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Delhi High Court rulings on constitution of PE and attribution of profits


The Delhi High Court has recently delivered separate rulings in the matter of two overseas Rolls Royce entities - Rolls Royce Singapore Pte Limited and Rolls Royce Plc on the issue of constitution of Permanent Establishment ("PE") and attribution of profits to a PE. Taxand India provides a look at the facts of the case.

Both the Appellant and Revenue, had filed appeals to the HC against the order of the ITAT.

Issues before the HC
Inter alia, the following questions came up for determination before the HC:
(a) Whether ANR was an agent of independent status so as not to constitute a PE in India of the Appellant.
(b) Whether the payments made by the Appellant to ANR were at arm's length warranting no further attribution of income to the PE in India.
(c) Whether the attribution made to the PE in India at 10 percent of profits in respect of supply of spares was justified.

Appellant's contentions before the HC
(a) ANR as a dependent agent PE
The Appellant contended that ANR was not a dependent agent PE of the Appellant because of a number of reasons as laid out in the main article

(b) Arm's length criteria for payment to ANR
The payment by the Appellant to ANR was at arm's length. ANR was a third party and the terms of its payment could not be dictated by the Appellant.

The payment by the Appellant to ANR was at arm's length. ANR was a third party and the terms of its payment could not be dictated by the Appellant. The amount paid to ANR had already been taxed in India. In view of the ratio of the decisions in the case of Morgan Stanley and Set Satellite, since the commission paid to ANR was at arm's length, no further profits could be attributed to the alleged PE.

Access the full article for a more detailed analysis of the facts of the case, including details of the ruling

Taxand's Take

The decision of the HC has highlighted that in order to constitute a dependent agent, what is crucial is that the activities should be devoted wholly or almost wholly for the foreign enterprise. The decision suggests that, while the extent of operational control over the agent may be a relevant factor, if it can be shown that the agent had a reasonable amount of income from other sources or other customers, it cannot be said to be a dependent agent so as to constitute a PE. It seems that the HC has not given any specific finding on the argument raised by the Appellant that ANR was not engaged in any of the activities specified under Article 5(8) of the tax treaty. If it was found that ANR was not undertaking any of the specified activities, even the dependence of ANR on the Appellant would not have resulted in it constituting a dependent agent PE in India. This aspect seems to have escaped the HC's attention. The decision seemingly proceeds on the assumption that such an activity was carried out.

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