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| DATE: | June 9, 2012 (Date of publication) |
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| Click here to download the judgement (aramex_subsidiary_PE.pdf) |
A subsidiary created for Indian business is a PE of the foreign parent
The applicant, a Singapore company, entered into an agreement with an Indian group subsidiary company for the performance of shipment transport services within & outside India. The agreement was on a principal to principal basis. The applicant claimed that as it had no office, equipment, employee or agent in India and did not carry out operations in India, it did not have a PE in India and no part of the receipts from outbound and inbound consignments was taxable in India. HELD by the AAR:
(i) A “permanent establishment” is something which enables a non-resident to carry on a part of its whole business in a particular country. The Aramex group could not have done business in India without a presence in India. This presence in India can be achieved through an independent entity or through a subsidiary. If the entity is an independent & uncontrolled entity, then there is no PE if the requirements in Article 5(2) of the DTAC are not satisfied. However, if a 100% subsidiary is created for the purpose of attending to the business of the group, the subsidiary must be taken to be a PE of the group in India applying common sense.
(ii) As the subsidiary has a fixed place of business in India and the business of the applicant is carried on through it, the definition in Article 5(1) is satisfied. The subsidiary is also a PE under Article 5(8) because it habitually secures orders in India wholly for the Aramex group and concludes contracts for the group. The exception in Article 5(10) that the fact that a subsidiary carries on business shall not of itself constitute that company a PE of the foreign company does not apply because it is not a case of the subsidiary carrying on “its business” in India but it is a case of the entire group carrying on business in India through the subsidiary. Also, the fact that the agreement refers to the subsidiary as “independent” and “non-exclusive” is not relevant because it is a mere camouflage to screen the fact that the subsidiary is really a PE of the applicant’s group in India.
This is a very unsettling ruling, to say the least. The AAR has decided that the Indian subsidiary constituted a PE merely because (1) The Indian company was wholly owned by the Group (2) the Group’s Indian operations were being carried out by the subsidiary. This, for the AAR, was sufficient to declare that there was indeed a fixed place PE in India.
There was no discussion on what the Fixed Place Rule in Article 5(1) actually means; nor did the AAR delve into the factual matrix – whether the Indian company’s premises were being used by a non-resident, whether there was an agency relationship etc. OECD commentary and substantial jurisprudence on the topic find no mention in the ruling at all.
Instead, applying ‘common sense’ the AAR observed “But when that business is got done, not through such an agent, but through a subsidiary created, a wholly owned subsidiary at that, is it not possible, to postulate that the subsidiary entity would be a permanent establishment of the group‟? Common sense says, that it would be. After all, a permanent establishment is defined to be a permanent place of business. Which is the permanent establishment of Aramex group in India in this case? It is clearly the location of its subsidiary in India.”
The AAR goes on to hold “But in a case where a 100% subsidiary is created for the purpose of attending to the business of the group in a particular country, here, in India, I am of the view that the Indian subsidiary must be taken to be a permanent establishment of the group in India”.
If one were to adopt the AAR’s reasoning, every MNC operating in India is a PE! Isn’t this common sense?
Now let’s see what view is adopted by Special Bench in DHL Operations matter… If having subsidiary creates PE for Parent to run business.. chaos is invited…
The AAR has decided that since the Group’s Indian operations are run by the Indian company, “the Group” has a PE in India. On this basis, it goes on to decide that the Singapore company (the applicant in this case) has a PE in India on this account. Now if at all a “Group” has a PE, logically it must be the parent company which has a PE. In this case, the parent appears to be in UAE. The Singapore company is only a sister subsidiary of the Indian company. So, even assuming that the Aramex “group” has a PE in India, why did the AAR decide that the PE is that of the Singapore company?
My sympathies for the applicant and his counsel.