Delhi High Court
The Commissioner Of Income Tax – … vs Samsung Electronics Co. Ltd. on 15 January, 2025
Author: Yashwant Varma
Bench: Yashwant Varma
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 09 January 2025
Judgment pronounced on: 15 January, 2025
+ ITA 1029/2018
THE PR. COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Sanjay Kumar, SSC with
Ms. Monica Benjamin and Ms.
Easha Kadian, JSCs.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 1058/2018
THE COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Sanjay Kumar, SSC with
Ms. Monica Benjamin and Ms.
Easha Kadian, JSCs.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 1060/2018
THE COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Sanjay Kumar, SSC with
ITA 1029/2018 & Connected Matters Page 1 of 54
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:15.01.2025
18:15:40
Ms. Monica Benjamin and Ms.
Easha Kadian, JSCs.
versus
SAMSUNG ELECTRONICS CO. LTD .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 1065/2018
THE PR. COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Sanjay Kumar, SSC with
Ms. Monica Benjamin and Ms.
Easha Kadian, JSCs.
versus
SAMSUNG ELECTRONICS CO. LTD .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 1066/2018
THE COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Sanjay Kumar, SSC with
Ms. Monica Benjamin and Ms.
Easha Kadian, JSCs.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
ITA 1029/2018 & Connected Matters Page 2 of 54
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:15.01.2025
18:15:40
+ ITA 1099/2018
THE COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Sanjay Kumar, SSC with
Ms. Monica Benjamin and Ms.
Easha Kadian, JSCs.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 604/2019
THE COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr.
Anant Mann, JSC.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 625/2019
THE COMMISSIONER OF INCOME TAX -
INTERNATIONAL TAXATION -3 .....Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr.
Anant Mann, JSC.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
ITA 1029/2018 & Connected Matters Page 3 of 54
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:15.01.2025
18:15:40
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
+ ITA 289/2023
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION)-3 .....Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr.
Anant Mann, JSC.
versus
SAMSUNG ELECTRONICS CO. LTD. .....Respondent
Through: Mr. Himanshu S. Sinha, Mr.
Prashant Meharchandani, Mr.
Jainender Singh Kataria & Ms.
Kanika Jain, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE HARISH VAIDYANATHAN
SHANKAR
JUDGMENT
YASHWANT VARMA, J.
1. The Commissioner of Income Tax (International Taxation) in
this batch of appeals impugns the order of 22 March 2018 passed by the
Income Tax Appellate Tribunal1 and which had been followed by the
Tribunal in its orders dated 14 December 2018 and 22 March 2021,
pursuant to which composite appeals preferred by the respondent-
assessee Samsung Electronics Co. Ltd.2 and pertaining to Assessment
1
Tribunal
2
Samsung Korea
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Years3 2007-08 to 2009-10, 2011-12 to 2015-16 and 2017-18 came to
be allowed.
2. ITAs 604/2019, 625/2019 and 289/2023 which are connected
with the lead appeal, ITA 1029/2018, pertain to AYs 2013-14, 2015-16
and 2017-18 respectively, in which the view as expressed by the
Tribunal in its judgment of 22 March 2018 has been followed. For the
sake of convenience, we place hereinbelow a tabular chart which would
encapsulate the details pertaining to all the appeals forming part of the
batch:-
ITA Nos. Assessment Order of the Tribunal challenged in the
Year appeals
ITA 1029/2018 2007-08 Order of 22 March 2018 for AYs 2004-05
to 2009-10; 2011-12; 2012-13 & 2014-15
ITA 1058/2018 2012-13
ITA 1060/2018 2008-09
ITA 1065/2018 2009-10
ITA 1066/2018 2011-12
ITA 1099/2018 2014-15
ITA 604/2019 2013-14 Order of 14 December 2018 for AY 2013-
14 and 2015-16 which has followed the
ITA 625/2019 2015-16
order of 22 March 2018
ITA 289/2023 2017-18 Order of 22 March 2021 for AY 2017-18
which has followed the orders of 22 March
2018 and 14 December 2018
3. We had by our order dated 09 August 2024, admitted these
appeals on the following questions of law:-
“A. Whether the Income Tax Appellate Tribunal [“Tribunal”]
erred in law in holding that the assessee company had no Fixed
Place Permanent Establishment [“PE”] in India within the meaning
of Article 5 of the Double Tax Avoidance Treaty [“DTAA”]3
AY
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between India and Korea without appreciating the detailed finding of
the Dispute Resolution Panel?
B. Whether the Tribunal erred in holding that the activities of
the assessee in India were of the nature specified in Article 5(4) of
the DTAA and consequently there was no PE in India, when the
facts on record clearly indicate that critical business decisions such
as decisions relating to the product to be manufactured, pricing of
the product and decisions relating to launch of new products were
being taken in India? ”
4. The salient facts which merit notice for the purposes of disposal
of these appeals are as follows. Samsung Korea, the respondent-
assessee is stated to be a company incorporated in South Korea and a
tax resident of that country. It had two wholly owned subsidiaries in
India being Samsung India Electronics Pvt. Ltd.4 and Samsung
India Software Operations Pvt. Ltd.5, the latter of which for the sake
of brevity shall be called “Samsung R&D”. It appears that a survey was
conducted on the premises of SIEL on 24 June 2010 and which led to
notices under Section 148 coming to be issued for six A.Y.s, namely
2004-05 to 2009-10.
5. The Assessing Officer6, as the Tribunal noticed in the course of
proceedings undertaken, had held against the respondent by coming to
the conclusion that the premises of SIEL constituted a Fixed Place
Permanent Establishment7 by virtue of Article 5 of the India- Korea
Double Tax Avoidance Agreement8. The AO had further held that
SIEL, being a subsidiary of Samsung Korea, was liable to be
considered as a PE per se. It had additionally held that SIEL also met
4
SIEL
5
Samsung R&D
6
AO
7
PE
8
DTAA
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the tests of a Dependent Agent Permanent Establishment9 as well as
a Service PE.
6. When the matter reached the board of the Dispute Resolution
Panel10, it proceeded to set aside the conclusions which had come to be
recorded by the AO with respect to SIEL being liable to be viewed as a
PE of Samsung Korea solely on account of it being a subsidiary. The
DRP also negated the conclusion of the AO with respect to DAPE and
Service PE. This becomes evident from a reading of paras 5.4.4.2 to
5.4.4.6 of the order of the DRP dated 29 September 2012 and which are
extracted hereinbelow:-
“5.4.4.2 Subsidiary as P.E: The Panel has also observed that all the
conclusions made by the AO are based on the statements of various
employees of SIEL during the survey conducted at its premises.
Apart from these statements, the other material relied on by the AO
is a presentation on Wi-max found during the survey, a layout plan
of SIEL’s factory at Chennai to cater for South east Asian market
and the Technology Agreements between SIEL and SEC. Therefore
in order to determine whether the claim that SEC exercises such a
high level of control on the affairs of SIEL that it may in its entirety
be treated as PE of the assessee, it would be in order to examine
whether this is evidenced by the facts on record. The statements of
employees attached with the remand report were therefore perused
by us to sift our the responses under various heads. The result in
respect of some salient aspects which are very relevant to determine
what is the exact level of control exercised by SEC over SIEL is as
under:
i. Level of control of SEC for appointment of expatriate employees
in SIEL: who decides such issues whether they can be summarily
sent back etc.
1. Jung Soo Shin, President and CFO:
On being asked if he can go back and join the parent company
whenever he likes: It is mutually agreed between me and the
company. (p-39)9 DAPE
10
DRP
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Movement of expatriate a tri-partite agreement between the two
companies and the employee (p-40)
Normally they stay in India for 5 years.
There are several reasons for their going to Korea like personal
reason, work performance, business need, spent enough time in
India. (p-41)
Decision for repatriation: It was done by HR under my advise
Salary of persons coming from Korea: It is decided by SIEL with
employee concerned. (P-41)
Decision to recruit a particular employee: Sometime I choose, while
other time they come from other side
2. Anshuman Shah: Qu.7: We are a technology company and
sometime like whenever there is a new launch we need one or two
experts to come and train us and sometimes explain to our potential
client. The request for such experts can be sent either by me or my
direct reporties. (page 3)
Qu.10: We have few expats come few days back. Normally they are
here in 2-3 months as per requirement. They normally come to
impart technical expertise to local engineers. They come here on
local units request for training and some technical support. This
request is made to the R&D Technical Support Group based out of
Korea. (P-5)
(Qu 13) To impart technical details of new technology or products,
expatriate engineers are required. Once the local engineers acquire
requisite knowledge and expertise, the local support is handled by
them.
3. HK Seo, President Sales and Marketing:
You opted yourself to join India from Moscow: The current CFO
and MD of SIEL proposed to current position and I accept that
position. (p-53). In the first place SIEL asked me about my decision
and SIEL asked to Moscow office and relieved me to go. (p-54)
4.Yong Hee Cho, V.P (Sales and Marketing (North):
When you came to India was it you choice: I had got suggestion
and I accepted that position. (p-61)
5. Byong Dae Park:
Can you be repatriated back to Samsung Korea at your wish or
would it be decision of Hqrs (Korea) to when to get you back: In
two way agreement (p-65)ITA 1029/2018 & Connected Matters Page 8 of 54
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ii. Extent of control of SEC over launch of new products; instruction
by SEC to employees of SIEL; role of SEC in other major decisions
taken by employees of SEC:
Anshuman Shah: Senior Management from. Sales and Marketing
are responsible for product launch. The decision is democratic and
based on collective leadership (Q. 8-Page4)Hyun Dong Lee, Head of CDMA business (P-26) (about who
decides production of phones and takes decision about its launch in
India): It will be decided by lots of people. After discuss internally.
There are product Manager and Sales force and so on. After discuss
with them we decide we will launch the model in India or not.
(About last strategic decision about sales, marketing and launch of
product): There was a meeting with TATA. I could not provide
details for this Meeting. It was held in May 2010. The attendee was
Mr. Jung Soo Shin, CEO of SIEL, Mr. Ranjit Yadav, Director of
HHP. (P-27)
Juno Soo Shin President and CFO: on being asked about who
decide if a product is manufactured in India or Korea: It is decided
by Factory Management and I do not personally look into this
matter. (p-44)
Respective Division decides this matter (which item to import and
market in India) (p-44)
J. H Kyung, Chief Financial Officer and Director:
Who takes policy decisions regarding financing various business
divisions:
MD and CFO (me) (p-49)
Decision both through Board Meeting and independently (p-49)
Are your decisions influenced by Hqrs at Korea: No
Do you communicate major policy decision to Hqrs at Korea: Yes,
just reference
For major investment or policy decisions eg. Setting up a factory in
Chennai, approval of Korea is taken It is necessary. (p-51).
HK Seo. President Sales and Marketing:
How do you liaise with Samsung Hq for product development and
production?: By reading Indian consumer insight and finding the
better product for India. I request Hq to develop Indianised product.
In this process there needs lots of explanation and persuasion.(p-54)ITA 1029/2018 & Connected Matters Page 9 of 54
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Communicate with Hqrs: In general once a week. Before that I hear
and discuss with local people …. as a result of that Samsung Fridge
has two vegetable box.
Yong Hee Cho, V.P (Sales and Marketing( North):
Do you get any directions for marketing policies to adopt from the
Hqrs: No. directly from Hq. but from H.O in Gurgaon.
