Dissent in Nokia tax verdict may mean more litigation

A dissenting judgment in the majority order by a tax tribunal over the issue of permanent establishment (PE) has fuelled fear of more litigation. 

The Income Tax Appellate Tribunal (ITAT) ruled in favour of Finland-based Nokia Network OY, engaged in manufacturing of advance mobile and fixed telephony equipment and systems.

It has said their subsidiary in India does not constitute a PE hence, the parent company is not liable to pay taxes on global sales. 

However, a three-member Bench gave this ruling by a majority judgement. There was a dissenting one, which said the subsidiary — Nokia India Pvt Ltd — had  a business connection with the parent, which is liable to pay tax on a portion of global sales.   

"This ruling in a 2:1 ratio will leave the battle on attribution issues open, since the revenue authorities will place reliance on the dissenting member’s ruling to invoke taxation in future litigation on this issue,” felt  Rakesh Nangia, managing partner, Nangia Advisors.

The case was referred to the bench by the high court here. It referred to global sales of Finland-based Nokia Networks OY for the assessment years 1997-98 and 1998-99.

The assessing officer had estimated taxable profit of Rs 390 million for 1997-98 and Rs 110 million for 1998-99.  

The bench examined the concept of fixed place PE in the light of Article 5 of the India-Finland double taxation avoidance agreement (DTAA), and propositions laid down by the Supreme Court (SC) in the Formula One ruling and international lax commentaries.

According to the SC verdict, certain conditions need to be satisfied to prove there is a fixed place PE in India. These are termed disposal test.

The dissenting judge held that the fixed place of business and disposal tests are not relevant for unassociated or indirect PEs. 

Nangia said the dissenting ruling challenges the settled position on disposal tests.

"Also, mere interdependence and interconnection between the foreign entity and its Indian subsidiary has been taken as a base for constitution of business connection, which might lead to more litigation on this matter," he added.