Facts of the Case

The Revenue filed appeals under Section 260A challenging the findings in favour of Nortel Network Singapore Pte Ltd regarding taxability issues. The primary contention was that the respondent had a Permanent Establishment (PE) in India due to supervisory activities and that payments received for software were taxable as royalty.

The Assessing Officer alleged that expatriates supervised installation projects in India, invoking Article 5(4) of the DTAA. However, no clear factual finding was recorded regarding the duration or satisfaction of the 183-day threshold requirement.

Additionally, the Revenue contended that software payments constituted royalty under Article 12 of the DTAA.

Issues Involved

  1. Whether the respondent had a Permanent Establishment in India under Article 5(4) of the India-Singapore DTAA.
  2. Whether payments received for software 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 respondent had a PE in India as expatriates were supervising installation projects.
  • Article 5(4) of the DTAA was applicable due to supervisory activities in India.
  • The earlier decision in Nortel Networks India International Inc. applied a different DTAA (India-USA), hence distinguishable.
  • Payments for software should be treated as royalty under Article 12.

Respondent’s Arguments (Assessee)

  • No PE existed as conditions under Article 5(4), particularly the 183-day requirement, were not satisfied.
  • The Assessing Officer failed to establish factual findings regarding duration of supervisory activities.
  • Software payments were not royalty and were covered by judicial precedents.
  • Relied on earlier Delhi High Court rulings supporting their position. 

Court’s Findings / Order

  • The Court held that the Assessing Officer failed to demonstrate how the conditions under Article 5(4), especially the 183-day requirement, were satisfied.
  • Mere observation that expatriates supervised projects was insufficient to establish a PE.
  • The issue of software payments being royalty was already settled against the Revenue by the Delhi High Court in Commissioner of Income Tax vs ZTE Corporation (2017).
  • Since both issues were covered by existing precedents, no substantial question of law arose.
  • Accordingly, all appeals filed by the Revenue were dismissed.

 

Important Clarification

  • Establishment of PE under DTAA requires strict factual satisfaction of conditions, especially time thresholds.
  • Mere supervisory presence without proof of duration exceeding 183 days is insufficient.
  • Software payments cannot automatically be treated as royalty without satisfying DTAA provisions and judicial tests.

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

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