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2019 (9) TMI 304

..... essee, in the absence of any change in the material facts, following the earlier order of this Tribunal [2018 (6) TMI 497 - ITAT DELHI] , we hereby hold that the assessee do not have a PE within the terms of Article 5 of India-Finland DTAA. Thus, this ground of appeal of the assessee is allowed. Taxability of revenue from supply of software - whether the consideration towards the software portion of the equipment is in the nature of royalties under Article 13 of India-Finland DTAA? - HELD THAT:- Regarding the taxability of revenue from supply of software, the ld. CIT (A) held that since software is an integral part of the telecom hardware and software supply has been made pursuant to the contract in respect of which a PE has been upheld, software is effectively connected to the PE and should be dealt with as the "business profits' in accordance with provisions of Article 7. In view thereof, there is no need to segregate the payments for software from other business receipts from supply of telecom hardware. Sale of hardware took place outside India and hence no income from sale of hardware accrued to Nokia in India. The issue of royalty on the software has been held in favo .....

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..... nication equipment. 4. Without prejudice, based on facts and circumstances of the case and in law, the ld. CIT (A) has erred in not considering the India specific Profit and Loss account furnished by the appellant, which reflected losses incurred from supplies made to customers in India. 5. Without prejudice, based on facts and circumstances of the case and in law, the ld. CIT (A) has erred in attributing 20 percent of the estimated income from supply of telecommunication equipment to the alleged PE in India, by completely ignoring the following facts submitted by the appellant: (a) Supply contracts/purchase orders, being high value contracts, were concluded/accepted outside India in view of the fact that the power to conclude contracts vests with the Board of Directors/other approving authority off the assessee based outside India at the registered office of the company in Helsinki (Finland). (b) No supply contracts were signed in India. (c) No income can be said to have accrued on account of mere signing of contracts, as upheld by the Hon ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (288 ITR 408) (d) The appellant s role was limited to supply of .....

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..... % of profits to activity of the PE in India for supply of Hardware. 2. On the facts and circumstances of the case, Ld. CIT(A) has erred in attributing only 20% of profits of activity of the PE in India for supply of Operating Systems Software. 3. On the facts and circumstances of the case, Ld. CIT(A) has erred in attributing the profits on Research & Development (R&D) activities in the same proportion as the proportion of Global Profits are attributable to ratio of Global R&D Expenses & Global Expenses and thus disregarding the facts that Global Expenses even contain expenses of the branches where R&D activities are not even carried out. 4. The issues in the grounds taken by the assessee as well as the revenue involved similar issues. Hence, taken up and adjudicated together. 5. Brief background of the case are that Nokia Corporation is a company incorporated under the laws of Finland and is engaged in the business of supplying advanced telecommunications systems and equipment for use in fixed and mobile phone networks. The assessee has presence in India in the form a 100% subsidiary by the name of Nokia India Private Ltd (hereinafter referred to as Nokia India) .....

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..... between the appellant and Nokia India (Relevant for Assessment Years 2004-05 to 2006-07) 7. The orders of the ld. CIT (A) were mainly based on the order of the Special Bench of ITAT Delhi dated 22.06.2005 in the case of assessee. Later, the matter reached the Hon ble High Court where the Hon ble High Court has passed an order dated 07.09.2012 25 Taxman 225 dealing with the issues. Later, the Special Bench was constituted following the directions of the Hon ble High Court and the ITAT Special Bench, Delhi passed an order dated 05.06.2018 65 ITR (T) 23 for the assessment year 1997-98 and 1998-99. 8. Ground Nos. 1, 3 to 5 of assessee s appeal in ITA Nos. 1006 to 1008/Del/2010, Ground Nos. 2 & 3 of assessee s appeal in ITA No. 5819/Del/2010 and Ground Nos. 1 to 3 of departmental appeal in ITA Nos. 1236 to 1238/Del/2010 deals with existence of permanent establishment in India. 9. With regard to the PE, the ld. CIT (A) adjudicated based on the order of the Special Bench of ITAT Delhi dated 22.06.2005. The relevant part of the order is as under: "Taking up the second part of the second question as to whether the Indian subsidiary of the assessee, referred to as NTPL, can be consi .....

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..... onclusion, or whether it 1s permissible for us even to make such an inference from the circumstances of the case, is not really material for the present purpose. What it material is that there was ample scope for the assessee to control and monitor the activities of NTPL which, it should be remembered is a l00% subsidiary of the assessee, in such a manner that NTPL became a virtual projection of the assessee company in India. The other point made by the Income-tax authorities was that the assessee even represented to the Indian cellular operator that it will not dilute its share holding in the Indian subsidiary below 51% without the written permission of the Indian cellular operators. This allegation of the Income-tax authorities has not been refuted 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% 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 agreemen .....

