TMI Blog2022 (8) TMI 889X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant Company for 2009 and 2010 were positive, and that was how the A.O. could attribute profits to the P.E. In so adopting the gross profit margins of the Appellant Company, the A.O. has acted in a manner which is directly contrary to Article 7(1) of the DTAA and also contrary to the said Special Bench Judgment. It is the Net Profits margins which are to be considered as for attribution as per the DTAA. Computation made by the A.O. in his assessment order is incorrect as the AO has not allowed the payments made by the Appellant to NSN India for the services rendered by NSN India as a deduction from the profit attributable to the alleged PE. If the said payments are allowed as a deduction from the gross profit figures taken by the A.O., then again the resultant figure would be losses. Consequently, even if the method of attribution adopted by the A.O. is considered to be correct, in any event, there would be no profit/income attributable to the PE. Consequently, even if the Appellant has a P.E. in India, no profit or income can in law at all be attributed to the P.E. which would be taxable in India. Hence, we hold that the adjudication on issue of PE would be academic in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith DCIT, Circle-2(1), International taxation, New Delhi. However, w.e.f. 1.4.2007, the said telecommunication network business was transferred by Nokia Corporation to Nokia Siemens Networks B.V. [later changed to Nokia Solutions Networks BV] [NSN BV for short], Nokia Siemens Networks Oy [Later changed to Nokia Solutions and Networks Oy] [NSN Oy for short] is the wholly owned subsidiary of NSN BV and is incorporated in Finland. NSN Oy is the business principal and operational headquarters company of NSN group. However, NSN Oy did not voluntarily filed its return of income for AY 2008-09 or later assessment years. 4. When this fact came to light, a notice under section 142(1) of the IT Act, 1961 dated 02.06.2011 was issued to NSN Oy to file its return of income for AY 2010-11. In pursuance of the same, return declaring total income Nil was filed by the assessee on 17.10.2011. Even though the income was declared at Nil, assessee has shown net tax payable of Rs. 25,780,929 and taxed paid of Rs. 78,661,048 and thus refund of Rs. 52,880,119 has been claimed in the return. The return was selected for scrutiny and notice u/s 143(2) was issued on 31.07.2012 served on the assessee. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 152,340,455 Euros is in respect of software (INR 9,739,403,046); and 392,094,843 Euros is in respect of hardware (INR 23,380,615,488) [approx. 72%]. 7. In addition to the above, NSN Oy has also sold network equipment worth INR 9,861,132,884 to NSN India Pvt. Ltd. Taking the same proportion as above, hardware sales to NSNIPL would come to INR 7,100,015,676 and software portion will come to INR 2,761,117,208. 8. Provision of services to NSNIPL (Network support services). Total payments received by NSN Oy on this account is INR 244,195,397. This international transaction was referred to the Transfer Pricing Officer who has not suggested any adjustment in this respect vide his order dt. 24.01.2014. Revenue of INR 244,195,397, being revenue from provision of network support services to NSN India have been offered to tax as Fee for Technical Services @ 10.5575% on gross basis under the provisions of section 9(1)(vii) read with section 115A of the Act for the subject A.Y. 9. During the FY relevant to the subject AY, NSN Oy also procured following services from NSNIPL, in respect of which it is submitted that NSNIPL was compensated at arm's length price: (i) Marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 78,661,049 13. Total tax deducted on account of software comes to Rs. 52,878,899 and for network support services comes to Rs. 25,782,150. The network support services have been offered for taxation in Income Tax Return. It may be mentioned here that the group company NSNIPL is deducting tax on payment of software, however, the assessee claims it to be its business income. 14. Heard the arguments of both the parties and perused the material available on record. 15. We have gone through the draft order of the AO, order of the ld. DRP in the case of the assessee and also order u/s 92CA(3) in the case of NSNPL. We have gone through the issue with regard to the tax receivable to the exchequer of India from the assessee keeping in view the global profits earned by the assessee, provisions of DTAA and also various judgments of the Courts on the issue of PE and attribution of profits thereof. 