These facts have been confirmed by the Managing Director of NIPL, Mr. Simon Piers Beresford Wylie in his statement recorded on oath on 14.02.2000 u/s.131, wherein he has affirmed that about the fact that employees of assessee were coming to India for contract negotiation and entire support mechanism were provided by the NIPL with administrative support like office, telephone, fax, conveyance, etc. This has been independently confirmed by the assessee in the memorandum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent taken on oath. The same is for sake of ready reference is reproduced here: Q 15. Are there separate offices of Nokia Finland Oy and Nokia Ltd. since 1995? Ans. Always the offices have been the same. The assessee has also confirmed the same in its memorandum of the minute s recorded in question No. 15 as under:- Are there separate offices of Nokia Telecommunications Oy, India Liaison Office and Nokia Limited since 1995 or there is only one office? It was informed to the DCIT that Nokia Limited and Nokia Telecommunications Oy. India Liaison Office have the same office in India. They have however shifted the office during this period. Mr. Simon Piers Beresford Wylie was asked as to how the network planning was carried out in respect of the contracts and what the role of NIPL in that was. The relevant excerpt of the memorandum of meeting with regard to the same is as under:- Q. no. 9 (of the memorandum)- How was network planning carried out before the signing of contract? What is the role of Nokia Limited? Ans. It was informed to the DCIT that network planning is generally carried out by Nokia, depending upon customer specification. Q. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities. He also referred to certain paragraphs of earlier Tribunal order and drew our attention specifically to paragraphs number 273 and 274, wherein the Tribunal while holding NIPL to be PE has given certain observations. He also relied upon the decision of Hon'ble Supreme Court in the case of Formula One World Championship (supra) and submitted that the disposal test laid down by the Hon'ble Supreme Court is clearly established in this present case, because the assessee was having control over Indian company through its employee and the place of Indian subsidiary was also made available to the assessee. Once there is real and dominant control, then fixed placed PE gets established. 32. On the issue of NIPL as a DAPE, he submitted that NIPL did not acted as an independent contractor while dealing with assessee s customer and in fact NIPL was fully dependent on assessee not only of entering into contract with the assessee s customer but also for everything after it came into existence. 33. In so far as, on the issue of attribution of income, he submitted that the assessee has carried out operation in India, both pre and post negotiation, network planning throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patriate employees visited India to provide services regarding supply of equipments, for which NIPL provided administrative support, like telephone, cars etc. ➢ Setting up of GSM network is very complex and technical project which was carried out by highly skilled employees of Assessee Company sent to India from time to time. ➢ Supply Contacts and related agreements were signed in India by the employees of assessee. ➢ The services claimed to have been provided by the NIPL both to the assessee and to cellular operators were in fact provided by expatriates of assessee and NIPL did not reimburse the salary. Details of expatriates and their salary paid in foreign currency were pointed out to before us. ➢ Responsibility and liability for all the services provided to the customers in India was with the assessee. ➢ Heavy reliance on the judgments of Morgan Stanley (SC) and Centrica (Delhi Hon'ble High Court) (supra). ➢ Identity of NIPL and assessee merged into one due to above factors and hence it acted as virtual projection of foreign entity. DECISION 35. We have heard the rival contentions and perused the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. 36. After noting the aforesaid facts, Hon'ble High Court observed that the finding of fact by the Special Bench specifically with regard to point nos. i, iv, v and vi are purely based on assumption which are completely divorced from the facts for arriving to the conclusion on NIPL being PE. The relevant paragraphs of the Hon'ble High Court have already been incorporated above but for the sake of ready reference same is again reproduced hereunder:- 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 the argument of Mr. Syali that the clear cut impact of such assumptions is evident from the fact that findings (i), (iv), (v) and (vi) are all suppositions in the absence of appreciating that there was a marketing sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see are thus disposed of with the aforesaid direction remitting the case rack to the Tribunal for fresh consideration on these issues. 37. From the findings and observation appearing from para 34 to 38 and the final directions given by the Hon'ble High Court, following aspect defining the scope of present proceedings can be as inferred:- Firstly, there are only four contracts which are the subject matter of examination and the entire scope of adjudication of PE or attribution of profit which have been highlighted in paragraph 34 in the following manner:- 34. We may recapitulate 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 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal has considered NIPL to be PE of the assessee being subsidiary as it is the virtual projection of the company in India and further accounts of the Indian subsidiary show that the company had incurred huge losses and it was not compensated properly for the installation work carried out. It has been conceded by the learned ASG is not correct. ➢ Lastly, since there were many factual error which has been accepted by the Revenue also, therefore, the Hon'ble High court deemed appropriate to remand back the matter to the Tribunal for fresh consideration only with regard to the following issues:- (a) Whether the subsidiary of the assessee would provide business connection; or whether same constitutes a permanent establishment of assessee in India. (b) And if the answer to above question is in affirmative then, whether any attributes of profits on account of signing, network planning and negotiation of off-shore supply contracts in India could be attributed to such business connection/ permanent establishment. (c) Whether notional interest on delayed consideration of supply of equipment and licensing of software taxable in the hands of assessee as interest from ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal to principal basis. However, the off-shore supply contract of GSM equipments between the assessee and Indian customers continued to be done by the assessee. In the light of the facts and background discussed in detail in the foregoing paragraphs, 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. 40. Though the issue of business connection under the provisions of Income Tax Act should ordinarily be taken first as to whether any income of the assessee directly or indirectly accrues or arises through or from any business connection in India. But, since the main mandate of the direction of the Hon'ble High Court as well as the key arguments of the parties before us including the case of the department mostly revolves around the question whether assessee had any permanent establishment in the form of NIPL in terms of Article 5 or not, therefore, we will take up the issue of PE first. Before we examine the relevant facts and material on record for the purpose of examining whether the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 person undertakes for the enterprise, if such a person: ( a ) has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph (4) which, if exercised through a fixed place of business, would not make the fixed place of business a permanent establishment under the provisions of that paragraph ; or ( b ) has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. (6) Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to reinsurance, be deemed to have a permanent establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have a PE simply because it carries out the business through agent of an independent status if such an agent is acting in the ordinary course of business, except that if such an agent is devoted wholly or almost wholly on behalf of that enterprise, then it is not reckoned to be as an independent agent. ➢ Lastly, one very important exception which has been carved out in para 8 is that, if a company which is a resident of a contracting state of a foreign entity (here for instance NIPL) is controlled by company which is resident of other contracting state (Nokia Finland) or which carries on the business in that other state, i.e., India, (whether through a PE or otherwise) shall not of itself constitute either a company or the PE of the other. This inter-alia means that merely having a subsidiary company or if foreign enterprise has a control on that company which carries out the business in that country (India) will not itself construe a PE. 41. We shall now deal with the concept of fixed place of PE which has been harped upon by the ld. CIT-DR at great length and has been objected to by the learned counsel that it was never the case of the department either by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that place. The entire concept of fixed pace PE under Article 5(1) under the OCED model convention had come up for consideration before the Hon'ble Apex Court in the case of Formula One World Championship Ltd. vs. CIT (supra). Their Lordships have threadbare discussed the concept after referring to various commentaries and views of eminent international jurists, judgments rendered by foreign courts and also the judgment of Hon'ble High Courts in India. The Hon'ble Apex Court first of all have referred to the judgment of the Hon'ble Andhra Pradesh High Court in the case of CIT vs. Vishakhapatnam Port Trust reported in (1983) 144 ITR 146, wherein the Hon'ble High Court had laid down a very important proposition which is reproduced hereunder: The words permanent establishment postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. Thereafter, their Lordships have re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... characteristics, i.e. a distinct situs , a fixed place of business . This definition, therefore, contains the following conditions: - the existence of a place of business , i.e. a facility such as premises or, in certain instances, machinery or equipment. - this place of business must be fixed , i.e. it must be established at a distinct place with a certain degree of permanence; - the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. 