ACIT vs. Epcos AG (ITAT Pune)

DATE: (Date of pronouncement)
DATE: January 18, 2009 (Date of publication)

In rendering services to the subsidiary, there is no “permanent establishment” under DTAA

Where the assessee, a German company, rendered services to its Indian subsidiaries in respect (a) product marketing and sales support services and (b) information and technology support services and the AO claimed that as the assessee had a permanent establishment in India to which the said services were “effectively connected”, the business profits had to be computed on a gross basis by applying s. 44D, HELD, rejecting the stand of the Revenue that:

(i) As a tax treaty is an alternative taxation regime in the sense that it allocates taxing rights between two competing tax jurisdictions, it is useful to first check whether the receipt is chargeable to tax under the DTAA before considering its taxability under the Act;

(ii) The concept of PE is a result of compromise between residence rule and source rule of taxation, and it constitutes ‘home’ of a foreign enterprise abroad. In order to constitute a PE, there should be (a) a fixed place of business in the source jurisdiction and (b) the business of the foreign enterprise should be carried on through such a fixed place of business in the source jurisdiction.

(iii) Under Article 5(7), while the existence of a subsidiary or parent company in the source jurisdiction by itself does not constitute a PE; the parent or subsidiary can be a PE of each other if the business of the foreign enterprise is carried out by the PE. This depends on the facts of the each case.

(iv) On facts, the assessee had rendered support services to its subsidiaries and some employees of the latter had worked under the guidance of the assessee, but the work so done by the employees was for the business of the Indian subsidiaries and not for the assessee. There is a distinction between business of the foreign company and that of its Indian subsidiaries. What was done by the employees of the Indian subsidiaries was running the business of the Indian subsidiaries with the guidance of the assessee. The work done by the employees of Indian subsidiaries did not mean that these employees were doing business of the foreign principal unless the work so done by these employees entitled the assessee for rewards of the work so done. The situs and manner of rendering of services, by anyone other than the employees or sub-contractees of the foreign principal, cannot govern whether or not the foreign principal will have a PE in India.

(v) Further, a non-resident having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction.

(vi) For purposes of the exclusion clause in Article 12 (5) to apply and for royalties and fees for technical services to be taxable on gross basis u/ss 44D and 115A, it will have to be demonstrated that the royalties and fees for technical services have a live economic nexus with the PE. The mere fact that there is a PE is not sufficient.