PE case law

Indian Court rules no further profit attribution needed for Singapore company's Indian operations

On 21 March 2024, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) ruled in favor of a Singapore company, holding that no further profits are attributable to its alleged permanent establishment (PE) in India, where its Indian associated enterprise (AE) had already been remunerated at arm's length.

The case stemmed from Indian tax authorities' earlier determination that the Singapore company's Indian AE constituted a fixed-place PE and a dependent agent PE. Consequently, the authorities attributed profits to this alleged PE. The ITAT had initially ruled that the Singapore company did not have a PE in India. However, the Delhi High Court remanded the matter to the ITAT to decide the profit attribution issue.

Before the ITAT, the Singapore company contended that no further attribution was warranted because its Indian AE had already been remunerated at arm's length, relying on a Supreme Court's ruling. The ITAT accepted this argument, noting its previous finding that the Indian AE did not perform additional functions leading to a PE.

Indian tribunal rules on physical presence requirement for Service PE

On 14 March 2024, the New Delhi Branch of the Income Tax Appellate Tribunal (ITAT) issued decision 2681 & 3377/Del/2023, analyzing the existence of a Service PE and a Virtual Service PE. The case involved a Singapore tax resident entity providing legal services to multiple clients in India.

During the assessment years, the taxpayer provided legal services remotely from outside India. However, the taxpayer's employees were physically present in India for a total period of 120 days. This period included 36 days of vacation, 35 days of business development activities, and five common days. Excluding these non-service days, the taxpayer rendered services in India for 44 days.

Initially, the taxpayer filed a tax return declaring nil income. However, after scrutiny, the assessing officer concluded that the taxpayer constituted a Service PE based on the physical presence of employees in India. Additionally, the assessing officer determined the existence of a Virtual Service PE, arguing that the Singapore-India tax treaty does not require physical presence for a Service PE.

The ITAT noted that physical presence of employees in India is a prerequisite to determining the existence of a Service PE. Consequently, vacation days, business development days, and common days should be excluded as no services were provided to customers in India during those periods.

Regarding the Virtual Service PE, the ITAT observed that although this type of PE does not require physical presence, the Singapore-India tax treaty does not contain provisions for such a PE. Therefore, the taxpayer cannot constitute a Virtual Service PE in India under the existing treaty.