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..... 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. 44. 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 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 .....

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..... ta of evidence has been brought on record that Mr. Hannu Karavitra had signed any 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 accrued thereof, was subject to tax in India. During the course of the hearing, it was brought to our notice that on one assignment letter dated 24.05.1995 was signed by Mr. Hannu Karavitra whereby on shore services 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-à-vis the customers. Whether Mr. Hannu Karavitra was representative of the assessee and was working for NIPL or was receiving .....

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..... 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 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. 46. Another set of allegations which can said to have some significance is that; whenever 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 .....

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..... 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, ld. 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 for carrying out its business wholly or partly in India. The sequitur of the judgment of Hon'ble Apex Court as incorporated above is that, in order to ascertain as to whether an establishment being a fixed place for PE or not is that physically located premises have to be '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 I .....

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..... erence 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. The test laid down by the Hon'ble Supreme Court does not get satisfied in this case as 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. 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) .....

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..... handise 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 off-shore 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 supplied is directly passed on to the customers in India and NIPL neither undertakes any negotiation process nor assist in delivery of goods. Under a DAPE the character of the agent can be said to be determined; firstly, his commercial activities for the enterprise is subject to instruction or comprehensive control; 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 .....

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..... f 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 crores which suddenly from the year 1996, got shifted in the Indian company and from there he draws an inference that Indian company has not received any compensation for the same from assessee and this shows the close business connection between the NIPL and the assessee. This observation again is of no consequence, because when 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 c .....

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..... tion 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 that there is no DAPE within the scope and terms of Article 5(5) of the treaty. 50. Admittedly, paragraph 6 of Article 5 is not applicable. Paragraph 7 of Article 5 deals with 'agent of independent status.' Independence of an agent has to be both legal as well as economic independence. Legal independence has to be seen from the context, whether 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 agen .....

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..... pport 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 assessee; seeking approval from the assessee for the manner in which the business is to be conducted; etc., then all such control if at all could be only in relation to the contracts carried out by the NIPL in India to ensure technical quality of the contact work done. When there is absolutely no income generated to the assessee from installation contract work done in India by the NIPL, then 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 .....

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..... 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 existence of a substantial element of enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. Such a fixed place should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country to the soil of another country. The concept of 'virtual projection' flows from the fixed place itself or 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 .....

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..... the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.'' First requirement is whether any income is deemed to have been received in India to non-resident. Here on the facts of the case this clause may not be applicable, because undisputedly the title of the goods of the GSM equipments supplied by the assessee has been transferred outside India and the payments have also been received by the assessee outside India. Secondly, coming to the provisions of sub section 2(b) which deals with accrual of income or deemed accrual of income, the provision of Section 9 has to be seen as it stood 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 prope .....

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..... lighted before us in this regard. 54. Before us, regarding the existence of business connection, Mr. Deepak Chopra relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC) and submitted that mere performance of some activities in the Indian Territory does not afford a business connection of foreign company in India. What is important to examine here is that the trading activities within the territories should be linked with the trading activities carried on outside the taxable territories. Here, in this case, he submitted that the activity in question is the off-shore supply of equipment for which relevant trading activities are procuring of raw materials, manufacture of finished goods, sale and delivery of goods, which all have been 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 t .....

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..... Relying upon the aforesaid judgment, he submitted that mere existence of a business connection it is not enough to trigger taxability in India in respect of off-shore supply of telecomm equipment to Indian customers because there must be same activity carried out in India relating to the off-shore supply. 55. On the other hand, learned CIT-DR has reiterated the same set of arguments that right from negotiation of contract to supply was undertaken through employees of the assessee either independently or through NIPL and the entire marketing activities for such sale has been done through NIPL. Hence, it constitutes a business connection in India. 56. We have heard the rival contentions made by the parties and also material placed on record. First of all, we find that the Hon'ble High Court in the context of LO has 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 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 .....

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..... giving rise to a tax liability in India; (vi) the existence of the overall responsibility clause was held to be irrelevant in Ishikawajima's case and likewise the overall agreement executed in the assessee's case should not make any difference to the taxability of the equipment supplied; (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; (viii) the Supreme Court relied upon Instruction No. 1829 to come to the conclusion that the existence of an overall responsibility clause was not material in determining the tax liability arising from the offshore supply of equipment and as the said instruction continues to 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 fo .....

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..... essee 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. Thus, the finding and the ratio of the Hon'ble High Court would apply mutatis mutandis though rendered in the context of LO will also apply in the case of NIPL as qua the supply contract there is no material change in any case. 58. Apart from the judgment of Hon'ble Delhi High Court in the case of assessee as discussed above, we find that, Hon'ble High Court in Nortel Network India International Inc. (supra) somehow on similar set of facts has reiterated the same 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 .....