Chungseop Song, G.M Purchase (Mobiles Phones):
Sometime I receive guidelines from Korea. Regarding vendors
(foreign suppliers) (p-76)Chong Ho Yon, G.M (R & D) & Visual Display:
I receive guidelines from Mr. K. W Cho, M.D in India. Technically
Korea supports me (for guidance)iii. Other issues: who pays salary; whom the senior employees report
to; frequency of communication with Headquarter in Korea etc.S Name of In India Reporting to Getting Whether Communication
No employee since (who has the salary from employed with SEC
authority to by SEC
Instruct) or SIEL/
1 Kyung Yeol October Jung Soo Shin, Not asked Not asked Travel back to
Kim, V.P 2004 CEO Korea 1 to 2
Home times a year
Appliance for business as
well as family
visits
2 Hyun Dong April 2009 Not asked Not getting Not asked Not asked
Lee, Head of any
CDMA remuneration
business from SEC
3 Jung Soo Shin, February Communicate Not asked Not asked Not very often
President and 2009 with Heads of (in touch with
CFO relevant H.O)
Divisions in Communicate
Korea mostly through
Internet4 J.H Kyung, January Not asked Not asked Not asked 2 to 4 times a
Chief 2010 week on
Financial internet and
Officer and mobile phone
Director
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With Global
Support and
Global
business
management
team
No regular
reporting- only
1 to 2 time per
year
5 HK Seo, October Not asked Not asked SIEL asked
President 2009 him about
Sales and shifting
Marketing from
Moscow to
India and
then it was
arranged
7 Yong Hee April 2006 Not asked Not asked Communicates
Cho, VP once a week.
(Sales and They usually
Marketing ask me about
(North) aging stock.
Because of
global
performance
reason.
8 Byong Dae 2008 Not asked Not asked Not asked Normally daily
Park
9 Chungseo p 2010 Mr K. W Cho Not asked SIEL Some times
Song, G.M (MD)
Purchase
(Mobile
Phones)
10 Chong Ho 2005 Mr K. W Cho Not asked Samsung Not asked
Yon, G.M. (MD) India
(R&D) &
Visual
Display
11 Byung Gwan 2006 Mr K. W Cho Not asked Samsung Not asked
Yun, (MD) India
Production
Manager
12 Eungkyo 2008 Mr K. W Cho Not asked SIEL Not asked
Seo, C.F.O. (MD)
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From above it is seen that SEC is not exercising that kind of absolute
control over posting of employees to SIEL that the A.O seem to
assert. From above it can be seen that SEC does not unilaterally post
its employees to SIEL. It is a tripartite arrangement in which SEC,
SIEL and the concerned employee is involved. Repatriation of
employees is also with agreement. Appointment is done by SIEL. In
the A.O’s compilation itself there are appointment letters issued by
SIEL to Sh. K. W Cho, Director Marketing (p 172), Sh. J Kyung (p
176) and Sh B. D Park, Director HHP (P180). Although some senior
employees are in constant touch with SEC it is not as if all major
decisions are taken by SEC. Majority of the decisions seem to be
taken by SIEL and that too by mutual consultation by division head
and their teams. In very important strategic decisions like starting a
new plant in Chennai, the approval of SEC is said to be necessary.
However, considering that SIEL is a 100% subsidiary of SEC
control in such strategic decisions is something quite expected.
Next, it is seen that all the employees are getting their salary from
SIEL which deducts tax at source on them. All the senior employees
report to MD and the MD deals with various Division Heads of SEC
in Korea.
iv. On page 3 of 33 of his report the AO has referred to some
documents which according to the AO prove clearly how strong the
SEC’s control over SIEL is. The AO has stated as under:
“The Control and Management of the subsidiary rests with
the parent company including even basic matters such as
like what to do, how to source, from whom to source,
pricing issues, ageing stock issues etc.
SIPL is not free to make decisions of what to buy, from
whom to buy and at what price/except rom the menu
provided by Parent, please refer Page No. 111 & 112 of
Annexure -I of survey material of documents found at M/s
Samsung India Electronics Ltd (Corporate Office-Gurgaon)
which is Technology License Agreement dated 26/0212006,
according to which SEC lends its Technology, Specifies
Standards SEC provides assistance in manufacturing, sale
and operation of Products through its personnel Technology
remains property of SEC to have full access to SIEL’s
premises Improvements in Technology is SEC’s property
SIEL to provide funds and personnel for SEC’s projects
Suppliers to be chosen by SEC Inspection of products by
SEC and Audit by SEC.”
However a reference to page 111 and 112 of the Annexure shows
that there is nothing in them to justify the above assertion. Pare 111-
12 contain Article 2 to 4.3 of an Agreement dated 1.6.2003 between
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SEC and SIEL. The Articles contained in these pages relate to terms
of licensing, acceptance of license, provision of technology, general
obligations of SEC. However there is nothing in these two pages
which could even distantly relate to anything concerning the ‘control
or management’ of subsidiary by SEC. Considering the gravity of the
above assertion made by the AO and the bearing it may have on
deciding the issue at hand, this Panel sifted through the compilation
submitted by the AO and it was seen that it contains copies of the
following Agreements:
i. Agreement dated 1.9.2006 pages 90-108
between SEC and SIEL
ii. Agreement dated 1.6.2003 pages 109-125
between SEC and SIEL
iii. Agreement dated 1.6.2003 pages 126-142
between SEC and SIEL
iv. Agreement dated 1.12.2004 pages 143-146
between SEC and SIEL
v. Agreement dated 26.2.2006 pages 147-164
between SEC and STIPL
vi. Agreement dated 1.12.2004 pages219-222
between SEC and SIEL
vii. Agreement dated 26.2.2006 pages 223-241
between STIPL
There are two Agreements dated 26.2.2006; however both of them
are between SEC and Samsung Telecommunication India P Ltd and
not with SIEL. Giving discount of some inadvertence on the part of
the AO, this Panel further examined at least one of the Technology
Agreement between SIEL and SEC (the one at no. i. above at pages
90-118). This Agreement does not contain any thing which would
evidence the following assertion made by the AO:
“The Control and Management of the subsidiary rests with
the parent company including even basic matters such as
like what to do, how to source, from whom to source,
pricing issues, ageing stock issues etc.
SIPL is not free to make decisions of what to buy, from
whom to buy and at what price/except from the menu
provided by Parent,”
It does contain an Article (no.5), which lays down that all Technical
Information provided by SEC to SIEL shall remain the property of
SEC and that SIEL shall during the term of Agreement disclose to
SEC all improvements to the Technical Information. Considering
that it is a know-how cum technical service type of an Agreement, in
which the Company providing the know-how retains the right over it
and gives the other party the right only to use the know-how and not
to part with it to a third party, no adverse inference can be derived
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from this Article as far as the issue at hand is concerned. However
this Article or the Agreement do not contain any provision which
can prove the above assertion of the AO. Therefore, considering the
serious nature of assertion made by the AO and the kind of evidence
(or in this case total lack of any evidence) it are based on, this Panel
tends to agree that it is based on surmises and conjectures.
A perusal of the data reproduced earlier in the tabular form shows
that the conclusion drawn by the AO that SEC controls each and
every aspect of functioning of SIEL is not borne out of the evidence
on record. Further it has to be kept in mind that SIEL is a company
incorporated under the law governing the Companies in India and is
conforming to all the rules and regulations that govern the operations
of a corporate body in the country. It is filing its return and paying
the taxes under the Income tax Act and other Statutes. Its
International transactions have been reported under the Transfer
Pricing regulations and examined by the TPO. In view of all these
facts there can be no case for lifting of corporate veil and ignoring
totally that the existence of the corporate entity (SIEL) and hold that
it is merely a PE of SEC. The proposition made by the AO to treat
the subsidiary company as a P.E is therefore rejected.
5.4.4.3 Fixed place P.E: This issue has already been discussed earlier
and this Panel has agreed that in as much as the deputationists and
other visiting expatriate employees of SEC perform the functions
which actually belong to SEC through the premises of SIEL, a fixed-
place P.E is deemed to come into existence. It may again be
reiterated here that the direction given by this Panel is to hold the
deemed P.E created owing to the facts narrated earlier as a ‘fixed
place P.E’ and not a ‘Service P.E’. This issue need not therefore be
discussed again here.
5.4.4.4 Agency P.E: The proposal made by the AO to treat SIEL as
Agency P.E is considered next. It is noted that there is no material
brought on record by the AO on the basis of which it could be said
that SIEL is an Agent of SEC. What the AO has asserted is that SIE
is maintaining stock of goods of SEC. However there is no evidence
in support of this proposition. The assessee has clarified that all the
goods is sold by SEC to SIEL ex-Korea and that the title to these
goods passes when they are shipped; these goods are imported. by
SIEL in its own name and custom clearance etc is done by SIEL and
these goods are stocked in SIEL’s warehouse and all the subsequent
operations relating to sales, collections of receivables etc are done by
SIEL in its own name. There is nothing on record to controvert these
assertions made by the assessee. The assessee has further rebutted
the assertion of AO that is completely economically dependent on
SEC by clarifying that it is a manufacturer of goods in its own right
in India and imports finished goods from SEC to supplement its
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portfolio. The assessee has further stated that all its transaction with
SEC, whether it is import of finished goods, stores or service parts,
exports, import of technology etc are in a principal to principal
capacity and it has no authority to act on behalf of SEC or to
conclude contracts on behalf of SEC. and this relationship can in no
manner be treated as an ‘agency’ relationship. The assessee has given
some more arguments to rebut the AO. However they need not be
reproduced here. This Panel is of the view that in absence of any
material on record except of the statements of employees and
technology Agreements, which have been considered by us it cannot
be held that SIEL’s relation with SEC is that of an ‘Agent’. In view of
this the suggestion that SIEL may be treated as a dependent Agent
for the purpose of Art 5 is rejected.
5.4.4.5. SIEL as a place of management for South East Operations.
The assessee has stated in its rebuttal that during the period under
consideration it did not have any set-up for Southwest Asia Regional
operations and the business of its sales into Bangladesh, Sri Lanka,
Nepal, Bhutan and Maldives was handled from Korea itself without
any involvement of SIEL’s officials and therefore, the assertion that
SEC had a PE at SIEL premises under Article 5(2)(a) of DTAA in
respect of sales made by it in the Southwest Asian countries, is
contrary to the facts for the year under consideration. The assessee
has, categorically stated that operations with regard to Southwest
Asia region were not carried out during the period under
consideration from SIEL’s premises and therefore the assertion with
regard to SEC having place of management at SIEL’s premises with
reference to such activities is baseless and based on conjecture and
surmises. No PE of SEC exists under Article 5(2)(a) of the Treaty
with regard to South West Asia operations. It has been pointed out
by the assessee that this issue was examined by the AO in the
original assessment proceedings and the assessee had filed its reply
in this regard vide letter dated November 18, 2011, which was
considered and accepted by the AO while framing the draft
assessment order. The submissions of the assessee have been
considered. As in the case of ‘subsidiary P.E’ and ‘Agency P.E’, it is
seen that this suggestion has also been made by the AO merely on
the basis of the response of the M.D of SIEL that he is looks after
the operations of some south East Asian countries. However apart
from this there is no other material on record in support of this
suggestion. It is not possible to hold SIEL as SEC’s place of
management for south East Asian countries merely on the basis of
this statement. However this issue is important from the point of
view of the function of business development of Asian market
performed by the M.D for the Head office which has been dealt with
under the head ‘fixed place’ P.E earlier and compensation for which
has been brought to tax by the AO in the draft order.
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5.4.4.6. SIEL as a service P.E: The AO has suggested that SIEL can
be considered inter-alia as a Service P.E of SEC. In this connection
the assessee has made the following rebuttal:
“….even if the seconded expatriate employees are said to
have performed stewardship functions, as alleged by the Ld.
AO, no PE of SEC can said to result from such activities in
India in view of the Apex Court’s decision. Further, it is
reiterated that the India-Korea Tax Treaty does not have a
service PE clause and therefore such PE cannot in any case
be alleged to have been formed by such expatriate
employees seconded to SIEL by SEC.
Secondly, the Ld. AO has placed reliance on the advance
ruling in the case of Verizon Data Services India Private
Limited to draw guidance with regard to existence of PE of
SEC in India. Without going into facts of Verizon’s case, it
would be relevant to note that the Hon‟ble Madras High
Court has set aside the Advance Ruling in the case of
Verizon and therefore any reliance by the Ld. AO on said
ruling is legally misplaced.”
The suggestion of AO and the rebuttal of assessee have been
considered. A service P.E comes into existence when an enterprise
of a contracting state renders services in the other contracting state
through its employees for another enterprise. Here the AO is
proposing that the expatriate employees of assessee performing
services for the assessee may be considered a Service P.E. This is
not in keeping with the concept of the Service P.E which comes into
existence in the circumstance referred to above. Moreover the India-
South Korea does not contain a provision for a service P.E. This
proposition of AO is therefore rejected.”
7. The DRP, while disagreeing with the various suggestions of the
AO, essentially came to conclude that the secondment of employees by
Samsung Korea would result in SIEL being treated as a deemed Fixed
Place PE of the respondent-assessee. The aforesaid conclusion rested
on the statements of various expatriate employees who had been
seconded to SIEL.
8. The conclusions as drawn by the DRP in this respect are noticed
by the Tribunal in paragraph 31 of its judgment and which is
reproduced hereinbelow:-
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“31. Having rejected all the grounds pleaded by the AO, Ld. DRP
reached a conclusion that SIEL be treated as a deemed fixed place
PE of the assessee, and the relevant observation is to the effect that-
“Although they derive their remuneration from SIEL, their
formal contract of employment is with the Parent company.
The statements of some of these employees report frequently
to. SEC. Sh B. D Park, Director (Mobile and 1.T business),
who is at number two position in SIEL has acknowledged
that he communicates with SEC almost daily. Sh J. H
Kyung, Chief Financial Officer has stated that he is in touch
with SEC two to three times a week. Sh H. K Sea) President
Marketing and Sales also. Stated that. he communicates
with SEC once a week in general. Sh. Yang Hee who, who
is. The charge of sales has stated that he communicates with
SEC once week. Statements of some of these officers who.
are of the rank of Division Heads, also. Show that they
continue to. be under the same can, the SEC for certain
activities like research and development of products for the
Indian market and development of marketing strategy,
decisions relating to pricing of product exploration and
development of new markets in the neighbouring countries.
These are the functions that would normally have been
performed by SEC through its own employees, or such
functions would have been outsourced by it to some third
party, in which case the third party would be entitled to
some remuneration for these services. However in the
present case it is the seconded employees of SEC are
performing these functions in addition to their own duties
performed by them for SIEL. For performing the above
functions of SEC these employees have a ‘fixed place of
business’ i.e the premises of SEiL available to them.
Moreover, it is an admitted fact that apart from these
‘seconded employees’ who are in the payroll of SIEL, other
employees of SEC also come from time to time to India and
use the premises of SIEL for the functions performed by
them for SEC. This is quite evident from the statements of
Sh Mahesh Sutagatti and Sh Anshuman Sah, VP (Sales &
Marketing). Sh Suttagati is himself an employee of SEC who
was in India for the development of assessee’s Wi-max
business in India. Sh. Sah has admitted that the employees
of SEC come from time to time and work with the local
personnel.”
9. The Tribunal in the order impugned before us has copiously
reproduced the statements of various expatriate employees which had
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been recorded in the course of the survey. Since Mr. Kumar, learned
counsel appearing in support of these appeals has rested his
submissions primarily on those statements, we deem it appropriate to
extract paragraph 19 of the order of the Tribunal in its entirety
hereinbelow:-
“19. Proper appreciation of the rival contentions requires reference
to relevant portion of such statements, hereunder:
Statement of Sh. Kyoung Sao Kim s/o Shri Jong Suk Kim
Q1. Please identify yourself ?
Ans. I am Kyoung Soo Kim s/o Jong Suk Kim aged 40 yrs, working
with Samsung. India Electronics as Deputy General Manager
(Purchasing).
Q2 Since you use working in this organisation ?
Q7. Being the purchase in charge do you get any direction from
Samsung Electronics Korea regarding the import of raw
materials
Ans. Korean company gives me information on quality, delivery &
cost of raw materials.
Q8. Who are you reporting here?
Ans. I am reporting K W Cho MD.
Q9. By whom have you been issued the appointment letter for
working in the Samsung Electronics India P. Ltd.?
Ans. I have been issued the appointment letter by Samsung
electronics Corporate Korea.
Q10. Who decides the pricing of imports?
Ans. I am guided by the Korean company Samsung electronics
Korea, then I decided the purchase.
Statement of Mr. B.D. Park, Director, Samsung India Electronics
Ltd.
Q1. Please identify yourself ?
Ans. Name Byong Dae Park, working as a Director in Samsung
India Electronics Ltd. Looking after the Mobile business & IT
Business.
Q2. Since when have you been with M/ s SIEL?
Ans. Since the middle of the year 200
Q5. What is your present Salary approximately?
Ans. Approximately US 200 K a year.
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Q6. You are working in India, why is it convenient for you to
remember your salary in US currency especially when you are
getting your salary in INR?
Ans. I am more comfortable in calculating in us dollars.
Q9. For how much time have you been posted in India?
Ans. It is not fixed , normally I expect to stay for three to four yearsQ10. Can you be replaced back to Samsung Korea, at your wish or
would it be the decision of the headquarters to when to get you
back?
Ans. In two way agreement.
Ql6. What is the mode of communication with Samsung Korea?
Ans. Over the phone & email (intranet) .
Ql7. You have the intranet systems installed with the corporation,
where is the server of the intranet situated?
Ans. I have no idea. Maybe, in Korea, or in Singapore.
Q18. How often do you communicate with the headquarter in
Samsung Korea?
Ans. Normally daily.
Q19. You communicate directly or through your GEO?
Ans. It depends on the issues. Something which may affect the
business result seriously will be discussed with my boss, MD
but in most cases of simple opinion exchange the
communication is done without MD intervention.
Q20. To whom do you generally communicate in Korea?
Ans. Mr. Ryu, Vice President. of Mobile Communication Division
and many other persons,
Q21. From where do you generally import your products, please
give details product-wise.
1) Mobile Phone. : Korea, China & Vietnam,
2) Monitor : Malaysia
3) OMS. : Philippines
4) Printer : China
5) Lap Top Computer : China
Q25 The computer in your office have an operation system installed
in Korean, as well as the communication between the heads is
in Korean. What is the reason for it?
Ans. Sometimes in Korean. Sometimes in English. Communication
between only Koreans is done in Korean normally. But when
any Indian or non-Korean is involved we use English.
Statement of Shri Anuj Pareek, Sr. Manager Accounts
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Q. Please introduce yourself
Ans. Myself is Anuj Pareek, working in Samsung (SIEL) since July
… At present working in the capacity of Sr. Manager-
Accounts.
Q. I am showing you the remittances of Rs. 9,63,134 dtd. 10/02/10
and Rs. 12,42,25,457 dtd.9/02/10 in which these payments
have been made to M/ s Samsung Electronics Corporation as
reimbursement of expenses. How would you justify such
payment without deduction of tax thereon?
Ans. Question asked about Rs. 12,42,25,457 dtd. 09/02/10 was not
made. Form 15CA was wrongly uploaded on the site and there
is no provision to sever it or cancel it. Remittance of Rs.
9,63,13481 dtd. 9. Feb ]0 was on also salary paid to the
Expatriate employees, the said salary has been offered to tax
by the employers in India. Far administration conveyance part
of the salary is paid to Samsung Korea which in turn is paid to
expatriate employees all In Korea.
Q3. The part salary which IS remitted outside India is of the
individual expatriate and if it has to be remitted for their
conveyance then it should be in their respective South Korea
Bank A/cs and not in the Bank a/c of Samsung Electronics
Corporation. Please give reason for this
Ans. For the administrative conveyance, the salary paid to Samsung
Electronics Corporation Korea
Q4. What is the administrative conveyance in getting the salary to
the A/c of the parent company that is Samsung Electronics
Corporation?
Ans. The expatriate employees have personal obligations in Korea.
To avoid any inconvenience for their personal obligation in
Korea the salaries paid by Samsung Electronics Korea to
expatriate Bank A/c and same is reimbursed by Samsung India
Electronics Pvt.. Ltd.
Q5. Does this reply in Q4 mean that the salaries of the employees
of Samsung India Electronics Pvt. Ltd is paid by SEC South
Korea and the same is reimbursed by SIEL.
Ans. No. Samsung Electronics is only a conduit for the payments in
expatriate Bank a/cs in Korea. Salary expenses are incurred in
SIEL India and proper income tax on the salaries is deducted
from individual of expatriate employees’ salary and deposited.
Q6. Pls explain why such remittances are termed as
reimbursements.
Ans. The salary paid IS expense of SIEL, India as stated above. Just
for Administration purpose the amount is paid to SEC Korea
which in turn paid to expatriate personal bank a/cs.
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Q7. In reply to Q4 and Q3 you stated that the above the
methodology adopted for the Administration conveyance of the
expatriate employees, where is in reply of Qno. 6 you have
stated that SEC paid 1.his amount to personal Bank a/c of the
employees when such amount is remitted to SEC.since the
remittance of salaries are made to SEC on a Qtrly basis, this
would mean that a person I would get his salary in his South
Korea Bank after 3 months of the receipt of salary in India.
How would you term this as a conveyance of such employee.
Ans. I am not aware
Q8. The remittance letter sent to bank of America show that this
expartiate are on deputation to your company on SEC Korea,
where as it has been claimed that such persons are your
employees without any (Not clearly readable) with the parent
company. Pls justify your above statement.
Ans. I am not aware.
Q9. Details available show that sometimes the remittance is
credited to (Not clearly readable) Bank Branch whereas
sometimes to Korea Exchange Bank. Who gives direction
regarding Bank Branch in which this amount has to be
credited.
Ans. Looks after by the treasury department.
Q10. The details available show that a Debit note has been raised
by SEC, Korea and their after-payment is made from SIEL
India. This implies the salaries are not paid to the employees
of SIEL after the payment has been received from India but the
salaries are paid as if such expats were their own employees
and then a debit note in respect of such salaries is raised to
SIEL India. What do you have to say?
Ans. I cannot comment because I am not aware of the reason.
Statement of Mr. Anshuman Sah
1) Please identify yourself I am Anshuman Sah. working as Vice-
President (Sales & Marketing) for Telecom Systems in
Samsung Electronics India Ltd. I have been working here for 7
months.
7) How frequently do you deal with the expats while carrying out
your duties as VP-Sales eX Marketing? Please give a detailed
note on it.
We are a technology Company & sometimes like whenever
there is a new launch, one or two experts to come and train us
and & sometimes explain to our potential client. The request
for such experts can be sent either by me or my Direct reports
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10) Please refer to question sr. no 7 and your reply . Do you have
such experts working for you at present:
We have few expat came few days back. Normally they are
here in 2-3 months as per requirement. There are 5 persons
here:
1. Mr. Mahesh -for tech support.
2. Mr: Jiho Song -for tech marketing
3. Mr. Shin-for tech support
4. Ms. Cha -for tech support
5. Mr. Jaewoo Park-Marketing support.
Are working to support my local unit as technical expert. They
normally come to impart technical expertise to local engineers.
They have come here on a local unit’s request for training &
some tech support. This request is made to the R&D or
Technical support Group bases out of South Korea.
11) How are these expats compensated for their services?
I do not know.
12) For how long these experts would be in India?
There is no fixed tenure but generally, they come for 3-4 days
& go back by the weekend
13) Please refer to the question @ Sr. No. 10 and your subsequent
reply to that. You have said that these expats “come to ‘impart
technical expertise to local engineers”. Please elaborate on
this.
To impart technical details of new technology or products,
expat engineers are required once the local engineers acquire
requisite knowledge & expertise the local support is, handled
by them. Some such support also is arranged through tele
conferencing
Statement of Sh Kyong Yeol Kim, vice President, HA marketing,
Q1. Please identify yourself and your nationality
Ans. I am Sh.. Kyung Yeol Kim, Vice President, Samsung
Electronics Pvt ltd (Home appliences) Marketing I am a
national of the Republic of Korea
Q8 How often do You travel back to Korea
Ans. I travel back to Korea 1-2 times a year for business trip and
family visits. My family is in Delhi with me and my parents are
in Korea
Q9. What is the agenda for meetings in Korea?
Produce line in India is discussed along with business strategy.
The main product line and R&D is in Korea. At the address:
413 Mactan- Dong, Young Tong – ku, Suwan Ciy, Korea.
This is the office of R&D and marketing.
Q10. Who do you report to here?
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CEO – Jung Soo Shin,
Deputy MD – Ravindra Zuithi
They are both at present in South Korea on a Global Strategy
meeting being held from 2200 June to 24th June at office
premises 4B Mactan – Dong, Young Tong – Ku Suwan City,
Korea of Samsung Electronics Ltd. All the country heads of
Samsung Electronics ….coming for this meeting.
Statement of Mr. JH Kyung
Ql. Please identify yourself.
Ans. I am JHKyung as CFO & Director SIEL since Jan 2010.
Q2. Where had you been working before joining SIEL?
Ans. I was worked in Mobile ….. Division in Samsung Korea.
Q3. You were working in the parent company before you joined
SIEL? What was your designation in Samsung Korea?
Ans. Yes, Director.
Q4. Since when have you been associated with Samsung group?
Ans. 1990
Q6. What are the duties assigned to you in SIEL?
Ans. Managing F/A, A/R, Logistics, Taxation & HR
Q7. When you joined SIEL, was it your decision or you were simply
posted to India?
Ans. Own decision and MD’s order and HO recommendation.
Q9. How often do you communicate with the Head Quarter? What
is the most common mode of communication?
Ans. 2-4 times a week, internet and mobile phones.
Ql0. With whom do you generally communicate in headquarters at
Korea for official purposes?
Ans. Global support team and global Biz management
Ql1. Please clarify what is global biz management.
Ans. Manage all functions of specific product all over the world.
Q12. Are there different GBMS for different products?
Ans. Yes, Mobile-Mobile phones & Video Display-TV, monitor.
Q13. Do you regularly send reports to GBMS? How often are the
report sent?
Ans. No, 1-2 times by-yearly.
Q14. Then how do the GBMS manage the functioning of different
divisions in India, as stated by you in answer to question 11?
Ans. GBM is more common sales they touch more sale teams then
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Q15. Who takes the policy decision regarding the financing of
various business divisions of SIEL?
Ans. MD&CFO
Q16. How are such policy decisions taken? Are they through the
board meetings or your independent decisions?
Ans. Both
Q17. But none of the minutes of board meetings show any such
policy decisions being taken in board meetings?
Ans. I am not sure because have joined less than 6 month but major
issue show all board members.
Q20. Who takes the policy decision regarding which product/ model
are to be manufactured and which are to be purchased and
traded?
Ans. Sales. I just concern Profit and Loss
Q26. In case of major investment or policy decision of setting up a
factory in Chennai etc, is the consent or approval of
headquarters at Korea taken?
Ans. Yes
Q27. Is this approval necessary? Say if you have your own funds and
you want to launch a manufacturing unit of new product, still
you would require approval from headquarter at Korea?
Ans. Yes
Statement of Mr. H.K. Seo, Vice President- CE Sales & Marketing
in M/ s Samsung India electronics (P)Ltd. (SIEL)
Q5. What are the duties assigned to you in current posting?’
Ans. Sales & Marketing related job:
– Involve local sales & marketing in SIEL’s strategic direction.
For example: to introduce Samsung products on Global
consumer’s requirements;
– Sales Forecast for sales and production;
– More strategic direction setting and also liase with Samsung
HQ for product development and production;
– Also, by meeting Indian customers- try to make strategy of
sales & marketing with other employee of SIEL.
Q6. How do you liase with Samsung HQ for products development
and production?
Ans. By reading Indian Consumer’s insight and finding the better
product for India, I request HQ to develop Indianized
products. In this process, there needs lots of explanation &
persuasion. Once HQ decided to develop the product by
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utilizing HQ’s resource in initial stage and then factory
prepare its production facilities for material locally and other
country ‘s factory. If possible, factory is trying to purchase its
material locally.
Q7. In the Liasoning activities with the HQ, do-you send
information collected from India to Samsung Korea. So that
they can develop a product suitable for India?
Ans. DefinitelyQ8. How Often do you communicate with HO and what is the mode
of communication?
Ans. In General once a week, Before communicating I hear and
discuss with Local people and hear the necessities and I
summarize and communicate with HQ Marketing and Other
Department.
Q9. Since you are having R&D centre’s in India at Bangalore and
Noida, Then why is not such technology develop in these R&D
Centres?
Ans. Basically Samsung’s philosophy is to make localized for
operation (Sales & Marketing) and production. When local
environment is not ready, Samsung HQ support to develop.
And when all local functions are ready, whole development &
Material purchase occurs locally. In the meantime,
localization rate is increasing year by year.
Q10. What is the role of GBM (Global Business Management) at
HQ in deciding which products to manufacture or Trade?
Ans. It is not GBM’s decision to decide a specific models. On SIEL’s
requirement they develop and also SIEL select the models of
local market’s demand. GBM has more product and strategy
function from global market perspective they discuss with
global subsidiaries for products, price trend, and market
development, marketing function. But, as they are more
globally dedicated functional organization, SIEL is
communicating with HQ to develop the product and support
marketing practice by collecting best practice of Samsung
Global operation.
Q11. What is gathered from your replies is that after market
research of Indian Market & coordination with GBM, a new
product is developed in Korea, Later on this technology is
transformed to SIEL for domestic production. Is it true?
Ans. Yes. Market research is done two ways, a,) by SIEL alone b) by
the request of SIEL together with GBM. As recent research,
MWO, it is found that Indian consumers prefer more small
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oavity of MWO, and more black colour. This is done by Focus
group Interview. As results it was sent to HO under progress of
Development.
Statement of Mr. Y.H. Cho, VP ,Sales -North Region in M/ s
Samsung Electronics (P) Ltd (SIEL)Q5. How did you carry product marketing as GBM GM in India?
Ans. Discussion about, proper USP with each country subsidiary.
We don’t arrange direct marketing, which will be done by
Subsidiary. GBM is focusing on developing special features for
each market subsidiary.
Q6. How do you get technical input to develop special features for
Indian Market?
Ans. SIEL sends each requirement of USP to GBM. We discuss on
these Requirements with internal R&D Department in GBM.
Q7. This means that the technical input for a specific products
specialization are provided by SIEL?
Ans. Feature Requirements are requested by SIEL.
Q8. What are your duties as Head of Sales, North Region in SIEL?
Ans. Manage organization and Sales of SIEL products in Northern
Region.
Q9. How do you carry out such duties?
Ans. We have each RM & BMs execute our sales & also get
involved in Sales with them.
Q10. Do you have to communicate with Samsung Headquarter to
perform your duties? If yes then how after do you communicate
with Samsung India?
Ans. Yes, Once in a week.
Ql 1. In your communication with HQ what are things/points
discussed?
Ans. They usually ask us about the reason of aging stock.
Q12. Since most of the items marketed by you, being CE head, are
manufactured in India then why is HQ concerned with Ageing
Stock?
Ans. Because of Global performance.
Statement of Mr. Mahesh Suttagati
Q1. Please give your introduction.
Ans. Working as manager in Samsung Electronics, since 2004 Oct
15 at their HQ R&D in Suwon, before this I had taken a
sabbatical of approx. 1 year, before this worked with L&T
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Infotech (Bangalore) for 3 years approx. as Project Leader,
before that worked in Arvind Mills (Pune) for approx. 8yr.
Q2. You are drawing your salary from which company and what is
the amount of salary?
Ans. Samsung Electronics Corp. Suwon South Korea, my salary is
being paid by Samsung Electronics approx 3200000-3500000
Won (net in my salary account) in Won.
Q3. What is your scope of work in Samsung Electronics South
Korea?
Ans. Incharge for interoperational testing between base station and
mobile devices, Also take care of trail test with operators for
mobile wimax.
Q4. Since when have you been in India and what is your scope of
work in India?
Ans. Arrived at Bombay on 18th June, Scope of work is to plan
POC/proof of concept trial test with RIL and assist states
assets.
Q7. Who instructed you to proceed to India and help Samsung
Electronics India Ltd for wimax?
Ans. Usually on request from Indian team and local HQ
representatives, we get instructions through emails/telephone
etc.
Q8. Who pays you for the work done in India for Samsung India
Electronics ltd?
Ans. I am paid my monthly salary in Korea, I collect bills for money
that I spread during Stay and get reimbursements in Korea.
Q9. Why is Samsung Electronics Corporation paying you for the
work you are in India for Samsung Electronics India Ltd.?
Ans. I don t know
Statement of Mr. Chungseop Song
Q13. Do you receive the Guidelines from Korea regarding
Purchases?
Ans. Yes, Sometimes I receive guideline from Korea.
Q14. What type of Guidelines you receive?
Ans. Regarding Vendors (Foreign Suppliers)”
10. Ultimately and upon evaluation of the aforenoted statements, the
Tribunal had come to the following conclusions:-
“27. It is pertinent to note that having gone through the
statements and also some other material relating to the
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aspects as to who pays the salary, whom the senior
employees reported to, frequency of communication with
headquarters in Korea etc, ld. DRP dealt with almost all the
aspects argues by the ld. DR before us. They found that the
assessee is not exercising that kind of absolute control over
posting of employees to the Indian subsidiary, but the
assessee has been posting the employees only pursuant to
the Triparte agreements between the assessee, Indian
subsidiary and the concerned employee. Ld. DRP further
held that the Indian subsidiary is a company incorporated
under the laws governing the companies in India and is
confirming to all the rules and regulations that govern the
operations of a corporate body in the country, by filing its
returns and paying the taxes under the income tax at and
other statutes. It was further observed by the library DRP
that the international transactions have been reported under
the transfer pricing regulations and examined by the TPO.
28. Ld. DRP vide paragraph No. 5.4.4.2 recorded that the
observations of the Ld. AO in respect of the assertion as to
the subsidiary as PE, the conclusions made by the AO are
based on the statement of the various employees of SIEL
during the survey conducted at its premises. Since SIEL is a
company incorporated under the laws governing the
companies in India and is confirming to all the rules and
regulations that govern the operations of a cooperate body,
filing its returns of income and paying taxes by reporting
the international transactions under Transfer Pricing
Regulations, it cannot be said that the SIEL which is
subsidiary company is a PE and rejected the findings of the
AO on that aspect.
29. So also the Ld. DRP by paragraph no 5.4.4.4 rejected
the contention of the AO that SIEL may be treated as a
dependent agent for the purpose of Article 5. Ld. DRP also
rejected the view of the AO that SIEL is a place of
management for south east operations and held that no PE
of the assessee exists under Article 5(2)(a) of the treaty with
regard to south east operations.
⃰ ⃰ ⃰
32. We have considered the observations of ld. DRP in the
light of the above statements. There is no doubt that there is
seemless information exchange between the employees of
the assessee and the expat employees. However, on a
careful consideration of the entire matter including the
statements of the expatriate employees, extracted supra, we
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are of the considered opinion that the statements show that
such information exchange relates to the models/designs to
the liking of the Indian consumers, plans and strategies
relating to the sale of the products, detailed stock/logistical
status, the market strategies both the mid and long terms etc.
