Case Law Details

Case Name : Laird Technologies India Pvt. Ltd. In Re. (Authority for Advance Rulings)
Appeal Number : AAR No. 793/ 2008 : 2010-TIOL-06-ARA-IT
Date of Judgement/Order :
Related Assessment Year :
Courts : Advance Rulings (181)

AAR Ruling: The amount received on account of assignment of rights, title, interest, obligations and duties in connection with the supply of products is not taxable in India in the absence of a Permanent Establishment and therefore, tax is not required to be withheld under section 195 of the Income tax Act while making remittance outside India [Laird Technologies India Pvt. Ltd. (AAR No. 793/ 2008)(2010-TIOL-06-ARA-IT)].

Facts:

Laird Technologies (P) Ltd. (applicant), an Indian company, which was a group company of Laird Plc, U.K. The applicant’s holding Company is Laird Technologies, Singapore. The applicant was Laird Plc’s first manufacturing facility in India, which was located within the Nokia Special Economic zone at Sriperumbedur near Chennai. The applicant was, inter alia, engaged in the business of designing and manufacturing antenna and battery packs for the mobile phone industry. It had business dealings with leading electronic manufacturers in India such as Nokia, Sony Ericsson.

Laird Technologies Inc, USA with its headquarters in St.Louis (Laird USA), a unit of the Laird Group Plc, England, was a globally known designer and manufacturer of Antennae, EMI, data communications etc. Laird USA has manufacturing plants and technical support operations in the US and various other countries. Laird USA was a ‘tax resident’ of USA .

Laird USA had negotiated an arrangement with Nokia to manufacture and supply products to Nokia Corporation globally. On 25 June 2003 a Product Purchase Agreement (PPA) was executed by and between Nokia Corporation, Finland, and its affiliates on the one part and the Laird USA and its affiliates on the other part. The PPA, inter alia, covers the supply of products in relation to Nokia’s manufacturing requirements in India. In order to assign its rights and obligations under the PPA in connection with the supplies of its products to Nokia India Pvt. Ltd. (Nokia India) for a period of 5 years in favour of the applicant, Laird USA entered into an Assignment Agreement (Agreement) with the applicant on 17 December 2007. Under the Agreement, Laird USA irrevocably assigned all its beneficial rights, title, interest, obligations and duties in connection with supply to Nokia India under the PPA in favour of the applicant. As per the agreement, the applicant would act in an independent status and supply the products to Nokia India at its own risk and obligations. The consideration of USD 5.3 million payable by the applicant to Laird USA shall be paid within 30 days of from the invoice date outside India.

Issues raised before the Authority for Advance Rulings (AAR):

  1. Whether the amount receivable by Laird USA as per the Assignment Agreement is taxable in India having regard to the provisions of the Income tax Act (Act) and the Double Taxation Avoidance Agreement between India and USA (DTAA’)?
  2. If the answer to Question no. (1) above is in the affirmative, then, to what extent and in which year(s) would the receipt be taxable in the hands of Laird USA in India having regard to the provisions of the Act and the DTAA?
  3. If the answer to Question Number (1) above is negative, i.e., the amount receivable by Laird USA is not taxable in India, then, whether the Applicant is required to withhold tax under section 195 of the Act while making remittance to Laird USA?

Contention of the Applicant:

  • The PPA entered into by Laird USA with Nokia constitutes capital asset in the sense that Laird USA had acquired the right to manufacture and supply the specified products to Nokia Corporation globally (reference was made to section 55(2)(a) and proviso to section 28(va) of the Act). The situs of PPA contract is outside India as it was entered into and signed by the parties in Finland and the Agreement is governed by the Finnish Law. The consideration was also remitted by the applicant outside India. By writing of the assignment, there is a transfer of said capital asset and since the capital asset is situated outside India, the capital gains tax cannot be levied in India.
  • Even if the consideration received by Laird USA under the Agreement is construed as business profits, it would not be taxable in the absence of Laird USA having a business connection or a permanent establishment in India as per the provisions of the Act and the DTAA respectively.
  • The applicant is not acting as an agent of Laird USA in any capacity and the applicant would supply the products to Nokia India on a principal to principal basis and not on behalf of Laird USA.

