BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI. 18 th Day of February 2010 P R E S E N T

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI 18 th Day of February 2010 P R E S E N T Mr. Justice P.V. Reddi (Chairman) Mr. J. Khosla (Member) A.A.R. NO. 793/2008 Name & address of : M/s Laird Technologies India Private Limited the applicant Plot No.1, Nokia Telecom SEZ, SIPCOT Industrial Park, Phase IIIA(1), NH4, Sriperumbudur, Kancipuram, Tamil Nadu. Commissioner concerned : Commissioner of Income Tax-I Chennai. Present for the Applicant : Dr.Anita Sumanth, Advocate Mr.Rajan Vora, CA Mr.Amit Kumar Baid, CA Mr.A.J.Majumdar, E&Y Advocate Present for the Department : Mr.D.Ravindran, CIT, Chennai-I Mr.S.D. Kapila, Advocate, Spl.course Mr.R.R.Maurya, Advocate R U L I N G (By Hon ble Chairman) 1. This application for advance ruling under section 245Q(1) of the Income-tax Act, 1961 has been filed by an Indian Company, namely, Laird Technologies (P) Ltd., which is a group company of Laird Plc, U.K. The applicant s holding Company is Laird Technologies, Singapore. Laird Plc, it is stated, is a leading international supplier of custom-designed electronic components and solutions to the global electronic industry. The applicant is Laird Plc s first manufacturing facility in India. It is located within 1

2 the Nokia Spl. Economic zone at Sriperumbedur near Chennai. It is, inter alia, engaged in the business of designing and manufacturing antenna and battery packs for the mobile phone industry. It has business dealings with leading electronic manufacturers in India such as Nokia, Sony Ericssion. The applicant has also set up a Corporate Research laboratory in Bangalore. 1.1 Laird Technologies Inc, USA with its headquarters in St.Louis (Laird USA) which is a unit of the Laird Group Plc, England, is stated to be a globally known designer and manufacturer of Antennae, EMI, data communications etc. Laird USA has manufacturing plants and technical support operations in the US and various other countries. Laird USA is a tax resident of USA. 1.2 Laird USA has negotiated an arrangement with Nokia to manufacture and supply products to Nokia Corporation globally. On 25 th June, 2003 a Product Purchase Agreement (PPA) has been executed by and between Nokia Corporation, Finland, and its affiliates on the one part and the Laird USA and its affiliates on the other part. The PPA, inter alia, covers the supply of products in relation to Nokia s manufacturing requirements in India. In order to assign its rights and obligations under the PPA in connection with the supplies of its products to Nokia India Pvt Ltd (Nokia India) for a 2

3 period of 5 years in favour of the applicant, Laird USA entered into an Assignment Agreement ( Agreement for short) with the applicant on 17 th Dec, Under the Agreement, Laird USA irrevocably assigned all its beneficial rights, title, interest, obligations and duties in connection with supply to Nokia India under the PPA in favour of the applicant. The applicant states that as per the agreement, it would act in an independent status and supply the products to Nokia India at its own risk and obligations. The applicant asserts that no agency relationship is intended or created between the applicant and Laird USA and moreover, the applicant s business is not confined to Nokia India only. The applicant states that the risk of pricing of products remains with it. Further, the applicant cannot assign its rights and obligations under the Agreement. The applicant would not have any right under the Agreement after the expiry of 5 years unless the agreement is extended on mutually agreed terms. The consideration of USD 5,300,000 payable by Laird India (the applicant) to Laird USA shall be paid within 30 days of invoice by means of wire transfer to the account of Laird USA maintained at Wachovia Bank, NA. It is the case of the applicant that the said amount receivable by Laird USA under the terms of the Assignment Agreement is not taxable in India either under the Income-tax Act or under the DTAA 1. 1 Double Taxation Avoidance Agreement between India and USA. 3

4 2. The applicant submits that the consideration under the Agreement would be received by Laird USA outside India, the PPA and the Assignment Agreement have been executed outside India and further the capital asset that inheres in PPA is located and transferred outside India. Therefore, there is no taxable income either on accrual or receipt basis in India. The applicant points out that Laird USA would not trigger a business connection in India so as to attract Section 9(1)(i) of the Income-tax Act as no business activity is being carried on by Laird USA in India. Further, Laird USA has no permanent establishment in India within the definition of Art. 5 of DTAA and the profits are therefore not liable to be taxed in India in view of the specific provision contained in Art. 7 of the DTAA. The applicant contends that having regard to the above features, the payments to the non-resident (Laird USA) being not chargeable to tax in India, the applicant is not required to withhold any tax under section 195 of the Act. 3. The following questions are framed by the applicant for the purpose of seeking advance ruling from this Authority: 1. Given the facts and circumstances of the case, whether the amount receivable by Laird USA as per the Assignment Agreement is taxable in India having regard to the provisions of the Act and the Double Taxation Avoidance Agreement between India and USA ( the DTAA )? 2. If the answer to Question no. (1) above is in the affirmative, then, to what extent and in which year(s) would the receipt be taxable in 4