33. As rightly argued by the Ld. AR that none of the
statement would go to show that the any activity of the
global business management (GBM) has ever been
conducted in India or that the market survey is conducted in
India, as spoken by the expatriate employees has nothing to
do with the business of the Indian subsidiary and it is solely
for the benefit of the assessee. All the activities that are
spoken by the expatriate employees related to the specificity
of the products, stock verification, they designs according to
the preferences of the Indian consumers, the market
strategies to be adopted etc are clearly within the ambit of
the business of the Indian subsidiary. Such a
communication would primarily benefit the Indian
subsidiary and would help the assessee in its GBM to
sustain its supply chain management and to place optimized
purchase orders at a right timing or to acquire the most
promising manufacturing technologies, as is submitted on
behalf of the assessee.
34. At the best, the statements and other material relied
upon by the revenue show that by way of the seamless
communication between the Indian subsidiary and the
assessee, the expatriate employees were only discharging
the duties of the subsidiary company towards the holding
company. Whatever the benefits that are derived by the
Indian subsidiary by such communication are offer to tax in
India. We therefore find that the activities spoken by the
expatriate employees in their statements are in the nature of
reporting required in the course of discharge of the
functions of the subsidiary company towards the holding
company, and such activities do not constitute a PE under
Article 5(4)(d), (e) and (f) of the DTAA.
⃰ ⃰ ⃰
37. In the absence of proof as to any management activity of
the assessee being conducted in India or that it is established
that the decisions relating to the products to be
manufactured, pricing in the domestic markets, or the
decisions relating to the launch of such products in India
taken by the assessee, we find it difficult to agree with the
authorities below that through the expatriate employees theITA 1029/2018 & Connected Matters Page 29 of 54
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assessee has been conducting the business of assessee in
India. Further, except stating that 10% of the remuneration
of these employees has to be assumed as the income of the
assessee, absolutely there is no evidence that is placed on
record by the assessing officer to show that by way of
business through these expatriate and seconded employees,
the assessee derived any business income in India.”
11. As is manifest from the aforesaid conclusions rendered by the
Tribunal, the appellants appear to have woefully failed to establish that
the seconded employees were engaged in the carrying on of any activity
pertaining or relating to the business of Samsung Korea. The Tribunal
also found on fact that the seconded employees were being posted to
India pursuant to a tripartite agreement entered into between the
respondent-assessee, SIEL and the concerned employees.
12. On consideration of the statements of those seconded employees,
the Tribunal noted that although information was exchanged and plans
and strategies for the Indian market were also discussed, none of the
activities undertaken by those seconded employees could be said or
construed to be the carrying on or the conduct of business of Samsung
Korea from the premises of SIEL. It is these facts which led to the
Tribunal observing that none of those statements could be interpreted as
evidence of any activity of the global business of Samsung Korea being
conducted in India. The Tribunal has also on facts found that the
seconded employees were engaged in assisting SIEL in its business in
India. It has observed that the mere fact that marketing strategies and
future plans pertaining to the business of the Indian subsidiary were
also discussed and deliberated upon by Samsung Korea, would not lead
to a PE coming into existence.
13. Article 5 of the India- Korea DTAA reads as follows:-
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“ARTICLE 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Agreement, the term “permanent
establishment” means a fixed place of business through which the
business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially :
(a) a place of management ;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a sales outlet;
(g) a warehouse in relation to a person providing storage
facilities for others;
(h) a farm, plantation or other place where agricultural, forestry,
plantation or related activities are carried on; and
(i) a mine, an oil or gas well, a quarry or any other place of
extraction of natural resources.
3. The term “permanent establishment” also encompasses:
(a) a building site or construction, installation or assembly
project or supervisory activities in connection therewith, only
if such site, project or activities last more than 183 days;
(b) the furnishing of services, including consultancy services, by
an enterprise through employees or other personnel engaged
by the enterprise for such purpose, but only where activities
of that nature continue (for the same or connected project)
within the country for a period or periods aggregating more
than 183 days within any 12-month period.
4. Notwithstanding the preceding provisions of this Article, the term
“permanent establishment” shall be deemed not to include:
(a) the use of facilities solely for the purpose of storage, display
or delivery of goods or merchandise belonging to the
enterprise;
(b) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of storage,
display or delivery;
(c) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the
purpose of purchasing goods or merchandise or of collecting
information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the
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purpose of carrying on, for the enterprise, any other activity
of a preparatory or auxiliary character;
(f) the maintenance of a fixed place of business solely for any
combination of activities mentioned in subparagraphs a) to
e), provided that the overall activity of the fixed place of
business resulting from this combination is of a preparatory
or auxiliary character.
5. Notwithstanding the provisions of paragraphs 1 and 2, where a
person – other than an agent of an independent status to whom
paragraph 7 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 in respect of any activities which that person
undertakes for the enterprise, if such a person:
(a) has and habitually exercises in that State an authority to
conclude contracts in the name of the enterprise, unless the
activities of such person are limited to those mentioned in
paragraph 4 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; or
(b) has no such authority, but habitually maintains in the first-
mentioned State a stock of goods or merchandise from which
he regularly delivers goods or merchandise on behalf of the
enterprise; or
(c) habitually secures orders in the first-mentioned State, wholly
or almost wholly for the enterprise itself.
6. Notwithstanding the preceding provisions of this Article, an
insurance enterprise of a Contracting State shall, except in regard to
re-insurance, be deemed to have a permanent establishment in the
other Contracting State if it collects premiums in the territory of that
other State or insures risks situated therein through a person other
than an agent of an independent status to whom paragraph 7 applies.
7. An enterprise shall not be deemed to have a permanent
establishment in a Contracting State merely because it carries on
business in that State through a broker, general commission agent or
any other agent of an independent status, provided that such persons
are acting in the ordinary course of their business. However, when
the activities of such an agent are devoted wholly or almost wholly
on behalf of that enterprise, and conditions are made or imposed
between that enterprise and the agent in their commercial and
financial relations which differ from those which would have been
made between independent enterprises, he will not be considered an
agent of an independent status within the meaning of this paragraph.
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8. The fact that a company which is a resident of a Contracting State
controls or is controlled by a company which is a resident of the
other Contracting 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 of the other.”
14. A Full Bench of this Court in a recent decision handed down in
Hyatt International Southwest Asia Ltd. v. CIT11 had an occasion to
explain in some detail the concept of a PE and which question occurs
repeatedly in taxation related disputes emanating from DTAAs‟. While
Hyatt International was concerned with the DTAA between India and
United Arab Emirates12, the definition of a PE as appearing in that
Treaty and Convention is similar to Article 5 of the India- Korea
DTAA. In any event, we fail to discern any significant conceptual
distinction in the manner in which a PE has been defined in those two
Conventions. We thus proceed further.
15. In Hyatt International, the Full Bench while explaining the
concept of a PE had observed as follows:-
“33. It becomes pertinent to note that Article 5 while defining the
expression “PE” brings within its ambit a varied nature of
establishments and which need not necessarily be those which have
a separate legal persona. As we view Article 5, it becomes apparent
that the nature of establishments which are included within the
meaning of the phrase “PE” range from a place of management to a
mine or a building site and thus not being confined to a juridical
entity as is ordinarily understood in law.
⃰ ⃰ ⃰
42. The concept of a PE is based upon the undertaking of economic
activity in a particular State irrespective of the residence of an
enterprise and the same being understood to be in the nature of a
conglomerate or an entity which may have many arms or
independent functional units situate in various fiscal jurisdictions.
11
2024 SCC OnLine Del 6546
12
UAE
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Any entrepreneurial activity which gives rise to income or profit
thus becomes liable to be taxed at source irrespective of the ultimate
recipient or owner of that income. Source here would mean the
location which gives rise to the accrual of profits or income or which
is the location where the same arises. The PE principle thus enables
the assignment of tax to the State which constitutes the source. The
PE concept thus creates a functional relationship and connect
between the principal entity and the place of business whose
activities give rise to the income or profit. It is this fictional creation
of an independent economic center in a Contracting State which
informs the allocation of taxing rights. Once the DTAA confers an
independent identity upon the PE, it would be wholly erroneous to
answer the question of taxability basis either the activities or
profitability of the parent or the entity which seeds and sustains the
PE.
43. The Contracting State in which this imagined entity is domiciled
and undertakes business thus becomes identified as an independent
profit or revenue earning center which is liable to be taxed. Once
such an entity is found to exist in one of the Contracting State, it is
viewed as a unit which contributes to the economic life of that State
and thus be liable to tax. It is these basic precepts which convince us
to debunk the theory of taxation in the source State being dependent
upon a global profit or taxation being subject to income or profit
having been earned at an entity level.
44. The identity which attaches to a PE for the purposes of
ascertainment of a taxing liability cannot possibly be doubted
bearing in mind the succinct observations of the Supreme Court
in Morgan Stanley and where their Lordships without a degree of
equivocation acknowledged the distinction that is liable to be drawn
between a PE with respect to income earned in the Contracting State
where it is domiciled or deemed to exist and the global enterprise of
which it may be a part. Vogel explains the PE concept as
constituting the threshold and the “essential demarcation line” in the
source State which sanctions the imposition of a tax in a fiscal
jurisdiction other than the State of residence. This would clearly
appeal to logical since the right of taxation which inheres in the
source State is connected to the “economic life” of that transnational
enterprise which is moored and berthed by virtue of the existence of
a PE which may be found to exist. Regard must also be had to the
fact that right of the source State to tax does not extend to profits
which are not allocable to the PE. All of the above, thus clearly leads
us to hold that the existence and identity of the PE is separate and
distinct and subject to tax to the extent of activities that it may
undertake in a State distinct from that of its principal.
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45. It would also be pertinent to note that a cross-border entity may
structure its operations in a manner where it operates in more than
one taxing jurisdiction. If it be open for such an entity to assert that
its global profits and income are not liable to be taxed on the basis of
the source principle, it would be wholly impermissible for it to
contend that the income which accrues or arises in the Contracting
State is also exempt from tax. In any case, the usage of the
phrase “…so much of them as is attributable to the permanent
establishment.” is a clear indicator of the DTAA warranting the PE
being liable to be viewed as an independent center of revenue.
46. The identifiable parts of Article 7 not only restrict the right of
one of the Contracting States to tax, it also provisions for the extent
to which a tax may be imposed by that State. This becomes evident
from it freeing a trans-border entity from the spectre of a tax liability
if it does not have a PE in the introductory part of that covenant. It
then proceeds to restrict the impost by adopting the principle of
attribution. It thus constructs an objective criterion for identification
of a PE and when a foreign enterprise with sufficient economic
presence would become subject to tax. All of the above, convinces
us to hold against the argument of a PE not being taxable on an
independent evaluation being misconceived.
47. On a jurisprudential plane, the sovereignty concept is based on a
State’s power over a territory and a set of subjects which accept its
authority. It was these aspects which governed and regulated the
right of a State to levy a tax. However, as trade and commerce
transcended boundaries and borders, nations were confronted with
profits and incomes being shifted and claimed as exempt. It is the
aforenoted factors which appear to have moved the League of
Nations in the early 1920s‟ to constitute a group of economists to
study the issue of double taxation. That group is stated to have
identified the fundamental factors worthy of consideration to be (a)
the origin of wealth or income, (b) the situs of income, (c)
enforcement of rights connected with the above and (d) domicile of
the person vested with the power to use or dispose of that income or
wealth. It was the factor pertaining to “origin” of income which led
to the enunciation of the source rule bearing in mind the need to
identify the primary source of creation of income and the residence
of its owner. It is these fundamental precepts which led to the
formulation of measures to determine the economic presence of an
entity in a given State and the functional integration of such an entity
in the economic activity undertaken in that State.”
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16. Proceeding further to explain the extent to which the profits of an
enterprise could be taxed in a Contracting State where a PE existed, our
Court in Hyatt International had held as follows:-
“52. Article 7 of the DTAA postulates that the profits of an
enterprise shall be taxable only in that State. It thus, and as a matter
of first principle, restricts the taxation of profits of an enterprise only
to and in the State of which it may be a resident. However, it then
proceeds to expand the scope of taxability by taking into
consideration the activities that may be undertaken by such an
enterprise in the other Contracting State through a PE situate therein.
