Article 5, 7 India-USA DTAA – On facts, having regard to the activities performed in India, the Indian group company was PE of the USA company and 50% of profit was attributable to the PE.
Facts:
The taxpayer was a company incorporated in USA and member-company of Nortel group. Nortel group was a leading supplier of hardware and software products for GSM cellular radio telephone system.
Nortel group also had an Indian company (“ICo”), which had entered into a composite contract with an Indian telecom company (“TelCo”) for supply of equipment. Immediately after signing the contract, ICo assigned it in favour of the taxpayer without any consideration.
The equipment to be supplied under the contract was acquired by the taxpayer from its group company in Canada. The Canadian company had a Liaison Office (“LO”) in India. Employees of various Group companies visited India for facilitating execution of the contract and worked from the premises of the LO or ICo.
The performance under the contract was guaranteed by Nortel group.
The AO was of the view that the taxpayer was merely a “paper company” created to avoid taxes in India by assignment of the contract by ICo and the overall execution/ work was done through ICo only. The Taxpayer thus triggered a Permanent establishment (PE) in India by virtue of activities done by ICo, the LO and the services provided by employees of Group companies visiting India.
Held:
• The contract was indivisible turnkey contract for supply, installation, testing, commissioning, etc. Responsibility for negotiating, securing and executing the contract as well as installation and commissioning were undertaken by ICo. Accordingly, ICo was a fixed place of business and dependent agent PE of the taxpayer.
• The LO of Canadian company was rendering all kinds of services to all group companies including the taxpayer. Hence, it constituted fixed place PE of the taxpayer.
• The taxpayer approached the customer, negotiated the contract; installed and tested the equipment. All these activities were undertaken through ICo and LO. Experts of group companies visited India in connection with the project and carried out business of the taxpayer through the premises of the LO and ICo. The contract did not merely require loading the equipment in ship but a number of other activities which were carried out in India and remuneration for these activities was included in consideration payable for the contract. Though represented as sale consideration for the equipment, the amount represented payment for works contract under which entire installation and customisation were carried out in India.
• The activities of the taxpayer in India through ICo, LO and employees of Group companies constituted its PE under Article 5 of India-USA DTAA . These activities were core activities of the taxpayer and hence, they were not preparatory and auxiliary activities.
• The accounts furnished by taxpayer, being not audited, had no sanctity. The only explanation for the trading loss in an intra-group transaction could be avoidance of tax. Hence, the group accounts should be examined to have correct picture. Computation of income of PE depends on the facts of each case and in the present case, after allowing expenses relatable to PE, selling, general marketing and R&D expenses, attribution of 50% of the profits to PE would be reasonable.