Contention of the Revenue:

  • Applicant is one of the affiliates of Laird USA :- Laird USA and the applicant are ‘affiliates’, being ‘sub-subsidiaries’ of Laird Plc., UK and therefore, the applicant shall be deemed to be a party to the PPA. PPA was entered into between Nokia Corporation including its affiliated companies and Laird USA on behalf of itself and its ‘affiliates’. Therefore, the question of assignment of rights and obligations under the PPA to its affiliate does not arise. A reference was made to the definition of ‘affiliated company’ given in PPA which is defined to mean “any other entity controlled by, or under control with, a Party”. It was further argued that the expression used in the definition is not merely “controlled by” but also “under control with a party”. What it means, where Laird USA together with another entity, for e.g., the applicant is under the control of Laird Group Plc., the two would be affiliates. Therefore, it is immaterial whether the control is direct or indirect.
  • There is no assignment of any rights in favour of the applicant :- There is no provision in the PPA which can be said to have granted any legally enforceable contractual right to manufacture and supply any of Laird’ s products to Nokia Corporation. The PPA only casts a host of obligations upon Laird USA without any consideration flowing to it and any legal right derived by it. In the absence of any legal right accruing to Laird USA under the PPA, there is no question of assignment of any rights in favour of the applicant. Hence, no asset can be said to have been transferred to the applicant outside India.
  • Nokia Corporation has not consented to or ratified the Assignment Agreement :- Under law, there can be assignment only of the rights and benefits under the contract but not the burden and obligations. Assignment of obligations of Laird USA under the PPA to Laird India requires a novated tripartite agreement between Laird USA, Laird India and Nokia Corpn. In the present case, the Assignment Agreement purports to assign not only beneficial rights, title and interest but also the obligations and duties in and in relation to the manufacture and supplies to Nokia India as per the PPA. The Revenue contended that such assignment of obligations is not recognised by law. In this connection, the reliance was placed on the Pollock & Mulla’s Commentary on the Indian Contract Act and the decision of the Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (AIR 1962 SC 1810) to contend that a party to a contract cannot transfer his liability under it without the consent of the other party, which can be transferred by a tripartite contract amounting to novation.
  • Laird USA has a PE in India :-
    • As per the PPA, Laird USA has an obligation to deliver its products to Nokia at Nokia’s production lines and for which it has to avail of the services of a domestic Logistic Service Provider (LSP) for warehousing and delivering the products at the plant site of Nokia. It was therefore, contended that the business network of LSP who would import goods on behalf of Laird and deliver them to Nokia at site constitutes the PE of Laird USA.
    • As per the LOI the parties shall endeavour to enter into detailed agreements (‘final agreements’) setting forth the detailed terms and conditions with respect to the subject-matter of LOI. Therefore, the applicant should be considered as a dependent agent of Laird USA.
    • The applicant is wholly dependent on Laird USA for its business of supplies of products to Nokia. Relying on certain clauses of the Agreement, it was contended that Laird USA continues to have legal commitment in respect of the business operations of the applicant in terms of guarantee of risks of volume of sales and Laird USA has to provide minimum insurance cover of more than 20 million US dollars “for work outside the United States”.

Short-term Capital Gain :- The payment made to Laird USA under the Agreement is a short term capital gain. In this connection, it was argued that Laird USA had acquired valuable rights from Nokia India under the LOI and those rights are: (a) right to acquire interest in the lease-hold land held by Nokia India in SEZ at cost (b) right to infrastructural facilities like water, electricity, etc. to be provided by Nokia India at cost and (c) right to supply products to be manufactured by it in India. It was contended that Laird USA has received US $ 5.3 million from the applicant for transferring the legal rights accruing to it under the LOI.

Acquisition of technical know-how or patent rights :- The Revenue suggested that the consideration paid under the Assignment Agreement may be for acquiring the technical know-how from Laird USA or for obtaining patent rights in respect of the products marketed by the applicant.

Reply of the Applicant:

Applicant is one of the affiliates of Laird USA :-Laird USA has no shareholding in the applicant company, either directly or indirectly and the applicant is a stand-alone, independent Indian company. Laird USA has no control over the management of the applicant.