This is further explained with Article 7(1) prescribing that if the
enterprise were carrying on business through a PE situate in the
other Contracting State, its profits would become liable to be taxed
in the other State, restricted however, to the extent that those profits
are attributable to that PE.
53. On a plain reading of Article 7(1), it becomes apparent that while
the profits of an enterprise of a Contracting State are ordained to be
taxed only in that State, if that enterprise were to carry on business
in the other Contracting State through a PE, the profits earned from
activities undertaken by such an establishment would become
subject to tax in the other State coupled with the rider of the same
being confined to the extent to which those profits are attributable to
such an establishment.
54. As we read Article 7, it becomes evident that Paragraph (1)
clearly envisages the profits of a PE being liable to be independently
taxed notwithstanding that PE being a constituent of a larger
enterprise which may be domiciled in the other Contracting State.
The exemption from taxation which stands accorded to an enterprise
of a contracting State would cease to be applicable by virtue of the
use of the word “unless” which precedes the Article taking into
consideration the existence of a PE of that enterprise in the other
Contracting State. Article 7(1) proceeds to clarify that if the
enterprise were carrying on business through a PE in the other
Contracting State, its profits to the extent attributable to that PE
would become subject to tax in the other State.
⃰ ⃰ ⃰
58. Consequently, even though a PE may be merely a part of the
larger entity, the profits generated from its activities undertaken in
the other State becomes subject to taxation. Article 7(1) further
requires us to undertake an exercise of identifying the extent of
profits as are attributable to the PE. It is to that extent alone that the
profits of the enterprise ultimately come to be taxed.
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⃰ ⃰ ⃰
63. As was noticed hereinabove, the profits of an enterprise do not
become subject to taxation unless it be found that it functions in the
other Contracting State through a PE. Article 7 further postulates
that it is only such income which is attributable to the PE which
would be subjected to tax in the source State. As is pertinently noted
in the OECD and UN Commentaries, it would be wholly incorrect to
found taxation on the basis of the overall activities or profitability of
an enterprise. The source State is ultimately concerned with the
income or profit which arises or accrues within its territorial
boundaries and the activities undertaken therein. As those
commentaries pertinently observe, the profits attributable to a PE are
not liable to be ignored on the basis of the performance of the entity
as a whole. This position also finds resonance in the decisions of the
Supreme Court in Morgan Stanley and Ishikawajama and relevant
parts whereof have been extracted above.”
17. Having noticed the broad legal principles underlying the concept
of a PE, we proceed further to take note of the salient precepts which
courts have identified as being germane for answering the question of
when a PE could be said to have come into existence. We in our recent
decision in Progress Rail Locomotive Inc. v. Deputy Commissioner
of Income-tax (International Taxation) and Others13 had an
occasion to review the body of precedent which has come to evolve
around this question and thus deem it appropriate to refer to the
following passages from that decision.
18. It becomes pertinent to note at the outset that Progress Rail too
was a case where a corporate entity whose activities straddled various
tax jurisdictions had two units in India. The Revenue in that case had
asserted that those units constituted a PE and thus profits liable to be
attributed and brought to tax.
19. While negating those contentions, we had held:-
13
2024 SCC OnLine Del 4065
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“85. That leads us to examine the correctness of the opinion as
formed with respect to the Noida factory and the Varanasi office
constituting a fixed place permanent establishment. Decades before
global commerce attained the degree of complexity which attaches
to it today, the Andhra Pradesh High Court in CIT v. Visakhapatnam
Port Trust [(1983) 144 ITR 146 (AP); 1983 SCC OnLine AP 287;
(1984) 38 CTR 1 (AP); (1983) 15 Taxman 72 (AP).], and which
decision constitutes the locus classicus on the subject, explained the
concept of a “permanent establishment” as postulating a substantial
element of presence of a foreign enterprise in another country. The
presence, as Jagannadha Rao, J. explained, had to additionally meet
the test of an enduring and permanent nature. It was this seminal
decision which propounded the concept of “virtual projection”.
86. The principles pertaining to fixed place permanent establishment
were more lucidly explained by the Supreme Court in Formula One
World Championship Ltd. [Formula One World Championship Ltd.
v. CIT (International Taxation), (2017) 394 ITR 80 (SC); (2017) 15
SCC 602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).]
in the following terms (page 100 of 394 ITR):
“Emphasising that as a creature of international tax law, the
concept of permanent establishment has a particularly
strong claim to a uniform international meaning, Philip
Baker discerns two types of permanent establishments
contemplated under article 5 of Organization for Economic
Co-operation and Development Model. First, an
establishment which is part of the same enterprise under
common ownership and control–an office, branch, etc., to
which he gives his own description as an „associated
permanent establishment‟. The second type is an agent,
though legally separate from the enterprise, nevertheless
who is dependent on the enterprise to the point of forming a
permanent establishment. Such permanent establishment is
given the nomenclature of „unassociated permanent
establishment‟ by Baker. He, however, pointed out that
there is a possibility of a third type of permanent
establishment, i.e., a construction or installation site may be
regarded as permanent establishment under certain
circumstances. In the first type of permanent establishment,
i.e., associated permanent establishments, primary
requirement is that there must be a fixed place of business
through which the business of an enterprise is wholly or
partly carried on. It entails two requirements which need to
be fulfilled : (a) there must be a business of an enterprise of
a contracting State (FOWC in the instant case); and (b)
permanent establishment must be a fixed place of business,
i.e., a place which is at the disposal of the enterprise. It is
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universally accepted that for ascertaining whether there is a
fixed place or not, permanent establishment must have three
characteristics : stability, productivity and dependence.
Further, fixed place of business connotes existence of a
physical location which is at the disposal of the enterprise
through which the business is carried on…
The principal test, in order to ascertain as to whether an
establishment has a fixed place of business or not, is that
such physically located premises have to be „at the disposal‟
of the enterprise. For this purpose, it is not necessary that
the premises are owned or even rented by the enterprise. It
will be sufficient if the premises are put at the disposal of
the enterprise. However, merely giving access to such a
place to the enterprise for the purposes of the project would
not suffice. The place would be treated as „at the disposal‟
of the enterprise when the enterprise has right to use the
said place and has control thereupon….
Taking cue from the word „through‟ in the article, Vogel
has also emphasised that the place of business qualifies only
if the place is „at the disposal‟ of the enterprise. According
to him, the enterprise will not be able to use the place of
business as an instrument for carrying on its business unless
it controls the place of business to a considerable extent. He
hastens to add that there are no absolute standards for the
modalities and intensity of control. Rather, the standards
depend on the type of business activity at issue. According
to him, „disposal‟ is the power (or a certain fraction thereof)
to use the place of business directly….
Organization for Economic Co-operation and Development
commentary on Model Tax Convention mentions that a
general definition of the term „permanent establishment‟
brings out its essential characteristics, i.e., a distinct ‘situs’, a
„fixed place of business’. This definition, therefore, contains
the following conditions : (i) the existence of a „place of
business’, i.e., a facility such as premises or, in certain
instances, machinery or equipment; (ii) this place of
business must be „fixed‟, i.e., it must be established at a
distinct place with a certain degree of permanence; (iii) the
carrying on of the business of the enterprise through this
fixed place of business. This means usually that persons
who, in one way or another, are dependent on the enterprise
(personnel) conduct the business of the enterprise in the
State in which the fixed place is situated.
The term „place of business’ is explained as covering any
premises, facilities or installations used for carrying on the
business of the enterprise whether or not they are used
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exclusively for that purpose. It is clarified that a place of
business may also exist where no premises are available or
required for carrying on the business of the enterprise and it
simply has a certain amount of space at its disposal. Further,
it is immaterial whether the premises, facilities or
installations are owned or rented by or are otherwise at the
disposal of the enterprise. A certain amount of space at the
disposal of the enterprise which is used for business
activities is sufficient to constitute a place of business. No
formal legal right to use that place is required. Thus, where
an enterprise illegally occupies a certain location where it
carries on its business, that would also constitute a
permanent establishment. Some of the examples where
premises are treated at the disposal of the enterprise and,
therefore, constitute permanent establishment are : a place
of business may thus be constituted by a pitch in a market
place, or by a certain permanently used area in a customs
depot (e.g. for the storage of dutiable goods). Again the
place of business may be situated in the business facilities
of another enterprise. This may be the case for instance
where the foreign enterprise has at its constant disposal
certain premises or a part thereof owned by the other
enterprise. At the same time, it is also clarified that the mere
presence of an enterprise at a particular location does not
necessarily mean that the location is at the disposal of that
enterprise….
As per article 5 of the Double Taxation Avoidance
Agreement, the permanent establishment has to be a fixed
place of business „through‟ which business of an enterprise
is wholly or partly carried on. Some examples of fixed place
are given in article 5(2), by way of an inclusion. Article
5(3), on the other hand, excludes certain places which
would not be treated as permanent establishment, i.e., what
is mentioned in clauses (a) to (f) as the „negative list‟. A
combined reading of sub-articles (1), (2) and (3) of article 5
would clearly show that only certain forms of establishment
are excluded as mentioned in article 5(3), which would not
be permanent establishments. Otherwise, sub-article (2)
uses the word „include‟ which means that not only the
places specified therein are to be treated as permanent
establishments, the list of such permanent establishments is
not exhaustive. In order to bring any other establishment
which is not specifically mentioned, the requirements laid
down in sub-article (1) are to be satisfied. Twin conditions
which need to be satisfied are : (a) existence of a fixed place
of business; and (b) through that place business of an
enterprise is wholly or partly carried out….
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We are of the opinion that the test laid down by the Andhra
Pradesh High Court in CIT v. Visakhapatnam Port Trust
[(1983) 144 ITR 146 (AP); 1983 SCC OnLine AP 287;
(1984) 38 CTR 1 (AP); (1983) 15 Taxman 72 (AP).] fully
stands satisfied. Not only the Buddh International Circuit is
a fixed place where the commercial/economic activity of
conducting F-1 Championship was carried out, one could
clearly discern that it was a virtual projection of the foreign
enterprise, namely, Formula-1 (i.e., FOWC) on the soil of
this country. It is already noted above that as per Philip
Baker (A Manual on the Organization for Economic Co-
operation and Development Model Tax Convention on
Income and on Capital), a permanent establishment must
have three characteristics : stability, productivity and
dependence. All characteristics are present in this case.
Fixed place of business in the form of physical location, i.e.,
Buddh International Circuit, was at the disposal of FOWC
through which it conducted business. Aesthetics of law and
taxation jurisprudence leave no doubt in our mind that
taxable event has taken place in India and the non-resident
FOWC is liable to pay tax in India on the income it has
earned on this soil.”
87. As per the Manual on the Organization for Economic Co-
operation and Development Model Tax Convention, and the
precedents rendered on the subject, there are two basic conditions
which are spelt out and which must be fulfilled for acknowledging a
permanent establishment being existent and constituting a fixed
place of business. They are:
(a) a place which stands placed at the “disposal” of an
enterprise; and
(b) The establishment answering the characteristics of
stability, productivity and dependence.
88. The expression “disposal” was explained to mean a right to use a
place and exercise “control” thereupon. “Control” was explained
further to mean the place of business being at the “disposal” of an
enterprise and which may have use of the same to a considerable
extent. It was further observed that the test of place of business being
under the “control” of a foreign enterprise would be met even though
the said premises may not be directly owned or taken by way of
lease or on rental basis. In Formula One World Championship Ltd.,
the Supreme Court observed that even a certain amount of space
which may be placed at the “disposal” of an enterprise for the
purposes of the use of its business activities would be sufficient. The
Supreme Court significantly observed that for the purposes of
recognizing the existence of a fixed place permanent establishment,
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no formal legal right to use need be discerned or proven. It was thus
held that as long as it is a space in an establishment or premises
placed at the constant “disposal” of the enterprise, it would satisfy
the test of a fixed place permanent establishment as contemplated
under articles 5(1) and 5 (2)(a)-(k) of the Double Taxation
Avoidance Agreement.
