International Tax Updates

published on 30 April 2025 I reading time approx. 4 minutes

International Tax updates

1. Absent any generation of income in India, employee secondment does not constitute Permanent Establishment (‘PE’) in India, holds Delhi HC:

In the instant case of Samsung Electronics Co. Ltd. (‘Samsung Korea’), the core issue was whether the secondment of employees to its Indian subsidiary, Samsung India Electronics Pvt. Ltd. (‘SIEL’), constituted a PE under Article 5 of the India-Korea DTAA. The Assessing Officer (‘AO’) held that SIEL constituted a Fixed Place PE, a Dependent Agent PE (‘DAPE’), and a Service PE of Samsung Korea, relying on the presence and statements of seconded employees, inter-company agreements, and indicators of operational control. However, the Dispute Resolution Panel (‘DRP’) disagreed, noting that the secondments were made under a tripartite agreement between Samsung Korea, SIEL, and the concerned employees, with SIEL exercising substantive control. While the DRP found no sufficient evidence to establish a DAPE or Service PE, it concluded that a deemed Fixed Place PE was constituted based on the nature of functions performed by certain seconded employees.

Delhi ITAT overturned the DRP’s findings, holding that the seconded employees were under SIEL’s control, on its payroll, and engaged in activities solely for SIEL’s business — not that of Samsung Korea. The Delhi High Court upheld the ITATs ruling, dismissing the Revenue’s appeal. The Court noted that there was no evidence of the seconded employees generating business for Samsung Korea, and their presence in India was to support SIEL’s independent functions such as market research, data collation, and operational support. It ruled that Article 5(3)(b) of India-Korea DTAA (Service PE) was not applicable, as no services were rendered by Samsung Korea to SIEL. Referring to the principles laid down in earlier landmark Court rulings, the Court concurred with ITAT’s view that the seconded employees were not discharging functions connected with Samsung Korea’s global business. Their secondment was merely to facilitate SIEL’s independent business and did not meet the threshold for establishing a PE under the DTAA or OECD/UN commentaries. Consequently, the Court held that there was no Fixed Place PE, DAPE, or Service PE, and dismissed the Revenue’s appeal.

2. Mumbai ITAT holds that co-contracting does not give rise to DAPE if there is no interdependence for service responsibilities:

In the instant case, the taxpayer was a Canada-based non-profit organization carrying out its activity for the benefit of all stakeholders of the World’s Commercial Aviation Industry and had a branch office in India. The taxpayer had received income from the Indian aviation company ‘Air India’ for conducting passenger satisfaction survey with the assistance of a third party, which was an independent third party based in Switzerland, engaged in conducting qualitative and quantitative research studies around the world. A tri-partite contract was entered into between the taxpayer, Air India and the third-party Service Provider. As per the tripartite service contract, the services were to be provided by the taxpayer and the third-party Service Provider jointly from outside India. The AO / DRP held that the third-party Service Provider was to be treated as DAPE of the taxpayer as most of the flights of Air India started and ended in India and that most of the customers who participated in the survey were from India, resulting in the source of such Income arising out of India.

On perusal of the material on record, Mumbai ITAT made the following observations:

The third-party Service Provider did not have a PE in India.
As per the terms of tri-partite contract the services to Air India were jointly provided by the taxpayer and the third-party Service Provider, with each of them responsible for its own services.
The relationship between the taxpayer and the third-party Service Provider was principal to principal.
The service responsibilities of the third-party Service Provider had no dependency on the taxpayer and had to be met independently by the third-party Service Provider.
The AO/DRP had not brought any material on record in support of the claim that the source of income from survey services provided to Air India was arising majorly from India.

In view of the above points, the ITAT ruled that no DAPE of the taxpayer was constituted in India. Other points on which the ITAT gave its rulings, based on the rulings of the coordinate bench of the ITAT in the case of the taxpayer or in other cases were as follows:

Provision of distance learning courses through Authorised Training Centres (‘ATC’) did not constitute a DAPE of the taxpayer, as the ATCs were not providing courses solely on behalf of the taxpayer.
Sale of physical publications, provision of database access facilities is sale/provision of copyrighted material/information and not vesting of the copyright itself and therefore not taxable as royalty.
Provision of advertising space on the website/publications of the taxpayer, without giving the right to use, display, exploit or modify the taxpayer’s brand or logo in any manner does not constitute royalty.
Joining and annual fees collected from members for availing clearing house facility for settling transactions between them, as also towards data processing charges are not taxable, in view of the concept of mutuality.

3. Chennai ITAT holds surcharge and education cess not applicable on DTAA rates:

In the instant case, taxpayer, a US citizen residing permanently in India filed an income tax return in India declaring total income of approx. INR 67 million, of which INR 0.9 million was earned in India. The CPC processed the income tax return and raised a demand of INR 0.3 million on the taxpayer, by levying education cess on entire tax liability including the tax computed under DTAA rates. Taxpayer filed a rectification application under section 154 of ITA, which was rejected. Aggrieved by the rejection, the taxpayer filed an appeal before the Commissioner (Appeals), which was also dismissed. The matter was then escalated by the taxpayer by way of an appeal filed before the Chennai ITAT.

The Chennai ITAT, relying on Article 2 of the India–USA DTAA, held that surcharge and surtax were included within the maximum tax rates prescribed under Articles 10 and 11 of the DTAA. ITAT further held that ‘cess’, being an additional surcharge, would also be deemed to be included within the DTAA-prescribed rates. Relying on various judicial precedents, the ITAT observed that surcharge and education cess are not separately leviable on income taxable under DTAA and accordingly directed the CPC to recompute the tax liability.

The ITAT decision holds significance as many a times the taxpayers face an issue that their income offered to tax in the income tax return under the relevant DTAA rates is also subjected by the CPC or AO’s to surcharge and education cess as prescribed under the ITA.

From The Newsletter

Newsletter India

Contact

Contact Person Picture

Martin Wörlein

Partner, Head of India practice

+49 911 9193 3010

Send inquiry

How We Can Help

Rödl & Partner in India