14. ‘X” Ltd. is an Indian subsidiary of an American company manufacturing and selling copier machines. The Indian company among other things purchases and sells these copier machines also. Does any part of the profits of the sales of American company to the Indian company accrue or arise in India? Discuss.

1. Facts of the Case

• ‘X’ Ltd. is an Indian subsidiary of an American parent company.
• The American company is engaged in manufacturing copier machines.
• ‘X’ Ltd. (Indian company) purchases copier machines from the American parent company and sells them in India.
• The Indian subsidiary acts as a distributor/reseller, and not as a mere agent.
• The transaction involves import of goods into India followed by domestic sales by the Indian entity.

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2. Issues in the Case

1. Does any portion of the profits of the American company from the sale of copier machines to its Indian subsidiary accrue or arise in India?
2. Are such transactions taxable in India under the provisions of the Income Tax Act, 1961?
3. Under what conditions can a foreign company’s income be taxed in India?
4. Does the presence of a subsidiary company in India create a permanent establishment (PE) of the foreign company?

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3. Legal Principles Covered to Support Case Proceedings and Judgements

A. Section 5 and Section 9 of the Income Tax Act, 1961

• As per Section 5, a non-resident is taxable only on income that accrues or arises in India, or is deemed to accrue or arise in India.
• Section 9(1)(i) deals with income deemed to accrue or arise in India through a business connection or source of income in India.

B. Business Connection and Explanation 2 to Section 9(1)(i)

• If a foreign enterprise sells goods to an Indian company on a principal-to-principal basis, there is no business connection unless the Indian entity is merely a conduit or agent of the foreign company.
• Mere sale of goods to an Indian entity does not constitute income arising in India, unless the foreign company has a business presence or operations in India that significantly contribute to the earning of profits.

C. Permanent Establishment (PE) – Under Double Taxation Avoidance Agreements (DTAAs)

• As per most DTAAs (e.g., India-USA DTAA), business profits of a foreign company are taxable in India only if the company has a Permanent Establishment (PE) in India.
• A subsidiary does not automatically constitute a PE unless it acts as a fixed place of business or a dependent agent of the parent company.
• If ‘X’ Ltd. operates independently and purchases goods for resale on its own account, there is no PE of the American company in India.

D. Judicial Precedents

• DIT v. Morgan Stanley & Co. (2007) 292 ITR 416 (SC) – Merely having a subsidiary in India does not mean the foreign company has a PE unless the subsidiary carries out core business activities of the foreign company.
• Formula One World Championship Ltd. v. CIT (2017) 394 ITR 80 (SC) – A foreign entity will be taxed in India only if it has a PE and business is carried out through it in India.

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4. Possible Judgement

Based on the facts and legal principles:

• The American parent company is merely selling copier machines to ‘X’ Ltd., its independent Indian subsidiary, on a principal-to-principal basis.
• ‘X’ Ltd. carries out the sale and distribution activities independently and does not act as an agent or representative office of the American company.
• The American company does not have any business operations, office, or personnel in India engaged in concluding contracts or executing business functions.