Relevance of PE would be seen only where profit has been accrued to the Assessee

Facts of the Case:

  • The Assessee (Nokia Solutions and Networks OY) is a company incorporated in Finland and is engaged in the manufacturing and supply of telecom equipment on principal-to-principal basis to various Indian companies and also to its group company Nokia Solutions and Networks India Private Limited.
  • The Assessee did not file return of income for AY 2008-09 or later assessment years. The Assessing Officer (AO) issued notice u/s 142(1) of the Income Tax Act, 1961 (the Act) through which the Assessee was given an opportunity to file the return of income for AY 2010-11. The Assessee duly filed the return of income disclosing NIL income and claimed a refund.
  • Thereafter, the case was selected for scrutiny assessment and the AO computed the income of Assessee using gross margin method. It was submitted by the Assessee, that the Assessee does not have a Permanent Establishment (PE) in India and thus supply of equipment from outside India to Indian customers can be considered as business income and accordingly not liable to tax in India. Without prejudice to the earlier submission, the Assessee further submitted that even if a PE of Assessee exists in India, the income cannot be subject to tax since no profit has been earned by the Assessee in India. Further, the Assessee also mentioned that method adopted by the AO for calculating income is incorrect.
  • The AO observed that the sale orders of the Assessee are secured by the efforts and performance of an Indian Associated Enterprise (AE) and it is a case of secondment of employees hence, the Assessee has a Dependent Agent PE in India. Further, the AO also computed income by gross margin method which has resulted into profit. The order of the AO was confirmed by the Dispute Resolution Panel. Aggrieved with the impugned order, the Assessee filed an appeal before the Hon’ble ITAT wherein the grounds raised by the Assessee had been confirmed and hence the AO had preferred an appeal before Hon’ble High Court of Delhi.

Issue before the Hon’ble High Court:

  • Whether the Assessee has PE in India within the meaning of Article 5 of the DTAA?
  • Whether the profits are attributable to the PE of the Assessee relying on the decision of earlier cases of the Assessee company?

Decision of the Hon’ble High Court:

  • The Hon’ble High Court has observed that on plain reading of Article 7(1) of DTAA, it can be clearly inferred that issue of taxability would arise if the profit has been accrued to the Assessee and that too only to the extent they can be attributed to its PE in India.
  • However, in current case the Hon’ble ITAT has already confirmed the fact that the Assessee had recorded a ‘global net loss’ in the relevant assessment year, and therefore no profit could have possibly been attributed to it. Further, in the earlier case of the Assessee, the special bench had held that the Assessees’ world-wide net profit margins as per its audited accounts are to be applied for determining the quantum of the income to be attributable to the PE.
  • Thereafter, the Hon’ble High Court has confirmed the method of computation of income affirmed by the ITAT as ‘Net Profit Margins’ basis only and observed that “even if the Assessee has a PE in India, no profit or income can in law at all be attributed to PE which would be taxable in India. Hence, we hold that, the adjudication on issue of PE would be academic in nature”.
  • Hence, the Hon’ble High Court has dismissed the appeal of the AO and decided the matter in favor of the Assessee company.

SW Point of View:

The Hon’ble High Court of Delhi has confirmed the provisions of Article 7 of DTAA by emphasizing that issue of PE will only arise in cases where profits have been earned during the concerned assessment year. Without profit element, the concept of PE is not relevant to be discussed under Article 7 of DTAA.

In High Court of Delhi
Commissioner of Income Tax (International Taxation)
Nokia Solutions and Networks OY

Virendra Vikram, Tax Associate, SW India

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