TMI Blog2019 (9) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 favour of the assessee based on the order in the case of DIT Vs Ericssion AB [ 2011 (12) TMI 91 - DELHI HIGH COURT] . It was held that these payments cannot be said to be in the nature of royalty either as per the Indian Income Tax Act or DTAA and hence 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 Taxability of the notional interest /vendor financing on delayed consideration for supply of equipment and licensing of software - HELD THAT:- No income can be said to accrue to the assessee on account of delayed payments as neith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 telecom equipment and it did not have any role in network planning activities undertaken in India. 6. Not pressed 7. Based on facts and circumstances of the case and in law, the ld. CIT (A) has erred in upholding the action of the learned assessing officer who has arbitrarily imputed ₹ 50,000,000 as income from vendor financing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). According to the assessee its Indian liaison office had become defunct after incorporation of the Indian subsidiary, Nokia India, in May 1995 and was closed in January 2002 after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t evidence or not for this conclusion, 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt simply whittles down for the reason that firstly, 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 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 employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove 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, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 entrepreneuri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also directed to examine as to whether the subsidiary of the assessee would provide business connection or is Permanent Establishment. Thus, for the sake of completeness, we shall discuss in brief, whether the assessee was having any kind of business connection in India or not. The provision of Section 5 of the Income-tax Act defines the scope of total income and sub section (2) reads as under:- (2) Subject to 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 situated in India shall be taxable in India if they come within the meaning of income deemed to accrue or arise in India as explained in Section 9 of the Act. Thus, where any income accrues or arises to a nonresident through or from any business connection in India where all the operations are not carried out in India only such income will be chargeable to tax in India as can be attributed to the operations carried out in India. In light of these provisions and facts of the case, we will analyse the rival contentions of the parties and the judicial proposition highlighted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supply Contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India Finally, he strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Nortel Networks India International Inc. v. DIT [2016] 386 ITR 353/241 Taxman 464/69 taxmann.com 47 and submitted that this judgment squarely clinches the issue in favour of the assessee and strongly relied upon paragraphs 43 to 47 of the said judgment. 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 emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia was not considered a relevant circumstance whilst determining whether any part of the profit on the offshore supply was chargeable to tax in India in the case of Ishikawajima, so also in the assessee's case. (iv) although admittedly a permanent establishment existed in the case of Ishikawajima, nevertheless, the Court held that no part of the profit arising from the supply of the equipment was chargeable to tax in India as the permanent establishment had no role to play in the transaction sought to be taxed as it look place abroad, whilst in the case of the assessee, it has been found as a fact by both the appellate authorities that no permanent establishment existed; (v) the mere signing of the contract pursuant to which the supply was made in India, in both cases does not result in 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 nomenclatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation and only then would question of apportionment arise having regard to expressed language of Section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arises in India. 57. Whence in the concept of LO already a categorical finding has been given by the Hon'ble High Court that supply of off-shore equipment which has been done outside India cannot be held to be taxable in India, then the same principle and proposition would also be applicable in the case of NIPL also, because, so far as the supply contracts are concerned there is absolutely no change in the facts and circumstances as even after the NIPL is incorporated in May, 1995, the off shore supply equipment and the supply contract remained the same. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities disregarded the corporate structure of the assessee and proceeded on the basis that its identity was the same as N(C). On the issue, whether the appellant had a PE, both fixed place PE and DAPE in India in the terms of liaison office Nortel Canada and also in terms of subsidiary Nortel Network India Pvt. Ltd. which carried out installation services, Hon'ble High Court observed and held as under:- 'It is apparent from the plain reading of Section 9(1) of the Act that all income which accrues or arises through or from any business connection in India would be deemed to accrue or arise in India. In CIT v. R.D. Aggarwal Co.: (1965) 56 ITR 20 (SC), the Supreme Court observed that business connection would mean a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business . However, by 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(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 equipments nothing can be held to be taxed in India in terms of Section 9(1). In fact, in the finding of the Hon'ble High Court in paragraphs 69 to 72, it has been held that the Indian subsidiary of Nortel and LO will not constitute a PE. For the sake of ready reference, paragraphs 69 to 72 are reproduced hereunder:- 69. The AO, CIT (A) and ITAT have held that the office of Nortel India and Nortel LO constituted a fixed place of business of the Assessee. As pointed out earlier, we find no material on record that would even remotely suggest that Nortel LO had acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf. Thus, it is not possible to accept that the offices of Nortel LO could be considered as a fixed place of business of the Assessee. