UPS Asia is a company incorporated under the laws of Singapore and is engaged in the business of provision of supply chain management including the provision of freight forwarding and logistic services. In 2012 UPS Asia had entered into a Regional Transportation Services Agreement with UPS SCS (India) Pvt. Ltd. for the provisions of freight and logistics services. Under the Transportation Agreement, UPS Asia arranged to perform international freight transportation and provide overseas support services, while UPS India performed freight and logistics services in India to its India customers and to UPS Asia. Following an audit an assessment was issued according to which UPS Asia had a PE in India in the form of UPS India. Furthermore, profits of Rs.2,09,53,496 was considered attributable to operation in India. The tax authorities held that UPS India constitutes a PE of UPS Asia in India within the meaning of Article 5 of India–Singapore DTAA. Not satisfied with the assessment UPS Asia filed an appeal and submitted that UPS India was remunerated in accordance with the arm’s length principle (article 9) and, therefore, no further profit was required to be attributed (Article 7) to UPS India in the present case. Judgement of the Tax Appellate Tribunal The Tribunal allowed the appeal of UPS and set aside the assessment. Excerpt ” … 9. …. Thus, respectfully following the decision of the Co–ordinate Bench rendered in assessee’s own case cited supra, we hold that when the Indian A.E. is remunerated at arm’s length price no further profit attribution is required and the issue of existence of P.E. becomes wholly tax neutral. Accordingly, the addition made by the Assessing Officer is directed to be deleted. 10. In the result, appeal by the assessee is allowed in terms of our aforesaid findings. .. Click here for html-version ...

GE is incorporated in and is a tax resident of the USA. It is engaged in the business of manufacture and offshore sale of highly sophisticated equipments such as gas turbine parts and subassemblies. GE sells its products offshore on a principal to principal basis to customers all over the world, including to customers located in India, whereby the title to the goods sold to Indian customers passes from it outside India. A liaison office was set up in 1991 in New Delhi to act as a communication channel and not carry on any business activity. GE has been in India since 1902. Its global businesses had a presence in India and the group had become a significant participant in a wide range of key services, technology and manufacturing industries. Employment across India exceeds 12,000. Over 1 billion dollar of exports from India support GE’s global business operations around the world. It has sourced products, services and intellectual talent from India for its global businesses. It pioneered the concept of software sourcing from India and was one of the largest customers for the IT service industry of India. Following an extensive audit the tax authorities issued an income assessment to what they had determined to be a permanent establishment of GE in India. GE held they were not subjected to income tax laws of India as they had no permanent establishment. The High Court dismissed GE’s appeal and upheld the assessment. The High Court concluded that core sales activity was conducted from GE premises in India and that the activities in India were not of a preparatory and auxiliary character. The High Court rejected GE’s contention that since the expatriate employees and employees of the Indian entity did not have the authority to conclude contracts, the activities could not be anything other than preparatory and auxiliary. Determining whether a practice is preparatory or auxiliary requires asking whether the activity undertaken at the fixed place of business is an essential and significant part of the activity of the enterprise as a whole – it must be the case that the activities must per se be responsible for the realization of profits.” “… the process of sales and marketing of GE‟s product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple.” “…. the facts of the present case clearly point to the fact that the assessee‟s employees were not merely liaisoning with clients and the headquarters office.” “GE India comprising of expats and other employees of GEIIPL etc., were not working for a particular enterprise, but, for multiple enterprises dealing in one of the three major businesses of GE group. Activities of an agent must be “devoted wholly, or almost wholly on behalf of that enterprise.” “GE India‟s activities clearly constitute activities that would establish agency PE in India” “…the analysis carried out by the Revenue – not merely by the ITAT but also by the AO in the assessment order, was after considering the relevant decisions – including Rolls Royce PLC – where 35% profits were attributable to marketing activities in India.” “Having regard to the conspectus of facts in this case and the findings of the lower Revenue authorities – including the AO and the CIT(A), both of whom have upheld the attributability of income to the extent of 10% and apportionment of 3.5% of the total values of supplies made to the customers in India as income, the Court finds no infirmity with the findings or the approach of the Tribunal in this regard.” “…since all questions of law have been answered against the assessees, these appeals have to fail and are consequently dismissed but without orders as to costs.” ...

Prior to a business restructuring in 1999, the Spanish subsidiary, Roche Vitaminas S.A., was a full-fledged distributor, involved in manufacturing, importing, and selling the pharmaceutical products in the Spanish and Portuguese markets. In 1999 the Spanish subsidiary and the Swiss parent, Roche Vitamins Europe Ltd., entered into a manufacturing agreement and a distribution agreement. Under the manufacturing agreement, the Spanish subsidiary manufactured products  according to directions and using formulas, know-how, patents, and trademarks from the Swiss parent. These manufacturing activities were remunerated at cost plus 3.3 percent. Under the distribution (agency) agreement, the Spanish subsidiary would “represent, protect and promote” the products. These activities were remunerated at 2 percent of sales. The Spanish subsidiary was now characterized as a contract manufacturer and commission agent and the taxable profits in Spain were much lower than before the business restructuring. The Spanish tax authorities argued that the activities constituted a PE in Spain according to article 5 of DTT between Spain and Switzerland. Therefore, part of the profits should be allocated to the Spanish subsidiary in accordance with article 7 of the DTT. Supreme Court Judgement The Supreme Court held that the restructured Spanish entity created a PE of Roche Vitamins Europe Ltd. in Switzerland. The profits attributed to the PE included not only the manufacturing profits but also profits from the distribution activity performed on behalf of Roche Vitamins Europe Ltd. in Switzerland. Excerpts “The administration is therefore correct in stating that the applicant company operated in Spain by means of a permanent establishment…” “In short, what is laid down in these two paragraphs 1 and 2 of Article 7 of the Spanish-Swiss Convention (in summary form) is that: (a) If a taxpayer acts in a State, of which he is not a resident, through a permanent establishment, then the profits of that taxpayer may be taxed in that State, but only to the extent that such profits are attributable to the said re-establishment. (b) This means that only the profit that the non-resident would have made in that State if he had had a full presence (as a resident), through a separate and distinct company, will be taxable in that State; but, of course, only in respect of the activity carried out by that establishment. The Audiencia Nacional, contrary to this reading of Article 7, establishes that if a non-resident company has a permanent establishment, then it must be taxed in the State in which that establishment is located for all the activities carried out in the territory of that State, even if they are not carried out through the permanent establishment. Contrary to this, and by application of the only possible interpretation of Article 7(1) and (2) (already explained and in accordance with the criteria of the OECD Tax Committee, as we shall see below), a permanent establishment should only be taxed in the State in which it is located on the profit derived from the activity carried out through the permanent establishment.” “…the sales figure must include all sales made by the permanent establishment. We consider that it is established in the file, contrary to the appellant’s submissions, that those sales must include those made to Portuguese customers, since they were made as a result of the promotional and marketing activities of Roche Vitaminas SA and are therefore attributable to it. It is also common ground that the expenses referred to by the appellant have been taken into account, as is stated in the official document dated 12 July 2002. For the rest, we refer to what was established in the settlement agreement dated 23 April 2003, as well as to the full arguments contained in the judgment under appeal.” Click here for english translation Click here for other translation ...