5 the hands of Laird USA in India having regard to the provisions of the Act and the DTAA? 3. If the answer to Question Number (1) above is negative, i.e, the amount receivable by Laird USA is not taxable in India, then, whether the Applicant is required to withhold tax under section 195 of the Act while making remittance to Laird USA? 4. The contentions advanced by the learned counsel for the applicant are as follows: The PPA entered into by Laird USA with Nokia constitutes capital asset in the sense that Laird USA had acquired the right to manufacture and supply the specified products to Nokia Corporation globally. The situs of PPA contract is outside India as it was entered into and signed by the parties in Finland and the Agreement is governed by the Finnish Law. The consideration of 5,300,000 US dollars was remitted by Laird India to a bank account of Laird USA in US. By writing of the assignment, the transfer of said capital asset by Laird USA in favour of the applicant had taken place and a capital gain has, no doubt, accrued to Laird USA but as the capital asset is situated outside India, the capital gains tax cannot be levied in India. Then it is contended that even if the consideration received by Laird USA under the Assignment Agreement is construed as business profits, the charge to tax fails both on account of the absence of business connection between Laird USA and the applicant within the meaning of Section 9(1)(i) of 5

6 the IT Act and in the absence of the permanent establishment of Laird USA in India. It is contended that the applicant is not acting as an agent of Laird USA in any capacity and the applicant would supply the products to Nokia India on a principal to principal basis and not on behalf of Laird USA. 4.1 In order to contend that the rights flowing to Laird USA as per the PPA represent a capital asset held by Laird USA, the applicant s counsel has drawn our attention to Section 55(2)(a) of the Act occurring in the Chapter on Capital Gains and the proviso to Section 28 (va). Section 28 enumerates various items of income which shall be regarded as profits and gains of business or profession. Section 55 of the Act while defining the expression cost of acquisition of a capital asset specifically recognizes that right to manufacture, produce or process any article or thing or right to carry on any business as capital assets. These words were introduced by the Finance Acts of 1997 and In the definition cost of any improvement (vide Section 55(2)(b)) also, the same expression is found. Moreover, the proviso to clause (va) of Section 28 makes it clear that any sum received on account of transfer of the right to manufacture or produce or process any article or thing or right to carry on any business chargeable under the head Capital Gains is not chargeable to income-tax under the head profits and gains of business. 6

7 5. The learned counsel for the Revenue, while not disputing the proposition that if the transfer of a capital asset of the nature contemplated in Section 55(2)(a) of the Act and the receipt of consideration had taken place outside India, the capital gains tax need not be paid in India, has endeavoured to demolish the sanctity and validity of the Assignment Agreement. 6. For the purpose of appreciating the respective contentions, it is necessary to refer to the main features and terms of the two Agreements. 6.1 The Product Purchase Agreement (PPA) was entered into between Nokia Corporation Finland including its affiliate companies (described as buyer ) and Laird Technologies, a Delaware Corporation, on behalf of itself and its affiliates (collectively Laird Technologies). The Agreement contains the terms and conditions which apply globally to all sale and purchase of products (vide cl.2.1). Each product shall meet the specifications agreed upon and be manufactured in accordance with the mutually agreed process of the products (vide cl.3.1.1). As per cl.3.2.1, Seller guarantees the availability of the products specified in Appendix-2 and the seller further guarantees such availability of the products for 10 years even after the exclusion of the product from Appendix- 2, provided the parties separately agree upon price, delivery terms etc. The rights of the buyer in respect of customized products is 7

