By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Articles 5 and 7 of India-USA DTAA – Branch engaged in preparation of drawings, designs and structural calculations by engaging highly technical and skilled professionals, which constitutes the core business of head office (HO), triggers PE of the HO in India.
Facts:
The Taxpayer, a US Company, has a branch in India (branch). The Indian branch provided engineering design and consultancy services to its HO, i.e, the Taxpayer. As part of these services, the branch prepared drawings and designs and also structural calculations by engaging highly technical and skilled professionals. For these services the branch was reimbursed at cost plus margin. The Tax Authority contended that the presence of Taxpayer in the form of fixed assets, number of employees etc., in India indicates that the activities carried out by the branch constituted main business of the Taxpayer and the cost reimbursed by the Taxpayer to the branch was not at arm’s length. Thus, the Taxpayer has a PE in India as per India-USA DTAA and the income attributable to the operation carried out by the PE shall be taxable in terms of Article 7 of the India US DTAA .
The Taxpayer contended that the activities of the branch were in the nature of preparatory and auxiliary services and hence the branch does not constitute a PE of the Taxpayer in India. Consequently, no income can be assessed in terms of Article 7 of the India-US DTAA .
Held:
The Branch was engaged in preparation of drawings, designs and doing structural calculations which require high technical and managerial skills. The branch was also doing research and development work for the Taxpayer which was the core business of the Taxpayer and the same cannot be considered to be of preparatory or auxiliary character. Accordingly, in terms of Article 5 of India-USA DTAA , the branch constituted PE of the Taxpayer in India.
