No Permanent Establishment Unless Proven by the Revenue

The Income Tax Appellate Tribunal (Delhi Bench) recently in the case of SAIC clarified an important principle in international taxation: the tax authorities must clearly establish the existence of a Permanent Establishment (PE) before taxing a foreign company’s income in India.

Background of the Case

The case involved SAIC Motor Corporation Limited, a Chinese automobile manufacturer, and its Indian subsidiary MG Motor India Private Limited. The key question was whether the presence of six employees seconded from SAIC to India and the use of the subsidiary’s manufacturing facility could create a Permanent Establishment for the Chinese parent company under the India–China Double Taxation Avoidance Agreement.

The Revenue argued that SAIC had a Supervisory PE in India because of the seconded employees and also a Fixed Place PE because the subsidiary’s manufacturing plant was allegedly available to the parent company.

Tribunal’s Findings on Supervisory PE

The Tribunal examined the role of the six employees who had been seconded to the Indian subsidiary. It found that these employees were working under the employment, direction, and control of MG Motor India, not the Chinese parent company.

Their work was carried out for the benefit of the Indian entity, and they did not perform supervisory activities on behalf of SAIC Motors. Since the employees were effectively part of the Indian company’s workforce, the Tribunal concluded that their presence did not create a Supervisory Permanent Establishment for the foreign parent.

Tribunal’s Findings on Fixed Place PE

The Revenue also argued that the manufacturing facility of MG Motor India should be treated as a Fixed Place PE of SAIC Motors.

However, the Tribunal rejected this argument. It noted that MG Motor India is a separate legal entity, and its premises cannot automatically be considered the place of business of its foreign parent.

For a Fixed Place PE to exist, the foreign company must have the right to use the premises and exercise effective control over them. This is commonly assessed through the “disposal test” and the “control test.”

In this case, the Tribunal found that SAIC Motors did not have the right of disposal over the subsidiary’s manufacturing plant, nor did it exercise operational control over the premises. Therefore, the conditions required to establish a Fixed Place PE were not satisfied.

Wider Implications

The Tribunal emphasized that simply sending employees to a subsidiary or having a related entity operating in India does not automatically create a Permanent Establishment for a foreign parent company.

It also observed that accepting the Revenue’s arguments could create significant uncertainty for multinational groups, potentially disrupting the taxation framework for foreign companies operating through subsidiaries in India.

Conclusion

The ruling reinforces a key principle of international tax law: the burden of proving a Permanent Establishment lies with the tax authorities. Without clear evidence of control, disposal of premises, or supervisory functions, a PE cannot be assumed.

For multinational groups operating in India, the decision highlights the importance of maintaining clear functional and operational separation between foreign parents and their Indian subsidiaries, while also reaffirming that secondment arrangements alone do not create a PE.