Applicability of Permanent Establishment (PE) in India and its impact

In October 2021, at an OECD-led meeting of 136 countries, it was agreed that there would be a global minimum corporate tax rate of 15 percent. The intention of this agreement is to combat corporate tax avoidance through companies setting up a subsidiary in a low tax jurisdiction, but in reality, sourcing their income in higher-tax jurisdictions. 

The intention of this reform is to stop large multi-nationals from abusing existing permanent establishment rules which mean, in the absence of a ‘fixed’ presence in a jurisdiction, they avoid having to pay income tax there. 

The existence or otherwise of PE has been a subject matter of endless debate in the legal forums, due to the subjectivity associated with interpretations of relevant law. Due to the subjectivity involved and also the issues of interpretation, sometimes it may be uncertain whether a foreign enterprise qua a specific activity or non-activity has constituted a PE or not.

A permanent establishment (PE) is a fixed place of business that generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and in most European Union Value Added Tax systems. The tax systems in some civil-law countries impose income taxes and value-added taxes only where an enterprise maintains a PE in the country concerned. Definitions of PEs under tax law or tax treaties may contain specific inclusions or exclusions.

Objective of Permanent Establishment

§  To tax profits arising to an enterprise resident of a foreign state from activities carried on in the state of source through a fixed place of business as it amounts to ‘doing business in a country’ as opposed to ‘doing business with a country’ For the state of source

§  To levy tax on foreign enterprise carrying on business on its soil For a taxpayer

§  The concept is significant as if there is no PE then no tax is payable in the state of source.

When the following criteria are met, a foreign enterprise's fixed place Permanent Establishment (PE) exists in India.

(a)    The location of a business must be fixed and should be consistent for a reasonable amount of time. ...

(b)   The location must be available to the foreign entity. ...

(c)    A proper commercial activity must be carried out from such a set location.

Concept Permanent Establishment (PE)

The concept of permanent establishment was developed to determine whether an organization’s activities in any given jurisdiction are taxable by local authorities. In other words, to determine if there is a taxable presence in that jurisdiction. To put it in a more favourable light, a correct Permanent Establishment (PE) determination also helps ensure that double taxation does not occur.

The concept of a permanent establishment (PE) is a fundamental concept in international tax law as it establishes the right to tax business profits of non-resident entities in the country where business activities are carried out.

With globalisation economic/ trading activities spreading across jurisdictions the enterprises nowadays have presence in several jurisdictions. The taxability of activities undertaken at the foreign soil by enterprise is closely linked to permanent establishment (PE), a concept created by international tax and treaty law, which has assumed considerable significance. The countries often exercise taxing rights by employing deeming fictions to bring the income within its tax net.

Under the terms of various tax treaties, existence of a Permanent Establishment in source State is a pre-requisite for the purpose of taxation by that jurisdiction on business profits of a foreign enterprise. The term Permanent Establishment (PE) is generally defined in various double tax avoidance agreements (“DTAAs”) as “a fixed place of business through which the business of a foreign enterprise is carried on wholly or in part”.

In addition, a Permanent Establishment may also be constituted by virtue of certain activities of the foreign enterprise such as carrying on the sales activities through a dependent agent in India or furnishing of services through employees in India exceeding the prescribed period.

Under the Income Tax Act, 1961, any income arising to a non-resident, whether directly or indirectly inter alia through or from any business connection is deemed to accrue or arise in India. Therefore, if a non-resident has a PE in India, then business connection stand established in India.

If a company is incorporated in India, its earnings are subject to Indian taxation. India has the authority to tax a company’s global income on the basis of the “residential base” of taxation. India also has the power to tax the foreign company’s income to the extent that the source of income is in India. According to the Indian Income Tax Act, if a foreign company’s income is received or deemed to be received in India, or is accrued/ arisen or deemed to have accrued/ arisen in India, the source of such income is said to be in India, and India has the right to tax such income under the principle of “source base” taxation. If a foreign company has a long-term presence in India for the purpose of conducting business, the revenue received by such company, to the extent that it is due to their presence in India, becomes taxable in India. The concept of Permanent Establishment (PE) is derived from this rationale.

Definition of Permanent establishment (PE)

The concept of PE was introduced in the Act as part of the statutory provisions of transfer pricing by the Finance Act, 2001. Circular No. 14 of 2001 clarified that the term PE has not been defined in the Act but its meaning may be understood with reference to the tax treaty entered into by India. However, vide Finance Act, 2002, the definition of PE was inserted in the Act under section 92F(iiia) which states that the ‘Permanent Establishment’ includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Clause (iii) of section 92F of the Act defines the term “enterprise” to mean a person (including a permanent establishment of such person) who is, or is proposed to be, engaged in any of the specified activities. Clause (iiia) of the said section defines the term “permanent establishment” to include a fixed place of business through which the business of the enterprise is wholly or partly carried on. The definition of the term enterprise is exhaustive while that of the term permanent establishment is inclusive.

Article 7 mandates that existence of a ‘Permanent Establishment’ in a jurisdiction is a pre-requisite for the purpose of taxation of business profit of an enterprise of another jurisdiction in that jurisdiction.

Permanent establishment (PE) means having a taxable presence outside your company’s state of residence.

Typically, a tax treaty defines a Permanent Establishment using the following two general tests:

·      whether the corporation has a fixed place of business within the target country, as defined under the language of a specific treaty; or

·      whether the corporation operates in the target country through a dependent agent, other than a general agent of dependent status acting in the ordinary business as such, that habitually exercises the authority to conclude contracts on behalf of the corporation in the target country.

The current definition of Permanent Establishment in the Income Tax Act is based on the definition developed by the Organisation for Economic Co-operation and Development (OECD). A PE is defined in paragraph 1 of Article 5 of the OECD Model Tax Convention (OECD MTC) as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. As per paragraph two of Article 5, it specifically includes a place of management, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. It also includes a building site or construction or installation project which lasts for more than 12 months.

Specifically excluded from the aforementioned definition, in paragraph 4 of the OECD MTC, is “the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise” and “the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character”.

Permanent Establishment (PE) in India

India recognises and acknowledges the PE concept in its international tax treaties under ‘Article 5 – Permanent Establishment’. Domestic tax laws provide for the concept of a ‘business connection’ in Section 9 of the Act and PE in Section 92F of the Act. India is also one of the signatories to the Multilateral Instrument (MLI) signed recently. According to the provisional list of India’s reservations on the MLI, it appears that it has accepted the MLI’s recommendations on PE.

The tax on foreign entities in India is based on different aspects such as place of income, source of income and presence of the entity in India. So with the increase of global business presence in India, the concept of PE has gained importance.

Permanent establishment (PE) was thus formulated to levy taxes on the income generated. There are two major grounds for Permanent Establishment taxation –

(a)          Residential taxation – The permanent establishment rule under residential taxation says that if an individual in India is earning revenues by carrying out business activities globally, they are liable to pay taxes under residential taxes.

(b)         Sourced Taxation – The permanent establishment rule under sourced taxation mentions that if a foreign business or entity is partially or wholly operating any economic activities in India to generate income, they are bound to pay taxes under sourced taxation.

Permanent Establishment (PE) – Meaning

Permanent Establishment means a substantial element of an existence of an enduring or permanent nature of a Multinational Enterprise - from its residential place of business to another country which can be attributed to a fixed place of business in that other country. It is a virtual projection of an enterprise from one country to another country. The primary identification of a PE is to ensure the right of a country to tax the profits of an enterprise of another country.

[A] Income Tax Act, 1961

           [1]  Explanation 2 to Section 9(1)(i)

Explanation 2. - For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident, -

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are -

  (i)  in the name of the non-resident; or

 (ii)  for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or

(iii)  for the provision of services by the non-resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:

       [2]  Section 44DA read with Section 92F

       Special provision for computing income by way of royalties, etc., in case of non-residents.

44DA. (1) The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, shall be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act :

PROVIDED that no deduction shall be allowed,—

 (i)  in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or

(ii)  in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices :

Provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this section.

(2) Every non-resident (not being a company) or a foreign company shall keep and maintain books of account and other documents in accordance with the provisions contained in section 44AA and get his accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288 24[before the specified date referred to in section 44AB and furnish by that date] the report of such audit in the prescribed form25 duly signed and verified by such accountant.

Explanation. - For the purposes of this section, -

(a)  “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

 (b) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

 (c) “permanent establishment” shall have the same meaning as in clause (iiia) of section 92F.

       [3]  Section 92F(iiia)

(iii)    “enterprise” means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places;

(iiia) “permanent establishment”, referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;

[B] DTA - Article 5

As per section 90 of the Act, the Central Government has the power to enter into an agreement with other country for avoidance of double taxation or for the exchange of the information or for recovery of Income Tax under this act. These agreements are generally called DTAA agreement and may also called as Tax Treaties.

India has one of the largest networks of tax treaties for the avoidance of double taxation and prevention of tax evasion. The country has Double Tax Avoidance Agreements (DTAAs) with over 85 countries under Section 90 of the Income Tax Act, 1961

Also, as per section 90(2) of the Act, if the DTAA provisions are more beneficial for an assessee than the provisions of Income Tax Act, then he may follow DTAA provisions. Therefore, the provisions of DTAA will supersede the provisions of Income Tax Act to the extent they are more beneficial to the assessee.

In these DTAA agreement, the broad definition of Permanent Establishment has been elucidated and most of the agreements has adopted the definition of OECD’s Model Tax Convention on Income and on Capital (version 2017).

Article 5 states that ‘PE’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The same as taken in section 92F(iiia) of Income Tax Act, 1961.

Article 5 further explains that term ‘PE’ especially includes,

§  place of management;

§  a branch;

§  an office;

§  a factory;

§  a workshop, and

§  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources

§  a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months

Where a person is acting on behalf of an enterprise and has authority to conclude contracts in the name of that enterprises in other country, then that enterprise shall be called to have a ‘PE’ in that other country.

However, if the activity of that person is limited to the activity mentioned below exercised through fixed place of business in other country, then that enterprise shall not be said to have ‘PE’ in that country,

§  the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

§  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

§  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

§  the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

§  the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

However, also, if that person is a broker, general commission agent or any other agent of an independent status, then that enterprise shall not be said to have a ‘PE’ in that country.

Permanent Establishment and its importance

Internationally, two basic principles of taxation are followed –

(a)      the residence based taxation; and

(b)     the source based taxation.

Importance of Permanent Establishment (PE)

§  The concept of a PE is relevant for determining the right of a Contracting State to tax the profits of an enterprise of the other Contracting State.

§  Under all three MCs, the existence of a PE is the decisive condition for the taxation of income from business activities.

§  Under Article 7 a Contracting State cannot tax the profits of an enterprise of the other Contracting State unless it carries on its business through a PE situated therein. In other words, Business profits, under Article 7 of the treaty are taxable only if the non resident has a PE in India

§  Concept of PE is used to determine the right of “Source State” to tax business profits of the foreign enterprise

§  Existence of PE also enables the Source State to tax capital gains, dividends, interest and royalties that are effectively connected/attributable to such PE

When a resident of one country earns income from a source in another country, the possibility of double taxation arises because one country may tax that income on the source principle whereas the other country may tax it on the residence principle. This is where the international tax concepts of PE and profit attribution come into play. These determine the right of a country to tax the profits of a company that is the resident of another country.