34) The term place of business is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod of time so as to constitute a fixed place of business (see paragraphs 6 to 6.3) and that the activities that are performed there go beyond the activities referred to in paragraph 4 of the Article. (c) The third example is that of a road transportation enterprise which would use a delivery dock at a customer's warehouse every day for a number of years for the purpose of delivering goods purchased by that customer. In that case, the presence of the road transportation enterprise at the delivery dock would be so limited that that enterprise could not consider that place as being at its disposal so as to constitute a permanent establishment of that enterprise. (d) Fourth example is that of a painter, who, for two years, spends three days a week in the large Page 45 office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions of his business (i.e. painting) constitute a permanent establishment of that painter. 36) It also states that the words through which must be given a wide meaning so as to apply to any situation where business activities are carried on at a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olesome reading would bring out the real transaction between the parties. Such an approach is essentially required to find out as to who is having real and dominant control over the Event, thereby providing an answer to the question as to whether Buddh International Circuit was at the disposal of FOWC and whether it carried out any business therefrom or not. There is an inalienable relevance of witnessing the wholesome arrangement in order to have complete picture of the relationship between FOWC and Jaypee. That would enable us to capture the real essence of FOWC's role. xxx xxx xxx xxx xxx xxx xxx 76) We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country. It is already noted above that as per Philip Baker, a PE must have three characteristics: stability, productivity and dependence. All characteristi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial on record, specifically with reference to the following activities which have been identified by the Hon'ble High Court while remanding the matter back to the Tribunal. (a) Signing of contracts; (b) Network planning; (c) Negotiation of off-shore contract in India. As discussed earlier, the Assessing Officer has noted that LO was engaged in the activities of network planning, negotiation of contract and signing of contracts, however in the earlier round it has been categorically held that LO is not a PE qua these activities and nowhere there is a categorical and specific finding by the Assessing Officer or by the ld. CIT(A) in the entire order that there exist any fixed place PE qua the Indian subsidiary, i.e., NIPL, except for stating that office of the LO and NIPL were co-located, employees of the assessee were working with NIPL and therefore, it constituted a fixed place PE. If that reasoning alone is to be taken into consideration, then such an interpretation of PE did not found judicial favour either by the earlier Special Bench or by the Hon'ble High Court qua the LO, hence on same reasoning and principle, NIPL would also cannot be reckoned as fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices were assigned to NIPL and while working in India he was receiving salary from assessee only. First of all, Mr. Hannu Karavitra was employed with the LO earlier, prior to the incorporation of NIPL and he was not employed with the Indian company. In any case assignment was from assessee to NIPL and no authority was being exercised on behalf of the assessee company vis- -vis the customers. Whether Mr. Hannu Karavitra was representative of the assessee and was working for NIPL or was receiving salary from assessee, same would have some relevance in the context of Service PE , but certainly not while examining the fixed place PE . Even if the arguments sake it is accepted that he was a seconded employee to NIPL, then also if he had worked under the control of NIPL despite lien was maintained with assessee company, then also it does not lead to an inference that assessee company was having any kind of a PE, leave alone under paragraph 1 of Article 5. Similarly the allegation has been made by the Assessing Officer as well as strongly contended by the learned CIT-DR that employees of the NIPL were mostly belonging to the assessee company as some of the expatriates/ technical pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enever the employees of the assessee were visiting India in the context of networking, assigning or negotiation of off-shore supply contract, the employees of NIPL were either assisting by providing certain administrative support services made available in the form of telephone, fax and 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 to be attributed accordingly. This second part of allegation does not hold ground at all, because; firstly, as stated in the earlier part of the order, assessee and NIPL have entered into separate marketing and technical support agreements in respect of the projects installed and has no correlation with the supply contract. This has been specifically held so by the Hon'ble High Court also in paragraph 34 reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 physically located premise. The word used in Article 5(1) is fixed place of business through which business of enterprise is wholly or partly carried out . A fixed place alludes to some kind of a particular location, physically located premise or some place in physical form. Nowhere is it borne out that any kind of physically located premise or a particular location was made available to the assessee which was at the disposal of the assessee for carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g has been brought on record by the AO or ld. 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. 47. Now coming to the paragraphs 2, 3 and 4 of Article 5, it is not the case of any one that the NIPL constitutes any kind of PE under these provisions. Albeit if one goes by clause (e) of Paragraph 4 of Article 5, where it has been categorically provided that the PE shall not be deemed to include a maintenance of a fixed place of business solely either; a) for the purpose of advertising; b) for the supply of information or for scientific research; c) being activities solely of a preparatory or an auxiliary character in the business of the enterprise. This clause clearly excludes any activities solely for preparatory or auxiliary in nature and if one goes by scope of remand by the Hon'ble High Court, i.e., to see, whether signing, networking planning and negotiation constitutes a PE and also whether profits can be attributed to such activities, then such kind of an activity ostensibly falls within the scope and realm of preparatory or auxiliary in nature, because mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; and secondly, he does not bear the entrepreneurial risk. The agent must have sufficient authority to bind enterprise s participation in the business activities and the agent involves the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is the authorization to act on behalf of somebody else so much as to conclude the contracts. Here the NIPL neither has any authority to conclude contracts for supply nor any of the orders has been booked by NIPL which can be said to be binding upon the assessee. NIPL is an independent entity carrying out activities of installation, technical support services for the equipments installed are being carried out on principal to principal basis independently with Indian customers; and marketing support agreement is an independent agreement with the assessee for which it is remunerated at arm s length and none of its activities even remotely relate to supply of equipments, leave alone habitually exercising any authority to conclude contract. Lastly, it bears its own entrepreneurial risks. 