TMI Blog2019 (4) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of delayed payment as neither there was any corresponding liability on any of the debtors nor the assessee had claimed any entitlement on such an interest. So AO/CIT(A) have erred in imputing ₹ 50,000,000/- as income from vendor financing for the purpose of taxability in the hands of assessee in India as business income. In view of what has been discussed above, we are of the considered view that following the decision rendered by SB-1 and SB-II which is applicable to the facts and circumstances of the cases at hand on account of identical facts, existence of fixed place PE of assessee in India is not established, consequently appeals filed by the assessee allowed. - ITA No. 2135-2137, 2286-2288/Del/2005 & ITA No. 1004, 1005,1234,1235/Del/2010 - - - Dated:- 29-3-2019 - SHRI R.K. PANDA, ACCOUNTANT MEMBER And SHRI KULDIP SINGH, JUDICIAL MEMBER Assessee By: Sh. Deepak Chopra, Adv., Sh. Amit Srivastava, Adv., Sh. Ankul Goyal, Adv. Revenue By: Sh. G.K. Dhatt, CIT(DR) ORDER PER KULDIP SINGH, JUDICIAL MEMBER: Since common question of law and facts have been raised in the aforesaid appeals and cross appeals, the same are being disposed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or not expressly commented upon in the appellate order. Acceptance test is carried out by the appellant and subsequent to it, the ownership in the equipment is passed on to the customer. After sales and support services are carried out by the appellant through its employees. The purchase order with Bharti Airtel was concluded by Nokia India on behalf of the appellant. The purchase orders of Hutchison Max Telecom Limited were concluded by Nokia India on behalf of the appellant. The appellant did not furnish copies of the contracts with Skycell Communications, BPL Telecom Ltd. ONGC, Supreme, Comtel Dedicated Network, Bharti Air Tel and Hutchison Max Direct Export, even though the appellant had submitted before the Assessing officer that supplies to these customers were made on the basis of purchase orders only. The appellant on its own volition had furnished sample purchase orders from some of these customers and no request was made by the Assessing offer for furnishing purchase orders from the remaining customers. Further, the said allegation has been even with respect to Indian parties (Bharti Air Tel, Comtel Dedicated Networks and Hutchison Max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not preparatory or auxiliary in nature and therefore not excluded from the purview of constituting PE under Article 5(4)(e) of the India- Finland tax treaty. In case of offshore supplies undertaken by the appellant in India, certain operations are inextricably interlinked in India and therefore income has accrued to the appellant from offshore supply of equipment. The supply of equipment was not merely supply simplicter but it was inextricably linked and interwoven with the total project of the GSM. All equipment were tailored made for Indian conditions and as per requirement of the customer in India. The learned assessing officer is justified in rejecting the audited India specific accounts filed by the appellant during the course of the assessment proceedings since: - The appellant has not maintained separate books of accounts for Indian operations; - No vouchers were produced before the learned assessing officer for verification; - The justification and basis of claim of various expenses in the audited India specific accounts is not clearly explained; and - The evidence and nexus that all the expenses are relatable to Indian busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, alter, amend or vary from the grounds of appeal at or before the time of hearing. 5. Briefly stated common facts necessary for adjudication of the controversy at hand in all the aforesaid appeals are : assessee company being incorporated under the laws of Finland is into business of designing and supplying hardware software product for setting up GSM Cellular Radio Telephone System (GSM). Assessee has supplied hardware software components of products as per the supply contracts to the customers in India (Telecom Operator). During the assessment year1999-2000, assessee claimed to have supplied hardware and software as under :- Name of the customer Total Supply Amount (US$) Tata Communication 32,88,342 BPL Cellular 1,43,68,828 Fascel Limited 21,64,348 Skycell Communication Limited 4,14,358 BPL Telecom Ltd. 1,47,660 Oil and Natural Gas Corporation Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of the case. 11. Applications moved by Ld. DR raising additional grounds is dismissed having not been pressed during the course of arguments. Assessee s appeal no. 2135, 2136, 2137/Del/2005 1004, 1005/Del/2010 For A.Y. 1999-2000, 2000-01, 2001-02, 2002-03 2003-04 respectively 12. Undisputedly, initially no return of income was filed by the assessee, but pursuant to the notice issued u/s 148 of the Act, assessee filed its return declaring nil income and thereafter notice u/s 143(2) was issued and AO assessed the total income of the assessee from the supply of hardware at USD 3879226 and income from the supply of USD 8505397 on which AO computed the total tax at ₹ 18,66,08,995/- (aforesaid figures are taken from assessment year 1999-2000 for disposal of all the appeals as facts and ground raised are identical). It is also not in dispute that order passed by Ld. CIT(A) for A.Y. 1997-98 and 1998-99 have been decided by the special bench of the Tribunal vide order dated 22.06.2005 and order dated 05.06.2018 reported as (2005) 95 ITD 269 (Delhi) (Special Bench) and (2018) 65 ITR (T 23) (Delhi Trib.) (SB) (hereinafter referred to as SB-I SB-II) respectively. