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TMI Blog2025 (1) TMI 880X X X X Extracts X X X X X X X X Extracts X X X X ..... terprise 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 existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax (International Taxation) in this batch of appeals impugns the order of 22 March 2018 passed by the Income Tax Appellate Tribunal [Tribunal] 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. [Samsung Korea] and pertaining to Assessment Years [AY] 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 Year Order of the Tribunal challenged in the 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 604/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Panel [DRP] , 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k: 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Not asked 2 to 4 times a week on internet and mobile phone With Global Support and Global business management team No regular reporting-only 1 to 2 time per year 5 HK Seo, President Sales and Marketing October 2009 Not asked Not asked SIEL asked him about shifting from Moscow to India and then it was arranged 7 Yong Hee Cho, VP (Sales and Marketing (North) April 2006 Not asked Not asked Communicates once a week. They usually ask me about aging stock. Because of global performance reason. 8 Byong Dae Park 2008 Not asked Not asked Not asked Normally daily 9 Chungseo p Song, G.M Purchase (Mobile Phones) 2010 Mr K. W Cho (MD) Not asked SIEL Some times 10 Chong Ho Yon, G.M. (R D) Visual Display 2005 Mr K. W Cho (MD) Not asked Samsung India Not asked 11 Byung Gwan Yun, Production Manager 2006 Mr K. W Cho (MD) Not asked Samsung India Not asked 12 Eungkyo Seo, C.F.O. 2008 Mr K. W Cho (MD) Not asked SIEL Not asked 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 between SEC and SIEL dated 1.9.2006 pages 90-108 ii. Agreement between SEC and SIEL dated 1.6.2003 pages 109-125 iii. Agreement between SEC and SIEL dated 1.6.2003 pages 126-142 iv. Agreement between SEC and SIEL dated 1.12.2004 pages 143-146 v. Agreement between SEC and STIPL dated 26.2.2006 pages 147-164 vi. Agreement between SEC and SIEL dated 1.12.2004 pages219-222 vii. Agreement between STIPL dated 26.2.2006 pages 223-241 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 expatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 years Q10. 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. Q16. What is the mode of communication with Samsung Korea? Ans. Over the phone email (intranet). Q17 . 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs? 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 marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SIEL alone b) by the request of SIEL together with GBM. As recent research, MWO, it is found that Indian consumers prefer more small 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement ; (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 merc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent 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. 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 Internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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 constitutin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight 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. 16. Proceeding further to explain the extent to which the profits of an enterprise could be tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke 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. ⃰ ⃰ ⃰ 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 notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly 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 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, constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 order to decide whether a permanent establishment stood constituted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ⃰ ⃰ ⃰ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isposal; - 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 the 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployment 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 [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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