Facts of the Case

The Revenue filed appeals before the Delhi High Court under Section 260A of the Income Tax Act challenging the findings in favor of Nortel Network Singapore Pte Ltd. The core dispute revolved around whether the respondent had a Permanent Establishment (PE) in India under Article 5 of the India–Singapore Double Taxation Avoidance Agreement and whether payments received for software were taxable as royalty under Article 12.

The Assessing Officer alleged that expatriates supervising installation activities in India constituted a PE. Additionally, the Revenue contended that software payments should be taxed as royalty.

Issues Involved

  1. Whether the respondent had a Permanent Establishment in India under Article 5(4) of the India–Singapore DTAA due to supervisory activities.
  2. Whether software payments received by the respondent were taxable as royalty under Article 12 of the DTAA.
  3. Whether any substantial question of law arose under Section 260A.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that supervisory activities carried out by expatriates in India triggered Article 5(4), thereby creating a Permanent Establishment.
  • It was contended that the earlier Delhi High Court ruling in Nortel Networks India International Inc. applied a different DTAA (India–USA), and hence should not govern the present case.
  • The Revenue also argued that payments for software should be treated as royalty, taxable in India.

Respondent’s Arguments (Assessee)

  • The assessee contended that the conditions under Article 5(4) were not satisfied, particularly the requirement of supervisory activities exceeding 183 days.
  • It was submitted that the Assessing Officer failed to establish factual findings demonstrating fulfillment of the PE conditions.
  • The respondent relied on judicial precedents including Nortel Networks India International Inc. and other rulings to argue that no PE existed and software payments were not royalty.

Court’s Findings / Order

  • The Court held that the Assessing Officer failed to provide factual evidence showing that the conditions under Article 5(4), especially the 183-day requirement, were satisfied.
  • Mere observation that expatriates supervised installation was insufficient to establish a Permanent Establishment.
  • On the issue of software payments, the Court relied on its earlier decision in CIT vs ZTE Corporation (2017) 392 ITR 80 (Del) and held that such payments were not taxable as royalty.
  • Since both issues were already covered against the Revenue by binding precedents, no substantial question of law arose.
  • Accordingly, all appeals were dismissed.

Important Clarification by the Court

  • Establishment of a Permanent Establishment requires clear factual findings, not mere assertions.
  • The 183-day threshold under Article 5(4) is a mandatory condition and must be specifically proven.
  • Payments for software cannot automatically be classified as royalty without satisfying legal criteria under DTAA provisions.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:8337-DB/SKN26112018ITA10852018_104222.pdf

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