TaxTMI 
TaxTMI 
2024 (5) TMI 1417
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....RESS RAIL LOCOMOTIVE INC. CONTD. 31-56 G. TAX AUTHORITY'S RESPONSE 57-65 H. PE-A BROAD OVERVIEW 66-72 I. RESPONDENTS' TAKE ON PE-A RECAP 73-77 J. ANALYSING ARTICLE 5 OF THE INDIA-USA DTAA 78-80 K. THE COURT'S ANALYSIS 81-113 K.1 THE SERVICE PE 82-84 K.2. THE FIXED PLACE PE 85-95 K.3. ARTICLE 5 (3)-PREPARATORY AND AUXILIARY FUNCTIONS 96-110 K.4. ARTICLE 5 (4) AND DAPE 111-113 L. CONCLUDING OBSERVATIONS 114-138 M. OPERATIVE DIRECTIONS 139-140 A. INTRODUCTION 1. These writ petitions impugn notices issued under Section 148 of the Income Tax Act, 1961 [Act] by the first respondent. The details of the individual writ petitions are set out hereinbelow:- Relevant AY Notice issued on W.P.(C).no 2012-13 28.03.2019 12408/2019 2013-14 29.04.2019 12406/2019 2014-15 29.04.2019 12405/2019 2015-16 31.05.2019 12407/2019 2016-17 31.05.2019 12409/2019 2017-18 31.05.2019 12410/2019 2018-19 31.05.2019 12411/2019 2. The first respondent has assumed authority to initiate reassessment proceedings upon finding that the product....
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....ted Enterprise [AE] of the petitioner. The petitioner has relied upon one such order dated 18 October 2016 pertaining to AY 2013-14 and which holds that the subsidiary provides only back office and technical support services to the petitioner. 6. The petitioner asserts that neither the said Transfer Pricing Order nor any other order made by the authorities under the Act have ever found the Indian subsidiary to constitute a PE of the petitioner despite the said entity having been duly assessed for the past 25 years. It is also the case of the petitioner that the products manufactured by the Indian subsidiary are clearly distinct from those manufactured and supplied by it, and consequently it would be found that the core business activities of the petitioner and the Indian subsidiary are completely different. They have in this regard disclosed the following distinct production activities pursued by the two entities:- Petitioner Subsidiary Company i. EMD OEM components available for locomotive, marine and power generation applications. Boards, panels, consoles, desks, cabinets and other bases for a voltage exceeding 1,000V." ii. Freight and Tank Car Parts, Shortline ....
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.... from the employees of PRIPL as well as a copy of all the documents/information collected by the petitioner during the course of those survey proceedings in terms of its letter dated 06 June 2019. 10. On 24 June 2019, the petitioner addressed a letter to the first respondent asserting that its duly allotted PAN was linked to the office of the fourth respondent and consequently questioned the issuance of notices by the first respondent additionally on this score. It was thus contended that the first respondent had wrongly assumed jurisdiction and the notices were thus liable to be withdrawn on this ground alone. On 26 June 2019, and faced with the fact that the petitioner had failed to submit its Return of Income [ROI] in compliance with the notices issued, the first respondent initiated penalty proceedings referable to Section 271F read with Section 274 of the Act. In response to the said notice, the petitioner reiterated its stance that its PAN fell within the jurisdiction of the fourth respondent, and that consequently, both the Section 148 notice as well as the penalty notice issued by the first respondent were without jurisdiction. While responding to the penalty notice, the....
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.... in Delhi by virtue of the location of its registered office which was situate in that jurisdiction and had also been subjected to transfer pricing assessments. 14. Mr. Datar took us through the following conclusions and findings which appear in a Transfer Pricing Order dated 18 October 2016:- "1. Reference u/s 92CA was made by the DCIT, Circle 8 (1), New Delhi, New Delhi for determination of Arm's length price for the international transactions/domestic transaction undertaken by the assessee during the FY 2012-13. In response to notice Mr. Sahil Malhotra, being the authorized representatives appeared periodically. The documentations prescribed under Rule 10D of the Income Tax Rules, 1962 and other details asked for were submitted and placed on record. 2. Introduction EMD Locomotive Technologies Pvt. Ltd. is engaged in provision of support services to EMD Group on which it is remunerated on a cost plus basis. The company provides back office support and technical support services starting from monitoring the Indian market for upcoming tenders and participating in such tender meetings to provide technical support including coordination with regard t....
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.... services to Group Companies. As part of its business operations, the Company also coordinates with Indian Railways for providing technical assistance with regard to the locomotives and spare parts/ components etc. directly purchased by it from EMD Group. In return for these services, the Company is remunerated on a cost plus basis. The nature of the services rendered by EMD India is outlined below: ● Monitor upcoming tenders in the Indian market for locomotives and provide requisite support to EMD Group in preparation of the proposal. ● Attend tender opening meetings with Indian Railways and examine the terms and conditions based on which inputs/comments are provided to EMD Group. ● Coordinate with EMD Group for timely bid submission for tenders in the Indian market. ● Tracking LCs and shipments so as to provide updated information on the status of the consignment to Indian Railways. ● Regularly track the market situation to understand competitor movements and new business opportunities. ● Organise events and seminars and coordinate with industry associations such as CII, FICCI, AMCH....
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....Taxes [CBDT], and which had inter alia delineated the areas over which the second and the fifth respondent could exercise powers of assessment. Our attention was firstly drawn to Serial No. 1 of that Notification and which sets out the areas over which the fifth respondent could exercise the powers otherwise conferred upon it under the Act. Mr. Datar then drew our attention to Serial No. 3 of that Notification, and which spelt out the areas over which the second respondent was empowered to exercise authority and which extended to areas falling within the territorial limits of the States of Uttar Pradesh and Uttarakhand. 18. It is relevant to note that in terms of the arrangement made for entities falling within the ambit of Serial No. 3, the Notification further provided that the said authority would also have the right to assess persons who may be non-residents, including foreign companies having a PE in the territories noted above. In terms of the aforesaid Notification, the Commissioner of Income Tax (International Taxation-3), Delhi, the second respondent herein, issued an order on 15 November 2014 vesting jurisdiction upon the Additional Commissioner of Income Tax [ACIT]/Jo....
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....gs under the Act, only if it had come to conclude that it had a PE within the territorial area assigned to it. It is this foundational link which joins the assumption of jurisdiction by the first respondent and the issue of PE of the petitioner in the State of Uttar Pradesh. The decision of the first respondent on the issue of PE thus emerges as being not only the central point of contestation, but also of significant import since the very foundation of the impugned reassessment action rests on the correctness of the view as taken by the said respondent in that respect. E. THE PE ISSUE-A BRIEF BACKGROUND 22. Since learned counsels for respective sides have addressed elaborate submissions on the concept of Fixed Place PE, Service PE and DAPE, we do not find any justification to go into the issue of PAN migration and the challenge in that respect which was addressed. This, since we would have to necessarily answer the fundamental question of whether a PE could be said to have come into existence within the territorial area over which the first respondent stood empowered to exercise powers conferred by the Act and thus examine whether the Section 148 power was justifiably invoke....
