Permanent establishment tests under the India-U.S. treaty rejected for fixed place, service, and agency attribution.
Fixed place permanent establishment under Article 5(1) required a place of business in India at the foreign enterprise's disposal through which its own business was carried on; outsourcing to an Indian subsidiary, shared services, or support functions was insufficient, so no fixed place PE existed. Service permanent establishment under Article 5(2)(l) arose only where services were furnished in India through employees or other personnel, and auxiliary support or stewardship activity did not meet that test, so no service PE existed. Agency permanent establishment under Article 5(4) required authority to conclude contracts or equivalent treaty conditions, which were not shown, so no agency PE existed. The MAP resolution was case-specific and did not bind later years.
Issues: (i) whether the assessees had a fixed place permanent establishment in India under Article 5(1) of the India-U.S. Double Taxation Avoidance Agreement, 1990; (ii) whether the assessees had a service permanent establishment under Article 5(2)(l); (iii) whether an agency permanent establishment existed under Article 5(4); and (iv) whether the mutual agreement procedure resolution bound subsequent assessment years.
Issue (i): whether the assessees had a fixed place permanent establishment in India under Article 5(1) of the India-U.S. Double Taxation Avoidance Agreement, 1990.
Analysis: A fixed place permanent establishment requires a place of business in India that is fixed and at the disposal of the foreign enterprise, through which its own business is carried on. Mere outsourcing to an Indian subsidiary, close commercial association, shared services, or the existence of support functions in India does not satisfy the disposal test. The Indian subsidiary remained a separate legal and tax entity, and the material business of the assessees was not carried on through any premises in India placed at their disposal.
Conclusion: No fixed place permanent establishment existed; this issue was decided in favour of the assessees.
Issue (ii): whether the assessees had a service permanent establishment under Article 5(2)(l).
Analysis: Service permanent establishment under Article 5(2)(l) arises only where services are furnished within India through employees or other personnel. The customers of the assessees were located outside India, and the services performed in India were merely auxiliary or supportive. The seconded employees and personnel in India were not shown to be rendering services to any customer in India, and stewardship or protective oversight was not enough to attract the clause.
Conclusion: No service permanent establishment existed; this issue was decided in favour of the assessees.
Issue (iii): whether an agency permanent establishment existed under Article 5(4).
Analysis: An agency permanent establishment requires authority to conclude contracts, or conduct falling within the specific deeming clauses of the treaty. No factual foundation was laid to show that the Indian subsidiary habitually concluded contracts on behalf of the assessees or otherwise satisfied the treaty conditions for agency attribution.
Conclusion: No agency permanent establishment existed; this issue was decided in favour of the assessees.
Issue (iv): whether the mutual agreement procedure resolution bound subsequent assessment years.
Analysis: The mutual agreement procedure resolution was entered for specified assessment years and was case-specific. Such resolutions are not precedents for later years and do not bind subsequent assessments in the absence of a corresponding factual and legal basis. The arm's length pricing arrangement also did not justify additional attribution on the facts found.
Conclusion: The mutual agreement procedure resolution did not bind subsequent years; this issue was decided in favour of the Revenue, but without altering the final result.
Final Conclusion: The Revenue failed to establish that the assessees had any taxable permanent establishment in India on the facts of the case, and the appeals were therefore dismissed.