Salary reimbursement and permanent establishment tests failed where deputed employee worked for the Indian entity and treaty conditions were unmet.

Salary reimbursement for a deputed employee on a cost-to-cost basis, with the employee working under the control and supervision of the Indian entity, was treated as administrative reimbursement without income element and not as fee for technical services; service permanent establishment was not established on the facts. The Indian marketing arrangements also did not satisfy treaty tests for dependent agent permanent establishment or fixed place permanent establishment, because the Indian entities were not shown to habitually conclude contracts, maintain stock for delivery, or secure orders for the assessee. In the absence of a permanent establishment, no business income could be attributed in India.

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Issues: (i) Whether salary reimbursement paid in respect of the deputed employee was taxable in the assessee's hands as fee for technical services and whether a service permanent establishment existed in India; (ii) Whether the Indian marketing arrangements created a dependent agent permanent establishment or fixed place permanent establishment, warranting attribution of business income.

Issue (i): Whether salary reimbursement paid in respect of the deputed employee was taxable in the assessee's hands as fee for technical services and whether a service permanent establishment existed in India.

Analysis: The deputation agreement placed the employee under the control, direction and supervision of the Indian entity, released the foreign company from lien and other employment obligations, and showed that salary was paid only for administrative convenience and reimbursed on a cost-to-cost basis. The evidences, including the employee's role in the Indian entity's functioning, supported the finding that he worked for the Indian entity and not for the foreign company. Since the reimbursement contained no income element, and the technical services contention also failed, the same amount could not be taxed again as fee for technical services. The existence of service permanent establishment was not established on the facts.

Conclusion: The issue is decided in favour of the assessee, and the salary reimbursement was not taxable as fee for technical services.

Issue (ii): Whether the Indian marketing arrangements created a dependent agent permanent establishment or fixed place permanent establishment, warranting attribution of business income.

Analysis: The conditions for dependent agent permanent establishment under the treaty were not satisfied, as there was no showing that the Indian entities habitually concluded contracts, maintained stock for delivery, or secured orders wholly or almost wholly for the assessee. The marketing activities were carried out for the Indian operating entity and its franchisees, not on behalf of the assessee, and no independent basis was shown for attributing their activities to a permanent establishment of the assessee in India. In the absence of a permanent establishment, no business income could be attributed. The fixed place permanent establishment allegation also failed.

Conclusion: The issue is decided in favour of the assessee, and no dependent agent permanent establishment or fixed place permanent establishment was established.

Final Conclusion: The Revenue failed to establish taxable presence or attributable business profits in India on the facts found, and the additions were not sustained.

Ratio Decidendi: A reimbursement of salary for a deputed employee, where the employee functions under the control of the Indian entity and the payment is on a cost-to-cost basis without income element, does not constitute fee for technical services; and a permanent establishment cannot be inferred unless the treaty conditions for taxable presence are affirmatively satisfied.

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