Permanent Permanent Permanent Permanent EstablishmentEstablishment

CHYTHANYA K K CHYTHANYA K K B C FCA LLBB C FCA LLBCHYTHANYA K.K., CHYTHANYA K.K., B. Com, FCA, LLBB. Com, FCA, LLB

Raghuraman Raghuraman & Chythanya& Chythanyagg y yy yAdvocatesAdvocates

#32, 1st Floor,#32, 1st Floor,Patalamma Temple Street BasavanagudiPatalamma Temple Street BasavanagudiPatalamma Temple Street, Basavanagudi,Patalamma Temple Street, Basavanagudi,

Bangalore, Karnataka, IndiaBangalore, Karnataka, India..chyti@vsnl.netchyti@vsnl.net, 09844114184, 09844114184

BusinessBusiness Connection in IndiaConnection in India

Business connection in India1. NR may not have any business in India. Business is

an instrumentality which by itself does not determinethe accrual. The concept of place of accrual isdifferent from the situs of instrumentality.

2. Actual accrual of income from business situated inIndia does not ordinarily depend on whether any ofIndia does not ordinarily depend on whether any ofthe business operations are carried out in India and ifyes, the extent of such operations.

3. The actual place of accrual for the purpose of section5 i t b d t d i th l l d5 is to be understood in the legal sense anddetermined by the place where the right to receiveincome is recognised and enforced

Business connection in India

4. As there is no actual accrual, the Act steps to deem accrual to the extent of Indian contribution to such accrual.

5. This necessarily imNRes that income attributable to contributing operations is to be deemed to accrue incontributing operations is to be deemed to accrue in India.

6. The contributing operations are best identified with the operations carried out in India. This is where sec 9(1)(i) d ith E l ti t i9(1)(i) read with Explanations steps in.

BUSINESS (Instrumentality + SOI)

C ti iIn India (BII) Connection in India [BCI]

Meansbusiness

controlled in India

Means business

operations in IndiaIndia

BCI is not BII , hence doesn’t constitute a SOI [see Sec

Thus business in India constit tes a SOI in India

India

constitute a SOI [see Sec 9(1)(i) which distinguishes BCI

vis-à-vis SOI]

constitutes a SOI in India

When SOI is in IndiaWhen SOI is in India, income ordinarily accrues

in India

SOI is o/s India hence income ordinarily accrues o/s India

Income from BCI is deemed to accrue/arise u/s 9(1)(i)

Such deemed accrual is confined to operation in India

[Expl. (1)(a)]

Notes:

1. Ordinarily in an income earning process, three factors are involved 

Instrumentality SOI POAInstrumentality SOI POA

House  Agreement Place where rental is recoverable 

Services Employee Contract Place where SalaryServices –Employee Contract Place where Salary is recoverable 

Services –Agent Contract Place whereServices  Agent Contract Place where remuneration is recoverable 

2. However, w.r.t. business although technically, SOI is each contract with

customer, when understood w.r.t. 2(24)(i)/28(1)/Sec5, entire business has to be

understood as both instrumentality and SOI.

Meaning of business connection in India

1. Business connection in India is different frombusiness in India.

2 Business in India would mean that business is2. Business in India would mean that business iscontrolled in India irrespective of where the businessoperations are performed.operations are performed.

3. Business connection in India means business withIndia and not business in India.

Meaning of business connection in India

5. In other words, business connection in India meanscarrying business operations in India

6 Under sec 9 we are considering a case where the6. Under sec 9, we are considering a case where thebusiness is not in India but business outside India ishaving some connection in India.having some connection in India.

7. Business connection in India necessarilypresupposes some business operations carried out inIndia [Explanation 1(a)/3]

Business connection in India8 Business connection in its generic sense8. Business connection in its generic sense

encompasses the operations carried out by theassessee himself either through his own set up orassessee himself either through his own set up, orthrough his employees or through his assets or acombination of the above.

9. This is sought to be covered by section 9(1)(i) whenth id l th t 'b i ti 'the said clause uses the term 'business connection'.

10 This should also cover the operations carried out10.This should also cover the operations carried outthrough an agent who acts on behalf of NR.

11. Thus, ordinarily agency operations in India on behalfof a NR necessarily imply business connection.

Business connection in India8 However creation of Explanation 2 prospectively8. However, creation of Explanation 2 prospectively

makes agency operations as a separate specie9 Restricting scope of Explanation 2 to only some9. Restricting scope of Explanation 2 to only some

agency activities means that non specified agenciesdo not constitute business connection even in theordinary sense

10. Insertion of Explanation 3 which carries the samel d i t t E l ti 1( ) k itlanguage and intent as Explanation 1(a) makes itclear that agency business connection is beingadded as a separate specie complete with necessaryadded as a separate specie complete with necessaryexclusions and exemptions

11. Explanation 2 is added to align the Act with DTAp gwhich confirms that it is a separate specie newlyadded.

Explanation 21 Explanation 2 was inserted by FA 2003 with effect1. Explanation 2 was inserted by FA 2003 with effect

from 1.4.2004 for ‘removal of doubts’

2. Retrospective or prospective?

3. Memorandum declares it as clarificatory but stillk it timakes it prospective

4 Circular 7 of 2003 dt 5 9 2003 also declares it as4. Circular 7 of 2003 dt 5.9.2003 also declares it asclarificatory and additionally to align the Act withDTAs and confirms that it is prospective.p p

Explanation 2 – Expansive or restrictive?1 Uses ‘shall include’ and not ‘includes’1. Uses shall include’ and not includes’

2 Without Explanation 2 all agency activities would2. Without Explanation 2, all agency activities wouldhave naturally come under the scope of businessconnection.

3. Explanation 2 limits the scope to only three types ofti itiagency activities.

4 This is manifest in certain exemptions exNRcitly4. This is manifest in certain exemptions exNRcitlyprovided in Explanation 2(a) relating to purchase ofgoods, first proviso relating to agents of independentg , p g g pstatus and Explanation 3 limiting the scope ofExplanation 2 to operations carried out in India

Explanation 2 – Activities analysis1 Explanation 2 has 3 activities1. Explanation 2 has 3 activities

2 Expl 2 in its preamble uses the phrase 'on behalf of'2. Expl 2 in its preamble uses the phrase on behalf of .In clauses (a) & (b), similar phrase is used but not in(c) which deals with agent habitually securing ordersin India, mainly or wholly for the non resident. clause(c) does not as such require the use of 'on behalf of‘

3. Expl 2 may apply to both goods and services.

4. In case of royalty/fts services, as the same arecovered by sec 9(1)(vi)/(vii), Expl 2 is not apNRcabley ( )( ) ( ), p p

5. Chart on different combinations

Explanation 2

Broker/ General Commission Agent/ Independent Agent (IA) 

Works wholly/mainly on behalf of NR/controlled NRs/

Yes No

Prohibited activities

No YesIA

BCNo BC Contd..

