AAR – subsidiary created for Indian business is PE of foreign applicant company as well as its group companies in India
Authority for Advance Rulings (AAR): A subsidiary created for Indian business has been held to be a Permanent Establishment of the foreign applicant company as well as its group companies in India – (A.A.R No. 1061 of 2011)
Aramex International Logistics Private Limited (the assessee/applicant), a part of Aramex Group, was a company incorporated in Singapore. Aramex India Private Limited. (AIPL) was the Indian subsidiary of Aramex International Limited, Bermuda (Aramex Bermuda). The applicant entered into an agreement on 1.4.2010 with AIPL for carrying on the business arrangement originally conducted through Aramex Bermuda.
The Aramex group was in the business of door-to-door express shipments by air and land; and performing related transport services. It had expertise, experience and personnel and technical information and know-how required for the business. As per the agreement, the applicant was responsible for transportation of packages throughout the world outside India whereas AIPL was responsible for transportation of packages in India.
As per the agreement, in respect of outbound consignments, AIPL picked up the consignment from respective consignors in India and got them delivered to a destination outside India. On such consignments reaching the overseas destination, the applicant arranged to get them cleared and delivered them to the ultimate consignee. In respect of inbound consignment, the applicant picked up the consignments from the consignors in various foreign countries whether by itself or its affiliates and tendered them either to international airlines or on board couriers for transportation. On such consignments reaching India, AIPL acting as an independent contractor, took necessary steps for delivery to the consignees. The applicant charged fees to AIPL in connection with invoicing and payment functions performed by it.
The key features of the agreement were as follows:
- The applicant appointed APIL as a non-exclusive service provider and APIL undertook the international express business of the applicant.
- The applicant had to assist AIPL in the delivery of the packages outside India. Correspondingly, AIPL had to assist the applicant in the delivery of the packages in India.
- The contract was entered into by the parties on a principal to principal basis.
- The applicant conducted its international express business of its own account outside India and AIPL conducted its international business of its own account in India.
- AIPL was entitled to use specific transport and logistical service providers outside the Aramex group upon a request by the customer.
- AIPL could at its own discretion and expense open offices in India.
- Both the applicant and AIPL were not liable to each other for negligence, misrepresentation or otherwise for loss of profits or revenues in business, anticipated savings so on.
- AIPL was not authorised to act on behalf of the applicant.
- AIPL could not legally bind the applicant.
- AIPL was not authorized to make any agreement, warranty, covenant or other representation, or to create any obligation on behalf of the applicant.
- The applicant was not authorized to act for and on behalf of AIPL other than within the scope of the agreement.
Questions raised before the Authority for Advance Rulings (AAR):
The main questions on which the applicant has sought ruling are as under:
1. Whether in absence of office, equipment, employee or agent in India and no operations are carried out by the applicant in India there exists a Permanent Establishment (PE) of the applicant in India in connection with the international express business under India-Singapore Double Taxation Avoidance Agreement (DTAA)? Whether there is any other basis to attribute or allocate income to applicant in India?
2. Whether the amounts received by the applicant from AIPL be subjected to withholding tax under section 195 of the Income-tax Act, 1961 (‘the Act’)?
Observation and Ruling of the AAR:
>The Aramex group companies in various parts of the world contact the customers, take delivery of the articles to be delivered to various cities and towns in India and deliver them at a chosen destination. The business is completed by delivery of the consignments. For that, the Aramex group has incorporated subsidiary in India i.e. AIPL. Without the association of AIPL, the business of Aramex group as regards the articles sent to India, cannot be performed. It is the case of the applicant that the goods are brought to a common destination and delivered to AIPL and AIPL ensures that the articles are delivered to the concerned parties in various parts of India. Aramex group thus cannot successfully conduct its business of transporting and delivering articles from and in India without AIPL performing its role in India. The Indian side of the business is carried on through the Indian subsidiary AIPL. The income earned by the applicant though AIPL is the income from the business in India.
>PE enables the non-resident company to carry on part or whole of its business in a particular country. Without AIPL, Aramex group cannot complete its business or fulfill its obligations to its clients or customers around the world.
>When a business cannot be carried on exclusively in so far as it relates to customers in India like in the present case, without intervention of another entity, a subsidiary, normally that entity must be deemed to be the PE of the group in that particular country. The position may be different when the entity is an independent entity uncontrolled by the group.
>In a case where a 100% subsidiary is created for the purpose of attending to the business of the group in a particular country, , the subsidiary must be taken to be the PE of the group,
>Under Article 5(1) of India-Singapore DTAA, the term “PE” means a fixed place of business through which the business of an enterprise is wholly or partly carried out. AIPL has a fixed place of business and branches. The business of the applicant and Aramex group in India is only carried on by AIPL. APIL obtains orders, collects articles, transports them to a specified destination so as to be taken over by the group and then delivered to the addressees in various countries through its entities in those countries. Thus, AIPL would be considered to be the PE of the applicant in India.
>Whole business of Aramex group is carried on in India by its Indian subsidiary i.e. AIPL. It is really a case of a group carrying on its business in India or that part of the business relatable to India through a fully owned subsidiary involving all its business activities. The agreement put forward by the applicant relating to its business with AIPL is a mere camouflage to screen the fact that AIPL is really a permanent establishment of the applicant’s group in India. Thus, the provisions of Article 5(10) of India-Singapore DTAA which lay down that entity cannot become PE just because it is subsidiary of an enterprise do not come to the rescue of the applicant.
>AIPL secures orders in India wholly for the Aramex group. It also has the right to conclude and concludes contracts for the group for its express shipment business. Hence, AIPL is an agent of the applicant. Thus, AIPL is deemed to be PE of the applicant in India.
>In a Ruling in AAR No.542 of 2001 (274 ITR 501), in a similar situation, this Authority ruled that an independent agent of an American principal would be a PE of the American company in terms of paragraph 1 of Article 5 of the DTAA between India and USA.
>There exists a PE of the applicant in India under India-Singapore DTAA in the form of AIPL in connection with its international express business and receipts by the applicant from outbound and inbound consignments attributable to the PE in India is taxable in India. Further, such receipts would be subject to withholding tax under Section 195 of the Act.
This is a unique Ruling rendered by the AAR wherein the concept of “PE of a group of companies” has been discussed. It is well known that a subsidiary of a foreign company is not enough to qualify the former as a PE of later or its group companies. The mere existence of a company control is not, in fact, enough, in accordance with Article 5 of the OECD Model, However, considering the peculiar facts of the case, in this ruling the AAR has observed that 100% subsidiary is created for the purpose of attending to the business of the Group in India and therefore, such Indian subsidiary must be taken to be a PE of the Group in India.
Although the AAR Ruling is applicable only in the case of an applicant who has sought it, it nevertheless carries a persuasive value.
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