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e support like office support, cars, telephone etc. is provided by Nokia Limited. *************************************** Q15. Are there separate offices of Nokia Finland OY and Nokia Ltd. Since 1995? Ans. Always the offices have been the same. 16. When we examine assessment orders as well as order passed by Ld. CIT(A) for A.Y. 1999-2000 to A.Y. 2003-04, there are categoric findings that both AO as well as the Ld. CIT(A) have passed the orders under challenge by following orer of A.Y. 1997- 98 and 1998-99, subsequently, set aside by Special Bench of the Tribunal. For ready perusal findings of the AO following the order passed in A.Y. 1997-98, 1998-99, returned in A.Y. 1999-2000 to 2001-02 are extracted as under 2.2 Before getting into the details, it is pertinent to not that all the facts and legal proposition has been discussed at length in the assessment orders of A. Y. 1997-98, and A.Y. 1998-99. Complete reliance is placed on the orders of the those years passed by my predecessor. The same orders were subject matter of appeal and the Hon ble CIT(A) XXIX has upheld the view that the hardware is taxable in India and supply of software is to be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had a PE in India through office of the Indian company. He has observed that in the context of these facts it will be difficult to hold that the appellant and the Indian company acted independently in so far as their business are concerned and it will more appropriate to hold that IC merely acted at the instructions of the assessee in respect of installation and marketing contracts. It was also observed by the CIT(A) that we have also seen that 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. 4.7 Considering the above facts, circumstances and legal position in all the three assessment years it is established that the appellant had carried its business in India through its subsidiary and LO on continuous and on regular basis which clearly shows that th appellant had business connection in India as per section 9(1) of the IT act and also had PE as per Article 5 of the treaty. Therefore, following the judgment of my predecessor for A.Ys. 97-98 98-99 and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO has not made any attempt either in the assessment order or in the remand report to explain the basis of arriving at the percentage split in the case of other telecom vendors nor has he attempt to distringuished the appellant s case from that of other telecom vendors wherein lower percentage has been considered towards software supply. As the AO has not given the analysis and details of various purchase orders which could have substantiated the estimates made by the AO, the estimate made by the AO is totally arbitrary and based on presumptions only unsubstantiated by any facts on records. Therefore, following the orders of earlier years i.e. 97-98 and 98-99, I estimate that in the total supplies, the component of hardware is 70% and software is 30%. Therefore, AO is directed to recomputed the income on the basis of earlier years ratio of 70% to 30%. 6. In earlier years my predecessor has attributed about 50% of the total net profit to the Indian operations. Considering the facts of the case and submission of the appellant and relying on the judgment of my predecessor for the asstt. Year 1997- 98 1998-99 I also direct the AO to attribute 50% of the net income as computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of total project undertaken by the appellant. Nokia India is only conducting the business of the appellant and not of any other concern. Therefore, it is not undertaking the work in ordinary cause of its business. The installation work is inextricably linked with the total project of designing, supplying, installation, operations, after sales service and warranty. As per the annexure to the assessment order of A.Y. 1999-00 and 2000-2001 it is clear that in the contract with BPL US West, the responsibility of the appellant are well defined in all the activities of the project. In fact the overall responsibility was of the appellant. Besides this the A.O. has discussed various projects in detail and has mentioned that some contracts were signed by the employees of Nokia India also. The existence of PE is governed by the Article 5 of the DTAA. The appellant is undertaking various projects in India and making supplies continuously for several years. The activities are being done continuously in India on regular basis. The word Permanent Establishment postulates the existence of substantial element of an enduring or permanent nature of foreign enterprise in another country which can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Wylie, MD, NIPL. 24. Now, we would examine the contention raised by Ld. DR in view of findings returned by Special Bench in assessee s own case for AY 1997-98 in SB-II, whereby as per directions of the Hon ble High Court following issues have been examined available at page 18 paper book (a) Whether the subsidiary of the assessee (Nokia India Pvt. Ltd.) would provide business connection? 