IA

Acting in ordinary course of Business

Yes No

No BCProhibited activities

No Yes

BCNo BC

Computation of income1 Once BC triggers the business income of the NR1. Once BC triggers, the business income of the NR

has to be computed.2 One needs to understand whether the computation of2. One needs to understand whether the computation of

income arising from BC is to be done at gross level or net level.

3. Sec 9(1)(i) deals with deemed accrual. Actual accrual and deemed accrual are dealt with by sec 5.

4 A l i it l l l t t t NR d t4. Accrual in its legal sense relates to toNRne and not the bottomline.

5 Bottomline is the result of process of computation of5. Bottomline is the result of process of computation of toNRne in respect of which a legal right to receive has arisen to assessee. Even for royalty and FTS, y y ,section 44DA deals with deduction of expenses.

Computation of income1 While so computing is it necessary to confine the1. While so computing, is it necessary to confine the

computation of income only to the activities specifiedin (a) (b) and (c)?in (a), (b) and (c)?

2. Thanks to these activities, BC triggers, and once BCtriggers there is nothing to indicate that thecomputation should be circumscribed by referring toth ti itithese activities.

3 Once BC triggers the entire business income where3. Once BC triggers, the entire business income wherethe specified activities are carried out is exposed tocomputation in India.p

Computation of income1. Let us assume that a local agent (LA) is BC for NR1. Let us assume that a local agent (LA) is BC for NR

on basis that it is habitually securing ordersmainly/wholly for NR.

2. Thus, NR is enabled to make sales in India.

3. The entire income from the sales made in Indiawould be computed in the first place In this stage ofwould be computed in the first place. In this stage ofcomputation, no reference will be made to theoperations in India.p

4. For the purpose of computing income at this stage,ti fit f NR t tit l l t b t kentire profits of NR at entity level cannot be taken

although same may be taken as basis fordetermining profits accruing/arising through or from

Computation of income1 A reference may also be made to rule 10 for this1. A reference may also be made to rule 10 for this

purpose.

2. Giving effect to Explanation 3 now, only so much ofprofits as may be reasonably attributable tooperations in India alone should be be taken.

3 If NR i l d li ith t i th t h3. If NR is also dealing with certain other agents whomay carry out either non-specified agency activitiesor specified agency activities but on an independentor specified agency activities but on an independentbasis, a question that arises is whether only theprofits arising from NR through LA should be taken orp g gprofits arising from all the agencies including that ofLA should be taken?

Computation of income4 The above question may be answered by4. The above question may be answered by

understanding the scope of Explanation 2.

5. Explanation 2 would apply only to specified agenciesand not to all agencies

6. If so, the deeming fiction would be restricted toifi d i lspecified agencies only

7 Meaning thereby that no attribution can happen in7. Meaning thereby that no attribution can happen inrespect of activities performed through otheragenciesg

ApNRcation of Explanation 1(a)/3

NR

Global Profits 100 mn

Attribution on India Sales Sec 9(1)(i) / Expl. 2

India ROWIndia

90 mn10 mn 90 mn10 mn

Confined to India operation Expl .1(a)/3

India ROW

4 mn

India ROW

6 mn4 mn 6 mn

Principal’s income v. Agent’s remuneration1 Whether the remuneration paid by NR to LA decides1. Whether the remuneration paid by NR to LA decides

the income attributable to NR in India?2 There is a belief [supported by case laws] that if LA is2. There is a belief [supported by case laws] that if LA is

remunerated at ALP, the same will extinguish theassessment of NR in India.

3. In principle, there is no connection between thebusiness income deemed to accrue to NR in Indiath k t LA d th ti hi h NR ithanks to LA and the remuneration which NR iscontractually bound to pay to LA for its services.

4 Former relates to ALP profits of NR and latter relates4. Former relates to ALP profits of NR and latter relatesto ALP profits of LA. Both cannot be said to overlap.It makes no economic sense for NR to payp ycommission to LA equivalent to its own income.

Principal’s income v. Agent’s remuneration1 Take an example of a service PE paying salary to1. Take an example of a service PE paying salary to

employees. One cannot expect the PE to be makingnil profits by paying all its profits as salaries to itsnil profits by paying all its profits as salaries to itsemployees.

NRNR

LA LA

Status and activities of LA

Created by contract

Additionally /

Retains its third party triggers BC/PE of 

NR in India

party status/identity

Analysis of the above chart1. In the above chart, LA retains its third party status inp y

so far as its assessment is concerned.

2 Th LA ld tit t PE/BC f NR2. The very same LA would constitute PE/BC of NRthanks to its dependent status and prohibitedactivitiesactivities.

3. LA’s third party status is relevant for assessing itsp y gown income

4. LA’s PE/BC status is relevant for assessing NR’sincome.

5. LA creates exposures – one for its self and one forNR

Principal’s income v. Agent’s remuneration1 Correct position is to determine profits of NR on an1. Correct position is to determine profits of NR on an

independent basis through/from its BC in India.2 While determining the same FAR of LA is of no2. While determining the same, FAR of LA is of no

relevance. It is the overall business picture of NR thatis to be taken into consideration. The profits of NRcannot be equated to profits of LA

3. Once the profits of NR are so determined, if not allti i d t i I dioperations are carried out in India, as per

Explanation 3, only so much of profits as arereasonably attributable to operations carried out inreasonably attributable to operations carried out inIndia should be deemed to accrue or arise.

4. From such profits, necessary expenses will have top , y pbe allowed as deduction and such expenses inter aliainclude commission paid to LA also.

Is circular 23/ 23.07.1969 correct?1 As per circular if agent’s commission fully represents1. As per circular if agent’s commission fully represents

the value of the profit attributable to his service; itshould prima facie extinguish the assessment of NRshould prima facie extinguish the assessment of NR

2. It ignores risk assumed by NR in India3. Is ‘risk’ an operation carried out in India?4. Explanation 3 uses ‘attributable’ which is not the

same as 'relatable' or 'derived'.5 Whil it i t th t i k i t ti i d t5. While it is true that risk is not a operation carried out

in India, the risk is attributed to operation carried outin Indiain India.

6. Attribution is not an arithmetical exercise of totalprofits X operations carried out India/total operationsp p pcarried out worldwide.

Is circular 23/ 23.07.1969 correct?1 It is a case of attributing profits to operations carried1. It is a case of attributing profits to operations carried

out India and the operations carried out in India willhave to be understood as including all attendanthave to be understood as including all attendantaspects associated with it for the purpose ofattribution

2. Even if NR's activities are wholly channeled throughLA, and NR has no further activities in India, and

h it i d th t FAR f t l ieven when it is assumed that FAR of agent alone isto be taken into account, it cannot be assumed thatALP of such FAR from the agent's point of view [i eALP of such FAR from the agent s point of view [i.e.his income] should be same as ALP of the identicalFAR from the principal's point of view [i.e. principal'sp p p [ p pincome].

