The Mumbai income-tax tribunal has stated foreign companies could be taxed independently even if their dependent agents are paid on an arms length basis.
The order has been passed in case of Sony Entertainment Television (SET) based in Singapore whose dependent agent is Sony India. SET- Singapore had earlier obtained a relief from the income-tax commissioner (appeals) for not being taxed in India, citing the advance ruling of Morgan Stanley.
In case of Morgan Stanley, the advance ruling authority has stated that if the dependent agent is paid at an arms length in India, the foreign company (Morgan Stanley parent) could not be taxed in India.
The order assumes significance since it will be applicable to all foreign companies which are operating in India on dependent agent basis. The assessment pertains to 2002-03 and the department has raised a demand of over Rs 100 crore.
A dependent agent is one who is legally and economically dependent on the principal (foreign company) and is authorised to negotiate and secure contracts on behalf of the foreign company.
The tribunal has held that the taxation of foreign company could be done since the permanent establishment of the foreign company and dependent agents are two different entities.
In this case, the authorities could tax the permanent establishment of the foreign company independently of the dependent agent.
The PE and the dependent agent are the same entities but the dependent agent is taxed as an Indian entity and the PE becomes the basis on which the foreign company is taxed on its Indian earnings.