Does franchising trigger a permanent establishment? What was the ruling of the Indian court of appeal? And how does the Indian court address fees for technical services? Read our international tax news.
Indian tribunal rules that franchisee does not create PE
On 29 June 2018, the Mumbai Income Tax Appellate Tribunal (ITAT) ruled that a franchisee in India did not constitute a dependent agent permanent establishment (DAPE) of a US franchise-owner under the India-US tax treaty. As a result, the US company’s income from franchising in India could not be subject to tax as business income in India. The ITAT’s decision was based on the following facts and circumstances: the Indian company did not in any manner act on behalf of the US company, although 3% of sales revenue was payable to the US company as consideration for the rights granted under the MFA, all the profits and losses from the stores belonged only to the Indian company and the sub-franchisees, while certain clauses within the MFA entitled the US company to examine the accounts, approve suppliers and exercise some control over advertising, neither the Indian company nor the sub-franchisees retained any stock or goods on behalf of the US company, the Indian company did not enter into sub-franchise agreements or other agreements on behalf of the US company; all agreements were independently negotiated, entered into and executed by the Indian company.
Indian tribunal rules on fees from technical services
The Mumbai Income Tax Appellate Tribunal (ITAT) ruled on 8 June 2018 that consideration received by a Dutch tax resident company for conducting training programs in India and providing Indian entities with access to computer systems does not qualify as “fees for technical services” (FTS) under article 12(5) of the India-Netherlands tax treaty.
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