No PE in India, Offshore Supply of Telecom Commodities Contracts Not Taxable : Delhi HC Rules in Nokia’s Tax Matter [Read Order]

The Delhi High Court in a recent ruling has held that Nokia Network OY (now Nokia Corporation) does not have a Permanent Establishment (PE) in India, thereby exempting its offshore supply transactions from taxation under Indian law.

The case involved multiple Income Tax Appeals challenging the taxability of Nokia’s operations in India. The Revenue argued that Nokia had a Fixed Place PE and a Dependent Agent PE (DAPE) in India and that certain revenues, including interest from delayed payments and software licensing fees, were taxable under the Income Tax Act, 1961, and the DTAA.

The Revenue argued that Nokia’s Liaison Office (LO) in India constituted a Fixed Place PE, facilitating business operations and revenue generation. However, the High Court upheld the Tribunal’s ruling that the Liaison Office only carried out preparatory and auxiliary functions, such as advertising, and did not contribute to revenue generation and that offshore supply contracts were executed outside India, with transfer of ownership occurring overseas, thereby not generating taxable income in India.

Worried About SME IPO Pitfalls? Gain Clarity with This Advanced Course! Register Now

Based on these findings, the Court ruled that Nokia did not have a Fixed Place PE in India, affirms the principles laid down under the India-Finland Double Taxation Avoidance Agreement.

Another main issue in the present case was whether Nokia India Private Limited (NIPL), a wholly-owned subsidiary of Nokia Network OY, constituted a DAPE under Article 5(5) of the DTAA. The Revenue claimed that Nokia had effective control over NIPL, making it a virtual projection of the parent company in India.

The High Court rejected this argument of the revenue, ruling that NIPL was a separate legal entity with independent installation contracts with Indian telecom operators. The court held that there was no direct evidence showing that Nokia controlled NIPL’s business decisions. It was observed that agreements between Nokia and NIPL were conducted at arm’s length, with proper remuneration for services provided. Since NIPL did not have the authority to conclude contracts on behalf of Nokia, the High Court held that it did not constitute a DAPE.

The Revenue sought to tax interest on delayed payments for the supply of equipment and software licensing, arguing that Nokia had an enforceable contractual right to receive interest. The High Court observed this contestation and held that the existence of an interest clause does not automatically create taxable income unless interest is actually received. The High Court held that Nokia had never charged or received such interest from Indian customers. It was held that Taxation is based on real income, and notional income cannot be taxed. The High Court asserted and upheld that since no actual interest income was earned, it could not be brought under the tax net.

Worried About SME IPO Pitfalls? Gain Clarity with This Advanced Course! Register Now

Another question before the Court was whether Nokia’s software sales to Indian customers should be classified as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA. It was argued by the Revenue that software payments were license fees and should be treated as royalty. However, the Court held that the software was an integral part of the telecom equipment and was sold as a copyrighted article, not as a copyright itself. It was also observed that There was no separate consideration for software licensing, and it was part of the hardware supply. Therefore the payment did not qualify as royalty under Indian tax law or the DTAA, which made Nokia’s software sales were non taxable within India

The High Court bench consisting of Justice Yashwant Varma and Justice Ravinder Dudeja ruled that Offshore supply transactions remain non-taxable if executed outside India. Held that A subsidiary does not automatically become a PE, even if it is wholly owned, that notional interest on delayed payments cannot be taxed unless actually received. The Court also asserted that Bundled software sales do not qualify as royalty payments.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates