India: Ruling on Agency PE in case of marketing and distribution activities for group companies

Rajendra Nayak		Aastha Jain

The Mumbai Income Tax Appellate Tribunal (Tribunal) in the case of Varian India Private Ltd. (VIPL) [TS-292-ITAI-2013], recently ruled on the issue of creation of a Dependent Agent Permanent Establishment (Agency PE) on account of marketing and distribution activities carried out by an Indian branch for certain group companies. VIPL, a US company, had an Indian branch (taxpayer), engaged in marketing and distribution of products manufactured by group companies located in the US, Australia and Italy pursuant to a distribution and representation agreement (DRA) with them. As per the DRA, sales in India were made either by the Taxpayer on a principal-to-principal basis by importing goods from the group companies or directly by the group companies as facilitated by the taxpayer by rendering liaison, marketing and post-sale support activities. For undertaking such support activities, taxpayer earned commission income from the group companies. The Tribunal had to adjudicate on whether an agency PE was created in India of the group companies under India's tax treaties with US, Italy and Australia. It was held that the taxpayer would not constitute an agency PE in India as it performed only administrative support functions for the group companies. The taxpayer neither had any authority to conclude contracts or accept orders, nor did it assume any kind of risk on behalf of any of the group companies. Further, the taxpayer did not fulfil the twin cumulative conditions to be treated as a dependent agent under the tax treaties, that is, firstly, agent's activities should be devoted wholly or almost wholly for the enterprise and secondly, the transactions should not be made under the arm's-length conditions. Based on taxpayer's sales data for the past two years, it was observed that taxpayer is not devoted wholly or almost wholly on behalf of any one group company. It was compensated at an arm's-length price and this fact was not challenged by the tax authorities. Further, it was also held that a PE was not created merely because taxpayer was a wholly owned subsidiary of VIPL. In view of the above, an attribution of 10% profit margin by Indian tax authorities to taxpayer on the basis of global account of group companies was invalidated.

Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)

EY

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