Premises of Indian subsidiary used by parent company to perform core sales activities constitutes fixed place PE for the parent company in India.
The employees of Indian subsidiary securing orders on behalf of the parent company constitutes dependent agent PE for the parent company.
Facts 1:
The Taxpayer, a company incorporated in China, was engaged in supplying telecommunications network equipment. The Taxpayer had not filed any return of income in India.
Taxpayer had a wholly owned subsidiary in India (ICo). A survey was undertaken by the Tax Authorities at the ICo’s premises. On the basis of the documents found at the time of survey, the Tax Authority concluded that the Taxpayer has a PE in India and the income that has accrued from the supply of telecommunications network equipment during the previous year is taxable in India.
Held 1:
The Tribunal observed that the business of the Taxpayer was carried on India through the active involvement of the employees of the ICo. The employees of the ICo and the Taxpayer had jointly prepared bidding contracts, as well as negotiated and concluded the contract on behalf of the Taxpayer with its Indian customers from ICo’s premises.
Since the premises of the ICo was used to carry out core selling activities of the Taxpayer, the Taxpayer had a fixed place PE in India in the form of office premises of the ICo.
The employees of the ICo were part of the sales team of the Taxpayer, who habitually secured orders in India wholly or almost wholly for the Taxpayer in India. Further, the ICo was economically and financially dependent on the Taxpayer. Thus the ICo also created a Dependent Agency PE as per the India- China DTAA as well as a business connection as per the ITA for the Taxpayer in India
Software embedded in equipment necessary for the operation and control of the equipment does not constitute Royalty
Facts 2:
The Taxpayer was engaged in the supply of telecommunications network equipment. The Tax Authority artificially allocated the revenue from such supply between the Hardware and Software, although there was one consolidated price for the supply.
In respect of the Hardware portion, the Tax Authority computed the operating profits and allocated a part of it to the PE in India. In respect of the Software portion, the Tax Authority contended that it amounted to Royalty as per the India-China DTAA.
The Taxpayer contended that there was no separate supply of software and the software was embedded with the hardware/equipment. Thus, the entire receipt must be taxed as Business Income. Reference in this regard was made to the Delhi High court decision in the case of Ericsson A.B. (2012)(204 Taxman 192) and Nokia Networks OY (2013)(212 Taxman 68).
Held 2:
From the agreement with the Indian customers it is clear that the Software is a set of programmes embedded in the equipment and is necessary for control, operation and performance of the equipment.
The buyers were granted non-exclusive, nontransferable and non-sub-licensable licence to use the software. No ownership rights or interests are transferred to the buyer.
Hence following the decision in the case of Ericsson A.B (supra) it was held that the entire income is to be taxed as business income in India.