8 dealt with in cl.3.3. Under cl.5.6, the Seller agrees not to refuse to deliver products in accordance with the purchase orders. Under cl.5.3 the Seller agrees that global and other forecasts are not offers to purchase products and are not binding on the Buyer, unless otherwise mutually agreed. It is further stipulated that the Buyer shall not have any minimum ordering and/or purchase commitment for products. The time of delivery is governed by cl.6. The prices are stated in Appendix-2 and changes in prices shall be mutually agreed in writing. The payment term normally is 60 days from the date of invoice. Rescheduling and/or cancellation of purchase orders shall be as agreed upon in Appendix-4 (vide cl.7). The Agreement continues to be effective until terminated in accordance with the Agreement and the Agreement shall be governed by and construed in accordance with Finnish law (cl.27.1). Cl.26.1 stipulates that neither party shall assign any of its rights or obligations under this Agreement without prior written consent of the other party. The clauses relating to insurance, warranty, product liability are also found in the Agreement. 6.2 We may now refer to the terms of the Assignment Agreement in brief. The Agreement as noticed earlier was executed by the parties namely Laird Technologies Inc, USA and Laird Technologies India (P) Ltd. (the applicant) on 17 th December, In the recital portion of the Agreement, it is stated: 8

9 (B) LT India is proposed to be engaged in the business of manufacture and supply of products for the electronics industry. LT India is pursuing opportunities to establish relationships with other major electronics manufacturers in India. (C) Laird uses its knowledge, contacts and expertise to negotiate manufacturing and supply arrangements with Nokia Corporation ( Nokia ) globally and has negotiated such an arrangement that inter alia covers the supply of products in relation to Nokia s manufacturing requirements in India ( Nokia India ). (D) Laird is desirous of assigning its rights and obligations in connection with supply to Nokia India under the Supply Contract for a period of five years in favour of LT India and LT India is desirous of acquiring all the rights and obligations of Laird under the Supply Contract in connection with supply to Nokia India for a period of five years on and subject to the terms and conditions referred in point number (2) below. The expression supply contract is defined to mean as any arrangement or agreement for the supply of products by Laird to Nokia and its affiliates. Clause (2) which is the operative part of the Agreement bears the caption Assignment of the Supply contract. The relevant clauses are as follows : 2.1 Laird hereby irrevocably assigns all its legal and beneficial rights, title and interest, obligations and duties, in and in relation to the supplies to Nokia India as per the Supply Contract in favour of LT India absolutely, which LT India hereby accepts (the Assignment ). 2.2 LT India shall act in its own capacity as principal vis a vis Laird and no agency relationship is intended or created between the Parties by this Agreement, whether oral or written. LT India would act in an independent status and supply Nokia India for a period of five years at its own risk and obligations. LT India would continue pursuing new relationships with electronic manufacturers in India to whom it can supply products and shall not function as an exclusive Nokia supplier. 2.3 LT India shall pay the Consideration within thirty days of invoice from Laird (the Consideration Invoice ). However, it is clarified by the Parties hereto that the Consideration is due to Laird on the Effective Date. 2.4 The Consideration shall be paid by LT India by wire transfer to the account of Laird, maintained at Wachovia Bank NA. The expression consideration has been defined as an amount of USD 5,300,000 payable by LT India to Laird in consideration for assigning the rights, title and interest for supplies to Nokia India in the Supply Contract absolutely in favour of LT India. 9

10 2.5 Taxes, if any that may arise in relation to the Agreement contemplated herein shall be borne solely by Laird. 2.6 In the event of significant variations in the volumes as stipulated in Annexure 2 of the Agreement, LT India will have the right to renegotiate the terms with Nokia India. 2.7 In the event the volume of the sales to Nokia from LT India pursuant to the Supply Contract, exceed the volumes indicated in Annexure 2 of the Agreement, then LT India shall pay Laird an additional consideration to be mutually agreed upon by the Parties. The Parties will also mutually agree upon the terms and payment of such additional consideration separately. 2.8 Alternatively, in the event the volume of sales is lower than that stipulated in Annexure 2, then Laird shall pay LT India a consideration as may be mutually agreed upon between Parties at a later date. 2.9 LT India would not be entitled to assign or divulge with the rights and obligations under this agreement LT India shall not have any right under the agreement after the expiry of five years. The Contract can be extended by the parties at an additional consideration and terms mutually agreed upon. The volumes to be shipped to Nokia India by LT India yearwise is mentioned in Annexure-2. The other provisions of the Agreement will be referred to wherever necessary. 7. Firstly, it is contended by the learned counsel for Revenue that Laird USA and the applicant are affiliates, being subsubsidiaries of Laird Plc., UK and therefore the applicant shall be deemed to be a party to the PPA. As noted earlier, PPA was entered into between Nokia Corporation including its affiliated companies and Laird Technologies US (Delaware Corporation) on behalf of itself and its affiliates. The applicant, it is pointed out, is one of its affiliates and therefore the question of assignment of 10

