Delhi High Court Rules on Permanent Establishment Under India-Korea DTAA: “Mere Control by Parent Company Does Not Constitute a PE”; Dismisses Revenue Appeals Against Samsung Subsidiary for Lack of Fixed Place, Dependent Agent, or Service PE Evidence

Court’s Decision

The Delhi High Court dismissed the appeals filed by the Revenue challenging the Income Tax Appellate Tribunal’s (ITAT) order. The court concluded that Samsung Electronics Co. Ltd.’s Indian subsidiary (Samsung India Electronics Pvt. Ltd. – SIEL) did not constitute a “Permanent Establishment” (PE) under Article 5 of the India-Korea Double Tax Avoidance Agreement (DTAA).

The court held:

1. Fixed Place PE: SIEL’s premises did not constitute a fixed place of business for the parent company.
2. Dependent Agent PE: SIEL was not economically dependent on the parent company and operated as an independent legal entity.
3. Service PE: The activities of seconded employees were auxiliary in nature, supporting the subsidiary rather than carrying out the business of the parent company.

Facts

Samsung Electronics Co. Ltd., based in South Korea, operates in India through its subsidiary, SIEL. The Revenue argued that SIEL constituted a PE under the India-Korea DTAA due to the following:

1. Fixed Place PE: The premises of SIEL were allegedly used by expatriate employees seconded by the parent company for the benefit of the parent.
2. Dependent Agent PE: SIEL was claimed to act on behalf of Samsung Korea, making it dependent on the parent company for business decisions.
3. Service PE: Seconded employees allegedly carried out the parent company’s business in India.

The dispute arose from the activities of expatriate employees who were seconded from the parent company to SIEL. A survey conducted by the tax authorities revealed extensive communication and decision-making between the parent company and its subsidiary.

Issues

The court examined two main legal questions:

1. Fixed Place PE: Did the premises of the Indian subsidiary constitute a PE of the parent company?
2. Dependent Agent PE and Service PE: Were the Indian subsidiary’s operations and seconded employees engaged in the business of the parent company?

Petitioner’s Arguments (Revenue)

1. The Revenue argued that the seconded employees and senior management of SIEL were under the control of the parent company, making SIEL a Fixed Place PE.
2. It claimed that SIEL functioned as an agent of the parent company, acting on its behalf in India and creating a Dependent Agent PE.
3. The expatriate employees, seconded by Samsung Korea, allegedly provided technical and strategic inputs for the parent company’s benefit, thus forming a Service PE.

The Revenue relied heavily on survey evidence, including statements from employees, which suggested that:

• Expatriate employees communicated frequently with the parent company.
• Key decisions, such as product pricing and market strategies, were influenced by the parent company.

Respondent’s Arguments (Samsung Electronics Co. Ltd.)

1. The respondent argued that SIEL was an independent legal entity, incorporated under Indian law, and complied with local tax and corporate regulations.
2. The seconded employees worked under the control and supervision of SIEL and contributed only to the subsidiary’s operations in India.
3. Transactions between SIEL and the parent company were in the nature of principal-to-principal dealings, adhering to transfer pricing regulations.
4. The India-Korea DTAA specifically excluded activities of a “preparatory or auxiliary” nature from constituting a PE.

Analysis of the Law

1. Permanent Establishment under Article 5 of the DTAA
The court analyzed the definition of a PE under Article 5, which includes:

• Fixed Place PE: A fixed place of business through which the enterprise’s business is conducted.
• Dependent Agent PE: An agent habitually exercising authority to conclude contracts or securing orders on behalf of the parent company.
• Service PE: Furnishing of services through employees, provided such activities exceed 183 days in a 12-month period.

The court emphasized that activities of a preparatory or auxiliary nature (e.g., market research, logistics, or support functions) are specifically excluded from constituting a PE under Article 5(4).

2. Fixed Place PE
The court found no evidence that the premises of SIEL were used as a fixed place of business for Samsung Korea. The expatriate employees operated under SIEL’s management and contributed to its operations in India, not the parent company’s.

3. Dependent Agent PE
SIEL conducted its operations independently:

• It bore the risks and rewards of its business.
• All transactions with the parent company were arm’s-length transactions. The Revenue failed to demonstrate that SIEL was economically dependent on the parent company or acted as its agent.

4. Service PE
The court noted that the expatriate employees seconded to SIEL:

• Worked under SIEL’s direction and control.
• Provided auxiliary support, such as market research and technical training. Such activities were insufficient to establish a Service PE, particularly since the DTAA did not recognize Service PEs unless the activities exceeded the specified threshold.

Precedent Analysis

The court referred to past judgments establishing that:

1. A subsidiary does not automatically become a PE of the parent company simply due to ownership or control.
2. There must be evidence of substantive business activities conducted by the parent company in the host country.

Court’s Reasoning

1. No Fixed Place PE: The seconded employees operated under the control of SIEL, and their activities were limited to the subsidiary’s business in India.
2. No Dependent Agent PE: The subsidiary acted independently, making its own business decisions. Transactions with the parent company were on a principal-to-principal basis.
3. No Service PE: The activities of seconded employees were auxiliary, falling under the exclusions in Article 5(4).

The court observed:

• Seamless communication between the parent company and subsidiary does not automatically create a PE.
• Strategic discussions on market preferences and product localization benefited the subsidiary and were not indicative of the parent company conducting business in India.

Conclusion

The appeals were dismissed. The court upheld the ITAT’s ruling that SIEL did not constitute a PE under the India-Korea DTAA.

Implications

This judgment reaffirms the principle that mere control or supervision by a parent company over its subsidiary does not create a Permanent Establishment under the DTAA. It provides clarity for multinational corporations on the limits of PE determination, emphasizing the need for clear evidence of substantive business activities by the parent company in the host country.

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