Post by Sapphire Capital on Jul 12, 2008 21:10:25 GMT 4
In two recent rulings, the Delhi Income-tax Appellate Tribunal (ITAT) has ruled on the question of PE and income attribution to the PE. The rulings are in the case of Rolls Royce Plc vs. DIT which involved the India-UK tax treaty and Galileo International Inc vs. DDIT which involved the India-USA tax treaty. The Rolls Royce ruling relates to the case of a UK company – Rolls Royce (RRPLC) – which was engaged in supplying aero engines to Indian customers. Rolls Royce India Limited (RRIL), a UK subsidiary of RRPLC, had an office in India which was engaged in providing support services to RRPLC.
The ITAT ruled as follows: (a) RRPLC had a PE in India under article 5(1) of the treaty since employees of RRPLC visited India frequently and the premises of RRIL were used and occupied by the employees of RRPLC during such visits; (b) RRPLC also had a PE under article 5(4)(c) of the treaty under the agency rule as the activities of RRIL constituted RRIL soliciting and receiving orders wholly and exclusively on behalf of RRPLC; and (c) 35% of profits from sales made to Indian customers were allocated towards marketing activities which were carried out in India and was held to be income attributable to the PE and taxable in India.
Galileo International, (Galileo) was a US company which provided electronic global distribution services to the travel industry using a computerised reservation system (CRS) located outside India. Galileo had appointed an unrelated distributor in India who marketed and distributed the CRS services to travel agents in India and entered into contracts with travel agents on his own account. Galileo/distributor also provided hardware to the travel agents to enable them to access the CRS through a communication network belonging to a third party service provider which was made available by Galileo.
The ITAT ruled as follows: (a) Galileo carried on business of partly operating the CRS system in India through the computers installed in the premises of subscribers in India and thus had a PE under article 5(1) of the treaty; (b) the distributor constituted a dependent agent of Galileo, who habitually exercised authority to conclude contracts on behalf of Galileo and thus Galileo has a PE under article 5(4) of the treaty; (c) 15% of revenues generated from bookings made in India was attributable to the PE and taxable in India. Galileo paid nearly 33% of the booking fee to the distributor for its service, which was considered as a deductible expense in computing the income of the PE. As the fee paid to the distributor exceeded the income attributable to the PE, the ITAT held that there cannot be any taxable income for Galileo in India.
The ITAT ruled as follows: (a) RRPLC had a PE in India under article 5(1) of the treaty since employees of RRPLC visited India frequently and the premises of RRIL were used and occupied by the employees of RRPLC during such visits; (b) RRPLC also had a PE under article 5(4)(c) of the treaty under the agency rule as the activities of RRIL constituted RRIL soliciting and receiving orders wholly and exclusively on behalf of RRPLC; and (c) 35% of profits from sales made to Indian customers were allocated towards marketing activities which were carried out in India and was held to be income attributable to the PE and taxable in India.
Galileo International, (Galileo) was a US company which provided electronic global distribution services to the travel industry using a computerised reservation system (CRS) located outside India. Galileo had appointed an unrelated distributor in India who marketed and distributed the CRS services to travel agents in India and entered into contracts with travel agents on his own account. Galileo/distributor also provided hardware to the travel agents to enable them to access the CRS through a communication network belonging to a third party service provider which was made available by Galileo.
The ITAT ruled as follows: (a) Galileo carried on business of partly operating the CRS system in India through the computers installed in the premises of subscribers in India and thus had a PE under article 5(1) of the treaty; (b) the distributor constituted a dependent agent of Galileo, who habitually exercised authority to conclude contracts on behalf of Galileo and thus Galileo has a PE under article 5(4) of the treaty; (c) 15% of revenues generated from bookings made in India was attributable to the PE and taxable in India. Galileo paid nearly 33% of the booking fee to the distributor for its service, which was considered as a deductible expense in computing the income of the PE. As the fee paid to the distributor exceeded the income attributable to the PE, the ITAT held that there cannot be any taxable income for Galileo in India.