Post by Nayak Pai on Apr 29, 2009 2:04:35 GMT 4
India: Ruling on attribution of profits to a permanent establishment
The Delhi Income Tax Appellate Tribunal (ITAT) in the case of Rolls Royce (2009-TIOL-103-ITAT-DEL) recently examined certain issues relating to attribution of profits to a permanent establishment (PE). Rolls Royce is a company incorporated in the UK and is engaged in the business of supplying aero engines to Indian customers. Under an agreement, its UK subsidiary, Rolls Royce India Limited (RRIL), through its offices in India, provided marketing, business development and other support services to the taxpayer on a cost-plus basis. In an earlier order of the ITAT relating to the taxpayer, it was held that RRIL was a dependent agent of the taxpayer and the taxpayer through RRIL, had a dependent agent PE in India under article 5(4) of the double taxation avoidance agreement between India and UK.
The global profits of the taxpayer in respect of India sales were allocated and held to be taxable as follows: (i) 50% towards manufacturing activities and 15% towards research and development (R&D) activities - Activities carried on outside India and held not to be taxable; (ii) 35% towards marketing activities - Activities carried on in India and held to be taxable. The taxpayer filed a petition seeking rectification of this ruling, relying on the principles outlined in the supreme court decision in the case of DIT v Morgan Stanley (292 ITR 416) and an administrative circular (circular number 23 July 26 1969). Under this principle, the assessment of a non-resident taxpayer will extinguish, where the profits attributable to the dependent agent PE is equal to the remuneration payable to the agent. The taxpayer also sought a ruling on the computation of global profits for determining the income attributable.
The ITAT observed that the taxpayer's sales to Indian customers were not secured entirely by availing the services of RRIL under the agreement, but also by deputing personnel and availing additional services of RRIL, not forming part of the agreement. It observed that the remuneration to RRIL is only towards services rendered in accordance with the agreement and for the functions performed/risks assumed by the taxpayer directly, no remuneration is paid to RRIL.
Therefore, it would be necessary to attribute profits for the functions/risks that have not been considered and paid for in the agreement. As regards the income attributable, the ITAT held that since the profits attributable to the R&D activities were excluded, losses were also required to be ignored. Accordingly, expenses in respect of the R&D activities were not to be reduced in the computation of the taxpayer's global profits.
Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)
The Delhi Income Tax Appellate Tribunal (ITAT) in the case of Rolls Royce (2009-TIOL-103-ITAT-DEL) recently examined certain issues relating to attribution of profits to a permanent establishment (PE). Rolls Royce is a company incorporated in the UK and is engaged in the business of supplying aero engines to Indian customers. Under an agreement, its UK subsidiary, Rolls Royce India Limited (RRIL), through its offices in India, provided marketing, business development and other support services to the taxpayer on a cost-plus basis. In an earlier order of the ITAT relating to the taxpayer, it was held that RRIL was a dependent agent of the taxpayer and the taxpayer through RRIL, had a dependent agent PE in India under article 5(4) of the double taxation avoidance agreement between India and UK.
The global profits of the taxpayer in respect of India sales were allocated and held to be taxable as follows: (i) 50% towards manufacturing activities and 15% towards research and development (R&D) activities - Activities carried on outside India and held not to be taxable; (ii) 35% towards marketing activities - Activities carried on in India and held to be taxable. The taxpayer filed a petition seeking rectification of this ruling, relying on the principles outlined in the supreme court decision in the case of DIT v Morgan Stanley (292 ITR 416) and an administrative circular (circular number 23 July 26 1969). Under this principle, the assessment of a non-resident taxpayer will extinguish, where the profits attributable to the dependent agent PE is equal to the remuneration payable to the agent. The taxpayer also sought a ruling on the computation of global profits for determining the income attributable.
The ITAT observed that the taxpayer's sales to Indian customers were not secured entirely by availing the services of RRIL under the agreement, but also by deputing personnel and availing additional services of RRIL, not forming part of the agreement. It observed that the remuneration to RRIL is only towards services rendered in accordance with the agreement and for the functions performed/risks assumed by the taxpayer directly, no remuneration is paid to RRIL.
Therefore, it would be necessary to attribute profits for the functions/risks that have not been considered and paid for in the agreement. As regards the income attributable, the ITAT held that since the profits attributable to the R&D activities were excluded, losses were also required to be ignored. Accordingly, expenses in respect of the R&D activities were not to be reduced in the computation of the taxpayer's global profits.
Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)