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....nce of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if : (a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities....
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....etendra Pratap Singh: "Question 4- What services are provided by you in your company and what is your role in the company? Answer- I provide Post Tender/ Post agreement services such as taking purchase orders, taking care of delivery of goods and punctuality in the same, providing information regarding purchase orders and modifications in the same to EMD Locomotive Technology Pvt. Ltd. and Electro Locomotive Diesel Inc. USA and providing goods to Diesel Locomotive Work in Benaras within time specified by them. In reference to this, following up on behalf of D.L.W. with companies situated in Noida and USA and vice-versa, providing information regarding any type of Rejection/Modification/Rectification/Correction. Providing follow-ups on payments, etc. roles are played here in Varanasi. xxxx xxxx xxxx Questions 9-During the inquiry of the survey, Purchase order, Bill of lading/OPT (Overseas Transport Project), etc, were found that are related to EMD Locomotive Technology Pvt. Ltd. and Electromotive Diesel Inc USA. Kindly elaborate. Answer-In relation to this, I would like to say that the purchase order whose information regarding their paym....
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....s a subsidiary of the petitioner and the various purchase orders and Bills of Lading collected pertaining to the Indian subsidiary as well as the petitioner herein. These documents were explained by Mr. Jeetendra Pratap Singh, who is asserted to have stated, that purchase orders which carry details of payments in US Dollars [USD]relate to the petitioner while those where payments were expressed in INR concern the Indian subsidiary - PRIPL. The first respondent also relied upon the response of the said employee with respect to emails which were addressed to various individuals and details whereof are found in Question 15. While responding to that query, the employee is asserted to have stated that those emails were concerned with directions for procurement, modification of purchase orders, delivery of goods, refunds, sale and purchase of goods as received by the Indian subsidiary from the petitioner. The employee is also asserted to have stated that the emails so received are also reported to the petitioner from time to time through proper channels. 27. In the course of the survey operations, the first respondent also recorded the statements of Mr. Shivanshu Narendra Kaushik and ....
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....mponent/Locomotive of foreign/global tendered how the same is communicated to you? How you submit your work to the foreign team? Ans. The designwork is allocated by M/s PRL Inc., USA and the same is communicated through e-mail from USA. A release note is provided by e-mail in which the work allocated to me. For every such project a project head is made in USA in M/s PRL Inc. Who co-ordinates such projects and we report to him. All the team members work on common platform/ software which is accessible by all members and team Head as well. The work is automatically submitted on that platform xxxx xxxx xxxx Q14. When did you last work on any Indian Contract/Project? Ans. l have not worked on any Indian project for last 4-5 years. However, at times I have given suggestions to my other colleagues working on Indian projects. Q15. Who does your evaluation/appraisal in respect of the work done by you? Ans. As far as annual appraisal of my work is concerned, the discipline, behavior etc. are appraised by Sh. Anand Chidambram, M. D. in M/s PRIPL but the appraisal of my technical performance is done by Mr. Dave Babnic of M/s PRL Inc., USA.....
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....loyees are reporting. Who are these foreign persons, to which company they are relating? Ans. Sir, These persons are from EMD Inc. USA to whom there employees of EMD India are reporting." 29. On the basis of the aforesaid, the first respondent proceeded to hold that it was evident that the petitioner had a "virtual projection" in India in the form of the wholly owned subsidiary and whose activities could neither be viewed as being "preparatory" nor "auxiliary". It was on the aforesaid basis that the first respondent proceeded to hold that the petitioner had a Fixed Place PE/Service PE/ DAPE. Ultimately and upon taking into consideration the statements as well as the material which was gathered prior to and post the survey which was conducted, the first respondent came to the following basic conclusions:- "III. Brief appraisal of documents found during the survey & statements recorded : a. Office of EMD Locomotive Technologies Pvt. Ltd. is at the disposal of EMD Inc. USA for all its activities in India including sales to DLW (Diesel Locomotive Works), Varanasi of Indian Railways. In fact, during the course of survey u/s. 133A of I.T. Act. 1961 at the of....
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.... work for EMD Inc. USA as under: ✓ Providing tender information-Assistance regarding tenders from Indian Railways. ✓ Tender support-follow up-paper work clearance, ✓ Procurement of Purchase Orders, ✓ Tracking of Sales to Diesel Locomotive Works-Varanasi, ✓ Payments collection and its follow up. ✓ Communication on behalf of EMD Inc. USA with DLW, Varanasi, ✓ Warranty claim and support, etc. f. As per Marketing and Engineering Services Agreement dated 1-1-2011 between EMD Locomotive Technology Pvt. Ltd. India (Service Provider) and Electro Motive Diesel Inc. USA (Service Recipient), listing out various services to be provided by service provider like Marketing Support, Engineering Support, Service Support, Warehousing. Assembly and Sourcing. As per the First Amendment to this agreement warranty service on the sales effected by EMD Inc. USA to DLW of Indian Railways have been assigned. to the Indian entity Co. viz. M/s EMD L.T. P. Ltd. which includes organizing all support activities, logging of warranty claims, performing joint inspections/investigations, etc. As p....
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....ess Rail Locomotive Inc. USA) has virtual projection in India, in the form of M/s EMD Locomotive Technologies Pvt. Ltd (Now known as M/s Progress Rail Innovation Pvt. Ltd.), whose activities are not merely preparatory or auxiliary w.r.t the said Non-Resident Company's business in India especially with Indian Railways. b) The conclusion at 'a' above is in line with ratio decidendi of Hon'ble Supreme Court's judgment dated 24-04-2017 in the case of Formula One World Championship Vs. CIT (IT)-3, Delhi [reported in 394 ITR 80/295 CTR 12/248 Taxman 192 (SC)) and Hon'ble Andhra Pradesh High Court's judgment dated 17-06-1983 in the case of CIT Vs. Vishakhapatnam Port Trust [reported in 114 ITR 146/38 CTR 1/15 Taxman 72 (AP)] c) Therefore, the Non-Resident Company M/s Electro Motive Diesel Inc. USA (now known as M/s Progress Rail Locomotive Inc. USA) has a PE in India (Fixed Place PE/Service PE/Dependent Agent PE) in terms of Article 5 of India-USA DTAA and income attributable to this PE based on the said Non-Resident Co.'s sales in India is taxable in the hands of such PE. d) Reason to believe that income has escaped assessment ne....