Accounting principles for a Permanent Establishment (PE)

A foreign company is required to maintain its books of account relating to the Indian business in the manner provided in section 209 of the Companies Act, 1956. The accounts must be drawn in Indian rupees. The Supreme Court observed in the case of CIT v. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC) that the profits attributable to the PE are required to be computed under the normal accounting rules.

Consequences of establishment of Permanent Establishment (PE) in India

Once it is determined that a foreign firm has a PE in India, profits linked to its activities in India will be taxed as “Business Income” in accordance with Article 7 of the treaties.

·         Profits due to a Permanent Establishment (PE) are the profits that the PE would have made if it had operated independently in the same or comparable activities within the same or similar conditions as the rest of the company.

·         They have to compulsory maintain books of accounts.

·         They must apply for PAN, TAN and should be registered under regulations of Indirect tax.

·         Expenses incurred for the purpose of the PE's business, whether incurred in India or elsewhere, are allowed as tax-deductible expenses for determining the PE's earnings.

·         The Net Profits will subsequently be subject to the taxation that a foreign company would face in India.

·         Mandatory compliance of With-Holding Tax (TDS).

Basic Rule for Permanent Establishment

Conditions to be satisfied for constituting a Permanent Establishment

§  There is an “enterprise”

§  Carrying on a “business”

§  There is a “place of business”

§  The place of business is at the disposal of the enterprise

§  “Fixed” place of business

§  Business of the enterprise is carried on wholly or partly through this fixed place of business

Basic Rule Permanent Establishment (PE) - Determination Tests

The tests are-

(a)  There should be a place of business (Place of Business/location Test)

(b)  Such Place of business is at the disposal of the assessee. (Disposal Test)

(c)   Such place of business is fixed (Permanence Test)

(d)  The business of the entity is carried on wholly or partly through such fixed place of business. (Activity Test)

[1] Basic Rule Permanent Establishment (PE) - Place of Business Test

      The business must be conducted through a ‘place’

§  Physical location is important.

§  Presence to be ‘visible’ in the other contracting state

§  Covers premises as well as tangible assets like equipment

Illustrations : Place of business

§   An office of 10 ft by 10 ft.

§   A depot for storing imported goods.

§   A fully equipped diving support/fishing vessel

§   A computer server.

§   A place of business which is notified under s 592 of the Indian Companies Act, 1956.

§   A facility for berthing at a port in Source State which is guaranteed for foreign ships provided on a time charter.

§   Residential premises, if used for carrying out business activities.

§   A motor racing circuit.

§   Lockable space for storing tools and equipment within a stadium and lighting facilities.

§   Vessels engaged in seismic surveys on the high seas in connection with the exploration of mineral oil/ natural resources.

Illustrations: No “place of business”

§   Intangibles (e.g., a website which is a combination of software and electronic data) – as opposed to a server.

§   No services are rendered in India by an international newspaper (X) when it receives advertisement charges from its Indian client (Y) for publishing Y’s advertisements in X’s newspapers if such advertisements are meant for business of Y outside in India.

[2]   Basic Rule Permanent Establishment (PE) - “Business activity”/ “Business connection”

        tests

The business of a foreign enterprise must be carried on (“business activity test”) wholly or partially through a fixed place of business ("business connection test"). It may be carried on in Source State:

§   pursuant to the physical presence of the entrepreneur himself, or his personnel (e.g., employees, dependent agents, etc); or

§   through automatic equipment (e.g., vending machines, computer, etc) when the foreign enterprise operates and maintains such equipment'. Human intervention may not be necessary for existence of a Permanent Establishment (PE).

The activities performed through the fixed place of business must be of a business character

(a) Business should be carried on – wholly or partly

§  A mere space (say an empty warehouse or office) is not sufficient

§  Foreign Enterprise should be engaged in some part of the business

§  Through personnel or equipment

§  Regular, continued exercise

(b)  Business performed “Through” a fixed place of business

§  The place of business must ‘serve’ the business activity

§  Simple occurrence of a business activity at the place of business is not sufficient

§  US Company having an office in Canada only for compliance purposes not a PE

(c)  Core business activity

§  BPO performing back office operations

§  Agent / sub-contractor although no Agency PE?

§  Liaison office

[3] Basic Rule Permanent Establishment (PE) – Location Test

 The fixed place of business must be located in a certain territorial area

(a) Fixed location (of the person), (including equipments) through which business is wholly or partly carried on.

(b) Activities performed within a broader geographical area covered

§  Mine or oil well

§  Pitch in market place

§  Requires both geographical & commercial coherence

(c)   Activities carried out within a defined geographical location could constitute a PE:

§  A diving offshore vessel functioning within a defined area

§  Dealer selling merchandise from a mobile van or ship

(d)    Presence to be ‘visible’ in the other contracting state

(e)     Usually linked to a geographical location

(f)     Covers premises as well as tangible assets used for carrying on business

(g)    Movable places of business with a temporary fixed location meet the location test

[4] Basic Rule Permanent Establishment (PE) – Permanence Test (Duration Test)

(a)  Availability of a fixed place of business for a reasonable period should result in compliance with this condition

  The use of the fixed place of business must last for a certain period of time. The place should be available for sufficiently long period of time

(b)  No minimum threshold under Indian law

§  In general 6 month period considered

[OECD Commentary – PE normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months]

§  An isolated activity cannot lead to establishment of a fixed base Permanent Establishment (PE) as the ingredients of regularity, continuity and repetitiveness are essentially missing

(c)   If the nature of business is such that it is required to be carried on only for a short period of time, then the place of business where such business is carried on, may constitute a Permanent Establishment (PE)  

A place of business may constitute a Fixed Place PE, even though it exists, in practice, only for a very short period of time, where the nature of the business is such that it will only be carried on for that short period of time

(d)  The activity need not be “permanent” in the literal sense

  The fixed place of business must have a certain degree of permanence, ie should not be of purely temporary nature. Temporary interruptions does not affect Permanent Establishment (PE)  

(e)  Intent as well as actual conduct to be seen

Where the activities are of a recurrent nature, each period during which the place is used needs to be considered in combination with the number of times during which that place is used (which may extend over a number of years)

[5]  Basic Rule Permanent Establishment (PE) – “Power of disposition” test

Place should be at the disposal of the foreign enterprise for the purpose of its business activities

The place of business should be at the disposal of the foreign enterprise for the purposes of its business activities.

        Foreign enterprise should have the ability to exercise some right or dominion or control

Some right or domain or control to use a place is required for having a PE.

        Place may be owned, rented or leased or in any way available for use

Such place of business may be owned or rented or may also be situated in business facility of another entity.

Legal right to use need not be the sole determinant; factual use or exercise of such right will have a greater bearing

The premise must be at the disposition of the enterprise. However, such power need not be a legal right to use a place and an illegally occupied place could also constitute a PE if the enterprise has some domain or control to use it.

Even illegal occupation could constitute a PE

Even illegal occupation could constitute a Permanent Establishment (PE)

Could be in another enterprises’ premises

At the same time, no Permanent Establishment (PE) exists merely because an enterprise is present at a particular place if that place is not at the disposal of the enterprise, or that the presence is very limited. There should be some evidence to indicate that whenever any employee of the foreign enterprise comes to Source state, he should be able to walk into the business premises and occupy a space or a table. The onus is upon the Revenue to prove these facts to establish existence of PE.

       NOTE

§  Website not a PE. But server of the enterprise can be a Permanent Establishment (PE).

§  Computers of NR at customer’s offices can be a Permanent Establishment (PE)  

§  Intangible property is not a Permanent Establishment (PE).

§  Software not a Permanent Establishment (PE)

§  Financial assets – shares, etc. cannot be a Permanent Establishment (PE).

Types of permanent establishment

In the OECD Model Tax Convention, essentially three types of PEs can be construed:

(i)     A fixed place of business PE (article 5(1));

(ii)    A construction or project PE, which is a special subset of the fixed place of business PE, with different requirements (article 5(3)); and

(iii)  An agency PE, through the actions of a dependent agent (article 5(5-6)).

The UN Model Tax Convention, which gives greater consideration to developing countries, adds what is known as a service PE in article 5(3)b.

Structure of Article 5 : Overview of article of OECD Model Commentary is as under:

Article no.	Particulars	Type of PE
Article 5(1)	Basic rule	Fixed base PE : Article 5(1) defines a permanent establishment and lays down the basic rule that a business activity carried on through a fixed place of business would constitute the PE of the tax payer.
Article 5(2)	Illustrative list of PE	Inclusions to fixed base PE Article 5(2) mentions several examples of fixed place of business. These examples could also be said to form the ‘positive list’.   Illustrative Inclusions – The following are generally considered, prima facie, as constituting permanent establishments: • A branch • A warehouse (but see excluded places below) • A factory • A mine or place of extraction of natural resources • A place of management
Article 5(3)	PE in relation to projects	Construction PE & Service PE Article 5(3) includes certain construction related activities and service related activities within the scope of PE if such activities continue for certain period.
Article 5(4)	List of exclusions	Exclusion from fixed base PE (Specific activities exemption) Article 5(4) mentions that a PE shall be deemed not to include certain activities. These could be said to form the ‘negative list’.   Many treaties explicitly exclude from the definition of PE places where certain activities are conducted. Generally, these exclusions do not apply if non-excluded activities are conducted at the fixed place of business. Among the excluded activities are: • Ancillary or preparatory activities • The use of a storage facility solely for delivery of goods to customers • The maintenance of a stock of goods owned by the enterprise solely for purposes of processing by another enterprise (sometimes referred to as toll processing) • Purchasing or information gathering activities
Article 5(5)	Dependent / Independent agent	Agency Permanent Establishment Article 5(5) stipulates rules for determining when an enterprise represented by an agent would have a PE.   Article 5(6) deals with the case of an enterprise carrying on insurance business.
Article 5(6)	PE in case of Insurance Business	Independent Agent Article 5(6) does not have a corresponding provision under the OECD Model Convention. It provides that an enterprise carrying on insurance business shall be deemed to have a PE in the Source Country if: §  It collects premium in the territory of the Source Country; or §  If it insures risks situated in the Source Country through a person other than an independent agent referred to in Article 5(7).
Article 5(7)	Associated enterprise [Absence of Arm’s Length Relationship]	Subsidiary Permanent Establishment Article 5(7) provides for an exception to agency rule PE. An enterprise is not deemed to have a PE in the Source Country merely because it carries on business in that country through a broker, general commission agent or any other agent of an independent status if such person is acting in the ordinary course of business.
Article 5(8)	No PE by virtue of Relationship	Article 5(8) set out rules in respect of an enterprises represented by an agent or an enterprises related to it.

NOTE

Article 5(6) in UN Model contains a special rule for agents of insurance company & is absent in OECD and US model

Permanent Establishments can be of the following types:

[1] Fixed Place of Business Permanent Establishment

To constitute a “fixed place permanent establishment”, it is necessary that there is a certain level of permanence and to be at the disposal of the company. However, if the company’s business is partly carried on at an “home office” of the worker/employee due to Covid restrictions/government directives, it cannot be said to be at the disposal of the company because merely one individual is using the said office. Moreover, it is clarified that if the work done by the worker/employee is not permanent i.e. is only happening at home due to Covid-19 restrictions/government directives and will eventually end, it cannot be said to constitute a “fixed place of business” or a “fixed place permanent establishment”

A fixed place of business PE exists where an enterprise carries on business in a country through a fixed location, such as an office or store, its definition codified in Article 5(1) of the OECD Model Convention, which provides that or the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

The fixed place of business means having a branch in a foreign country. Examples include:

§  Offices

§  Factories

§  Branches

§  Workshops

§  Oil wells

It is common for fashion companies to have their head office in their native country. However, their factories are often located in foreign markets. Suppose the fashion company conducts business and generates income in a foreign country. In that case, it is liable for various taxes in both jurisdictions.

Fixed place of business

A fixed place of business has three components:

(a)          Fixed refers to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer. An “office hotel” may constitute a fixed place for a business for an enterprise that regularly uses different offices within the space. By contrast, if there is no commercial coherence, the fact that activities may be conducted within a limited geographic area should not result in that area being considered a fixed place of business.

(b)          A place of business. This refers to some facilities used by an enterprise for carrying out its business. The premises must be at the disposal of the enterprise. The mere presence of the enterprise at that place does not necessarily mean that it is a place of business of the enterprise. The facilities need not be the exclusive location, and they need not be used exclusively by that enterprise or for that business. However, the facilities must be those of the taxpayer, not another unrelated person. Thus, regular use of a customer's premises does not generally constitute a place of business.

(c)          Business of the enterprise must be carried on wholly or partly at the fixed place.

        When the following criteria are met, a foreign enterprise’s fixed place PE exists in India.

(a)  The location of a business must be fixed and should be consistent for a reasonable amount of time. The term ‘carried on’ in the definition means that a passing, ephemeral, or casual activity, even if carried out from a specific location, does not fall within the scope of PE. A reasonable amount of consistency and regularity is required.

(b) The location must be available to the foreign entity. If the place of business is located in the business premises of another company and the foreign company has access to a portion of those premises on a regular basis, the premises may be considered to have a PE in India.

 

(c)  A proper commercial activity must be carried out from such a set location.

Specifically excluded places

Many treaties explicitly exclude from the definition of PE places if certain activities are conducted. Generally, these exclusions do not apply if non-excluded activities are conducted at the fixed place of business. Among the excluded activities are:

·      Ancillary or preparatory activities

·      The use of a storage facility solely for delivery of goods to customers

·      The maintenance of a stock of goods owned by the enterprise solely for purposes of processing by another enterprise (sometimes referred to as toll processing)

·      Purchasing or information gathering activities

[2] Construction Permanent Establishment

In the case of construction or installation projects, a taxable event will occur in India only if a foreign enterprise's operations in India form a “construction PE”. When a construction site or installation project is carried out over a period longer than the specified duration under the respective tax treaty with that country, it is referred to as a Construction PE.

 

Article 5 (3) - Building and Construction PE

§  Building site or construction or installation project constitutes a PE only if it lasts more than twelve months

§  Building site: not only construction of buildings but also construction of roads, bridges or canals etc, and renovation thereto

 

To constitute a “construction permanent establishment”, it is necessary that a building site, installation or construction project must last for more than :

 

12 Month Period – OECD Model

§  Twelve month test under the OCED Model applies to each individual site or project

§  A building site should be regarded as a single unit, even if it is based on several contracts

§   OECD MC clarifies 12 months threshold to be applied in respect of each individual site or project.(Stand alone approach)

 

6 months under the UN Model

– Six months test applies to each individual site or project

 

Duration

– Site exists from date on which work begins, including any preparatory work

– It continues to exist until work is completed or permanently abandoned. Should not be regarded as ceasing to exist if work is temporarily discontinued

 

Moreover, as shown above, a site will not cease to exist if the work is temporarily disrupted. Therefore, even if the work is temporarily disrupted due to Covid-19 restrictions/government directives, a “construction permanent establishment” can be established

Type of Projects would include

India’s tax treaties provide for the constitution of a ‘Construction PE’ if a foreign company undertakes the following activities in India for a specified duration:

§  Activities in relation to a building or construction site

§  Roads, bridges, canals

§  Renovation (involving more than mere decorating) of buildings, roads, bridges, etc

§  Laying of pipelines and excavating and dredging

§  Installation of new plant and equipment

§  Planning and supervision services related to these services (UN Model – only supervision)

Ø Planning & Supervision carried on by builder inclusive falls within Construction PE. If a person carries on only planning and supervision without construction then it does not constitute construction PE

Starting Date 

The date when a foreign enterprise commences its first activity (including preparatory work should be considered as the start date.

Ending Date

The date when the foreign enterprise either completes/abandons the work completely should be considered as its ending date.

Temporary Breaks

Any temporary discontinuance of the work due to any factors such as seasonal interruptions of any other barriers such as labour shortage, material shortage should be disregarded while computing the project duration.

[3]  Service Permanent Establishment

A Service PE is attracted by the foreign enterprise in India if :

§  if the employees of foreign enterprise furnishing services or perform services in India of any kind including Consultancy constitutes Service PE [Other than those services referred under Article dealing with Royalties & Fees for technical services] for a specified period of time (Furnishing of Services is the most important check for attraction of Service PE).

§  Through its employees or Other Personnel,

§  In the same or the connected project

§  For a period or periods aggregating more than 6 months

This can include situations where businesses are providing technical or managerial services in a country. In some countries, something as simple as back-office services could trigger PE.

For example in Indo - US Double Taxation Avoidance Agreement, the specified period is 90 days within any twelve-month period. The employment lien with the foreign enterprise has to be established for the employees providing services, to constitute a Service PE.

A Service PE refers to cases companies supplying technical and management assistance to a firm located beyond its region of origin. As a result, it leads to PEs with no physical presence in the foreign nation. In other words, if a foreign enterprise delivers services (other than Fees for technical services) in India through workers or other persons for a period of time that exceeds a threshold limit, a Service PE exists.

For instance, a consultancy company offering services in a country other than their homeland is officially making profits abroad. As a result, they must pay taxes to that foreign nation.

Service Permanent Establishment (PE) - Features

§   Furnishing of ‘services’ within India which is not FTS / FIS

§   Through employees or other personnel

§   Activities continue for a period exceeding 90 days. Most treaties specify a period of 90 days to constitute a Service PE (UAE has a specified period of 9 months); (30 days or one day where services are rendered by associated enterprises)

[Special clause for “Associated Enterprises” in some treaties where lower time threshold necessary to constitute Service PE eg USA (1 day), UK (30 days), Singapore (30 days)]

The concept specifically excludes services covered by Fees for Technical Services (FTS)/ Fees for Included Services (FIS) Article

§   OECD / US Model Convention does not have an Article governing this

§   No service PE clause in some Treaties

§   Netherlands, France, Mauritius, etc.

[4]   Agency Permanent Establishment

Agency PE is attracted for a foreign enterprise in India if the agent appointed by the foreign enterprise in India is a dependent agent. The agent who is dependent and performs the following functions will be considered as a PE of the foreign enterprise:

§  Exercises an authority to conclude contracts on behalf of the foreign enterprise.

§  Secures orders wholly or almost wholly for the foreign enterprise.

§  Maintains the stock of goods or merchandise from which the agent regularly delivers on behalf of the foreign enterprise.

The above functional requisites for the Agency PE can in principle be captured in the binding test and dependency test for the agent of the foreign enterprise in India.

Binding Test

If the action of the agent who is found to be a dependent agent after applying the dependency test, like securing orders, legally bind the foreign enterprise to perform the contract in India and the final decision to perform or not does not lies with the principal, the agent can be considered to be a PE of the foreign enterprise in India. The aspect of conclusion of contracts would have to be seen from the point of view of performing all the actions necessary for the conclusion of contracts, though the actual signing of the contract may be performed by the foreign enterprise outside India.

Dependency test

The dependency Test is to corroborate whether the agent is dependent legally and economically on the foreign enterprise for the conduct of business. The agent who is found to be a dependent agent after applying the dependency test and who performs any of the three requisite functions for attracting the Agency PE as mentioned above would be considered as the PE of the foreign enterprise in India.

Legal dependence

The legal dependence is reflected by the facts of arrangement or agreement between the foreign enterprise and the agent. If the risk and return of the business done by the agent fully accrue to the agent, then the agent can be deemed to be an independent agent.  The act of the agent with autonomous decisions in the normal course of business and remuneration for the services at arm’s length by the foreign enterprise would strengthen the claim of the agent as an independent agent.

Economic dependence

The agent if earns the major portion (say more than 75 percent) income from other than the relevant foreign enterprise, it mean that, the agent does not act wholly and exclusively on behalf of the foreign enterprise. Economic independence signify the business relationship with its principal (here the foreign enterprise) and the consequent dependency for the functioning of business of the agent. For example, if the foreign enterprise is the only customer the agent serves as part of its agency business, then it would be deemed that the agent is economically dependent on the foreign enterprise. If the agent’s activities are not wholly or exclusively devoted to the foreign enterprise and the agent’s services are being remunerated at arm’s length, then the agent would be considered as an independent agent.

Article 5(5) of the OECD Model Tax Convention on Income and on Capital provides that an “agency permanent establishment” is constituted if a person (a dependent agent) is acting on behalf of the company, and the said person habitually concludes the company’s contracts or has an authority to conclude contracts in the name of the company in the contracting State.

Due to Covid-19 restrictions/government directives, a dependent agent of a non-resident company who is working from home could establish an “agency permanent establishment”. 

Dependent Agency Permanent Establishment

If a person residing in India represents or acts on behalf of a foreign enterprise, his presence in India may be construed as the foreign enterprise's presence in India, triggering the establishment of a PE in India.

Dependent Agent PE
Following conditions to be satisfied (cumulative conditions)

§  Should be a ‘Person’

A person, whose activities create an “agency permanent establishment”, is deemed to be a “dependent agent”. Such dependent agents can be a company/individual and neither requires to not a place of business in the contracting State nor requires to be a resident of the contracting State.

§  Agent other than an agent of independent status as per Article 5(6)

§  Acting on behalf of an enterprise

§  In name of enterprise

§  No auxiliary activities

§  Has an authority to conclude contracts in a Contracting State

Habitually exercising such authority in a Contracting State

It is necessary that the dependent agent “habitually” makes use of the said authority to constitute an “agency permanent establishment”. In other words, the said authority must not merely be transitory in nature.

However, it is unlikely that a dependent agent’s activities will be “habitual” by merely working from home in the contracting State for a temporary time period that too due to Covid-19 restrictions/government directives.

