As reported by The Economic Times: Foreign companies are liable to be taxed for the income generated from their Indian subsidiaries, according to an order by Authority for Advance Rulings, a quasi-judicial body for settling tax disputes.

AAR gave its ruling in a case related to global courier company Aramex International Singapore, which had filed an application to the authority stating that it is not liable to pay tax in India for the revenue generated from its local arm AIPL as it does not have a permanent establishment in the country.

Under the India-Singapore tax treaty, tax is to be paid where the taxpayer has a permanent establishment. Aramex claimed its subsidiary AIPL is not a permanent establishment, but an agent that does certain services as per an agreement signed between the two parties. It said AIPL is an independent entity and its contract with Aramex is non-exclusive.

However, the tax authority said Aramex, which has a global presence, could not do its business in India without AIPL which plays a critical role in delivery of inbound and outbound goods. The business of the taxpayer Aramex group is carried out in India by AIPL, which clearly has a fixed place of business and branches, the ruling held. Experts said the company could likely challenge the ruling before a higher authority.

Though, for the time being, tax officers could use this decision against foreign express logistics companies to deem their Indian subsidiaries as a PE in India “It is important to distinguish between business of Aramex International against the business of Aramex India and the fact that contracts concluded by Aramex India are on its own account and not on behalf of Aramex International,” said Hemal Zobalia, partner at KPMG.