Article 5 and 7 of India-USA DTAA, India-Australia DTAA and India-Italy DTAA
Since no condition under Article 5(4) dealing with dependent agent was fulfilled, the PE was not constituted—in absence of PE, ‘force of attraction rule’ did not apply.
Facts:
The taxpayer was the Indian branch of an American company VIPL, which in turn was a wholly owned subsidiary of Varian USA. Varian USA was engaged in manufacturing and marketing of various kinds of instruments. Varian group had five group entities in USA, Australia, Italy, Switzerland and the Netherlands. The taxpayer had entered into Distribution and Representation agreements with Varian group companies in respect of India. The taxpayer carried out pre-sale activities such as liaisoning and post-sale support activities and received commission for the same. The taxpayer did not have any authority to negotiate or conclude contracts on behalf of the group companies. Further, all the risks like market risk, product liability risk, research and development risk, credit risk, price risk, inventory risk or foreign currency risk were born by the selling entity.
The issues before the Tribunal were as follows.
(i) Whether the Indian branch of the taxpayer constituted PE of the group companies?
(ii) If the taxpayer was considered to constitute the PE, whether ‘force of attraction rule’ could apply?
Held:
(i) Dependent agent PE
The taxpayer did not have any authority to negotiate or conclude contract on behalf of group companies. The group companies directly sold the products to the Indian customers and also undertook all the associated risks.
Under Article 5 (4) of India-USA DTAA, an agent constitutes a PE only if he fulfils one of the three conditions specified therein. On facts, the taxpayer did not fulfil any of the three conditions as it had no authority to conclude contract, nor did it act as delivery agent, nor as order-securing agent. Therefore, the test of dependent agent PE failed and the US affiliate triggered no taxation in India.
The corresponding conditions under India-Australia DTAA and India-Italy DTAA were also similar to Article 5(4) of India-USA DTAA and in those cases too, the PE did not kick in.
(ii) Applicability of ‘force of attraction rule’
For application of ‘force of attraction rule’: the foreign enterprise should have a PE in India for selling goods, and the goods sold by the foreign enterprise should be same or similar to those sold by the PE. As the foreign enterprise did not have a PE in India, question of applicability of ‘force of attraction rule’ did not arise.
