Establishment of Permanent Establishment (PE) in India has always been a vexed issued. Once the PE is established, another challenge is the attribution of profit to the PE. Recently, the Delhi Tax Tribunal1 had an occasion to examine whether the secondment of employees resulted into PE in India or not. As there was no agreement between the Indian Company and the expats who were seconded, Delhi Tax Tribunal held that the foreign company has a PE in India. Further, the Delhi Tax Tribunal has also provided its ruling on profit attribution to the PE. We, at BDO in India, have summarised the ruling of the Delhi Tax Tribunal and provided our comments on the impact of this decision.
Facts of the case
Teradata Operations Inc. (Taxpayer), a company incorporated in and tax resident of United States of America (USA), is engaged in the business of providing data warehousing services. It provides professional services and receives royalty in respect of software licence to its Associated Enterprise in India (TIPL). During the year under consideration, the taxpayer received following reimbursements in respect of the employees seconded to TIPL, and thereby not taxable:
- INR 52.1mn towards cost of employees seconded to TIPL; and
- INR 41mn towards relocation expenses like visa charges and other travel cost.
The tax officer treated seconded employees to have resulted into Taxpayer having a PE in India and accordingly brought INR 23.2mn (i.e. mark up of 25 percent on the total reimbursement viz. INR 93.1mn) to tax. Aggrieved, the taxpayer filed objections before the Dispute Resolution Panel (DRP) who did not grant any relief to the taxpayer. Hence, taxpayer filed an appeal before the Delhi Tax Tribunal.
The Tribunal held that the taxpayer has a PE in India and observed that:
- The employees of the taxpayer have been deputed to manage the affairs of TIPL and provide technical knowledge.
- The employees though worked at the premises of TIPL but for all practical purposes remained employees of the taxpayer.
- The employees continued to make their social security contributions in USA and their salaries were also distributed to their bank accounts in USA.
- There was no agreement between the taxpayer and the seconded employees.
Also, on PE attribution, the Tribunal held that the taxpayer has rendered services to TIPL through PE and therefore the income which accrued to the PE is the market value of the services which has been provided by the seconded employees reduced by the cost of the services. The market value of the services to PE can also be deduced from the sale value or revenue fetched by TIPL on those services reduced by the average profit margin of TIPL. Accordingly, it restored the file to the Tax Officer for a fresh consideration, considering the submissions made in this regard by the taxpayer.
While the Delhi Tax Tribunal has referred Centrica India Offshore Private Limited2, it has observed that in Centrica's case there was an agreement between the Indian entity and the seconded employees but in this case, there was no agreement between the seconded employees and TIPL. Further, while the Revenue Authority had taken an alternate ground to treat the payment as Fees for Included Services (FIS), there was no detailed discussion on this point. In this regard, it is pertinent to note that Article 5(2)(l) of India-US DTAA has an exclusion that if services are treated as FIS, it escapes the rigours of Service PE.
For determining whether Multinational Enterprises have a PE in another country or not, clauses of agreement play a key role, various factors (like conduct of the parties, etc) apart from the agreement need to be evaluated. Analysing whether there is a PE exposure or not is a complex one and one should take into account various judicial pronouncements before a conclusion can be reached. This decision would require multi-national enterprises to relook at their secondment arrangements and have necessary contractual agreements in place with their counter parties/AE in India, to avoid constituting service PE in India.
1 Teradata Operations Inc vs DCIT (ITA Nos 7805/Del/2017 and 2580/Del/2018)
2 Centrica India Offshore (Private) Limited vs. CIT (2014) 44 taxmann.com 300
Originally published 17 June 2020
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