Permanent establishment under the India-USA treaty requires independent factual proof; a subsidiary alone does not create taxable presence.

A foreign tax resident carrying on diamond grading services through an Indian subsidiary was found not to have a permanent establishment in India under Article 5 of the India-USA DTAA. The subsidiary acted independently, contracted with customers on its own account, bore commercial risks, and used the foreign enterprise only for subcontracted work, so no fixed place PE arose from corporate association alone. No service PE existed because the foreign enterprise's personnel did not render services in India through employees or other personnel. No agency PE was made out, as the subsidiary had no authority to conclude contracts, did not habitually secure orders, and operated in the ordinary course of its own business.

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Issues: Whether the assessee had a permanent establishment in India under Article 5 of the India-USA DTAA so as to permit taxation of its income in India.

Analysis: The assessee was a foreign tax resident carrying on diamond grading services through an Indian subsidiary. The arrangement showed that the Indian subsidiary acted independently, entered into contracts with customers on its own account, bore the relevant commercial risks, and used the assessee only for sub-contracting work where it lacked capacity or expertise. On these facts, the subsidiary could not be treated as a fixed place PE merely because of corporate association, nor as a service PE because the assessee's personnel did not render services in India through employees or other personnel. The subsidiary also did not qualify as an agency PE, as it had no authority to conclude contracts for the assessee, did not habitually secure orders for it, and acted in the ordinary course of its own business as an independent entity. The alternative reliance on a joint venture theory was rejected on the facts.

Conclusion: The assessee did not have a permanent establishment in India and the income could not be taxed in India on that basis.

Ratio Decidendi: A foreign company's Indian subsidiary is not a permanent establishment unless the factual requirements of fixed place, service, or agency PE under the treaty are independently satisfied; mere close association, subcontracting, or business dependency is insufficient.

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