Nokia Corporation has not consented to or ratified the Assignment Agreement :-The Assignment Agreement had the seal of approval of Nokia Finland (Reference was made to a letter addressed by Laird USA to Nokia Corporation Finland requesting to give a consent to the assignment). The applicant submitted that the assignment has been consented to or ratified. It was pointed out that Nokia India has been accepting the supplies from the applicant and has been lodging claims for defective/ damaged goods. Thus, even by conduct and mutual dealings, the ratification of assignment can be definitely inferred.

Laird USA has a PE in India

  • No LSP was ever appointed or provided by Laird USA.
  • No other agreement was entered into pursuant to LOI.
  • As regards the clauses on guarantee of risks of volume of sales is concerned, it was
  • pointed out that these clauses have not been invoked at any time by either party.
  • The applicant clarified that the cost of insurance is being borne by the applicant itself.

Acquisition of technical know-how or patent rights :- As regards the Revenue’s suggestion of entering into assignment agreement for acquiring the technical know-how or for obtaining patent rights in respect of the products marketed by the applicant is concerned, the same was emphatically denied by the applicant. The applicant stated that it has obtained the designs for the factory lines, plant and machinery, manufacture and assembly processes from other business entities in Sweden and China. The Revenue’s assumption that Laird USA owns the patent in the products was categorically denied.

AAR Observation and Ruling:

Whether Applicant is one of the affiliates of Laird USA :-Laird Plc. UK is the ultimate holding company of the applicant and other Laird group companies including Laird Technologies USA does not bring the applicant within the scope of the definition ‘affiliate company’. The element of control (i.e. direct or indirect ownership of more than 50% of the shares) is lacking. The jointness of control in respect of Laird USA and the applicant vesting in some other party is also missing. The expressions used in the application that, Laird USA is a unit of Laird Plc., the applicant is “Laird Plc.’s first manufacturing facility in India and the applicant is referred to as “our operating Indian subsidiary”, are in a very broad and loose sense do not operate as estoppel against the applicant to contend that it is not an affiliate of Laird USA, going by the definition of ‘affiliated company’. The use of such words does not automatically lead to the interpretation sought to be placed by the Revenue.

Whether there is assignment of any rights in favour of the applicant :- The provisions in the PPA would unmistakably indicate that legally enforceable contractual rights and obligations are created in relation to the manufacture and delivery of certain products. It cannot be construed to be a one-sided Agreement casting only obligations on one party without conceding any rights. The fact that under the Agreement it is stated that Nokia “shall not have any minimum ordering and/ or purchase commitment for products” or the declaration that the global and other forecasts are not offers to purchase products and are not binding on the buyer, has not reduced the PPA to the level of a non-binding informal arrangement between the parties. The Agreement shall be read as a whole.

Whether Nokia Corporation has consented to or ratified the Assignment Agreement :-

    • It is not safe to act on the letter of Laird USA addressing to Nokia Corporation, which was filed after the case was partly heard, and draw an inference therefrom that Nokia Corporation has consented to or ratified the Assignment Agreement. As the authenticity of such letter is doubted, the AAR has held that this is not a valid assignment in the eye of law.
    • The mere fact that Nokia India was accepting the goods from the applicant does not lead to the necessary inference that it was being done pursuant to the approval of assignment by Nokia Corporation in April, 2009.
    • In the absence of valid assignment backed up by an express or necessarily implied consent of Nokia Corporation (which was a party to the PPA), the contention of the applicant that there was legal transfer of capital asset and that the consideration shall be deemed to be the capital gain cannot be accepted.

