From The Judiciary

Does the mere presence of a subsidiary or its activities automatically create a Permanent

Nokia Networks OY [TS-132-HC-2025(DEL)]

Facts

Nokia Networks OY, a Finnish Company (Assessee) engaged in suppling telecom equipment, has limited contractual engagements in India, with its Liaison Office (LO) serving as a communication link for marketing and business development without generating taxable income. Its subsidiary, Nokia India Private Limited (NIPL), operates independently, providing installation and maintenance services under separate contracts with Indian telecom operators.

The Assessing Officer (AO) concluded that Nokia had a Permanent Establishment (PE) in India through its LO and NIPL, imposing tax liabilities on income from hardware sales and services.

The Income Tax Appellate Tribunal (ITAT) disagreed, ruling that the LO did not constitute a PE under the India-Finland tax treaty. The Tribunal also clarified that while hardware sales occurred outside India, no taxable income was generated in India. However, it noted that NIPL’s activities, such as network planning and contract signing, could potentially create a PE. The Tribunal stated that further analysis was needed on profit attribution to this potential PE.

The Revenue appealed to the Delhi High Court, challenging the Tribunal’s conclusions. under India's DTAAs, the broad guidance provided is discussed below.

Held

The court reinforced that the existence of a PE cannot be determined based on subjective perceptions of "virtual projection" but must rely on objective, evidencebased standards as outlined in Article 5 of the tax treaty. The Tribunal had previously found that NIPL operated independently, without the authority to enter contracts From the Judiciary binding Nokia OY, and its activities were disconnected from those of Nokia OY. Consequently, the appellants did not demonstrate that NIPL constituted either a Fixed Place PE or a Dependent Agent PE. The court concurred with the Tribunal's findings and emphasized that the mere relationship of a subsidiary to its parent company does not in itself define PE status, underlining that a thorough factual analysis is necessary for determining such matters.

Referred cases

• Director of Income Tax, International v. Western Union Financial
• Progress Rail (supra)
• Hyatt International Southwest Asia Ltd. Vs. Additional Director
• Formula One World Championship Ltd. v. CIT

Our Comments

This case highlights that merely having a subsidiary in a country does not automatically establish a PE for the parent company. Instead, a thorough analysis of the subsidiary's activities, its authority, and its relationship with the parent company is required.

Does salary reimbursement on seconded employees constitute Fees for Technical Services (FTS)?

Flipkart Internet Private Limited [TS-115-HC-2025(KAR)]

Facts

Assessee, an Indian Company is a subsidiary of a foreign entity in Singapore. The said foreign entity had entered into an Inter-Company Master Service Agreement with the holding company Walmart Inc., Delaware, which is a USA entity.

Accordingly, Walmart seconded its employees to the assessee. For the seconded service, the assessee remitted the salary amount to the US entity by way of reimbursement. The Assessing Officer concluded that the amount earned as income by the foreign entity in India is liable for levy of tax under Section 195 of the 1961 Act, the said income not being the salary reimbursement of the employees concerned. AO recorded the finding that the services rendered by the seconded employees would fall within the precincts of Section 9(1)(vii) of the 1961 Act and that the payment made by the Assessee-Company is towards consideration for the technical services rendered by the foreign entity.

Held

The Karnataka High Court noted that the Single Judge Bench had relied on the co-ordinate bench ruling in Abbey Business Services² India to conclude that the Secondment Agreement between Flipkart and Walmart constituted an independent contract of service.

The HC dismissed the Revenue's contention that the absence of termination power over the seconded employees disproved the employer-employee relationship. It observed that such arrangements are common in international business and do not necessarily follow the traditional indicators of control and supervision. The court emphasized that if the Triple Test (direct control, supervision, and direction) is satisfied, a strong case for the employer-employee relationship exists, even if some traditional indicators are missing. The HC confirmed that the reimbursement of amounts after deducting TDS was not disputed by the Revenue, and dismissed the writ appeal, clarifying that the doctrine of estoppel was not invoked.

Our Comments

This judgment highlights that in international business arrangements, traditional employer-employee indicators may not always apply, and the Triple Test (control, supervision, and direction) can help establish such a relationship. It also emphasizes the need for flexible interpretation of tax laws in cross-border transactions involving reimbursements

HC: Stressing on ‘importance of time’, holds AO’s order barred by limitation

Sterling Oil Resources Ltd [TS-41-HC-2025(BOM)-TP]

Assessment Year 2010-11

Facts

The dispute revolves around the Assessing Officer (AO)'s final assessment order, which was passed pursuant to directions of the Dispute Resolution Panel (DRP). The DRP directions were received by the AO on 23 December 2014, wherein the DRP directed the AO to consider the State Bank of India (SBI) Prime Lending Rate (PLR) of FY 2009-10 as the arm's length price for evaluating the share application money transaction. The AO forwarded the directions to the TPO on 5 January 2015 and the TPO recomputed the total adjustment (INR 493.9 million) via an order dated 27 January 2015. Thereafter, AO passed the final assessment order on 27 February 2015.