49. We shall in brief examine various allegations of the AO, which has been harped upon by the Ld. CIT-DR al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian company came into existence in May, 1995 operations of the LO were slowly scaled down and there was no was requirement of the LO and the employees of the LO were transferred to the Indian Company w.e.f. June 1995. In so far as the allegation of the Assessing Officer that NIPL is a dependent agent, we find that nowhere he has brought on record that NIPL had any authority to conclude contracts relating to supply of equipments on behalf of the assessee. The Managing Director in his statement in answer to question no.9 has clearly stated that network planning was a service which could be provided by NIPL; however he categorically emphasized that it is prebid exercise which was only exercised to request for quotation. Nowhere it has been said in the statement that NIPL in anyway had authority to conclude contract on behalf of the assessee. In so far as the other allegation of the Assessing Officer which has been discussed in the earlier part that, NIPL has concluded contracts with cellular operators for installation services and it becomes responsibility of assessee to get the contracts executed by the NIPL; and further assessee had issued guarantee to the Indian customers t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the agent s commercial activities for his principal are subject to detailed instructions or comprehensive control by the principal or not; or to what extent the agent exercises freedom in the conduct of his business on behalf of principal; or the agent s scope of authority is affected by limitations on the scale of business which may be conducted by the agent. Economic independence has to be seen from the context as to what extent the agent bears the entrepreneurial risk or business risk and agent s activities are not integrated with those of the principal; and whether the agent acts exclusively for the principal. The tests for determining the independent status has to be seen from what kind of activities is being carried out by the agent for his principal. Here in this case, first of all we have to borne in mind that installation activity carried out by NIPL is not generating any revenue or income for the assessee in India albeit any income from such activity is already subject to tax in India. The off-shore supply contract is carried out by assessee on FOB basis from Finland and as discussed in foregoing paragraphs NIPL is carrying out various onshore activities, like inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all such comprehensive control does not have much relevance. Article 5(7) will apply only when some of the activities of the foreign enterprise are done by an agent wholly or almost wholly on behalf of that enterprise. Here the crucial test is that activities of the assessee must be carried out through the agent wholly and almost wholly for the assessee. When installation activity is not carried out by the assessee in India and is done by NIPL on principal to principal basis with the customers then there is no question of examining the installation activity for purpose of PE. The activity carried out by the assessee through an agent in India would be key factor for examining PE. Thus, provision of paragraph 7 of Article 5 will also not apply. 51. Lastly, coming to paragraph 8 of Article 5, it clearly states that mere fact that company which is a resident of a contracting status controls or is controlled by a company which is resident of the other contracting states or which carries on the business in other state, whether through a PE or otherwise shall not of itself constitutes either company or a PE of other. This inter alia means that if the NIPL, i.e., an Indian company is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with any other parameters of establishment of PE under Article 5. This concept alone is not relevant but has to be seen in relation to fixed place or any other concept of PE. The Hon'ble Supreme Court while coming to the conclusion in paragraph 76, held that not only Buddh International Circuit was a fixed place where the commercial or economic activity of conducting Formula One Championship was carried out, but one could clearly discern that it was a virtual projection of a foreign enterprise, namely, Formula One on the soil of this country. All the characteristic of the fixed place PE including the physical location and disposal test stood satisfied. The concept of virtual projection cannot be in vacuum dehors any other parameters of PE. In other words, virtual projection is in relation to either fixed place or in relation to any other parameters or conditions envisaged in Article 5. As in the case of Vishakapatnam Port Trust, it was in relation to fixed place. The concept of virtual projection does not mean that even without a fixed place, virtual projection itself will lead to an inference of a PE. If on a facts there is no establishment of a fixed place and disposal test i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od at the relevant time which read as under: Income deemed to accrue or arise in India. 9 (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [* * *] or through the transfer of a capital asset situate in India. Explanation.- For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out outside India. Only the marketing activities which have been performed by the Indian Company is somehow relevant, but for that there is a separate agreement between the assessee and NIPL and already income arising there from to the Indian company has been offered to tax in the hands of NIPL. The activities performed by NIPL only led to making of offers by the customers in the taxable territories to purchase goods manufactured by the non-resident which latter was not obliged to accept. Thus, in view of the principle laid down by the Hon'ble Supreme Court in the case of R.D. Agarwal and Co. (supra) he submitted that no business connection can be said to exist in the present case. The concept of agency as envisaged in the scope of business connection u/s.9(1)(i) of the Act was introduced by the Finance Act, 2003 and hence would not be applicable to the assessment years under consideration. Without prejudice, he submitted that how much portion of the profits whatsoever from the off-shores supply can be taxed in India is moot point. Regarding the agreements for contracts of supply of goods sold to the customers on CIP/FCA basis, he submitted that Hon'ble High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or evidence on the basis of which it can be said that LO can offer a business connection to assessee in India and it does not constitute PE of the assessee in India. The same reason ostensibly applies to NIPL also, as the terms and conditions of supply contract continues as spelled out in para 17 of the judgment remains the same. Further, the Hon'ble High Court in paragraph 13 has noted that income which has been earned by the assessee is a result of supply of software and hardware license under the supply agreement and if supply agreement is taken on standalone basis then such supplies under this agreement were made outside India. The properties and goods has passed on to the buyers under the supply contract outside India where the equipment was manufactured and for coming to this conclusion, the Hon'ble High Court has referred and relied upon the judgment of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v/s. DIT, reported in (2007) 3 SCC 481, that such agreement would not be taxable in India and no profit arising from supply of equipment outside India would be chargeable to tax in India. The Hon'ble Court has even drawn the paralle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be in force for the assessment year relevant to the present appeals, the existence of an overall agreement should make no difference to the taxability of the equipment supplied by the assessee. In paragraph 15, the Hon'ble Court has further observed that no doubt the contract in question was signed in India but it may not be a relevant circumstance to determine the taxability of such an income and for this proposition they have referred the judgment of Hon'ble Andhra Pradesh High Court in the case of Skoda Export v/s. Addl. CIT, (1983) 43 ITR 452. Finally in paragraph 17 as incorporated above, Hon'ble High Court has categorically said that the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test is not the determinative of this factor and further referring to the judgment of Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. vs. CIT, (1972) 86 ITR 147 (SC), held that overall agreement does not result the income accruing in India and the execution of an overall agreement is promoted by purely commercial considerations as India Cellular Operator would be desirous of having a single entity t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principle. Before that the relevant facts in the said case were as under:- The assessee was incorporated in the USA and was a tax resident of the USA. The assessee was a part of the N group which was stated to be a leading supplier of hardware and software for global system for mobile communication cellular radio telephone systems. The assessee was a step-down subsidiary of N, a company incorporated in Canada. N(C) also had an indirect subsidiary in India N (I). N (I) negotiated and entered into three contracts with R, namely, optical equipment contract, optical services contract and the software contract on June 8, 2002. On the same date, N (I) entered into an agreement assigning all rights and obligations to sell, supply and deliver equipment under the equipment contract to the assessee. R and N(C) were also parties to the assignment contract and in terms thereof, N(C) guaranteed the performance of the equipment contract by the assessee (assignee). In terms of the assignment contract, R placed purchase orders directly on the assessee and also made all payments for the equipment supplied directly to the assessee. The equipment supplied to R was manufactured by N(C) and anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by virtue of Explanation 2 read with Explanation 3 to Section 9(1) (i) of the Act, no part of Assessee s income could be brought to tax under the Act. It is only when a non-resident Assessee s income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. xxx xxx xxx xxx xxx xxx 47. As noticed earlier, there seems to be no dispute that the title to the equipment passed in favour of Reliance overseas. However, the AO, CIT (A) and ITAT did not consider the same to be relevant as according to them, the equipment continued to be in the possession of the Nortel Group till its final acceptance by Reliance. In our view, even if it is accepted that the equipment supplied overseas continued to be in possession of Nortel India till the final acceptance by Reliance, the same would not imply that the Assessee s income from supply of equipment could be taxed under the Act. Clause (a) of Explanation 1 to Section 9(1)(i) of the Act postulates the principle of apportionment and only such income that can be reasonably attributed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that Nortel India constituted a fixed place of business of the Assessee or Nortel Canada. 