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Indian Representative Office Is A PE, Tribunal Says

by Mary Swire, Tax-News.com, Hong Kong

06 March 2014


In Brown and Sharpe Inc. v. DCIT (January 17, 2014), the Delhi Income Tax Appellate Tribunal ruled that a representative office (RO) in India constitutes a permanent establishment (PE) taxable in India, if its role cannot be viewed as limited. The decision is based on Indian domestic law, not treaty provisions.

Per India's foreign exchange regulations, ROs are subject to central bank monitoring. Importantly, ROs are fully funded by remittances from overseas, and they cannot carry on business in India. ROs may only collect information and act as a "communication channel" between the overseas head office and the Indian customer base.

The case involved a US company that had set up an RBI-approved RO in India. For the years in question, the US head office made more remittances to India than was required to fund the RO. The issue was whether the Income Tax Department (ITD) had the right to tax this excess amount. Under Section 9 of the Income Tax Act (ITA) 1961, a non-resident derives Indian-source income if it is from a "business connection" in India.

Here, the tribunal ruled against the taxpayer, and held that the RO constituted a PE to the extent that it was serving as more than just a communication link. The judges found that the RO was engaging in sales and marketing activities in India.

The critical factor here was that the RO's employees received performance-related pay, as well as sales targets. The notion that the RO complied with the RBI regulations, however, was found not to be relevant for tax purposes.

The judgment in Brown and Sharpe Inc. v. DCIT demonstrates that care should be exercised when penetrating an overseas market by setting up an RO, in particular in India. On this occasion, the structure proved to have significant tax impacts.

TAGS: court | tax | business | India | law | employees | corporate headquarters | multinationals | transfer pricing | regulation | Tax

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