2019 (1) TMI 542 - HC - Income Tax

Fixed place permanent establishments - India-USA DTAA - assessee/appellants separately had an independent agent PE, located in India - GE s activities in India were not of an auxiliary or preparatory nature - Held that - The facts of the present case clearly point to the fact that the assessee s employees were not merely liaisoning with clients and the headquarters office. E-mail communications and chain mails indicate that with respect to clients and possible contracts of GE with Reliance CS-1, GE Oil & Gas, Bongaigaon Refinery, Draft LOA for WHRU (E-mail from Andrea Alfani (GE Overseas) to Vivek Venkatachalam (GEIIPL) and Riccardo Procacci (GEII) on proposed email to send Reliance, including comments to RIL on the proposed letter of acceptance and relevant attachments. Also, asked them whether they wanted to send the e-mail themselves to RIL or for it to be sent directly. These appear to show important role for Vivek and Riccardo in the negotiating process. The e-mail chain on CONFIDENTAL Ad Syst contains e-mail from Gioseppe La Moita (GE Overseas). These suggest that Gioseppe La Moita, Renato Mascii (GE Overseas) and Riccardo Procacci (GEII) were in India negotiating the BHEL contract. Rest of the correspondence is not particularly relevant. These suggest that substantive negotiation work on the BHEL contract was done in India by a mix of GE Overseas and GE India team. It is clear that in the kind of activity that GE carries out, i.e manufacture and supply of highly specialized and technically customized equipment, the core activity of developing the customer (identifying a client), approaching that customer, communicating the available options, discussing technical and financial terms of the agreement, even price negotiations, needed a collaborative process in which the potential client along with GE s India employees and its experts, had to intensely negotiate the intricacies of the technical and commercial parameters of the articles. This also involved discussing the contractual terms and the associated consideration payable, the warranty and other commercial terms. No doubt, at later stages of contract negotiations, the India office could not take a final decision, but had to await the final word from headquarters. But that did not mean that the India office was just for mute data collection and information dissemination. The discharge of vital responsibilities relating to finalization of commercial terms, or at least a prominent involvement in the contract finalization process, discussed by the revenue authorities, in the present case, clearly revealed that the GE carried on business in India through its fixed place of business (i.e the premises), through the premises. Question No. 1 is answered in favour of the revenue Agency PE - assessee/appellants separately had an independent agent PE, located in India - Held that - The assessee, GE has organized its affairs in such a manner and one cannot quarrel with its intent, so as to minimize tax incidence in India. Yet, the court s task is not as easy to neatly compartmentalize the analysis of whether the patterns of past decisions result in its establishments constituting fixed place PE or a dependent agent PE. The intricate nature of activities it has carefully designed, where technical officials having varying degree of authority involve themselves along with local managerial and technical employees, in contract negotiation, often into core or key areas, modification of technical specifications and the negotiations for it, to fulfill local needs and even local regulatory requirements, the complexities of price negotiation, etc. clearly show that the assessee carries out through the PE business in India. These activities also intersect and overlap with the content of the principle of dependent agent, inasmuch it is evident that these agencies work solely for the overseas companies, in their core activities. Attribution of income to such PEs - Held that - In this case and the findings of the lower Revenue authorities including the AO and the CIT(A), both of whom have upheld the attributability of income to the extent of 10% and apportionment of 3.5% of the total values of supplies made to the customers in India as income, the Court finds no infirmity with the findings or the approach of the Tribunal in this regard. This question too is answered against the assessee and in favor of the Revenue. Decided against the assessee.

Issues Involved:
1. Existence of a fixed place Permanent Establishment (PE) of the assessee in India.
2. Existence of an independent agent PE in India.
3. Attribution of profits to the alleged marketing activities and the extent of such attribution to the PE in India.

Detailed Analysis:

1. Existence of a Fixed Place Permanent Establishment (PE) of the Assessee in India:

The court examined whether GE's activities in India constituted a fixed place PE under Articles 5(1) to 5(3) of the Indo-US DTAA. The term "place of business" was interpreted broadly to include any premises, facilities, or installations used for carrying on the business of the enterprise, even if not used exclusively for that purpose. The court found that GE's employees used the AIFACS building premises continuously, indicating it was at their disposal.

The court analyzed whether the activities carried out from the fixed place were of a preparatory or auxiliary character. It determined that the activities performed by GE India were core business activities, such as identifying business opportunities, negotiating terms, and finalizing deals with customers, which went beyond mere preparatory or auxiliary services.

2. Existence of an Independent Agent PE in India:

The court considered whether GE India constituted an agency PE under Article 5(4) of the DTAA. It examined whether GE India's employees had the authority to conclude contracts on behalf of GE overseas entities. The court noted that the OECD Commentary, which suggests that mere participation in negotiations does not constitute authority to conclude contracts, was not binding and should be read holistically.

The court found that GE India's activities, such as negotiating and finalizing terms with Indian customers, demonstrated that GE India had the authority to conclude contracts on behalf of GE overseas entities. The court also noted that GE India's activities were not limited to a single enterprise but involved multiple related enterprises, further supporting the existence of an agency PE.

3. Attribution of Profits to the Alleged Marketing Activities and the Extent of Such Attribution to the PE in India:

The court reviewed the method used by the Revenue authorities to attribute profits to the PE in India. The Assessing Officer (AO) estimated the total profit from sales made by GE overseas entities in India at 10% of the sales consideration. The AO then attributed 35% of this profit to marketing activities carried out by the PE in India, based on precedents like Rolls Royce PLC.

The court found that the AO's approach was reasonable and based on relevant material. It upheld the estimation of 10% of sales as the total profit and the attribution of 35% of this profit to marketing activities in India. The court noted that the attribution of profits should be fact-based and aligned with the extent of activities carried out by the PE in India.

Conclusion:

The court concluded that GE had a fixed place PE and an agency PE in India. It upheld the attribution of 10% of sales as the total profit and 35% of this profit to marketing activities carried out by the PE in India. Consequently, the appeals were dismissed.

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