My foreign company sells to Indian customers through its Indian subsidiary, which I pay on a cost-plus basis. If that subsidiary is treated as my permanent establishment, is the cost-plus fee the end of it?
No. The Delhi High Court held that where the Indian subsidiary is the permanent establishment and carries on the core marketing, negotiating and selling functions, an arm's length cost-plus remuneration to it does not exhaust the tax. Profits of the foreign enterprise attributable to the Indian operations remain chargeable, and the Court upheld the Tribunal's functional apportionment of global profit - 50 per cent to manufacturing, 15 per cent to research and development, and the balance 35 per cent to marketing carried out in India. Both the assessee's appeals and the Revenue's appeals were dismissed.
Decided by the High Court (High Court of Delhi at New Delhi - Hon'ble Mr Justice A.K. Sikri and Hon'ble Mr Justice M.L. Mehta; judgment by A.K. Sikri, J) on 2011-08-30, reported as ITA 493/2008 and connected appeals (Delhi High Court). It bears on section 9(1)(i), section 5(2), section 90 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the leading Delhi High Court authority on attributing profit to a dependent-agent permanent establishment where the taxpayer says the arm's length payment to the Indian entity closes the question. The Court accepted a functional apportionment of worldwide profit under Rule 10 rather than an entity-level transfer pricing answer, and it upheld a 35 per cent attribution to Indian marketing and sales. It also shows how survey material can convert a described liaison arrangement into a permanent establishment: routing every customer order through the Indian office, staff of the foreign parent working from the Indian premises, and employees reporting to the Indian director were what carried the Article 5 finding. Practitioners reach for it both for the PE indicators and for the attribution mechanics, including the refusal to allow a second deduction for research and development already excluded from the apportioned base.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Rolls Royce Plc, a UK company, supplied parts and equipment to Indian customers, principally the Indian Navy, the Indian Air Force and Hindustan Aeronautics Limited. Rolls Royce India Limited, also a UK company and a wholly owned subsidiary, maintained liaison offices in India set up with Reserve Bank approval and was paid on a cost-plus basis. A survey threw up correspondence showing that Indian customers could not send orders or even requests for quotation directly to the UK company; everything was routed through the Indian office, staff of the group worked from those premises, and employees reported to the Indian director. The Assessing Officer held the Indian entity to be a permanent establishment and a business connection, and attributed 100 per cent of the profit on Indian sales for assessment years 1997-98 to 2000-01 and 75 per cent for 2002-03 and 2003-04, applying Rule 10. The Commissioner (Appeals) reduced the attribution to 75 per cent; the Tribunal reduced it further to 35 per cent. Both sides appealed.
The appeals of the assessee and of the Revenue were both dismissed. The Court answered the question on validity of reassessment and the additional question on coordinate benches against the assessee as not pressed. On permanent establishment it held that the Commissioner (Appeals) and the Tribunal had given sufficient and adequate reasons for treating the Indian subsidiary as the permanent establishment, that the assessee's objections to the remand report and the documents filed with them had been considered, and that there was no need to remand. On attribution it upheld the Tribunal's estimate of 35 per cent of global profit as attributable to Indian marketing and sales, and rejected the claim that net research and development expenditure should be deducted again in arriving at the profit to be apportioned. The Revenue's plea to restore the Assessing Officer's higher attribution failed as a consequence of the Tribunal's order being upheld in its entirety.
On the permanent establishment the Court proceeded on the Tribunal's findings, which it found were reached after examining the service agreement, the survey documents and the objections. The Tribunal had first found a business connection under section 9(1)(i) from the extent and scope of the services the Indian entity rendered, and then found a permanent establishment under Article 5 of the India-UK treaty on four grounds: a fixed place at the disposal of the group through which its business was carried on; an activity that was core marketing, negotiating and selling rather than preparatory or auxiliary; an entity acting almost like a sales office and working wholly and exclusively for the group; and a dependent agent habitually securing orders in India, which brought Article 5(4)(c) into play even if the agent could not negotiate or conclude contracts. The contention that the Indian entity was merely a post office was rejected on the documents. On attribution, the Court accepted the Tribunal's functional split of global profit - 50 per cent to manufacturing, 15 per cent to research and development and the balance to marketing - and reasoned that because research and development was carried on wholly outside India and had already been excluded in arriving at the 35 per cent, allowing the net research and development expense as a further deduction would give the same relief twice. Activities carried on wholly outside India, whether they yield profit or loss, are ignored in computing the profit attributable to the Indian operations.
