HIGH COURT OF DELHI
Director of Income-tax
v/s.
Nokia Networks OY
IT Appeal nos. 359 OF 2005, 1137 and 1138 OF 2006,
503, 505, 506, 512 & 1324 OF 2007, 30 OF 2008
September 7, 2012
JUDGMENT
A.K. Sikri, Actg. CJ. : Some of these appeals filed by the Nokia Network OY (hereinafter referred to as ‘the assessee’) and some filed by the Director of Income-tax (hereinafter referred as to ‘the Revenue’) pertain to assessment years 1997-98 and 1998-99.
2. The assessee, a company incorporated under the laws of Finland, is a leading manufacturer of advanced telecommunication systems and equipment (GSM equipment) which are used in fixed and mobile phone networks. During the previous year relevant to assessment years 1997-98 and 1998-99, Nokia maintained a Liaison Office and also had a subsidiary in India, presently known as Nokia India Private Limited (hereinafter referred to as NIPL). During this period, GSM equipment manufactured in Finland was sold to Indian telecom operators from outside India on a principal to principal basis, under independent buyer-seller arrangements. Installation activities were undertaken by Indian subsidiary under its independent contracts with Indian telecom operators. Nokia, being a tax resident of Finland, is governed by the provisions of India-Finland Double Taxation Avoidance Agreement. Assessment under section 143(3) was completed, in the following manner:-
(a) Nokia was carrying on business in India through a Permanent Establishment (PE). Both the Indian Liaison Office and Indian subsidiary were held to constitute a PE of Nokia in India. ‘Installation PE’ was also constituted on the basis that Nokia had supported Indian subsidiary in discharging its obligation under the installation contracts.
(b) 70% of total equipment revenue (comprising of hardware and software) was attributed to sale of hardware and 40% of the same was estimated as income of Nokia from supply of hardware. Further 30% of the profits so determined were attributed to the PE of Nokia in India. The remaining 30% of the equipment revenues were attributed towards supply of software and the same was taxed as ‘royalty’ (on a gross basis) both u/s 9(1)(vi) of the Income-tax Act and under Article 13 of the India-Finland DTAA, holding that software was not sold but licensed to the Indian telecom operators.
(c) In addition, income from vendor financing and delayed payment was imputed at Rs. 50,000,000 for each assessment year on account of specific clause in this regard in the off-shore supply contracts. The said income was classified as commercial income and added to the income from sale of equipment and licensing of software and taxed at the rate of 55%.
(d) Interest under section 234B of the Act was levied on account of non-payment of advance income-tax.
3. Being aggrieved by the assessment order, an appeal was filed before the CIT(A) who held as under:
(i) True intention of the contract of supply was not merely to supply the equipment but was also to install and provide related services by or on behalf of Nokia.
(ii) Nokia was held to have its presence in India in the form of the Liaison Office and Indian subsidiary. ‘Installation PE’ was also affirmed on the basis that Indian Subsidiary did not act independently in discharge of its obligation towards Indian telecom operators.
(iii) India specific Profit and Loss statement, duly audited by the Auditors of Nokia, was rejected on the basis that Profit and Loss statement was not supported by any documents.
(iv) Profit on sale of equipment (comprising of hardware and software) was arrived at on the basis of net margins disclosed in the global profit and loss accounts of Nokia and 50% of the same was attributed to activities alleged to have been undertaken by Nokia in India.
(v) Income from vendor financing was held to be rightly computed by the Assessing Officer.
(vi) Interest under section 234B of the Act was, however, deleted.
4. As the appeals were partly allowed, both the parties felt aggrieved by the order of CIT(A). Thus, appeals were filed both by Nokia as well as by the Department with the Income-Tax Appellate Tribunal (ITAT). A Special Bench was constituted wherein these appeals were taken up alongwith appeals of Motorola Inc. and Ericsson Radio Systems AB. The key issues before the Special Bench in Nokia appeals were as follows:
(a) Whether the Liaison Office of Nokia constitutes a PE in India under Article 5 of the DTAA?
(b) Whether NIPL constitutes a PE in India under Article 5 of the DTAA?
(c) If the answer to Question Nos. 1 and 2 is in affirmative, what is the income attributable to the PE under Article 7 of the DTAA?
(d) Whether income from off-shore supply of equipment can be taxed in India?
(e) Whether any income forming part of the consideration for supply of equipment and licensing of software integral thereto is taxable as ‘royalty’ under section 9(l)(vi) of the Income-tax Act, 1961 or Article 13 of the DTAA?
(f) Whether on facts and in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of Nokia?
(g) Whether interest under section 234B of the Act can be levied on Nokia, being, a non-resident when TDS provisions applied to the sums in question and tax due had not been deducted at source?
5. The ITAT decided appeals of all the assessees by a common judgment dated 22.6.2005. Insofar as appeals relating to Nokia are concerned, findings of the Special Bench are as under:
(1) Liaison Office neither constituted a business connection under the Act nor a PE of the Nokia under Article 5 of the India-Finland DTAA, as it merely carried on advertising activities in India.
(2) Sale of hardware took place outside India and no income from sale of hardware accrued to Nokia in India.
(3) Nokia was not responsible for installation of telecom equipment and Nokia’s arrangement with the Indian Telecom Operators did not constitute a works contract. NIPL is a separate corporation entity and is also assessed separately for its installation income.
(4) However, Nokia was held to have a PE in India in the form of NIPL, on the basis that Nokia virtually projected itself in India through NIPL and Mr. Hannu Karavirta, acted for both. Losses incurred by NIPL and guarantees given by Nokia that it will not ‘dilute its shareholding in NIPL below 51% without written permission of Indian Telecom Operators was used as the main basis to hold that Nokia was in a position to control and monitor NIPL’s activities.
(5) While upholding NIPL as a PE of Nokia, the Special Bench observed that it did not matter that there was no direct evidence for the control of NIPL by Nokia. For purposes of PE, what is relevant is only the perception that NIPL was a projection of Nokia, whether or not in fact and in truth its activities were being controlled/monitored by Nokia. Following discussion ensued on this aspect: –
‘… 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 supply of software was held not taxable both under the provisions of the Act and under DTAA.
(7) Interest income from vendor financing was held to have been correctly added.
(8) Following 3 activities were held to have been carried out by NIPL, the PE of Nokia in India
(a) Network Planning;
(b) Negotiations in connection with the sale of equipment; and
(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).
6. It is clear from the above that certain issues are decided in favour of Nokia and some in favour of the Revenue, by the Special Bench. That is precisely the reason for both by the Revenue and Nokia approaching this Court by filing appeals challenging the respective findings which have gone against them. Gist of the issues raised in the appeals filed by both the parties is tabulated as under:-