70. The AO has further alleged that the offices of Nortel LO and Nortel India were used as a sales outlet. In our view, this finding is also unmerited as there is no material which would support this view. The facts on record only indicate that Nortel India negotiated contracts with Reliance. Even assuming that the contracts form a part of the single turnkey contract, which include supply of equipment - as held by the authorities below - the same cannot lead to the conclusion that Nortel India was acting as a sales outlet. 71. The AO's conclusion that there is an installation PE in India, is also without any merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee or Nortel Canada. Undisputedly, Nortel India was also received the agreed consideration for performance of the Services Contract directly by Reliance. 72. The finding that Nortel India is a services PE of the Assessee is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le High Court in the case of assessee as well as in the case of Nortel, we hold that income of the assessee from off-shore supply of equipments in pursuance of supply contract cannot be brought to tax in India. 59. Since we have already held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts. Accordingly, the issue of attribution which has been remanded back by the Hon'ble High Court has become purely academic. 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 @18% for each day elapsed from the due date of actual payment. Thus, the only reason for making such an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Assessee must have received or acquired a right to receive the income before it can be taxed. In other words, there must be a debt owed to it by somebody if it is to be taxed on accrual basis unless a debt has been created in favour of the assessee by somebody it cannot be said that income has accrued to it or it has a right to receive the income. 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 vs. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Member IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI SPECIAL BENCH A , NEW DELHI [Coram: N K Saini AM, Pramod Kumar AM and Amit Shukla JM] ITA Nos. 1963 and 1964/Del/2001 Assessment years: 1997-98 and 1998-99 Nokia Networks OY, Finland ...........Appellant [PAN: AAACS0343R] Vs Joint Commissioner of Income Tax Non Resident Circle, New Delhi . ......Respondent ORDER Per Pramod Kumar: 1. I have my reservations on the views expressed in the draft order, so far as the questions of existence of a business connection and permanent establishment of the assessee company and the profit attribution thereto is concerned. These issues were discussed at length with my distinguished colleagues on this Special Bench but all that these discussions have yielded is a revised and more elaborate draft on the same lines finalized, and duly initialled, by both of my distinguished colleagues. The majority view is thus already expressed and outcome of this appeal, at this stage, is now fait accompli. In that sense, my views have no impact on the outcome of the appeal at this stage and now it is purely an academic exercise to express my view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as receiving salaries from the assessee company also . The Assessing Officer took note of the role played by the assessee company in he operations of Indian subsidiary, and then discussed the contents of certain contracts to highlight that awarding of technical support services contracts, in respect of the equipment supplied by the assessee company, involved a specific undertaking to the end customer to the effect that as long as any part of the commitments under the technical support agreement remain outstanding, we will continuously and diligently monitor business affairs of Nokia India with the aim of ensuring that the company at all times is in a position to meet its commitments to you and that as long as any part of technical support agreement are not performed, we shall not dispose of our ownership of Nokia India Pvt Ltd below 51% without your prior written permission . He was of the view that in the light of this position, the assessee company has a permanent establishment in India in the form of its Indian subsidiary, which is a dependent agent permanent establishment . He then referred to, and reproduced, the provisions of Article 5 and 7 of the then Indo Finnish tax t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the assessee company is a permanent establishment of the assessee company. His reasoning, as set out at page 21 of the assessment order for the assessment year 1997-98, was as follows: (a) The Indian subsidiary company is a dependent agent of the assessee company because (a) even though the Indian subsidiary company has concluded contracts with various cellular companies for installation of equipment and services, the entire responsibility rests with the assessee company; (b) the assessee company has given written guarantee to the effect that it will be responsible for proper discharge of obligations by the Indian subsidiary; and (c) the assessee company has even given undertaking that, except with the prior written approval of the vendor with which the Indian subsidiary has entered the contract, the assessee company will not dilute its shareholding in the Indian company below 51%. The Assessing Officer thus pointed out that the assessee company was in full control and the Indian subsidiary was no more than an agent of the assessee company. (b) The contract entered into by the Indian companies with the end customer specifically provided, such as in Article 19 of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Telecommunications OY and all its receipts are from contracts executed by it for supplies made by Nokia Telecommunications OY and as there is total control over the management and affairs of Nokia Telecommunications Pvt Ltd since its is a 100% subsidiary and further the foreign company is giving guarantee on behalf of Indian that they (the assessee company) will see to it that contracts are properly executed 4. Having so analysed the facts of the case, the Assessing Officer proceeded to form his opinion about these arrangements, at page 25 of the assessment order for the assessment year 1997-98, as follows: In the light of the aforesaid facts, it is clear that the Indian company is nothing but an extension of the foreign company and there is no basis of arm s length principle. The capital is contributed by the assessee company, the knowhow has been given by the assessee company for installation work, the expatriate employees have been provided by the assessee company, part of salary cost has been absorbed by the assessee company or its associated companies, the warranty and after sale service has been provided by the Indian subsidiary on behalf of the assessee company ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the customer . He then referred to certain dates and the signatories of the contracts, an aspect on which facts have been set out fairly elaborately in the lead order, and I, therefore, need not really supplement the same. Suffice to say that conclusion of the Assessing Officer was that the assessee company had a PE in India, and then, after taking note of the fact that gross profit of the assessee company was 40.87% in 1997 and 39.4% in 1996, the Assessing Officer adopted 40% as the gross profit earned by the assessee for the assessment year 1997-98. The net sales, converted into INRs, being ₹ 146,61,61,361, the gross profit was worked out at ₹ 41,05,25,180 by assuming that hardware sale was 70% of total sales. Allowing a deduction of 5% under section 44C and noting that there was no claim of expenses incurred in India operations, the Assessing Officer computed the profits attributable to the PE at ₹ 38,99,98,921 for the assessment year 1997-98. Using the same methodology, but with total sale figure of ₹ 84,51,41,736 for the assessment year 1998-99, the taxable profit attributable to the PE was worked out at ₹ 10,97,07,697. Aggrieved by the stand s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation contracts. The IC is a wholly owned subsidiary of the appellant and, therefore, appellant was in the knowledge of prices put on the installation contracts. It had wide experience in this line of business and yet the IC undertook business in a manner that, it incurred substantial losses. Therefore, it cannot be said that the transactions between the assessee, the operators, and IC were at arms length. In fact the agreements by the assessee with the Indian operators on one hand and IC with the Indian operators on the other can be said to have been arranged in a manner that loss would be incurred in the IC. In view thereof, there is reason to hold that the IC constituted the PE of the assessee and observed losses on behalf of the assessee. In the context of these facts, it will be difficult to hold that the assessee and the IC acted independently in so far as their businesses are concerned and it will more appropriate to hold that the IC merely acted at the instructions of the assessee in respect of installation and marketing contracts. It was also the case of the assessee that certain averment in Appendix 6 to the effect that Indian subsidiary assumed responsibilities on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o operations in India are taken at 5% of the sales to the Indian Parties. 