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.... are made by the petitioner directly. Learned senior counsel in this regard drew our attention to the various emails which form part of Annexure 8 of a compilation which was tendered in Court during oral submissions and in terms of which quantity and price issues were approved by the petitioner, and thereby establishing that the Indian subsidiary played no role whatsoever in relation to those activities. It was also highlighted by learned senior counsel that the core activities or business of the petitioner are not even carried out in the factory at Noida or in the office at Varanasi, and this, more so, since the products manufactured and supplied by the petitioner and the subsidiary are different. In view of the above, it was Mr. Datar's submission that the view taken by the first respondent on Fixed Place PE is wholly erroneous and untenable. 33. It was Mr. Datar's contention that the argument based on Article 5 (2) (l) (ii) of the DTAA is equally misconceived since it was not even the first respondent's case that the petitioner was discharging a service within India for a "related enterprise". It was asserted that the first respondent has not based the impugned action on any ....
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.... of an enterprise is wholly or partly" carried out. Similarly, in E-Funds IT Solutions Inc., Mr. Datar submitted, the Supreme Court had clearly held that the mere existence of a wholly owned subsidiary in one of the Contracting States would not ipso facto amount to an assumption of a PE having come into existence and which is also evident from a plain reding of Article 5 (6) of the India-USA DTAA. As in E-Funds IT Solutions Inc., Mr. Datar submitted that here too, the various services and functions performed by the Indian subsidiary could have by no stretch of imagination been construed as extending beyond the performance of back office services. 36. Mr. Datar submitted that insofar as interrelated transactions were concerned, those were conducted at arm's length and had also been independently assessed and examined in transfer pricing studies. The petitioner had in this regard also placed reliance upon the observations as appearing in the TPO's report dated 18 October 2016 and relevant parts whereof have been extracted hereinabove. It was Mr. Datar's submission that the services performed by the Indian subsidiary were identical to those which were noticed by the Supreme Court i....
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....propriate Assessing Officer [AO] in the Delhi jurisdiction who alone would have the jurisdiction to initiate reassessment proceedings under Section 148 of the Act. 40. Mr. Datar then drew our attention to an opinion rendered by the Authority for Advanced Ruling in In re., Speciality Magazines P. Ltd 2005 SCC Online AAR-IT 20, and more particularly to the following passages of that decision: "26. ..... The terms "wholly" and "almost wholly" are not technical terms or terms of art. They must receive their ordinary meaning as understood by English speaking people. The word "wholly" means entirely, completely, fully, totally ; "almost wholly" would mean very near to wholly, a little less than whole. In terms of percentage "almost wholly" would mean anything less than 90 per cent. It is shown that though SMPL has other clients, the fact remains that the activities of SMPL for TENL yield 75 per cent, to 80 per cent, of its income and income from other clients is between 22 per cent, to 25 percent., so it cannot be said that the activities of the SMPL are carried out wholly or almost wholly for TENL. It follows that SMPL does not fall in the second part of para. 5 of article 5....
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.... (2007) 292 ITR 416 (SC) Progress Rail Locomotive Inc. Applicable DTAA India-UAE DTAA India-USA DTAA India-USA DTAA Article 5 (3) of DTAA provides that-notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include the maintenance of a fixed place of business solely for the purpose of other activities which have a "preparatory or auxiliary character", for the enterprise (under Article 5 (3)(e) of DTAA). Main business activities of the respective Assessee company Providing remittance services for transfer of monies from the UAE to various places in India. Providing financial advisory services, corporate lending and underwriting Providers of rolling stock and infrastructure solutions and technologies for global rail securities customers. Back office support services, liaison office - held to be activities which have 'preparatory or auxiliary character' - thus, the Indian Subsidiary/Office providing these activities cannot be treated as a "PE" of the foreign company [Article 5 (3) (e)] Ancillary Services provided by the Indian Office / Subsidiary of the respective Assessee company ....
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....collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE. The activities carried on by the liaison office of the respondent in India as permitted by RBI, clearly demonstrate that the respondent must steer away from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only. In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever." 45. Mr. Datar then submitted that the first respondent appears to have proceeded on a wholly incorrect presumption that the existence of a wholly owned subsidiary in one of the Contracting States would invariably result in the creation of a PE. It was submitted that a wholly owned subsidiary, would by virtue of the investments in its capital and in the larger business interest of a group as a whole, always be subject to policy interventions and broad oversight by the holding entity. It was contended that the premise on which the impugned reassessment proceeds is in the teeth of the clarification in this respect which stand....
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.... explicitly stated in the treaty. "A basic-rule PE could not be constituted by a subsidiary for a parent company under German domestic laws." Hence, the provision in the former German treaty with Italy, which allowed PE taxation of subsidiaries, was without significance in Germany." 36.2.3 Policy Considerations A neutral tax system would allow a subsidiary PE to be constituted in all cases where the same conclusion would be reached for unrelated companies. This solution is expressly stated for a subsidiary PE under the agency clause. Consequently, the position of some older pre-OECD authors that a subsidiary can never constitute a PE for the parent has not been sustained. The conventional position of the OECD-based tax-treaty doctrine used to be that a subsidiary PE can only be based on the agency clause. However, the tax treaties aim at allowing the source state to tax business profits with a certain economic allegiance to the country, expressed through the enterprise's PE. This intention must also apply when the parent company's business income is earned by the intermediation of a subsidiary. Thus, from a de lege ferenda point of view, PE taxation of the....
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.... importance of the functionality test regulating a subsidiary PE, Skaar makes the following pertinent observations:- "36.3.3 The Functionality of the Subsidiary PE a) General A PE can only be created by the carrying on of the business activities of the taxpayer as distinguished from other activities. Thus, a parent company can, for example, get a PE in a country if it carries out the business of a subsidiary in the facilities of the subsidiary, and a subsidiary may get a PE if the parent company carries on the business of the subsidiary through its facilities at home. In this respect, it is important to distinguish between the parent company's activities as a shareholder (shareholder activities), and the business activities of the subsidiary or parent company. A parent company's activities abroad as a shareholder in other companies cannot create a PE. Hence, participation in meetings of the Board of Directors and annual shareholders' meetings do not create a PE. However, what if a member of the Board of Directors performs activities for the company that go beyond the activities the directors are supposed to do in their capacity as mem....
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....f the initiatives are carried out by the subsidiary alone. Moreover, there are no reasons why this principle should not apply also to the management performed by individuals. Rather than applying an artificial interpretation of the conditions, for PE," the OECD model treaty's Principal Purposes Test" may be considered if the tax authorities fear that the tax treaties are abused, as probably was the case in Cicero Practice from some national courts, in particular in Spain and Italy," also shows examples of departure from the task to interpret the tax treaties and the tax laws in good faith, and instead attempt to change the law as a response to fundamental changes in business structures." The possibilities created by the combination of electronic commerce (e.g., the website in Dell Spain), contract manufacturing (as in Borax.") and commissionnaire agreements (DSM Nutritional Products and Dell Spain) lead to reactions that reflect discontent with the threshold, which the OECD model treaty and the commentaries have established. As much as the present writer sympathizes with this view de lege ferenda, such a reaction should come from the treaty negotiators and the lawmakers, and no....
