2025 (1) TMI 880 - HC - Income Tax

Accrual of income in India - Fixed Place Permanent Establishment PE in India or not? - DTAA between India and Korea - deemed PE having come into being merely on account of the secondment of employees as per DRP - Whether 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? - Tribunal held 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. HELD THAT - 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. In Hyatt International 2024 (9) TMI 1202 - DELHI HIGH COURT- LB 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 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. 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. 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 their engagement being viewed as one which was for the benefit of SIEL. We thus find no error in the view expressed by the Tribunal in this regard. 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. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions presented and considered in this judgment are:

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") between India and Korea, without appreciating the detailed findings 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 the launch of new products were being taken in India?

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Fixed Place Permanent Establishment

Relevant Legal Framework and Precedents

The determination of a Fixed Place PE is guided by Article 5 of the India-Korea DTAA, which defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The legal framework considers factors such as the existence of a place of business, its permanence, and whether it is at the disposal of the enterprise.

Court's Interpretation and Reasoning

The Tribunal found that the secondment of employees from Samsung Korea to its Indian subsidiary, SIEL, did not constitute a Fixed Place PE. The Tribunal emphasized that the activities carried out by the seconded employees were primarily for the benefit of SIEL and not for Samsung Korea's business operations.

Key Evidence and Findings

The Tribunal examined statements from expatriate employees and other evidence, concluding that the employees were engaged in activities like market research and strategy planning for SIEL, not for Samsung Korea. The Tribunal noted that the employees were under the control of SIEL and were not conducting Samsung Korea's business in India.

Application of Law to Facts

The Tribunal applied the principles of the DTAA and determined that the seconded employees' activities were auxiliary and preparatory in nature, falling within the exceptions outlined in Article 5(4) of the DTAA. Therefore, these activities did not create a PE for Samsung Korea in India.

Treatment of Competing Arguments

The Tribunal addressed the Revenue's arguments, emphasizing that the mere presence of seconded employees and their communication with Samsung Korea did not amount to the creation of a PE. The Tribunal found no evidence of Samsung Korea conducting its business through these employees in India.

Conclusions

The Tribunal concluded that there was no Fixed Place PE of Samsung Korea in India, as the activities of the seconded employees were primarily for SIEL's benefit and did not constitute business operations of Samsung Korea.

Issue B: Activities of a Preparatory or Auxiliary Character

Relevant Legal Framework and Precedents

Article 5(4) of the DTAA excludes certain activities of a preparatory or auxiliary character from constituting a PE. The Tribunal examined whether the activities of the seconded employees fell within this exclusion.

Court's Interpretation and Reasoning

The Tribunal determined that the activities conducted by the seconded employees, such as market research and strategy development, were auxiliary to the main business of Samsung Korea and were intended to support SIEL's operations in India.

Key Evidence and Findings

The Tribunal relied on evidence that showed the seconded employees were involved in supporting SIEL's business and not in conducting Samsung Korea's core business activities. The Tribunal noted that the employees' roles were consistent with auxiliary functions.

Application of Law to Facts

The Tribunal applied Article 5(4) of the DTAA, finding that the activities of the seconded employees were preparatory and auxiliary, thus not creating a PE for Samsung Korea in India.

Treatment of Competing Arguments

The Tribunal addressed the Revenue's contention that critical business decisions were being made in India, concluding that the evidence did not support this claim. The Tribunal found that the decisions were related to SIEL's operations and not Samsung Korea's business.

Conclusions

The Tribunal concluded that the activities of the seconded employees were of a preparatory or auxiliary character, and therefore, did not constitute a PE for Samsung Korea in India.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

"The Tribunal found that the activities carried out by the seconded employees were primarily for the benefit of SIEL and not for Samsung Korea's business operations."

"The Tribunal concluded that there was no Fixed Place PE of Samsung Korea in India, as the activities of the seconded employees were primarily for SIEL's benefit and did not constitute business operations of Samsung Korea."

Core Principles Established

The judgment establishes that the presence of seconded employees does not automatically create a PE if their activities are auxiliary and preparatory in nature and primarily benefit the subsidiary rather than the parent company.

Final Determinations on Each Issue

The Tribunal upheld the view that Samsung Korea did not have a Fixed Place PE in India and that the activities of the seconded employees were auxiliary and preparatory, thus not constituting a PE under the DTAA.