6. Aggrieved by the stand so taken by the CIT(A), assessee carried the matter in appeal before this Tribunal, and, in the first round of proceedings, a coordinate special bench of the Tribunal concluded, in a rather brief operative portion of the order on this point, as follows: Taking up the second part of the second question as to whether the Indian subsidiary of the assessee, referred to as NTPL, can be considered as a PE of the assessee in India, we are of the view that having regard of the findings recorded by both the AO and the CIT(A), the NTPL can be considered as a PE. The issue has been dealt with in para 6.3 of the order of the CIT(A), though in several earlier parts of the order, there is scattered reference to this aspect of the matter. However, the final decision of the CIT(A) is only in para 6.3 of his order. A reading of this paragraph shows clearly that what the CIT(A) has in mind, as in the case of the AO, is that NTPL, the Indian subsidiary, is the virtual projection of the assessee itself in India, though this idea may not have been properly articulated in the orders of the IT author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or proved wrong by the assessee in the course of the proceedings before them or even before us. This also shows that the distinction between the two corporate entities, namely, the assessee on one hand and NTPL, its 100 per cent subsidiary, on the other hand, virtually got blurred with the result that it can be said that when the Indian cellular operators were dealing with NTPL in connection with the installation contract and marketing agreement, they were in fact dealing with the assessee itself. We are therefore, of the opinion that the test propounded by the Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust (supra) is fully answered. We are, therefore, unable to find fault with the CIT(A) for holding that NTPL, the 100 per cent Indian subsidiary of the assessee, constituted the assessees PE in India. 7. The conclusions so arrived at by the Special Bench were challenged by the assessee before Hon ble Delhi High Court, and the questions framed for consideration by Their Lordships were as follows: 1. Whether on a true and correct interpretation of the relevant DTAA the Tribunal's reasoning is right in law in holding that NIPL, (the subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osses 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 . 9. It was in this backdrop of these factual errors, as noted by Their Lordships, that Hon ble Delhi High Court referred the matter back to this Tribunal by observing as follows: 38. As we find that the order of the Tribunal is based on many factual errors (emphasis by underlining supplied by me now) which are even accepted by the Revenue before us, it would be appropriate to refer the matter back to the Tribunal for fresh consideration on the issues as to whether the subsidiary of the assessee would provide business connection or is Permanent Establishment and even if it is so, is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on any material ] - The conclusion arrived at by the special bench was erroneous as it was based on various factual errors which has crept in the orders of the lower authorities (emphasis supplied by me now) ..and the factual errors of the orders of the AO were specifically pointed out in the submissions to the CIT (A) and specific grounds were also taken before him (emphasis supplied by me now) which are as under:- (i) The Indian subsidiary was executing contracts on behalf of the appellant through its employees. (ii) All the contracts with the operators were signed in India. (iii) The employees of Indian Office (LO) were compensated by some other entity. (iv) From 1996 onwards all the expenses of Indian office 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. [This is an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, perceptions of the learned counsel for the assessee, on the implications of Hon ble High Court s judgment is not correct. Except for the mistakes so specifically pointed out by Their Lordships, all the issues are left open for adjudication and determination. It is in the backdrop of this factual scenario that the questions to be decided by this bench, so far as the existence of the permanent establishment and profit attribution thereto is concerned, are as follows: (a) Whether, on the facts and in the circumstances of this case, the subsidiary company of the assessee, namely Nokia India Pvt Ltd (NIPL), would constitute business connection or permanent establishment of the assessee company, i.e. Nokia OY, Finland; (b) In the event of NIPL being held to be a PE of the assessee company, whether any profit could indeed be attributed to the PE on account of signing, networking, planning and negotiation of offshore supply contracts in India ; and (c) In case NIPL is held to be PE of the assessee company and in case the work in the nature of signing, networking, planning and negotiation of offshore supply contracts in India can be said to have any profit attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Undoubtedly, Hon ble Delhi High Court has pointed out an error of omission (i.e. not dealing with quantification of PE profit attribution), certain errors of misconception of facts (i.e. mixing up facts of Ericson with the facts of this case, proceeding on the basis that since NIPL was a wholly owned subsidiary, the assessee will have direct and complete control over the subsidiary and proceeding on the basis that there was evidence to support the plea that losses of the Indian subsidiary were absorbed by the assessee company) and the error of reaching erroneous conclusions on the basis of factual errors in the orders of the AO which were duly pointed out to the CIT(A). Yet, none of these errors, either on standalone basis or taken together, cannot lead us to the conclusion that the finding of the earlier Special Bench is to be reversed. The errors so pointed out by Their Lordships do lead to the conclusion that, based on the material on record, findings of the Tribunal could not be sustained, but then there is a difference, and a vital difference at that, in the findings of the Tribunal not being sustained and the findings of the Tribunal being reversed. Take, for example, Their L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted in the UN Commentary as well), with which I have some issues on this point and I will discuss that in detail a little later, there can be situations in which a subsidiary can be a permanent establishment of the parent company, and even vice versa. The following extracts from the current OECD Commentary will throw light on the same: 115. It is generally accepted that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by the subsidiary company is managed by the parent company does not constitute the subsidiary company a permanent establishment of the parent company. 116. A parent company may, however, be found, under the rules of paragraph 1 or 5 of the Article, to have a permanent establishment in a State where a subsidiary has a place of business. Thus, any space or premises belonging to the subsidiary that is at the disposal of the parent company (see paragraphs 10 to 19 above) and that constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide an economic benefit to the business of another company does not mean that the latter company carries on its business through that location: clearly, a company that merely purchases parts produced or services supplied by another company in a different country would not have a permanent establishment because of that, even though it may benefit from the manufacturing of these parts or the supplying of these services. 15. It will, therefore, be wholly inappropriate to proceed on the basis that just because Their Lordships have observed that the Special Bench was incorrect in proceeding on the basis that merely because the NIPL was a wholly owned subsidiary, the assessee had direct and complete control over the activities of subsidiary, we have to now proceed on the basis that NIPL cannot be a PE of the assessee company. The direct control over subsidiary simply by the virtue of ownership is just one of the aspects of the matter, but there can be a direct control over subsidiary on account of several other factors as well. Those aspects of the matter, in my humble understanding, are open issues and this Tribunal is duty bound to deal with those aspects of the matter, to the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out in the submissions to the CIT (A) and specific grounds were also taken before him , but then that s not the end of the road for the case of the Revenue. Their Lordships noted that the order of the Tribunal is based on many factual errors but then referred the matter back to the Tribunal for fresh consideration on the issues as to whether the subsidiary of the assessee .is Permanent Establishment . What essentially implies is that the Tribunal has to take a fresh call on this question, and, while doing so, the conclusions of the Tribunal must not be vitiated by the factual mistakes that it had committed in the first round of proceedings. In the light of the discussions above, it is also clear that typically subsidiary companies, by default, do not constitute permanent establishments of the parent company though but then in a situation in which facts of a case warrant or justify such a conclusion, there is no bar in treating an Indian subsidiary as PE of the foreign company in India. That is the reason as to why, in a situation in which the foreign parent company and the Indian subsidiary company are operating in India simultaneously, any finding about the Indian subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning that the Assessing Officer, in the immediately succeeding paragraph, concludes that the Indian company is nothing but an extension of the foreign company , that the Indian company was providing the marketing support and coordination on behalf of the foreign company and that these factors, along-with other facts of the case, make it clear that the incorporation of Indian company was a veil to avoid the taxability of the foreign company on profits earned through the supplies made by the assessee company . Essentially, therefore, unmistakable pointer of the Assessing Officer is that the Indian subsidiary company of the assessee, because of the activities carried out by the subsidiary and the