tax notes international - Tuck School of Business - Dartmouth College

INDIA
Addressing the assessee’s deduction of the salary
costs of some employees in its head office, the tax officer
said those costs were in the nature of head office
expenses, which are subject to a deductibility cap under
section 44C of the Indian Income Tax Act. 2 Subjecting
it to that limit, the tax officer denied the deduction.
The assessee successfully argued its case before the
commissioner of income tax (appeals). The Revenue
Department then appealed to the tribunal.
Tribunal’s Ruling
The tribunal held that the Malaysian company did
not have a PE in India under article 5(4)(a) of the
India-Malaysia tax treaty. It noted that the personnel
supplied by the Malaysian company were under the
direct control of the assessee, that the Malaysian company
had no further role after the personnel were supplied
to the assessee, and that the Malaysian company
did not carry out any direct supervisory activities in
India.
Also, the tribunal noted that there is no article in
the India-Malaysia tax treaty that deals specifically
with fees for technical services. Consequently, there
was no obligation on the assessee to withhold Indian
tax from the payments it made to the Malaysian company
and the payments were therefore tax deductible.
The tribunal also noted that article 5(2)(j) of its tax
treaties, which provides for a threshold of six months
in India, specifically refers to a building site, installation,
or assembly project, or supervisory activities in
connection therewith.
Turning to the assessee’s payments to the U.K. company,
the tribunal noted that, in contrast to article
5(2)(j), a PE is triggered under article 5(2)(k) when services,
including managerial services, are performed in
India for an unrelated party for a period of more than
90 days in any 12-month period.
The tribunal therefore applied the settled legal principle
that if two provisions are equally applicable to a
situation, the one that is most beneficial to the taxpayer
should be adopted. Because the personnel of the
U.K. company were deployed in India for no more
than 135 days, there was no PE for the U.K. company
under article 5(2)(j) of the India-U.K. tax treaty. Consequently,
the assessee was not required to withhold any
Indian tax from its payments to the U.K. company and
the payments were therefore tax deductible.
Regarding the services supplied by the Dutch company,
the tribunal held that those services, while tech-
2 ITA section 44C limits the deduction for head office expenses
to 5 percent of taxable income, computed as specified.
Head office expenses have been defined to mean executive and
general administrative expenditures incurred by the assessee outside
of India, including salaries, rent, travel expenses, and so on.
nical, did not make any technical knowledge or experience
available to the assessee. As such, the assessee’s
payments to the Dutch company could not be classified
as fees for technical services within the meaning of
article 12 of the India-Netherlands tax treaty, the tribunal
said. The assessee therefore was not required to
withhold any Indian tax from the payments, and the
payments were tax deductible, the tribunal ruled.
On the final question, the tribunal held that the deductibility
cap on head office expenses is limited to
executive and general administrative expenses incurred
by the head office for a common purpose — for example,
for purposes of managing the head office as
well as all branches and PEs in general. In the case at
issue, the payment was made to employees who
worked in the head office and did not work exclusively
on the Indian project (that is, they also worked for the
head office, as shown by the allocation of part of the
salary costs based on the hours spent on the Indian
project). Therefore, there was a common purpose for
those expenses as envisaged in ITA section 44C, the
tribunal said.
However, because the employees were providing specific
technical services to the Indian project, their costs
could not be classified as executive and general administrative
expenditures, which refer to managerial and
administrative services alone and do not include technical
services, the tribunal said. Therefore, those costs
were not subject to the deductibility cap imposed by
ITA section 44C and were fully deductible in computing
the taxable profits of the Indian PE.
For nonresidents with a PE in India, this ruling may
make it easier to fully claim a deduction for costs relating
to services other than managerial and administrative
services, subject of course to the arm’s-length principle
under the transfer pricing code.
♦ Shrikant S. Kamath, tax consultant, Hong Kong
Subsidiaries in India Do Not
Constitute a PE, Tribunal Rules
A German company’s Indian subsidiaries do not
constitute a permanent establishment in India; therefore,
the company is not subject to taxation in India,
according to the Pune Income Tax Appellate Tribunal.
The tribunal’s ruling in ACIT v. Epcos AG — issued
on June 30, 2008, and made public on January 21 —
involves the 2003-2004 assessment year and deals with
issues relating to the Germany-India income tax treaty
and the Indian Income Tax Act, 1961. (For the ruling,
see Doc 2009-1333 or 2009 WTD 14-21.)
Background
Epcos AG is a multinational company that designs,
manufactures, and markets electronic components. It
396 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.