M/s. Nokia Networks OY vs JCIT (ITAT Delhi)
Delhi ITAT (Special Bench) Ruling – Whether the Indian subsidiary of the assessee constitutes Permanent Establishment (PE) of the assessee in India on account of ‘signing, networking, planning and negotiation of offshore supply contracts in India’? If yes, whether any profit is attributable to the same, and the quantum thereof?
Facts of the case:
The assessee, i.e., Nokia Networks OY (formerly known as Nokia Telecommunications OY), is a company incorporated under the laws of Finland and is engaged in the manufacturing of advanced telecommunication systems and equipments (GSM equipments) which are used in fixed and mobile phone networks; and trading of telecommunication of hardware and software. The appeals pertain to the assessment years 1997-98 and 1998-99.
In the year 1994 (i.e., on 30.03.1994), assessee established a Liaison Office (LO) and later on a wholly owned subsidiary was incorporated on 23.05.1995, named as ‘Nokia India Pvt. Ltd.’ (NIPL).
Before the incorporation of NIPL, the GSM equipments manufactured in Finland were sold to Indian Telecommunication operators from outside India on principal to principal basis under independent buyer-seller arrangements as well as certain contracts for installation were entered through the LO. After the incorporation of NIPL in May 1995, the installation activities were carried out by the Indian subsidiary under its independent contracts with the Indian Telecommunication operators.
All the contracts of installation with the Indian telecom operators were entered into with NIPL except the contracts entered with Modi Telstra (India) Ltd. and Skycell Communications Ltd., the same were signed prior to incorporation of NIPL on 23.05.1995. In these contracts, the installation activities were later assigned to NIPL.
For the off-shore supply of equipments, the assessee did not file return of income in India for the AY 1997-98. In response to notice u/s 142(1), the assessee filed nil return claiming that there existed no business connection as well as no PE in India and hence, the assessee was not liable to tax in India.
The Assessing Officer (AO) however did not agree and completed assessment holding both the LO and NIPL as constituting a PE of the assessee. The AO relied heavily on the fact that, Mr. Hannu Karavirta signed contracts on behalf of the assessee:
– as the Country Manager of LO from 1.2.1994 to 31.12.1994 and
– as the Managing Director of NIPL 1.1.1996 to 31.7.1999.
Thus, the AO held that the sale of GSM equipment was taxable in India. Further, 70% of total equipment revenue was considered towards sale of hardware and profits were attributed to the PE of assessee 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, 1961 (the Act) and under Article 13 of the India-Finland Double Taxation Avoidance Agreement (DTAA), holding that software was not sold but licensed to the Indian telecom operators.
Further, the AO also made an addition on the ground that assessee provided credit facilities to its customers for which it should have charged interest on the same. For coming to this conclusion, he has referred to a clause of the contract that purchaser was liable to pay interest @18% for each day elapsed from the due date till actual payment.
Thus, the addition was made on the following three grounds:
1. Profit on sale of hardware
2. Profit on licensing of software
3. Interest income on vendor financing.
The CIT(A) confirmed the order of the AO. The assessee filed an appeal before the Hon’ble Income-Tax Appellate Tribunal, Delhi (ITAT). The matter was referred to Special Bench1 along with other appeals of Motorola Inc. and Ericsson Radio Systems2 (hereinafter referred to as ‘erstwhile ITAT’). The decision of the erstwhile ITAT was appealed before the Delhi High Court (HC). A summary of the decision on different grounds at the various forums is given below:
