I. Case Introduction
Company A is a German company engaged in beverage filling and packaging technology, providing machinery for filling and packaging beverage products to global customers including India. A established a subsidiary B in India. Its main business, in addition to purchasing and selling products of affiliated companies, providing project commissioning and after-sales services, is to find potential customers for Company A, coordinate product delivery and payment with Company A’s customers, and receive commissions for this.
During the audit of Company B, the Indian tax authorities found that Company B completely relied on the intangible assets owned by Company A to carry out the sales and marketing of Company A’s products and coordinate product delivery and payment with customers. Based on this, it was determined that Company B constituted Company A’s agency-type permanent establishment in India, and the income obtained by Company A from Company B’s activities should be attributed to the permanent establishment. Company A disagreed with the tax authorities’ view and appealed to the Indian Income Tax Appellate Tribunal (ITAT), which eventually supported Company A.
2. Focus of the Dispute
The focus of the dispute in this case is whether Company B’s actions of helping Company A find customers and coordinate the delivery and payment of products constitutes a permanent establishment of Company A in India. In other words, it is necessary to determine whether the above activities of Company B are labor services for introducing transactions or acts as an agent for Company A.
The Indian tax department believes that the following main facts exist: ① Company B completely relies on the intangible assets owned by Company A to carry out the sales and marketing of Company A’s products and coordinate product delivery and payment with customers; ② Company B is completely economically dependent on Company A; ③ It regularly maintains inventory for Company A; ④ It does not receive any remuneration for activities other than commissions. Based on the above facts, the Indian tax department believes that Company B constitutes an agent-type permanent establishment of Company A in India, and the income obtained by Company A from the activities of Company B should be attributed to this permanent establishment.
Company A countered that: ① Company B had no right to sign contracts on behalf of Company A; ② Company B had never served as Company A’s inventory manager, nor had it kept inventory records on behalf of Company A; ③ Company B was an independent legal and economic entity, and Company A had no financial control over Company B.
3. Final Decision
The Indian Income Tax Appellate Tribunal (ITAT) ruled that the business activities of Company B did not result in it becoming an agent-type permanent establishment of Company A. In addition, since the commission activities of Company B were paid by Company A on an arm’s length basis, no further attribution was required. The ITAT’s ruling was based on the following reasons:
(i) Company B did not regularly obtain and complete orders on behalf of Company A
1. Company B’s mere marketing activities by meeting with Company A’s customers in India do not constitute regular procurement and conclusion of orders on behalf of Company A.
2. Company B did not accept the order on behalf of Company A nor did it indicate to potential customers of Company A that Company B accepted the order. Company B was only engaged in marketing activities and the contract was signed by Company A outside India.
2. Company B did not maintain Company A’s inventory
Company B has never served as Company A’s inventory manager, nor has it kept inventory records on Company A’s behalf.
(III) Company B is not economically dependent on Company A
According to the financial status of Company B, the company has its own trading inventory and commission income accounts for approximately 11.5% of total revenue.
4. Previous Supreme Court rulings and India-Germany tax treaty
Previous decisions of the Supreme Court and the tax treaty signed between India and Germany have clearly excluded independent agents from agency-type permanent establishments.
4. Implications for “Going Global” Enterprises
First, pay attention to the matching of overseas corporate structures with tax functions and risks. In this case, whether Company B assumes additional functions and risks for Company A is an important condition for determining whether Company B constitutes PE. When “going out” enterprises build structures and clarify functions overseas, they must carefully sort out the functions and risks assumed by each company to prevent being identified as a permanent establishment of the parent company by the local tax authorities due to assuming additional functions.
Second, it is important to preserve supporting materials for the division of functions between the parent company and its subsidiaries. In this case, whether Company B has the right to sign contracts on behalf of Company A and whether it maintains inventory for Company A, etc., all require supporting materials. When communicating with the tax department or providing evidence to the court, being able to provide substantive materials from daily business activities will play a key role in the final determination.
Third, understand the tax legal remedy procedures of the country of investment. Pay attention to whether the country of investment has a similar administrative reconsideration system, whether the legal system is case law or statutory law, and the precedents of the country on relevant tax dispute cases, etc., learn from experience and lessons, and do a good job in risk assessment and prevention.