11 rights and obligations under the PPA to its affiliate does not arise. The expression affiliated company has been defined in PPA, though the word affiliate as such is not defined. However, the definition of affiliated company can as well be applied to the expression affiliate. Affiliated Company is defined to mean any other entity controlled by, or under control with, a Party. For purposes of this definition, control shall mean the direct or indirect ownership of fifty (50) percent or more of the shares or interests which are entitled to vote for the directors of an entity or the equivalent, for as long as such entitlement subsists, or which mean equivalent power over management of an entity. Party is defined as buyer or seller. The applicant has explained in the rejoinder as well as the Reply to Revenue s submissions that Laird Technologies USA has no shareholding in the applicant company, either directly or indirectly and the applicant is a stand-alone, independent Indian company. Laird USA has no control over the management of the applicant-company. However, the Revenue s counsel submits that the expression used in the definition is not merely controlled by but also under control with a party. What it means, according to the Revenue s counsel is that where Laird USA together with another entity, for e.g., the applicant (Laird India) is under the control of Laird Group Plc., the two would be affiliates. It is immaterial whether the control is direct or indirect, submits the 11

12 counsel. We do not think that the argument has any substance. The fact that Laird Plc. UK is the ultimate holding company of the applicant and other Laird group companies including Laird Technologies USA does not bring the applicant within the scope of the definition affiliate company. The element of control as per the definition is lacking. The jointness of control in respect of Laird USA and Laird India vesting in some other party is also missing. True, in Annexure-2 to the application, it is stated that Laird USA is a unit of Laird Plc. and that the applicant is Laird Plc. s first manufacturing facility in India. In the letter dated 24/2/2009 addressed by Laird USA to Nokia Corporation, Finland, the applicant is referred to as our operating Indian subsidiary. These expressions used in a very broad and loose sense do not operate as estoppel against the applicant to contend that it is not an affiliate of Laird USA, going by the definition of affiliated company. The use of such words does not automatically lead to the interpretation sought to be placed by the counsel for Revenue. The fact that Laird Plc, UK is the ultimate holding Company of Laird US and the applicant-company and both of them are a part of the organizational structure of Laird Plc. UK and known as Laird group companies in a broad sense, does not make the applicant an affiliate of Laird USA. 12

13 7.1 It is then contended that there is no provision in the PPA which can be said to have granted any legally enforceable contractual right to manufacture and supply any of Laird s products to Nokia Corporation. According to the Revenue s counsel, the PPA only casts a host of obligations upon Laird USA without any consideration flowing to it and any legal right derived by it. In the absence of any legal right accruing to Laird USA under the PPA, there is no question of assignment of any rights in favour of the applicant. Hence, no asset can be said to have been transferred to the applicant outside India. This contention does not also appeal to us. The provisions in the PPA would unmistakably indicate that legally enforceable contractual rights and obligations are created in relation to the manufacture and delivery of certain products. It cannot be construed to be a one-sided Agreement casting only obligations on one party without conceding any rights. The fact that under cl.5.3 it is stated that Nokia shall not have any minimum ordering and/or purchase commitment for products or the declaration that the global and other forecasts are not offers to purchase products and are not binding on the buyer, has not reduced the PPA to the level of a non-binding informal arrangement between the parties. The Agreement shall be read as a whole. 8. The next and more important contention raised by the counsel for Revenue is that under law, there can be assignment 13

14 only of the rights and benefits under the contract but not the burden and obligations. Assignment of obligations of Laird USA under the PPA to Laird India requires a novated tripartite agreement between Laird USA, Laird India and Nokia Corpn. In the present case, it is pointed out that the Assignment Agreement purports to assign not only beneficial rights, title and interest but also the obligations and duties in and in relation to the manufacture and supplies to Nokia India as per the PPA. It is pointed out that such assignment of obligations is not recognized by law. 9. In Pollock & Mulla s Commentary on the Indian Contract Act (13 th Edition): A party to a contract cannot transfer his liability under it without the consent of the other party, which can be transferred by a tripartite contract amounting to novation.(at p.1237) Broadly speaking, the benefit of a contract can be assigned, subject to the exception of personal contracts, but not the burden. This is because every person has the right to choose with whom he will contract, and no-one is obliged to accept the liability of a person other than the one with whom the contract is made. It was observed in Tolburst vs. Associated Portland Cement Manufacturers by the Court of Appeal ( , AuER 386): Neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor onto those of another without the consent of the contractee. (at p.972) 9.1 Further, in the case of Khardah Company Ltd. vs. Raymon & Co. (AIR 1962 SC 1810), the Supreme Court observed : An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. As a rule, obligations under a contract cannot be assigned except with the consent of the promise and then it is a novation resulting in substitution of liabilities. On the other hand, 14

