Daikin Industries Ltd. Vs ACIT (ITAT Delhi)
Introduction:
Generally, it is seen in the Tax Treaties and Model Tax Conventions that, the Article 5 Clause 7 provides for that an entity which is resident of contracting state who is controlled by another entity who is resident of other contracting state will not be considered as PE in other contracting state.
Relevant Extracts from India – USA Treaty…………
- The fact that a company which is a resident of one of the States controls or is controlled by a company which is a resident of the other State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment.
The Delhi Income Tax Appellate Tribunal (ITAT) ruled on 28 May 2018 that an Indian subsidiary that carries out functions, such as identifying customers, negotiating prices, and finalizing contract terms in connection with products sold directly by a foreign parent company, constitutes a dependent agent permanent establishment (PE) in India of the parent company.
Facts of the case:
The taxpayer, a Japanese company, was engaged in the manufacture and supply of refrigeration equipment. It had a wholly-owned subsidiary in India. The taxpayer sold air conditioners to the Indian subsidiary and made direct sales to third-party customers in India. The taxpayer paid a commission to the Indian subsidiary for providing marketing support services.
The Indian tax authorities noted that the price charged by the Japanese company on the direct sales to Indian third parties was higher than that charged by the taxpayer to the Indian subsidiary and enquired into the Indian subsidiary’s role in relation to the taxpayer’s direct sales to Indian third parties. The Japanese company contended that the subsidiary’s role was limited to marketing support services.
However, the taxpayer was unable to provide satisfactory evidence to prove that it exclusively conducted the activities of identifying customers in India, negotiating and finalizing prices with those customers directly from Japan.
Relevant Provisions of India Japan DTAA under Article 5:
(7) Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 8 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if:
(a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
(b) he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or
(c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise.
Relevant Provisions of Business Connection Contained in Section 9 of Income Tax Act,1961:
Explanation 2. —For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident, —
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are—
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non- resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident
Decision of the ITAT:
In reaching its decision that the Indian subsidiary created a PE for the Japanese parent company, the ITAT made the following observations:
