DIT v. Nokia Networks OY and others (2012) 78 DTR 41 (Delhi) (High Court) & DIT v. CIT Alcatek New Delhi (2012 78 DTR 41 (Delhi) (High Court) & Nokia Net works OY v. ADIT (2012) 78 DTR 41 (Delhi) (High Court)

S.9(1)(vi) : Income deemed to accrue or arise in India – Software – Royalty – DTAA – India-Finland – Off-shore supply profits not taxable. (Art.13 )

The assessee, a French company, sold GSM equipment manufactured in Finland to Indian telecom operators from outside India on a principal to principal basis, under independent buyer-seller arrangements. Installation activities were undertaken by the assessee’s subsidiary. The Assessing Officer and Commissioner (Appeals) held that the assessee’s liaison office and subsidiary constituted a Permanent Establishment (PE) and a portion of revenue was attributable to the PE and the whole of software revenue was held as assessable as “royalty” under section 9(1)(vii) and Article 13. The Tribunal decided the issue in favour of assessee. On appeal by revenue, the court held that as regards the profits on supply of equipment, the legal position is that the places of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. The only relevant factor is as to where the property in the goods passes. As the goods were manufactured outside India and the sale has taken place outside India, even in a “composite contract”, the supply has to be segregated from the installation and only then would question of apportionment arise to determine the extent to which it arises in section 9(1)(i). The departmental argument that composite contracts cannot be  split so as to exempt supply profit is not acceptable.

As regards the profits on supply of software, there is a distinction between the supply of a “copy right” and supply of a “copyrighted article”. Though the Explanation 4 was added to section 9(1)(vi) by the Finance Act, 2012 with retrospective effect from 1-6-1976 to provide that all consideration for user of software shall be assessable as “royalty” the definition in the DTAA has been left unchanged. In CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.)(High Court), it was held that amendments cannot be read in the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act. (A.Ys. 1997-98 and 1998-99( ITA 512 of 2007. 1137 of 2006 /1138 of 2006/ 505 of 2007/506 of 2007/359 of 2005/ 1324 of 2007/30 of 2008 dated 7-9-2012)

DIT v. Nokia Networks OY and others (2012) 78 DTR 41 (Delhi) (High Court)

DIT v. CIT Alcatek New Delhi (2012 78 DTR 41 (Delhi) (High Court)

Nokia Net works OY v. ADIT (2012) 78 DTR 41 (Delhi) (High Court)