89. The principles governing fixed place permanent establishment
were again spelt out and enunciated by the Supreme Court in
Morgan Stanley and Co. Inc. [DIT (International Taxation) v.
Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7
SCC 1.] and Samsung Heavy Industries Co. Ltd. [DIT (International
Taxation) v. Samsung Heavy Industries Co. Ltd., (2020) 426 ITR 1
(SC); (2020) 7 SCC 347.] In Morgan Stanley and Co. Inc. [DIT
(International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292
ITR 416 (SC); (2007) 7 SCC 1.] , and where the following pertinent
observations came to be rendered (page 421 of 292 ITR):
“With globalisation, many economic activities spread over
to several tax jurisdictions. This is where the concept of
permanent establishment becomes important under article
5(1). There exists a permanent establishment if there is a
fixed place through which the business of an enterprise,
which is multinational enterprise (MNE), is wholly or partly
carried on. In the present case MSCo is a multinational
entity. As stated above it has out sourced some of its
activities to MSAS in India. A general definition of
permanent establishment in the first part of article 5(1)
postulates the existence of a fixed place of business whereas
the second part of article 5(1) postulates that the business of
MNE is carried out in India through such fixed place. One
of the questions which we are called upon to decide is
whether the activities to be undertaken by MSAS consist of
back office operations of MSCo and if so whether such
operations would fall within the ambit of the expression „the
place through which the business of an enterprise is wholly
or partly carried out‟ in article 5(1)….
In our view, the second requirement of article 5(1) of the
Double Taxation Avoidance Agreement is not satisfied as
regards back office functions. We have examined the terms
of the Agreement along with the advance ruling application
made by MSCo inviting the AAR to give its ruling. It is
clear from a reading of the above Agreement/ application
that MSAS in India would be engaged in supporting the
front office functions of MSCo in fixed income and equity
research and in providing Information Technology enabled
services such as data processing support centre and
technical services as also reconciliation of accounts. In
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order to decide whether a permanent establishment stood
constituted one has to undertake what is called as a
functional and factual analysis of each of the activities to be
undertaken by an establishment. It is from that point of
view, we are in agreement with the ruling of AAR that in
the present case article 5(1) is not applicable as the said
MSAS would be performing in India only back office
operations. Therefore to the extent of the above back office
functions the second part of article 5(1) is not attracted.”
90. Morgan Stanley and Co. Inc. was followed by the Supreme
Court in Samsung Heavy Industries Co. Ltd. and where and in the
context of a fixed place permanent establishment, the Supreme Court
held (page 18 of 426 ITR):
“A recent judgment of this court, namely, Asst. DIT v. E-
Funds IT Solution Inc., concerned itself with the India-US
Double Taxation Avoidance Agreement with similar
provisions. Dealing with what was referred to as a ‘fixed
place’, permanent establishment, this court held (SCC p. 310,
para 16 and page 51 of 399 ITR):
“The Income-tax Act, in particular section 90
thereof, does not speak of the concept of a
permanent establishment. This is a creation only of
Double Taxation Avoidance Agreement. By virtue
of article 7(1) of the Double Taxation Avoidance
Agreement, the business income of companies
which are incorporated in the US will be taxable
only in the US, unless it is found that they were
permanent establishments in India, in which event
their business income, to the extent to which it is
attributable to such permanent establishments,
would be taxable in India. Article 5 of the Double
Taxation Avoidance Agreement set out hereinabove
provides for three distinct types of permanent
establishments with which we are concerned in the
present case : fixed place of business permanent
establishment under articles 5(1) and 5(2)(a) to
5(2)(k); service permanent establishment under
article 5(2)(1) and agency permanent establishment
under article 5(4). Specific and detailed criteria are
set out in the aforesaid provisions in order to fulfil
the conditions of these permanent establishments
existing in India. The burden of proving the fact that
a foreign assessee has a permanent establishment in
India and must, therefore, suffer tax from the
business generated from such permanent
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establishment is initially on the Revenue. With these
prefatory remarks, let us analyse whether the
respondents can be brought within any of the
subclauses of article 5.’ ”
Dealing with ‘support services’ rendered by an Indian
company to American companies, it was held that the
outsourcing of such services to India would not amount to a
fixed place permanent establishment under article 5 of the
aforesaid treaty, as follows (SCC p. 320, para 22 and page 63
of 399 ITR):
“This report would show that no part of the main
business and revenue earning activity of the two
American companies is carried on through a fixed
business place in India which has been put at their
disposal. It is clear from the above that the Indian
company only renders support services which enable
the assessees in turn to render services to their
clients abroad. This outsourcing of work to India
would not give rise to a fixed place permanent
establishment and the High Court judgment (DIT v.
E-Funds IT Solution); is, therefore, correct on this
score ”
A reading of the aforesaid judgments makes it clear that
when it comes to ‘fixed place’ permanent establishments
under double taxation avoidance treaties, the condition
precedent for applicability of article 5 (1) of the double
taxation treaty and the ascertainment of a ‘permanent
establishment’ is that it should be an establishment ‘through
which the business of an enterprise’ is wholly or partly
carried on. Further, the profits of the foreign enterprise are
taxable only where the said enterprise carries on its core
business through a permanent establishment. What is equally
clear is that the maintenance of a fixed place of business
which is of a preparatory or auxiliary character in the trade or
business of the enterprise would not be considered to be a
permanent establishment under article 5. Also, it is only so
much of the profits of the enterprise that may be taxed in the
other State as is attributable to that permanent
establishment….
Though it was pointed out to Income-tax Appellate Tribunal
that there were only two persons working in the Mumbai
office, neither of whom was qualified to perform any core
activity of the assessee, the Income-tax Appellate Tribunal
chose to ignore the same. This being the case, it is clear,
therefore, that no permanent establishment has been set up
within the meaning of article 5(1) of the Double Taxation
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Avoidance Agreement, as the Mumbai project office cannot
be said to be a fixed place of business through which the core
business of the assessee was wholly or partly carried on.
Also, as correctly argued by Shri Ganesh, the Mumbai project
office, on the facts of the present case, would fall within
article 5(4)(e) of the Double Taxation Avoidance Agreement,
inasmuch as the office is solely an auxiliary office, meant to
act as a liaison office between the assessee and ONGC. This
being the case, it is not necessary to go into any of the other
questions that have been argued before us.”
91. When we test the stand taken by the respondents, bearing in
mind the aforesaid precepts as culled out from the various judgments
noticed hereinabove, we find ourselves unable to sustain even the
prima facie formation of opinion by the first respondent in this
respect. It is pertinent to note that the impugned notices and the
reasons set out for initiating action under section 147/148 nowhere
allude to a particular space or a part of the premises situated in
Noida or Varanasi having been placed under the exclusive or
significant “control” or “disposal” of the petitioner. The first
respondent fails to rest its prima facie opinion with respect to fixed
place permanent establishment on any part of the Noida or Varanasi
premises which may have been set apart or exclusively placed in and
under the “control” of the petitioner for use of its business activities
and which may have tended to indicate that the space was made
available for the use of the petitioner and from where it was
conducting its business activities. It would have had to be shown that
the “control” of that space answered the test of considerable extent.
We recall Vogel describing this particular genre of a permanent
establishment as being akin to an “instrument (equalling or
resembling an operating asset) for his entrepreneurial activity”. The
concept of “virtual projection” is concerned with a functional
integration between the two units and which would mean an
establishment which has been virtually used for all purposes to carry
out the paramount business activity of the petitioner. None of these
factors are either alluded to or appear to have been borne in
consideration before arriving at the conclusion that the Indian
establishment constituted a fixed place permanent establishment.
20.
⃰ ⃰ ⃰
94. We also take note of the judgment in Formula One World
Championship Ltd. [Formula One World Championship Ltd. v. CIT
(International Taxation), (2017) 394 ITR 80 (SC); (2017) 15 SCC
602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).] and
where it was significantly observed that a permanent establishment
must qualify and meet the tests of stability, productivity and
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dependence. Of equal significance were the observations which
explained the phrases “at the disposal of” and “through”. Tested on
the aforesaid precepts also, the impugned notices and the reasons set
out for initiating action under section 147/148 woefully fail to rest on
any evidence which could have possibly compelled us in
acknowledging that a fixed place permanent establishment had come
into being.”
20. As is manifest from the principles that we had identified in
Progress Rail, a PE would be deemed to have come into existence if
one were to find a Fixed Place through which the business of the
enterprise seated in the other Contracting State was being carried out.
Those premises must be found to be at the disposal of that enterprise
and under its control. We had quoted, with approval, the test formulated
by Klaus Vogel who had explained control over premises or space to
answer the test of “considerable extent” and the premises being “an
instrument (equalling or resembling an operating asset) for his
entrepreneurial activity”. It is these tests which would qualify the
benchmark of “virtual projection” as evolved by courts.
21. In Hyatt International, the Full Bench of our Court had explained
that PE itself was a concept based upon an enterprise undertaking
economic activity in a particular State irrespective of its residence. The
taxability of business profits, we had explained, is itself dependent
upon a PE existing in the Contracting State notwithstanding that
establishment being a constituent of a larger enterprise which may be
domiciled in the other Contracting State. However, and as the Tribunal
itself has noticed, the DRP had not concurred with the opinion of the
AO that a Fixed Place PE, DAPE or Service PE of the respondent-
assessee had come into existence. While the DRP had disagreed with
the AO on those aspects, it ultimately came to hold against the
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respondent-assessee, taking the view that by virtue of secondment of
employees, a deemed PE had come into being. It is this view that the
Tribunal has proceeded to overturn.
22. We find ourselves in complete agreement with the opinion
expressed by the Tribunal, since the secondment of employees has not
been found to be for the furtherance of the business or enterprise of the
respondent. Those seconded employees were not discharging functions
or performing activities connected with the global enterprise of the
respondent. Their placement in India was with the objective of
facilitating the activities of SIEL. Collection of market information,
collation of data for development of products, market trend studies or
exchange of information would not meet the qualifying benchmarks of
a PE.
23. This was an aspect which we had noticed even in our decision in
Progress Rail where we had held as follows:-
“96. We then proceed to test the correctness of the prima facie
conclusions arrived at by the first respondent on the anvil of article
5(3) of the India-USA Double Taxation Avoidance Agreement
((1991) 187 ITR (Stat) 102). As was noticed hereinabove, article
5(3) excludes permanent establishments which may otherwise fall
within the ambit of article 5(1) or article 5(2), if it were found that
the said permanent establishment were engaged in the discharge of
functions enumerated therein. While and undisputedly sub-clauses
(a), (b) and (c) of article 5(3) are not even invoked, even if we were
to examine the correctness of the view taken by the first respondent
based on sub-clauses (d) and (e), we find ourselves unable to sustain
the impugned notices and the reasons set out for initiating action
under section 147/148, basis which the impugned notices were
issued.
97. In terms of article 5(3)(d), if a permanent establishment were to
be engaged solely for the purposes of purchase of goods or
merchandise, or for that matter for “collecting information” for a
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foreign enterprise, the same would stand excluded from the ambit of
sub-clauses (1) and (2) of article 5. The first respondent appears to
have been heavily influenced by the Indian subsidiary – PRIPL
routing communications between the petitioner and DLW and other
arms of the Indian Railways. The first respondent also alludes to
certain supportive functions such as gathering of information and
other allied activities allegedly undertaken by PRIPL for and on
behalf of the petitioner. It becomes pertinent to note that be it
collecting information or for that matter studying market trends or
future business prospects, the same would clearly fall not only within
the ken of sub-clause (d), but also partly within the scope of sub-
clause (e) of article 5(3). This, since both sub-clauses (d) and (e) are
concerned with collection or supply of information. We also bear in
consideration the Supreme Court in Morgan Stanley and Co. Inc.