Ø Satisfaction of all the above conditions is necessary

        Independent Agent - Tests

·        Is he legally & economically independent

·        Not subject to high degree of control (like employer/ employee relationship)

·        Not subject to detailed instructions and control in respect of conduct of business

·        Conduct business according to own view, expertise and method

·        Will the agent continue its business if principal terminates the service agreement

Independent Agent A PE will NOT include:
Carrying on of business in the other contracting state through:

·      a broker,

·      general commission agent, or

·      any other agent

·      of an INDEPENDENT status acting in the ordinary course of their business – legal and economic independence

[5]  Subsidiary Permanent Establishment

§  The mere presence of a subsidiary company in India does not automatically make it a PE of the parent company.

§  Enterprise under the same control need not be a PE

§  To make a subsidiary a PE, the parent company's operations must be conducted through the subsidiary company, as defined by the other PE provisions. Subsidiary company will constitute PE if it satisfies any of the conditions for creating a PE

§  Parent Company may constitute a PE under Article 5(1) or Article 5 (2) in a State where it has a place of business

Mandatory requirements for PEs in India

Following are few key imperatives / requirements once a foreign company constitutes a PE in India:

§   Maintenance of books of accounts and supporting records in accordance with the provisions under the Companies Act 2013

§   Auditing of accounts by an accountant and a duly signed and verified audit report obtained in the prescribed format before the due date of filing the return of income

§   Mandatory Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN) and GST and other indirect tax registrations, as may be applicable.

§   Filing of return of income in India, reflecting PE’s income and expenses, assets and liabilities.

§   Taxation of profits attributable to a PE in India at the rate of 40% (plus applicable surcharge and cess) on a net basis, subject to domestic tax provisions

§   Deduction of expenses incurred, such as salary cost of employees, from income attributable to a PE, subject to its compliance with Withholding Tax provisions under domestic tax provisions

§   Mandatory compliance with Withholding Tax requirements – Withholding Tax on payments made, filing of Withholding Tax returns, issue of tax withholding certificates, etc.

§   Fulfilling GST and indirect tax obligations and compliances as per GST and other indirect tax laws

§   Mandatory personal taxation of employees of foreign companies in India

Consequences of establishment of permanent establishment in India

Having a permanent establishment in another country means you will be charged tax within that jurisdiction. Different tax treaties between your home and host countries define your tax rate.

§  Once it is established that foreign enterprise has a PE in India, the profits that are attributed to its activities in India will be taxed as “Business Income” in accordance with the rules laid down in Article 7 of Treaties.

§  Profits attributable to a PE are those which the PE would have made, had it been dealing independently in the same or similar activities under the same or similar conditions with the other part of the enterprise.

§  Though no guidelines are available to determine how much should be the income reasonably attributable to the operations carried out in India, the same has to be determined on factual situation prevailing in each case.

§  The analysis of attributing profits to the PE has to be undertaken taking into account the Functions performed, Assets utilised and Risks assumed (FAR analysis) by the PE in India. Transfer Pricing regulations have laid down the principals and methods to determine the profits that may be attributed to the activities of PE in India.

§  While determining the profits of a PE, expenses that are incurred for the purpose of business of the PE whether incurred in India or outside shall be allowed as tax deductible expenses. The Net Profits then shall be subject to tax that is applicable to a foreign Company in India.

Not regarded as permanent establishment (Exclusions)

Most of the Indian Treaties provide for activities that are specifically excluded from the purview of PE. In such cases, they are not regarded as PE even if any of those activities are carried out through a fixed place of business. These activities are:

(a)          Use of facility solely for the purpose of storage or display of goods belonging to the enterprise;

(b)         Maintenance of stock of goods belonging to the enterprise solely for the purpose of storage or display;

(c)          Maintenance of stock of goods belonging to the enterprise solely for the purpose of processing by another enterprise;

(d)         Maintenance of fixed place of business solely for the purpose of purchasing of goods or for collection of information for the enterprise;

(e)          Maintenance of fixed place of business solely for the purpose of advertising, for supply of information or for scientific research, being activities solely for preparatory or auxiliary in character.

(f)          Combination of activities mentioned above

Exceptions to permanent establishment

Tests of all permanent establishments are independently applied. No hierarchy.

Under what circumstances deputation and secondment create permanent establishment

Service permanent establishment arises when an employee of a multinational enterprise renders services in the host country beyond a specified period of time and where such employee deputed continues to be on the payroll of the home country or continues to have the lien on its employment with the multinational enterprise only. In order to mitigate the risk of permanent establishment, one needs to carefully examine the difference between legal and economic employer. A legal employer :

(1)  has right to appoint and terminate,

(2)  is not responsible for errors / omission or for the work performed by the secondees, and

(3)   does not supervise, control, issue instructions or directions to the secondees. Whereas the economic employer (I) enjoys the fruits of labour, (2) has the authority to inspect and control the seconded employees, (3) bears the responsibility or risk for the results,

(4)  pays remuneration calculated on the time spent by the seconded employees,

(5)  can impose disciplinary sanctions and

(6)   has the right to terminate the secondment. In the case of economic employer, the work is performed at a place which is under the control of the user (economic employer).

Thus, in order to avoid service permanent establishment, it is better to terminate the employment of the seconded / deputed employees.

Whether Liaison Office (LO)/ Rep office can be treated as Permanent Establishment

§   A non-resident can open a liaison office in India with the permission of the Reserve Bank of India. Liaison offices are not PEs inasmuch as they are not permitted to conduct business activities. If a liaison office is engaged in the activities which creates a “business connection” in India and is not confined to mere purchases of goods for exports out of India, it may create a PE.

§   Liaison office will not constitute Permanent Establishment if it confines its activity solely to liaison work.

§   Where LO is engaged in collection of specifications and requirements of the customers, supplies them to the head office and on the instructions of the head office, provides details of purchase price, further technical details, availability of product and lead time to the prospective buyers, and thereafter the sales are clinched, purchase orders are obtained, sent to the head office out of India on the basis of which the head office would place the orders to the suppliers, and LO would also follow up the payments and offer after sale services to the customers, it would create a business connection in India.

§   Likewise, where LO assists the taxpayer not only in purchase of goods from the manufactures in India, but also carries out activities relating to ensuring selection of quality material, quality testing, conveying requisite designs, picking out competitive sellers, ensuring quality, ensuring policy of the assessee and complying on behalf of the taxpayer with the local regulations, such a LO would constitute a business a connection in India.

Taxation of Business Process Outsourcing (“BPO”) operations in India

The CBDT Circular No. 5/2004, dated 28.09.2004 clarifies that the non-resident/foreign entity outsourcing operations to India would be liable to tax in India only if the Business Process Outsourcing (“BPO”) unit constitutes its Permanent Establishment (“PE”) as per the provisions of Article 5 of the Double Taxation Avoidance Agreement (“DTAA”) between India and the country of residence of the foreign company.

§  As per the Circular, profits of a foreign entity would be taxed in India only to the extent the amount is attributable to the PE in India. For this purpose, the amount attributable to tax in India would be the amount determined as per arm’s length principle.

§  For this purpose, the meaning of arm's length price would be the same as defined in Section 92F(ii) of the Indian Income Tax Act, 1961, ("the Act”) i.e. the price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

§  While computing the profits of the PE, the expenses incurred in connection with the activity of the PE in India would be allowed as deduction in accordance with the accepted principles of accountancy and the provisions of the Act.

 

CBDT Circular No. 5/2004, Dated 28.09.2004

Subject : Taxation of IT-enabled Business Process Outsourcing Units in India

1. A non-resident entity may outsource certain services to a resident Indian entity. If there is no business connection between the two, the resident entity may not be a Permanent Establishment of the non-resident entity, and the resident entity would have to be assessed to income-tax as a separate entity. In such a case, the non-resident entity will not be liable under the Income-tax Act, 1961.

2. However, it is possible that the non-resident entity may have a business connection with the resident Indian entity. In such a case, the resident Indian entity could be treated as the Permanent Establishment of the non-resident entity. The tax treatment of the Permanent Establishment in such a case is under consideration in this circular.

3. During the last decade or so, India has seen a steady growth of outsourcing of business processes by non-residents or foreign companies to IT-enabled entities in India. Such entities are either branches or associated enterprises of the foreign enterprise or an independent Indian enterprise. Their activities range from mere procurement of orders for sale of goods or provision of services and answering sales related queries to the provision of services itself like software maintenance service, debt collection service, software development service, credit card/mobile telephone related service, etc. The non-resident entity or the foreign company will be liable to tax in India only if the IT-enabled BPO unit in India constitutes its Permanent Establishment. The extent to which the profits of the non-resident enterprise is to be attributed to the activities of such Permanent Establishment in India has been under consideration of the Board.

4. A non-resident or a foreign company is treated as having a Permanent Establishment in India under Article 5 of the Double Taxation Avoidance Agreements entered into by India with different countries if the said non-resident or foreign company carries on business in India through a branch, sales office etc. or through an agent (other than an independent agent) who habitually exercises an authority to conclude contracts or regularly delivers goods or merchandise or habitually secures orders on behalf of the non-resident principal. In such a case, the profits of the non-resident or foreign company attributable to the business activities carried out in India by the Permanent Establishment becomes taxable in India under Article 7 of the Double Taxation Avoidance Agreements.

5. Paragraph 1 of Article 7 of Double Taxation Avoidance Agreements provides that if a foreign enterprise carries on business in another country through a Permanent Establishment situated therein, the profits of the enterprise may be taxed in the other country but only so much of them as is attributable to the Permanent Establishment. Paragraph 2 of the same Article provides that subject to the provisions of Paragraph 3, there shall in each contracting state be attributed to that Permanent Establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a Permanent Establishment. Paragraph 3 of the Article provides that in determining the profits of a Permanent Establishment there shall be allowed as deductions expenses which are incurred for the purposes of the Permanent Establishment including executive and general administrative expenses so incurred, whether in the State in which the Permanent Establishment is situated or elsewhere. What are the expenses that are deductible would have to be determined in accordance with the accepted principles of accountancy and the provisions of the Income-tax Act, 1961.

6. Paragraph 2 contains the central directive on which the allocation of profits to a Permanent Establishment is intended to be based. The paragraph incorporates the view that the profits to be attributed to a Permanent Establishment are those which that Permanent Establishment would have made if, instead of dealing with its Head Office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. This corresponds to the “arm’s length principle”. Paragraph 3 only provides a rule applicable for the determination of the profits of the Permanent Establishment, while paragraph 2 requires that the profits so determined correspond to the profit that a separate and independent enterprise would have made. Hence, in determining the profits attributable to an IT-enabled BPO unit constituting a Permanent Establishment, it will be necessary to determine the price of the services rendered by the Permanent Establishment to the Head office or by the Head office to the Permanent Establishment on the basis of “arm’s length principle”.

7. “Arm’s length price” would have the same meaning as in the definition in section 92F(iii) of the Income-tax Act. The arm’s length price would have to be determined in accordance with the provisions of sections 92 to 92F of the Act.

