P.V. Reddi, J. (Chairman) -
(1.) THIS application for advance ruling under Section 245Q(1) of the Income -tax Act, 1961 has been filed by an Indian Company, namely, Laird Technologies (P) Ltd., which is a group company of Laird Plc, U.K. The applicant's holding Company is Laird Technologies, Singapore. Laird Plc, it is stated, is a leading international supplier of custom -designed electronic components and solutions to the global electronic industry. The applicant is Laird Plc's first manufacturing facility in India. It is located within the Nokia Spl. Economic zone at Sriperumbedur near Chennai. It is, inter alia, engaged in the business of designing and manufacturing antenna and battery packs for the mobile phone industry. It has business dealings with leading electronic manufacturers in India such as Nokia, Sony Ericssion. The applicant has also set up a Corporate Research laboratory in Bangalore.
1.1 Laird Technologies Inc, USA with its headquarters in St. Louis (Laird USA) which is a unit of the Laird Group Plc, England, is stated to be a globally known designer and manufacturer of Antennae, EMI, data communications etc. Laird USA has manufacturing plants and technical support operations in the US and various other countries. Laird USA is a 'tax resident' of USA .
1.2 Laird USA has negotiated an arrangement with Nokia to manufacture and supply products to Nokia Corporation globally. On 25th June, 2003 a Product Purchase Agreement (PPA) has been executed by and between Nokia Corporation, Finland, and its affiliates on the one part and the Laird USA and its affiliates on the other part. The PPA, inter alia, covers the supply of products in relation to Nokia's manufacturing requirements in India. In order to assign its rights and obligations under the PPA in connection with the supplies of its products to Nokia India Pvt Ltd (Nokia India) for a period of 5 years in favour of the applicant, Laird USA entered into an Assignment Agreement ('Agreement' for short) with the applicant on 17th Dec, 2007. Under the Agreement, Laird USA irrevocably assigned all its beneficial rights, title, interest, obligations and duties in connection with supply to Nokia India under the PPA in favour of the applicant. The applicant states that as per the agreement, it would act in an independent status and supply the products to Nokia India at its own risk and obligations. The applicant asserts that no agency relationship is intended or created between the applicant and Laird USA and moreover, the applicant's business is not confined to Nokia India only. The applicant states that the risk of pricing of products remains with it. Further, the applicant cannot assign its rights and obligations under the Agreement. The applicant would not have any right under the Agreement after the expiry of 5 years unless the agreement is extended on mutually agreed terms. The consideration of USD 5,300,000 payable by Laird India (the applicant) to Laird USA shall be paid within 30 days of 'invoice' by means of wire transfer to the account of Laird USA maintained at Wachovia Bank, NA. It is the case of the applicant that the said amount receivable by Laird USA under the terms of the Assignment Agreement is not taxable in India either under the Income -tax Act or under the DTAA Double Taxation Avoidance Agreement between India and USA.
(2.) THE applicant submits that the consideration under the Agreement would be received by Laird USA outside India, the PPA and the Assignment Agreement have been executed outside India and further the capital asset that inheres in PPA is located and transferred outside India. Therefore, there is no taxable income either on accrual or receipt basis in India. The applicant points out that Laird USA would not trigger a business connection in India so as to attract Section 9(1 )(i) of the Income -tax Act as no business activity is being carried on by Laird USA in India. Further, Laird USA has no 'permanent establishment' in India within the definition of Article 5 of DTAA and the profits are therefore not liable to be taxed in India in view of the specific provision contained in Article 7 of the DTAA. The applicant contends that having regard to the above features, the payments to the non -resident (Laird USA) being not chargeable to tax in India, the applicant is not required to withhold any tax under Section 195 of the Act. The following questions are framed by the applicant for the purpose of seeking advance ruling from this Authority:
1. Given the facts and circumstances of the case, whether the amount receivable by Laird USA as per the Assignment Agreement is taxable in India having regard to the provisions of the Act and the Double Taxation Avoidance Agreement between India and USA ('the DTAA')?
2. If the answer to Question No. (1) above is in the affirmative, then, to what extent and in which year(s) would the receipt be taxable in the hands of Laird USA in India having regard to the provisions of the Act and the DTAA?
3. If the answer to Question Number (1) above is negative, i.e, the amount receivable by Laird USA is not taxable in India, then, whether the Applicant is required to withhold tax under Section 195 of the Act while making remittance to Laird USA?
(3.) THE contentions advanced by the learned Counsel for the applicant are as follows:
The PPA entered into by Laird USA with Nokia constitutes capital asset in the sense that Laird USA had acquired the right to manufacture and supply the specified products to Nokia Corporation globally. The situs of PPA contract is outside India as it was entered into and signed by the parties in Finland and the Agreement is governed by the Finnish Law. The consideration of 5,300,000 US dollars was remitted by Laird India to a bank account of Laird USA in US. By writing of the assignment, the transfer of said capital asset by Laird USA in favour of the applicant had taken place and a capital gain has, no doubt, accrued to Laird USA but as the capital asset is situated outside India, the capital gains tax cannot be levied in India. Then it is contended that even if the consideration received by Laird USA under the Assignment Agreement is construed as business profits, the charge to tax fails both on account of the absence of business connection between Laird USA and the applicant within the meaning of Section 9(1 )(i) of the IT Act and in the absence of the permanent establishment of Laird USA in India. It is contended that the applicant is not acting as an agent of Laird USA in any capacity and the applicant would supply the products to Nokia India on a principal to principal basis and not on behalf of Laird USA.
4.1 In order to contend that the rights flowing to Laird USA as per the PPA represent a capital asset held by Laird USA, the applicant's counsel has drawn our attention to Section 55(2)(a) of the Act occurring in the Chapter on 'Capital Gains' and the proviso to Section 28 (va). Section 28 enumerates various items of income which shall be regarded as profits and gains of business or profession. Section 55 of the Act while defining the expression 'cost of acquisition of a capital asset' specifically recognizes that "right to manufacture, produce or process any article or thing" or "right to carry on any business" as capital assets. These words were introduced by the Finance Acts of 1997 and 2002. In the definition "cost of any improvement" (vide Section 55(2)(b)) also, the same expression is found. Moreover, the proviso to Clause (va) of Section 28 makes it clear that any sum received "on account of transfer of the right to manufacture or produce or process any article or thing or right to carry on any business chargeable under the head Capital Gains" is not chargeable to income -tax under the head "profits and gains of business.";