Tax and permanent establishment

The Delhi Tribunal has described the method to arrive at an appropriate profit, which is attributable to the permanent establishment when transfer pricing methods fail to compute reasonable profit.

The recent decision of the Delhi Income Tax Appellate Tribunal in the case of Convergys Customer Management is significant as it deals with attribution of profits to Permanent Establishments (PE). It is important to foreign entities procuring services from India through PEs. The taxpayer, a foreign company, was providing customer management services by utilising its advanced information system capabilities, human

resource management skills and industry experience. The taxpayer procured services from its subsidiary in India, namely Convergys India Services Pvt Ltd, on a principal-to-principal basis, while it did not carry out any business operations in India.

The tribunal held that the taxpayer had a fixed place in India as its employees frequently visited the premises of CIS to provide supervision, direction and control over operations, and such employees had a fixed place of business at their disposal. CIS was practically the projection of the taxpayer’s business in India and carried it out under the control and guidance of the taxpayer without assuming any related significant risks.

The tribunal relied on the Supreme Court’s decision in the case of Morgan Stanley and Circular No. 5 of 2004 to observe that the taxpayer’s revenue cannot be considered as the revenue of the PE by any stretch of imagination. The tribunal prescribed a methodical approach by applying the percentage of global income to the end-customer revenue from India operations. From the resultant figure the profit-before-tax of CIS was to be reduced and then the rate of 15 per cent applied to the residual amount.

This decision will be helpful to foreign companies with a PE in India, to compute the profit attributable to the PE. The tribunal has described the method to arrive at an appropriate profit, which is attributable to the PE when the transfer pricing methods fail to compute reasonable profit. The guidelines will provide clarity to foreign companies in determining their tax liability in India.

— KPMG