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....usion of contracts on behalf of the other company. Neutrality and equity considerations justify de lege ferenda PE taxation in cases where "empty" companies are used to conclude and later pass on contracts to a related foreign enterprise if a PE would otherwise have been constituted. The practical result of a subsidiary PE will be that the company, which takes over the obligations under the contract and performs the work, is subject to PE taxation. The cases discussed in this chapter show de lege lata that a subsidiary PE is only created when the parent company itself would have met the conditions for PE if the transactions had not been performed through a subsidiary. Thus, a completely empty subsidiary with no material significance for the performance of the work does not constitute a subsidiary PE. For example, a parent company's transportation business does not create a PE simply because the contracts are concluded by a subsidiary with an office and passed on to the parent, provided that the parent would not have a PE in the absence of the subsidiary (i.e., the contracts were concluded by the parent directly). Moreover, international practice seems to suggest that a....
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....idiary PE. However, a possible reason for PE taxation is that a PE is constituted through extensive, joint venture-like cooperation between two related (alter ego) companies. Such cooperation may justify PE taxation between unrelated companies under the basic rule and the fact that the companies are related cannot protect then against PE taxation." 51. Mr. Datar then drew our attention to a work titled New Trends in the Definition of Permanent Establishment [New Trends in the Definition of Permanent Establishment, edited by Prof. Gugliemlo Maisto, EC and International Tax Law series, 2017], edited by Professor Guglielmo Maisto and which examines the subsidiary PE question with reference to the position as found in various international jurisdictions. Dealing firstly with the position as understood by authorities in Australia, Mr. Datar drew our attention to Para 10.2.6 which is reproduced hereinbelow:- "10.2.6. Subsidiary companies as PE of the parents (and vice versa) One example as to when a subsidiary company can give rise to a PE is if the subsidiary allows the parent company to operate from its premises such that the primary test in article 5 (1) is satisf....
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.... the recognition of a PE are applicable, i.e. part of the profit realized by the head office should be attributed to the PE and will be taxed in the source state. Moreover, this will also have an impact on the taxation of certain specific types of income that are attributable to the PE, such as passive income (i.e. dividends, interest and royalties) capital gains and other income in the meaning of article 21 of the OECD Model. The taxation of income stemming from employment can also be impacted by the presence of a PE. In case a PE is recognized, it will have to fulfil certain Belgian compliance requirements, such as the annual filing of a non-resident tax return, the with-holding of professional withholding tax on remuneration paid to employees provided that the remuneration is taxable in Belgium and the sincere cooperation with the tax authorities in case of a request for information. 11.2.7. Group of companies and closely related enterprises The DTCs concluded by Belgium typically contain a provision identical to article 5(7) of the OECD Model according to which closely related companies (eg, subsidiaries) are not automatically deemed a PE of the other....
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....contact with the parent. If personnel of the enterprise have free access to the premises and undertake any important activities that cannot be called auxiliary functions, when the subsidiary acts almost like a sales office of the enterprise, and when the subsidiary has and habitually exercises an authority to conclude contracts even if the formal acceptance is done elsewhere. - Where the activities of the foreign company and the Indian subsidiary are intertwined and the Indian entity participates in the economic activities of the foreign company, the activities of the Indian entity are to be analysed to determine whether there is a fixed place PE. - There is also a view that when the subsidiary is merely an alter ego of the parent, being entirely dependent on the parent for its survival, it may result in a virtual projection of the foreign enterprise in India thereby creating a PE in India. - When the enterprise claims to have made direct sales to customers and the subsidiary is claimed to engage purely in after-sales functions, the absence of any expenditure on selling (together with other corroborating factors) has also recently been taken as an indicat....
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....uxiliary character, is deemed not to be a permanent establishment. The wording of this sub-paragraph makes it unnecessary to produce an exhaustive list of exceptions. Furthermore, this sub-paragraph provides a generalised exception to the general definition in paragraph 1 and, when read with that paragraph, provides a more selective test, by which to determine what constitutes a permanent establishment. To a considerable degree it limits that definition and excludes from its rather wide scope a number of forms of business organisations which, although they are carried on through a fixed place of business, should not be treated as permanent establishments. It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a pa- tent or a know-how contract, if such activities have a preparatory or auxiliary character. ....
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....constitute permanent establishments so long as their activities are restricted to the functions which are the prerequisite for assuming that the fixed place of business is not a permanent establishment. This will be the case even if the contracts necessary for establishing and carrying on the business are concluded by those in charge of the places of business themselves. The employees of places of business within the meaning of paragraph 4 who are authorised to conclude such contracts should not be regarded as agents within the meaning of paragraph 5. A case in point would be a research institution the manager of which is authorised to conclude the contracts necessary for maintaining the institution and who exercises this authority within the framework of the functions of the institution. A permanent establishment, however, exists if the fixed place of business exercising any of the functions listed in paragraph 4 were to exercise them not only on behalf of the enterprise to which it belongs but also on behalf of other enterprises. If, for instance, an advertising agency maintained by an enterprise were also to engage in advertising for other enterprises, it would be regarded as a ....
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.... to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. Therefore, paragraph 5 proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them. In such a case the person has sufficient authority to bind the enterprise's participation in the business activity in the State concerned. The use of the term "permanent establishment" in this context presupposes, of course, that that person makes use of this authority repeatedly and not merely in isolated cases. 5C.32.1 Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to....
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.... must "habitually" exercise an authority to conclude contracts reflects the underlying principle in Article 5 that the presence which an enterprise maintains in a Contracting State should be more than merely transitory if the enterprise is to be regarded as maintaining a permanent establish- ment, and thus a taxable presence, in that State. The extent and frequency of activity necessary to conclude that the agent is "habitually exercising" contracting authority will depend on the nature of the contracts and the business of the principal. It is not possible to lay down a precise frequency test. Nonetheless, the same sorts of factors considered in paragraph 6 would be relevant in making that determination." G. TAX AUTHORITY'S RESPONSE 57. Appearing for the respondents and while controverting the submissions of Mr. Datar, Mr. Agarwal addressed the following submissions. Mr. Agarwal first relied upon the statements of the employees of PRIPL and more specifically the statement of Mr. Shivanshu Kaushik, DGM, PRIPL, Noida and drew our attention to the following statements made by Mr. Kaushik: "Q9. From the job profile which you explained it seems that if no new tender is fl....
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.... & Anr (2017) 15 SCC 602. 59. Mr. Agarwal then submitted that PRIPL constituted a Service PE of the petitioner. In support of the aforesaid proposition, learned counsel first relied upon the response to Question No. 15 by Mr. Kaushik, where it was stated that the appraisal of his technical performance was done by employees of the petitioner and not the Indian subsidiary - PRIPL. He then relied upon emails obtained from the Noida office of PRIPL which contained information regarding visits to India by foreign expatriates, minute to minute programs of the said expatriates during their visit to India and other related information. Mr. Agarwal highlighted some of those emails and whose contents were, according to him, suggestive of foreign expatriates undertaking visits to India to overview PRIPL's operations, devise short term and long term plans for India, diversify business and to engage in discussion aiding the formulation of future business strategies. Relying upon these emails, Mr. Agarwal contended that the petitioner was furnishing services through its employees for the benefit of PRIPL and thus constituting a Service PE under Article 5 (2) (l) (ii) of the India-USA DTAA. ....
