Delhi High Court (HC) has confirmed the Income Tax Appellate
Tribunal's decision that various overseas entities of the GE
Group had a fixed place, permanent establishment (PE), and a
dependent agent PE in India.
The entities in question had sold their products to
customers in India on a principal-to-principal basis, and the
title to such products passed to customers outside India.
However, expatriate employees and employees of an Indian entity
participated in the negotiation of contracts (including in
areas relating to warranty, pricing, delivery, etc.). As a
result, an issue arose regarding whether this could trigger a
taxable presence for the overseas entities.
There are several important aspects that are considered in
this decision, specifically with regards to the scope of the
preparatory and auxiliary exclusion, as well as the situations
in which a dependent agency PE can be constituted.
Fixed place permanent establishment
The High Court upheld the factual findings of the Tribunal,
noting that the office space of the overseas entities liaison
office in India was at the disposal of the overseas entities.
This was based on the finding that specific chambers/rooms and
secretarial staff were allotted to GE staff, and were used by
them for their work.
The High Court also concluded that the core sales activity
was conducted from these premises and, therefore, the business
of the overseas entities could be said to have been carried out
from such premises.
More importantly, the High Court rejected the contention of
GE that the activities in India were of a preparatory and
auxiliary character. It noted that considering the highly
specialised and technically customised equipment manufactured
by the GE entities, the activities of identifying and
approaching the customer, communicating available options to
the customer, discussing technical and financial terms, and
price negotiations were core activities. It went on to conclude
that the discharge of vital responsibilities relating to the
finalisation of commercial terms, as well as having a prominent
involvement in the contract finalisation process, would lead to
the overseas entities continuing business in India through its
fixed place of business.
The High Court also rejected GE's contention that since the
expatriate employees and employees of the Indian entity did not
have the authority to conclude contracts, the activities could
not be anything other than preparatory and auxiliary in nature.
It held that the existence of such authority was not relevant
in determining whether the activities were preparatory or
auxiliary in nature.
Agency permanent establishment
The High Court also upheld the finding of the Tribunal that
the activities in India constituted a dependent agent PE for
the overseas entities. In this regard, the court relied on the
Italian decision in Ministry of Finance (Tax Office)
v. Philip Morris (GmbH), Core Suprema di Cassazione
(No. 7682/02 of May 25 2002). The case concluded that
the participation of representatives (or employees) of a
resident company that is in a phase of concluding a contract
between a foreign enterprise and a customer, can fall within
the concept of 'authority to conclude contracts', even in the
absence of a formal power of representation.
Attribution of profits
The High Court also upheld the attribution of profits to the
PE at 3.5% of the total value of supplies made to the customers
Rishi Kapadia (firstname.lastname@example.org) and Rakesh
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