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 group entities. In absence of any such evidence, this view could not be sustained. 74. The CIT (A) as well as the ITAT 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 ITAT 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). Ld. counsel for the assessee had submitted that the said judgment has already been distinguished in the subsequent judgment of Hon'ble Supreme Court in the case of UCO Bank (supra) and secondly, only the real income can be brought to tax and not something 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the Indian customers in respect of interest on delayed credit period on Vendor Financing. Thus, we hold that when assessee has neither treated the amount to be legally claimed nor has acknowledged any 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 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. 62. The aforesaid findings and conclusions given in respect for the A.Y. 1997-98, will apply mutatis mutandis in the appeal for the A.Y. 1998-99 year, as exactly similar facts and issues are permeating in this year also. 63. In the result, all the issues which have been re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount paid for use of the software is to be treated as the commercial income or business profits of the assessee since the assessee had been held by him to have PE in India. However, the nature of the payment had been found by us in the cases of Ericsson and Motorola to be not royalty at all. We have found that the payment is for a copyrighted article and not the copyright right. The same finding holds good in this case also. Therefore, even Article 13.6 of the DTAA which provides that if the foreign enterprise has a PE in India, the royalties shall be taxed not under Article 13 but as business profits under Article 7 of the DTAA will not be attracted. In other words even though we have held that the 100% Indian subsidiary of the assessee, namely, NTPL, constitutes the assessee s PE in India, the payment for the software cannot be assessed under Article 15 for the reasons that it is not in the nature of royalty. However, a question may arise as to why the payment cannot be assessed as business profits under Article 7. The reason is that the software has been held by us to be part of the GSM Cellular Systems as a whole, the sale of which has taken place outside India as held by u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;... We only meant to convey that because of the close connection between the assessee and NIPL, it was possible to look upon NIPL as a virtual projection of the assessee in India. We have in fact clarified in the same paragraph that what matters is that there was scope for previewing the assessee's soul in the body of NIPL and that it did not matter that there was no direct evidence for the control of NIPL by the assessee. For purposes of PE, what is relevant is only the perception that NIPL was a projection of the assessee, whether or not in fact and truth its activities were being controlled/monitored by the assessee. Our observations are therefore confined to the question of PE. Otherwise, both the assessee and NIPL remain separate corporate entities and NIPL has also been assessed separately for its installation income. Thus the observations in para 274(b) have no relevant to what has been discussed in this paragraph.' (6) Payment for supply of software was not in the nature of 'royalty' because the same was for a copyrighted article and 'not for a copyright. Further, software was held to be integral part of GSM equipment. Payment for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the PE in the form of NIPL (Nokia India Pvt. Ltd.) a subsidiary Issue remitted back to AO (Para 31 of HC Order) Q5. Whether on facts and in law interest under section 234B is leviable? Decided in favour of assessee (Para 30 of HC Order) Assessee Appeals before Hon'ble High Court (ITA 1137 1138/2007 Q1. Whether on a true and correct interpretation of the relevant DTAAA the Tribunal's reasoning is right in law in holding that NIPL, (the subsidiary of the Appellant) is a permanent establishment? All these Issues have been remitted back to ITAT (Para 38 of High Court order) Q2. 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? Q3. Whether prejudice, if the answers to Q.1 Q.2 are in affirmative, is there any attribution of profits on account of signing, network planning and negotia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- In our view, the term goods as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd.(supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent to supply fully functional equipment. Clause 19.1 of the supply contract with Tata does not provide that non-performance of Acceptance Test is a material condition for breach of the supply contract and reference placed by the Revenue is factually incorrect. That contract further reveals that NIPL was responsible for undertaking acceptance test under the terms of its installation contract with the Indian customers. The fact that Acceptance Test was to be done by respondent's subsidiary, NIPL has been specifically noted by the ITAT Special Bench in para 279. We are therefore, of the opinion that this submission of the Revenue is factually in correct. 30. Question nos.3 and 5 are accordingly decided in favour of the assessee and against the Revenue. Thus, this ground of appeal of the assessee is allowed. 