The Delhi High Court recently upheld a ruling by Indian tax authorities that found General Electric (GE) group entities selling products to customers in the country had fixed place and dependent agent permanent establishments (PE).
The group entities involved in the dispute and their specific roles are described below:
- GE overseas entities: sells products to customers in India
- GE International Operations Company Inc., US (GEIOC): operates a liaison office (LO) in India to act as a communication channel
- GE India Industrial Pvt. Ltd (GEIIPL): provides limited market support services to GE overseas entities
- GE International Inc, US (GEII): a nonresident entity that performs payroll services for expatriates who work in India to support various businesses of the GE group.
The tax authorities conducted a survey at the LO premises and recorded interviews with various employees. On the basis of information gathered during the survey and the post-survey enquiries, the tax authorities concluded:
- The LO premises were being used by the GE overseas entities for business operations and therefore constituted a fixed place PE.
- The expatriates and Indian employees constituted a dependent agent PE of the GE overseas entities due to sales-related activities of the GE group entities.
GE contested the tax authorities’ findings, claiming that a PE should not be created by the GE entities’ activities. On the issue of the fixed place PE specifically, GE argued that the expatriates and the employees of GEIIPL did not have the authority to conclude contracts and were merely carrying on a marketing nature for the GE overseas group entities. As such, it believed the activities were of a “preparatory or auxiliary” function and fell within the exception provided by Article 5(3) of the India-U.S. income tax treaty. However, the High Court did not agree with this interpretation. It concluded that performance of vital responsibilities related to finalizing contracts and prominent involvement in the process clearly indicated that the GE group entities carried on business in India.
On the dependent agent issue, GE relied on OECD commentary and argued that to constitute agency PE, employees should negotiate “all” elements of the contract. However, the High Court noted the referenced OECD commentary also states that a lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent. The court held that “lack of” does not mean "none” and, accordingly, the term “authority to conclude” should not require handling “all” elements and details, but undertaking activities which are “core” in nature.
GE further argued that activities of the agent should be devoted wholly, or almost wholly, on behalf of a single enterprise. This argument also did not find favor with the court as the activities performed for GE group entities were intermingled and there were no separate agreements or different payments. Thus, the High Court held that the marketing and sales support employees were involved in core elements of the contract, and therefore such activities created a dependent agency PE.
The ruling has expanded the scope of agency PE by reducing the threshold for agents’ activities from negotiating all elements to negotiating core elements. U.S. multinational enterprises with market support entities in India would need to evaluate their existing arrangement to mitigate risk of forming a PE in India. The GE group entities have an option to further file an appeal against this ruling before the Apex Court, which would provide finality to this dispute.
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