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06 September 2013
The Hyderabad Bench of the Income Tax Appellate Tribunal has held(1) that payments received by an Indian branch from its US head office for providing software development and medical transcription services were taxable in India, as the Indian branch was rendering services of a commercial nature that had been outsourced by the US head office.
The tribunal observed that Article 7(3) of the India-US double tax avoidance agreement has two parts - the first relates to activities carried on by the Indian branch that are commercial in nature, while the second relates to non-commercial and specific services performed by the Indian branch.
The tribunal also observed that the services rendered by the Indian branch under the specific permission granted by the Reserve Bank of India were commercial activities outsourced by the US-based head office. Therefore, such services were taxable under Article 7(3) of the India-US double tax avoidance agreement. The tribunal held that the profits of the Indian branch must be computed in relation to the income earned by it; it was immaterial whether the US head office suffered losses.
In the absence of a basis for estimating the profits of the Indian permanent establishment, the tribunal upheld the 10% mark-up on cost as reasonable for attributing profits to the Indian branch.
When determining taxability under Article 7(3) of the India-US double tax avoidance agreement, the tribunal divided the activities undertaken by the Indian branch into commercial and non-commercial activities. It held that income arising from non-commercial activities specifically assigned by a head office to its branch office were not taxable in the hands of the branch in India. Thus, the nature of services rendered by a branch office must be analysed beforehand in order to determine whether such services are taxable in India.
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