A subsidiary in India does not constitute a permanent establishment of the parent company as held by the majority view of Delhi ITAT Special Bench - Nokia Networks OY

Delhi ITAT (Special Bench) Ruling – Whether the Indian subsidiary of the assessee constitutes Permanent Establishment (PE) of the assessee in India on account of ‘signing, networking, planning and negotiation of offshore supply contracts in India’? If yes, whether any profit is attributable to the same, and the quantum thereof?


M/s. Nokia Networks OY vs. JCIT, New Delhi

[ITA Nos. 1963-1964/Del/2001]/ [2018] 94 taxmann.com 111 (Delhi - Trib.) (SB)




The assessee, i.e., Nokia Networks OY (formerly known as Nokia Telecommunications OY), is a company incorporated under the laws of Finland and is engaged in the manufacturing of advanced telecommunication systems and equipments (GSM equipments) which are used in fixed and mobile phone networks; and trading of telecommunication of hardware and software. The appeals pertain to the assessment years 1997-98 and 1998-99.

In the year 1994 (i.e., on 30.03.1994), assessee established a Liaison Office (LO) and later on a wholly owned subsidiary was incorporated on 23.05.1995, named as ‘Nokia India Pvt. Ltd.’ (NIPL).

Before the incorporation of NIPL, the GSM equipments manufactured in Finland were sold to Indian Telecommunication operators from outside India on principal to principal basis under independent buyer-seller arrangements as well as certain contracts for installation were entered through the LO. After the incorporation of NIPL in May 1995, the installation activities were carried out by the Indian subsidiary under its independent contracts with the Indian Telecommunication operators.   

All the contracts of installation with the Indian telecom operators were entered into with NIPL except the contracts entered with Modi Telstra (India) Ltd. and Skycell Communications Ltd., the same were signed prior to incorporation of NIPL on 23.05.1995. In these contracts, the installation activities were later assigned to NIPL.

For the off-shore supply of equipments, the assessee did not file return of income in India for the AY 1997-98. In response to notice u/s 142(1), the assessee filed nil return claiming that there existed no business connection as well as no PE in India and hence, the assessee was not liable to tax in India.

The Assessing Officer (AO) however did not agree and completed assessment holding both the LO and NIPL as constituting a PE of the assessee. The AO relied heavily on the fact that, Mr. Hannu Karavirta signed contracts on behalf of the assessee:

  • as the Country Manager of LO from 1.2.1994 to 31.12.1994 and
  • as the Managing Director of NIPL 1.1.1996 to 31.7.1999.

Thus, the AO held that the sale of GSM equipment was taxable in India. Further, 70% of total equipment revenue was considered towards sale of hardware and profits were attributed to the PE of assessee in India. The remaining 30% of the equipment revenues were attributed towards supply of software and the same was taxed as ‘royalty’ (on a gross basis) both u/s 9(1)(vi) of the Income-tax Act, 1961 (the Act) and under Article 13 of the India-Finland Double Taxation Avoidance Agreement (DTAA), holding that software was not sold but licensed to the Indian telecom operators.

Further, the AO also made an addition on the ground that assessee provided credit facilities to its customers for which it should have charged interest on the same. For coming to this conclusion, he has referred to a clause of the contract that purchaser was liable to pay interest @18% for each day elapsed from the due date till actual payment.

Thus, the addition was made on the following three grounds:

  1. Profit on sale of hardware
  2. Profit on licensing of software
  3. Interest income on vendor financing.

The CIT(A) confirmed the order of the AO. The assessee filed an appeal before the Hon’ble Income-Tax Appellate Tribunal, Delhi (ITAT). The matter was referred to Special Bench[1] along with other appeals of Motorola Inc. and Ericsson Radio Systems[2] (hereinafter referred to as ‘erstwhile ITAT’). The decision of the erstwhile ITAT was appealed before the Delhi High Court (HC). The HC remanded back certain issues to ITAT. A special bench was again constituted by the ITAT to examine the issues remitted by the Delhi HC.




1. Whether on a true and correct interpretation of the relevant DTAA, NIPL constitutes a permanent establishment of the assessee in India, on account of it having a virtual projection of the foreign enterprise in India?


Fixed Place Permanent Establishment (Fixed Place PE) - Article 5(1)


  • For establishing the fixed place PE as referred to in Article 5(1), one of the crucial terms used is ‘fixed place of business through which the business of an enterprise is wholly or partly carried on’. The word ‘through’ assumes a great significance, because it enlarges the scope of a fixed place in as much as where no fixed premises may belong to an enterprise but even if a particular space is made available at its disposal then such place is reckoned to be place of business under this paragraph.
  • Further, The ITAT referred to the decision of the Hon’ble Supreme Court (SC) in the case of Formula One World Championship Ltd[3] in which the commentary of Klaus Vogel has also been referred to extensively. In the SC’s observations on the word ‘through’ in Article 5, the emphasis is that the place of business will qualify, only if the place is at the disposal of the enterprise. ‘At the disposal’ of the enterprise means when the enterprise has the right to use the said place and the control thereupon. The disposal is the power to use the place of business directly.

