Facts of the Case

The Revenue filed appeals under Section 260A of the Income Tax Act, 1961 against Nortel Networks Singapore Pte Ltd. The dispute pertained to:

  1. Whether the assessee constituted a Permanent Establishment (PE) in India under Article 5(4) of the India-Singapore DTAA due to supervisory activities.
  2. Whether payments received for software were taxable as royalty under Article 12 of the DTAA.

The Assessing Officer alleged that expatriates of the assessee supervised installation projects in India, thereby triggering PE provisions. Additionally, payments for software were treated as royalty income.

Issues Involved

  1. Whether the assessee had a Permanent Establishment in India under Article 5(4) of the India-Singapore DTAA.
  2. Whether software payments constitute royalty under Article 12 of the DTAA.
  3. Whether any substantial question of law arises under Section 260A.

Petitioner’s (Revenue) Arguments

  • The assessee carried out supervisory activities in India through expatriates in connection with installation projects.
  • Under Article 5(4), such activities exceeding 183 days would constitute a Permanent Establishment.
  • Payments received for software should be taxed as royalty under Article 12 of the DTAA.
  • Earlier judgments relied upon different DTAA (India-USA), hence not directly applicable.

Respondent’s (Assessee) Arguments

  • The conditions under Article 5(4) were not factually satisfied, particularly the requirement of supervisory activities exceeding 183 days.
  • The Assessing Officer failed to provide specific findings or evidence supporting PE existence.
  • Software payments are not royalty, relying on settled judicial precedents.
  • Issues are already covered by earlier Delhi High Court rulings.

Court’s Findings / Order

  • The Court held that the Assessing Officer failed to establish factual satisfaction of conditions under Article 5(4), especially the 183-day requirement for supervisory activities.
  • Mere reference to expatriates supervising installation was insufficient to constitute a PE without detailed findings.
  • The issue of software taxation as royalty was already settled against the Revenue in CIT v. ZTE Corporation (2017) 392 ITR 80 (Del).
  • Since both issues were covered by 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 mandatory and must be specifically proven.
  • Judicial consistency applies where issues are already settled by precedent.

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

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