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..... y virtue of Explanation 1 to Section 9(1) of the Act, only such part of the income which is reasonably attributable to operations carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the 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. 44. There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods 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 Avoid .....

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..... In so far as Nortel India is concerned, there is also no evidence that the offices of Nortel India were at the disposal of the Assessee or Nortel Canada. Even if it is accepted that Nortel India had acted on behalf of the Assessee or Nortel Canada, it does not necessarily follow that the offices of Nortel India constituted a fixed place business PE of the Assessee or Nortel Canada. Nortel India is an independent company and a separate taxable entity under the Act. There is no material on record which would indicate that its office was used as an office by the Assessee or Nortel Canada. Even if it is accepted that certain activities were carried on by Nortel India on behalf of the Assessee or Nortel Canada, unless the conditions of paragraph 5 of Article 7 of the Indo-US DTAA is satisfied, it cannot be held 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 .....

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..... 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. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee." This judgment of Hon'ble Delhi High Court clearly clinches the issues in hand, both on the point of taxability u/s. 9(1)(i) and also in the context of PE. Thus, respectfully following the ratio laid down in aforesaid judgment of Hon'ble 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 off shore supply contracts, therefore, there is no question of any attribution of income o .....

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..... 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 settled proposition that income cannot be generated, actual or accrued if no income has actually been accrued or received to the assessee. There has to be some income which has resulted to the assessee and even though in books, entries have been made about hypothetical income which does not materialized at all cannot be brought to tax. The income tax is levy on real income, i.e., the profits arrived on commercial principles. 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 cas .....

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..... al stands decided in favour of the assessee and against the Revenue. 11. Since, the matter of PE stands adjudicated in favour of the assessee, in the absence of any change in the material facts, following the earlier order of this Tribunal, we hereby hold that the assessee do not have a PE within the terms of Article 5 of India-Finland DTAA. Thus, this ground of appeal of the assessee is allowed. 12. Ground Nos. 4 to 6 of assessee s appeal in ITA No. 5819/Del/2010 and Ground No. 2 of departmental appeal in ITA Nos. 1236 to 1238/Del/2010 deals with supply of equipment as hardware and software arbitrarily basis and whether the consideration towards the software portion of the equipment is in the nature of royalties under Article 13 of India-Finland DTAA. 13. The order of the ld. CIT (A) on the taxability of the supply of hardware in relation to the PE has already been discussed above. 14. Regarding the taxability of revenue from supply of software, the ld. CIT (A) held that since software is an integral part of the telecom hardware and software supply has been made pursuant to the contract in respect of which a PE has been upheld, software is effectively connected to the PE and shoul .....

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..... re is no need to bifurcate the payments from supply of telecommunication system separately into hardware and software. The entire receipts in respect of the contract for Supply of telecom equipment including hardware and software shall be treated as business Income. 15. This issue has been summarized in the judgment of Hon ble High Court as under: 6.1 These questions have been decided by the Special Bench vide judgment dated 22.06.2005; however, in so far as the appeal 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 i .....

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..... nning; (b) Negotiations in connection with the sale of equipment; & (c) Signing of supply and installation contracts. (9) 20% of the net profit determined on the basis of the global net profit of Nokia (10% towards signing of the contract and 10% towards other two activities) was attributed to the PE in India. This margin was directed to be applied on the Indian sales of Nokia (clarified by the Special Bench of the 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 withi .....

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..... e cannot be held to be taxable. It was held that what was sold was a GSM which consisted both hardware as well as the software and hence they cannot be taxed under two different articles. For ready reference the relevant part of the judgment of the Hon ble High Court is reproduced as under: QUESTION OF LAW NOS. 3 & 5 25. This aspect has already been discussed in detail by us in DIT v. Ericsson A.B. [2012] 343 ITR 470 / 204 Taxman 192 / [2011] 16 taxmann.com 371 (Delhi) which reasoning equally applies to these cases. The relevant portion of the said judgment is reproduced below: "55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integ .....

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..... t; includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes. ………………… ………………. 29. Our reasoning given in Ericsson A.B. (supra) therefore would apply to this case as well. Even otherwise, we find, as a fact, the assessee had entered into contract for supply of GSM equipment. Responsibility for installation and commissioning of the equipment and provisioning of technical services was untaken by NIPL undertaken its separate contract with Indian customers. This installation contract has not been entered into between the assessee and Tata. We also find that Clause 19.1 of the supply contract between the respondent and Tata has been examined threadbare by the ITAT Special Bench in para 277 to hold that title and risk in the equipment has passed to Tata outside India and thereafter, Tata continues to hold the hardware at their own risk and therefore, no part of the contract prior to the passing of the title and risk could .....