    According to the SC, the ‘disposal test’ is paramount which needs to be seen while analyzing fixed place PE under Article 5(1). The ITAT noted that, the test of permanency qua fixed place has been slightly diluted by the SC but not the ‘disposal test’.

  • The ITAT noted that nowhere there is a categorical and specific finding by the AO or CIT(A) that there existed any fixed place PE qua NIPL, except for stating that office of the LO and NIPL were co-located, employees of the assessee were working with NIPL and they were availing certain administrative services like phone, fax and conveyance and therefore, it constituted a fixed place PE.
  • One of the key arguments by the Revenue before the ITAT is that foreign expatriates were present in NIPL office who were working as employees of NIPL and were engaged in the business of NIPL, i.e., installation and marketing activities. The ITAT observed that these arguments would hold context in the case of a service PE but not in the case of fixed place PE. Also in the absence of a specific provision regarding the same in the then DTAA, it would not constitute PE.
  • The ITAT observed that after incorporation of NIPL on 23.05.1995, no evidence was brought on record that Mr. Hannu Karavirta had signed any contract on behalf of the assessee. Even if it were considered that he was acting as a representative of the assessee or was receiving salary from assessee, the same would not have any relevance while examining ‘fixed place PE’.
  • The ITAT noted that other than off-shore supply of equipment, no other activities were carried out by the assessee after the incorporation of NIPL. Thus, any activities relating to NIPL under the independent contracts entered into by NIPL, cannot be reckoned to constitute a PE in the context of Article 5(1). The ITAT also observed that NIPL is an independent entity and all its income from India operation is liable for tax in India.
  • NIPL was providing technical and marketing support services to the assessee and hence, the AO contended that it was assisting in sale of equipments of the assessee in India. Therefore, the revenue authorities contended that NIPL per-se by ‘force of attraction rule’ under Article 7 of the DTAA will constitute a PE. However, the ITAT held that for rendering these services NIPL was compensated with cost plus mark-up of 5% which was adversely commented by the AO but no further action was taken. Thus, the ITAT concluded that the remuneration paid by the assessee to NIPL was considered to be at arm’s length and hence, ignored.
  • The ITAT observed that though administrative activities were carried out by NIPL, there was no place of business which was provided by NIPL ‘at the disposal’ of the assessee for carrying out its business wholly or partly in India. It was nowhere brought out by the AO that any kind of physically located premise or a particular location was made available to the assessee.
  • Further, the ITAT observed that providing telephone or fax or conveyance services could not be equated with fixed place and thus, concluded that providing such kind of administrative support services will not form fixed place PE.
  • The ITAT held that as per the scope of remand of the HC, i.e., to see, whether signing, networking planning and negotiation constitutes a PE, then such kind of activities would fall within the scope of ‘preparatory or auxiliary’. The ITAT observed that mere signing, planning and negotiation or networking before supply of goods, are preliminary activities (i.e. preparatory and auxiliary) and therefore, would fall under the exclusion provided under Article 5(4).
  • Thus, there could not be any fixed place PE under Article 5(1).


Dependent Agent Permanent Establishment (DAPE) as per Article 5(5)


  • To determine Dependent Agent PE as provided in Article 5(5), the key consideration for holding an agent to constitute PE is that, a person/enterprise who is not an agent of independent status is acting in a contracting state (India) on behalf of an enterprise of the other contracting state (Finland) in respect of any activities where it habitually exercises an authority to conclude contracts on behalf of the enterprise of the other contracting state (Finland).
  • The entire contract of supply of off-shore equipments has been done by the assessee outside India and no activity relating to off-shore supply has been performed in India. There is no material fact on record that NIPL has negotiated or concluded any contract of supply of equipment on behalf of the assessee which binds the assessee.
  • The tests to be satisfied For DAPE, as laid down by the ITAT are:
  1. agent’s commercial activities for the enterprise are subject to instruction or comprehensive control;
  2. agent does not bear entrepreneurial risk.
  • The ITAT noted that NIPL neither had any authority to conclude contracts for supply, nor any of the orders were booked by NIPL which were binding upon the assessee. Thus, NIPL is an independent entity carrying out activities of installation and providing technical support services for the equipments installed, on a principal to principal basis independently with Indian customers. Thus, NIPL did not bear any entrepreneurial risks on behalf of the assessee.
  • It was also noted that after coming into the rolls of NIPL, Mr. Hannu Karavirta did not sign any contract with any Indian customer for off-shore supplies on behalf of the assessee. He only signed installation contracts on behalf of the NIPL.
  • The AO contended that the warranty and guarantee services provided by NIPL’s employee were monitored by assessee and for the installation work done by Indian company, some kind of note regarding installation contracts were sent to the assessee. The ITAT observed that managing or providing guarantee by assessee does not yield any income to the assessee, albeit to NIPL, which is already taxed in India.
  • Thus, on the facts and material on record, the ITAT held that there is no DAPE within the scope and terms of Article 5(5) of the DTAA.