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....ty to conclude contracts" on behalf of the petitioner. 63. Mr. Agarwal also contended that the activities of PRIPL do not fall within the negative list as specified in Article 5 (3) of the India-USA DTAA and that by no stretch could the activities of PRIPL be considered to be of an "auxiliary" or a "preparatory" character. Mr. Agarwal also sought to distinguish the decisions of the Supreme Court in E-Funds IT Solutions Inc. and Samsung Heavy Industries Limited, which were cited by Mr. Datar in support of his argument that the activities of PRIPL constituted an "auxiliary" or "preparatory" function. As per Mr. Agarwal, E-Funds IT Solutions Inc. was a case where the Indian subsidiary was performing only back office or support service functions in order to enable the foreign company to render services to its clients abroad. That, according to learned counsel is clearly distinct from the facts which have been found by the AO in the present case. 64. Likewise, Mr. Agarwal submitted that the decision in Samsung Heavy Industries Limited was also a case where the Indian subsidiary's project office was functioning merely as a liaison office performing back office functions as opposed ....
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....ognised principles governing the question of a PE, he had also placed for our consideration various academic texts and treatises to enable us to obtain a broader perspective on the concept of a PE. We, however, deem it apposite to additionally notice some of the principles which stand enunciated in Klaus Vogel's seminal work on Double Taxation Conventions [Klaus Vogel on Double Taxation Conventions, Edited by Ekkehart Reimer and Alexander Rust, Wolters Kluwer, 5th edition, 2022]. While explaining the "control" test which would be determinative for the purposes of acknowledging the existence of a place of business under the sufficient command of an entity situate in one of the Contracting States, the learned author observes as under:- "110. For all types of business activities, control can be based on legal titles or factual circumstances. Legal control might be derived from ownership or any other right, including equitable rights under common law if the respective right conveys factual mastery of a POB to the taxpayer enterprise. Such rights are perfect where the taxpayer enterprise is the legal proprietor of the POB. Likewise, the position of the taxpayer as a tenant, a l....
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....del Conventions contained the condition that the fixed POR should have a productive character, this requirement was never adopted by the OECD Model (see no. 35 OECD MC Comm. On Article 5). None of the current MCs provide a specific productivity test. It follows that POBs may constitute a PE even if they perform activities which mainly or exclusively expenditures to show for. 137. Likewise, the 'carrying-on' requirement does not imply an activity in the sense of an active and visible work. It includes even stand-by services and omissions. This gains significant relevance where the omission is profitable (e.g., in the case of a POB earning money in the source State simply by fulfilling, for whichever period of time, a non-competition agreement relating to the territory of that State). 138. However, a diffuse passivity which equals a (temporal or lasting) suspension of the activities which the POB has been designed for may indicate that the POB is not 'permanent'. For details, see supra m.no.87 et seq. 139. Thirdly, the phrase 'through which' indicates that the taxpayer makes use of the POB in that he employs it is an instrument (equalling or resembl....
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....h' since 2003. The Commentary holds the view that the requirement of a functional integration is met as soon as the taxpayer exercises the business in a fixed POB which is at his disposal (no. 20 OECD MC Comm. on Article 5 (added on 28 January 2003)). This is the reason for the characterization of the famous painter example (i.e., the fictitious case of a painter who, for two years, spends three days a week in the large office building of its main client) as a service PE. In substance, the view of the OECD MC Comm. limits the meaning of 'through' to the first two instead of all three semantic aspects required by Article 5 (1) OECD MC (supra m.no. 135 et seq. and 139 et seq.)." 69. Proceeding further to deal with the concepts of "preparatory" and "auxiliary" services and which are intended to remove a place of business which may otherwise fall within the meaning of a PE, and which phraseology is mirrored in Article 5 (3)(e) of the India-USA DTAA, Klaus Vogel's work has the following instructive passages:- "59. [Determination of the activity's character] It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those whi....
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....to determine whether the collection of information of information goes beyond the preparatory or auxiliary threshold. Where, for example, an investment fund sets up an office in a State solely to collect information on possible investment opportunities in that State, the collecting of information through that office will be a preparatory activity. The same conclusion would be reached in the case of an insurance enterprise that sets up an office solely for the collection of information, such as statistics, on risks in a particular market and in the case of a newspaper bureau set up in a State solely to collect information on possible news stories without engaging in any advertising activities: in both cases, the collecting of information will be a preparatory activity." 70. Speaking in greater detail on the aspect of "preparatory" and "auxiliary" functions, the author observes:- "303. Already before the 2017 Update to the OECD MC, all of the activities listed in Article 5 (4) (a) to (f) OECD and UN MC had to be preparatory or auxiliary (infra m.mo. 304 et seq.). This followed from the use of the word 'other' in Article 5 (4) (e) UN MC. This word relates not only to the s....
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.... shared by no. 60 OECD MC Comm. on Article 5 as well as by most authors. 307. It seems to your author, however, that the strict and exclusive application of relative standards would not do justice to cases where an enterprise of type (1) above (supram.no. 283) is so large that POBs which, from an absolute perspective, are respectable entities with valuable assets, a considerable number of employees and fully- fledged bureaucratic and administrative facilities of their own, just seem to be small, preparatory or auxiliary from the perspective of the company's headquarters. If they are still the biggest employer in a given municipality, it is hardly justified from the viewpoint of fiscal equivalence to exempt such POBs under Article 5 (4) OECD and UN MC. 308. It follows that a combined approach is most appropriate. While relative standards apply at the outset (supra m.no. 304), absolute standards require a second filter: -The activities of a POB qualify as being 'of a preparatory or auxiliary character', as compared to the overall activities of the enterprise if they have not more than a marginal relevance within the enterprise's overall business....
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....tracts and the business of the principal. It is not possible to lay down a precise frequency test. Nonetheless, the same sorts of factors considered in paragraph 6 would be relevant in making that determination." 72. Of equal significance are the following principles which are set out by the author while seeking to emphasize the necessity of it being found that the subsidiary or asserted PE carries on activities which are recurrent in nature:- "91. Within the permanence test, a crucial problem arises wherever the taxpayer enterprise does not perform its activities continuously, but activities are performed with significant interruptions (as opposed to those described supra m.no. 87 et seq.) or in multiple tranches. Where none of these activities of a recurrent nature meets the requirement of 'permanence' in itself, a PE may still exist if the single activity forms part of one comprehensive project or one ongoing homogeneous business. 92. The standards are stricter than under Article 5 (5) OECD and UN MC, however. While an agent qualifies as a PE as soon as he exercises his authority to conclude contracts 'habitually' ('habituellement"), a POB consti....