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 offshore 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. 25. Answers to the aforesaid questions given by the SB-II are extracted as under :- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sake of ready reference is reproduced hereunder:- Before the contract was signed a number of expatriates came to India, stayed in India and carried out the network planning. They were also involved in negotiating the same with various customers and were interacting with them on regular basis. This was not possible without the assessee having a fixed place of business from which it carried out these operations. This fixed place of business was the liaison office together with office of the Indian company. This fact has been confirmed by the Managing Director of the Indian company that the expats who were coming to India were provided administrative support like office, telephone, fax and at times conveyance. Secondly, even the Special Bench had proceeded to determine the issue of N1PL constituting a fixed place PE in India; and Lastly, even the Id. CIT (A) in the impugned order though in the context of LO had also mixed up the concept of fixed place PE in the case of NIPL. Accordingly, we are proceeding with adjudication of the fixed place PE qua NIPL. In para (1) of Article 5, one of the crucial terms used is 'fixed place of business through which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Court but not the disposal test . Again this judgment of Hon'ble Supreme Court has been reiterated and referred extensively in a subsequent judgment by the Hon'ble Supreme Court in the case of Asstt. DIT v. E-Fund IT Solution (supra) , wherein the Hon'ble Apex Court had quoted extensively the same views and commentaries and also the judgment of Formula One World Championship Ltd. and held that there must exist a fixed place in India which is at disposal of foreign enterprise through which they carry on their own business. In that case, the Indian subsidiary company of the foreign enterprise was rendering support services which enabled the foreign enterprise in turn to render services to its client and the outsourcing of work to the Indian subsidiary was held to be not giving rise to fixed place of PE. This judgment of the Hon'ble Supreme Court nearly clinches the issue before hand in so far as role of Indian subsidiary while deciding the fix place PE. 27. Applying the principle lay down by Hon ble Supreme Court in formula One World Championship (supra) SB-II proceeded to conclude that assessee did not have any PE in India as per provisions contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; lastly, whenever the asses see's employee used to come to India then NIPL was providing infrastructure facilities like, telephone, fax, vehicles, etc. which goes to show that there was a place in the form of NIPL which was at the disposal of the assessee. 45. First of all, in so far as the allegation that the Country Manager of the LO continued to be the Managing Director of the Indian Company, the same has with reference to one employee, namely, Mr. Hannu Karavitra who was the Country Manager in LO and in that capacity has signed two contracts in the month of February and March, 1995. These contracts were signed when NIPL was not even in existence. After the incorporation of NIPL on 23.05.1995, not an iota of evidence has been brought on record that Mr. Karcnitra had signed am contract on behalf of the assessee. He was a Managing Director of NIPL from 01.01.1996 to 31.07.1999 and after he was employed with NIPL. he has not signed any supply contracts with the Indian customers. All the installation contracts which have been signed by the NIPL have been executed by the NIPL independently with the Indian customers on principal to principal basis and any income received or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legs to stand. His core argument was on the point that installation activities done through employees of the assessee constitutes a 'Service PE' and assessee was unable to furnish the details of employees working in NIPL alongwith the details of their duration and therefore, in absence of such details adverse view should be drawn for treating these employees constituting PE in India. The entire thrust of his argument simply whittles down for the reason thatfirstly, there is absolutely no concept of 'Service PE' in the then existing provision of Article 5; and secondly, other than off-shore supply of equipment, no other activities has been carried out by the assessee after the incorporation of the Indian subsidiary NIPL and this fact has been accepted by the Hon'ble High Court also. Thus, any activities relating to NIPL under the independent contract cannot be reckoned to constitute a PE in the context of Article 5(1); and even if for argument sake it is accepted that the