15 rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment, e.g, as in the case of goods covered by personal licences Apart from the legal position enunciated above, cl.26.1 of the PPA in specific terms lays down : Neither party shall assign any of its rights or obligations under this Agreement without prior written consent of the other party. 10. It is the case of the applicant that the Assignment Agreement had the seal of approval of Nokia Finland. In this context the applicant has placed before this Authority at the time of hearing a letter dated 24 th February, 2009 addressed by Laird USA to Nokia Corporation Finland and it reads thus : Dear Sirs Re Laird Technologies India Pvt Ltd ( Laird India ) Assignment Agreement In connection with the audit of Laird India, we have been requested by our auditors Messrs Ernst & Young for confirmation of Laird Technologies Inc s assignment of the right for supply of product to Nokia India to our Indian operating subsidiary, Laird India. We enclose the Product Purchase Agreement (PPA) between Nokia Corporation and Laird Technologies Inc. ( Laird USA ), dated 25 June 2003 and the Letter of Intent signed between Nokia India Private Limited and Laird USA dated 16 May Clause 26.1 of the PPA requires written consent from yourselves regarding the aforementioned assignment. The Letter of Intent implies this consent but we have been requested to obtain written confirmation to satisfy the clause. We would be grateful if you could cosign this letter to confirm Nokia Corporation s permission to the assignment and return it to us. We appreciate your assistance in this matter. 15

16 Yours sincerely Sd/- Robert Berg Laird USA Sd/- for and on behalf of Nokia Corporation MIKA ORPANA Director, Mechanics Components 3/4/2009, Espoo, Finland 10.1 It is submitted that the assignment has been consented to or ratified and moreover there is clinching evidence to show that the assignment has been acted upon by Nokia. It is pointed out that Nokia India has been accepting the supplies from the applicant and has been lodging claims for defective/damaged goods. Thus, even by conduct and mutual dealings, the ratification of assignment can be definitely inferred. It is therefore submitted by the learned counsel for the applicant that neither the legal position governing assignment nor cl.26.1 of the PPA comes in the way of recognition of assignment as a valid transaction in law. The consent letter, it is pointed out, gives quietus to this controversy. 11. On a deep consideration, we are of the view that it is not safe to act on the letter of 24 th Feb.,2009 (filed after the case was partly heard) and draw an inference therefrom that Nokia Corporation has consented to or ratified the Assignment Agreement. As rightly pointed out by the learned counsel for the Revenue, the Assignment Agreement as such has not been enclosed with the letter. In the letter, there is a bare reference to Laird USA s assignment of the right for supply of products to Laird 16

17 India (applicant). It is not known whether Nokia Corporation has been apprised of all the terms of the Agreement including the obligations that are passed on to the applicant. There is no explanation as to why this letter of 24 th Feb (signed by Nokia s Director on 3 rd April, 2009) has seen the light of the day only in October, Further, it is not known whether the Director (Mechanics components) who signed for and on behalf of Nokia Corporation is authorized to give such consent. There is not even the seal of Nokia Corporation beneath the signature of the Director. For all these reasons, we are not inclined to place reliance on this letter. We shall therefore proceed on the premise that there is no valid assignment in the eye of law. There is one more fact to be considered in this context. It is contended by the applicant that apart from the consent letter, the conduct of Nokia India accepting supplies from the applicant since the last 1½ years substantiates the case of the applicant that the Assignment Agreement was ratified by Nokia Corpn. The delivery challans relating to August, 2009 in respect of replacement materials and the first sale invoice raised in February 2008 are filed to establish the factum of supplies of antennae to Nokia India. The mere fact that Nokia India was accepting the goods from Laird India (the applicant) does not lead to the necessary inference that it was being done pursuant to the approval of assignment by Nokia 17

18 Corporation in April, The probability is that supplies of goods by the applicant could only be pursuant to an informal understanding and a local arrangement between the applicant and Nokia India In the absence of valid assignment backed up by an express or necessarily implied consent of Nokia Corporation (which was a party to the PPA), the contention of the applicant that there was legal transfer of capital asset and that the consideration shall be deemed to be the capital gain cannot be accepted. However, the fact remains that the applicant did pay a sum of 5.3 million US dollars to Laird USA and the amount was received by Laird USA in its American bank account. Irrespective of the validity of the assignment vis-a-vis Nokia Corporation and irrespective of the fact that there is no transfer of capital asset as per law, the said consideration received by Laird USA would still be income in the nature of business profits in the hands of the recipient. The consideration passed under the said Agreement for parting with certain rights in favour of the Indian group company i.e., the applicant. Irrespective of its enforceability against Nokia Corporation, that Agreement binds the parties to the agreement. It is not an agreement opposed to public policy or tainted by an illegal purpose. Further, it is seen from the material furnished by the applicant that Laird USA was instrumental in paving the way for the 18