Is circular 23/ 23.07.1969 correct?1 Agent's income is an outgoing for the principal The1. Agent's income is an outgoing for the principal. The

value of FAR of agent when viewed from agent'sperspective is economically less valuable asperspective is economically less valuable ascompared to the FAR of the agent when viewed fromprincipal's perspective.

2. The function of the agent qua principal has lesservalue vis-a-vis the self same function of the agent

t id [i i i l t i i l]qua outsider [i.e. principal to principal].3. Circular 7 of 2009 dt 22.10.2009 has rightly

withdrawn circular 23withdrawn circular 234. Circular 5 of 2004 dt 28.9.2004 reflects the correct

position dealing with BPO activitiesp g

Is Morgan Stanley 292 ITR 416 SC correct?1 With respect it is noted that the Hon SC has mixed1. With respect, it is noted that the Hon. SC has mixed

up the ALP remuneration of PE with the ALP incomeof the NR in Indiaof the NR in India.

2. The Hon. SC did not appreciate that as per Art 7(2),the profits are to be attributed to PE of the enterprise.

3. The profit attributable to PE of the NR is differentfrom the compensation payable by NR to the PE.

4 ALP ti t th i FAR f th4. ALP compensation to the payee requires FAR of thepayee where profit attributable to PE requires FAR ofPE and not the payeePE and not the payee

5. Indian courts have ruled that an assessee in Indiahas to be compensated on ALP on an independentp pbasis notwithstanding whether NR has made anyprofits or not.

Is Morgan Stanley 292 ITR 416 SC correct?1 Assuming that in the case before SC MSco did not1. Assuming that in the case before SC, MSco did not

do any activity in India and all Indian activities areperformed by MSSA the SC and AAR failed to noteperformed by MSSA, the SC and AAR failed to notethat article 7(2) does not work on the same lines asExplanation 1(a)/3 to section 9(1)(i).

2. Attribution as per article 7(2) does not depend onti i d t i I dioperations carried out in India.

3 Rule 10 supports the proposition that ALP of agent3. Rule 10 supports the proposition that ALP of agentcannot be the basis for determining the income of theprincipal.p p

PermanentPermanent EstablishmentEstablishment

PE - Meaning

IT Act DTA

Sec 44DA Read with

Sec 9 (1) (i)Article 5

Read with Sec 92F

Explanation 2

PE includes a fixed the place of business

1. Extended meaningof businessConnectionp

through which the business of the

enterprise is wholly or partly carried on

Connection

2. Similar to DAPE

or partly carried on

PE meaning PE meaning –– IT Act v. DTAIT Act v. DTA

ITIT ActAct –– usedused inin inclusiveinclusive sensesense

-- InclusiveInclusive sensesense indicatesindicates ParliamentParliament intentionintention totocovercover serviceservice PEPE agencyagency PEPE softwaresoftware PEPEcovercover serviceservice PE,PE, agencyagency PE,PE, softwaresoftware PE,PE,constructionconstruction PEPE etcetc [Morgan[Morgan StanleyStanley 292292 ITRITR 416416SC]SC]]]

DTADTA –– usedused inin exhaustiveexhaustive sensesenseDTADTA usedused inin exhaustiveexhaustive sensesense

PE  ‐ IT Act v. DTA

1 A PE for NR can happen only under Art 5 of the DTA1. A PE for NR can happen only under Art 5 of the DTA.It can be under art 5(1)/(2) where NR has a right ofaccess to local entity’s [LE] place of business so thataccess to local entity s [LE] place of business so thatlatter's POB is effectively NR's POB.

2. More likely, LE constitutes PE for NR under art 5(5),i.e. DAPE

3. Section 92F(iii) defines an enterprise as including apermanent establishmentpermanent establishment.

4. Section 92F(iiia) defines PE as including a fixed( ) gplace of business through which the business of theenterprise is wholly or partly carried on.

PE  ‐ IT Act v. DTA

1 The definition is inclusive so as to attain a wider1. The definition is inclusive so as to attain a widermeaning but may not include DAPE in the absence ofexplicit provisions in the Actexplicit provisions in the Act.

2. A DAPE is a fiction in a bilateral agreement and in itsnatural meaning, may not be regarded as a PE.

3. Such fiction by implication cannot be introduced intothe Act of Parliament.

4 A 90(2) i i f A t ld l t th4. As per sec 90(2), provisions of Act would apply to theextent more beneficial to the tax payer.

5 Thus one may contend that DAPE is not a PE under5. Thus one may contend that DAPE is not a PE underthe Act.

6. Thus, only when LE constitutes PE of NR under, yarticle 5(1)/(2), one may say that NR has a PE underthe Act by way of a fixed place of business in India

Observation of Morgan Stanely 292 ITR 416

However vide Finance Act 2002 the definition of PEHowever, vide Finance Act, 2002 the definition of PEwas inserted in the Income-tax Act, 1961 (for short,‘IT Act’) vide section 92-F (iiia) which states that theIT Act ) vide section 92 F (iiia) which states that thePE shall include a fixed place of business throughwhich the business of the MNE is wholly or partlycarried on. This is where the difference liesbetween the definition of the word PE in thei l i d th I t A tinclusive sense under the Income-tax Act asagainst the definition of the word PE in theexhaustive sense under the DTAA This analysisexhaustive sense under the DTAA. This analysisis important because it indicates the intention ofthe Parliament in adopting an inclusive definitionp gof PE. so as to cover service PE., agency PE.,software PE., Construction PE etc

Is Morgan Stanely 292 ITR 416 right?

1. With respect, the aforesaid observations are notrightright.

2. As stated earlier, parliamentary intention may bepressed to sustain a fiction but cannot be pressed to

t fi ticreate a fiction.

PE - Relevance

IT Act DTA

Royalties & FTSNo PE PE

No PE PE BP/FTS/R/IPSR/FTS/IPS BP

25% 40%

R/IPS

40%

R/FTS/IPS BP

u/s 115A (1) (A&B)

On Grossi

As per FA, 2013, I Sch

Part IIEntry No. 2 (b) (x)

40%

As per FA , 2013, I Sch

Part IIEntry No. 2 (b) (x)

Concessional rate

On GrossR i

No Tax

Receiptsy ( ) ( )

On Net receipts after expenses

On Net receipts

after expenses

Receipts

PE relevancePE relevance

TheThe conceptconcept ofof aa PEPE isis asas regardsregards determiningdeterminingthethe rightright ofof aa ContractingContracting StateState (CS)(CS) toto taxtax thethethethe rightright ofof aa ContractingContracting StateState (CS)(CS) toto taxtax thetheprofitsprofits ofof anan enterpriseenterprise ofof thethe otherother ContractingContractingStateState..