Subsidiary will not be deemed PE - Article 5(8)


  • A subsidiary cannot be reckoned to constitute PE merely because it is controlled by a foreign enterprise. Even the OECD and UN Model Conventions clarify that mere existence of foreign enterprise’s subsidiary in a source state should not give rise to foreign enterprise’s PE in the source state. This has been held so by the SC in the case E-Funds[4]. Thus, as noted by the ITAT, the exception given in Article 5(8) to a subsidiary, answers most of the contentions made by the revenue authorities.


Virtual Projection


  • The revenue authorities contended that entire identity of the assessee and NIPL got blurred, and that NIPL was practically a ‘virtual projection’ of assessee in India, on the grounds that:
  1. NIPL carried out installation activities for the contract of supply entered by the assessee
  2. NIPL carried out marketing and technical support services for the equipments installed by the assessee.
  • The concept of ‘virtual projection’ as laid down in the case of Vishakhapatnam Port Trust[5] flows from the fixed place itself or with any other parameters of establishment of PE under Article 5. The SC in Formula One (supra) held that not only Buddh International Circuit was a fixed place where the commercial or economic activity of conducting Formula One Championship was carried out, but one could clearly discern that it was a virtual projection of Formula One on the soil of this country. The ITAT held that the concept of virtual projection does not mean that even without a fixed place, virtual projection itself will lead to an inference of a PE.
  • The ITAT noted that no income from installation activities has been earned by the assessee in India or can be attributed either directly or indirectly through NIPL. Insofar as other activities like marketing and technical support services are concerned, the same has been transacted at arm’s length in absence of any adverse finding recorded by the AO.
  • If on facts there is no establishment of a fixed place and disposal test is not satisfied, then virtual projection itself cannot be held to be a factor for creation of a PE. Thus, the concept of virtual projection brought in by the AO will not lead to any kind of establishment of PE.
  • Thus, the ITAT concluded that there was no PE within the terms of Article 5 of DTAA.The ITAT noted that once it has held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts.


2. Without prejudice, if the answer to the above is in affirmative, is there any attribution of profits on account of signing, network planning and negotiation of offshore supply contracts in India and if yes, the extent and basis thereof?


  • The ITAT noted that once it has held that nothing is taxable on account of signing, network planning and negotiation of offshore supply contracts, therefore, there is no question of any attribution of income on account of these activities which are purely related to supply contracts.


3. Whether on a true and correct interpretation of the Act, the assessee has business connection in India, through its Indian subsidiary?


Business Connection


  • The ITAT noted that the HC in the context of LO held that there existed no material or evidence to state that LO constituted a business connection in respect of the assessee in India. The ITAT noted that the same reason quoted by HC for LO, was applicable for NIPL as well.
  • The ITAT observed that in the present case, the goods were manufactured outside India and even the sale had taken place outside India.
  • The ITAT relied on the decision of Nortel Network[6], wherein it has been clearly concluded that equipments supplied overseas cannot be taxed under the Act.


4. Whether in law the notional interest on delayed consideration for supply of equipment and licensing of software is taxable in the hands of assessee as interest from vendor financing?


Interest on Vendor Financing


  • The ITAT held that only the real income can be brought to tax and not something on a hypothetical basis, because there has to be corresponding liability to the other party to whom the income becomes due. In the present case, conduct of the parties showed that such clause in the contract for charging interest on delayed payment, though may have been agreed upon, was never enforced by the parties.
  • Hence, no income can be said to accrue to the assessee on account of delayed payments as neither there was any corresponding liability on any of the debtors nor assessee had claimed any entitlement on such an interest, following the judgment of the SC in Excel Industries Ltd[7].




  • The Hon’ble Member of ITAT has expressed his reservations on the majority view expressed by the Special Bench of the ITAT by way of a separate note. The majority view at this stage, is now fait accompli; in that sense, his views being purely academic have not been elaborated.




  • The decision of the Special Bench reiterates the importance of the ‘disposal test’ or ‘right to use test’, for determining the existence of a fixed place PE. This test has been emphasised in the case of Formula One World Championship Ltd.
  • This decision also clearly lays down the true meaning of the ‘virtual projection principle’ of a foreign enterprise in the source state, which establishes the existence of a PE. This principle is not an independent methodology for determining a PE, but has to be read in conjunction with article 5 of the respective DTAA. The following words fundamentally establish this principle, “The concept of virtual projection cannot be in vacuum dehors any other parameters of PE”. 


[1] The President of the ITAT can constitute a Special Bench of three or more members for the disposal of any particular case u/s 255(3) of the Act.

[2] Motorola Inc. v. DCIT [(2005) 95 ITD 269 (Delhi)(SB)]

[3] Formula One World Championship Ltd. vs. CIT [394 ITR 80 (SC)]

[4] IT vs. E Funds IT Solutions [(2014) 364 ITR 256 (Del)]

[5] CIT vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (SC)]

[6] Nortel Networks India International Inc. vs. DIT [(2016) 386 ITR 353 (Del)]

[7] Excel Industries Ltd. [(2013) 358 ITR 259 (SC)]

13 Jun 2018