manner in which these activities are carried out, constitutes permanent establishment of the assessee company. Yet, he has stated, clearly unmindful of the correct implications of the expression dependent agent permanent establishment , the assessee company has a permanent establishment in India in the form of its Indian subsidiary, which is a dependent agent permanent establishment . There is not even whisper of a reasoning in support of any of the ingredient of the DAPE under article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso seen that the appellant himself has taken up the responsibility on behalf of the subsidiary company and has gone to the extent of holding out that its equity will not be diluted below 51% till installation contract is completed, except with written permission of the Indian operator. This strengthens the view that the assertions of the assessee in the matter are not correct. Accordingly, it is held that the ld. AO was right in holding that the appellant had a PE in India through the office of the IC. 19. The findings of the CIT(A), which are called into question in appeal before us, adopt and approve the same reasoning as was adopted by the Assessing Officer and come to the conclusion that the assessee company had a PE in India through the office of the Indian subsidiary company as the Indian subsidiary was acting, not because of the ownership of the Indian subsidiary company but because of the nature of, and manner in which, business activities are carried out by the assessee company and the Indian subsidiary company. 20. Verbosity of the assessment order apart, there can hardly be any doubt about underlying thrust of the assessment order. There is no mention about sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statute but observations made by Hon ble Supreme Court s landmark judgment in the case of CIT Vs R D Agarwal Co [(1965) 56 ITR 20 (SC)] give ample guidance about its connotations: .The expression business is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression business connection and its precise connotation is vague and indefinite. The expression business connection undoubtedly means something more than business . A business connection .involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the nonresident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non- resident thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts on behalf of Nokia Finland in response to which it was stated that administrative support like office support, cars, telephone etc are provided by Nokia Ltd . As stated in the statement of facts before the CIT(A), though it was stated that, during the course of assessment proceedings, that service agreement was effective from January 1, 1997, prior to which marketing was done by Nokia Finland directly, we stand corrected that an agreement (dated April 19, 1996) did exist for the provision of services before 1997 and the payment of ₹ 7,16,00,000 was made by Nokia Finland to Nokia Limited pursuant to invoice no. 61084 dated December 16, 1996 . It is also stand of the assessee that the IC was compensated, on arm s length basis, for the services rendered by the IC to the customers of the assessee. It is difficult, for the detailed reasons that I will set out, to take these arrangements at face value and as arm s length arrangements, including in the light of the statement of IC s Managing Director, which was recorded on 14th February 2000, extracts from which are reproduced below: Q 2: As per your agreement with Nokia Telecommunications OY and the customers, Nokia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and knowledge is predominantly dependent on the expatriate employees of the assessee company working for this Indian subsidiary at the operational level as also at the top management level. The agreement was signed, on behalf of the subsidiary, by the then Managing Director of the Indian company who was also an employee of the assessee company and wearing two different hats at the same point of time, one as Country Manager- India of the assessee company, and the other, as Managing Director of the IC. The persons actually rendering these expert services were also the employees of the assessee company, though wearing a different cap while rendering these services on behalf of the IC. All this adequately demonstrates that the contents of the agreement cannot be taken at face value, and the role of these persons, who were predominantly employees of the assessee company on secondment or otherwise deeply associated with the assessee company, working through the IC was the same as it would have been even if these persons were to directly work in their normal capacity as representatives of the assessee company. The agreement is more of a device which brings Indian IC into picture to artifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money consideration for these services was to be essence of the arrangements, someone sitting at the helm of affairs would have at least known about the fact of, if not quantum of, money consideration. These arrangements of the assessee with its Indian subsidiary were on a continuous basis and integral to its main business interests in India. It is also important to note that the assessee company was selling high value complex infrastructure project and in all the cases of its sale of these projects, the erection contract and after sale service contract was awarded to IC. As to the nature of these business transactions, I may refer to the following statement made by the Managing Director of the assessee company, on oath, on 14th February 2000: Q 8 During the year 1995 and 1996, most of the contracts were signed. How marketing was carried out by Indian company? Ans: These are very complex infrastructure projects. There is a group of very specialized people who do the marketing and sales, contract negotiations and trade finance, if required. At the same time, local services such as contract management, roll out services (deployment) and system integration (if required) are mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 51% without your prior written permission . On a realistic note, the role played by these undertakings and arrangements cannot be ignored in the association of the IC with the customers of the assessee company. One cannot be so na ve so as to ignore the role played by the assessee company is ensuring business for its subsidiary and the role played by the subsidiary in furtherance of the business interests of the assessee company. These two entities, even though hypothetically and legally independent of each other, have carried out their respective business activities in tandem with each other. On these facts, the work done by the IC cannot be viewed on a standalone basis. It has to be little more than coincidence that all the India based customers of the assessee company have awarded the erection and after sales service contracts to its Indian subsidiary. As a matter of fact, it is not even in dispute that the assessee company plays the decisive role in deciding as to who should be awarded the erection contract. In the submissions dated 14th February 2000, the assessee has accepted that position by stating, at page 5- paragraph 7(1), that the clause in agreements (for sale of eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o quote the words of Hon ble Supreme Court in R D Agarwal s case (supra), may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business of the non-resident. That is precisely what the IC, at the minimum, does in the present case. I donot share the perception of the majority that the marketing activities and installation contract undertaken by NIPL has been on principal to principal basis; and in the case of the former agreement between assessee and NIPL the payment has been made to NIPL on cost plus basis which has not been disturbed; and in the later agreement there .(are) independent contracts with Indian customers which has nothing to do with the assessee . These contracts, in my opinion, have so much to do with the assessee that these contracts would not have been possible but for the indulgences shown by the assessee and these contracts cannot be viewed as independent contracts between the IC and the Indian customers of the assessee company, in isolation with the assessee company. The sale agreements clearly provide that the installation of equipment is to be done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Contracts, Optical Services Contract and Software Contract, and, on the same date- with Nortel Canada and RIL being parties to the arrangement, assigned the equipment contract to the Nortel USA. Nortel Canada guaranteed the performance of equipment contract by Nortel USA. On these facts, the case of the Assessing Officer was that Nortel USA was a shadow company of Nortel Canada and was inserted as an intermediary only to avoid taxes, and that in substance, the contracts were performed by Nortel Canada along with its LO and Nortel India, who acted in unison to identify, negotiate, appraise, secure, execute, manufacture, supply, install, commission and provide warranty and after sales service in respect of the Optical Fibre project of Reliance . Rejecting the financial results filed by the assessee, which were unaudited, the Assessing Officer proceeded to estimate the profits of the assessee company on the basis of book results shown by the Nortel Canada. When matter travelled in appeal before the CIT(A), it was held, as noted by Their Lordships, that (a) that the Assessee was assigned the contract for supply of hardware to Reliance Infocom days after its incorporation; (b) thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Hon ble High Court observed that if it is accepted that the assessee (i.e. Nortel USA) has received only the consideration for equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of assessee s income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India . There can be no quarrel with this proposition, not