1. Introduction

Relatively recently, in a landmark decision (majority opinion) of the special bench of the Indian Income Tax Appellate Tribunal (ITAT), it was held that presence of the Indian subsidiary of a well-known foreign company did not give rise to the latter’s permanent establishment in India. But, one of the three members (judges) on the bench opined that, inter alia, issuance of performance guarantee by the foreign company – in respect of the installation activities of the Indian subsidiary – gave rise to the foreign company’s permanent establishment in India.

Though the majority decision of the ITAT’s special bench went in favor of the taxpayer company, the minority view can be expected to cause significant confusion and substantial litigation in a large number of contracts involving many multinational enterprises in respect of (i) offshore supply, and (ii) performance guarantees in respect of the activities of Indian subsidiaries.

 

Therefore, the above-mentioned decision warrants our attention and a careful analysis....