India: Subsidiary of a foreign company constitutes permanent establishment; gifting of shares

India: Permanent establishment; gifting of shares

The KPMG member firm in India has prepared reports about the following tax developments (read more at the hyperlinks provided below).

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  • Indian subsidiary of a foreign company constitutes a permanent establishment (PE): The Delhi Bench of Income-tax Appellate Tribunal held that an Indian company of a China-based company (taxpayer) was taxable in India on income derived from the supply, installation, and commissioning of telecommunication network equipment. The tribunal found that the Indian company’s activity was not simply to sell telecommunication equipment but to commission it after customizing certain hardware and software in accordance with the requirement of the telecommunication service provider. Further the taxpayer continued to undertake the risk of rejection of the supply in India; therefore, there was an extension of business of the taxpayer in India in respect of the supply of equipment to India.
    • The tribunal found that the activity of supervision in connection with the installation constituted an installation permanent establishment (PE) under Article 5(2)(j) of India-China income tax treaty.
    • The tribunal also held that the Indian entity was not only a dependent agent PE of the taxpayer but also a service PE and a fixed place PE pursuant to Article 5 of the tax treaty.
    • The tribunal observed that the foreign entity’s employees visited India to monitor the progress at various stages of the project starting from bidding to final implementation phase. Further, joint bidding by both entities showed that the business activity including the signing of bid documents was done from the office premises of the Indian entity, and that the Indian entity participated in the negotiation of contracts with Indian clients on behalf of the taxpayer and the installation/commissioning have been done by the Indian entity.

The case is: Huawei Technologies Co. Ltd. Read a December 2020 report [PDF 320 KB]

  • Gifting of shares to group company pursuant to restructuring: The Madras High Court in a case concerning a gift of shares by a company to its step-down subsidiary held that the transaction was not covered within the capital gains tax-exemption provisions because it was a transfer of a capital asset. The court further held that the share transfer was not voluntary and would not qualify as a valid gift, but rather was executed for a consideration and thus failed to satisfy the legislative test to qualify as a valid gift. The case is: Redington (India) Limited. Read a December 2020 report [PDF 309 KB]

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