Brief Overview

• The Delhi High Court (“HC”) held that Progress Rail Locomotive Inc. (“Taxpayer”)[1], a US company, did not have a permanent establishment (“PE”) in India under the India–USA Double Taxation Avoidance Agreement (“DTAA”), and therefore, reassessment proceedings were invalid.
• The HC rejected the Tax Authority’s contentions on Fixed Place PE, Service PE and Dependent Agent PE (“DAPE”), and quashed the Section 148 notices under the Income-tax Act, 1961 (“ITA”).
• The Honourable Supreme Court (“SC”)[2] has dismissed the Tax Authority’s Special Leave Petition (“SLP”), thereby affirming the HC ruling in favor of the Taxpayer.

Background and Facts

• The Taxpayer supplied locomotives and related equipment to (now known as Banaras Locomotive Works), other Indian Railways centers, and global customers.
• Its wholly owned Indian subsidiary, Progress Rail Innovations Private Limited (“PRIPL”), provided back-office, technical clarification, purchase order procurement, sales order tracking, tender monitoring and coordination, information technology services, and more, to the Taxpayer. Further, PRIPL provided annual maintenance services directly to DLW, Varanasi, through a separate local contract.
• The Tax Authority initiated reassessment proceedings against the Taxpayer, alleging that PRIPL’s operations constituted a Fixed Place PE, a Service PE, and a DAPE in India, thereby seeking to tax the Taxpayer’s business income related to India as attributable to the alleged PE.
• The HC decisively dismissed the PE claims, affirming that PRIPL operates independently, with no part of the Taxpayer’s core business conducted through it. The HC further concluded that there was no taxable business profit in India attributable to a PE, and thus, the reassessment proceedings were unsustainable.
• The Tax Authority filed an SLP before the SC challenging the HC ruling. The SC affirmed the HC’s decision and dismissed the Tax Authority’s SLP, thereby approving the HC’s findings.

Key Principles Emerging from the Ruling

The SC, after hearing the Taxpayer's counsel on the facts and circumstances of the case, was not inclined to entertain the SLP and dismissed it. Thereby, in principle, the SC has affirmed the HC’s detailed findings. The key principles emerging from HC’s ruling and effectively approved by the SC, are discussed below.

1. Disposal and control over Indian premises (disposal test): The HC relied on various judicial precedents[3] to conclude that a Fixed Place PE is established where a foreign enterprise exercises control and disposal over an Indian enterprise’s premises and conducts its business through such location. However, the mere provision of support functions by the subsidiary through its premises does not, by itself, satisfy the “place at the disposal” requirement for a Fixed Place PE. There must be demonstrable control and use of such premises for the foreign enterprise’s core business.
2. Preparatory and auxiliary activities (core functions test): The HC, relying on the SC’s ruling of Morgan Stanley[4] and other judicial precedents[5], reiterated that mere auxiliary, preparatory, or support activities performed by a subsidiary, without assumption of core entrepreneurial functions and risks, are not sufficient to create a PE.
3. Subsidiary PE exists where subsidiary is an alter ego (subsidiary PE test): The HC relied on SC’s ruling in the case of E-Funds[6], wherein it was observed that even if some of the functions were transferred to an Indian entity by way of handing over of business or back-office operations, the same would not result in the creation of a Fixed Place PE. Moreover, the HC also laid emphasis on Article 5(6) of the DTAA to hold that the mere existence of a subsidiary does not constitute a PE, where such subsidiary performs independent activities and is not an alter ego of the foreign parent.
4. Agency threshold (DAPE test):The absence of contract-concluding authority with the Indian subsidiary on a habitual basis, weighs against the existence of a DAPE.
5. Normal management contribution (Shareholder activities test): The HC reinforced the position that mere presence of foreign enterprise’s employees for managerial oversight, sharing of best practices, experiences, and problem-solving (identified as normal management contribution) would not, by itself, create a Service PE in India, since no services are being rendered.
6. No attribution if arm’s length remuneration paid to subsidiary (): While relying on the SC ruling in the case of Honda Motor[7], the HC reiterated that where a related-party transaction is already at an arm’s length price (“ALP”), any further attribution to a PE becomes essentially academic. Therefore, no additional profits would be taxable in India under such circumstances.

A&M takeaways

• The HC ruling, as affirmed by the SC, aligns with the recent trend of court rulings, wherein the courts have affirmed the principle that mere existence of a subsidiary does not, by itself, create a PE. Further, it also aligns with the principles established inter alia in the SC rulings of Morgan Stanley (referred above), Amadeus[8] and Galileo[9], Sabre Inc.[10], wherein courts have held that no further profits are to be attributed to India, once the Indian subsidiary, which is an alleged PE, is adequately remunerated on an arm’s length basis as per the Indian transfer pricing regulations (i.e., no separate enterprise fiction for PE).
   
• The outcome of this ruling, however, stands in contrast to the recent landmark SC ruling in the case of Hyatt[11], wherein the SC held that continued, pervasive, strategic, and operational control exercised by the foreign enterprise over the Indian entity resulted in a Fixed Place PE. It also stands in contrast to the PE attribution principle, holding that an Indian PE must be viewed on its own (i.e., separate enterprise fiction), and profits can be attributed to it even if the overall enterprise had global losses.

[1] Progress Rail Locomotive Inc. (Formerly Electro Motive Diesel Inc.) [TS-374-HC-2024(DEL)]

[2] DCIT v. Progress Rail Locomotive Inc., SLP (C) Diary No. 35563/2025 (SC, 21-11-2025)

[3] Formula One World Championship (2017) 15 SCC 602; Samsung Heavy Industries Company Limited (2020) 7 SCC 347; Vishakhapatnam Port Trust

[4] Morgan Stanley & Co. Inc. (2007) 7 SCC 1

[5] National Petroleum Construction Co. vs. Director of Income-tax (2016 SCC Online Del 571); Union of India vs. UAE Exchange Centre ((2020) 9 SCC 329)

[6] E Funds IT Solutions Inc. 2014 SCC Online Del 555

[7] Honda Motor Company Limited (2018) 6 SCC 70

[8] Amadeus Global Travel Distribution S.A. [2011] 11 taxmann.com 153 (Delhi); SLP (C) Diary No. 40152/2011 (SC, 20/01/2012)

[9] Galileo Nederland BV [TS-524-HC-2014(DEL)]; S.L.P.(C) CC No. 004952 / 2015 SLP(C) No. 012425 / 2015 Diary No. - 4638/2015 (SC)

[10] 2009 taxmann.com 1020 (Delhi)

[11] Hyatt International Southwest Aisa Ltd [TS-954-SC-2025]