UnderUnder allall threethree MCs,MCs, thethe existenceexistence ofof aa PEPE isis thethede i i ede i i e onditionondition fofo thethe t tiont tion ofof in omein omedecisivedecisive conditioncondition forfor thethe taxationtaxation ofof incomeincomefromfrom businessbusiness activitiesactivities andand ofof capitalcapital pertainingpertainingtoto suchsuch activitiesactivities..toto sucsuc act t esact t es

UnderUnder ArticleArticle 77 aa CSCS cannotcannot taxtax thethe profitsprofits ofof ananppenterpriseenterprise ofof thethe otherother CSCS unlessunless itit carriescarries onon itsitsbusinessbusiness throughthrough aa PEPE situatedsituated thereintherein..

PE relevancePE relevanceThisThis rulerule isis designeddesigned toto ensureensure thatthat businessbusinessThisThis rulerule isis designeddesigned toto ensureensure thatthat businessbusinessactivitiesactivities willwill notnot bebe taxedtaxed byby aa StateState unlessunless andanduntiluntil theythey havehave createdcreated significantsignificant economiceconomicbondsbonds betweenbetween thethe enterpriseenterprise andand thatthat StateState..

Conversely,Conversely, ifif economiceconomic bondsbonds withwith aa foreignforeigncountrycountry areare onlyonly loose,loose, taxationtaxation isis reservedreserved forforthethe StateState ofof residenceresidencethethe StateState ofof residenceresidence..

TheThe existenceexistence ofof aa PEPE isis aa conditioncondition forfor taxationtaxationTheThe existenceexistence ofof aa PEPE isis aa conditioncondition forfor taxationtaxationonlyonly insofarinsofar asas itit involvesinvolves incomeincome fromfrom thethebusinessbusiness activitiesactivities ofof anan enterpriseenterprise andand thetheassetsassets onon whichwhich suchsuch businessbusiness isis basedbased..

PE relevancePE relevance

TheThe taxationtaxation ofof incomeincome oror capitalcapital ofof anyany otherothertypetype isis governedgoverned byby thethe distributivedistributive rulesrulestypetype isis governedgoverned byby thethe distributivedistributive rulesrulesapplicableapplicable toto thethe typetype concernedconcerned..

AA personperson whowho isis PEPE ofof aa nonnon--residentresident personperson isisnotnot onlyonly instrumentalinstrumental toto fastenfasten taxtax liabilityliability butbut isisl ol o eligibleeligible toto tt benefitbenefit il bleil ble totoalsoalso eligibleeligible toto taxtax benefitsbenefits availableavailable toto aa

residentresident personperson ::

-- AARAAR 143143 TaxmanTaxman 7171-- CourtCourt ofof JusticeJustice ofof ECEC inin casecase CC--307307//9797 betweenbetweenCourtCourt ofof JusticeJustice ofof ECEC inin casecase CC 307307//9797 betweenbetween

SaintSaint--GobainGobain andand FinanzamtFinanzamt AachenAachen-- InnenstadtInnenstadt((22)st)st September,September, 19991999((11))

PE - Definition

Narrower Broader

FavoursSOS

FavoursSOR

EncouragesInternational

Protects domestic International

Tradedomestic

trade

Works when Capital/trade

Flow is balanced

But discouragesFlow of capital/

Trade fromDeveloped countriesDeveloped countries

DTA – Article 5

5 (1) 5 (2) 5 (3) 5 (4)

Extended Fixed

place of Exempted Dependent Categories

place of business

pActivities

pAgent PE

1 Pl f M t1. Place of Management2. Branch3. Office4. Factory5 Workshop

A. Goods or Merchandise1. Storage2. Display3 D li

A. Activities not Limited to Preliminary & 5. Workshop

6. A mine, an oil or gas well, a quarry7. Warehouse8. Farm, Plantation

3. Delivery4. Maintenance5. ProcessingB. Place of Business for-

yAuxiliary Character

B. Concludes,9. Stores10. Natural Resources11. Building site12. Service PE

Business for-1. Collecting information2. Advertisement

Contracts

C. ExclusivelySecures orders

Article 5 (1) v. (2)Article 5 (1) v. (2)The instances of PE are enumerated in para 2by means of an inclusive clause.

Broadly speaking, para 2 of article 5 isl t t th l t f PEcomplementary to the general concept of PE

embodied in the opening paragraph of article 5.

Para 2 serves the dual purpose of beingexplanatory and clarificatory of the concept of PEexplanatory and clarificatory of the concept of PEas contained in paragraph 1.

Article 5 (1) v. (2)Article 5 (1) v. (2)By resorting to specific enumeration under article5.2 of PE, the framers of the Treaty evidently

t d t l th ibl d bt d twanted to clear the possible doubts and toillustrative spell out various forms of PE.

Not only that, certain qualifications orparameters are laid down for example clause (i)parameters are laid down, for example, clause (i)of para 2, so that the general definition of PE isnot unduly stretched or restricted.y

Cal Dive Marine Construction (Mauritius) Ltd.Cal Dive Marine Construction (Mauritius) Ltd.[2009] 315 ITR 334 (AAR)

S i PES i PEService PEService PE

A Service PEA Service PEAA ServiceService PEPE isis deemeddeemed toto exist,exist, whenwhen::--

-- FurnishingFurnishing ofof services,services,

-- ThroughThrough employees,employees, oror

-- OtherOther personnel,personnel,

-- TheThe samesame oror thethe connectedconnected project,project,

-- ForFor aa periodperiod oror periodsperiods aggregatingaggregating moremore thanthan 66monthsmonths withinwithin 1212 monthsmonths..

FurnishingFurnishing servicesservices ofof anyany kindkind includingincludingconsultancy,consultancy,consultancy,consultancy,

OtherOther thanthan servicesservices referredreferred underunder ArticleArticleOtherOther thanthan servicesservices referredreferred underunder ArticleArticleRoyaltiesRoyalties && FeesFees forfor technicaltechnical services,services,

ThisThis clauseclause goesgoes beyondbeyond thethe ‘fixed‘fixed base’base’conceptconcept

ThisThis extensionextension ofof taxationtaxation byby thethe statestate ofofsourcesource isis ofof particularparticular significancesignificance ininconnectionconnection withwith makingmaking personnelpersonnel availableavailableandand withwith providingproviding technicaltechnical assistanceassistanceandand withwith providingproviding technicaltechnical assistanceassistance

‘Through‘Through employeesemployees oror otherother personnel’personnel’requiresrequires thatthat thethe employeesemployees asas wellwell asas otherotherrequiresrequires thatthat thethe employeesemployees asas wellwell asas otherotherpersonnelpersonnel areare notnot independentindependent ofof thetheenterpriseenterprise butbut areare underunder itsits directdirect controlcontrol

SomeSome casescases

1.1. Deputed/secondedDeputed/seconded employeesemployees2.2. EmployeesEmployees ofof associates/subsidiariesassociates/subsidiaries3.3. EmployeesEmployees ofof independentindependent serviceservice providersproviders4.4. EmployeesEmployees ofof subsub contractorcontractor5.5. IndependentIndependent employeesemployees ofof dependentdependent agentagent6.6. IndependentIndependent employeesemployees ofof independentindependent agentagent

Duration testDuration testExtendedExtended periodperiod duedue toto protocol/MFNprotocol/MFN isis totobebe consideredconsidered

DifferentDifferent situationssituations

1.1. SingleSingle customercustomer vv.. multiplemultiple customerscustomers1.1. SingleSingle customercustomer vv.. multiplemultiple customerscustomers2.2. SingleSingle serviceservice contractcontract vv.. multiplemultiple serviceservice

contractscontracts3.3. SingleSingle placeplace vv.. multiplemultiple placesplaces withinwithin IndiaIndia

SeeSee Worley Parsons [2009] 313 ITR 74 (AAR)

Article 5 (4)Article 5 (4)--Dependent Agent Dependent Agent

PersonsPersons whosewhose activitiesactivities maymay createcreate aa PEPE forforyythethe enterpriseenterprise areare soso--calledcalled “Dependent“DependentAgents”Agents”..ThisThis isis calledcalled DependentDependent AgentAgent PEPE -- DAPEDAPE

Indo USA DTA

DAPE (Art. 5)DAPE (Art. 5)

Art 5 (1)/(2) Art 5 (5)Art 5 (4)

1. Applies ‘not withstanding Article 5 (1)/ (2)’Article 5 (1)/ (2)

2. ApNRes only when Article 5(5) is NA

Agent’s Place of Business (POB)( )

Principal has right of disposal over it?

Yes No

Whether Art A t 5(1)/(2)Whether Art 5(4) applies ?

Art 5(1)/(2) NA

A t 5

Yes No

Art 5 (5)

5(1)/(2) 5(1)/(2) NA

PE under Art. 5(4) Ref Notes 

5(1)/(2) applies 

PE under Art. 5(1)/(2) Ref Notes

Notes:

1. In either case there is PE.

2. The purpose of ‘Notwithstanding’ is that when

objective criteria of Art 5(4) are met there is noobjective criteria of Art 5(4) are met, there is no

scope for subjective criteria of right of disposal

test for Art. 5(1)/(2).

3 Is there a difference in profit attribution3. Is there a difference in profit attribution

between PE under Art 5(1)/ (2) and PE under Art

5(4)?

Art 5 (5)?

Yes No

No PE h b dActivity

Prohibited Activity

Yes NoYes No

PE No PEPE No PE

Art. 5 (5)

Broker/ General Commission Agent/ Independent Agent (IA) 

Activities are wholly/ almost wholly devotedalmost wholly devoted

Yes No

Dealing at ALPDealing at ALP

No YesIAIA

IA

IA

Acting in the course of Business

Yes No

No PE

Go to Art 5(4)Go to Art. 5(4)

h fScheme of Art. ( )5(5)5(5)

1st Limb : Critical parameters 2nd Limb : Specific parameters

IA Acting in ordinary 

Wholly/ mainly devoted

Not at ALP

course of business

Denies IADenies IA status

Note : Specific parameters in 2nd Limb apply for determining IA status of 1st

Limb

Point to note 

Despite being IA, Art 5(4) triggers if

not acting in ordinary course of

business.

NR is Holding Co. of LA

NR’s dominion over POB of LA

Yes No

Whether Art 5(4) applies ?

Art 5(1)/(2) NA

Yes No

Art 5 (5)

5(1)/(2) 5(1)/(2) NA

PE under Art. 5(4) Ref Note 1

5(1)/(2) applies 

PE under Art. 5(1)/(2) Ref Note 1

ContdContd

Yes No

No PE Prohibited Activity

Yes NoYes No

PE No PEPE No PE

LA is a PE of NR

Art 5(1)/ (2)

Art 5(4)( )

Profit attribution to

Profit attribution to

Whole of PE [Art 7(2)]

Only DAPE?[Art 7(2)]

Attribution difference between 5(1)/(2) and 5(4)and 5(4)

1. In the case of a PE, in terms of article 7(1)/(2), there has to be an attribution to that PE the profits which ithas to be an attribution to that PE the profits which it would have made acting independently of the enterprise of which it is a PE.p

2. If an Indian PE under article 5(1)/(2) contributes to earning income overseas [eg sales/services referral],

i i f h ian appropriate portion of such overseas income should be attributed to Indian PE

3 If an Indian DAPE under article 5(4) canvasses for3. If an Indian DAPE under article 5(4) canvasses for the enterprise’s sales outside India, such activity being outside India is not a prohibited activity andbeing outside India is not a prohibited activity and hence outside the PE regime. In such case, there cannot be attribution of such profits to Indian DAPE.

Attribution difference between 5(1)/(2) and 5(4)and 5(4)

4. Art 5(1)/(2) may be person/place based PE whereas Art 5(4) is activity based PEArt 5(4) is activity based PE

5. In case of activity based PE, the attribution cannot y ,travel beyond the activities that trigger PE

Meaning of ‘Activities’ devoted wholly or almost wholly

1. Does it refer to only ‘agency activities’ or overall economic

functions?

2. Take following combinations:

a. Agency for NR + Agency for others IA

b. Agency for NR + Own trading IA or DA ?

c. Agency for NR + Contractmanufacturing for others

IA or DA ?

d. Agency for NR + Own manufacturing IA or DA ?

e. Agency for NR + Services  IA or DA ?g y

f. Agency for NR + Two or more of the above

IA or DA ?

Activities devoted Wholly or almost wholly

for NR 1for NR‐1

Prohibited activitiesProhibited activities

Identical turnover

Agent 1 Agent 3Agent 2Agent 1 Agent 3Agent 2

No other ti iti

Also into agency f NR 2/R

Also into manufacturingactivities for NR-2/Rmanufacturing

DAPE IAIA

1. Art. 5(5) uses: 

a) ‘the activities‘ and not ‘such activities’ 

b) ‘activities of such an agent‘ and ‘not activities as an agent’  

2 Between A2 & A3 there is no difference to NR 1 in terms of his normal business/2. Between A2 & A3, there is no difference to NR‐1 in terms  of his normal business/

economic exposure.

