Clarifying the Criteria for Permanent Establishment Under the India–Korea DTAA

Introduction

The Commissioner of Income Tax (International Taxation) initiated a series of appeals against Samsung Electronics Co. Ltd. (“Samsung Korea”) challenging orders by the Income Tax Appellate Tribunal (“Tribunal”). The central issue was whether Samsung Korea had a Permanent Establishment (“PE”) in India for the relevant Assessment Years (AYs) solely because of certain expatriate employees, seconded from Samsung Korea to its Indian subsidiary, Samsung India Electronics Pvt. Ltd. (“SIEL”). The Department contended that the presence and activities of these expatriate employees established a Fixed Place PE or, alternatively, a Dependent Agent PE (“DAPE”) for Samsung Korea in India.

This case is significant because it clarifies the requisites for determining the existence of a PE under the Double Taxation Avoidance Agreement (“DTAA”) between India and South Korea. The High Court of Delhi, building upon the Tribunal’s findings, examined extensive statements from expatriate employees, contractual arrangements, and relevant legal provisions. Ultimately, the Court endorsed the principle that seconded employees performing tasks for the Indian subsidiary, within the scope of the Indian subsidiary’s business objectives, do not necessarily create a PE for the foreign parent corporation.

Summary of the Judgment

• The High Court upheld the Tribunal’s conclusion that Samsung Korea did not have a Fixed Place Permanent Establishment in India merely by seconding employees to SIEL.
• The Court held that the expatriate employees’ activities and daily tasks pertained largely to SIEL’s functioning and did not constitute Samsung Korea’s “continuing business” being conducted in India.
• The Court rejected the revenue’s argument that SIEL could be treated as an automatic PE simply because it was a wholly owned subsidiary of Samsung Korea.
• The Court also rejected the contentions relating to a Dependent Agent PE and Service PE, concluding that there was insufficient evidence to show that SIEL habitually acted on behalf of or was legally dependent on Samsung Korea in a manner that would create a PE.
• Overall, the Court affirmed that the seconded employees were not setting up or operating a business for the foreign entity in India, and hence no PE exposure arose.

Analysis

Precedents Cited

Although the Judgment text does not list specific Supreme Court or other high court precedents by name, the Tribunal and the Dispute Resolution Panel (“DRP”) discussed concepts and rulings regarding:

• Subsidiary vs. PE: Judicial rulings and OECD commentary clarifying that a local subsidiary, which is a separate legal entity, does not automatically create a PE for the foreign parent.
• Dependent Agent PE Principles: Case law indicating that the foreign enterprise must exercise control over the local entity for concluding contracts and carrying out core business functions on its behalf in order to meet the threshold for DAPE.
• Fixed Place PE Tests: Prior decisions elaborating on the requirement of a fixed place of management or a location at the disposal of the foreign enterprise from which the foreign enterprise’s own business is carried on.
• Service PE: Judicial interpretations which emphasize that if the relevant DTAA does not contain a service-PE clause or the activities of employees seconded are not for the foreign enterprise’s service in India, a service PE cannot be constituted.

Collectively, these precedents guided the High Court in establishing that the basic tests under Article 5 of the India–Korea DTAA must be met before concluding the existence of a permanent establishment.

Legal Reasoning

The Court’s legal reasoning hinged on Article 5 of the India–Korea DTAA, which sets out definitions and conditions under which a non-resident company could be considered to have a PE in India. The Court meticulously analyzed:

1. Seconded Employees’ Role: The expatriate employees stationed in India primarily performed tasks relating to SIEL’s local marketing, research, and logistical support. There was no conclusive evidence that they were working “for and on behalf of” Samsung Korea’s core business operations in India.
2. Control Over Employees: The presence of a tripartite agreement among Samsung Korea, SIEL, and the seconded employees indicated that SIEL retained autonomy and bore the costs (including salaries, taxes, etc.) for employees’ local work. The employees, in effect, were integrated into SIEL’s organizational structure, limiting the inference that they were carrying on Samsung Korea’s business in India.
3. Absence of Dedicated Space: Although the seconded employees worked out of SIEL’s premises, the High Court found no evidence that Samsung Korea had an independent “fixed place” at its disposal in SIEL’s offices. The Court clarified that occupying the same physical premises as a subsidiary does not automatically meet the fixed place test for PE if the business conducted is that of the subsidiary, not the foreign parent.
4. Business Decisions in India: The Court scrutinized whether vital and strategic business decisions (such as product pricing and global procurement) for Samsung Korea were being conducted on Indian soil. It concluded that local marketing strategies and consumer feedback may flow to the parent, but that fact, without more, does not transform the Indian office into a PE of the foreign entity.

Impact

The Judgment sets an authoritative precedent on the treatment of foreign employees seconded to Indian subsidiaries. Key impacts include:

• Greater Certainty for MNCs: Multinational corporations can draw clearer borders between subsidiary operations and parent company involvement, reducing the risk of inadvertent PE creation.
• Guidance on Employee Secondments: The Court’s analysis provides a framework for structuring secondment agreements in a manner that legitimately reflects the local subsidiary’s employment relationship with seconded personnel.
• Influence on Future Litigation: Tax authorities must demonstrate substantial nexus or active foreign business operations in India beyond local market-related activities to assert a PE.
• Transfer Pricing vs. PE: The fact that the Indian subsidiary pays taxes and reports transactions under Transfer Pricing channels underscores that compliance at the subsidiary level does not automatically translate to foreign parent taxability under PE provisions.

Complex Concepts Simplified

Permanent Establishment (PE):
In the realm of international taxation, a PE is a fixed place of business in another country through which substantial business operations of a foreign entity are carried out. If a foreign entity is deemed to have a PE in India, its business profits connected to that PE can be taxed in India. In this case, the authorities attempted to show that Samsung Korea carried on its own business through its seconded employees in India. The Court found otherwise because these employees were effectively integrated into the Indian subsidiary’s local operations and were not running Samsung Korea’s core business from India.

Tripartite Agreements:
These are contracts involving three parties—in this context, the foreign parent company, the Indian subsidiary, and the employee being seconded. They define the scope of work, the lines of reporting, and the costs to be borne. The Court relied on evidence that such tripartite agreements demonstrated the employees were functionally employed by SIEL for all practical purposes.

Dependent Agent PE (DAPE):
DAPE arises if a local entity, acting on behalf of the foreign principal, habitually finalizes contracts or executes the principal’s core business in the source country. The Court determined that SIEL did not act as a DAPE of Samsung Korea because it was not habitually concluding contracts on behalf of the parent, nor was it performing the parent’s business. It was an independent subsidiary making its own business decisions for the Indian market.

Conclusion

The Delhi High Court’s ruling in Commissioner of Income Tax (International Taxation)-3 v. Samsung Electronics Co. Ltd. affirms that foreign entities do not automatically create a Permanent Establishment in India through their Indian subsidiaries, even where employees are seconded to assist local operations. Absent clear evidence of foreign business being carried on in India—or proof of the subsidiary acting as a mere agent with authority to conclude contracts on behalf of the foreign parent— no PE arises.

This decision provides a valuable roadmap for multinational corporations seeking to clarify and structure employee secondments to Indian subsidiaries. As long as the local entity genuinely exercises control over such employees, and their work primarily serves the local entity, the risk of inadvertently triggering a PE for the foreign entity is substantially reduced.