[DIT (International Taxation) v. Morgan Stanley and Co. Inc.,
(2007) 292 ITR 416 (SC); (2007) 7 SCC 1.] having held that market
research or analysis, data processing support or for that matter,
account reconciliation are essentially back office functions and
support services and which would not be sufficient to acknowledge a
fixed place permanent establishment existing.
****
134. In so far as the MES Agreement and other allied agreements are
concerned, it is clear that in terms of the said agreements, the
employees of the Indian subsidiary were to keep track of monetary
balances and record the movement of goods, maintain and co-
ordinate the implementation of accounting control procedures, assist
in the development of both short term and long-term strategy plans,
study market trends and other such allied activities. Regard must be
had to the fact that the Indian entity – PRIPL was undoubtedly a
wholly owned subsidiary of the petitioner, and formed part of the
multi-national group – Caterpillar. There would undoubtedly be some
degree of collaboration and exchange of information between a
principal and its wholly owned subsidiary. However, that alone
would not justify a presumption of a permanent establishment having
come into existence. As has been repeatedly emphasized, a
subsidiary would be deemed to become a permanent establishment
only if it satisfies the tests as laid out in article 5(1), 5(2), 5(4) and
5(5). A group of companies may well engage in discussions at
different levels so as to evolve a marketing strategy or identify a
research output with respect to future prospects. That, however,
cannot be viewed as being sufficient to hold that the Indian
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establishment attains the character of a permanent establishment.
The exchange and collaboration between entities forming part of a
larger conglomerate would clearly be intended towards subserving
the growth of the group as a whole and could relate to not only
operations in India, but also to any market in the globe in which the
petitioner may have a footprint.”
24. Regard must also be had to the fact that Paragraph 3(b) of Article
5 would also not be applicable since it was not even the case of the
appellants that the respondent was rendering services, consultative or
otherwise, to SIEL through the employees who stood seconded or
placed at the disposal of the latter.
25. This would constitute an appropriate juncture to pause and take
into consideration how the secondment of employees is explained in the
UN and OECD Model Commentaries.
26. The OECD Model Commentary 2017 while explaining the scope
of Article 5 enters the following pertinent clarifications:-
“39. There are different ways in which an enterprise may carry on its
business. In most cases, the business of an enterprise is carried on by
the entrepreneur or persons who are in a paid-employment
relationship with the enterprise (personnel). This personnel includes
employees and other persons receiving instructions from the
enterprise (e.g. dependent agents). The powers of such personnel in
its relationship with third parties are irrelevant. It makes no
difference whether or not the dependent agent is authorised to
conclude contracts if he works at the fixed place of business of the
enterprise (see paragraph 100 below). As explained in paragraph
8.11 of the Commentary on Article 15, however, there may be cases
where individuals who are formally employed by an enterprise will
actually be carrying on the business of another enterprise and where,
therefore, the first enterprise should not be considered to be carrying
on its own business at the location where these individuals will
perform that work. Within a multinational group, it is relatively
common for employees of one company to be temporarily seconded
to another company of the group and to perform business activities
that clearly belong to the business of that other company. In such
cases, administrative reasons (e.g. the need to preserve seniority or
pension rights) often prevent a change in the employment contract.
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The analysis described in paragraphs 8.13 to 8.15 of the
Commentary on Article 15 will be relevant for the purposes of
distinguishing these cases from other cases where employees of a
foreign enterprise perform that enterprise‟s own business activities.”
27. While dealing with Article 15 and the subject of taxation of
income from employment, we find the following relevant passages
which would guide us in answering the challenge which is raised before
us: –
“8.5 In some cases, services rendered by an individual to an
enterprise may be considered to be employment services for
purposes of domestic tax law even though these services are
provided under a formal contract for services between, on the one
hand, the enterprise that acquires the services, and, on the other
hand, either the individual himself or another enterprise by which
the individual is formally employed or with which the individual has
concluded another formal contract for services.
(Added on 22 July 2010; see HISTORY)
8.6 In such cases, the relevant domestic law may ignore the way in
which the services are characterised in the formal contracts. It may
prefer to focus primarily on the nature of the services rendered by
the individual and their integration into the business carried on by
the enterprise that acquires the services to conclude that there is an
employment relationship between the individual and that enterprise.
(Added on 22 July 2010; see HISTORY)
8.7 Since the concept of employment to which Article 15 refers is to
be determined according to the domestic law of the State that applies
the Convention (subject to the limit described in paragraph 8.11 and
unless the context of a particular convention requires otherwise), it
follows that a State which considers such services to be employment
services will apply Article 15 accordingly. It will, therefore,
logically conclude that the enterprise to which the services are
rendered is in an employment relationship with the individual so as
to constitute his employer for purposes of subparagraphs 2 b) and c).
That conclusion is consistent with the object and purpose of
paragraph 2 of Article 15 since, in that case, the employment
services may be said to be rendered to a resident of the State where
the services are performed.
(Added on 22 July 2010; see HISTORY)
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8.13 The nature of the services rendered by the individual will be an
important factor since it is logical to assume that an employee provides
services which are an integral part of the business activities carried on
by his employer. It will therefore be important to determine whether the
services rendered by the individual constitute an integral part of the
business of the enterprise to which these services are provided. For that
purpose, a key consideration will be which enterprise bears the
responsibility or risk for the results produced by the individual‟s work.
Clearly, however, this analysis will only be relevant if the services of an
individual are rendered directly to an enterprise. Where, for example, an
individual provides services to a contract manufacturer or to an
enterprise to which business is outsourced, the services of that
individual are not rendered to enterprises that will obtain the products or
services in question. (Added on 22 July 2010; see HISTORY)
8.14 Where a comparison of the nature of the services rendered by the
individual with the business activities carried on by his formal employer
and by the enterprise to which the services are provided points to an
employment relationship that is different from the formal contractual
relationship, the following additional factors may be relevant to
determine whether this is really the case:
– who has the authority to instruct the individual regarding the manner in
which the work has to be performed;
– who controls and has responsibility for the place at which the work is
performed;
– the remuneration of the individual is directly charged by the formal
employer to the enterprise to which the services are provided (see
paragraph 8.15 below);
– who puts the tools and materials necessary for the work at the
individual‟s disposal;
– who determines the number and qualifications of the individuals
performing the work;
– who has the right to select the individual who will perform the work
and to terminate the contractual arrangements entered into with that
individual for that purpose;
– who has the right to impose disciplinary sanctions related to the work
of that individual; who determines the holidays and work schedule of
that individual.
(Added on 22 July 2010; see HISTORY)
8.15 Where an individual who is formally an employee of one enterprise
provides services to another enterprise, the financial arrangements made
between the two enterprises will clearly be relevant, although not
necessarily conclusive, for the purposes of determining whether the
remuneration of the individual is directly charged by the formal
employer to the enterprise to which the services are provided. For
instance, if the fees charged by the enterprise that formally employs theITA 1029/2018 & Connected Matters Page 51 of 54
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individual represent the remuneration, employment benefits and other
employment costs of that individual for the services that he provided to
the other enterprise, with no profit element or with a profit element that
is computed as a percentage of that remuneration, benefits and other
employment costs, this would be indicative that the remuneration of the
individual is directly charged by the formal employer to the enterprise to
which the services are provided. That should not be considered to be the
case, however, if the fee charged for the services bears no relationship to
the remuneration of the individual or if that remuneration is only one of
many factors taken into account in the fee charged for what is really a
contract for services (e.g. where a consulting firm charges a client on the
basis of an hourly fee for the time spent by one of its employees to
perform a particular contract and that fee takes account of the various
costs of the enterprise), provided that this is in conformity with the
arm‟s length principle if the two enterprises are associated. It is
important to note, however, that the question of whether the
remuneration of the individual is directly charged by the formal
employer to the enterprise to which the services are provided is only one
of the subsidiary factors that are relevant in determining whether
services rendered by that individual may properly be regarded by a State
as rendered in an employment relationship rather than as under a
contract for services concluded between two enterprises.
(Added on 22 July 2010; see HISTORY)”
28. A similar explanation appears in the UN Model Commentary
2021 which, while explaining the scope of Article 5 of the Model
Convention, adopts the position as enunciated in paragraph 39 of the
OECD Commentary and observes: –
“15. The Committee considers that the following part of the
Commentary on Article 5 of the 2017 OECD Model Tax
Convention, which deals with the interpretation of the phrase
“through which the business of an enterprise is wholly or partly
carried on” in paragraph 1 of the Article, is applicable to paragraph 1
of Article 5 of this Model (the modifications that appear in italics
between square brackets, which are not part of the Commentary on
the OECD Model Tax Convention, have been inserted in order to
provide additional explanations or to reflect the differences between
the provisions of the OECD Model Tax Convention and those of this
Model):
“39. There are different ways in which an enterprise may
carry on its business. In most cases, the business of an
enterprise is carried on mainly by the entrepreneur or
persons who are in a paid-employment relationship with the
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enterprise (personnel). This personnel includes employees
and other persons receiving instructions from the enterprise
(e.g. dependent agents). The powers of such personnel in its
relationship with third parties are irrelevant. It makes no
difference whether or not the dependent agent is authorised to
conclude contracts if he works at the fixed place of business
of the enterprise (see paragraph 100 below [of the
Commentary on Article 5 of the 2017 OECD Model Tax
Convention] ). As explained in paragraph 8.11 of the
Commentary on Article 15 [of the 2017 OECD Model Tax
Convention, as quoted in paragraph 5 of the Commentary on
Article 15 of this Model] , however, there may be cases
where individuals who are formally employed by an
enterprise will actually be carrying on the business of another
enterprise and where, therefore, the first enterprise should not
be considered to be carrying on its own business at the
location where these individuals will perform that work.
Within a multinational group, it is relatively common for
employees of one company to be temporarily seconded to
another company of the group and to perform business
activities that clearly belong to the business of that other
company. In such cases, administrative reasons (e.g. the need
to preserve seniority or pension rights) often prevent a change
in the employment contract. The analysis described in
paragraphs 8.13 to 8.15 of the Commentary on Article 15 [of
the 2017 OECD Model Tax Convention, as quoted in
paragraph 5 of the Commentary on Article 15 of this Model]
will be relevant for the purposes of distinguishing these cases
from other cases where employees of a foreign enterprise
perform that enterprise‟s own business activities……………”
29. As is manifest from the above, the secondment of employees
which may consist of technically trained personnel or persons with
experience is an arrangement not uncommon in today‟s world of
business. What however needs to be considered is whether the
deployment of such employees is in furtherance of the business of their
formal employer or intended to be utilized for the business of the
enterprise with whom they are placed. In the facts of the present case,
the weight of evidence which was collated unerringly leans towards
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their engagement being viewed as one which was for the benefit of
SIEL.
30. We thus find no error in the view expressed by the Tribunal in
this regard. In our considered opinion, the Tribunal was justified in
interfering with the opinion formed by the DRP and which had spoken
of a deemed PE having come into being merely on account of the
secondment of employees. Absent any material that would have even
tended to indicate that the functioning of the seconded employees was
concerned with the business or the generation of income of the
respondent in India, the decision of the Tribunal cannot be faulted.
31. We consequently answer the questions posited in the negative
and against the appellant. We accordingly and for reasons assigned
hereinabove, uphold the judgment of the Tribunal dated 22 March
2018, 14 December 2018 and 22 March 2021 and dismiss these
appeals.
YASHWANT VARMA, J.
HARISH VAIDYANATHAN SHANKAR, J.
JANUARY 15, 2025/RW
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