Associate in the Tax Practice at the Delhi office of Cyril Amarchand Mangaldas. Abhimanyu specialises in various aspects of corporate and taxation laws. He can be reached at abhimanyu.hazari@cyrilshroff.com

The Income Tax Appellate Tribunal, Delhi (ITAT) recently delivered a very significant decision in the case of Nokia Networks O.Y (Assessee)[1] on the issue of its permanent establishment (PE) in India and attribution of income to the PE. The majority of members of the ITAT ruled in favour of the Assessee holding that its Indian subsidiary would not constitute a PE in India, especially in absence of a Service PE clause in the erstwhile India-Finland Tax Treaty (Treaty).

Facts

The Assessee is a resident of Finland and sold GSM equipment manufactured by it to Indian telecom operators, on a principal-to-principal basis. It’s Indian subsidiary, Nokia India Private Limited (NIPL) was either assigned the installation contracts by the Assessee or entered into independent contracts with the customers for installation. NIPL also entered into technical support agreements with customers. NIPL’s income from these activities was taxed in India.

The Assessing Officer (AO) was of the view that NIPL constituted a PE of the Assessee and attributed an additional 30 percent of the profit from the equipment to NIPL. The AO also concluded that 30% of the equipment price pertained to supply of software and sought to tax it as royalty in the hands of the Assessee. On appeal, the ITAT held that NIPL being a virtual projection would form a PE, and attributed to NIPL 20 percent of the Assessee’s profits from the sale of equipment to Indian customers.

Continue Reading Subsidiary is Not a Permanent Establishment but Beware the ‘Virtual Projection’ Risk

The Income Tax Act, 1961 (IT Act) contains several special beneficial provisions that allow for deductions in order to promote certain activities. One such provision is Section 10A of the IT Act, which seeks to promote and boost new business undertakings situated in free trade zones by providing suitable deductions. It provides for a 100 percent deduction of profits and gains derived by undertakings engaged in export of articles or computer software. The deduction is available for ten assessment years from the year in which the entity commences operations. These profits are to be determined based on the ratio of export turnover to the total turnover of the undertaking.

Over the years, there have been several disputes over the manner in which this ratio is to be determined. This is largely because while the term ‘export turnover’ has been defined under Section 10A of the IT Act, “total turnover” has not. In other words, there is no explicit provision that allows the taxpayer to exclude amounts from total turnover in case such amounts have already been excluded from export turnover.

In the recent case of CIT v HCL Technologies Limited[1], the Supreme Court of India dealt with this issue and provided much needed clarity on the subject.

Continue Reading Expenses Excluded from Export Turnover, also to be Excluded from Total Turnover