JUDGMENT

A.K. Sikri,Acting Chief Justice:

1. Some of these appeals filed by the Nokia Network OY (hereinafter referred to as 'the assessee') and some filed by the Director of Income-Tax (hereinafter referred as to 'the Revenue') pertain to assessment year 1997-98 and 1998-99.

2. The assessee, a company incorporated under the laws of Finland, is a leading manufacturer of advanced telecommunication systems and equipment (GSM equipment) which are used in fixed and mobile phone networks. During the previous year relevant to assessment years 1997-98 and 1998-99, Nokia maintained a Liaison Office and also had a subsidiary in India, presently known as Nokia India Private Limited (hereinafter referred to as NIPL). During this period, GSM equipment manufactured in Finland was sold to Indian telecom operators from outside India on a principal to principal basis, under independent buyer-seller arrangements. Installation activities were undertaken by Indian subsidiary under its independent contracts with Indian telecom operators. Nokia, being a tax resident of Finland, is governed by the provisions of India-Finland Double Taxation Avoidance Agreement. Assessment under Section 143 (3) was completed, in the following manner:

(a) Nokia was carrying on business in India through a Permanent Establishment (PE). Both the Indian Liaison Office and Indian subsidiary were held to constitute a PE of Nokia in India. 'Installation PE' was also constituted on the basis that Nokia had supported Indian subsidiary in discharging its obligation under the installation contracts.

(b) 70% of total equipment revenue (comprising of hardware and software) was attributed to sale of hardware and 40% of the same was estimated as income of Nokia from supply of hardware. Further 30% of the profits so determined were attributed to the PE of Nokia in India. The remaining 30% of the equipment revenues were attributed towards supply of software and the same was taxed as 'royalty' (on a gross basis) both u/s 9(1)(vi) of the Income Tax Act and under Article 13 of the India-Finland DTAA, holding that software was not sold but licensed to the Indian telecom operators.

(c) In addition, income from vendor financing and delayed payment was imputed at Rs.50,000,000 for each assessment year on account of specific clause in this regard in the off-shore supply contracts. The said income was classified as commercial income and added to the income from sale of equipment and licensing of software and taxed at the rate of 55%.

(d) Interest under section 234B of the Act was levied on account of non-payment of advance income-tax.

3. Being aggrieved by the assessment order, an appeal was filed before the CIT (A) who held as under:

(i) True intention of the contract of supply was not merely to supply the equipment but was also to install and provide related services by or on behalf of Nokia.

(ii) Nokia was held to have its presence in India in the form of the Liaison Office and Indian subsidiary. 'Installation PE' was also affirmed on the basis that Indian Subsidiary did not act independently in discharge of its obligation towards Indian telecom operators.

(iii) India specific Profit and Loss statement, duly audited by the Auditors of Nokia, was rejected on the basis that Profit and Loss statement was not supported by any documents.

(iv) Profit on sale of equipment (comprising of hardware and software) was arrived at on the basis of net margins disclosed in the global profit and loss accounts of Nokia and 50% of the same was attributed to activities alleged to have been undertaken by Nokia in India.

(v) Income from vendor financing was held to be rightly computed by the Assessing Officer.

(vi) Interest under Section 234B of the Act was, however, deleted.

4. As the appeals were partly allowed, both the parties felt aggrieved by the order of CIT(A). Thus, appeals were filed both by Nokia as well as by the Department with the Income-Tax Appellate Tribunal (ITAT). A Special Bench was c