19 provision of infrastructural facilities by Nokia India to Laird India within the framework of LOI for the purpose of setting up the factory. Part of the consideration received by Laird USA could also be attributable to that arrangement. Thus, there is no escape from the conclusion that the income is in the nature of business profits received by Laird USA. In fact, it is the case of the applicant itself that if the transaction is not in the nature of capital gain, the amount paid to Laird USA could be regarded as business profits. Therefore, treating the same as business profits, the next question is whether it is liable to be taxed in India. The answer to that question depends on whether Laird USA the recipient of consideration has business connection in India in terms of Section 9(1)(i) of the Act or Laird USA has a Permanent Establishment in India within the meaning of the DTAA. 12. In view of our finding on the permanent establishment, there is no need to discuss the issue of business connection. 13. We shall now address the question whether the applicant had at the relevant point of time a Permanent Establishment in India, because under the DTAA, only the business profits earned through a PE in India and the profits attributable thereto are taxable in India (vide Article 7.1 & 7.2 of DTAA). The applicant has clarified that Laird USA has no place of business in India and the applicant has never acted for and on behalf of Laird USA in carrying on the 19

20 business in India. However, it is fairly clear that Laird USA actively assisted the applicant in setting up the manufacturing facility in India within the framework of the understanding reached between Laird USA and Nokia India (P) Ltd. under the letter of intent dated 16 th May, Nokia India promised Laird USA to provide developed industrial land within its SEZ with all the infrastructural facilities in order to facilitate the setting up of manufacturing plant by Laird USA. Ultimately the manufacturing unit was set up by the applicant but not Laird USA. However, it is on record that an agreement of sub-lease was entered into by the applicant and Nokia India in order to make available a part of the land leased out to it (Nokia India) by SIPCOT. It is also stated by the applicant that the cost of land and other infrastructural facilities was reimbursed to Nokia India. Thus, Laird USA was instrumental in making the developed land available to the applicant within the SEZ of Nokia India. There is nothing on record that Laird USA had any other role to play in the manufacturing and business activities of the applicant thereafter. The applicant emphatically says that Laird USA had no fixed place of business in India through which any business activity was or is being carried on. For the purpose of negotiations in connection with the terms of LOI, the business presence of Laird USA was really not necessary. At the most, there may be some occasional visits and Laird USA and Nokia India would have 20

21 coordinated with each other for this limited purpose. There is nothing to show that the manufacturing plant was set up under the auspices of Laird USA and its personnel were deputed to supervise and monitor the activities of Laird India. 14. The Revenue s counsel has referred to Clause 5 of the PPA under which Laird USA has an obligation to deliver its products to Nokia at Nokia s production lines for which it has to avail of the services of a domestic Logistic Service Provider (LSP) for warehousing and delivering the products at the plant site of Nokia. It is therefore, submitted that the business network of LSP who would import goods on behalf of Laird and deliver them to Nokia at site constitutes the PE of Laird USA. It is clarified by the applicant s counsel in the course of arguments and in the written submissions that no LSP was ever appointed or provided by Laird USA and Clause 5 was not invoked. True, no details as regards the pattern of dealings between Laird USA and Nokia India before the applicant came into the picture have been spelt out. Even then, it is not reasonable to draw inference that the business profits representing the consideration paid under the Assignment Agreement is attributable to the PE in the form of LSP, or any other place of business. Thus, going by the facts appearing on record, a fixed place PE of Laird USA can be safely ruled out. 21

22 15. Then, we come to the question whether the applicant can be considered to be an agent or dependent agent of Laird USA within the meaning of Article 5.5 of the DTAA which reads as follows:- An enterprise of a contracting State shall not be deemed to have a PE in the other contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph It is the contention of the applicant that the applicant never acted as an agent much less as a dependent agent of Laird USA. The applicant states that it has been carrying its business operations by itself without any direction or instructions from Laird USA, bearing the risk and responsibility of its business transactions. It is pointed out that the applicant supplies goods to Nokia India not on behalf of Laird USA but on its own and its transactions with Nokia India have been on a principal to principal basis vide clause 2.2 of the Assignment agreement. Further, under the said agreement, the applicant is left free to establish business relationships with other major electronics manufacturers in India (vide clause 2.2). The applicant has averred that it has recruited its own sales personnel for the task. The applicant has reiterated that it is not depending on Laird USA economically nor it has been acting according to instructions or subjected to any form 22

