Delhi ITAT Reinforces Foundational PE Principles: Revenue Bears Onus to Prove Physical Presence

 In a ruling that provides crucial clarity on the taxation of foreign enterprises in India, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has emphatically reiterated that the burden of proving the existence of a Permanent Establishment (PE) rests squarely on the tax authorities. The decision in SAIC Motors (China) underscores that neither employee secondment nor a subsidiary’s premises can automatically create a PE for a foreign parent without satisfying stringent legal tests.

Background: A Scrutiny of Chinese Automobile Giant's Indian Operations

The case centered on the Indian operations of SAIC Motors, a Chinese automobile manufacturer, and its relationship with its Indian subsidiary, MG Motor India Pvt. Ltd. The Assessing Officer (AO) had alleged that SAIC Motors constituted two forms of PE in India during the relevant assessment year:

1. A Supervisory PE: Allegedly created by the presence of six employees seconded from SAIC to MG Motor India.

2. A Fixed Place PE: Allegedly constituted by treating the manufacturing facility of MG Motor India as a fixed place of business at the disposal of the foreign parent.

The Core Legal Issues

The ITAT distilled the dispute into two fundamental questions under the India-China Double Taxation Avoidance Agreement (DTAA):

• Does the secondment of employees inherently create a supervisory PE?

• Can a subsidiary's physical premises be attributed as a fixed place PE of its foreign parent?

Tribunal’s Analysis & Landmark Holdings

Rejecting the Revenue's arguments, the ITAT delivered a principled ruling anchored in established PE jurisprudence.

📌 On the "Supervisory PE" Claim: Control is King
The Tribunal meticulously examined the nature of the six seconded employees. It found that:

• These employees were on the payroll and under the operational control and supervision of MG Motor India.

• They performed functions integral to the Indian subsidiary’s business, not supervisory activities on behalf of SAIC Motors.

• Mere origin of secondment or technical expertise does not translate into creating a PE for the foreign entity. The substance of the employment relationship and control determined the outcome. Consequently, no Supervisory PE was held to exist.

📌 On the "Fixed Place PE" Claim: The Disposal and Control Tests Are Paramount
This part of the ruling reinforces a cornerstone of international tax law. The ITAT held that:

• MG Motor India is a separate and distinct legal entity. A subsidiary’s premises cannot be conflated with the parent’s without clear evidence.

• Critically, the Revenue failed to prove that SAIC Motors had the right of disposal or effective control over the manufacturing facility. The foreign parent did not have the freedom to use the premises for its own business purposes independently of the subsidiary.

• The Tribunal reaffirmed the necessity of satisfying the “disposal test” and “control test” – as propounded by the Supreme Court in earlier rulings – to constitutionally establish a Fixed Place PE. Since these tests were not met, no Fixed Place PE was constituted.

Key Implications and Takeaways

The SAIC Motors ruling carries significant weight for multinational enterprises and tax authorities alike:

1. Burden of Proof Firmly with the Revenue: The decision stresses that alleging a PE is not enough. The tax department must discharge its onus by presenting concrete evidence to satisfy the legal tests under the DTAA and domestic law.

2. Employee Secondment Clarified: It provides a clear precedent that secondment arrangements, common in global business, do not automatically create a PE. The focal points are the employer-employee relationship, day-to-day control, and whose business the employee conducts.

3. Separate Legal Entity Doctrine Upheld: The ruling protects the fundamental corporate law principle that a subsidiary is a separate person. Tax authorities cannot simply “pierce the corporate veil” for PE purposes without demonstrating explicit right to use and control the subsidiary’s fixed place of business.

4. Stability for Cross-Border Investment: The Tribunal itself noted that accepting the Revenue’s broad contention would lead to “undue disruption” in taxing multinationals. This ruling promotes certainty and aligns with international norms, ensuring that business profits of a foreign enterprise are taxable in India only when a demonstrably dependent PE exists.

Conclusion

The Delhi ITAT’s decision is a robust judicial correction that anchors PE determination in substance and legal principle over superficial form. It serves as a vital reminder to the tax administration that in the complex arena of international taxation, aggressive assertions must be backed by rigorous evidence and compliance with settled tests. For foreign companies operating in India through subsidiaries or seconded personnel, this ruling fortifies the defense against premature taxation of business profits, ensuring taxability arises only upon the clear and proven constitution of a Permanent Establishment.