The Delhi High court has ruled that a Project office set-up by a foreign company in relation to a contract for design and fabrication of petroleum platform is not a Permanent Establishment. The said ruling was given in the case of National Petroleum construction company, a resident of U.A.E.
The High Court accepted the argument advanced on behalf of the foreign company that the role of the project office was limited to performance of co-ordination activities. The fact that the contract which the foreign company entered into with the Indian party (ONGC) required it to set-up a Project office in India was also not considered relevant. The argument by the counsel of the foreign company that the employees at the project office had a low-profile and the team which was engaged in critical contractual discussions were not employees of the project office, as alleged by Revenue, found favor with the Court.
The Court further opined that the existence or otherwise of the Installation PE would have be tested from the time the activities are actually commenced at the site by the foreign company itself and time spent at the site by the sub-contractor for carrying our survey activities would not be reckoned for the purpose of determination of existence or otherwise of the PE.
Interesting, the company itself admitted to its project office as being a PE in its return of income filed and offered to tax that portion of income which related to activities in India. The company revised its position at the time of scrutiny, which was not accepted by the lower authorities – the Assessing Officer, the first level Dispute Resolution Panel as well as the Tax Tribunal – all of which came to the uniform conclusion that there was a PE in India.
LG has found itself once again in the cross-hairs of the Income-tax Department – this time, on the PE front.
Pursuant to a survey carried on at the premises of the Indian subsidiary (LG India) of the Korean Multinational, the Tax Department claims to have gathered enough material to take a view that the Indian subsidiary was effectively acting as a “Permanent Establishment” of the foreign parent.
A notice under section 148 was issued calling upon LG (the parent company) to file a return in India in respect of the PE. A notice under this section is issued when the Revenue believes that income has escaped the tax net.
The notice was sought to be challenged on the preliminary, jurisdictional grounds to the effect that all the transactions between the parent and its Indian subsidiary were reported by the subsidiary and also accepted by the Revenue to be at arm’s length – and therefore there was no basis to take a view that any income of the parent has escaped taxation.
Disagreeing with the Taxpayer’s challenge to the notice, the Court ruled that the aspect existence of Permanent Establishment was a new development and upheld the initiation of the proceeding against LG.
It would be relevant to note that the ruling does not mean that the Court has conclusively accepted the Revenue stand on existence of the PE. What it only means that the Court was satisfied that the Revenue have not acted unreasonably while initiating the tax proceeding, and there was sufficient prima facie evidence in support of their concern that income liable to be taxed had escaped tax.
However, the facts which were cited by the Revenue in support of its suspicion that the parent company had a PE did leave much to be desired to support the Revenue’s case. The Revenue cited various facts to suggest that the parent company may have played a significant role in managing the affairs of the Indian company. Would that translate to a PE exposure to the parent ? and even if it did, would it amount to all the transactions between the parent and subsidiaries being attributed to the PE ? these are issues where the Revenues case is likely to be scrutinized more closely in the second round of legal battle which would inevitably follow once the audit by Revenue is completed.
LG’s case also highlights one more instance of a seemingly innocuous survey operation by the Revenue leading to a significant Tax risk. The need of the hour for the Taxpayers is to pre-empt such unwarranted risks by strengthening their preparedness for such surprise visits, to ensure that they don’t find themselves dragged into needless Tax controversies.
In an interesting order, the Delhi Bench of Income-Tax Appellate Tribunal ruled in favor of the Revenue and decided that additional evidence in the form of LinkedIn profiles of employees of the Taxpayer can be considered ‘relevant evidence’ to determine if the Taxpayer had a Permanent Establishment in India or not. The interim order of the Tribunal admitting LinkedIn profiles as admissible evidence was given in the case of GE Energy Parts Inc. However, the final ruling on whether and to what extent a PE risk existed has not yet been pronounced.
As might be expected, the counsel from Taxpayer’s end tried to persuade the Tribunal that LinkedIn profiles were not relevant to determine the issue relating to existence of a PE. Challenge to filing of additional evidence in the form of LinkedIn profiles was made on various grounds viz. a) Revenue cannot try to ‘improvise’ its case at the level of the Tribunal b) the evidence was being produced too late in the day c) the LinkedIn profiles represented hearsay evidence and d) employees were prone to make exaggerated claims in their profiles.
However, the Tribunal ruled that technical objections should not come in the way of cause of justice. The Tribunal was also influenced by the fact that the Taxpayer had not submitted critical information relating to the role of its employees when the same was called for by the Revenue officer. While admitting the evidence, the Tribunal also left it open to the Taxpayer to rebut the information by bringing on record contrary facts.
Irrespective of which way the final ruling goes, the decision highlights the fact that Technology could be a double-edge sword – while facilitating easy conduct of business from any corner of the world, it also leaves a digital trail of activities – leaving businesses exposed to the prying eyes of the Taxman.