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April 26, 2007
Mumbai
Tribunal holds Arm’s Length Payment to Dependent Agent does not
extinguish Liability of a Permanent Establishment
The
Mumbai tax tribunal (“Tribunal”)
has recently held in case of SET Satellite (Singapore) Pte. Ltd.
(“SET”)
that payment of arm’s length price to the dependent agent does
not extinguish the tax liability of the foreign company in India.
The Tribunal has endorsed the ‘dual entity approach’ and held
that dependent agent Permanent Establishment (“PE”)
is distinct from the dependent agent and both can be taxed
separately in India. This means even though arm's length price is
paid to a related entity in India by a foreign company, additional
tax can be imposed on the foreign company’s revenues earned from
India. This ruling is likely to increase tax uncertainties in
India, thus increasing business risks for foreign companies doing
business in India through a dependent agent.
The
ruling comes in the middle of a raging controversy on attribution
of income to a PE. Recently, the Authority for Advance Rulings had
held in the case of Morgan Stanley that if the Indian company is
paid an arm’s length price, no further attribution can be made
to the PE in India. The tax office had appealed to the Supreme
Court of India on this issue, and a ruling is expected shortly.
In
this case, SET was a telecasting company tax resident in
Singapore. SET had appointed an agent in India for marketing
airtime slots and the agent constituted a dependent agent PE. SET
argued that as it remunerated the Indian agent at an arm’s
length price, nothing further would be attributable to it in
India. In arriving at this position SET relied on Circular no. 23
of 1969 and Circular no. 5 of 2004 (which was a clarification on
the taxation in case of outsourcing industry) issued by the
Central Board of Direct Taxes. The
Tribunal decided the case against SET holding that the
‘dependent agent’ and the ‘dependent agent PE’ were two
different tax payers. The income earned from India by the
dependent agent PE would be taxable in India and a deduction would
be allowed for the payment made to the dependent agent.
In
coming to this conclusion the Tribunal relied on the OECD Report
on ‘Attribution of Profits to PE’, and the Australian Tax
Office paper on the attribution of profits in case of dependent
agent PE. In countering the argument that, as stated in the OECD
Report a change in the language of the tax treaty currently in
place between India and Singapore would be required in order for
the report to be applied, the Tribunal held that the language of
the treaty as it currently stands merits this interpretation.
The
Tribunal thus seems to have departed from the single tax payer
approach thus far followed in India, and adopted the dual tax
payer approach advocated by the OECD. It remains to be seen which
approach the Supreme Court of India will take with regard to the
issue. This decision is likely to impact many foreign companies
which are doing business in India through dependent agents.
Source:
ITA
No. 205 and 535 / Mum / 04
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