23 of control by Laird USA from functional point of view. Attention is also drawn to clause 2.6 of the Agreement, according to which, the applicant reserves the right to renegotiate on its own in case there is substantial change in volumes. It is also pointed out that the risk of pricing a product continues to exist with the applicant. Above all, there is nothing to show that the activities of the applicant are devoted wholly or almost wholly to or on behalf of Laird USA. On the other hand, the clear case of the applicant is that under the terms of the Agreement and in actual practice, the applicant is not actually required to act as an agent of Laird USA in any sense while conducting the business. Having regard to the facts appearing from record, we are unable to reach the conclusion from any stand point that the applicant represents the agency PE of Laird USA within the meaning of Article 5.5 of DTAA In the written submissions furnished on 19th November 2009, the counsel for the Revenue has commented that the question whether the applicant is a dependent agent of Laird USA cannot be answered without looking into the various agreements referred to in LOI dated In this context, it is noticed that in para 5 of the LOI, it is stated that the parties shall endeavor to enter into detailed agreements ( final agreements ) setting forth the detailed terms and conditions with respect to the subject-matter of LOI. It has been clarified by the applicant that no other agreement 23

24 was entered into pursuant to LOI and the only relevant agreement is the sublease agreement referred to earlier. The LOI, in our view, does not have a bearing on the question whether the applicant is a dependent agent of Laird USA. The main purpose of LOI was to record an understanding between Laird USA and Nokia India with regard to the provision of land and setting up of a manufacturing facility which will pave the way for regular product supplies to Nokia India. The LOI, it is stated explicitly, is a non binding expression of the intention of parties. From the subsequent events, it is clear that Laird USA has gone out of the picture after Laird India (the applicant) had started manufacturing and supplying the goods The contention of the Revenue that the applicant is wholly dependent on Laird USA for its business of supplies of products to Nokia is not sustainable. It is not elaborated as to how and in what manner the applicant depends on Laird USA which has already assigned its rights. As observed earlier, Laird USA which has received valuable consideration for the assignment is bound by it, whether or not it is binding on Nokia Corporation. Once the necessary authorization to manufacture and supply the products to Nokia India has been given by Laird USA, Laird USA cannot carry on the same business in India or interfere with the business carried on by the applicant. It is a different matter if Nokia India the buyer of the products, objects to the role of the applicant and insists on 24

25 the manufacture and supply by Laird USA itself in terms of PPA. Apart from the categorical statements made by the applicant, the applicant has also furnished evidence in the form of invoices and delivery challans to establish its independent business relationship with Nokia India The counsel for the Revenue has referred to clauses (2) & (3) of the Agreement and contended that Laird USA continues to have legal commitment in respect of the business operations of the applicant in terms of guarantee of risks of volume of sales. The relevant clauses of the Agreement referred to are : 2.7 In the event the volume of the sales to Nokia from LT India pursuant to the Supply Contract, exceed the volumes indicated in Annexure 2 of the Agreement, then LT India shall pay Laird an additional consideration to be mutually agreed upon by the Parties. The Parties will also mutually agree upon the terms and payment of such additional consideration separately. 2.8 Alternatively, in the event the volume of sales is lower than that stipulated in Annexure 2, then Laird shall pay LT India a consideration as may be mutually agreed upon between Parties at a later date. 3.0 Volume of risk and guarantee 3.1 Laird hereby covenants that Nokia India shall procure the volumes of the products from LT India, as set out in the Annexure 2 to the Agreement. In the event of failure of Nokia to procure the products as per the volumes indicated in Annexure 2 to the Agreement (for any reason other than manufacturing defect and quality in workmanship), Laird agrees and undertake that the volume risk vis-a-vis the products shall be borne by Laird exclusively. In addition to the Assignment contemplated herein, in the event of a shortfall in the procurement of the products by Nokia India from LT India for the reasons stated above, 25

26 compared with the volumes as indicated in Annexure 2 to the Agreement, Laird agrees to procure from LT India, the necessary products to compensate the deficiency in procurement. Laird shall make good the deficiency in relation to the gross margins that LT India would have earned in supplying the products to Nokia India as per the volume indicated in Annexure 2 to the Agreement It is pointed out by the applicant in its rejoinder filed on 1 st October, 2009 that these clauses have not been invoked at any time by either party i.e. Laird USA or the applicant and they have only remained on paper. In any case, these provisions by themselves do not militate against the relationship of principal to principal between Laird USA and the applicant. These provisions meant in the business interests of both the parties to the Agreement cannot be construed to mean that the applicant acts as an agent much less as a dependent agent of Laird USA in supplying the products to Nokia India. It may be mentioned that more or less similar clauses in the deed of assignment were considered by this Authority in ABC Limited, In re (289 ITR 438) and it was held that such provisions did not give rise to a business connection between the non-resident and the Indian company. It was observed thus : Parties have provided the eventuality in the case of increase in the supply of volume of products as well as decrease in the volume of products. In neither case can it be accepted that the business connection is established. Though the said observations were made in the context of business connection, 26

