Profit attribution to India ops of foreign co is question of fact
Mumbai: The Supreme Court in a recent case related to Travelport (a US tax resident) affirmed the principle that the attribution of profits, in relation to the operations carried out in India (known as a permanent establishment in the country), is a question of fact. As the Income-tax Appellate Tribunal (ITAT) is the final fact-finding authority, no interference in its orders is warranted by the courts.India cannot tax the profits of a foreign entity, unless it has a fixed place of business in India, (known as a permanent establishment or PE). Further, only that portion of the profits that are attributed to such PE can be taxed.This judgment follows close on the heels of an earlier order, where the SC in the case of SAP Labs India and others held that high courts can examine whether the findings of the ITAT, while determining the arms length price in the context of transfer pricing are perverse or not. High courts had refused intervention in such litigation as the ITAT is the final fact-finding authority.According to Sanjay Tolia, partner and tax leader at PwC, The two decisions have nuanced distinctions. SAP Labs is generic to an issue affecting multiple cases, whereas Travelport is case specific. In the latter case, the SC upholds the attribution to the India operations contained in the ITATs order, on the ground that it was a reasonable approach.Rajendra Nayak, partner and international tax leader at EY-India said, A common thread that runs through the two judgments is whether there is any unreasonableness or perversity in the findings of the ITAT while applying income allocation principles whether transfer pricing rules or PE profit attribution rules. In the absence of any such findings, it is unlikely that a HC or a SC would interfere with the order of a tribunal.That said, the decisions have opened up new controversies in the way of conventional litigation even at the stage of admission of a case. The issue of whether there is a question of law to a particular set of comparables or PE attribution, in itself has become an issue, adds Tolia.Travelport provided electronic global distribution services to airlines through a computerised reservation system (CRS). It had entered into distribution agreements with an Indian entity to market and distribute the CRS services to travel agents in India. It paid an amount ranging from 33.3% to 60% of its total earnings to the Indian entity.For providing the CRS services, the US company made an amount of $3 or 3 euros per booking made in India and the tax authorities sought to tax this entire amount. However, the commissioner (appeals) restricted the profit attribution to 15% of the revenue generated in India. This was upheld by the ITAT, but owing to departmental appeals the matter reached the SC. The apex court observed that the quantum of revenue attributed to Indian operations was based on the function, asset, risk (FAR) analysis, which was duly considered by ITAT.
Monday, May 8, 2023 at 1:30 am