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....n northern Sweden. The activities in Sweden lasted only for three or four month search year with alternating employees. The Kammarrätten ruled that the company had fixed POB in Sweden although it was not present in Sweden for more than six months, given that the company was testing its software in Sweden for several years at the same place. Quite far-fetched, yet again not unjustifiable is the Formula One (F1) judgement of the Indian High Court of 30 November 2016 where the Court acknowledged an Indian PE of a UK resident company that had access to an Indian company's premises for up to six weeks during the F1 Championship season each year for a five year period. The UK Company entered into two contracts giving the Indian Company rights to host, stage and promote the F1 Grand Prix of India. 96. Not every recurring activity qualifies as a permanent activity. The longer it takes for the enterprise to fulfil the 183-day requirement, the less convincing is the acknowledgment of such recurring activities as 'permanent'. 97. Examples where a PE has correctly been denied include: - a Norwegian case concerning fifty stays within 600 days divided in different....
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....the activities discharged by the Indian subsidiary could not be said to be "preparatory" or of an "auxiliary" character. 76. The first respondent also highlights the statement of Mr. Jeetendra Pratap Singh, who is asserted to have stated that the office to which he was attached also worked for the petitioner. He is also asserted to have stated that all decisions relating to pricing of goods intended to be supplied to DLW, Varanasi by the petitioner was being controlled by the Indian subsidiary. The first respondent also bore in consideration the visits by senior officers of the petitioner to India during the period in question. On the basis of the aforesaid, it ultimately came to conclude that it was evident that the premises of the Indian subsidiary at Noida constituted a "virtual projection" of the petitioner and that since the activities and functions discharged by that entity could not be said to be confined to "preparatory" or "auxiliary" services, a PE came into existence and consequently the income earned and generated by the Indian subsidiary was liable to tax. 77. Having noticed the principal grounds which weighed upon the first respondent to initiate the reassessmen....
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....s who while situated in one of the Contracting States are engaged in "habitually" securing orders "wholly or almost wholly" for the foreign enterprise. K. THE COURT'S ANALYSIS 81. Having broadly set out the construct of Article 5 and the three categories of PEs' which are envisaged therein, this would be an appropriate juncture to commence the evaluation of the conclusions recorded by the first respondent. As we read the reasons recorded for initiating action under Sections 147/148 of the Act, it becomes manifest that the first respondent has sought to place the petitioner in all three conceivable silos of PEs', namely, a Fixed Place PE, Service PE and DAPE. K.1. THE SERVICE PE 82. However, and insofar as the asserted stand of the first respondent of the Indian establishment constituting a Service PE is concerned, suffice it to state that the same is thoroughly misconceived and untenable as is manifestly evident from a plain reading of Article 5 (2) (l) of the India-USA DTAA. As we had noticed hereinabove, the same is concerned with situations where a foreign enterprise performs or provides services to a "related enterprise" in the other State. The respondent nowhere as....
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....titioner to India were at best liable to be recognised as an extension of the right of the holding company to oversee India operations and exercise broad managerial oversight. These are, as some authors have chosen to describe, "normal management contribution". Therefore, and in light of the aforesaid discussion, we find that the argument addressed on Article 5 (2) (l) of the DTAA is wholly misconceived and untenable. K.2. THE FIXED PLACE PE 85. That leads us to examine the correctness of the opinion as formed with respect to the Noida factory and the Varanasi office constituting a Fixed Place PE. Decades before global commerce attained the degree of complexity which attaches to it today, the Andhra Pradesh High Court in Commissioner of Income Tax, Andhra Pradesh vs. Vishakapatnam Port Trust 1983 SCC Online AP 287, and which decision constitutes the locus classicus on the subject, explained the concept of a "permanent establishment" as postulating a substantial element of presence of a foreign enterprise in another country. The presence, as Jagannadha Rao, J. explained, had to additionally meet the test of an enduring and permanent nature. It was this seminal decision which p....
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....e. The place would be treated as "at the disposal" of the enterprise when the enterprise has right to use the said place and has control thereupon. xxxx xxxx xxxx 38. Taking cue from the word "through" in the article, Vogel has also emphasised that the place of business qualifies only if the place is "at the disposal" of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, "disposal" is the power (or a certain fraction thereof) to use the place of business directly.... 39. OECD commentary on Model Tax Convention mentions that a general definition of the term "PE" brings out its essential characteristics i.e. a distinct "situs", a "fixed place of business". This definition, therefore, contains the following conditions: (i) the existence of a "place of business" i.e. a facility such as premises or, in certain ....
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....r hand, excludes certain places which would not be treated as PE i.e. what is mentioned in clauses (a) to (f) as the "negative list". A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Article 5 (3), which would not be PEs. Otherwise, sub- article (2) uses the word "include" which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (a) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out. xxxx xxxx xxxx 85. We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case [CIT v. Visakhapatnam Port Trust, 1983 SCC OnLine AP 287 : (1983) 144 ITR 146] fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Champions....
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....rinciples governing Fixed Place PE were again spelt out and enunciated by the Supreme Court in Morgan Stanley & Co. Inc and Samsung Heavy Industries Company Limited. In Morgan Stanley & Co. Inc, and where the following pertinent observations came to be rendered: "8. With globalisation, many economic activities spread over to several tax jurisdictions. This is where the concept of PE becomes important under Article 5 (1). There exists a PE if there is a fixed place through which the business of an enterprise, which is multinational enterprise (MNE), is wholly or partly carried on. In the present case MSCo is a multinational entity. As stated above it has outsourced some of its activities to MSAS in India. A general definition of PE in the first part of Article 5 (1) postulates the existence of a fixed place of business whereas the second part of Article 5 (1) postulates that the business of MNE is carried out in India through such fixed place. One of the questions which we are called upon to decide is whether the activities to be undertaken by MSAS consist of back office operations of MSCo and if so whether such operations would fall within the ambit of the expression "the ....
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.... under Article 5 (2) (l) and agency PE under Article 5 (4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents can be brought within any of the sub-clauses of Article 5." 25. Dealing with "support services" rendered by an Indian company to American companies, it was held that the outsourcing of such services to India would not amount to a fixed place permanent establishment under Article 5 of the aforesaid treaty, as follows : (E- Funds IT Solution Inc. case [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294] , SCC p. 320, para 22) "22. This report would show that 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 as....
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....by the first respondent in this respect. It is pertinent to note that the impugned notices and the reasons set out for initiating action under Sections 147/148 nowhere allude to a particular space or a part of the premises situated in Noida or Varanasi having been placed under the exclusive or significant "control" or "disposal" of the petitioner. The first respondent fails to rest its prima facie opinion with respect to Fixed Place PE on any part of the Noida or Varanasi premises which may have been set apart or exclusively placed in and under the "control" of the petitioner for use of its business activities and which may have tended to indicate that the space was made available for the use of the petitioner and from where it was conducting its business activities. It would have had to be shown that the "control" of that space answered the test of considerable extent. We recall Vogel describing this particular genre of a PE as being akin to an "instrument (equalling or resembling an operating asset) for his entrepreneurial activity". The concept of "virtual projection" is concerned with a functional integration between the two units and which would mean an establishment which has....