27 the same are equally relevant in considering whether the applicant can be regarded as dependent agent having regard to the above terms of the Assignment Agreement The learned counsel for the Revenue also relied on cl.14 read with Appendix 5 of the PPA in regard to insurance. It is pointed out that Laird USA has to provide minimum insurance cover of more than 20 million US dollars for work outside the United States. In reply to this contention, the applicant has clarified that the cost of insurance is being borne by the applicant itself. The applicant has filed an invoice of Laird Plc. dated 30 th June, 2009 under which the group insurance recharges from July, 2008 to June, 2009 to the tune of 10,413 was charged to the account of the applicant. 16. The Revenue then made a faint attempt to suggest that the consideration paid under the Assignment Agreement may be for acquiring the technical know-how from Laird USA or for obtaining patent rights in respect of the products marketed by the applicant. This suggestion has been emphatically denied by the applicant. The applicant has stated that it has obtained the designs for the factory lines, plant and machinery, manufacture and assembly processes from other business entities in Sweden and China. The department s assumption that Laird USA owns the patent in the products has been categorically denied. 27

28 17. An attempt has also been made by the Revenue to bring the payment made to Laird USA under the Agreement as a short term capital gain. The argument of the Revenue s counsel in this behalf is that Laird USA had acquired valuable rights from Nokia India under the Letter of Intent dated 16 th May, 2006 and those rights are: (a) right to acquire interest in the lease-hold land held by Nokia India in SEZ at cost (b) right to infrastructural facilities like water, electricity, etc. to be provided by Nokia India at cost and (c) right to supply products to be manufactured by it in India. It is contended that Laird USA has received US $ 5.3 million from the applicant for transferring the legal rights accruing to it under the LOI. We find it difficult to accept this contention. First of all, the LOI cannot be construed as an enforceable agreement especially in view of the specific declaration therein that the LOI constitutes a non-binding expression of the intention of the parties. It is further declared : nothing contained in this LOI may be construed to create (i) legally binding obligations to Nokia to provide developed industrial land within its SEZ or (ii) legally binding obligation to the supplier to purchase or lease such land or related services. LOI contemplates final agreements to be entered into. However, according to the applicant, no such final agreement was ever entered into as the need did not arise. Therefore, it cannot be said that LOI has conferred on Laird USA any legal rights or interests in 28

29 respect of the land and infrastructure. The consideration in regard to land and common facilities was paid by the applicant to Nokia India in accordance with the Sub-lease Agreement. The Assignment Agreement only relates to manufacture and supply of products by the applicant to Nokia India. The rights and obligations under the Agreement centered round that aspect only and going by the terms of the Agreement, it is clear that the consideration has been paid as a quid pro quo for the assignment of rights and obligations under the PPA in relation to the business in India. Even if a part of the consideration was paid for the services of Laird USA in facilitating the sub-lease of land or for giving up the claims if any under the LOI, it cannot be said that any assets situated in India were transferred. 18. Thus, none of the contentions put forward by the Revenue have any merit. 19. In view of the foregoing discussion, the questions are answered as follows : Question No.1 The answer broadly is in the negative. The amount of consideration received by Laird USA from the applicant is in the nature of business profit that has accrued or arisen in India. However, as the recipient Laird USA has no permanent 29

30 establishment in India, the same is not liable to be taxed under the Income-tax Act, 1961 having regard to Art.7.2 of the DTAA. Question No.2 In view of the answer to the first question, this question need not be answered. Question No.3 The answer is in the negative. The applicant is not required to withhold tax under Section 195 of the Income-tax Act while making remittance to Laird USA as it has not derived any income chargeable to tax in India. Accordingly, the Ruling is given and pronounced on this the 18 th day of February, sd/- (J. Khosla) Member sd/- (P.V. Reddi) Chairman F.No. A.A.R. No. 793/2008 Dated: This copy is certified to be a true copy of the Ruling and is sent to: 1. The applicant 2. The CIT-I, Chennai, Sd/- (Batsala Jha Yadav) Addl. Commissioner of Income-tax 30