only in law as this is the binding law for us, but even on the first principles because this is exactly what the unambiguous scheme of the Act is. In sharp contrast with this case before Their Lordships, in which performance guarantee was given by an entity other than the assessee before Their Lordship, the performance guarantee for Indian subsidiary, and commitment not to dilute ownership and control in the Indian subsidiary, is given by the assessee company itself and no separate consideration is received by the assessee for the risk inherent in such a performance guarantee and commitments. Essentially, therefore, reward for this risk, which is wholly undertaken in respect of India operations, is prima facie embedded in the sale of equipment by the assessee to the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Their Lordships in a situation in which the general scope of section 9(1)(i) was held to be inadmissible on the particular facts of the case in the immediately preceding paragraph, and these observations cannot be construed as authority for the proposition that when the condition under Explanation 2 to Section 9(1)(i) are not satisfied in any fact situation, even if the provisions of Section 9(1)(i) are satisfied in general, there cannot be a business connection at all. 34. In my humble understanding, therefore, Hon ble jurisdictional High Court s judgment in the case of Nortel Network (supra) cannot be viewed as an authority for the proposition that income embedded in sale of equipment supplied overseas cannot be taxed under the Act under any circumstances, such as in a situation when a part of the consideration paid for such equipment can be reasonably attributed to the risks undertaken by the assessee in India for which he is not separately or adequately rewarded. The sweeping generalizations, as learned counsel seeks to make by relying upon this precedent to draw a proposition which will hold good de hors the peculiarities of this case, cannot be permitted. I, therefore, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective by Nilesh Modi (Second Edition, 2014; ISBN-13: 978-81-8473-531-4; at page 447), refers to, what it considers to be, true test for constitution of a PE by the subsidiary, in respect of a foreign company, as whether: The business of the foreign enterprise is carried out by its local affiliate; or The local affiliate is the alter ego of the foreign enterprise or, speaks his masters voice only or, is a mere fa ade; or The foreign enterprise carries on a business in State S, using the premises or personnel, of its local subsidiary . 39. The reference to alter ego of the foreign enterprise, as is used in Nilesh Modi s book, is more of a colloquial and factual expression rather than a legal term. This term is now also increasingly used in the tax literature worldwide. 40. The expression alter ego companies seems to be rather appropriate expression for dealing with a particular type of subsidiaries which constitute PEs of the parent foreign enterprise, and that is how I intend to use it in this analysis. It does refer to the situations in which a subsidiary should be treated as a permanent establishment of its non-resident parent company for the reason th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their parent companies. One ruling, rendered by the Authority for Advance Ruling over two decades back, illustrates this point. In the case of ABC In Re (Application No. P- 8) [(1997) 223 ITR 416 (AAR)], the Authority for Advance Ruling, speaking through Justice S Ranganathan- one of the most illustrious former Presidents of this Tribunal, who later adorned high judicial officers including that as a judge of Hon ble Supreme Court, had observed that it is of the opinion that the subsidiary will have to be considered to be a permanent establishment of ABC unless it has significant independent activities on its own or on behalf of persons other than ABC and unconnected with it . It is to be noted that, in this case, there is no reference to the conclusion of contracts, on behalf of the principal, or to the conditions precedent for invoking article 5(5), and yet the dependent agent, in the form of the subsidiary, has been held to be a PE. I am in most respectful and considered agreement with this approach which essentially leads to the conclusion that when a subsidiary company is merely an alter ego, or virtual projection, of its parent company, in the sense that it has no significant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t us look at this contract ... The assessee, and not NLC, selected ASPL to execute Contract Nos. III IV. Therefore, though NLC (i.e. the Indian customer) entered into Contract Nos. III and IV with ASPL (i.e. the Indian subsidiary) it was only at the instance of the assessee (i.e. the foreign enterprise and the parent company). ASPL was the assessee's subsidiary company. At least as far as this Project was concerned ASPL (i.e. the Indian subsidiary) is virtually the 'assessee's presence' (i.e. virtual presence of the foreign enterprise and the parent company) in India. The assessee controlled and managed ASPL for quality ensuring, maintenance of time schedule, quality control, progress of work etc. 44. It was in this backdrop that Hon ble Madras High Court upheld the stand of this Tribunal to the effect that the foreign company had a PE in India in the form of its subsidiary company which was assigned, at the instance of the foreign company, the installation work and which constituted virtually the assessee s presence . That is in effect the same thing as an alter ego company. To this extent thus, the concept of alter ego companies is not really alien to I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies from being permanent establishments of the overseas parent companies and vice versa ceases to hold good. Explaining this point, Arvid A Skaar, in his book Permanent Establishment- Erosion of a Tax Treaty Principle (South Asian Reprint Edition, 2009; ISBN: 978-81-89960- 81-0; at page 540), observes as follows: The treaty based protection of related companies recognizes the legal independence of related companies for tax purposes as a material reality until the opposite is proved [OECD Comm. 1977 art. 5 no. 39; cf. Debatin, Systematik IV, in Korn/Debatin, 1 Doppelbeseteuerung ann. 183 (looseleaf)]. This affects both the constitution of PE, and the allocation of income to a separate entity. [Emphasis, by underlining, provided by me] 48. I am in considered agreement with the school of thought that the presumption of independence of the subsidiary holds good only till the contrary is proved, and that is precisely the proposition my analysis in the preceding paragraphs seeks to justify. 49. It may, at this stage, also be noted that while the OECD Model Commentary invariably confine the role of subsidiaries as PE only as a dependent agent- and UN Model Commentar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llifies the impact of the intra AE association. That situation is materially different from the situation in pre transfer pricing legislation era, particularly when there is clear prima facie evidence, as in this case- as discussed earlier in this order, that the transactions were not at arm s length in the sense that the reimbursement mark-up was not even equal to interest factor for the time period involved in incurring the expenditure and reimbursement of the same, and that there were certain risks assumed by a party which were not rewarded at all. The presumption of independence is thus clearly demolished on the facts of this case. The next question then is to what extent OECD Commentaries bind us. I find guidance from the observations of Hon ble Supreme Court, in the case of CIT Vs PVAL Kulandagan Chettiar [(2004) 267 ITR 654 (SC)], wherein Their Lordships have, inter alia, observed that, Taxation policy is within the power of the Government and s. 90 of the IT Act enables the Government to formulate its policy through treaties entered into by it and even such Treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishments, which is beautifully captured, with approval, in paragraph 24 of Hon ble Supreme Court s judgment in the case of Formula One World Championship Ltd (supra) as follows: Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control an office, branch, etc., to which he gives his own description as an associated permanent establishment . The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a PE. Such PE is given the nomenclature of unassociated permanent establishment by Baker. He, however, pointed out that there is a possibility of a third type of PE, i.e. a construction or installation site may be regarded as PE under certain circumstances. In the first type of PE, i.e. associated permanent establishments, primary requirement is that there must be a fixed place of business through which the business of an enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances. If a subsidiary, considered to be a permanent establishment on account of, to borrow the expression employed by the AAR, not having significant independent activities on its own or on behalf of persons other than ..