Foreign firms and tax issues in India

Business profits of foreign enterprises are taxed in India only if the said foreign enterprise has a Permanent Establishment in India and the profits are attributable to that PE. If the foreign enterprise has no PE, business profits cannot be taxed.

In a recent case of Van Gord Dredging vs DDTT (reported in 105 ITD 97), the Mumbai Bench of Income-tax Appellate Tribunal considered an interesting situation where the foreign company did have a PE in India but received the business profits attributable to the PE after closing down of the PE.

The brief facts are that the assessee is a tax resident of Netherlands. During 2001-02, the assessee executed contracts in India and for this purpose the assessee has maintained project/site offices in India, established with the approval of the RBI.

The assessee filed his return of income for the assessment year 2001-02, showing a loss of about Rs 12 crore (Rs 120 million). In computing this returned loss of Rs 12 crore the income of Rs 30.78 crore (Rs 307.8 million) received in relation to the New Mangalore Port Trust Project was reduced on the basis that the said project was completed earlier in the financial year 1995-96 and accordingly, in the absence of a Permanent Establishment (PE) in relation to the NMPT and the project in the relevant assessment year of 2001-02, the said amount was not taxable.

The assessee submitted that to tax business profits, there should be a PE for the project during the relevant period and that the profits should be attributable to the PE in India. It was also submitted that once the PE is terminated, business profits cannot be brought to tax, as there must be a PE to which the source of income can be attributable.

Where there is no PE, the question of determining profits attributable to the same cannot arise.

A reading of the relevant Articles 5 and 7 of the DTAA between India and Netherlands shows that there are only two conditions for taxing an amount received by the assessee in India and they are that there should be a PE of the assessee in India and that the income should be attributable to the said PE.

In this case, the PE was admittedly in existence in India in the earlier assessment years 1995-96 and 1996-97, and that the income received by the assessee-company during the assessment year 2001-02 was attributable to the PE. However, the PE of the assessee for NMPT project was closed down and the income was received after termination of the PE.

The Tribunal observed: "As per the various Articles in the DTAA between India and Netherlands, we find that there is no condition therein for taxability of the income received by the assessee-company in India that in the year of receipt of that income there shall be a PE in India."

It was held that "since the assessee was having a PE in India and also the income of Rs 30.78 crore received from NMPT being attributable to the PE in India and there being no condition that PE should be in existence in India in the year of receipt of the amount by the enterprise, the amount of Rs 30.78 crore received by the assessee-company from NMPT project has rightly been taxed by the Assessing Officer as income of the assessee-company for the assessment year 2001-02."