When a Japanese company keeps its engineers in India for an extended period, it becomes important to determine whether the company has a Permanent Establishment (PE) in India and whether the income earned by these engineers is taxable in the country. On 21 September 2026, the Income Tax Appellate Tribunal (Delhi Bench D) ruled in favour of Toyota Tsusho Corporation in six combined appeals relating to the assessment years 2013–14, 2015–16, and 2016–17. The Toyota Tsusho India PE threshold analysis under the India–Japan DTAA, Article 5(4) six-month supervisory rule rewards close reading: the Tribunal rejected the officer's day-counting and refused to call ordinary dealer support "supervision of a project."
What the ruling held
It is mentioned for the assessment years that no supervisory PE exists in the case of Toyota Tsusho Corporation in India as defined in sec. 5(4) of the Act. The assessee's appeal was allowed in part (ITA Nos. 1828/Del/2018, 1513/Del/2020, 1514/Del/2020) while the appeal by the Revenue was dismissed (ITA Nos. 1911/Del/2018, 1908/Del/2020, 1508/Del/2020).
Two connected issues:
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Offshore supply profits not taxable. On ₹286.12 crore of offshore supplies, contracts, title transfer and consideration all lay outside India, principal-to-principal (Ishikawajima-Harima Heavy Industries Ltd., (2007) 288 ITR 408 (SC)).
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Cost-to-cost salary reimbursement not FTS. ₹2,08,41,050 reimbursed by Toyotsu Rare Earths India without markup was not the non-resident's taxable income, following Toyota Boshoku Automotive India (ITAT Bangalore); no estoppel against statute.
One limit: the holding covers supervisory PE only no findings on dependent-agent PE (Article 5(7)), fixed-place PE (Article 5(1)/(2)) or any other limb — and any appeal to the Delhi High Court is, as of the date above, not confirmed from any accessible source.
What Article 5(4) actually requires
Article 5(4) of the India–Japan DTAA (signed 7 March 1989, in force 29 December 1989) deems a PE only where supervisory activities in India meet two cumulative and mandatory conditions (order para 17): more than six months' duration and connection with "a building site or construction, installation or assembly project". Both limbs must be met failing either defeats the PE. Neighbouring provisions:
Provision What it covers Threshold
Art. 5(1)–(2) Fixed-place PE (office, branch, factory, etc.) No duration test
Art. 5(3) Building site / construction, installation or assembly project itself More than six months
Art. 5(4) Supervisory activities in connection with such a project More than six months plus the project connection
Art. 5(5) Services for mineral-oil exploration/exploitation More than six months
Art. 5(7) Dependent agent (contracts authority, stock, order-securing) Habitual conduct
Art. 5(8) Independent agent acting in ordinary course No PE
Art. 5(9) Subsidiary control alone No PE of itself
Based on the verified version of the treaty: 5(3) and 5(4) are separate limbs – the former looks at the project, the latter at the supervision of that project. Moreover, and fixing an error frequently made, the dependent agent limb is Art. 5(7), while the independent agent exception is Art. 5(8), the subsidiary control provision Art. 5(9).
The facts that decided the case
The assessing officer had aggregated employee-days across expatriates as project duration, attributing 75% of declared fees-for-technical-services revenue of ₹33,85,28,093 (₹25,38,96,070) plus a slice of offshore-supply profit (₹28.61 crore estimated at 10%, 35% attributed, ₹10,01,45,148 taxed). Both steps fell away.
The six-month test is project-wise, not employee-wise. Following the jurisdictional Delhi High Court in CIT v. Sumitomo Corporation [2016] 382 ITR 75 (Del), duration runs first-arrival to last-departure for the installation activity; overlapping days of simultaneous employees are not added. Aggregation was "not sustainable in the eyes of law" (para 19).
The day-count table (AY 2013-14, para 17):
|
Customer |
Expatriate |
Days in India |
|
Toyota Lakozy Auto Pvt Ltd (TLAL) |
Yuji Kuroki |
307 |
|
TLAL |
Kensuke Yamada |
365 |
|
Toyota Kirloskar Auto Parts (TKAP) |
Kato 131; Iwato 116; Yonemoto 65; Hara 65; Ozawa 86; Sudo 93; Yamamoto 44; Horikawa 57 |
all under 182 per person |
|
TT Assembly India |
Hydo 08; Higa 05; Yamamoto 05 |
— |
|
Mitsubishi Electric Automotive India |
Toshigi |
10 |
|
AT India Auto Parts |
Kazuma Terado |
7 |
Save the TLAL secondees, every expatriate stayed under six months; TKAP ran 28 October 2012 – 8 April 2013, under six months, unrebutted (para 18).