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....vely, would have been sufficient to dispel any presumption of the petitioner conducting its business activity from a permanent premises situate in India. We are consequently of the firm opinion that the assumption of a Fixed Place PE is misconceived and untenable. K.3. ARTICLE 5 (3)- PREPARATORY AND AUXILIARY FUNCTIONS 96. We then proceed to test the correctness of the prima facie conclusions arrived at by the first respondent on the anvil of Article 5 (3) of the India-USA DTAA. As was noticed hereinabove, Article 5 (3) excludes PEs' which may otherwise fall within the ambit of Article 5 (1) or Article 5 (2), if it were found that the said PE were engaged in the discharge of functions enumerated therein. While and undisputedly sub- clauses (a), (b) and (c) of Article 5 (3) are not even invoked, even if we were to examine the correctness of the view taken by the first respondent based on sub-clauses (d) and (e), we find ourselves unable to sustain the impugned notices and the reasons set out for initiating action under Sections 147/148, basis which the impugned notices were issued. 97. In terms of Article 5 (3)(d), if a PE were to be engaged solely for the purposes of purch....
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....rtake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case Article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5 (1) is not attracted. xxxx xxxx xxxx 14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5 (3). Under Article 5 (3) (e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5 (3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5 (1) or under Article 5 (2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Artic....
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.... are developed by e-Funds US. Software writing and conceptualisation of ideas were done by e-Funds US. All networks and infrastructure for this category of services is owned by e-Funds US only. Connex was developed by a company acquired by e-Funds US. e-Funds US's associate company in United Kingdom has developed and owns the Architect software which is middleware used primarily by financial institutions in Europe (there is one customer in Chicago). This software runs on IBM and Tandem computing platforms. All of them were located outside India. In accordance with the terms of the contract with government agencies, e-Funds US is responsible for management, support and control of the electronic payment band distribution of cash benefits to program participants through its ATM and point of sale network. Services provided by e-Funds India: e-Funds India provided testing, bug fixing and other related software development support services to e-Funds US for various software/software based solutions developed by e-Funds US. Such services are required by e-Funds US in the course of development of software/software based solutions and their use in providing services to....
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....xx xxxx Services provided by e-Funds US: e-Funds US was responsible for Customer Interface and customisation of products and services as per the dictates of the customer. Agreement/Contracts with the customers were entered into by e- Funds US. All risks and responsibilities for performance of the contracts at all times were of e-Funds US only. Services provided by e-Funds India: e-Funds US subcontracted part of its responsibilities under professional services contract with some of its customers to e-Funds India which involve the following: (i) Data Processing Services including making outbound calls to collate data; (ii) Making soft outbound calls to customers of e-Funds US clients to follow up payment; and (iii) Responding to inbound calls from customers from dealers/customers of telecom services providers (who are customers of e-Funds US), to check on the status of applications made for new connections, change in billing plans, etc. Note: Logica Global, an independent company, had received an order from the Reserve Bank of India for development and implementation of certain software. A part of this work was subcontracted to e-....
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.... remittance of funds to the beneficiaries in India by the NRI remitters. These are combination of virtual and physical activities unlike the virtual activity of funds being remitted by telegraphic transfer through banking channels. As regards the latter, it is not the case of the Department that the same would be covered and amenable to tax liability by virtue of deeming provision in the 1961 Act. 31. While answering the question as to whether the activity in question can be termed as other than that "of preparatory or auxiliary character", we need to keep in mind the limited permission given by RBI to the respondent under Section 29 (1) (a) of the 1973 Act, on 24- 9-1996. From Para 2 of the stated permission, it is evident that RBI had agreed for establishing a liaison office of the respondent at Cochin, initially for a period of three years to enable the respondent to: (i) respond quickly and economically to enquiries from correspondent banks with regard to suspected fraudulent drafts; (ii) undertake reconciliation of bank accounts held in India; (iii) act as a communication centre receiving computer (via modem) advices of mail transfer T.T. st....
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....the liaison office in India in that regard. To put it differently, no income as specified in Section 2(24) of the 1961 Act is earned by the liaison office in India and more so because, the liaison office is not a PE in terms of Article 5 of DTAA (as it is only carrying on activity of a preparatory or auxiliary character). The concomitant is - no tax can be levied or collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE. The activities carried on by the liaison office of the respondent in India as permitted by RBI, clearly demonstrate that the respondent must steer away from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only. In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever." 101. The aspect of whether an Indian establishment was performing functions of a "preparatory" or an "auxiliary" character was considered by this Court in National Petroleum Construction Co. vs. Director of Income-tax (International Taxation) 2016 SCC Online De....
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.... that the activities undertaken by the Indian subsidiary clearly do not appear to travel beyond being "preparatory" or "auxiliary". It is pertinent to note that both entities do not appear to have been established with a commonality of general purpose. The expression "preparatory" has been understood to mean work which is undertaken in contemplation of the essential and significant part of the principal activity of an entity. The principal or for that matter the essential activity of the petitioner is the manufacture and production of goods needed by railroad companies. The principal activity is concerned with the core business activity of the petitioner. That has clearly not been shown to have been undertaken at the Noida premises. Of equal significance are the observations appearing in National Petroleum, and where the Court had held that while activities undertaken by an entity which is asserted to be a "permanent establishment" may contribute to the productivity of the foreign enterprise, but if those functions be remote from the actual realisation of profits, the tests of a PE would not be satisfied. 103. Although, we have on an independent analysis found that the Noida and....
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....t business activity of the petitioner and of the Indian subsidiary, the same would clearly not take the case of the respondents any further. Regard must be had to the fact that the following up of purchase orders or gathering information with respect to tenders is work which is clearly of an "auxiliary" or "preparatory" character or concerned with the supply or collection of information. The follow up functions, though not asserted to have been discharged with sufficient repetition or recurrence, would fall more in the ken of an "auxiliary" function as opposed to a core business function. 107. The officer concerned was also asked to disclose details with respect to functional heads and the reporting mechanism of personnel. The employee significantly states that reporting to foreign personnel is essentially "to ensure compliance with global best practices of group companies". He further stated that performance evaluation is undertaken by functional heads present in India and insofar as it relates to employees of the Indian subsidiary. The appraisal of functional heads was stated to be a function discharged by the Indian Managing Director, the HR Department of the Indian subsidiar....
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....rly failed to appreciate that a collaborative team comprising of Indian and foreign employees would really not be indicative or evidence of the Noida or Varanasi premises having been virtually placed fully at the "disposal" of the petitioner. To meet that test, it would have to be found on facts that the Indian establishment was a mere conduit created for the business interests of the petitioner. K.4. ARTICLE 5 (4) AND DAPE 111. It is pertinent to recall that in order to fall within the scope of Article 5 (4), it was imperative for the respondents to have found that the Indian subsidiary not only stood conferred with the "authority to conclude contracts" but also that it was in fact "habitually" engaged in acting in discharge of that authority. The issue of a habitual or recurrent exercise of authority does not arise at all since we have already found that an "authority to conclude contracts" never stood conferred. Suffice it to observe that there is not an iota of evidence which may have even remotely justified Article 5 (4) (a) being invoked. 112. Similar is the position which emerges when the case as set up against the petitioner is examined on the anvil of Article 5 (4....