activities of NIPL were managed by assessee, then also, it does not constitute PE qua activities of supply contract or any activity from where it can be held that any income has been received or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been placed by Ld. CIT-DR on the statement of the then Managing Director, Mr. Simon Bresford. From the relevant statement he had pointed out that how the marketing support services have been provided by the Indian company to the assessee and also the administrative support services were provided by NIPL to assessee. Regarding marketing support services by NIPL to assessee we have already discussed above that it was done under separate contract and NIPL was remunerated at arm's length. In so far as administrative facilities being provided by the NIPL to the expatriates coming for signing of contract on behalf of the Nokia Finland, he had stated that, administrative support like office support, cars, telephones, etc. was being provided by NIPL ; and earlier office of liaison office of NIPL are at the same premise in the year 1995. Relying on such statement, Id. CIT-DR has vehemently contended that this material facts itself goes to prove that there is a fixed place PE which was at the disposal of the assessee. In light of such contention, we have to see whether any place of business was provided by NIPL to the assessee which can be said to be at a disposal of the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any physical place was made available which can be said to be at the disposal of the assessee for carrying out its off-shore supply contract in India. In fact the entire allegation of fixed place was qua the LO and never in the context of NIPL by the Assessing Officer. The entire case of the Assessing Officer was that NIPL is a DAPE of the assessee, because all employees of the assessee were either working for the NIPL or NIPL was undertaking certain marketing and technical support services for the assessee. The concept of DAPE would be discussed in succeeding paragraphs. However, 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 equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of contracts before off-shore supply of (GSM) equipments and sale of goods have been made off-shore outside India. 48. Coming to the Dependent Agent PE as provided in paragraph 5 of Article 5, the key consideration for holding an agent to be a deemed PE is that, a person/enterprise who is not an agent of independent status is acting in a contracting state (here in this case India) on behalf of an enterprise of other contracting state (here Finland) in respect of any activities where he habitually exercises an authority to conclude contracts on behalf of the enterprise; or if he has no such authority, but habitually maintains stock of goods or merchandise which he regularly delivers goods or merchandise on behalf of the enterprise, then he is deemed to be DAPE. From the material facts discussed in detail herein above are that the entire contract supply of off-shore equipments has been done by the assessee outside India and no activity relating to offshore supply has been performed in India. There is no material fact on record that NIPL has negotiated or concluded any contract of supply of equipment on behalf of the assessee which binds the assessee. The title of the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re contained at page 203 of the paper book which also gives the details of the persons signing it and none of the supply contract had been signed by any employee of NIPL. Thus, the basic condition contained in Article 5(5) does not stand satisfied at all. The contract which has been signed by NIPL is installation which cannot be reckoned DAPE, because assessee in India has not carried out any installation activities on its own. In so far as the allegation of the Assessing Officer that NIPL was in complete control of the assessee and was subject to its instruction. This again in our opinion is not a relevant consideration at all for a creation of a DAPE as discussed above, because none of the supply activities of the assessee has been carried out by NIPL and the employees if at all were for the NIPL's activities in India for which it is liable to tax in India. Further, for the purpose of this clause also, if activities are of preparatory and auxiliary in nature, then again the same will not satisfy the threshold of DAPE. The Assessing Officer has also referred to the fact that in the accounts of LO for the period ending 31st December,1995 there was an expenditure of ₹ 5 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for DAPE, authority to conclude contracts which is binding on the assessee needs to be seen. Next objection of AO is that the warranty and guarantee services provided by NIPL's employee were monitored by assessee and for the installation work done by Indian company, some kind of note regarding installation contracts were sent to the assessee. This objection has no relevance for determination of PE, because, firstly, it would have been of some relevance in the case of composite contract situation; and secondly, managing or providing guarantee by assessee does not yield any income to the assessee, albeit to NIPL, which is taxed in