16. Arguments at length have been taken up before the Tribunal by both the parties. Coming to the relevant core issue, we find that Appeal before us involve to the following two straight issues, (a) Does the assesee has Permanent Establishm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Hon'ble Supreme Court of Italy in Phillip Morris (supra) wherein it has been held that: the participation of representatives or employees of a resident company in a phase of the conclusion of a contract between a foreign company and another resident entity may fall within the concept of authority to conclude contracts in the name of the foreign company, even in the absence of a formal power of representation . C5. The expression 'an authority to conclude contracts' has not been defined in the DTAA. Para 5 of Article 5 of OECD Model Convention also uses the similar expression, namely: 'an authority to conclude contracts.' Para 31-35 of the OECD commentary deal with para 5 of the OECD Model Convention whose language, is similar to para 4 of Article 5 of the DTAA. C6. It is pertinent to mention here that India has clarified its position in 2008 on para 33 of the OECD commentary by making it clear that it does not agree with both these sentences from para 33 of the OECD commentary as in its view the mere fact that a person has attended or participated in negotiations in a State between an enterprise and a client, can, in certain circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act provides that market intangible includes client list. Indian AE has performed this function of maintaining and up keeping the client list in the capacity of PE entity. C10. This shows that Indian AE is responsible for protecting, development maintenance of the intangible assets (copyright, brand, patent confidential data of customers) in India. The risk of receivables from customers also exists in India. However, there is no compensation made for such functions. 18. Now, taking the second issue first, we find that the AO has attributed the profits in the following way: 9.1 As discussed above, the assessee has PE in India, wherein R D is being carried out on behalf of the assessee and the assessee earns income from utilizing the inventions so developed worldwide. There are no details available on record for such type of income which is attributable to its permanent establishment in India for the above mentioned activities. Under the above circumstances Rule 10 of the Income Tax Act is invoked for computing the profit of the assessee attributable to its activities in India relating to Research and development. For arriving at the profit attributable to the Research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the quantum of the income to be attributed to the P.E. The effect being if the Appellant Company is in net loss as per its audited accounts or the calendar years 2009 and 2010, which relate to the present A.Y. 2010-11, there would be no profit or income attributable to the P.E. There are losses in both years as per the audited accounts. PB- Volume A of Compilation page 164, at 169 and page 180, at 185. 21. The relevant portion of the said Special Bench Judgment is quoted herein below (page 287 of Volume C, at page 949-950): 287....Taking all these into consideration, we consider it fair and reasonable to attribute 20% of the net profit in respect of the Indian sales as the income attributable to the PE. The following steps are involved in computing the income attributable to the PE: First the global sales and the global net profit have to be ascertained. From the accounts presented before us as well as before the Income-tax authorities, the global net profit rate has been ascertained at 10.8% and 16.1% by the CIT (Appeals), to which no objection has been taken by either side. This percentage has to be applied to the Indian sales and by Indian sales, we mean the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 25. Article 7(1) thus provides as under: (a) The profits of an enterprise can ordinarily be taxed only by the country in which it is located. (b) If however, the enterprise has a P.E. located in another country (which is also a signatory to the DTAA), through which it carries on its business, then a portion of its profits, to the extent it is attributable to the P.E. can be taxed in the other country. 26. On a plain reading of Article 7(1) of the DTAA, the question of attributing profits to the P.E. arises only if the foreign enterprise is making a profit. This is the condition precedent. If it is making a loss then no question arises at all of attributing any profit to the P.E., which would be taxable in India. 27. The Assessing Officer has taken gross profit margins of the Appellant Company for 2009 and 2010 as per its audited accounts instead of the net profit margins. The gross profits margins of the Appellant Company for 2009 and 2010 were positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall at any time be entitled to enter any premises under the control of the Subcontractor for the purpose of taking possession of the materials referred to in clause 2.1. It is expressly understood that the Subcontractor shall use such documents, drawings, models or nay other materials only for the purpose of fulfilling the subcontracting work for NSN and for no other purpose whatever and that such materials are subject to confidentiality as set out in Clause 15. 31. Thus, the AO concluded that the office premises of NSNIPL is nothing but a branch of assessee which is virtually under the control of assesse because no independent party would give such unfettered rights to any other independent party. 32. The appellant has relied on the decision of Hon'ble Delhi High Court in the case of Adobe Systems Incorporated vs. Assistant Director of Income-tax 69 taxmann.com 228 whereas the revenue held that the contract clause 2.2 providing unfettered rights to enter any premises and this case distinguishes it from the cited case. 33. It may be important to note that the decision of Hon'ble bench in the case of the assessee on this issue for AYs 2004-05 to 2006-07 is base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169.Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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