Long presence still lost without a qualifying project. The TLAL secondees (307 and 365 days) crossed six months, yet no Supervisory PE arose Toyota Lakozy is an authorised automobile dealer in retail trading and sale of Toyota vehicles (Form 3CEB and supporting papers) and Revenue produced no cogent evidence of any building site, construction, installation or assembly project (para 21). It added FCC Co. Ltd. (ITAT Delhi), National Petroleum Construction Co. (Del) and GFA Anlagenbau GmbH (Hyd) technical assistance and quality control for a dealer or JV is not "supervisory activity in connection with" a qualifying project.
No PE meant no attribution (paras 21, 27) the arbitrary 10% × 35% formula never needed testing.
Practical implications: the evidence that wins or loses these cases
1. Project-wise day counts
Maintain a per-project, per-expatriate India day-count register arrival/departure dates, purpose of each visit supported by passport/FRRO, secondment or visitor logs Revenue gathers the same via section 133(6) notices if needed. The TKAP project's start and end dates were the winning rebuttal here. Track enterprise-wide presence for information only measure Article 5(3)/(4) duration on the Sumitomo first-arrival-to-last-departure basis, without double-counting overlapping days.
2. What counts as "supervisory" and what does not
Supervision in connection with a qualifying project sits on one side; technical assistance, quality control, dealer support and routine visits on the other (FCC line). Customer-business evidence Form 3CEB, licences, dealership papers can prove no qualifying project exists.
3. Project aggregation arguments
Where several secondees serve one customer, expect the officer to total their days duration belongs to the project, not the headcount keep commencement and completion records ready.
4. Independent-enterprise evidence for offshore supplies
As far as composite supply/services contracts are concerned, maintain invoices, Bill of Lading, Bill of Entry and documentation for offshore performance, ownership and payment; the protocol paragraph 6 confines attribution to only those transactions where the PE was involved.
5. Secondment and reimbursement structure
Keep the secondment agreement in place to show that the Indian entity has control pay reimbursement at cost basis make sure the payment of tax is done as per Section 192 in India.
6. Attribution readiness
If PE risk exists, maintain a FAR analysis and benchmarking to rebut arbitrary formula attribution.
India–Japan operational checklist
1. Per-project and per-expatriate India day-count list (date of arrival/departure and objective).
2. Identify the offshore project against the customer project file as either supervisory work, technical assistance or visits.
3. Establish whether the customer company carries out construction/installation/assembly project proof of its business.
4. Deputation contracts indicating Indian entity’s control cost-to-cost basis of accounting TDS on salary.
5. Offshore supply contracts proving offshore completion, passing of title and payment.
6. Time measure per project for Art. 5(3)/(4) overall time for enterprise.
7. Keep an eye on this decision’s appeal status before basing your plans on it.
Risks and common errors
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"Presence over six months = PE." No TLAL shows the project limb is independent and mandatory.
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"All employees' days add up." Rejected in Sumitomo and here.
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"Any supervision by foreign staff counts." Only if connected to a qualifying project.
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"A PE finding taxes offshore-supply profits." No Ishikawajima-Harima's three-limb test applies independently.
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"A receipt once offered cannot be reversed." No estoppel against statute.
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No general 183-day services-PE rule for Japan the treaty has only the mineral-oil limb at 5(5).
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No blanket PE amnesty: dependent-agent and fixed-place theories remain live and the appeal position is not confirmed.
Takeaway
The Toyota Tsusho India PE threshold outcome turns the India-Japan DTAA Article 5(4) six-month rule from a headcount into a project analysis: more than six months and a qualifying project, Revenue bearing the burden of proof on both. Groups moving Japanese personnel into India should build the evidence trail now won on day counts, project dates, dealership records and shipping documents, not argument.
For groups weighing secondment structures, offshore supply contracts or PE exposure on India–Japan trade routes, evidence-grounded cross-border tax and transfer pricing advice as SKMC Global permanent establishment and transfer pricing advisory work provides pays off before the notices arrive.