India. Lastly, in so far as the expatriates of NIPL were responsible for installation work were employees of the assessee, only proves that assessee provided necessary assistance, information, knowledge and expertise to do the work. This observation of AO only goes to prove that that expatriates employees deputed in NIPL are in connection with the installation contracts executed by NIPL and since there is no concept of 'Service PE' in India, therefore, nothing turns around on such observation. Thus, on the facts and material on record, we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India are independent and on principal to principal basis with the Indian customers and assessee has not signed any kind of installation contract with the Indian customers for which it could be said that the installation activity of NIPL was wholly and almost wholly on behalf of the assessee. The two contracts which were signed earlier prior to the incorporation of NIPL were separate and assigned to it and income from such installation has been shown in the hands of NIPL in India. There is no income whatsoever from installation activities has been earned by the assessee in India or can be attributed either directly or indirectly through NIPL. Insofar as other activities like marketing and technical support services are concerned, same has been transacted at arm 's length as discussed in detail in foregoing paras, hence no profit can be attributed from these activities as held by the Hon'ble High Court. Even if NIPL is held to be; subject to significant control with respect to the manner in which work is to be carried out; is subject to detail instructions from the assessee as to the conduct of work; is exercising less freedom in the conduct of business on behalf of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so by the Hon'ble Apex Court in the case E-Fund IT Solutions. Thus, the exception given in Article 5(8) to a company controlled by a foreign enterprise or its subsidiary answers most of the allegation made by the Department that NIPL being a subsidiary of the assessee itself will provide status of a PE. 52. In so far as the argument of the learned CIT DR that Indian subsidiary is a virtual projection of the assessee as employees of Assessee Company were practically performing all kinds of work, and therefore, it has to be treated as a permanent establishment of assessee. In support of such a concept of virtual projection, strong reliance has been placed on the judgment of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Vishakapatnam Port Trust (supra) which the learned CIT DR submitted that have been referred and relied upon by the Hon'ble Supreme Court in the case of Formula One (supra) also. First of all, the concept of 'virtual projection' has to be seen in the context of any of the ingredient of PE enshrined in Article 5. Hon'ble Andhra Pradesh High Court while explaining the concept of fixed place PE, observed that the PE postulates e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becomes academic. But special bench II vide order dated 05.06.2018 have returned categoric findings qua existence of business connection of the assessee in India. Special Bench-II has also discussed the issue of business connection raised with respect to the Liaison Office (LO) qua which Hon ble High Court in respect to LO held that there is no material 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 assessee in India . Special Bench vide order dated 05.06.2018 held that aforesaid findings of Hon ble High Court in context of LO ostensibly applies to NIPL also as the terms and condition on the supply of contract continues having been discussed in para 17 of the High Court judgment. 29. It is also held by Special Bench-II that even if it is assume that the NIPL does not render a business connection to assessee in India, even then no income earned by the assessee from offshore supply of equipment of Indian Customers can be brought to tax in India in view of the Explanation 1 to Section 9(1)(i) of the Act. Special Bench following the decision rendered by Hon ble Delhi High Court in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract 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 another group entity in Ireland. The same was invoiced by the assessee directly to R and consideration for it was received directly by the assessee. The Assessing Officer held that income arose to the assessee in India and was assessable. The Commissioner (Appeals): held that keeping in view the facts of the case, 50 per cent, of the asses see's estimated profits could be attributed to the permanent establishment in India. This was upheld by the Tribunal. The Income-tax authorities concluded that the assessee was a shadow company of N(C) and both the companies were essentially a singular entity. In other words the Income-tax authorities disregarded the corporate structure of the assessee and proceeded on the basis that its identity was the same as N(C). On the issue, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(l)(i) of the Act postulates the principle of apportionment and only such income that can be reasonably attributed to operations in India would be chargeable to tax under the Act. The position in