Thus the expenses on research and development were already taken care of when remuneration @ 35% was attributed to marketing activities in India on which global profits was apportioned.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that where the Indian subsidiary is the permanent establishment and carries on the core marketing, negotiating and selling functions, an arm's length cost-plus remuneration to it does not exhaust the tax. Profits of the foreign enterprise attributable to the Indian operations remain chargeable, and the Court upheld the Tribunal's functional apportionment of global profit - 50 per cent to manufacturing, 15 per cent to research and development, and the balance 35 per cent to marketing carried out in India. Both the assessee's appeals and the Revenue's appeals were dismissed. This was decided by the High Court (High Court of Delhi at New Delhi - Hon'ble Mr Justice A.K. Sikri and Hon'ble Mr Justice M.L. Mehta; judgment by A.K. Sikri, J) and bears on section 9(1)(i), section 5(2), section 90 of the Income Tax Act 1961. It is reported as ITA 493/2008 and connected appeals (Delhi High Court). This is the leading Delhi High Court authority on attributing profit to a dependent-agent permanent establishment where the taxpayer says the arm's length payment to the Indian entity closes the question. The Court accepted a functional apportionment of worldwide profit under Rule 10 rather than an entity-level transfer pricing answer, and it upheld a 35 per cent attribution to Indian marketing and sales. It also shows how survey material can convert a described liaison arrangement into a permanent establishment: routing every customer order through the Indian office, staff of the foreign parent working from the Indian premises, and employees reporting to the Indian director were what carried the Article 5 finding. Practitioners reach for it both for the PE indicators and for the attribution mechanics, including the refusal to allow a second deduction for research and development already excluded from the apportioned base. If it applies to you, the first step is this: Document what your Indian entity actually does, not what the service agreement says it does; correspondence found on survey is what decided this case.
Rolls Royce Plc, a UK company, supplied parts and equipment to Indian customers, principally the Indian Navy, the Indian Air Force and Hindustan Aeronautics Limited. Rolls Royce India Limited, also a UK company and a wholly owned subsidiary, maintained liaison offices in India set up with Reserve Bank approval and was paid on a cost-plus basis. A survey threw up correspondence showing that Indian customers could not send orders or even requests for quotation directly to the UK company; everything was routed through the Indian office, staff of the group worked from those premises, and employees reported to the Indian director. The Assessing Officer held the Indian entity to be a permanent establishment and a business connection, and attributed 100 per cent of the profit on Indian sales for assessment years 1997-98 to 2000-01 and 75 per cent for 2002-03 and 2003-04, applying Rule 10. The Commissioner (Appeals) reduced the attribution to 75 per cent; the Tribunal reduced it further to 35 per cent. Both sides appealed. The matter was decided on 2011-08-30 by the High Court (High Court of Delhi at New Delhi - Hon'ble Mr Justice A.K. Sikri and Hon'ble Mr Justice M.L. Mehta; judgment by A.K. Sikri, J). On those facts the High Court held as follows. The appeals of the assessee and of the Revenue were both dismissed. The Court answered the question on validity of reassessment and the additional question on coordinate benches against the assessee as not pressed. On permanent establishment it held that the Commissioner (Appeals) and the Tribunal had given sufficient and adequate reasons for treating the Indian subsidiary as the permanent establishment, that the assessee's objections to the remand report and the documents filed with them had been considered, and that there was no need to remand. On attribution it upheld the Tribunal's estimate of 35 per cent of global profit as attributable to Indian marketing and sales, and rejected the claim that net research and development expenditure should be deducted again in arriving at the profit to be apportioned. The Revenue's plea to restore the Assessing Officer's higher attribution failed as a consequence of the Tribunal's order being upheld in its entirety.
On the permanent establishment the Court proceeded on the Tribunal's findings, which it found were reached after examining the service agreement, the survey documents and the objections. The Tribunal had first found a business connection under section 9(1)(i) from the extent and scope of the services the Indian entity rendered, and then found a permanent establishment under Article 5 of the India-UK treaty on four grounds: a fixed place at the disposal of the group through which its business was carried on; an activity that was core marketing, negotiating and selling rather than preparatory or auxiliary; an entity acting almost like a sales office and working wholly and exclusively for the group; and a dependent agent habitually securing orders in India, which brought Article 5(4)(c) into play even if the agent could not negotiate or conclude contracts. The contention that the Indian entity was merely a post office was rejected on the documents. On attribution, the Court accepted the Tribunal's functional split of global profit - 50 per cent to manufacturing, 15 per cent to research and development and the balance to marketing - and reasoned that because research and development was carried on wholly outside India and had already been excluded in arriving at the 35 per cent, allowing the net research and development expense as a further deduction would give the same relief twice. Activities carried on wholly outside India, whether they yield profit or loss, are ignored in computing the profit attributable to the Indian operations. In the words reproduced by the source cited on this page: "Thus the expenses on research and development were already taken care of when remuneration @ 35% was attributed to marketing activities in India on which global profits was apportioned."