8. The CBDT Circular No. 1/2004, dated 2nd January, 2004 is hereby withdrawn with immediate effect.

Assessee-company made payment to an Irish company qua advertisement services received from it, since said Irish company did not have Permanent Establishment (PE) in India and it was resident of Ireland for taxation purposes, there was no liability on assessee to deduct TDS under section 195 on such payment

During year, assessee paid consideration of Rs. 67,68,768/- towards advertisement services to an Irish company without deduction of tax at source on same. Accordingly, Assessing Officer disallowed said payment made by assessee under section 40(a)(i). However, Commissioner (Appeals) observed that said Irish-company had certified that it did not have Permanent Establishment (PE) in India and it was resident of Ireland for taxation purposes, hence, there was no liability upon assessee to deduct TDS under section 195 on such payment made for advertisement services.

It was claimed by the Assessee that as the Assessee had made the payment to Facebook Ireland Inc. (In short “FII”), which admittedly did not have any permanent establishment (‘PE’) in India and, therefore, the payments made to it for advertisement services were not chargeable to tax in India in view of the article 7 of DTAA between India and Ireland. In support of its contention the Assessee also relied upon various judgments including in the case of Yahoo India (P) Ltd. v. DCIT (2011) 46 SOT 105 : 11 taxmann.com 431  (ITAT Mumbai) (URO) as relied upon by the Ld. AR before us as well, wherein it is clearly held that in the absence of any permanent establishment (‘PE’) of the deductor, the deductee is not liable to deduct the tax at source from the payments made for online advertisement services. It was also claimed by the Assessee that equalization levy was introduced to tax the income accruing to foreign e-commerce companies from India, requiring that a person making payment exceeding Rs. 1,00,000/- in a year to a non-resident, having no permanent establishment in India to withhold the tax at 6% of the gross amount, infact came into effect from 01.06.2016 only and prior to that the online advertisement were not subjected to deduction of tax at source.

We have given thoughtful consideration to the facts and circumstances of the case and observe that ld. Commissioner while considering the aforesaid claim of the Assessee and analyzing the provisions of sections 9 & 195 of the Act, held that the DTAA between India and Ireland provides that the profits of the foreign enterprise shall be taxable only if it had carried on business in India through a permanent establishment (‘PE’) situated therein. The Ld. Commissioner also observed that FII has certified that it has no permanent establishment (‘PE’) in India and is a resident of Ireland for taxation purposes. The Ld. Commissioner finally concluded that there was no liability of tax on payments made for advertising services to FII. Before us the aforesaid facts remained uncontroverted and even otherwise we do not find any material and/or any reason to take a contrary view against the conclusion drawn by the ld. Commissioner. Consequently, the view taken by Commissioner (Appeals) was to be upheld and impugned disallowance under section 40(a)(i) was to be set aside. [In favour of assessee] (Related Assessment year 2012-13) – [Addl. CIT v. Lenskart Solution (P) Ltd. (2022) 140 taxmann.com 242 (ITAT Delhi)]

Forex fluctuation loss allowable on loan transaction between permanent establishment (PE) and Head Office

Delhi ITAT dismisses Revenue’s appeal, allows forex fluctuation loss incurred on transaction of receipts of loan from head office and repayment thereof by relying upon coordinate bench ruling in Assessee’s own case for Assessment year 2014-15; Assessee is a Spanish company with a permanent establishment in India and is engaged in providing services and consultancy in projects, engineering and electrical contractors and suppliers; Assessee’s PE incurred foreign exchange fluctuation loss of Rs. 1.15 Cr on account of receipt of funds from head office as a part of working capital requirement and its repayment; Revenue observed that the said amount is recorded only as remittances and not shown as a loan from head office; Revenue further referred to Article 7(3) of the India-Spain DTAA and held that any notional expenditure/loss toward head office is not allowable as deduction, thereby disallowed the exchange fluctuation loss on the ground that capital remittance to establish and run a business through project office is not loan but capital, thus, the same could not be said to be a debt incurred during the course of business; CIT(A) noted that Assessee’s claim for fluctuation loss was accepted in preceding Assessment years and that Article 7(3) of India-Spain DTAA is not applicable in this case since nothing was paid by the Assessee to the head office on account of loss and no deduction claimed; CIT(A) allowed the exchange fluctuation loss by relying on co-ordinate bench ruling in Assessee’s own case for Assessment year 2014-15, wherein it was held that Assessee is entitled for deduction on account of foreign exchange fluctuation loss; ITAT relies on co-ordinate bench ruling in Assessee’s own case for Assessment year 2014-15 wherein identical issue has been decided in favour of the Assessee and which has not been reversed by Jurisdictional High Court yet; Thus, upholds CIT(A) order. [In favour of revenue] (Related Assessment year : 2016-17) – [DCIT (International Taxation) v. Cobra Instalaciones Y Services S.A [TS-571-ITAT-2022(DEL) (ITAT Delhi)]

Joint Venture’s factory in India not fixed place PE absent ‘control’ over premises; Rejects supervisory PE plea - Access to a foreign enterprise for providing technical assistance to its Joint Venture Company in its premises in India does not amount to a Permanent Establishment under the Double Taxation Avoidance Agreement

Delhi ITAT allows Assessee’s appeal, holds that the premises of Assessee’s joint venture entity in India did not constitute a 'fixed place' Permanent Establishment (PE) in India for Assessee as per Article 5(1) of India-Japan DTAA, also holds that no supervisory PE was constituted through Assessee’s employee visiting India; Assessee-Company (FCC Co. Ltd.), a tax resident of Japan engaged in manufacture of clutch systems & facing for cars & bikes, entered into a JV agreement with Rico Auto and formed JV named FCC Rico Ltd (FRL); Assessee received income from three streams from FRL: (i) royalty income, offered to tax @ 10%, (ii) FTS, offered to tax @ 10% and (iii) Income from supply of raw material, components and capital goods, which were not offered to tax being in the nature of business profit, not taxable in India in absence of PE; Revenue, for Assessment years 2014-15 and 2015-16, by relying on coordinate bench ruling in Huawei Technologies Co Ltd, China v. AD1T (ITA Nos. 5253/Del/2011, 5254/Del/2011, 5255/Del/2011 & 5256/Del/2011 dated 21.03.2014) held that Assessee’s JV premises in addition to hosting the business activities of FRL, served as a ‘branch’ and office of the Assessee, thereby constituted fixed place PE; Also held that since Assessee’s employees helped FRL in setting up a new product line in India, supervisory PE was constituted; ITAT analyses the provisions relating to Fixed Place PE in India-Japan DTAA, states that in order to constitute a Fixed Place PE it is a prerequisite that the alleged premise must be at the disposal of the enterprise; Observes that in the present case, the conditions laid down for creation of a Fixed Place PE is not satisfied, opines that “Merely providing access to the premises by FRL for the purpose of providing agreed services by the assessee would not amount to the place being at the disposal of the assessee.”, relies on Supreme Court ruling in Formula One World Championship Ltd. v. CIT, International Taxation-3, Delhi (2017) 394 ITR 80 (SC); States that although Assessee has access to the factory premises of FRL, it is for the limited purposes of rendering agreed services to FRL without any control over the said premises, further points out that FRL is an independent legal entity carrying on its business with its own clients, for which Assessee provides technical assistance from time to time; Rejects Revenue’s argument referring to various clause of the Master Service Agreement that title of goods supplied by the Assessee to FRL passed in India and hence the Assessee is carrying on business in India, opines that references to those clauses are irrelevant for concluding that Assessee has fixed place PE, explains that manufacture, sale and receipt of consideration for sale occurred outside India, thus the title of goods passed outside India, accordingly holds that Assessee did not carry out any operation in India in relation to supply of raw material/capital goods and thus Assessee does not have a Fixed Place PE in India; With respect to constitution of Supervisory PE, ITAT peruses documents submitted by the Assessee providing details of employees who visited India along with work performed by them in reference to relevant agreement and states that the employees of the Assessee visited India to assist FRL in relation to supplies made by FRL to its customers, resolving problems relating to production, maintenance, safety status of premises, quality control and IT related services and opines that “none of these activities performed by the employees are in the nature of supervisory functions, supervision being the act of overseeing or watching over someone or something which is not reflected in the work done by the engineers in India for FRL.”; Further states that no installation or assembly project was on going at FRL’s premises for which the Assessee’s employees were rendering services, thus the condition for satisfaction of period of 6 months stay as envisaged in Article 5(4) of India-Japan DTAA becomes academic in nature; States that technical services rendered by Assessee’s employees were duly offered to tax and thus, there is no Supervisory PE of the Assessee. (Related Assessment years : 2014-15 and 2015-16) – [FCC Co. Ltd. v. ACIT ( Int. Tax.)  - Date of Judgement : 09.03.2022 (ITAT Delhi)]

Assessee-company made payment to an Irish company qua advertisement services received from it, since said Irish company did not have Permanent Establishment (PE) in India and it was resident of Ireland for taxation purposes, there was no liability on assessee to deduct TDS under section 195 on such payment

During year, assessee paid Rs. 67,68,768/- towards advertisement services to an Irish company without deduction of tax at source on same. Accordingly, Assessing Officer disallowed the same on account of non-deduction of TDS qua payments of marketing expenses made by assessee under section 40(a)(i). It was claimed by the Assessee that as the Assessee had made the payment to Facebook Ireland Inc., which admittedly did not have any permanent establishment in India and, therefore, the payments made to it for advertisement services were not chargeable to tax in India in view of the article 7 of DTAA between India and Ireland. Commissioner (Appeals) observed that said Irish-company had certified that it did not have Permanent Establishment (PE) in India and it was resident of Ireland for taxation purposes, hence, there was no liability upon assessee to deduct TDS under section 195 on such payment made for advertisement services. Said view taken by Commissioner (Appeals) was to be upheld and impugned disallowance under section 40(a)(i) was to be set aside. [In favour of assessee] (Related Assessment year : 2012-13) – [Addl. CIT v. Lenskart Solution (P) Ltd. (2022) 140 taxmann.com 242 (ITAT Delhi)]

Assessee did not have a permanent establishment in India, it will be entitled to take benefit of article 12 of India UK DTAA, therefore, interest received on income tax refund of assessee would be subject to taxation as per article 12(2) of India UK DTAA at rate of 15 per cent of gross amount of interest as income

With respect to the interest on income tax refund of Rs. 44,55,967/- the Assessing Officer held it is chargeable to tax at maximum marginal rate of 40% as assessee is a permanent establishment in India. The claim of the assessee is that assessee being a non-resident company incorporated in United Kingdom is a tax resident of United Kingdom and as per article 12 (2) of the India United Kingdom Double Taxation Avoidance Agreement the interest income of the UK resident is taxable in India at the rate of 15% of the gross amount of the interest.