Ishikawajima-Harima Heavy Industries (supra) was also similar. There too, the equipments were supplied overseas and the contractor continued to retain control of equipment and material till the provisional acceptance of the work or the termination of the contract.' Thus, the Hon'ble High Court in Nortel's case has clearly concluded that equipments supplied overseas cannot be taxed under the Act and as per clause (a) of Explanation 1 to Section 9(l)(i) which postulates the principle of apportionment, the only such income that can be reasonably attributed to assessee in India could be chargeable to tax under the Act and therefore, under the fact where there is off shore supply of eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early 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 also erroneous. There is no material to hold that Nortel India performed services on behalf of the Assessee. 73. The AO has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Companies. In the present case, there is no material on record which would indicate that Nortel India habitually exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained. 76. The CIT (A) as well as the IT AT has proceeded on the basis that the Assessee had employed the services of Nortel India for fulfilling its obligations of installation, commissioning, after sales service and warranty services. The IT AT also concurred with the view that since employees of group companies had visited India in connection with the project, the business of the Assessee was carried out by those employees from the business premises of Nortel India and Nortel LO. In this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm s Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales service and warranty. As pe n:e annexure to the assessment order of A.Y. 1999-00 and 2000-200lit is clear that in the contract with BPL US West, the responsibility of the appellant are well defined in all the activities of the project. In fact the overall responsibility was of the appellant. Besides this the A.O. has discussed various projects in detail and has mentioned that some contracts were signed by the employees of Nokia India also. The existence of PE is governed by the Article 5 of the DTAA. The appellant is undertaking various projects in India and making supplies continuously for several years. The activities are being done continuously in India on regular basis. The word Permanent Establishment postulates the existence of substantial element of an endusing or permanent nature of 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 virtual projection of the foreign enterprise of one country into the soil of another country. Article 5(1) of DTAA defines the term PE as a fixed place of business through which the business of an enterprise is wholly or partly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of special bench-II with regard to NIPL are extracted for ready perusal as under :- 46. Now in the light of the aforesaid principle we shall examine the various kinds of contracts/activities undertaken by the assessee and the facts and material 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 offshore contract in India. As discussed earlier, the Assessing Officer has noted that liaison office 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 liaison office is not a permanent establishment qua these activities and nowhere there is a categorical and specific finding by the Assessing Officer or by the learned Commissioner of Income-tax (Appeals) in the entire order that there exist any fixed place permanent establishment qua the Indian subsidiary, i.e., Nokia India Pvt. Ltd., except for stating that office of the liaison office and Nokia India Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide order dated 05.06.2018, has already been challenged by the revenue in appeal before the Hon ble High Court in which following question of law has been framed 2.1 Whether on facts and circumstances of the case and in law, Ld. ITAT erred in holding that NIPL did not constitute a fixed place PE of the assessee, without appreciating the fact that NIPL is a virtual projection of the assessee for the following reasons 37. So, we are of the considered view that the contention raised by Ld. DR that the issue of NIPL being a fixed place PE of assessee in terms of paragraph 5(1) of taxed treaty has not been considered by Special Bench vide order dated 05.06.2018 is not sustainable. 38. The next contention raised by Ld. DR for the revenue in order to distinguish facts of AY 1999-2000 and 2001-02 are none of the contracts under which supplies have been made to the customers are turnkey contracts; that fresh contract for equipment supplies with parties with whom turnkey contracts was under taken during earlier years and portion of turnkey contracts has already been assigned to the Indian subsidiary. On the other hand, Ld. AR contended that the findings of the Ld. CIT(A) tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Ltd. and the rest of the contracts were merely supply contracts. 