On the taxpayer’s appeal with the Income Tax Appellate Tribunal (ITAT), the ITAT held that the assessment order is beyond the limitation period of one month from the end of the month in which the DRP's directions were received by the AO.

Revenue filed an appeal before the High Court (HC) challenging the ITAT’s order.

Revenue's contention before the HC

The Revenue argued that the time limit provided by Section 144C (13) of the Act is directory and not mandatory.

Taxpayer's contention before HC

The Taxpayer submitted that provisions relating to limitation should be construed strictly and there is no provision for condoning the delay if the order is not passed within the time limit provided u/s 144C(13) of the Act, it is a clear-cut violation wherein the whole assessment order is bad in law and shall be quashed.

Held by ITAT

The HC rejected the Revenue's argument that the time limit u/s 144C(13) was merely a directory, clarifying that Section 144C(13) was designed to speed up the resolution of disputes. The HC emphasized that if the Revenue’s view were accepted, it would not only create uncertainty regarding the timeline for completing assessments, contradicting the objectives of Section 144C but would also result in a delay in recovery of tax by the revenue.

The HC further stated that Section 144C(13) is the reincarnation of Section 153 which provides for a time limit for completion of the assessments. If the provisions of Section 153 are to be construed mandatorily, then the provisions of Section 144C(13) shall also be construed mandatorily.

The HC highlighted that the limitation period for the final assessment order u/s 144C(13) of the Act should be counted from the end of the month in which the DRP's directions were received by AO (23 December 2014) and not from the TPO's order of 27 January 2015. Therefore, the HC concluded that the assessment order passed by the AO is bad in law, as the same is barred by time limitations.

Our Comments

It is of utmost importance on the part of the taxpayer/ consultants, as a starting point, to appropriately check whether stipulated time limits are met by the authorities while passing the orders. In case an order is barred by time limitation, it might result in the quashing of the order since the same becomes a defunct order and makes it invalid in the eyes of law.

ITAT: Directs AO/TPO to consider TP study report for de novo order u/s. 92CA

Senatech India Pvt Ltd [TS-47-ITAT-2025(DEL)-TP]

Assessment Year 2020-21

Facts

The assessee is engaged in manufacturing and processing various mobile die-cut tape parts like sponge tape, heat resistance tape, double-side tape, battery tape etc. which are used in mobile phones. The Assessee responded to various Notices u/s 92CA and furnished audited financial statements, Form 3CA-CD, Form 3CEB, Loan Agreement, Audit Report, and various other details. However, the assessee did not furnish the Transfer Pricing Study Report (TPSR).

The TPO selected the Transaction Net Margin method (TNMM), instead of the Resale Price Method (RPM) used by the assessee, as the most appropriate method and selected 10 comparables, thereby, arriving at a margin of 3.03% against the assessee’s margin - 0.13% and made adjustment accordingly. The AO had passed the order incorporating TP adjustment, against which the assessee had filed an application before DRP.

The DRP rejected certain grounds of the assessee and directed a re-verification of comparables. The assessee then filed an appeal before the ITAT.

Taxpayer's contention before ITAT

The Assessee argued that it is a trader and not a manufacturer and it contested TPO’s use of TNMM instead of RPM used by the assessee. It further submitted that TPO selected faulty comparables engaged in dissimilar activities than that of the assessee. Additionally, it contested the loss-making filter applied by the TPO, as the assessee itself has reported a loss in the current year.

Revenue's contention before the ITAT

Revenue highlighted that TPSR was furnished by the assessee only on 21 July 2023 and TPO had passed the order u/s 92C(3) on 27 July 2023. Therefore, in such a short period the TPO had no occasion to study and verify the TPSR adequately.

Held by ITAT

Considering the TPO did not have adequate time to study the TPSR, ITAT set aside the order and remitted the matter back to the file of the AO/TPO for fresh consideration of TPSR.

Our Comments

The ruling highlights the importance of submitting the proper documentation whenever requested by the tax authorities and on a timely basis, as delay in submission can lead to the matter being remitted back for fresh consideration, which not only may result in a delay in the conclusion of assessment and administrative inconvenience caused by it but also might lead to additional adjustments and unfavourable outcomes for the taxpayer.