tax notes international - Tuck School of Business - Dartmouth College

has operations in Germany and subsidiaries across the
world, including two in India. During the year under
consideration, the German arm of Epcos AG supplied
services such as marketing, sales support, and technology
support to the Indian subsidiaries in return for royalty
payments.
In its Indian tax return, the German arm of Epcos
AG classified the payments it received from the Indian
subsidiaries as royalties and fees for technical services,
which were subject to Indian income tax at a rate of
10 percent under article 12 of the Germany-India income
tax treaty.
The Indian tax officer requested details about the
services supplied to the Indian subsidiaries by the assessee,
and the company submitted that sales are
handled by Epcos AG’s regional sales offices, whereas
marketing efforts are centralized at the German headquarters
in Munich.
The company said it is organized by product divisions,
and each division has a central marketing team
that works for all the manufacturing subsidiaries in that
division. Epcos AG charges an arm’s-length fee for the
services that the central marketing team renders for the
benefit of the various manufacturing subsidiaries.
The transfer pricing officer (TPO) agreed that the
services provided by the assessee were supplied to the
Indian subsidiaries on an arm’s-length basis, as required
by the transfer pricing provisions of the ITA.
The tax officer, however, thought that the assessee
had a PE in India in the form of the two subsidiaries
because the assessee was conducting its business in India
through those subsidiaries and more specifically,
through the employees of the subsidiaries. He classified
the payments at issue as business profits under article 7
of the Germany-India tax treaty and assessed tax on a
gross basis at the 20 percent rate provided under the
ITA. (For the year in question, the ITA did not allow a
deduction for any expenses related to royalties and fees
for technical services earned by a foreign company.)
The commissioner of income tax (appeals) subsequently
overturned the assessment, holding that the
services supplied by Epcos AG were routine in nature
and were provided to enable the Indian subsidiaries to
carry on their own business activities, and not the business
of the assessee. The Revenue Department then
appealed to the tribunal.
The Tribunal’s Decision
In the tribunal’s own words, the commissioner of
income tax (appeals) properly rejected the tax officer’s
‘‘overzealous approach.’’
The tribunal held that a tax treaty generally provides
for an alternate tax regime and not an exemption regime.
Therefore, the burden is first on the Revenue Department
to show that the assessee has taxable income
under the treaty, and then the burden is on the assessee
to show that its income is exempt under the treaty. Unless
a tax jurisdiction has a right to tax an income, it is
irrelevant whether, under the domestic tax legislation
of that tax jurisdiction, the income in question is taxable.
In a situation in which India has no right to tax a
particular income in the hands of the nonresident covered
by a tax treaty, the provisions of ITA do not
come into play at all.
The tribunal confirmed that when an economic activity
is carried out in a fixed place of business available
to a foreign enterprise, that place will be a PE of
the foreign enterprise regardless of whether the activities
at issue are core activities or peripheral activities.
However, if the PE carries on an activity that does not
serve the overall purpose of the foreign enterprise or
does not contribute to the profits of the foreign enterprise,
the existence of such a PE is wholly academic
and does not have any tax implications in the source
jurisdiction (in this case, India).
While Epcos AG’s business is to supply certain
types of services to its Indian subsidiaries, the business
of the Indian subsidiaries is to manufacture and sell
their own products, the tribunal said. The fact that the
employees of the Indian subsidiaries were also engaged
in marketing and information technology support activities
does not mean that those employees were doing
the business of the assessee, it said.
Further, the TPO had agreed that the payments
made by the Indian subsidiaries to Epcos AG were at
arm’s length, and the assessee had not reimbursed the
subsidiaries for any costs incurred in connection with
their employees in India, and as such, there could not
be any payment for, or in connection with, the services
rendered by those employees.
The tribunal therefore held that the Indian subsidiaries
did not constitute a PE of Epcos AG in India, and
that the assesssee was not subject to taxation in India
on royalties or technical service fees paid by the Indian
subsidiaries.
♦ Shrikant S. Kamath, tax consultant, Hong Kong
Indonesia
Exit Tax Rules Revised
INDONESIA
Indonesia’s Directorate General of Taxation on December
21, 2008, issued Regulation PER-53/PJ/2008
(later amended by PER-1/PJ/2009 of January 9,
2009), regarding the procedures for payment, exemption,
and administration of the fiscal (exit) tax for resident
individuals traveling overseas.
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 397
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.