43. When we examine the aforesaid contention of Ld. DR for the revenue and Ld. AR for the assessee in the light of the findings returned by Special Bench II. It is held by referring to the order of Hon ble High Court in assessee s own case that (vii) giving the nomenclature of a turnkey project or works contract is not relevant in determining whether any profit arising from the supply of equipment pursuant to such contract was chargeable to tax in India; 44. So we are of the considered view that aforesaid findings go to clinch the issue in favour of the assessee that decision of Special Bench II is applicable to the facts and circumstances of the cases under consideration. 45. Ld. DR for the revenue further contended that Special Bench-II has only considerd existence of PE under Article 5(1) and same was rejected on ground of non-satisfaction of disposal test. However, on the other hand, the Ld. AR of the assessee drew our attention towards para 49 page 73 of the decision rendered by Special Bench II and stated that the Special Bench II has duly considered the argument of existence PE under Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by Ld. DR is not sustainable because Special Bench has categorically held that under all pervasive exclusion clause there cannot be any permanent establishment which can be deemed either in terms of paragraph 1, 2 and 3 of Article 5 of the DTAA. 47. Furthermore to repel the argument addressed by Ld. DR for revenue, Ld. AR for the assessee by relying upon decision rendered by Jurisdictional High Court in case of National Petroleum Construction Company vs. Director of Income Tax (Delhi) 383 ITR 648 contended that provision of paragraph 2 and 3 of Article 5 are complementary to each other and thus paragraph 2 of Article 5 which an extraordinary provision can not be read in isolation to paragraph 1 of Article 5. Moreover, Special Bench has returned categoric finding that when preliminary conditions of Article 1 are not satisfied, there is no question of being a PE under any of the sub clause of paragraph 2. Operative part of findings returned by Hon ble High Court is as under :- 16. Paragraph 2 of Article 5 of the DTAA provides for an inclusive definition of the term Permanent Establishment and specifically lists out places of business that fall within the meaning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est is not tenable because it is settled principle of law that Article 1 and 2 are complementary to each other and Special Bench has held that when preliminary conditions laid down under Article 1 are not satisfied there is no question of being a PE under any of the sub clauses of paragraph 2. 49. Ld. DR for the revenue by relying upon para 3.3 at page 4 of assessment order further contended that purchase order of Airtel addressed to assessee in its local Delhi Office (which happens to be the office of NIPL) shows that the office premises of NIPL were at the disposal of the assessee which fact was also confirmed by M/s. Simon Piers Beresford Wylie, MD, NIPL and as such the business of assessee was being carried out from the premises of NIPL and moreover office and administrative support like telephones, facts etc. cannot be provided without any connection or availability of physical and geographical place and these facts prove the existence of PE under Article 5(1), Art. 5(2) Art. 5(3). 50. However, to repel this argument Ld. AR for the assessee contended that the aforesaid letters of customers as referred by AO in para 3.3 were directed to liaison office of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at aforesaid allegation does not go to establish the existence of assessee s PE in India. 52. Ld. DR for the revenue further contended that the assessee has not furnished the list of its own employees visiting India and their total period of stay including the purpose of visits in India; that nominal salary to the seconded employees is paid by NIPL and major part of their salaries (80%) paid by the assessee; and that salaries paid by the assessee to the expats working with NIPL not recovered from NIPL which has established existence of assessee s PE in India. 53. However, when we examine the findings of Special Bench II on this issue in para 36 to 38 this issue was raised and was duly decided and ultimately Special Bench II reaches the conclusion that existence of assessee s PE in India is not established. 54. Ld. DR for the revenue by relying upon para 3.5 of AO and para 7 of the Ld. CIT(A) further contended by referring to contract between Sterling Cellular Ltd. and assessee signed on 20.04.1999, signed by Heide Hamalinen, employee of NIPL and the Authorized Signatory of the assessee and contract with BPL US West Cellular Ltd. signed by Olli, employee of NIPL but no deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II in case of assessee for 1997-98 and 1998-99 before the Hon ble High Court the question of law on this issue has been framed which is extracted as under :- 2.1 Whether on facts and circumstances of the case and in law, Ld. ITAT erred in holding that NIPL did not constitute a fixed place PE of the assessee, without appreciating the fact that NIPL is a virtual projection of the assessee for the following reasons 58. So in view of the matter we are of the considered view that the contention of the Ld. DR is not tenable that the facts of the year under considerations are distinguishable from A.Y. 1997-98, 1998- 99 because issue that the assessee has a fix place PE in the NIPL office and DAPE in the form of NIPL has already been dealt with by the Special Bench II as is evident from a question of law framed by Hon ble High Court on the findings returned by the Tribunal in SB II holding that NIPL did not constitute a fix place PE of the assessee. 