DIT vs. Nokia Networks OY (Delhi High Court)

Offshore supply profits not taxable. Ishikawajima still good law. Despite retrospective amendments to s. 9(1)(vi) no tax on software in view of DTAA

The assessee, a Finnish company, sold GSM equipment manufactured in Finland to Indian telecom operators from outside India on a principal to principal basis, under independent buyer-seller arrangements. Installation activities were undertaken by the assessee’s Indian subsidiary. The AO & CIT(A) held that the assessee’s liaison office and subsidiary constituted a Permanent Establishment (PE) and that a portion of the revenue was attributable to sale of hardware and a portion to the supply of software. A part of the equipment revenue was held attributable to the PE and the whole of the software revenue was held assessable as “royalty” u/s 9(1)(vi) & Article 13. The Special Bench (Motorola Inc 95 ITD 269 (Del)) held that, in view of Ishikawajima-Harima 288 ITR 408 (SC) no part of the equipment profits was taxable in India as the title had transferred abroad and no part of the software royalty was taxable in India as it was for supply of a “copyrighted article” and not a “copyright“. The Special Bench verdict was approved by the High Court in DIT vs. Ericsson AB 343 ITR 370 (Del). Before the High Court, the department argued that Ericsson AB should not be followed because (a) Ishikawajima-Harima 288 ITR 408 (SC) was no longer good law in view of the larger Bench judgement in Vodafone International 345 ITR 1 (SC) as held in Roxar Maximum (AAR) & Alstom Transport (AAR) and (b) s. 9(1)(vi) had been retrospectively amended by the Finance Act 2012 to provide that even supply of a copyrighted article was assessable as “royalty“. HELD by the High Court dismissing the appeal:

(i) As regards the profits on supply of equipment, the legal position is that the places of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. The only relevant & determinative factor is as to where the property in the goods passes. As the goods were manufactured outside India and the sale has taken place outside India, even in a “composite contract“, the supply has to be segregated from the installation and only then would question of apportionment arise to determine the extent to which it arises in India u/s 9 (1) (i). The department’s argument, based on Roxar Maximum (AAR) & Alstom Transport (AAR) that Ishikawajima-Harima (and Hyundai Heavy Industries 291 ITR 482 (SC)) are “overruled” by the “look at” and not “look through” doctrine in Vodafone 345 ITR 1 (SC) and that composite contracts cannot be split so as to exempt supply profits, is not acceptable;

(ii) As regards the profits on supply of software, there is a distinction between the supply of a “copyright” and the supply of a “copyrighted article“. Though Explanation 4 was added to s. 9(1)(vi) by the Finance Act 2012 with retrospective effect from 1.6.1976 to provide that all consideration for user of software shall be assessable as “royalty“, the definition in the DTAA has been left unchanged. In Siemens AG 310 ITR 320 (Bom) it was held that amendments cannot be read into the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act.