Held : Merely having a project office in India cannot result into a permanent establishment of the assessee in India. Therefore, in the present case the assessee is entitled to take the benefit of article 12 of the Double Taxation Avoidance Agreement, as there is no permanent establishment in India. The article 12 of DTAA provides that

1.  Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2.  However, such interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

Therefore, the interest received on income tax refund of the assessee is subject to taxation as per article 12(2) of the Double Taxation Avoidance Agreement at the rate of 15% of the gross amount of interest as income as assessee did not have a permanent establishment in India, it will be entitled to take benefit of article 12 of India UK DTAA for calculating interest on income tax refund received. Therefore, interest received on income tax refund of assessee would be subject to taxation as per article 12(2) of India UK DTAA at rate of 15 per cent of gross amount of interest as income. (Related Assessment year : 2013-14) - [Dolphin Drilling Ltd. v. DCIT (International Taxation), Dehradun (2021) 191 ITD 181 : 130 taxmann.com 20 (ITAT Dehradun)]

Assessee company incurred design expenses for purchase of design/theme for its products from a foreign party, since design related work was rendered by foreign party outside India in its home country and such foreign party did not have any permanent establishment in India, said payment made by assessee towards design expenses to foreign party was not chargeable to tax in India under realm of section 9(1)(vii)

Assessee-company was engaged in business of export and trading of cloth such as made up/bed sheets, pillow cover, curtains etc. Assessee incurred design expenses for purchase of design/theme for its products from a party in Germany. Assessing Officer was of view that such expenses were for technical services related to income earned in India under section 9(1)(vii) and, therefore, assessee was liable to deduct TDS under section 195 on same. Said design related work was rendered by foreign party outside India in its home country and it had no any permanent establishment in India, thus, such income was accrued and arose to foreign party outside India, said payment made by assessee to foreign party was not chargeable to tax in India under realm of section 9(1)(vii). Accordingly, provisions of section 195 would not be attracted. [In favour of assessee] (Related Assessment year : 2009-10) – [ITO v. Anunay Fab (P.) Ltd. (2021) 133 taxmann.com 412 (ITAT Ahmedabad)]

Entities working for several shipping companies independently, not exclusively for Assessee, not Agency PE

Mumbai ITAT allows Assessee’s appeal, holds Assessee’s business profits not taxable in India as Assessee did not have any agency PE in India under India-Mauritius DTAA as alleged by the Revenue; Assessee-Company, a tax resident of Mauritius, engaged in the business of shipping computed its income in accordance with section 44B offering 7.5% of total receipts of USD 9.07 million from freight as taxable in India, and claimed relief under Article 8(1) of India-Mauritius DTAA; Revenue held that Assessee’s Place of Effective Management (POEM) was in UAE and not Mauritius and thus, was not eligible for the benefit under Article 8(1) on the basis that the two of the shareholders of the Assessee were located in UAE who had issued letters of authority in the name of the Assessee and that the board meetings were attended by the shareholders located in UAE; Revenue also held that the Assessee had agency PE in India in the form of two shipping agents providing  shipping services to the Assessee in lieu of commission, thus, held the business profit to be taxable under Article 7 of the India-Mauritius DTAA which was confirmed by CIT(A); ITAT, in the second round of litigation by recalling its earlier order and in the light of HC's remand order on Assessee's appeal, notes that the issue for consideration is whether the Assessee has agency PE in India in terms of Articles 5(4) and 5(5) of India-Mauritius DTAA; ITAT finds that the entities alleged to be agents are providing services to a number of shipping companies including the Assessee demonstrates that they are not exclusively working for the assessee and observes, "Not only they are agents of independent status, but the services provided by them to various shipping companies including the assessee are in course of their ordinary business as per Article 5(5) of the Tax treaty."; ITAT relies on the coordinate bench ruling in DCIT v. Overseas Transport Co. Ltd in ITA No.3129/Mum/2002 & Ors dated 27.07.2020 wherein under similar situation it was held that the two shipping agents situated in India do not constitute agency PE, and in absence of PE business profits are not taxable in India; ITAT further relies on its co-ordinate bench ruling in in ADIT v. Bay Lines (Mauritius) (2018) 91 taxmann.com 110 and holds that two shipping agents do not constitute agency PE in India, and thus business profits are not taxable in India. [In favour of assessee] (Related Assessment year : 1998-99 to 2000-01) – [Integrated Container Feeder Service v. Joint Director of Income-tax (Intl.tax) [TS-907-ITAT-2021(Mum)]

Interconnected services, provided by Telenor to Unitech, under unified agreement constitutes PE in India

Delhi ITAT dismisses Assessee’s appeal, holds that providing inter-connected, interlaced and sequential technical services under a unified agreement constitutes a PE in India and remits the matter back to Revenue for determination of income attributable to such PE; Assessee-Company, a tax resident of Norway, entered into a Business Service Agreement (BSA) with Unitech Wireless (Tamil Nadu) India (P) Ltd, providing numerous services through different Service Order Forms (SOFs); Assessee provided services related to Marketing, IT/IS, HR etc. and offered tax on income @ 10% on gross basis as FTS in accordance with Article 12 of India-Norway DTAA; Revenue held that the Assessee had a PE in India and assessed the Assessee at Rs. 8.26 Cr in relation to the service fee after allowing 40% as deduction on the receipts; ITAT finds various SOFs under the BSA to be inter-connected and its different facets as one seamless function; On perusal of the Assessee’s sequence of activities and the OECD’s Commentary on "enterprise" and the "connected projects", ITAT concludes that activities of the Assessee consist of same and interconnected projects; Referring to the consolidated billing pattern, ITAT holds, “existence of the PE of the Assessee is undeniable”; On attributability of income to the PE, ITAT concurs with Assessee’s argument that revenues raised out of services rendered in Norway cannot be attributed to Assessee’s PE in India; Remands the matter back to the file of Assessing Officer to consider services rendered by Assessee from Norway, and the evidence of expenses incurred as submitted by the Assessee; Dismisses Assessee’s appeal. [In favour of revenue] (Related Assessment year : 2010-11) – [Telenor ASA v. DCIT (Intl. Taxation), Gurgaon - [TS-762-ITAT-2021(DEL)]

NOTE

Under Article 5 of the India-Norway DTAA, the term PE includes furnishing of services including consultancy services through employees or other personnel, where activities of the nature continue (for a same or connected project) within the country for period aggregating to more than six months within any 12 months’ period.

Foreign nationals on deputation exclusively working for Indian AE, not supervisory or agency PE

Ahmedabad ITAT holds that foreign nationals working as Managing Directors of US-based entity’s India AE do not constitute supervisory or dependent agent PE when exclusively worked as the employees of the AE and acted as authorised signatory for the AE; Assessee (US-based entity) has an AE in India which was involved in establishing a new manufacturing unit and entered into an inter-company service agreement with the Assessee for  engineering, technology, design and project supervisory services, chargeable at cost plus 10% for which the Assessee sent its personnel to India;  For Assessment year 2015-16, Assessee offered Rs.1.89 Cr. as income from supervisory PE whereas the Revenue found that the salary paid to Mr. Timothy Earl Madden (Tim) and Mr. Mathew Scott Timmons (Matt) and partly reimbursed by the AE to the Assessee was not offered to tax as income from supervisory PE; ITAT observes that it was an undisputed fact that the AE paid the salary to Tim and Matt, complied with TDS requirements and Tim and Matt also filed their return of income in India; ITAT, on perusal of the agreement, finds that Tim and Matt were decided to be the employees of the AE and were to work under its supervision and guidance; ITAT holds that the Tim and Matt worked exclusive for the AE, Revenue had not disputed the primary facts and no adverse inference could be drawn from the website of the Assessee to justify the addition. (Related Assessment year : 2015-16) – [Lubrizol Advanced Materials Inc v. ACIT (International Taxation), Vadodara. [TS-433-ITAT-2021(Ahd)]

Imparting ‘Leadership Training’ to employees of Indian affiliate, not rendering of 'managerial services'

Pune ITAT rules that training fees, received by a Swedish company from its Indian affiliate, not taxable as FTS (‘fees for technical services’) under Article 12 of India-Sweden DTAA for Assessment year 2014-15, invokes MFN (Most Favored Nation) clause and applies restrictive provision of FTS as provided for in India-Portugal DTAA (that doesn't include ‘managerial services’ under its ambit and also contains 'make available' condition);  Assessee had argued that  the Leadership Training Services imparted by it enabled the recipients to manage the affairs of its Indian affiliate more effectively and hence, it was in the nature of ‘managerial services’ which cannot form part of FTS by virtue of MFN clause; ITAT rejects assessee’s stand and opines that “Ordinarily, training is conceived as passing on of some proficiency by the trainer to the trainee. It simply leads to honing up the skills of the other in the subject, which patently cannot be termed as an equivalent of rendering service in that field.”; Elucidates the same by stating that “acquainting someone in a formal manner with techniques to boost sales does not stand at par with rendering marketing services... Simply equipping or enabling the others for doing an activity is a step anterior to rendition of such services.”; At the same, ITAT also rejects Revenue’s stand of considering Training fee as a consideration for rendering Consultancy or Technical services, absent fulfilment of 'make available' condition; Lastly, holds that the training fee not taxable as business profits under Article 7 absent PE of assessee in India. [In favour of assessee] (Related Assessment year : 2014-15) – [Sandvik AB v. DCIT [TS-13-ITAT-2021(PUN)]

No attribution of profit in absence of permanent establishment

The appellant is a partnership firm established under Mauritius Law. It is engaged in the business of selling advertisement time and programme sponsorship from Mauritius in connection with the programming via non-standard television on ESPN, Star Sports and Star Cricket programming services. During the year under consideration, the appellant also entered into such services with respect to ESPN HD channel. AO proceeded by attribution of profit to PE and attributed 30% of the gross advertising revenue and made attribution of Rs. 103,32,02,031/-. Considering the past history of the assessee in light of the decision of this Tribunal read with the decision of the Hon’ble Supreme Court in the case of ADIT v. E-funds IT Solutions Inc. (2017) 399 ITR 34 : 251 Taxman 280 : 86 taxmann.com 240 (SC), we hold that the assessee has no business connection in India in terms of section 9(1) of the Act and has no PE under Article 5(2), 5(4) and 5(5) of India Mauritius DTAA. Since we have held that there is no PE, we are of the considered view that there cannot be any attribution of profit as held by this Tribunal in assessee’s own case in Assessment year 2009-10 and 2011-12. (Related Assessment year : 2012-13) – [ESPN Star Sports Mauritius v. DCIT - Date of Judgement : 20.10.2021 (ITAT Delhi)]

Project office in India cannot be construed as fixed place hence cannot be considered as permanent establishment- Deletion of addition by the High Court is affirmed

The Supreme Court affirmed the judgement of the Uttarakhand High Court that where the assessee, a Korean company, was awarded a project by the Oil and Natural Gas Corporation (ONGC) to, inter alia, undertake surveys, design, etc./and such assessee has a Project Office (PO) in India, it would per se not constitute a PE in India so long as that the assessee was not carrying on any core business activity through its Project Office in India.

