Facts of the Case

The writ petitions challenged reassessment notices issued under Section 148 of the Income Tax Act, 1961 for Assessment Years 2012–13 to 2018–19 to Progress Rail Locomotive Inc. (formerly Electro Motive Diesel Inc.), a U.S.-incorporated company engaged in supplying locomotive components and rail solutions globally.

The Revenue initiated proceedings on the basis that the petitioner’s wholly owned Indian subsidiary, Progress Rail Innovations Pvt. Ltd. (PRIPL), constituted a Permanent Establishment (PE) in India—specifically a Fixed Place PE, Service PE, or Dependent Agent PE—under Article 5 of the India-USA DTAA.

Issues Involved

  1. Whether the Indian subsidiary constituted a Permanent Establishment of the foreign parent under Article 5 of the India-USA DTAA.
  2. Whether reassessment proceedings under Sections 147/148 could be initiated on the assumption of such PE.
  3. Whether activities of the subsidiary amounted to core business operations or merely preparatory/auxiliary support services.
  4. Scope of jurisdiction of tax authorities over non-resident entities.

Petitioner’s Arguments

The petitioner contended that PRIPL functioned as an independent legal entity providing back-office, technical, and marketing support services on a cost-plus basis, as confirmed in transfer pricing assessments. The products manufactured by the subsidiary were distinct from those supplied by the petitioner.

It was argued that the subsidiary’s premises were not at the disposal of the foreign company and therefore could not constitute a Fixed Place PE. The petitioner emphasized that all supplies to Indian Railways were made directly by the U.S. entity, with pricing and contractual decisions taken outside India.

Respondent’s (Revenue’s) Arguments

The Revenue argued that PRIPL acted as the operational arm of the foreign company in India. Statements recorded during survey indicated that the subsidiary provided tender support, technical assistance, communication with Indian Railways, warranty services, logistics coordination, and payment follow-ups on behalf of the petitioner.

It was further contended that key officers of PRIPL reported to personnel of the foreign parent, expatriates frequently visited India for sales-related activities, and the subsidiary’s office and resources were effectively at the disposal of the foreign entity.

 Court Order / Findings

  • A Permanent Establishment requires a fixed place of business through which the enterprise’s core business is carried on.
  • Mere presence of a subsidiary or performance of support services does not establish a PE.
  • The subsidiary’s activities were largely preparatory or auxiliary in nature, including technical support, coordination, and back-office functions.
  • There was no evidence that the petitioner’s core manufacturing or sales operations were conducted from the subsidiary’s premises.
  • The premises of PRIPL were not shown to be at the disposal of the foreign company in the sense required for a Fixed Place PE.
  • Control or ownership of a subsidiary alone does not create a PE, consistent with Article 5(6) of the DTAA.
  • Transfer pricing assessments recognizing arm’s length remuneration further undermined the PE allegation.

Important Clarification

  • A wholly owned subsidiary is not automatically a Permanent Establishment of the foreign parent.
  • Support functions, even if extensive, must be distinguished from core business activities.
  • The “disposal test” and functional analysis remain central to determining a Fixed Place PE.
  • Transfer pricing compliance and arm’s length remuneration are significant indicators against PE attribution.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1772177664_PROGRESSRAILLOCOMOTIVEINCFORMERLYELECTROMOTIVEVsDEPUTYCOMMISSIONEROFINCOMETAXINTERNATIONALTAXATIONCIRCLENOIDAOR.pdf 

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