No Permanent Establishment in India, Rejects Notional Income Taxation: Delhi High Court Rules in Favor of Nokia OY

Act is Not Concerned with Taxation of Notional Income –  In a landmark ruling Delhi High Court dismissed the Income Tax Department's appeals against Nokia OY, holding that neither its Liaison Office (LO) nor its Indian subsidiary, Nokia India Pvt. Ltd. (NIPL), constituted a Permanent Establishment (PE) in India under the India-Finland Double Taxation Avoidance Agreement (DTAA).

The Division Bench of Justice Yashwant Varma and Justice Ravinder Dudeja upheld the Income Tax Appellate Tribunal’s (ITAT) ruling, emphasizing that a subsidiary’s mere existence does not create a PE, nor can the Revenue tax a notional income in the absence of actual accrual. The Court ruled that “the entire addition was based on a notional accretion, and thus clearly unsustainable.”

The tax dispute stemmed from assessments in which the Income Tax Department argued that Nokia OY had a Permanent Establishment (PE) in India through:

Its Liaison Office (LO), which the Revenue sought to classify as a Fixed Place PE.
Nokia India Pvt. Ltd. (NIPL), alleged to be a Dependent Agent PE (DAPE).
The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] upheld these findings, holding Nokia OY liable to tax in India. The ITAT overturned the decision, prompting the Revenue’s appeal before the High Court.

"No Real Income Was Generated – A Notional Addition Cannot Be Sustained"

The Income Tax Department attempted to tax a notional interest income on the assumption that Nokia OY should have charged interest on delayed payments or extended credit facilities. The High Court, however, firmly rejected this premise, holding that there was no factual basis for such an addition.

“The Department had failed to place any evidence on the record which may have established that Nokia OY had in any instance arising out of any of the contracts charged interest on delayed payment or extended credit facilities to its customers. It also held that there was not an iota of evidence which may have even tended to indicate that any of the customers of Nokia OY had in fact paid such sums. Since the Act is clearly not concerned with taxation of a notional income, the entire premise on which the said addition was based was rendered untenable.”

"A Subsidiary is Not Automatically a Permanent Establishment"

The Revenue’s attempt to establish a Permanent Establishment (PE) on the basis of Nokia India Pvt. Ltd. (NIPL)’s operations was categorically rejected by the Court.

“As that Article presently stands and forms part of the Convention, a PE is defined to mean a fixed place of business through which the business of an enterprise may be wholly or partly carried out. The mere existence of a subsidiary, without proof of it being at the disposal of the foreign entity to conduct business, does not satisfy the test for a PE.”

"Control and Disposal are the Determining Factors for a Fixed Place PE"
The High Court reaffirmed the principle laid down in Formula One World Championship Ltd. v. CIT [(2017) 394 ITR 80 (SC)], holding that the test of control and disposal over a place of business is crucial in determining a Fixed Place PE.

"The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be ‘at the disposal’ of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice.”

The Court concluded that Nokia OY had no such control over any premises in India and thus could not be taxed under the Fixed Place PE concept.

"No Evidence That NIPL Concluded Contracts on Behalf of Nokia OY"
The Revenue alleged that NIPL was habitually concluding contracts on behalf of Nokia OY, thereby creating a Dependent Agent PE (DAPE). The Court, however, dismissed this contention, holding that:

“NIPL had never been established on facts to be a dependent agent. Even before us, the appellants had failed to draw our attention to any evidence which may have even remotely qualified the test of an authority to conclude contracts in the name of Nokia OY having been conferred.”

The Court emphasized that habitual conclusion of contracts is a mandatory requirement for a DAPE, and since the Revenue failed to establish this, the claim could not be sustained.

"Preparatory and Auxiliary Activities Do Not Create a PE"

Under Article 5(3) of the DTAA, a Permanent Establishment does not arise if the activities in question are preparatory or auxiliary in nature. The Court ruled that NIPL’s operations were auxiliary in nature and did not contribute to Nokia OY’s core business of manufacturing telecom equipment.

“In view of the above, the activity of the assessee’s project office in Mumbai would clearly fall within the exclusionary clause of Article 5(3)(e) of the Double Taxation Avoidance Agreement and, therefore, cannot be construed as the assessee’s permanent establishment in India.”

"Taxation Cannot Be Based on Perceptions or Virtual Projection"
The Revenue attempted to invoke the doctrine of "virtual projection" to argue that Nokia OY’s presence in India was substantial enough to create a PE. The Court categorically rejected this approach, ruling that:

“We are of the firm opinion that 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.”

Dismissing the Minority Opinion in ITAT

The Revenue relied on a dissenting minority opinion from the ITAT that took a broader view of PE principles, arguing that Nokia OY exercised de facto control over NIPL. The High Court flatly rejected this reasoning, stating:

“The minority opinion attempts to blur the distinction between an associated and an unassociated PE. It fundamentally fails to appreciate that an enterprise does not become a PE merely because its parent company exercises a degree of oversight and control over its affairs.”

The Delhi High Court’s ruling is a decisive win for Nokia OY, reinforcing key principles of international taxation under the DTAA. The Revenue’s attempt to stretch the definition of a PE was firmly rejected, with the Court making it clear that only actual economic activities—not assumptions or notional calculations—can justify tax liability.

Dismissing the appeals, the Court upheld the ITAT’s ruling and concluded:

"We would thus answer the questions as posited in the negative and against the appellants. The appeals, in consequence, fail and shall stand dismissed."

Date of Judgment: February 21, 2025