59. Ld. DR for the revenue by referring to the statement of Mr. Simon Piers Beresford Wylie, MD, NIPL contended that Indian entity provided administrative support like telephones, Fax etc. and that said services could not be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 (Supreme Court) and Centrica (Delhi hon ble High Court) (supra). Identity of Nokia India Pvt. Ltd. and the assessee merged into one due to above factors and hence it acted as virtual projection of foreign entity. Decision 37. We have heard the rival contentions and perused the relevant findings given in the impugned orders, materials referred to before us especially in the light of the direction given by the hon ble High Court and the scope of remand before this Tribunal. The hon ble High Court in respect of the following substantial question of law; 1. Whether on a true and correct interpretation of the relevant Double Taxation Avoidance Agreement the Tribunal s reasoning is right in law in holding that Nokia India Pvt. Ltd. (the subsidiary of the appellant) is a permanent establishment? 2. 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? 3. Withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to the extent of hardware ratio of 70:30 as against 60:40 made by the AO and has also challenged the finding of the CIT(A) in restricting the attribution to 50% of the profit from supply of hardware in A.Y. 2002-03 and 2003-04. The revenue has also challenged the finding of Ld. CIT(A) in attributing 20% of profits to activity of the PE in India for supply of hardware and attributing 20% of profits to activity of PE in India for supply of operating system software. 64. We are of the considered view that in view of our findings in preceding paras when the revenue has failed to prove that there exists PE of the assessee these grounds raised by the revenue have become infructuous being consequential in nature. 65. ITA no. 1005/Del/2010 In A.Y. 2003-04 Assessee has raised ground no. 7 that the Ld. CIT(A) has erred in upholding the action of the Ld. Assessing Officer who has arbitrarily imputed ₹ 50,000,000/- as income from vendor financing and taxed the same in the hands of the assessee in India as business income, without providing any justification for imputation of the said income and without seeking any information and detail from the assessee nor providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing on hypothetical basis, because there has to be corresponding liability to the other party to whom the income becomes due and here such a clause was never enforced by the parties. Already the arguments of both the parties have been incorporated in earlier part of the order; therefore, same is not being discussed again. 63. After considering the relevant finding and rival contentions, we find that, it has not been brought on record that in any of the contract the assessee had charged any interest on delayed payment or providing any credit facilities to its customers or any customer has paid any such amount for each day elapsed from the due date to the actual payment. Once none of the parties have either acknowledged the debt or any corresponding liability of the other party to pay, then it cannot be held that any income should be taxed on notional basis which has neither accrued nor received by the assessee. Whence the benefit of credit period given to the customers has neither accrued to the assessee nor acknowledged by the other person, then it cannot be said that interest on notional basis should be calculated for the purpose of taxation. Otherwise, it is a well settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y debt due too on its customer as delayed payment then it cannot be held that any interest accrued to the assessee, and therefore, such a notional charging of interest for. each day elapsed from the due date to the actual payment cannot be held to be taxable to the assessee. This proposition has also been now well upheld by the hon'ble Supreme Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC). Hence, no income can be said to accrue to the assessee on account of delayed payments as neither there was any corresponding liability on any of the debtors nor the assessee had claimed any entitlement on such an interest. Accordingly, this issue is also decided in favour of the assessee. 69. So following the decision rendered by Special Bench II in assessee s own case for 1997-98, 1998-99. We are of the considered view that the assessee has not treated the amount to be legally claimed nor has acknowledged any debt due to its customer as delayed payment no income can be said to accrue to the assessee on account of delayed payment as neither there was any corresponding liability on any of the debtors nor the assessee had claimed any entitlement on such an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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