Dependent Agent PE

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The Income Tax Appellate Tribunal, Delhi (ITAT) recently delivered a very significant decision in the case of Nokia Networks O.Y (Assessee)[1] on the issue of its permanent establishment (PE) in India and attribution of income to the PE. The majority of members of the ITAT ruled in favour of the Assessee holding that its Indian subsidiary would not constitute a PE in India, especially in absence of a Service PE clause in the erstwhile India-Finland Tax Treaty (Treaty).

Facts

The Assessee is a resident of Finland and sold GSM equipment manufactured by it to Indian telecom operators, on a principal-to-principal basis. It’s Indian subsidiary, Nokia India Private Limited (NIPL) was either assigned the installation contracts by the Assessee or entered into independent contracts with the customers for installation. NIPL also entered into technical support agreements with customers. NIPL’s income from these activities was taxed in India.

The Assessing Officer (AO) was of the view that NIPL constituted a PE of the Assessee and attributed an additional 30 percent of the profit from the equipment to NIPL. The AO also concluded that 30% of the equipment price pertained to supply of software and sought to tax it as royalty in the hands of the Assessee. On appeal, the ITAT held that NIPL being a virtual projection would form a PE, and attributed to NIPL 20 percent of the Assessee’s profits from the sale of equipment to Indian customers.Continue Reading Subsidiary is Not a Permanent Establishment but Beware the ‘Virtual Projection’ Risk

Multinational enterprises often outsource back-office support operations to their captive subsidiaries in India. Additionally, foreign parent companies second their employees to provide guidance to the Indian subsidiary in the provision of back-office functions. A contentious question has for some time arisen, however. Should such arrangements constitute a fixed place Permanent Establishment (PE), a service PE or a Dependant Agent PE (DAPE) for the foreign company in India?

In the 2007 case of Morgan Stanley[i], the Supreme Court (SC), while dealing with the issue of PE, held that back office functions performed by the Indian subsidiary were preparatory and auxiliary in nature and, therefore, did not constitute a fixed place PE. The SC also held that if the foreign company had deputed its employees to the Indian company to render stewardship services, then no service PE would be constituted in India.

In contrast, however, in the case of Centrica Offshore[ii] in 2014, the Delhi High Court (Del HC), held that if the terms of employment of the employees seconded to India continued to be controlled by the foreign company, it would be regarded as having constituted a service PE in India.

In the ensuing paragraphs, we discuss the recent decision of the SC in the instant case of e-Funds Corporation and its implications for resolving this long-standing issue.Continue Reading Outsourcing of Back Office Support Functions Does Not Create a Permanent Establishment