Indian subsidiary performing functions in India, which, in its absence, the parent would have been required to perform, constituted PE.

Indian subsidiary performing functions in India, which, in its absence, the parent would have been required to perform, constituted PE of the parent and consequently, income was attributable to the PE.

The applicant was a company incorporated in, and tax resident of Singapore (‘SingCo’). SingCo was a member of a Group of companies, which were engaged in door-to-door express shipments and related transport services. A Group company incorporated in Bermuda (‘BermudaCo’) had a wholly owned subsidiary in India (‘IndCo’). BermudaCo had business arrangement with IndCo for inbound and outbound movement of packages within India. SingCo entered into agreement with IndCo for carrying on the business arrangement originally carried on by BermudaCo. The agreement was on principal-to-principal basis.

 In terms of the agreement:

(i) IndCo was non-exclusive agent of SingCo for transportation of packages in India.

(ii) IndCo had full discretion to open offices in India at its own expense. However, it was not to act on behalf of SingCo.

(iii) SingCo was responsible for transportation of packages throughout the world (outside India) and IndCo was not permitted to engage any service provider for rendering services outside India.

(iv) IndCo was also involved in domestic transportation of packages where the Group network was not used.

(v) Roughly, one-third income of IndCo was from its arrangement with SingCo.

(vi) SingCo was responsible for transportation of packages throughout the world (outside India) and IndCo was not permitted to engage any service provider for rendering services outside India.

(vii) SingCo was charging fees for providing certain support functions to IndCo. The issues raised before AAR were: l Whether, in terms of India-Singapore DTAA, IndCo constituted PE of SingCo in India? l Whether the receipts from outbound and inbound consignments were attributable to PE? l If the transactions between SingCo and IndCo were on arm’s-length basis, whether income could still be attributed to the PE? l If IndCo did not constitute PE, whether the fees received for support functions could be regarded as FTS under India-Singapore DTAA?

Held:

The AAR observed and held as follows.

•   PE is a place of business which enables a nonresident to carry on a part of its business in another country. SingCo cannot carry on its business, unless it makes arrangement for delivery of packages in India, either directly or through another entity. IndCo performed several functions such as obtaining orders, collecting and transporting packages to a specified destination, etc., which, otherwise, SingCo/Group would be required to perform. Hence, under Article 5(1) of India-Singapore DTAA, IndCo would constitute PE of SingCo/ Group in India. l Further, IndCo secures orders in India for the Group and also has right to conclude contracts for the express shipments business of the Group. Hence, under Article 5(8) of India- Singapore DTAA, it is agency PE of the Group. The exception under Article 5(10) of India- Singapore DTAA would not apply merely by describing IndCo as an independent entity or a non-exclusive agent when the Group is carrying on its business in India through IndCo.
• Since SingCo has a PE, income attributable to the PE is taxable in India and hence, payments made by IndCo to SingCo were subject to withholding of tax.
• The fact of the transactions being undertaken on arm’s-length basis should be verified to determine whether income can still be attributed to PE.