Naming India manager enough to tax MNC

BANGALORE: A country manager in India, of a foreign entity, has been held by the Authority for Advance Rulings (AAR) to constitute a permanent establishment of the foreign entity.

Consequently, the foreign entity will be taxable in India, but only to the extent that profits can be attributed to Indian operations. Under the tax treaties, a foreign entity can be taxed in India only if it has a permanent establishment (PE) in India.

A PE is constituted even if a person acting on behalf of the company is held to be a dependent agent.

Sutron Corporation (headquartered in US) was awarded two contracts by the state government of Andhra Pradesh. Each contract comprised of two parts, the first dealt with supply of goods and erection to specimen remote stations and on-spot training of personnel.

The second part dealt with providing local material and services. For the second leg of the contract, the foreign entity entered into a separate agreement with a local Indian company.

Based on the facts presented, in this case, the AAR held that Mr. Naresh Goel, the country-manager in India of Sutron Corporation, was not an independent consultant.

He was an employee of the US company, for which he was paid a fixed remuneration in addition to various perks such as local conveyance and driver’s salary.

In relation to contracts awarded by the AP government, Mr Goel, apart from various other activities, was also authorised to submit bids and sign contracts with the state government. He was thus a dependent agent.

His place of residence from where the activities were carried out was held by the AAR to be an office or PE of Sutron Corporation in India.

The AAR held that the profits under the contracts with the AP government for the sale of equipment, installation and service agreement shall be deemed to accrue and arise in India.

Only so much of the profits will be taxed, as can be attributed to the PE. Typically, once a PE is held to exist in India, attribution of income, that can be subject to tax in India, becomes a tricky issue.

In this case, while the contracts were executed in India, the goods were delivered in the US to the carrier appointed by the buyer (AP government).

“As regards attribution, in several instances, courts have held that when goods are sold outside India no income can accrue or arise in India,� explains Mr Dinesh Kanabar, the partner of RSM & Co.