|COURT:||Delhi High Court|
|CORAM:||S. Muralidhar J, Vibhu Bakhru J|
|SECTION(S):||9, Article 5, Article 7|
|CATCH WORDS:||Dependent Agent Permanent Establishment, India-Canada DTAA, liaison office, Permanent Establishment|
|COUNSEL:||Deepak Chopra, Manasvini Bajpai|
|DATE:||May 4, 2016 (Date of pronouncement)|
|DATE:||May 5, 2016 (Date of publication)|
|AY:||2003-04, 2004-05 and 2005-06|
|FILE:||Click here to download the file in pdf format|
|Important principles laid down whether profits arising from off-shore supply of goods can be taxed in India on basis that (a) the goods continued in the possession of seller till acceptance of the goods by buyer in India, (b) the seller had a liaison office in India, (c) the seller had a wholly-owned subsidiary in India which negotiated contacts with the buyer, (d) installation, commissioning etc services were provided in India etc|
Structure of Nortel Group
The assesse, Nortel Networks India International Inc is a part of Nortel Group which is stated to be a leading supplier of hardware and software for GSM Cellular Radio Telephone Systems. Assessee being a a step-down subsidiary of Nortel Networks Limited (Canada), is wholly held by Nortel Networks Inc. which in turn is wholly owned subsidiary of Nortel Canada. Further Nortel Canada has an indirect subsidiary in India, namely, Nortel Networks India Pvt. Ltd (Nortel India). Nortel Canada also owns 99.99% of share capital of Nortel Networks (Luxemburg) SA which in turn holds the entire share capital of Nortel Networks International Finance & Holdings BV (Nortel BV). Nortel BV holds 99.99% shares of Nortel Networks Mauritius Limited, a company incorporated in Mauritius, which in turn holds 99.99% of Nortel India. Nortel Canada also has a Liaison Office in India (hereafter called (Nortel LO‘).
Facts giving rise to the issue
The controversy whether the Assessee has a PE in India is interlinked to the finding that Nortel India had discharged some of the obligations of the Assessee under the Equipment Contract. Whilst, the Income Tax Authorities have held that the contracts entered into with Reliance – the Equipment Contact, Software Contract and Services Contract – are essentially a part of the singular turnkey contract, the Assessee contends to the contrary. Further, the Income Tax Authorities have held that a part of the Equipment Contract assigned to the Assessee was, in fact, performed by Nortel India. This too, is stoutly disputed by the Assessee. The question whether the Assessee has a PE in India is clearly interlinked with the issue whether Nortel India or Nortel LO had performed any of the functions or discharged any of the obligations assumed by the Assessee. Assessee argued that agreement for supply of hardware (Equipment Contract) could have been directly executed between Reliance and the Assessee but owing to relaince’s insistence on an Indian company being responsible for the entire works, agreements were executed between Nortel India and Reliance, with Nortel Canada as a surety.
1. There seems to be no dispute that the title to the equipment passed in favour of Reliance overseas. However, the AO, CIT (A) and ITAT did not consider the same to be relevant as according to them, the equipment continued to be in the possession of the ―Nortel Group till its final acceptance by Reliance. In our view, even if it is accepted that the equipment supplied overseas continued to be in possession of Nortel India till the final acceptance by Reliance, the same would not imply that the Assessee‘s income from supply of equipment could be taxed under the Act. Clause (a) of Explanation 1 to Section 9(1)(i) of the Act postulates the principle of apportionment and only such income that can be reasonably attributed to operations in India would be chargeable to tax under the Act. The position in Ishikawajima-Harima Heavy Industries (supra) was also similar. There too, the equipments were supplied overseas and the contractor continued to retain control of equipment and material till the provisional acceptance of the work or the termination of the contract
2. Assessee only assumed the obligation to sell, supply and deliver equipment in terms of the Equipment Contract and was paid in terms of the pricing mechanism as agreed to under the Equipment Contract. It is also material to note that Nortel India continued to be responsible for performance of the Equipment Contract except for performance of Purchase Orders and Exchange Orders for supply of equipment which were placed directly by Reliance on the Assessee. Although, the Assessee had repeatedly asserted that all other obligations for testing, installation and commissioning was done by Nortel India, for which Nortel India had been paid separately, no material or evidence was gathered by the AO to contradict the same. There is no material to indicate that equipment for Test Bed Laboratory which was to be supplied at no additional cost to Reliance had been procured by Nortel India at additional cost or that Nortel India was not remunerated for all the services rendered by it to Reliance. In terms of the Equipment Contract, adequate stock of spares was required to be maintained in India, however, there is no material to indicate that such stock was maintained in India by the Assessee or that such stock was maintained by Nortel India, not on its own behalf but on behalf of the Assessee, without being sufficiently remunerated. Thus, in absence of any such evidence or material, it is difficult for us to concur with the view that certain activities were performed in India for which the consideration was received by the Assessee.
3. Nortel LO did not form a fixed place PE as no material on record to suggest that Nortel LO acted on behalf of the Assessee or Nortel Canada in negotiating and concluding agreements on their behalf.
4. Nortel India cannot be considered as fixed place of business of assesse as there is no evidence that the offices of Nortel India were at the disposal of the Assessee or Nortel Canada. Nortel India is an independent company and a separate taxable entity under the Act. There is no material on record which would indicate that its office was used as an office by the Assessee or Nortel Canada. Even if it is accepted that certain activities were carried on by Nortel India on behalf of the Assessee or Nortel Canada, unless the conditions of paragraph 5 of Article 7 of the Indo-US DTAA is satisfied, it cannot be held that Nortel India constituted a fixed place of business of the Assessee or Nortel Canada.
5. The fact that Nortel India negotiated contracts with Reliance cannot indicate that offices of Nortel LO and Nortel India were used as a sales outlet even if said contracts formed a turnkey contract, which include supply of equipment.
6. No installation PE in India as Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee or Nortel Canada.
7. No service PE as no material to hold that Nortel India performed services on behalf of the Assessee.
8. The AO has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Companies. In the present case, there is no material on record which would indicate that Nortel India habitually exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained.
9. It is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Norte India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm’s Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee.
In view of our conclusion that the Assessee does not have a PE in India,the question of attribution of any income to the alleged PE also does not arise.