(foreign parent company) and unconnected with it is to fit in these three types of PEs, it can only fit in the second category i.e. unassociated permanent establishment or as indirect permanent establishment, and that is the category for which the requirement of fixed place of business and disposal test vis- -vis the foreign enterprise does not, even going by Hon ble Supreme Court s analysis, does not apply. These tests cannot be applied in such cases for the elementary reason that when the work of a foreign enterprise is being carried out by a separate legal entity in the source jurisdiction, there is no question of the foreign enterprise using the place of business in the source jurisdiction or having such a place at its disposal since the work of the foreign enterprise is carried out by a separate legal entity and it is this separate legal entity which must have the fixed place of business at its disposal for performing actions in furtherance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise is being carried partly through a fixed place, though at the disposal of such subsidiary- in a capacity as agent, representative or proxy. The theory of disposal test vis- -vis the foreign enterprise remains confined to only the associated PEs , or direct PEs as I put it, and cannot extend to the subsidiary PEs or, for that purpose, any other unassociated PE or indirect PE . To this extent, I am of the view that the approach adopted in the OECD Model Commentary, which is accepted in the UN Model Commentary as well, is not a legally acceptable position. My parallel discussions on this point, at other places in the same order and which are somewhat repetitive in that way, also lead me to the same conclusion 55. Learned counsel suggests that even if a subsidiary company is a virtual projection of the foreign enterprise, and it does business wholly or mainly for its foreign parent company, even then it cannot be treated as a PE of the foreign enterprise under the basic rule. That statement does hold good, as the position now in settled in law is by the binding judicial precedents from Hon ble jurisdictional High Court, in a situation in which the transactions between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the foreign enterprise by the NIPL. 56. This line of reasoning proceeds on the fallacious assumption that the concept of virtual projection has the same ramifications whether it is in respect of, to use the expression employed by Baker, associated permanent establishment (direct PE) and in respect of unassociated permanent establishment (indirect PE). No doubt, when the virtual projection theory is applied in terms of associated PEs (or, as I would prefer to put it- direct PEs ), the disposal test must be met, but this position cannot hold good for any form of unassociated PEs (or, as I would prefer to put it- indirect PEs ) by way of, in the words of Hon ble Supreme Court, is an agent, though legally separate from the (foreign) enterprise, nevertheless who is dependent on the (foreign) enterprise to the point of forming PE . The reason is simple. In the case of unassociated PEs, the legally separate enterprise steps into, because of its conduct, the shoes of the foreign enterprise and, in a way, acts as a proxy. In such a situation, the disposal test, vis- -vis the foreign enterprise, is irrelevant as the separate legal entity, representing the foreign ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of virtual projection as a sine qua non for the existence of basic rule PE. It is not, and it cannot be, the case of the assessee that even though all the preconditions of basic rule PE are satisfied, whatever constitutes PE cannot be treated as a basic rule PE because it does not amount to virtual projection of the foreign enterprise. To me, this is clearly an incongruous result. In any case, judgments of Hon ble Supreme Court cannot be read like a statute and cannot be interpreted as answering the questions which did not even fall for the consideration of Their Lordships. If authority is needed even for this elementary proposition, one can usefully refer Hon ble Supreme Court s judgment in the case of CIT Vs Sun Engineering Works Pvt Ltd [(1992) 198 ITR 297 (SC)]. 58. As regards the decision of Hon ble Delhi High Court, in the case of DIT Vs E Funds IT Solutions [(2014) 364 ITR 256 (Del)], which is now approved by Hon ble Supreme Court in the judgment reported as [(2017) 399 ITR 234 (SC)], that was a case in which Hon ble jurisdictional High Court had specifically observed that The international transactions between the assessees and e-Fund India and the income of e- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emselves observe that application of arm s length prices by the transfer pricing authorities was a relevant and an important fact , it would not really be possible that the observations made in that case will, by default, apply on a fact situation in which not only the transfer pricing provisions were not applicable and thus arm s length price were not the basis of assessment income but there were clear indicators about the transactions being not an arm s length basis. In my humble understanding, the question whether the same principles will apply to pre transfer pricing legislation, particularly when these parent-subsidiary transactions are clearly not on arm s length basis, is not concluded by the said judgment. The other important aspect of the matter is that, after expressing the agreement with the findings of the Hon ble High Court by stating that We agree with the findings of the High Court in this regard (that there is no fixed place PE on the facts of the present case), Hon ble Supreme Court has also observed that in the said case the Indian subsidiary was not an interface of the foreign company with the Indian customers, and in that sense it was not a place of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the foreign enterprise. Even though this approach was specifically in challenge before Hon ble Delhi High Court, in question no. 2 i.e. Whether the Tribunal was right in law in holding that a perception of virtual projection of the foreign enterprise in India results in a permanent establishment? , Their Lordships have, without expressing any opinion on the same, remitted the matter for reconsideration on factual aspects. As a matter of fact, the question framed by the assessee for the consideration of Hon ble High Court hardly leaves any doubt about the legal proposition laid down of the earlier special bench, and that legal proposition still holds good. The decision of the earlier special bench on this approach, therefore, continues to be a binding judicial precedent for this special bench as well. The position will of course be difference when a bench of greater strength, or a higher judicial forum, specifically disapproves the path so taken by the earlier special bench. There was no request at all for a reference being made to the larger bench. There is no occasion thus to deviate from the earlier special bench decision on this issue. 60. Let s now deal with the mista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport function. These services are listed at page 2 and 3 of the agreement dated 19.4.1996, a copy of which is placed before the bench in the paperbook filed by the learned Departmental Representative. 62. In effect thus the entire marketing and administrative support work is done by the assessee in India, through the Indian subsidiary and without adequate arm s length consideration, at a fixed place in India. This is carrying on the business of the assessee in India through a fixed place of business. The visiting employees of the assessee company also use the premises of the assessee and carry out important core business functions from the place of the IC. It is important to bear in mind the fact that at no stage, including in the course of the proceedings before us, the assessee has not submitted the details about names and duration of stay of the expatriate employees who availed such support from the IC. The IC renders these important and vital services to the assessee company on a non arm s length consideration. That aspect of the matter has already been discussed in detail earlier in this order. As for the disposal test vis- -vis the foreign enterprise, as the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is also no dispute that the installation and other post sale services rendered by the IC were complementary to the core business operations of the assessee company. The IC, in substance and in effect, was acting as a proxy of the assessee company s interest in performance of commercial activities as well. Viewed thus, the office of the IC is a PE of the foreign enterprise which constitutes the fixed place of business through which the business of the assessee company is wholly or partly carried out. In this case also, since IC is acting in a proxy capacity, and as an agent, the disposal test has to be vis- -vis the IC, as a proxy or as an agent, and not the foreign enterprise directly. 65. Quite interestingly, at page 6 in a written submissions filed before us, signed by one Tarandeep Singh, it is stated that one important aspect which is not considered by the lower authorities was that no adverse inference was drawn in the assessment proceedings of the Indian subsidiary with regard to compensation received on account of installation activities and that the learned Assessing Officer of the Indian subsidiary had duly accepted the compensation to be at arm s length which is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the attribution to 35 per cent, the reason given by the Tribunal was that profit attributed to manufacturing activity and research and development activities, i.e., 50 per cent and 15 per cent respectively had to be excluded. Thus the expenses on research and development were already taken care of when remuneration @ 35 per cent was attributed to marketing activities in India on which global profits was apportioned and there was no question of setting off the research and development expenses again in respect of marketing activities. We, thus, answer question No. 3 against the assessee. 68. Learned counsel s submission is that the assessee company has, on the basis of a separate profit and loss account prepared for the equipment sales in India, incurred losses of US Dollars 2,37,52,669 for the year ended 31.3.1997 and US Dollars 86,14,672 for the year ended 31.3.1998. In view of these losses, according to the learned counsel, there cannot be any question of any profits being allocated to the sale of equipment in India. 69. I have noted that the India specific financials donot make it clear as to on what basis the allocations of expenses have been done. All that these fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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