2017 (10) TMI 1011 - SC - Income Tax

US companies avoid permanent establishment in India despite subsidiary support services under Article 5 DTAA

The SC held that US companies did not establish a permanent establishment (PE) in India under Article 5 of the India-US DTAA. For a fixed place PE, there ... Determination of Permanent Establishment (PE) in India - Income accrued in India - fixed place PE in India - DTAA - Application of the Mutual Agreement Procedure (MAP) and its Binding Effect - non-disclosure of documents​​​​​​​ - whether the assessees had a PE in India under Article 5 of the India-US DTAA - Held that:- It is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. No part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score. Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of the DTAA is that an enterprise must furnish services “within India” through employees or other personnel it has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) is not satisfied. We entirely agree with the approach of the High Court in this regard. Article 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a “service PE” would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground namely, that “other personnel” would cover personnel employed by the Indian company as well, and that the US companies through such personnel are furnishing services in India. This being the case, it is clear that as the very first part of Article 5(2)(l) is not attracted, the question of going to any other part of the said Article does not arise. It is perhaps for this reason that the assessing officer did not give any finding on this score. Best Practice No.1 has no application on the facts of the present case, as the agreement reached applies only to the respondent companies, and not to any general category of taxpayers. It is clear, therefore, that Shri Ganesh is right in relying upon Article 3.6 of the OECD Manual. It is very clear, therefore, that such agreement cannot be considered as a precedent for subsequent years, and the High Court’s conclusion on this aspect is also correct. Having held in favour of the assessees that no permanent establishment in India can possibly be said to exist on the facts of the present case, we do not deem it necessary to go into the cross-appeals that were filed before the High Court, which were dismissed by the High Court agreeing with the ITAT that the calculation of the ITAT would lead to nil taxation. Issues Involved:1. Determination of Permanent Establishment (PE) in India.2. Attribution of income to the PE in India.3. Application of the Mutual Agreement Procedure (MAP) and its binding effect.4. Adverse inference due to non-disclosure of documents.Issue-wise Detailed Analysis:1. Determination of Permanent Establishment (PE) in India:The primary issue was whether the assessees had a PE in India under Article 5 of the India-US DTAA. The Revenue argued that the assessees had a 'fixed place PE,' 'service PE,' and 'agency PE' in India. The High Court, however, found no specific finding in the assessment order or appellate orders that any fixed place of business was at the disposal of these companies. The High Court emphasized that the mere outsourcing of business to an Indian subsidiary does not create a PE. The Supreme Court agreed, stating that the Indian company only rendered support services, which did not give rise to a fixed place PE. Additionally, the Court found that the service PE requirement under Article 5(2)(l) was not satisfied, as the services were not furnished within India. The 'agency PE' aspect was not argued before the ITAT and lacked a factual foundation.2. Attribution of Income to the PE in India:The Revenue contended that income attributable to the assessees' PE in India should be taxed in India. However, the High Court and the Supreme Court noted that the Transfer Pricing Officer had determined that the transactions between the US companies and the Indian subsidiary were at arm's length. The Supreme Court referenced the Morgan Stanley case, which held that if a PE is remunerated on an arm's length basis, no further profits would be attributable to the PE. Therefore, the Court concluded that no additional income was attributable to the assessees' PE in India.3. Application of the Mutual Agreement Procedure (MAP) and its Binding Effect:The Revenue relied on a MAP resolution for the assessment years 2003-04 and 2004-05, where the assessees had agreed to attribute a certain percentage of income to the Indian PEs. However, the Supreme Court noted that the MAP resolution explicitly stated that it was not binding for subsequent years. The Court also referred to the OECD Manual on MAP Procedure, which supports that such agreements are case-specific and not precedents for subsequent years. Thus, the MAP resolution did not bind the assessees for later years.4. Adverse Inference Due to Non-Disclosure of Documents:The Revenue argued for an adverse inference due to the assessees' failure to disclose certain documents. However, the Supreme Court dismissed this argument, noting that it was not raised before any of the authorities below or the High Court. Consequently, the Court did not consider it necessary to address this issue.Conclusion:The Supreme Court upheld the High Court's judgment, concluding that the assessees did not have a PE in India, and no additional income was attributable to them for taxation in India. The MAP resolution was not binding for subsequent years, and the argument for an adverse inference due to non-disclosure of documents was dismissed. The appeals were accordingly dismissed with no order as to costs.