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2012 (6) TMI 187 - AAR - Income TaxDTAC between India and Singapore - permanent establishment - applicant (Singapore Company) being part of Aramex group of companies who is in the business of international express, entered into an agreement dated 1.4.2010 with AIPL(Indian subsidiary of Aramex International Ltd ) - key features of the agreement are that the applicant appointed APIL as a non-exclusive service provider and APIL undertakes the international express business of the applicant - contract on principal to principal basis Held that - Aramex group cannot successfully conduct its business of transporting and delivering articles from and in India without AIPL performing its role in India. When a business cannot be carried on exclusively in so far as it relates to customers in India without intervention of another entity, a subsidiary, normally that entity must be deemed to be the establishment of the group in that particular country. In a case where a 100% subsidiary is created for the purpose of attending to the business of the group in a particular country, here, in India, that Indian subsidiary must be taken to be a permanent establishment of the group in India. AIPL may have an independent existence as a subsidiary, however, authority over it of the principal, vertical or persuasive, cannot be in doubt. Therefore, there exists a permanent establishment of the applicant in India in connection with its international express business under the DTAC between India and Singapore and receipts by the applicant from outbound and inbound consignments attributable to the permanent establishment in India is taxable in India. Whether the transaction between the applicant and AIPL as per agreement dated 1.4.2010 is on arms-length basis has to be verified to determine whether any income can still be attributed to the permanent establishment in India. Receipts by the applicant from AIPL would be subject to withholding tax under Section 195 of the Income-tax Act.
Issues Involved:
1. Existence of Permanent Establishment (PE) in India. 2. Attribution of receipts to PE. 3. Arm's length basis transactions. 4. Classification of fees as "fees for technical services." 5. Applicability of withholding tax under Section 195 of the Income-tax Act. 6. Potential tax avoidance. Detailed Analysis: 1. Existence of Permanent Establishment (PE) in India: The primary issue is whether the applicant, a company incorporated in Singapore, has a Permanent Establishment (PE) in India under the India-Singapore tax treaty. The applicant argued that it has no office, equipment, employee, or agent in India and no operations are carried out by it in India. However, the Revenue contended that Aramex India Pvt. Ltd. (AIPL), a subsidiary of Aramex International Bermuda, acts as a PE of the applicant in India. The Authority concluded that AIPL, being a 100% subsidiary and performing essential business functions for the Aramex group in India, constitutes a PE of the applicant in India. The Authority emphasized that AIPL's role in collecting and delivering consignments within India is integral to the applicant's business, making it a fixed place of business through which the applicant's business is partly carried out. 2. Attribution of Receipts to PE: The next issue is whether the receipts from outbound and inbound consignments are attributable to the PE in India. The Authority ruled that since AIPL is considered a PE, the receipts from the activities conducted by AIPL, including the collection and delivery of consignments, are attributable to the PE in India and, therefore, taxable in India. The Authority noted that AIPL's activities are crucial for the completion of the applicant's business in India, thereby justifying the attribution of receipts to the PE. 3. Arm's Length Basis Transactions: The applicant contended that the transactions between it and AIPL were on an arm's length basis and, therefore, no additional income should be attributed to the PE. The Authority ruled that the question of whether the transactions are on an arm's length basis needs to be verified to determine if any income can still be attributed to the PE. The Authority indicated that if the transactions are indeed at arm's length, it would affect the quantum of income attributable to the PE. 4. Classification of Fees as "Fees for Technical Services": The applicant sought a ruling on whether the fees received for support functions of invoicing and payment performed by the applicant are in the nature of "fees for technical services" under the India-Singapore tax treaty. The Authority declined to rule on this question in light of its findings on the existence of a PE and the attribution of income to the PE. 5. Applicability of Withholding Tax under Section 195: The final issue is whether the receipts by the applicant from AIPL are subject to withholding tax under Section 195 of the Income-tax Act. The Authority ruled that given the existence of a PE and the attribution of income to the PE, the receipts by the applicant from AIPL are subject to withholding tax under Section 195. The Authority emphasized that the payments made to the applicant for the services rendered are taxable in India and, therefore, subject to withholding tax. 6. Potential Tax Avoidance: The Revenue argued that the agreement between the applicant and AIPL was designed to avoid tax in India. The Authority considered this argument but focused on the substantive business activities carried out by AIPL and its role as a PE. The Authority ruled that the structure and agreements in place indicate that AIPL is a PE of the applicant, thereby addressing the potential tax avoidance concern by ensuring that the income attributable to the PE is taxed in India. Conclusion: The Authority for Advance Rulings concluded that AIPL constitutes a Permanent Establishment of the applicant in India. Consequently, the receipts from outbound and inbound consignments attributable to the PE are taxable in India. The transactions between the applicant and AIPL need to be verified for arm's length compliance. The receipts by the applicant from AIPL are subject to withholding tax under Section 195 of the Income-tax Act. The Authority declined to rule on the classification of fees as "fees for technical services" due to the findings on the PE and income attribution.
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