The assessee, a Korea based company, entered into a contract with ONGC and L&T as consortium partners. The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as “a communication channel” between the Assessee and ONGC in respect of the Project. Pre- engineering, survey, engineering, procurement and fabrication activities which took place abroad, all took place in the year 2006. Commencing from November, 2007, these platforms were then brought outside Mumbai to be installed at the Vasai East Development Project. The Project was to be completed by 26.07.2009. the Assessing Officer held that the work relating to fabrication and procurement of material was very much a part of the contract for execution of work assigned by ONGC. The work was wholly executed by PE in India and it would be absurd to suggest that PE in India was not associated with the designing or fabrication of materials. Accordingly attributed 25% of gross  receipts of the assessee outside India was attributable to the business carried out by the Project Office of the assessee. The DRP and also Appellate Tribunal confirmed the order of the Assessing Officer. On appeal by the assessee the High Court held that the question as to whether the Project Office opened at Mumbai cannot be said to be a “permanent establishment” within the meaning of Article 5 of the DTAA would be of no consequence. The High Court then held that there was no finding that 25% of the gross revenue of the Assessee outside India was attributable to the business carried out by the Project Office of the Assessee. According to the High Court, neither the Assessing Officer nor the ITAT made any effort to bring on record any evidence to justify this figure.  Accordingly the appeal of the assessee was allowed. On appeal by the revenue the Court held that, Project office in India cannot be construed as fixed place hence cannot be considered as permanent establishment. The condition precedent for applicability of “fixed place” permanent establishments under Article 5(1) of the Double Taxation Avoidance Treaties is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5. Also, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment. (Related Assessment year : 2007-08) – [Director of Income-tax v. Samsung Heavy Industries Co. Ltd (2020) 426 ITR 1 : 315 CTR 622 : 272 Taxman 366 : 117 taxmann.com 870 (SC)]

Liaison office of a non-resident entity in India engaging in preparatory or auxiliary business activities in accordance with RBI approval is not to be considered as permanent establishment of that non-resident entity in India, so as to attract taxability in India

The assessee, a tax resident of UAE, was engaged in provision of remittance services for transferring funds from UAE to beneficiaries in India. The assessee opened four liaison office in India and carried activities in accordance with the conditions imposed by the RBI. The expenses for maintaining the Liaison Office (LO) were met out of the funds received by the LO from its Head Office in UAE and the LO did not charge any fee/commission for the services rendered in India, in compliance with the conditions imposed by the RBI. The assessee entered into contracts with customers in UAE for provision of remittance services pursuant to which the customers handed over the funds to the assessee in lieu of one-time fees. The funds received from the customers were transferred to the beneficiaries in India, in the following two ways:- (a) By telegraphic transfer through bank channels; or (b) On request of the customer, the assessee dispatched instruments/drafts/cheques through its LO to beneficiaries in India. (while doing so, the LO remained connected with the main server in UAE for retrieving information related to the beneficiaries and the customer) The assessee filed an application before the AAR for determining, whether the activity in the second mode of transfer would result in a taxable presence of the assessee in India.

The AAR held that activities undertaken by the LO would constitute a taxable presence in India by observing that without the services of the LO, the assessee would not be able to render the remittance services to its customers in UAE. Further, the AAR also observed that the commission which the assessee received for remitting the amount covered not only the business activities carried on in UAE but also the activity undertaken by the LO. The AAR further held that, the activities undertaken by the LO constituted a main function of the business of the assessee and hence could not be termed as preparatory or auxiliary in nature.

The High Court reversed the decision of the AAR, by relying on the decision of Supreme Court in case of DIT v. Morgan Stanley & Co. (2007) 292 ITR 416 : 162 Taxman 165 (SC) and held that the activities undertaken by the LO were auxiliary in nature since it supported/aided the execution of the main activity undertaken by the assessee in UAE and hence the LO would not be considered as a PE of the assessee in India.

The Supreme Court upheld the order of the High Court and held that where an assessee has a Liaison Office (LO) in India to carry out certain activities permitted by the Reserve Bank of India (RBI) which are not core activities of the assessee’s business, they would fall into the exclusion of ‘preparatory or auxiliary’ under the concerned DTAA and such LO could not be regarded as the assessee’s fixed place PE in India. Thus, no part of the income of the assessee could be taxed in India. - [Union of India v. U.A.E. Exchange Center (2020) 425 ITR 30 : 116 taxmann.com 379 (SC)]

Question of existence of Permanent Establishment (PE), of an assessee in India which requires a detailed enquiry, is not envisaged at stage of deciding application for issuance of certificate under section 197

Assessee-company was incorporated under laws of United Arab Emirates (UAE). Principal activities of assessee comprised of fabrication and installation of onshore and offshore oil facilities and submarine pipelines and pipelines coating. Assessee entered into contract with ONGC for carrying out work of project management, survey, design, engineering, procurement, fabrication, transportation, removal/replacement of existing topside decks of ten platforms. Assessee filed an application under section 197 contending that there was no creation of Permanent Establishment (PE) in India and, thus, no income of foreign component was taxable in India. Assessing Officer rejected assessee’s application. Thus, instant petition was filed. Question of existence of permanent establishment of an assessee in India which requires a detailed enquiry, is not envisaged at stage of deciding application for issuance of certificate under section 197. Even otherwise, since in immediately preceding years for which regular assessment had been completed, assessee herein was held to be having PE in India, impugned order passed by Assessing Officer did not require any interference. [In favour of revenue] (Related Assessment year : 2019-20) – [National Petroleum Construction Co. v. DCIT (International Taxation) [2020] 421 ITR 24 : 271 Taxman 150 : (2019) 112 taxmann.com 364 (Del.)]

NR channel-company’s revenue from exclusive Indian distributor not taxable, absent PE

Bombay High Court dismisses Revenue’s appeal, upholds ITAT order confirming that distribution revenue accruing to assessee, Taj TV Ltd. (a Mauritian company engaged in telecasting sports channel called Ten Sports”), by virtue of entering into a distribution agreement with Taj India, is not taxable absent PE in India; High Court takes note of ITAT’s findings that Taj India was not acting as agent of the assessee but it had obtained the right of distribution of the channel for itself and subsequently, it had entered into contracts with other parties in its own name in which the assessee was not a party; Holds that, After examining the requirement of Article 5 of the DTAA to constitute agency Permanent Establishment, Tribunal as a matter of fact held that none of the conditions as stipulated in Article 5(4) was applicable because Taj India was acting independently qua its distribution rights and the entire agreement was on principal to principal basis.”; Observes that there was a concurrent finding of fact by both CIT(A) and ITAT that the entire relationship was on principal to principal basis corroborated by terms and conditions of the distribution agreement as well as sub-distributor agreement; Further, absent any perversity in such finding showcased by the Revenue, High Court declines to interfere with the finding of the Tribunal affirming CIT(A)’s order. [In favour of assessee] (Related Assessment year :  2005-06) – [CIT v. Taj TV Ltd. [TS-126-HC-2020(BOM)]

Non-compete fees received by NR-promoter after stake sale in Indian co., non-taxable absent PE

Mumbai ITAT holds non-compete and non-solicitation fees received by assessee (a non-resident individual) constitutes 'business income', not taxable in India in absence of business connection or PE in India in terms of Article 7 of the India-Qatar DTAA, relies on Kolkata ITAT ruling in Trans Global PLC; Notes that assessee [who was director/promoter of SIPL, an Indian company) had sold shares in SIPL to a Singapore based company [BVCPL] and offered the same to tax, thereafter, he had entered  into a separate independent non-compete and non-solicitation fees agreement with BVCPL and had received a consideration of Rs. 7.5 crores for restraint of trade in order not to compete with BVCPL in India for a period of 10 years; Observes that the said fees fell under the ambit of Section 28(va) as business income, however, noting that assessee is eligible for treaty benefit in terms of Section 90(2), ITAT holds that the business income could be taxed in the hands of the assessee in India only if it is established that there is a permanent establishment in India”; Rejects Assessing Officer’s stand that  since assessee was holding shares in SIPL earlier, the business connection and thereby PE of the assessee stood established in India, holds that Assessing Officer did not establish that assessee has PE / business connection India; Also rejects Revenue’s contention relying on Goetze India ruling that assessee’s claim seeking treaty benefit should not be entertained as assessee had not made any claim by way of valid return, noting that the said restriction is applicable only to the Assessing Officer and not to the appellate authorities, ITAT approves CIT(A)’s decision of entertaining assessee’s claim. [In favour of assessee] (Related Assessment year : 2014-15) – [ITO (Intl. Tax) v. Mr. Prabhakar Raghavendra Rao [TS-683-ITAT-2019(Mum)]

No PE for Audi AG’s ‘fully built-up’ cars sale to Indian AE

Mumbai ITAT rules that Indian AE [i.e Volkswagen Group Sales India (P) Ltd. , ‘VGSIPL’] of assessee [i.e Audi AG, a German Co.] does not constitute its PE in India in terms of Article 5 of the India-Germany DTAA for AYs 2009-10 and 2010-11, holds that VGSIPL is an independent and separate entity” which is not acting on behalf of assessee; Assessee had appointed VGSIPL as its sole distributor of Audi cars in India, whereby Indian AE purchased fully built-up cars” from the assessee, Volkswagen Group(AG) & Skoda India, and thereafter sold the same to third party dealers/distributors, however, the Assessing Officer held that VGSIPL is the exclusive distributor of Audi products in India whose only source of income is from Audi sales, and had accordingly opined that the assessee had business connection as well as PE in India in the form of VGSIPL, consequent to which, Assessing Officer had attributed 35% of total income of assessee in India; ITAT peruses the importer agreement [IA] between assessee and VGSIPL, finds force in assessee's submission that cars were sold to VGSIPL on principal-to-principal basis [P2P] and thereafter, VGSIPL sold cars on P2P basis to the dealers; Notes that Assessing Officer did not bring any material to counter the stand of assessee, thus explicates that, the car is sold to VW Group [VGSIPL] for further sale in India and VW Group is not acting on behalf of Audi AG nor is Audi AG selling cars through VW Group..”; With reference to assessee's reliance on co-ordinate bench ruling in Daimler Chrysler AG’s case, ITAT refers to a comparative chart dealing with the facts pertaining to the assessee's case as well as Daimler's case [who is also a German Co. and engaged in the distribution & selling of Mercedes cars], and holds that, despite the fact that the AE [in Daimler’s case] was performing more activities , it was held that the associated entity not created either fixed place PE nor dependent agent”, distinguishes Revenue's reliance on Aramex Logistic’s case on facts; Furthermore, observes that the sales of goods/cars were completed outside India, concludes that, The assessee is not undertaking any definite activity to which profit can be attributed” in India. [In favour of assessee] (Related Assessment Year : 2009-10) – [Audi AG v. ADIT [TS-548-ITAT-2019(Mum)]

Non-resident agent appointed by assessee for procuring export orders did not have permanent establishment in India and their activities as commission agents were being carried out outside India, there was no liability on assessee to deduct tax at source on payment made to said agents

During the course of assessment proceedings for assessment year 2011-12, the Assessing Officer noticed that the assessee had paid payment of Rs. 1,20,72,972/- to non-resident out of the total commission of Rs. 1.49 crores (rounded off) paid during the year. On such commission paid to non-residents, the assessee had not deducted any tax at source. The Assessing Officer therefore, inquired with the assessee, who responded by suggesting that all services were rendered by the non-residents outside India and therefore, no part of the income had accrued or arose in India. Such income was therefore, not taxable in India. The assessee relied on the decision of Supreme Court in case of GE India Technology Center (P) Ltd v. CIT reported in 327 ITR 456 and contended that, in such a case, there was no liability to deduct tax at source. The Assessing Officer did not accept such explanation and made the addition of entire amount in terms of section 40(a)(ia) of the Act. The assessee carried the matter in appeal. CIT(A) gave substantial relief to the assessee. All additions, barring commission payment of Rs. 18.80 lakhs (rounded off) were deleted. With respect to the said sum of Rs. 18.80 lacs, Commissioner was of the opinion that this related to the machines which were sold in India. He did not accept the assessee's contention that the non-resident commission agents did not have any permanent establishment in India and the services were also rendered by them outside India. He was of the opinion that the activity of the sale had taken place in India and that therefore the case would fall within section 9(1)(i) of the Act.