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....statements which have been heavily relied upon by the respondents, it becomes apparent that the view as taken is rendered wholly untenable and proceeds on various assumptions which cannot possibly be countenanced. Regard must also be had to the fact that the respondents do not allege that the products being supplied by the petitioner to DLW or other arms of the Indian Railways were being manufactured in India and through the Indian subsidiary. This is a factor which weighs heavily against the respondents. 116. Insofar as the issues emanating from the MES Agreement including the General Services Agreement dated 01 January 2011 which has been taken into consideration, those and issues arising therefrom would have to be necessarily evaluated bearing in mind the significant observations which appear in the TPO's order, which not only speaks of the Noida premises providing back office support and technical support services, but also takes into consideration the Indian subsidiary being duly remunerated for those services on a cost plus basis. Even if one were to take into consideration the nature of services which were rendered by the Indian subsidiary under the aforesaid agreements, ....
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....s we communicate on behalf of EMD USA with them. -Information Technology Services, etc." The aforesaid response would also establish that the Indian subsidiary was undertaking business activities independently and in its own right with DLW, Varanasi. This was therefore not a case where the subsidiary stood created solely for the purposes of undertaking activities and discharging functions concerned solely with the core business activity of the petitioner. 119. While taking note of the disclosures made by the Director- Finance, the first respondent chronicled the work undertaken by the Indian subsidiary for and on behalf of the petitioner by observing as follows: - III. Brief appraisal of documents found during the survey & statements recorded: xxxx xxxx xxxx e. Salient points from the statement of Mr. Phaneendra Kumar Potnuru, Finance Director of M/s. EMD Locomotive Technology Pvt. Ltd., Noida are: • Products of EMD Inc. USA are Locomotive components, Power assembly, Turbo charger, Cylinder head, Liner, Piston rings, Gas kits, Fuel Motor Pumps, Injectors, etc., 95% of which are to M/s Diesel Locomotive Works, Varanasi and rest 5% are to other In....
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.... that the appellant(s) has permanent establishment in India, the notice cannot be sustained once arm's length price procedure has been followed. Accordingly, the impugned order(s) is set aside and the appeals are allowed." 122. It may however be clarified that the above is noticed only as an aside since our conclusions on the question of PE have been rendered uninfluenced by the order of the TPO placed before us and which pertained to AY 2013-14 only. 123. More importantly, we note that the first respondent has utterly failed to bear in consideration the aspects pertaining to a subsidiary PE, and which was elaborately canvassed for our consideration by Mr. Datar. One cannot possibly overlook or ignore the significant provisions which stand incorporated in Article 5 (6) and which forbids us from presuming the existence of a PE, merely because an entity residing in a Contracting State is controlled by an entity situate in the other Contracting State. This was also not a case where the respondents had found that the Indian subsidiary was not engaged in any business activity of its own and was acting merely for the purposes of advancing the business and economic interests of the ....
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....ritative texts on the subject speak of a Fixed Place PE coming into existence where a space or a part of a facility stand duly earmarked for the carrying on of the business of an enterprise. Viewed in light of the above, it becomes manifest that the assumption of a Fixed Place PE being existing is wholly perverse. We also bear in mind the undisputed fact that the Indian subsidiary was not undertaking any manufacturing activity of the petitioner. It is equally significant to note the absence of any assertion on the part of the respondents that any space or part of the Indian establishment had been exclusively set apart or earmarked for the use of the petitioner. The view as expressed in this respect thus also fails to meet the "at the disposal" test as enunciated. 127. It was also not the case of the respondents that the entire complement of staff of the Indian subsidiary work under the administrative control of the petitioner. In fact, the evidence which has been taken note of would establish to the contrary. This, since administrative oversight, appraisal and all other HR related functions in respect of most of the Indian employees was being regulated by the Indian subsidiary. ....
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.... meet the location PE test comprised in Article 5 (1) & (2). The relevant extracts of the judgment in E-Funds IT Solutions Inc., as rendered by this Court is set out hereinbelow: "52. The assessing officer, Commissioner (Appeals) and the Tribunal have primarily relied upon the close association between e- Fund India and the two assessee and applied functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business. This is not a proper and appropriate test to determine location PE. The fixed place of business PE test is different. Therefore, the fact that e-Fund India provides various services to the assessee and was dependent for its earning upon the two assessees is not the relevant test to determine and decide location PE. The allegation that e-Fund India did not bear sufficient risk is irrelevant when deciding whether location PE exists. The fact that e-Fund India was reimbursed the cost of the call centre operations plus 16% basis or the basis of margin fixation was not known, is not relevant for determining location or fixed place PE. Similarly what were the direct or indirect costs and corporate allocatio....
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....any credence to the stand taken by the respondents. A collaboration between the constituents of the independently employed industrial engineers or designers has firstly not been established to be in connection with an India project. The respondents had essentially borne in consideration the collaborative activities undertaken by the Indian design team for contracts and tenders pertaining to Congo and other African nations as well as Bangladesh. That collaboration was thus not even concerned with any income that could be said to have arisen or accrued in India. Those activities in any case would not give rise to any income being earned in India. 133. Even if one were to test the conclusions arrived at by the respondents on the basis of the response proffered to Question No. 11 by Mr. Shivanshu Kaushik, the conclusion would remain the same. Question No. 11 which was posted to Mr. Kaushik is extracted hereinbelow: "Q11. Who allocate you the work for design of the component/Locomotive of foreign/global tendered how the same is communicated to you? How you submit your work to the foreign team? Ans. The design-work is allocated by M/s PRL Inc., USA and the same is co....
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....nd stipulations contained therein being satisfied. This, since it is not the case of the respondents that the Indian entity had been authorized to affix that seal on any document or contract. This, quite apart from there being no material that the seal was in fact affixed on any contract or agreement to which the petitioner was a party. The reasons recorded by the first respondent in support of the proposed action under Sections 147/148, also does not refer to any contract that the petitioner may have entered into with the Indian Railways, and which may have been executed for and on its behalf by the Indian subsidiary. The conclusions recorded on this score thus clearly appear to proceed on surmises and conjecture. 136. Even clause (c) of Article 5 (4) would not stand attracted since undisputedly the Indian subsidiary had independent transactions with DLW and other Indian Railway entities. It was thus not a mere arm or an extension of the petitioner established to secure orders on its behalf and that too "wholly or almost wholly" for it. 137. Accordingly, and for all the aforesaid reasons, we are of the considered opinion that the opinion as formed by the first respondent on ....