India: Delhi’s High Court maintains that overseas GE entities have a PE in India
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 in India.