3. There is no warrant in Art 5(5) to create any distinction between A2 & A3.

4. Even between A1 on one hand , ‘A2 & A3’ on other hand there is no different 

business/economic exposure to NR‐1. However, Art 5(4)/(5) creates an artificial 

difference between them.

Art 5(4) Prohibited activities

1 On behalf of1. On behalf of 

2. Activities within the state

a b c

1.1. Has and h bit ll

1. Habitually habitually exercising authority to  Contd

secures orders.

2. Wholly or almost whollyconclude

2. 5(3) exemption t d d

almost wholly

extended 

Contd(b)

1 No such authority but maintains stock and regular

( )

1. No such authority but maintains stock and regular delivery  therefrom + Additional activity conducted on behalf of principal .

2. If ‘A’ has such authority but doesn’t  habitually exercise

Activity (a) is NA

Activity (b) is also NA

3. Additional activities

i. doesn’t apply if ‘P ‘ conducts 

ii. ApNRes if ‘A’ conducts

iii. ApNRes if third parties conduct?

USA vs. UK

Art 5(4) ‐ Art 5(4) ‐Preamble Activities

1.1. Activity (a) 

1. No ‘notwithstanding clause’  in UK unlike (note on implication)

• Negotiate & enter into in UK (USA doesn’t have ‘Negotiate’)    

( ) l d ( )(note on implication)

2. ‘For or on behalf of ‘ in UK unlike ‘on 

• Enter (UK) vs. Conclude (USA)

• No 5(3) exemption in UK [can it be inferred?]

behalf of’ in USA (note for implication)

be inferred?]

• Purchase for enterprise is excluded  in UK– not so in USA lth h f d i A t 7(4)although found in Art 7(4)  

A ti itiActivities contd..

2. (b)2. Activity (b) 

• UK is not concerned with existence or otherwise ofUK is not concerned with existence or otherwise of ‘Authority to Conclude’ unlike USA – This may cause differential attribution between the two

USA • UK has no condition as to additional activities unlike 

USA 

3. Activity (c) 

‘S d f• ‘Secures orders for principal or connected principals’ in UK unlike USA

USA vs UK

( )

USA vs. UK  

Art 5(5)

USA UK

1. Activities are devoted

2 A ti iti l t ‘P’

1. Activities are carried out2. Activities only to ‘P’

3. Dealing at ALP creates independence

out

2. Activities to ‘Principal’ and connected independence  ‘Principals’

3. No exemption when dealing at ALPdealing at ALP

Notes: on ‘FOR’ OR ‘ON BEHALF OF’

FOR Principal to Principal

ON BEHALF OF Agency

1. Delivery ‘for’

vs

g y

vs.

Delivery ‘on behalf of’

2. When ‘A’ delivers in pursuance to contractual obligation of

‘P’, ‘A’ delivers on behalf of ‘P’ .

Eg. ‘P’ sends goods to ‘A’ and directs him to delivers to ‘P’

customers.

3. When ‘A’ delivers to the distributors of ‘P’ but

t i t t t l bli ti f ‘P’not in pursuance to contractual obligation of ‘P’,

‘A’ delivers it for ‘P’

Eg ‘P’ sends goods to ‘A’ and directs him toEg. P sends goods to A and directs him to

deliver to Ps third party manufacturer

4 M i f ‘ i t i ’4. Meaning of ‘maintains’:

• Maintenance vs. Maintains

• Maintenance – apNRes to stock/ merchandise ready

for delivery but not those anterior to delivery, like RM

etc.

Holding it for such time as wouldres lt in con enient dispatch No

Maintainsresult in convenient dispatch  ‐ No

Holding it for such time till delivery instructions are received ‐ Yes

5. Where a ‘Person’ acts as a contract manufacturer

• He manufactures ‘for P although not as an agentHe manufactures for P, although not as an agent

• Post manufacturing, he delivers to

P’s CustomerP’s TP 

manufacturer

Delivery LA Delivery FOR

Activity (B) triggers thanks to ‘FOR’

6.

Negotiating and entering intoNegotiating and entering into Contract

FOR LA

‘A’ negotiates and enters into contracts with customers

‘A’ negotiates and enters into• Directly 

•Assumes FAR with customers

A  negotiates and enters into with customers

•Makes ‘P’ assume FAR

•Will have BTB FAR with Principal

•Customers have recourse to ‘A’

•A’ has recourse to ‘P’

•Customers have no recourse to ‘A’ but only to ‘P’

•A  has recourse to  P  

Eg. German Car maker, Singapore global agent and Indian sub agent

S i C

7.

Securing Contracts

FOR LA

‘A ‘ secures ‘for’ IP (i di t i i l )(immediate principals) [Activity ‘c’] 

‘A’ secures ‘LA’ principal [No activity 

IP secures ‘LA’ UP (ultimate i i l) [N ti it ‘ ’]

‘c’]

principal) [No activity  ‘c’]

Eg. German Car maker, Singapore global agent and Indian sub agent

8. Significance of agent negotiating

Negotiate Don’t 

Negotiate 

Conclude Secure Conclude Secure

(a) (c) No (a) (c)

NRArt. 7(1)

LA (DAPE)

Taxability in India of

Profits attributable toProfits attributable to 

Art Art LA Other IA7(1)(a) 7(1)(b)/(c)

N i iNot constituting PE (FOA)Mitigating factor –

Expl. 1(a) to Sec 9(1)/Expl 3

Goods DAPE

Profits attributable to

A t 7(1)( )Art 7(1)(a) Art 7(1)(b)

LA Other IAs not constituting PE [Example] 

Service DAPE

l d d din USA

Eg. Cloud computing services provided in USA

Art 7(1)(a) Art 7(1)(c)Art 7(1)(a) Art 7(1)(c)

LALAOther IAs not constituting PE 

Art. 7(1)

Interplay between goods & servicesgoods & services

Art 7(1)(b) Art 7(1)(c)

S l iSale in India 

Business activities carried 

on in India

gSame/ Similar 

goods IA securing orders though not  PE,  is 

carrying out businessSame/ Similar 

business activitiescarrying out business activities in India  

business activities

A t 7(2)Art 7(2)

Attribution inAttribution in

Each CSSignificance of ‘each 

CS’CS

To the PE

The profits

dmake

PE is expected to make

Significance

1. Distinct & independent enterprise

2. Engaged in same/similar activities

3. Under same/similar conditions

4. Dealing wholly at arm’s length with HO

Slice out of HO profits

Independent Independent profit of PE

Art. 7(2) for LA

NRNR

Despatches goodsto

LA (DAPE) IALA (DAPE) IA

Commission Commission atComparable 

t dCommission at 8%

Commission at 10 %

trader 

Margin at 12 %

1.Benchmarking with IAg

)D t i l ALP ti f ta)Determines only ALP remuneration of agent

b)Looks fine as per 292 ITR 416 SC but inherent

k / d b k i h b h kiweakness/ drawback in such benchmarking

c)Art 7(2) not complied with as DAPE’s profits are

different from LA’s commissiondifferent from LAs commission

2. Benchmarking with Comparable Trader

a) Reflects profits which DAPE is expected to make

b) Comparative Analysis (FAR) is to be carried out to

ensure that trader is comparableensure that trader is comparable.

