Photo of Daksha Baxi

Head of International Taxation at the Mumbai office of Cyril Amarchand Mangaldas. Daksha has a vast experience of over 30 years in taxation laws and also specialises in succession and estate planning, education sector and employee equity compensation. She can be reached at daksha.baxi@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