By Geeta Jani, Dhishat B Mehta, Chartered Accountants
Article 5 of India-Netherlands DTAA – Indian subsidiary
rendering certain services to its parent, carries on subsidiary’s own business
in India and does not result in PE trigger for parent in India. Mere fact that
subsidiary and parent have common directors does not result in exercise of control
by the parent on the subsidiary
Facts
Taxpayer, a Netherlands Company (FCo), was engaged in the
business of –
– Sale of storage system equipment and products
including embedded software
– Sale of subscriptions
– Installation, warranty and professional
services with respect to data migration, data integration and disaster recovery
services.
FCo sold goods and services in India through third party
distributors who were appointed on non-exclusive basis. Further, FCo had a
subsidiary in India (ICo), which rendered certain services to the FCo pursuant
to a “commission agent agreement (CAA)”. In terms of CAA, services rendered by
ICo included, marketing and sales support services, assistance in organising
trade shows and pre sales marketing, etc.
Assessing Officer (AO) contended that (a) FCo had a business
connection in India and hence its income in India was chargeable to tax under
the Act; (b) marketing activities being the core business activities of FCo
were carried on by ICo in India. Without such activities of ICo supply/services
by FCo was not possible in India; (c) ICo acted as sales office in India and
hence created a Permanent Establishment (PE) for FCo in India under
India-Netherlands DTAA; (d) Alternatively, ICo had the power to conclude
contracts on behalf of FCo in India as both the entities have common directors
and hence created a dependent Agent PE (DAPE) in India.
FCo contended that the sales in India were carried on by it
through independent distributors. Further, ICo did not have an authority to
conclude contracts on behalf of FCo in India nor did it maintain any stock of
goods on behalf of FCo. ICo derived income from other activities in its own
rights such as IT and ITEs services and hence was not economically dependent on
FCo. Merely because FCo and ICo have common directors does not result in DAPE
in India.
FCo also contended that ICo was merely a service provider and
its employees were working under ICo’s own control and instruction. ICo did not
result in a fixed place PE or Agency PE of FCo in India. Without prejudice, the
activities carried on by ICo are preparatory and auxiliary and hence does not
result in tax presence in India.
Held
– Services rendered by ICo to FCo, results in a
business connection for FCo in India and thus income of FCo is subject to tax
in India under the Act. One will have to thus evaluate taxability under the
DTAA.
– A subsidiary company by itself does not
constitute a PE. None of the employees of the FCo are present in India nor are
the personnel or employees of FCo visit India. ICo is a separate legal entity
and has its own board of directors, premises, employees, contract, etc. and the
employees work under the control and supervision of ICo in India and not the
FCo. No evidence has been furnished to show that ICo carries on business of FCo
in India.
– In terms of the CAA, ICo is required to
merely inform FCo if any orders are placed by the customer in India. It would
then be the sole discretion of FCo to accept or reject it. Further, ICo has no authority to bind FCo in relation
to any orders received by it.
– ICo is merely a service provider to FCo and
carries on its own business. It cannot be considered as carrying on the
business of FCo in India.
– Common directors of FCo and ICo are not
engaged in the day to day activities, negotiation of contracts, marketing
function in India on behalf of the FCo. Nothing has been brought on record to
show that ICo was subject to detailed instruction and control of FCo. Merely
the fact that the directors are common does not result in exercise in control
by FCo over ICo.
– The revenue streams of ICo also clearly
suggests that it does not derive its income wholly or substantially from FCo,
but from other group entities as well. Thus ICo does not qualify as a dependent
agent of FCo.
