Arm's length remuneration to Indian agent blocks further attribution to a dependent agency permanent establishment

A dependent agency permanent establishment is treated as tax-neutral where the Indian agent has already been remunerated at arm's length for the functions performed, assets employed and risks assumed. On that basis, no further profits can be attributed to the foreign enterprise in India, and the addition described in the note is stated to be unsustainable. The note also indicates that attribution, gross profit basis and interest-related grounds do not survive independently once the core taxability fails.

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Issues: Whether the receipts from sale of software products and the addition made on the basis of an alleged dependent agency permanent establishment survived for taxation where the Indian agent was found to have been remunerated at arm's length.

Analysis: The addition was examined in the light of the binding jurisdictional precedent holding that a dependent agency permanent establishment does not give rise to further taxable profits if the Indian agent has already been compensated on an arm's length basis for the functions performed, assets employed and risks assumed. On the undisputed position recorded in the assessment proceedings, the remuneration to the Indian agent was at arm's length. Once that position was accepted, nothing further remained attributable to the alleged dependent agency permanent establishment. The other grounds, including attribution, gross profit basis and interest issues, did not survive independently once the core taxability itself failed.

Conclusion: The addition was not sustainable and was directed to be deleted; the appeal succeeded in favour of the assessee.

Ratio Decidendi: Where the Indian agent is remunerated at arm's length, the existence of a dependent agency permanent establishment is tax-neutral and no further profits can be attributed to the foreign enterprise in India.

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