Kiran Raj

The Delhi High Court has adjudicated on the long-standing dispute concerning Nokia Corporation’s tax liability in India, concluding that Nokia India Private Limited (NIPL) does not constitute a Permanent Establishment (PE) of Nokia Corporation under Indian tax laws and the India-Finland Double Taxation Avoidance Agreement (DTAA). The court dismissed the tax department’s appeal and upheld the findings of the Income Tax Appellate Tribunal (ITAT), which had ruled that no additional income could be attributed to Nokia Corporation on account of its Indian operations.

The case arose from multiple appeals filed by the Commissioner of Income Tax (International Taxation)-2 against Nokia Corporation. The tax authorities contended that Nokia’s Indian subsidiary, NIPL, functioned as a Dependent Agent Permanent Establishment (DAPE) of Nokia Corporation, thereby rendering a portion of Nokia’s global income taxable in India. The revenue authorities also sought to classify payments for software as royalty and sought to tax interest income from delayed payments under vendor financing arrangements.

Nokia Corporation, a Finnish multinational engaged in the manufacture and sale of telecommunications equipment, had entered into agreements with Indian telecom operators for the supply of hardware and software. These transactions were executed through supply contracts, installation contracts, and marketing support agreements between Nokia Corporation and NIPL. The tax authorities asserted that Nokia exercised significant control over NIPL, which, according to them, established a PE in India.

The ITAT had adjudicated in favor of Nokia, holding that the supply contracts were executed on a principal-to-principal basis and that NIPL’s role in the transactions did not constitute a PE. The revenue department challenged this ruling before the Delhi High Court, arguing that the tribunal had erred in its findings.

The High Court examined whether Nokia Corporation had a Fixed Place PE in India through its Liaison Office. The court recorded that the Liaison Office was engaged in advertising and promotional activities, which did not constitute a business connection under the Income Tax Act or a PE under Article 5 of the DTAA. The court stated:

"The Liaison Office neither constituted a business connection under the Act nor a PE of Nokia under Article 5 of the India-Finland DTAA, as it merely carried on advertising activities in India."

On the issue of whether NIPL constituted a PE, the court reviewed the ITAT’s finding that Nokia did not exercise direct control over NIPL’s operations. The court noted that the tax authorities had relied on the “virtual projection” theory, arguing that NIPL was an extension of Nokia in India. The court observed:

"While upholding NIPL as a PE of Nokia, the Special Bench observed that it did not matter that there was no direct evidence for the control of NIPL by Nokia. For purposes of PE, what is relevant is only the perception that NIPL was a projection of Nokia."

The High Court rejected this reasoning, holding that NIPL’s activities were conducted independently under separate agreements. The court stated: "NIPL is a separate corporate entity and is also assessed separately for its installation income."

Regarding software revenue, the court examined whether payments received for software were taxable as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA. The court concluded that the software was part of the telecom equipment and not a standalone license subject to royalty taxation. It recorded:

"Payment for supply of software was not in the nature of royalty because the same was for a copyrighted article and not for a copyright. Further, software was held to be an integral part of GSM equipment."

On the issue of vendor financing, the court reviewed whether interest from delayed consideration on supply contracts should be taxed as income in India. The court observed that there was no evidence that Nokia had received such interest or that the contractual clauses regarding delayed payment were enforced. It stated:

"Once none of the parties have either acknowledged the debt or any corresponding liability of the other party to pay, then it cannot be held that any income should be taxed on a notional basis which has neither accrued nor been received by the assessee."

The High Court dismissed the tax department’s appeals, upholding the ITAT’s findings that Nokia’s Indian subsidiary did not constitute a PE. The court held that the tax authorities could not attribute additional income to Nokia Corporation on the grounds of NIPL’s operations. It recorded that offshore supply contracts were executed outside India and were not taxable under Indian law.

The court also stated that payments for software were not taxable as royalty and that interest on vendor financing could not be taxed in the absence of actual receipts. The court directed the revenue authorities to comply with these findings and ensure that Nokia Corporation was not taxed beyond what was legally permissible under the DTAA and Indian tax law.

Case Title: The Commissioner of Income Tax (International Taxation)-2 v. Nokia Corporation (formerly known as Nokia Network OY)
Case Numbers: ITA 785/2019, ITA 786/2019, ITA 882/2019, ITA 883/2019, ITA 884/2019, ITA 885/2019, ITA 887/2019, ITA 166/2020, ITA 170/2020, ITA 171/2020, ITA 60/2023
Bench: Justice Yashwant Varma, Justice Ravinder Dudeja

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