17. Ground No. 7 of assessee s appeal in ITA Nos. 1006 to 1008/Del/2010 and Ground No. 9 of assessee s appeal in ITA No. 5819/Del/2010 deals with taxability of the notional interest /vendor financing on delayed consideration for supply of equipment and licensing of software. 18. On this issue, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he clause providing for interest. In these circumstances, we uphold the addition for both the years. Respectfully, following the decision of the Honourable Special Bench of the Delhi TATAT, I hold that income from vendor financing is taxable in the hands of the appellant. In the absence of details from the appellant, the AO was right in estimating this income. Therefore, the addition of ₹ 5,00,00,000/- on this account is upheld for each of the AYs 2003-04 to 2006-07. 19. Much water has flown subsequent to the order of the Special Bench of ITAT on which the ld. CIT (A) relied upon. Subsequently, post High Court order in the case of the assessee, a Special Bench of ITAT Delhi vide order dated 5th June 2018 has decided this issue in favour of the assessee. For ready reference, the order of the Special Bench of ITAT Delhi dated 5th June 2018 is reproduced as under: 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued 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 case of E.D. Sassoon Co. Ltd. v. CIT [1954] 26 ITR 27, CIT v. Ashokbhai Chaamanbhai [1965] 56 ITR 42, CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 and Godhara Electricity Co. Ltd. v. CIT, [1997] 225 ITR 746/91 Taxman 351. Further, the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore, (supra) which has been relied upon by the ld. CIT (A), has not been treated to be correct enunciation of law by the Hon'ble Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in respect of these R D activities. 22. The ld. CIT (A) held that since the assessee does not have separate accounts in respect of such expenses and revenues relatable to them and determination of profits attributable to the PE poses difficulties. Therefore in terms of Article 7 (paragraphs 3 and 4) of the DTAA, application of Rule 10 of IT Rules, 1962 by the AO is upheld. However, as far as the attribution ratio of 126% to 130% is concerned, it was held that the same in is excessive. From the calculations of the AO mentioned above it is seen that he has attributed 100% of the profits to R D activities. Profit of an enterprise is the result of various activities like manufacturing, selling and distribution, financing, branding, goodwill, R D and logistics etc. R D is thus, one of the activities amongst several others which results into profits to the enterprise. A rational basis of allocation of profits to R D would be in the proportion R D expenses to total expenses i.e. in the year 2004 which has been considered as an example, R D expenses of 3,733 million Euros is about 15.20% of the total expenses of 24,558 million Euros of expenses. Therefore, it would be f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DTAA. The Assessing Officer further reasoned that since the assessee had a PE in India, a part of the profit accruing to the assessee which was attributable to the activities in India was chargeable to tax under the Act. 25. At this juncture, we find that the facts of Adobe Systems Incorporated are similar to the assessee and the issue in question before us. The ld. CIT (A) held that there is fixed PE in terms of Article 5 of DTAA. The premises have been used for carrying R D activities of the assessee and the assessee has paid for all the costs and facilities. The assessee had control and authority to decide the R D projects undertaken by Nokia India. The premises have been in control of the assessee. These issues have been clearly dealt by the Hon ble High Court in their order. Further, the Hon ble High Court has also taken queue from the order of E-Funds IT Solutions regarding the fixed place PE. The reasoning of the ld. Assessing Officer in the case of Adobe Systems and the order of the Hon ble High Court dealing with the fixed PE is as under: Reasons to believe that income had escaped assessment. 12. In the reasons recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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 was applicable in terms of Rule 10B of the Income Tax Rules. Finally, the AO took note of the global profits reported by the Assessee and held that the same should be apportioned in the ratio of the R D expenses incurred by the Assessed. 26. The order of the Hon ble High Court dealing with the issue above as under: 32. Para (1) of Article 5 defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term 'fixed place of business' includes premises, facilities, offices which are used by an enterprise for carrying on its business. The fixed place must be at the disposal of an enterprise through which it carries on its business wholly or partly. Although, the word 'through' has been interpreted liberally but the very least, it indicates that the particular location should be at the disposal of an Assessee for it to carry on its business through it. These attributes of a PE under Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 the Assessee's employees constitute a Service PE in terms of Article 5(2)(l) of the Indo-US DTAA. The Assessee has denied that any of its employees has rendered any service in India. There is no material available with the AO that would contradict the same. The AO has concluded that the Assessee has a PE in India in terms of Article 5(2)(l) of the Indo-US DTAA, only on the basis that the Assessee has a right to audit Adobe India and that the agreement between the Assessee and Adobe India entails that the Assessee would provide specifications, assistance and supervision for the R D services procured by the Assessee. The said terms of the agreement do not in any manner indicate that the Assessee has been providing services in India. Clause 5.5 of the agreement referred to by the AO indicates that the Assessee is authorized to audit the Indian subsidiary (Adobe India), so as to ensure that Adobe India adh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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