DTAA | Subsidiary Of A Company Does Not Ipso Facto Constitute Its Permanent Establishment: Delhi High Court

Citing Article 5 of the India-Finland Double Taxation Treaty, a division bench of Justices Yashwant Varma and Ravinder Dudeja observed,

“There is no general presumption in law that a subsidiary can never be acknowledged to be a PE. This since Article 5(8) itself merely states that the said factor alone shall not be determinative of the PE question. The covenant thus clearly obliges us to evaluate the facts based on the other provisions comprised in Article 5 of the DTAA.”

The court held that a subsidiary would have to meet the test prescribed by Paras (1), (2), (3), (5) and (6) of Article 5 before it can be said to constitute a PE.

These include an assessment of whether it is a fixed place through which the business of the enterprise was being wholly or partly carried out, the nature of services rendered by the subsidiary, power acts on behalf of an entity in a contracting State, etc.

The development comes in a batch of appeals preferred by Finland-based Nokia Networks OY, which had initially established its Liaison Office in India and later incorporated a fully owned subsidiary namely Nokia India Private Limited (NIPL).

Nokia OY did not file any Return of Income by taking the position that offshore supplies were not exigible to tax. However, the Assessing Officer came to hold against it, stating that the Indian subsidiary NIPL constitutes a PE of Nokia in India.

As the Tribunal held in favour of Nokia, the Department preferred an appeal.

Nokia OY claimed that the sales of NIPL were on a principal-to-principal basis under independent buyer-seller arrangements.

The High Court found that the Department had abjectly failed to prove that NIPL stood conferred with the authority to bind or conclude contracts on behalf of Nokia OY. Further, it noted that NIPL had an independent source of income which was duly offered and subjected to tax.

“Nokia OY was not undertaking any installation activity in India and those activities were being performed by NIPL on a principal-to-principal basis for the benefit of its own customers under independent contracts.”

Further, the High Court observed that Article 5(8) of the DTAA in unequivocal terms injuncts the Revenue from either readily presuming or harbouring a presumption that a subsidiary would ipso facto constitute a PE.

“A parent or a holding company would invariably be expected to have an interest and concern in the working of an overseas subsidiary. This essentially represents its right of oversight, supervision and protection of shareholder interest. However, the exercise of those powers does not denude the subsidiary of its independent economic existence. As Article 5(8) explains, the mere fact that the enterprise is a subsidiary of another would not in itself be sufficient to recognise it as a PE,” it said.

Court explained that by virtue of Article 5, the question of whether an entity constitutes PE must be based on “measurable evidence” and not on a perception test.

“The question of PE is not liable to be answered on the basis of a “perception” of virtual projection. The DTAA does not leave this seminal issue to be decided on the basis of individual estimations or impressions. It lays in place certain empirical standards which must be borne in mind when answering the question whether a PE exists…It is here that the precepts such as the use and maintenance of a place of business, the place being at the disposal of an enterprise or being liable to be viewed as an operating asset of the enterprise itself assume significance.”

At this juncture, the Court also cited its judgment in Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax (International Taxation) and Others where it was held that as long as the activities undertaken could be said to be preparatory or auxiliary, the establishment would not be liable to be construed as constituting a PE.

It also cited Director of Income Tax, International v. Western Union Financial Services Inc where the High Court had determined the precepts pertinent to and determinative of whether an entity constitutes Fixed Place PE.

In this case, the Court found that NIPL was pursuing an independent line of business with Indian telecom operators. It was also found that NIPL was not generating any revenue or income for Nokia OY.

“In any event, absent the conferral of authority upon NIPL to conclude contracts binding Nokia OY or securing contracts on its behalf would lead one to the irresistible conclusion that no DAPE existed in the relevant AYs… onshore activities of NIPL were totally disconnected with the supply contracts of Nokia OY. There was thus a clear and discernible distinction between the activities undertaken by NIPL and the supply contracts executed by Nokia OY,” the Court held and dismissed the Department's appeal.

Appearance: Mr. Ruchir Bhatia, SSC for Appellant; Mr. Deepak Chopra, Mr. Ankit Goyal and Mr. Priyam Batnagar, Advocates for Respondent

Case title: The Commissioner Of Income Tax - International Taxation -2 v. Nokia Network OY

Citation: 2025 LiveLaw (Del) 235

Case no.: ITA 785/2019

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