By Geeta Jani, Dhishat B Mehta, Chartered Accountants
Article 5 and 7 of India USA DTAA – LO of Taxpayer from
where core sales activities of the taxpayer as well as other foreign group
entities are carried on by the expatriates (employed by some of the foreign
group entities) constitute a fixed place PE in India for the Taxpayer as well
as other group entities. An agent who works for more than one entity related to
each other cannot be treated as independent. Such agent who carries on core
sales activities in India constitutes Dependent Agency Permanent Establishment
(DAPE) in India – profit attribution has to consider all the functions performed
and risk taken by the PE
Facts
The Taxpayer was a USA company and tax resident of USA. The
Taxpayer was part of a group engaged in the business of sale of equipment
relating to oil and gas, energy, transportation and aviation business to
customers in India.
Taxpayer had set up a liaison office (LO) in India with the
approval of Reserve Bank of India (RBI), to carry out liaison activities in
India. Taxpayer entered into a service agreement with one of its Indian
affiliate in terms of which the Indian affiliate was required to act as a
communication link with regulatory authorities, provide information of customer
needs, and trends relating to group’s products in India, etc. A survey
under the Act was conducted at the premises of the LO followed by further post
survey enquiry. Following evidences were examined by the Assessing Officer
(AO).
– MOU signed with the customers
– E-mail chains between the employees of
various group entities
– Commercial proposals to customers and
purchase orders
– Visa of expatriates
– Linkedin profiles of personnel in India
– Letter of awarding of contracts
– Details of employees working in the liaison
office – like name, job description, self-appraisal report, employment letter
– Lease deed of liaison office
– Bank statements
– Letters filed to RBI
– Lease agreement in respect of residence of
expatriates
– Power of attorney granted to expatriates for
issue of cheques
– Statutory audit report
– Attendance sheet of employees working in the
LO
Based on the
evidences, following facts were noted
– Various expatriates of foreign group entities
were working in India in leadership roles along with support by team of persons
employed by other group entities (ICo)
– The expatriates as well as the employees of
ICo (group personnel) undertook various sales and marketing function including
price negotiation, supervision, administration and after sales activities of
the overall lines of businesses of the group irrespective of any specific
entity in India. These activities were carried out from the LO in India.
– Group personnel managed the business of
foreign group entities, secured orders and did everything possible that could
be done qua the Indian operations of the overseas group in India.
– Group personnel were fully involved in negotiating
the deal with the customers in India and were not merely acting as
communication channel
• They made direct offers and entertained
requests of the customers for revision of the offers.
• They were empowered to change/finalise the
terms and conditions of the customer contracts and hence decision making in
relation to the customer contracts was also done in India.
• They were in full command of the sales
activities in India and did not tolerate the interference of the overseas group
in deciding the terms to be agreed with the customers or for modifying customer
contracts.
• Entire correspondence with customers was
done in India by expatriates.
• They advised overseas group about the manner
in which a proposal is to be sent to customer and this indicated that they
acted as a sales team in India.
– Specific rooms/chambers in the LO were
allotted to the expatriates at the premises of the LO. Their computer, laptops
and business related documents were all stored in such allotted rooms.
– Further the group personnel also occupied the
premises of the LO which was evident from the attendance sheet maintained for
people working at the LO premises.
AO contended that in terms of Article 5 of India-USA DTAA, a
sales outlet used for receiving or soliciting orders also constitutes a PE.
Thus the LO from where the sale related activities were carried out and which
was at the disposal of the expatriates resulted in a fixed place PE in India
for the Taxpayer.
Moreover, group personnel, who habitually concluded contracts
and secured orders in India wholly or almost wholly for the overseas group as
well as participated in the price negotiations.
Furthermore, the expatriates and employee also created
Dependent Agency Permanent Establishment (DAPE) in India. Consequently, profits
of Taxpayer making sales in India are liable to be taxed as business income in
India as per Article 5 and 7 of the India-USA DTAA .
Taxpayer argued that the sale consideration in relation to
sale of equipment was not taxable in India since the title in respect of these
equipment was transferred outside India as well as payment was also received
outside India. Moreover, the activities in India were limited to LO activities
as approved by RBI and this is evident by the fact that the RBI approval was
not revoked. Nonetheless, the activities carried out in India were of
preparatory or auxiliary character.
Held
ITAT while upholding the AO’s contention provided the
following justification:
On Fixed place PE
– Core sales activities of finding the
customers and finalizing the deals with customers including the pre-sale and
post sales activities were done by the expatriates and employees in India. Such
activities being the core activities does not qualify as P&A.
– The expatriates were constantly using the
premises of the LO, specific chambers/rooms were allotted to them in the LO
premise with their name plates affixed. Though the expatriates were on the
payroll of foreign group entity, they constantly occupied the premises of the
LO and carried out the activities on behalf foreign group entities.
– Further the employees of ICo also occupied
the premises of LO and worked under the control and supervision of the
expatriates, who in turn worked for the foreign group entities. Evidences found
during the course of survey like attendance sheet maintained at the LO premises
also supported the fact that the premise was used by expatriates and employees
of ICo.
– Marketing and sales are income generating
activities in themselves, since the core activities in relation to sales and
marketing is carried on in India through the LO, it constitutes a fixed place
PE.
On Agency PE
– In the facts of the case expatriates were
working for the foreign group entities who are related to one another. The mere
fact that expatriates work for more than one entity does not make them
independent. The related entities are to be treated as a single unit.
– Article 5 of the DTAA does not require
negotiating ‘all elements and details of a contract for constitution of a PE it
only requires habitual exercises of an authority to conclude contracts so long
as agent’s activities are not in the nature of P&A
– Since the activities of the expatriates are
not in the nature of P&A, they clearly have an authority to conclude
contract and hence constitute DAPE.
On attribution of income
– As espoused by SC in DIT vs. Morgan
Stanley [292 ITR 416], there is no need of any further attribution to PE if
it has been remunerated at ALP.
However, if TP analysis does not adequately
reflect functions performed and risks assumed, there would be a need to
attribute further profits to the PE for those functions/risks which have not
been considered.
– In
the facts of the case, the survey revealed that the activities carried on by
group personnel was not merely liaison activities but extended to commercial
activities however the ALP was determined only on basis the liaison and not the
commercial activities undertaken in India. Since the commercial activities
resulted in a PE in India and such services have not been remunerated at all, there will be
need for further profit attribution to the PE.