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..... as held that income from vendor financing has been rightly imputed since there is no evidence on record to substantiate that such interest was not charged. Para 283 of the order reads as under: We have considered the facts and the rival contentions but we find no Substance in the assessed s case. The findings of the CIT (Appeals) have not been refuted before us on the basis of any material or evidence. The existence of the clause in the agreement for charging interest @ 18% p.a. is not denied. All that is contended is that the clause was not activated but this contention is without substance because if the agreement is in force then it is in force with all its clauses which includes the charging of interest. It was for the assessee to show on the basis of any evidence or correspondence or subsequent agreement modifying the earlier agreement under which interest was chargeable. This has not been done. The mere fact that no credit was taken in the account books for the interest cannot stop the accrual thereof as the assessee's income. Even before us no evidence was filed to show that the financial position of the cell operators was bad and that there was an agreement between the .....

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..... ncome 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. 61. 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 settled proposition that income cannot be generated, actual or accrued if no income has actually been accrued or received .....

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..... his proposition has also been now well upheld by Hon'ble Supreme Court in the case of Excel Industries Ltd. (supra). 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 assessee had claimed any entitlement on such an interest. Accordingly, this issue is also decided in favour of the assessee. As a result, appeal of the assessee on this ground is allowed. 20. Ground No. 8 of assessee s appeal in ITA Nos. 1006 to 1008/Del/2010, Ground Nos. 7 & 8 of assessee s appeal in ITA No. 5819/Del/2010 and Ground No. 3 of departmental appeal in ITA Nos. 1236 to 1238/Del/2010 deals with taxability of revenue from R&D activities undertaken in India. 21. The background of the issue is that Nokia India, the Indian subsidiary of the assessee has carried out R&D activities for the assessee during the AYs 2004-05 to 2006-07 in terms of the Research and Development Subcontracting Agreement . AO in the assessment orders for these years has held that Nokia India constitutes fixed places PE and Dependent Agent PE of the assessee in respect of these R&D activities. 22. The ld. CIT .....

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..... of that case are the assessee was a company incorporated under the laws of Delaware in USA. It provided software solutions for network publishing which included web, print, video, wireless and broadband applications. The assessee had a wholly owned subsidiary in India, namely, Adobe India. Adobe India provided software related Research and Development (R&D) services to the assessee and the assessee did not have any business operations in India. The R&D services rendered by Adobe India, were paid for by the assessee on cost plus basis in terms of an agreement entered into between the assessee and Adobe India. For relevent years, the Assessing Officer and the TPO accepted the fees paid by the assessee on cost plus 15 per cent basis as being on ALP and Adobe India's assessment was made accordingly. Subsequently, the Assessing Officer sought to reopen the assessment. The reasons recorded for said purpose were that activities carried out by Adobe India were a part of the assessee's core business activities and, consequently, Adobe India constituted the assessee's PE under article 5(1) of DTAA. The Assessing Officer further reasoned that since the assessee had a PE in .....

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..... was obliged to provide assistance, specifications and supervision and was further entitled to audit the facilities of Adobe India for maintenance of the requisite standards. This, according to the AO, indicated that the Assessee had a Service PE in India in terms of Article 5(2)(l) of the Indo-US DTAA. According to the AO, Adobe India was also a dependent agent of the Assessee and thus, constituted its PE in terms of Article 5(5) of the Indo-US DTAA. 14. The AO reasoned that since the Assessee had a PE in India, a part of the profit accruing to the Assessee which is attributable to the activities in India was chargeable to tax under the Act. 15. The AO further observed that the transaction between the Assessee and Adobe India involved transfer of intangibles and multiple interrelated transactions which could not be evaluated separately for the purposes of determining ALP by any one transaction. The AO also recorded that development and customisation of software was a highly technical job and the same could not be restricted to computation on cost plus basis. In his view, cost plus basis was not a suitable method for intangibles like software services and the Profit Split Method wa .....

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..... work to a subsidiary in India could be a factor for determining the applicability of Article 5(1) of the Indo-US DTAA. The Court had further expressly held that : "Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location permanent establishment. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place permanent establishment exists. Reference to core of auxiliary or preliminary activity is relevant when we apply paragraph 3 of Article 5 or when sub-clause (a) to paragraph 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place permanent establishment." 34. Thus, the AO's view that Adobe India constituted the Assessee's PE in terms of paragraph 1 of Article 5 of the Indo-US DTAA is palpably erroneous and not sustainable on the basis of the facts as recorded by him. 35. We also find that there is no material to hold that .....

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