Facts of the Case

The batch of appeals was filed by the Revenue against orders of the Income Tax Appellate Tribunal relating to multiple assessment years concerning Nokia Network OY, later known as Nokia Corporation, a company incorporated in Finland and engaged in manufacture and supply of telecom equipment and related software.

Nokia supplied GSM equipment and software to Indian telecom operators on a principal-to-principal basis from outside India. A liaison office was set up in India in 1994, followed by incorporation of a wholly owned subsidiary, Nokia India Private Limited (NIPL), in May 1995. Post incorporation, installation, marketing support and technical services were carried out by NIPL under independent contracts and were separately taxed in India.

The Assessing Officer held that Nokia had a Permanent Establishment in India in the form of its liaison office and subsidiary, attributed profits to such PE, treated software receipts as royalty, and taxed interest on delayed payments as vendor financing income.

The matter travelled through multiple rounds of litigation, including Special Bench decisions and earlier Delhi High Court rulings, and was eventually remanded to the Tribunal. The impugned appeals arose from the Tribunal’s decision after remand, which ruled largely in favour of the assessee.

Issues Involved

Whether Nokia had a Fixed Place Permanent Establishment in India
Whether NIPL constituted a Dependent Agent Permanent Establishment of Nokia
Whether revenue from offshore supply of software was taxable as royalty or fee for technical services under the Income-tax Act and the India-Finland DTAA
Whether interest on delayed consideration could be taxed as vendor financing income
Whether any profits could be attributed to India in respect of offshore supply contracts

Petitioner’s Arguments

The Revenue contended that Nokia carried on business in India through its subsidiary and liaison office, which constituted a Fixed Place PE and Dependent Agent PE. It was argued that employees of Nokia were involved in negotiation, network planning and signing of contracts in India. The Revenue further submitted that software was licensed and not sold, making the receipts taxable as royalty, and that interest on delayed payments was taxable as income accruing in India.

Respondent’s Arguments

The assessee argued that all equipment and software were supplied offshore on a principal-to-principal basis and that no part of the supply contracts was concluded in India. It was submitted that the liaison office carried out only preparatory and auxiliary activities and had already been held not to constitute a PE in earlier rulings. NIPL was an independent entity carrying out installation and support services under separate contracts, remunerated at arm’s length, and had no authority to conclude contracts on behalf of Nokia. Software was an integral part of the equipment and constituted sale of a copyrighted article, not licensing of copyright.

Court Order / Findings

The Delhi High Court examined the contractual framework, prior litigation history and factual findings of the Tribunal. The Court held that offshore supply of equipment and software took place outside India and did not give rise to taxable income in India.

The Court affirmed that the liaison office did not constitute a Fixed Place PE, and that mere provision of administrative support such as telephone, fax or conveyance by the Indian subsidiary did not satisfy the “at the disposal” test required to establish a fixed place of business. The Court relied upon principles laid down by the Supreme Court in Formula One World Championship Ltd. and E-Fund IT Solutions.

On the issue of Dependent Agent PE, the Court held that NIPL neither had nor habitually exercised authority to conclude contracts on behalf of Nokia, and that installation, marketing and technical support activities performed under independent contracts could not be attributed to offshore supply operations.

The Court further upheld that consideration for software supplied as part of telecom equipment was not taxable as royalty, as it involved sale of a copyrighted article and not transfer of copyright, consistent with earlier Nokia rulings and treaty interpretation.

The Tribunal’s findings on attribution of profits and taxability of vendor financing interest were found to be based on correct appreciation of facts and law, warranting no interference.

Important Clarification

The High Court clarified that existence of a wholly owned subsidiary in India does not automatically create a Permanent Establishment of a foreign enterprise. For a Fixed Place PE, the premises must be at the disposal of the foreign entity, and for a Dependent Agent PE, there must be authority to conclude contracts. Administrative assistance, preparatory or auxiliary activities, and arm’s-length support services do not meet these thresholds.

The Court further reaffirmed that offshore supply of equipment and embedded software cannot be taxed in India in the absence of a Permanent Establishment and that treaty protection under Section 90(2) prevails where more beneficial to the assessee.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770018829_THECOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION2VsNOKIACORPORATIONFORMERELYKNOWNASNOKIANETWORKOY.pdf

 

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