) Si il it f f ti il i il it fc) Similarity of functions prevails over similarity of

goods

How to benchmark?How to benchmark?

Apply Comparable Trader’s margin on sale through DAPE

Apply Comparable Traders purchase price to 

determine GP of DAPEsale through DAPE determine GP of DAPE

No scope for deduction under

DAPE salesdeduction under 

Art 7(3)  Less: ALP purchase 

= GP

Less: Expenses as per Art 7(3)

Reflected in Reasonable Estimation 

as per Art 7(2)as per Art 7(2)

TP between NR and LA

1. If it is found that NR has no BC/PE in India, thetransfer pricing provisions do not apply in respect oftransfer pricing provisions do not apply in respect ofthe transactions between NR and LA.

2. If it is found that NR has BC/PE in India through LA,the question is whether transfer pricing provisions

l i t f th t ti b t NR dapply in respect of the transactions between NR andLA.

If LA constitutes only a BC but not a PE1 A mere BC by itself does not constitute a PE1. A mere BC by itself does not constitute a PE

2 There is a difference between BC and PE2. There is a difference between BC and PE

• WESTERN UNION FINANCIAL 104 ITD 34 (DELHI)• Morgan Stanley and Co. Inc. (2007) 292 ITR 416

(SC)

3. A mere existence of BC does not create AErelationship under section 92A(2) except possiblyrelationship under section 92A(2) except possiblyunder clauses (g), (h) and (i)

If LA constitutes only a BC but not a PE1 If the above three clauses do no apply the TP1. If the above three clauses do no apply, the TP

provisions do not apply per se.

2. However, NR may independently apply TP provisions for proving that it is remunerating LA at ALP so that the same will extinguish its assessment taking recourse to 292 ITR 416 SC.

3. In such case, it may establish ALP either as per chapter X or independently as chapter X as such ischapter X or independently as chapter X as such is not applicable in the instant case.

If LA constitutes only a BC but not a PE1 If any of the above three clauses applies the TP1. If any of the above three clauses applies, the TP

provisions apply per se. NR shall apply TP provisions for proving that it is remunerating LA at ALPfor proving that it is remunerating LA at ALP.

2. This would apart from ensuring compliance with chapter X, will also extinguish its assessment as per 292 ITR 416 SC.

3. In such case, it shall establish ALP only as per chapter Xchapter X

TP between NR and LA

1 Assuming that LA is a PE of NR that by itself does1. Assuming that LA is a PE of NR, that by itself doesnot trigger AE relationship between the two as persec 92A except by virtue of clauses (g) (h) and (i)sec 92A except by virtue of clauses (g), (h) and (i).

2. If such a AE is created, needless to say that TPprovisions will apply.

3 I h AE i t d TP i i h3. In case no such AE is created, TP provisions as suchwill not apply.

4. However, as stated earlier, NR may apply TPprovisions for proving ALP dealing with LA top p g gextinguish its own assessment relying on 292 ITR416.

Impact on LA’s taxation

1 Personal taxability of LA in India is independently1. Personal taxability of LA in India is independentlygoverned by section 5(1) of the Act read with section4(1) Such taxability does not depend on whether LA4(1). Such taxability does not depend on whether LAconstitutes a BC or PE or both for NR.

2. LA’s liability to tax in its own name for its incomedoes not depend on whether LA triggers BC/PE forNR. If LA triggers BC/PE for NR, it only means

bilit i I di f fit f NR i dditi tassessability in India of profits of NR in addition tothe always existing liability to tax in India for LA.

3 Quantum of income of LA does not depend on3. Quantum of income of LA does not depend onquantum of income of NR.

4. However, if it is established that LA and NR are AEs,, ,it is axiomatic that LA has to offer ALP income to taxin India in so far as its transactions with NR.

Example where TP applies

Situation 

ALP Actual Observation

1 100 80 While LA pays tax on1 100 80 While LA pays tax ondifferential rs.20, NR can claimdeduction only of Rs.80 as persec 92(3)Note : Can AO insist on taxingRs.100 at 40%?

2 100 100 No impact

3 100 120 While LA pays tax on rs.120,NR can claim deduction only ofRs 100 as per sec 92(1) Note :Rs.100 as per sec 92(1) Note :Can AO insist on taxing Rs.100at 40%?

Assuming that LA is a subsidiary plus DAPECase ALP Actual Observation

1 100 80 While LA pays tax on differential rs 20 NR can claim deduction only of Rs 801 100 80 While LA pays tax on differential rs.20, NR can claim deduction only of Rs.80 as per sec 92(3). This will result in NR retaining Rs.20 without suffering DDT under section 115O.

Department's counter:

As per 292 ITR 216 and Circ 23, it is necessary that NR actually remunerates LA at ALP and not just LA notionally paying tax on ALP.  On this analogy, in the above proposition, NR may end up paying tax at 40% on Rs.20 and LA ends up paying tax at 30% on Rs.20.ends up paying tax at 30% on Rs.20.

Assessee's reply :

SC /Circular's intention behind sparing HO from tax if PE is remunerated at ALP i b i h b ALP i d d PE ld ThALP is on basis that tax base at ALP is preserved and PE would pay tax. The same is achieved even in the above case as PE would have paid tax on ALP.

Department's further counter :

In the entire scheme of things, there is a flight of tax base in as much as DDT is avoided.

2 100 100 No impact2 100 100 No impact

3 100 120 While LA pays tax on rs.120, NR can claim deduction only of Rs.100 as per sec 92(1). This will result in NR suffering DDT on extra Rs.20 under section 115O.

Impact on LA’s taxation

1 If it is established that LA and NR are not AEs LA's1. If it is established that LA and NR are not AEs, LA'sincome from NR is deemed to be at ALP in terms ofsection 92F(ii) as "arm's length price" means a pricesection 92F(ii) as arm s length price means a pricewhich is applied or proposed to be applied in atransaction between persons other than associatedenterprises, in uncontrolled conditions.

2 T k h th h TP i i d t2. Take a case where even though TP provisions do notapply, NR may determine ALP of remuneration to LAto extinguish its assessment relying on 292 ITR 416to extinguish its assessment relying on 292 ITR 416.

