GE Energy Parts Inc. v. Commissioner of Income Tax (International Taxation), ITA 621/2017, 21 December 2018 (High Court of Delhi)

The assesses were non-resident companies (“GE Overseas”) in the General Electric (GE) group who used the services of (i) expatriate employees of U.S.-resident GE company (“GEII”), who were then “deputed” to them, and (ii) services of Indian-resident employees of an Indian GE company (“GEIIPL,” with the term “GE India” apparently also referring to GEIIPL) whose services were charged out to them on a cost-plus basis, in connection with the marketing of their products, e.g., gas turbines, to Indian customers.

Bhat J held that the leased premises of one of the assesses in India where many of these personnel worked was a place of business of the assessees in India, having regard to the OECD recognized proposition that a “place of business” references “even a certain amount of space at its disposal” (para. 40). In rejecting the assessees’ submissions that the services performed at this office were merely of “a preparatory or auxiliary character,” he noted that the process of securing contracts with the Indian customers “involved a complex matrix of technical specifications, commercial terms, financial terms” (para. 57) that required the stationing in India of high ranking and mid-level employees who were required “to intensively negotiate the intricacies and commercial parameters of the articles” (para. 60). Accordingly, “the assessee’s employees were not merely liaisoning with clients and the headquarters office” (para. 58). Accordingly, such office constituted a fixed place of business of the assessees and, thus, a permanent establishment for purposes of the India-U.S. Tax Treaty.

He also found that, given the extensive involvement of GE India in negotiations (albeit subject to ultimate ratification overseas) that GE India also constituted a dependent-agent permanent establishment given that “the participation of representatives or employees of a resident company and another resident entity may fall within the concept of authority to conclude contracts in the name of the foreign company” (para. 70).

Various non-resident General Electric companies employed non-resident employees (the “expatriates”) in an office in India to secure customers and negotiate contracts with them. Bhat J found that as this was an intensive process, their services were not merely of “a preparatory or auxiliary character,” and the office constituted a fixed place of business and, thus, a permanent establishment for purposes of the India-U.S. Convention.

Bhat J accepted a finding below that, in the absence of any evidence of the profits generated from the sales in India, they should be estimated at 10% of such sales, and that 26% of this profit was attributable to the operations carried out by the PE in India.