AAR on constitution of a permanent establishment on provision of technical personnel to an Indian affiliate

This Tax Alert summarizes a recent decision of the Authority for Advance Rulings (AAR) in the case of Booz & Co. Group (Group entities) on the issue of whether provision of technical and professional employees to the Indian affiliate company (ICo) results in a permanent establishment (PE) of the relevant Group entities in India. The AAR, having regard to the interdependency amongst the Group entities and the nature of services rendered, held that a PE exists for the Group entities in India.

In this decision, the AAR has referred to many decisions on how the courts in India have looked at deputation of employees and technical personnel in the context of constitution of a PE. However, it is unclear as to how these observations were applied by the AAR in arriving at the conclusion that a PE is constituted for the Group entities in India.

The AAR did not conclude as to which type of PE is triggered for the respective Group entities in India. It appears from the AAR’s observations that the Group entities were alleged to have a fixed place PE, dependent agency PE as well as service PE in India. Furthermore, while arriving at this conclusion, the AAR has not considered whether or not the basic condition for constitution of such a PE, such as whether or not the relevant DTAA has a service PE rule or whether the time threshold for a relevant service PE as may be specified in a DTAA, is satisfied or not.

A ruling by the AAR is binding only on the Applicant, in respect of transaction in relation to which the ruling is sought and on the Tax Authority, in respect of the Applicant and the said transaction.