ExampleSituation ALP Actual ObservationSituation  ALP Actual Observation

1 100 80 Refer detailed notes in the following slides

2 100 100 ..do..

3 100 120 ..do..3 100 120 ..do..

Impact on LA’s taxation

1 In situation 1 as ALP is more than actual1. In situation 1, as ALP is more than actualremuneration, applying 292 ITR 416, NR is liable totax for the difference in India i e on Rs 20 This willtax for the difference in India i.e. on Rs.20. This willnot affect the taxation of LA as TP provisions do notapply to LA on the basis that it is not a AE of NR.

2. In situation 2, as ALP is equal to actual remuneration,l i 292 ITR 416 NR ti i h itapplying 292 ITR 416, NR extinguishes its

assessment. This will not affect the taxation of LA asTP provisions do not apply to LA on the basis that it isTP provisions do not apply to LA on the basis that it isnot a AE of NR.

Impact on LA’s taxation

1 In situation 3 as actual is more than ALP1. In situation 3, as actual is more than ALPremuneration, applying 292 ITR 416, NRextinguishes its assessmentextinguishes its assessment.

2. This will not affect the taxation of LA as TP provisionsdo not apply to LA on the basis that it is not a AE ofNR.

3. There is no legal backing to a possible claim that LAneed not pay tax on difference between actual andneed not pay tax on difference between actual andALP. Similarly, there is no legal backing to a possiblerevenue claim that NR has to pay incremental tax onp ydifference between actual and ALP to account for thetax rate differential between FC and DC.

If LA were a foreign company?1 Assume that LA is a company based in Singapore1. Assume that LA is a company based in Singapore

2. LA is a global agent for various principals2. LA is a global agent for various principalsincluding NR

3. LA sets up a India branch

4 I di b h th h i d d t t i PE4. India branch though independent may trigger PEfor NR failing ‘ordinary course of business’ test

PE twice over!!!

Indian branch of LA LA

DAPE for NRIndian Branch 

of LA

PE in India  for NR as per USA 

PE in India  for LA as per Singp

DTALA as per Sing 

DTA

LA’s PE in India1 LA has a PE in India as per Art 5(2) of Indo1. LA has a PE in India as per Art 5(2) of Indo

Singapore DTA

2. Benchmark branch’s profits by takingcomparable profits of an agent providing similarservices

3 Y h t t k bl t LA i3. You have to take comparable agent as LA isessentially carrying out agency work

4. Ignore the commission which is actually sharedbetween LA and its branch in its books ofaccount

NR’s PE in India1. NR has a PE in India through LA’s branch as per1. NR has a PE in India through LA s branch as per

Art 5(4) of Indo USA DTA

2. Benchmark DAPE’s profits by taking comparableprofits of a trader carrying out similar functions

iservices

3 You have to take comparable trader as NR is3. You have to take comparable trader as NR isessentially carrying out trading in India

4. Claim the entire commission which is actuallypaid by NR to LA relating to India operations

5. Ignore the profits of LA’s branch determined fortaxation as per Indo Sing DTA

Article 5 (6)Article 5 (6)--Controlled EntityControlled EntityTheThe factfact thatthat aa companycompany whichwhich isis aa residentresidentofof aa ContractingContracting StateState

ControlsControls oror isis controlledcontrolled byby aa companycompany whichwhichisis aa residentresident ofof thethe otherother ContractingContracting State,State,oror

WhichWhich carriescarries onon businessbusiness inin thatthat otherother StateState(th h(th h PEPE th i )th i )(through(through aa PEPE oror otherwise),otherwise),

ShallShall notnot byby itselfitself constituteconstitute eithereither companycompanyaa PEPE ofof thethe otherother..

Holding Holding –– Subsidiary Subsidiary gg yyrelationshiprelationship

-- AA subsidiarysubsidiary companycompany doesdoes notnot byby itselfitselfconstituteconstitute aa PEPE ofof itsits parentparent companycompany..

-- ForFor thethe purposepurpose ofof taxation,taxation, subsidiarysubsidiaryp pp p ,, yycompanycompany constitutesconstitutes anan independentindependent legallegalentityentity..

HoldingHolding –– SubsidiarySubsidiary relationshiprelationship::--HoldingHolding SubsidiarySubsidiary relationshiprelationship::

SubsidiarySubsidiary shallshall bebe regardedregarded asas aa PEPE onlyonly ifif-- SubsidiarySubsidiary shallshall bebe regardedregarded asas aa PE,PE, onlyonly ififitit hashas andand habituallyhabitually exercisesexercises anan authorityauthoritytoto concludeconclude contractscontracts inin thethe namename ofof parentparenttoto concludeconclude contractscontracts inin thethe namename ofof parentparentcompanycompany..

-- IfIf aa subsidiarysubsidiary isis actingacting inin thatthat manner,manner, itsitsparentparent companycompany willwill bebe exposedexposed toto PEPEtaxationtaxation onon profitsprofits derivedderived fromfrom suchsuchcontractscontracts concludedconcluded byby subsidiarysubsidiary onon behalfbehalfff itit ttofof itsits parentparent companycompany..

Implications Implications -- Advantages Advantages NoNo taxtax onon locallocal subsidiarysubsidiary [LS][LS]

NoNo splittingsplitting ofof profitsprofits betweenbetween FHSFHS andand LSLS

FairerFairer attributionattribution ofof profitsprofits toto PEPE asas againstagainstLSLS payingpaying taxtax onon globalglobal incomeincome whenwhen notnot aap y gp y g ggPEPE

FHSFHS isis eligibleeligible forfor FTCFTC

NoNo TPTP betweenbetween LSLS andand FHSFHS

Implications Implications -- Advantages Advantages

NoNo TPTP betweenbetween LSLS andand FHSFHS

IfIf LSLS actsacts asas aa sourcingsourcing agentagent ofof FHS,FHS, nonogg gg ,,attributionattribution atat all!all!

Implications Implications -- Disadvantages Disadvantages TaxTax atat 4040%%

ForceForce ofof attractionattraction inin respectrespect ofof directdirectsales/servicessales/services

BranchBranch profitsprofits taxtax underunder DTCDTCpp

ExposureExposure toto recklessreckless attributionattribution andandppconsequentconsequent litigationlitigation

DespiteDespite FHCFHC payingpaying fullfull tax,tax, LSLS maymay suffersufferMATMAT

IssuesIssuesTaxTax implicationimplication ofof paymentpayment ofof interestinterest byby LSLStoto FHCFHC andand vicevice versa?versa?

How would capital gains on transfer of shares heldin IS Co be taxed?

If FHC sells away all its shares, will this beregarded as alienation of PE and not as transfer ofh ?shares?

IsIs DDTDDT applicable?applicable?

Thank YouThank You