Whether Laird USA has a PE in India

  • Laird USA actively assisted the applicant in setting up the manufacturing facility in India within the framework of the understanding reached between Laird USA and Nokia India. However, there is nothing on record that Laird USA had any other role to play in the manufacturing and business activities of the applicant thereafter. The AAR has observed that as per the applicant Laird USA had no fixed place of business in India through which any business activity was or is being carried on.
  • Although no details as regards the pattern of dealings between Laird USA and Nokia India before the applicant came into the picture have been spelt out, it is not reasonable to draw inference that the business profits representing the consideration paid under the Agreement is attributable to the PE in the form of LSP, or any other place of business. Thus, going by the facts appearing on record, a fixed place PE of Laird USA can be safely ruled out.
  • The AAR has observed that the applicant never acted as an agent much less as a dependent agent of Laird USA and the applicant has been carrying its business operations by itself without any direction or instructions from Laird USA, bearing the risk and responsibility of its business transactions. Further, the applicant is not depending on Laird USA economically nor it has been acting according to instructions or subjected to any form of control by Laird USA from functional point of view and there is nothing to show that the activities of the applicant are devoted wholly or almost wholly to or on behalf of Laird USA. Having regard to the facts appearing from record, the applicant cannot be constituted as agency PE of Laird USA within the meaning of Article 5.5 of DTAA.
  • The LOI does not have a bearing on the question whether the applicant is a dependent agent of Laird USA. The main purpose of LOI was to record an understanding between Laird USA and Nokia India with regard to the provision of land and setting up of a manufacturing facility which will pave the way for regular product supplies to Nokia India. The LOI, it is stated explicitly, is a non binding expression of the intention of parties. From the subsequent events, it is clear that Laird USA has gone out of the picture after the applicant had started manufacturing and supplying the goods.
  • As regards the Revenue’s contention that the applicant is wholly dependent on Laird USA for its business of supplies of products to Nokia, the AAR has held that the Revenue has not elaborated as to how and in what manner the applicant depends on Laird USA which has already assigned its rights.
  • As regards the clauses on guarantee of risks of volume of sales is concerned, the AAR has observed that these provisions by themselves do not militate against the relationship of principal to principal between Laird USA and the applicant. These provisions meant in the business interests of both the parties to the Agreement cannot be construed to mean that the applicant acts as an agent much less as a dependent agent of Laird USA in supplying the products to Nokia India. In this connection, reliance was placed on the AAR’s ruling in ABC Limited, In re (289 ITR 438) wherein it was held that such provisions did not give rise to a ‘business connection’ between the non-resident and the Indian company.

Whether the amount is taxable as short-term capital gains

The LOI cannot be construed as an enforceable agreement especially in view of the specific declaration therein that the “LOI constitutes a non binding expression of the intention of the parties”. The LOI contemplates final agreements to be entered into. As no such final agreement was ever entered into, it cannot be said that LOI has conferred on Laird USA any legal rights or interests in respect of the land and infrastructure. The consideration in regard to land and common facilities was paid by the applicant to Nokia India in accordance with the Sub-lease Agreement. The Assignment Agreement only relates to manufacture and supply of products by the applicant to Nokia India. The rights and obligations under the Agreement centred round that aspect only and going by the terms of the Agreement, it is clear that the consideration has been paid as a quid pro quo for the assignment of rights and obligations under the PPA in relation to the business in India. Even if a part of the consideration was paid for the services of Laird USA in facilitating the sub-lease of land or for giving up the claims if any under the LOI, it cannot be said that any ‘assets’ situated in India were transferred.

In view of the above, the AAR has held that the amount of consideration received by Laird USA from the applicant is in the nature of business profit that has accrued or arisen in India. However, Laird USA has no PE in India and therefore, the same is not liable to be taxed in India. As Laird USA has not derived any income chargeable to tax in India, the applicant is not required to withhold tax under Section 195 of the Act while making remittance to Laird USA.

Our View:

This Ruling has brought out an important difference between assignment and novation of contracts. As per the commentary on the Indian contract Act and the Supreme Court Ruling, there can be assignment only of the rights and benefits under the contract but not the burden and obligations. A party to a contract cannot transfer his liability under it without the consent of the other party; the same can be transferred only by a tripartite contract which amounts to novation. Therefore, it is essential for all the parties to consider the critical factors as brought out in this ruling before entering into an assignment agreement which should be valid in the eyes of law.

The important distinction brought out by this ruling as regards the characterization of the consideration received for transferring rights of manufacturing under a contract, between it being a capital gain and a business income, may be critical while planning one’s affairs. Thus, in the present case, if Laird USA had correctly assigned its rights under the PPA, by taking consent of Nokia, then probably the consideration could have been characterized as capital gains instead of business income. Although the AAR Ruling is applicable only in the case of an Applicant who has sought it, it nevertheless carries a persuasive value.

This Ruling has once again reiterated the important principle of law that if the sum is not chargeable to tax in India, then tax is not required to be withheld under Section 195 of the Act while making the remittance outside India.

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Category : Income Tax (25916)
Type : Judiciary (10462)
Tags : AAR Rulings (197) Advance Ruling (211) section 195 (143)

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