The Income Tax Appellate Tribunal, Delhi (ITAT) recently delivered a very significant decision in the case of Nokia Networks O.Y (Assessee)[1] on the issue of its permanent establishment (PE) in India and attribution of income to the PE. The majority of members of the ITAT ruled in favour of the Assessee holding that its Indian subsidiary would not constitute a PE in India, especially in absence of a Service PE clause in the erstwhile India-Finland Tax Treaty (Treaty).


The Assessee is a resident of Finland and sold GSM equipment manufactured by it to Indian telecom operators, on a principal-to-principal basis. It’s Indian subsidiary, Nokia India Private Limited (NIPL) was either assigned the installation contracts by the Assessee or entered into independent contracts with the customers for installation. NIPL also entered into technical support agreements with customers. NIPL’s income from these activities was taxed in India.

The Assessing Officer (AO) was of the view that NIPL constituted a PE of the Assessee and attributed an additional 30 percent of the profit from the equipment to NIPL. The AO also concluded that 30% of the equipment price pertained to supply of software and sought to tax it as royalty in the hands of the Assessee. On appeal, the ITAT held that NIPL being a virtual projection would form a PE, and attributed to NIPL 20 percent of the Assessee’s profits from the sale of equipment to Indian customers.

Dealing with the appeal against the ITAT order, the High Court partially ruled in favour of the Assessee holding that software was embedded in the equipment and payment for it could not be taxed as royalty. The High Court noted certain factual errors leading to its own disagreement with the ITAT on PE and remitted the question back to the ITAT.

Fixed Place PE

As the Treaty did not have a Services PE clause, the majority of members concluded that the presence of employees of the Assessee was not relevant and they needed to examine whether the NIPL constituted a fixed place PE or a Dependent Agency PE (DAPE) of the Assessee.

The ITAT relied heavily on the Supreme Court ruling in the case of Formula One[2], for applying the tests for fixed place PE determination. They thought it to be of paramount importance whether NIPL was at the disposal of the Assessee for conducting the latter’s own business activities. For this purpose, the ITAT perused several contracts and examined the activities undertaken by the Assessee, especially signing of contracts, network planning, and negotiations of offshore contracts in India, to determine whether these constituted ‘business activities’ of the Assessee and whether they were carried out from a fixed place, at its disposal. They did not think so. They felt that the provision of telephone, fax and conveyance services provided by NIPL to the employees of the Assessee did not make the NIPL offices at the disposal of the Assessee. Therefore, no Fixed Place PE was formed. They held that the existence of seconded employees whose salaries were paid by the Assessee would be relevant in determining a Services PE but not for the analysis of a fixed place PE.

Preparatory or Auxiliary Exemption: DAPE and Independent Agent

Analysing Article 5(4) of the Treaty, which provides that a place of business from where preparatory or auxiliary activities are carried out does not constitute PE, they held that signing, network planning and negotiation would fall under preparatory and auxiliary activities. They also examined the DAPE provisions under Article 5(5) of the Treaty and concluded that NIPL had neither negotiated, nor concluded any contract on behalf of the Assessee. ITAT noted that NIPL did not assist in the delivery of goods, it bore its own entrepreneurial risk and acted as an independent party carrying out its own activities for which it was remunerated on an arm’s length basis. Thus, NIPL was not a DAPE.

ITAT also noted that none of the activities of NIPL were wholly or almost wholly devoted to the Assessee since NIPL entered into its own independent contracts in India.

Virtual Projection Test / Alter Ego Test

On this issue, the majority of members held a view that the concept of ‘virtual projection’ flows from the concept of PE itself. Therefore, if NIPL does not fall within the parameters of PE under Article 5, virtual PE cannot exist in a vacuum and independent of the other parameters.

The ITAT discussed business connection (BC) for the sake of completeness, noting that if there is no PE under the DTAA, then even if there was a BC, it would not impact the taxability of the Assessee in India.

Dissenting Judgment

A third member dissented from the majority’s view and held that NIPL would constitute a PE even if it were not a DAPE under Article 5(5) of the Treaty. He justified this by relying on the test of virtual projection. Referring to the term ‘alter ego’ and placing reliance on other international commentators[3], he opined that when a subsidiary company’s survival for carrying on its business activities is entirely connected with and dependent on the business of its parent, then the subsidiary is merely an alter ego, or virtual projection, of its parent. Consequently, it must be treated as a PE of the non-resident parent.

Further, he disagreed with the binding nature of the Organisation for Economic Co-operation and Development (OECD) commentaries, relying on a Supreme Court decision. He categorised PEs into two types: “associated/direct PE” and “unassociated/indirect PE”. In his view a subsidiary would fall into the latter category and concluded that the fixed place of business and the disposal tests are not relevant for such PEs. In his view, when the work of a foreign enterprise is carried out by a separate legal entity in the source jurisdiction, there is no question of the foreign enterprise using a place of business in the source jurisdiction or having a place at its disposal. In his view the separate legal entity having a fixed place of business at its disposal for performing actions in furtherance of the business interests of the foreign enterprise is sufficient and concluded that NIPL was a PE of the Assessee in India. He attributed 35% of the global profits of the Assessee from sales in India to the Indian PE.

He also disagreed that NIPL was compensated adequately for the marketing activities that it carried out in India for the Assessee for sales in India.


The majority decision holds in favour of the Assessee. However, the tax department is likely to appeal against this and would have a lot of ammunition from the dissenting judgement in arguing before the High Court. It is important to note that even the OECD and the United Nations are now grappling with the PE issue with changes in business models and claims by host countries for a higher share of business income of multinational companies.

It is interesting to note how tax authorities and courts are looking into business models and the substance of conduct of business as they interpret and apply treaties. It seems that increasingly the actual conduct of business as well as documentation will need attention for the purposes of achieving tax certainty, especially in cross-border situations.

This dissent judgement is likely to increase litigation on issues concerning PE and income attribution to PE, as tax authorities may rely on subjective tests proposed in the dissent judgment.

[1] Nokia Networks OY v. Jt. CIT, New Delhi, ITA Nos. 1963-64/DEL/2001

[2] Formula One World Championship Ltd. v. CIT [2017] 390 ITR 199 (Delhi)

[3] Arvid A Skaar’s dealing with Alter Ego companies in his book “Permanent Establishment- Erosion of a Tax Treaty Principle”; ‘Klaus Vogel on Double Taxation Conventions’; ruling of the Madras HC in case of Ansaldio Energia SPA Vs CIT [(2009) 310 ITR 337]

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