It was decided by the High Court on 2011-08-30 and is reported as ITA 493/2008 and connected appeals (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 9(1)(i), section 5(2), section 90, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeals of the assessee and of the Revenue were both dismissed. The Court answered the question on validity of reassessment and the additional question on coordinate benches against the assessee as not pressed. On permanent establishment it held that the Commissioner (Appeals) and the Tribunal had given sufficient and adequate reasons for treating the Indian subsidiary as the permanent establishment, that the assessee's objections to the remand report and the documents filed with them had been considered, and that there was no need to remand. On attribution it upheld the Tribunal's estimate of 35 per cent of global profit as attributable to Indian marketing and sales, and rejected the claim that net research and development expenditure should be deducted again in arriving at the profit to be apportioned. The Revenue's plea to restore the Assessing Officer's higher attribution failed as a consequence of the Tribunal's order being upheld in its entirety. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 9(1)(i), section 5(2), section 90 of the Income Tax Act 1961, and was decided by High Court of Delhi at New Delhi - Hon'ble Mr Justice A.K. Sikri and Hon'ble Mr Justice M.L. Mehta; judgment by A.K. Sikri, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If orders from Indian customers must be routed through the Indian office, expect a dependent-agent PE under Article 5(4)(c) even where the office cannot conclude contracts. Do not argue that a cost-plus arm's length fee to the Indian entity ends the enquiry - be ready with a functional analysis showing what share of global profit the Indian functions earn. When profit is apportioned functionally, check you are not asking for the same expense twice: costs already stripped out in fixing the percentage cannot be deducted again.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citedby search returns 13 later decisions and every one of them is from the Delhi High Court. The strongest thing said about the judgment is an endorsement rather than an application: in DIT v E Funds IT Solution Inc (Delhi High Court, 5 February 2014) the Bench held at para 38 that 'Judgment of the Delhi High Court in the case of Rolls Royce PLC versus Director of Income Tax (International Taxation) (2011) 339 ITR (Del) is a good authority for the proposition that subsidiary can constitute and become a PE of the controlling company. The said decision proceeds on its own peculiar facts and we do not find that any legal principle and the elucidation in the present decision is contrary to the legal ratio propounded in the case of Rolls Royce.' That confirms the ratio and confines it to its facts in the same breath, and E Funds itself went the other way on its own facts. No decision was found adopting the judgment's reasoning as a ground of its own decision: in GE Energy Parts Inc v CIT (Delhi High Court, 21 December 2018) it appears only in counsel's submissions at para 35, and the attribution discussion at paras 13 and 37 turns on the ITAT's own 26 per cent estimate, not on this judgment. So the entry stays short of 'good law' on the evidence found, while nothing overrules or doubts it. A practitioner should expect the 'peculiar facts' point from E Funds to be made against any broad use of it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists Rule 10 of the Income Tax Rules among the sections; that is a rule and not a section of the Act, so it is left out of the sections field although the attribution was made under it. The batch line carried no reporter citations, so the case numbers from the judgment's own first page are used instead. The Tribunal's order and the miscellaneous application order of 30 January 2009, which contain the detailed permanent establishment findings and the attribution working, were not read - the High Court's judgment reproduces only extracts. The assessment years covered are 1997-98 to 2000-01 and 2002-03 to 2003-04 as recited; the judgment does not set out year-wise figures. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals of the assessee and of the Revenue were both dismissed. The Court answered the question on validity of reassessment and the additional question on coordinate benches against the assessee as not pressed. On permanent establishment it held that the Commissioner (Appeals) and the Tribunal had given sufficient and adequate reasons for treating the Indian subsidiary as the permanent establishment, that the assessee's objections to the remand report and the documents filed with them had been considered, and that there was no need to remand. On attribution it upheld the Tribunal's estimate of 35 per cent of global profit as attributable to Indian marketing and sales, and rejected the claim that net research and development expenditure should be deducted again in arriving at the profit to be apportioned. The Revenue's plea to restore the Assessing Officer's higher attribution failed as a consequence of the Tribunal's order being upheld in its entirety.
TaxSphere, “Rolls Royce Plc v DIT (International Taxation)”, https://taxnotice.vittsphere.com/caselaw/case/rolls-royce-plc-v-dit/ (validity last checked 2026-08-29)
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