Section 9 of the Act, Article 5 of the India-USA DTAA – Though Indian company was controlled by foreign company, since all economic risks were borne by Indian company no fixed place PE was constituted – Since services were rendered outside India and no personnel had visited India, no service PE was constituted – Indian company neither had authority to conclude, nor had it concluded, contracts and since it had also not secured orders for foreign company, no agency PE was constituted

6. [2019] 109 taxmann.com 99 (Trib.) Mum. Gemmological Institute of America, Inc. vs.
ACIT ITA No.: 1138 (Mum.) of 2015 A.Y.: 2010-11 Date of order: 21^st June, 2019

Section 9 of
the Act, Article 5 of the India-USA DTAA – Though Indian company was controlled
by foreign company, since all economic risks were borne by Indian company no
fixed place PE was constituted – Since services were rendered outside India and
no personnel had visited India, no service PE was constituted – Indian company
neither had authority to conclude, nor had it concluded, contracts and since it
had also not secured orders for foreign company, no agency PE was constituted

______________________________________________

1.  (2012) 52 SOT 93 (Mum.)(Trib.) – In Daimler
Chrysler (DC), it was held that: the subsidiary of a company cannot be regarded
as PE; since sales of completely knocked down (CKD) kits were made by DC to the
Indian company on principal-to-principal basis, they became property of the
Indian company and did not constitute the Indian company as sales outlet or
warehouse of DC; as the Indian company had not carried out any operation in
India in respect of sales of CKD kits on behalf of DC, it could not be
considered as PE of DC in India

FACTS

The assessee was an
American company and a tax resident of USA. It was engaged in the business of
diamond grading and preparation of diamond dossiers. The assessee also owned
100% shares in an Indian company (I Co) which was also engaged in similar
services. Whenever I Co faced capacity and / or technical constraints, it would
send precious stones to the assessee for grading.

During the relevant
year, the assessee earned ‘Instructor Fee’ from I Co for rendering diamond
grading services. The AO contended that the assessee and I Co had established a
JV business in which both operated as partners. Consequently, he held that I Co
constituted a PE of the taxpayer in India.

The assessee
claimed that the impugned receipts were in the nature of business profits and,
in the absence of any PE in India, the said income was not chargeable to tax in
India in terms of the DTAA.

HELD

As regards
fixed place PE

In a joint venture,
each party contributes its share to undertake an economic activity under joint
control. The arrangement between I Co and the taxpayer could not be considered
a joint venture for the following reasons:

(a)   I Co had independent
expertise. It used the services of the assessee only when it faced technical or
capacity constraints. Thus, this was a sub-contracting arrangement;

(b)   I Co entered into agreement with the clients.
All the economic risks in relation to the agreement, viz., credit risk, risk of
loss or damage to articles while in transit, etc., were borne by I Co.

Merely because a
company has controlling interest in the other company would not by itself
constitute the other company’s (its) PE in terms of Article 5(6) of the
India-USA DTAA. Accordingly, the assessee did not have a ‘’fixed place’ PE in
India.

As regards
service PR

(i)    The assessee rendered services to I Co only
when I Co was facing capacity or technical constraints and requested the
assessee for providing services. The assessee rendered these services outside
India. None of the employees / personnel of the assessee had visited India for rendering
services;

(ii)    Two graders who were earlier employed with
the assessee were employed with I Co and were on the payroll of I Co. They were
working under the control and supervision of I Co.

Therefore, no
service PE was constituted in India in terms of the India-USA DTAA.

As regards
agency PE

Considering the
functions and the risks assumed² 
by I Co vis-à-vis its business activities in India, I Co was an
independent and separate legal entity incorporated in India. I Co had also
borne all the economic risks. Further, I Co did not have any authority to
conclude contracts and had not concluded any contracts on behalf of the
assessee. It had also not secured any orders for the assessee in India. Thus, I
Co could not be said to have constituted agency PE of the assessee in India.