The assessee carried the matter in appeal before the Tribunal. The Tribunal allowed the appeal on the ground that no part of the income had arisen or accrued in India. The payee was not liable to pay tax at such income. Requirement of TDS therefore would not arise.

In the present case, as noted, admitted facts are that the non-resident agents appointed by the assessee for procuring export orders do not have permanent establishment in India. Their agents are situated outside India. Their activities as commission agents are being carried out outside India. The Tribunal therefore correctly held that there was no liability on the assessee to deduct tax at source. Merely because a portion of the sale to the overseas purchasers took place in India, would not change situation vis-a-vis the commission agents. [In favour of assessee] – [PCIT v. Ferromatic Milacron India (P) Ltd. (2018) 99 taxmann.com 154 (Guj.)]

Mere outsourcing business to Indian subsidiary cannot create PE; MAP admission non-binding - Indian subsidiary of a foreign company providing back office support services does not constitute a PE in India under India-US tax treaty

Supreme Court dismisses Revenue's appeal, confirms Delhi High Court ruling holding that 2 US-based entities viz. eFunds Corporation USA and eFunds IT Solutions Group Inc., USA (assessees) did not have a fixed place PE, a service PE or an agency PE in India for Assessment year 2000-01 to 2002-03 and 2004-05 to 2007-08; Supreme Court observes that the burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue ; Regarding constitution of fixed place PE, observes that 'The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE'; Relies on Supreme Court ruling in Formula One for interpretation of fixed-place PE rule; Rejects Revenue's reliance on US Securities and Exchange Commission Report in Form 10K as misplaced as it spoke about e-Funds group of companies worldwide as a whole, holds that no part of the main business and revenue earning activity of assessees was carried on through a fixed business place in India which has been put at their disposal; Observes that 'the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE.'; Regarding Service PE constitution through employees seconded by assessees to Indian entity for Assessment year 2005-06, Supreme Court notes that none of the customers of assessees had received services in India and only auxiliary operations were carried out in India, thus holds that 'it is clear that as the very first part of Article 5(2)(l) is not attracted, the question of going to any other part of the said Article does not arise'; Also notes High Court observation that Assessing Officer has not given any finding on nature of functions performed by seconded employees, whether they reported to eFund Corp/ AEs while observing that this was not a correct way of deciding whether service PE existed, expresses agreement with the approach of High Court; Supreme Court also concurs with High Court that it has never been the case of Revenue that e-Funds India was authorized to or exercised any authority to conclude contracts on behalf of the US company, nor was any factual foundation laid to attract any of the said clauses contained in Article 5(4) of the DTAA; Further holds that since Revenue has agreed that transactions between assessees and Indian entity were at ALP, no further profits can be attributed even if there exists a PE in India, relies upon Morgan Stanley ruling; Regarding Revenue's contention that since assessee had admitted to certain profit attribution to 'Indian PEs' under MAP proceeding for Assessment year 2003-04, such admission would bind assessee for subsequent years, Supreme Court upholds High Court’s conclusion that MAP agreement for earlier year cannot be considered as precedent for subsequent years, relies upon Article 3.6 of OECD Manual on MAP procedure.  Finally, Supreme Court ruled in assessee's favour that no PE in India can possibly be said to exist on the facts of the present case. [In favour of assessee] (Related Assessment years : 2000-01 to 2002-03 and 2004-05 to 2007- 08) - [Assistant Director of Income Tax, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 (SC)]

NOTE

As per Article 5(2)((l), The term PE includes 'the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if:

(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or

(ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)]'.

Franchises agreement does not create Indian PE for Dominos; Distinguishes Formula One ruling

Mumbai ITAT rules that Dominos Pizza International Franchising Inc (a US based company) does not create a PE in India for AY 2012-13 by virtue of the Master Franchises Agreement (MFA) entered with Jubilant Food Works Ltd. (‘Jubilant’) for the franchise of Dominos Pizza Store in India; Rejects Revenue's stand that Jubilant constitutes assessee’s dependent agent PE in India, referring to various clauses of MFA, ITAT observes that no activities are carried out by Jubilant on behalf of assessee; Further observes that though certain clauses of MFA entitles the assessee to examine the accounts, approve suppliers and allowing control over advertisement, but the Jubilant or sub-franchise are not storing any goods on behalf of assessee; ITAT remarks that  considering the contents of the MFA and SFA (sub-franchise agreement), the Master franchise are independent business entity, the restriction provided in MFA and SFA are only to safeguard the brand value and to ensure the correct receipt of royalty income..”; Distinguishes Revenue's reliance on Formula One ruling wherein physical control of the circuit was with Formula One, observes there is no  physical control on the business of franchise and sub-franchise by assessee in present case. [In favour of assessee] (Related Assessment Year : 2012-13) – [DCIT v. Dominos Pizza International Franchising Inc [TS-260-ITAT-2018(Mum)]

Race circuit used for organising motor racing event in India held to be a fixed place PE of the non-resident - Income deemed to accrue or arise in India – Business connection - Formula One Grand Prix of India event constitute business income, liable to deduct tax at source

The Supreme Court has held that Formula One World Championship Limited (FOWC), a non-resident, had a Permanent Establishment (PE) in India, in respect of the Grand Prix Motor Racing event conducted at the Buddh International Circuit in India, notwithstanding the relatively short duration of racing event. FOWC has been held liable to pay tax in India on the business income attributable to such PE in India.

FOWC is a UK tax resident company. FOWC held license to the license for commercial rights in the FIA Formula One World Championship for 100-year term effective from 01.01.2011. FOWC is the exclusive nominating body at whose instance the event promoter is permitted participation. FOWC entered into a Race Promotion Contract (RPC) by which it granted to Jaypee Sports, the right to host, stage and promote F1 Grand Prix of India event for a consideration of USD 40 million. FOWC had right of access (two weeks prior to race, one week post race) specified in the agreement

The Supreme Court upheld the Delhi High Court's finding that the assessee has a fixed place PE in India by virtue of the international circuit i.e. a place where the motor racing event is hosted. Accordingly, the amounts received by it under the Race Promotion Contract constitute the assessee’s business income. With a view to examining whether the international circuit was put at the disposal of the assessee so as to constitute its fixed place PE, the Supreme Court noted that the arrangement clearly demonstrated that the entire event was taken over and controlled by the assessee and its affiliates. The Court rejected the assessee’s stand that since the duration of the event was only 3 days, the total duration for which limited access was granted to it was not sufficient to constitute the degree of permanence necessary to establish a fixed place PE; It clarified that the question has to be examined keeping in mind that the aforesaid race was to be conducted only for three days in a year and for the entire period of race the control was with the assessee. The Court also held that the construction or ownership of track or organising of events by the other party was immaterial as a common sense and plain thinking of the entire situation would lead to the conclusion that the assessee had earned income in India through the said track over which they had complete control during the period of race. – [Formula One World Championship Ltd. v. CIT, International Taxation-3, Delhi (2017) 394 ITR 80 (SC)]

Section 9(1)(i) : Income deemed to accrue or arise in India – Business connection – A “power of attorney” holder of a non-resident can constitute a “dependent agent”, “fixed place of business” and a “permanent establishment” under Article 5 of the DTAA. The fact that the physical presence of the non-resident in India is nominal is irrelevant – DTAA-India-Swiss.

Dismissing the appeal of assessee the Tribunal held that; the reference by Assessing Officer to Article 5 draws special importance. While business constitutes continuous activity in organized manner it is often a question of fact & law. “Place of business” usually means a premises of the enterprise used for carrying on the business, whether or not exclusively used for business. The residence of the country Manager was held to be a fixed place of business as the same was used as an office address in Sutron Corporation In re 268 ITR 156 AAR. Similarly an office space of 3 x 6 metres in Motorola Inc & Ors 95 ITD 269 (Del). To constitute a PE, the business must be located at a single place for a reasonable length of time. The activity need not be permanent, endless or without interruptions. It may not be out of place to mention that functions performed by Sri V. Subramanian or the Indian subsidiary could not be classified as preparatory or auxiliary in character. The facts strongly indicate towards Sri V. Subramanian constituting a dependent agent/ PE for reasons brought on record by the Assessing Officer and as discussed in foregoing paragraphs. There were no presence of a number of principals who exercised legal and or economic control over the agent Sri V. Subramanian. The principal i.e. the assessee has failed to demonstrate this aspect when confronted by the Assessing Officer. The principal i.e. the assessee was relying on the special skills and knowledge of the agent Sri V. Subramanian the Managing Director of the Indian entity by the same name and rendering similar functions. Sri V. Subramanian was acting exclusively or almost exclusively for and on behalf of the assessee during the currency of the contracts in question. To that extent it was not in furtherance of his ordinary course of business. Finally the refuge taken of Article 5(2)(j) on the short period of contracts and the interregnum does not offer any solace to the assessee either. The assessee has not demonstrated it was a mere passing, transient or casual presence for its activity in India. In view of this, we confirm the order of the lower authorities. This ground is therefore dismissed. [In favour of revenue] (Related Assessment year : 2008-09) – [Carpi Tech SA v. ADIT (2017) 145 DTR 17 (ITAT Chennai)]

Belgian company’s lighting contract for Commonwealth Games meets fixed place – PE’s ‘disposal’ test - Permanence test to be linked to nature and requirements of the business for constitution of a PE

AAR rules that entire consideration of USD 3.5 million received by applicant (a Belgium based company) for rendering, lighting and searchlight services to the Organizing Committee, Commonwealth Games 2010, Delhi (‘OCCG’)  under the Service Agreement dated  July 9, 2010 is taxable in India as business income, under the Act as well as India-Belgium DTAA; Firstly, AAR examines PE trigger for the applicant in  India considering the guidance provided by the Apex Court in Formula One case (which had also considered the Visakhapatnam Port Trust case relied by assessee) and the Klaus Vogel commentary; Rejects applicant's stand that fixing a light on a pole do not constitute a PE and the space provided to it was not in any way controlled by it; AAR notes that for providing the lighting and searchlight services, assessee had to do all related activities, such as obtaining all authorizations / permits, engaging personnel with the requisite skills, supply and / or procure all necessary equipment, subcontracting and shipping and loading, insurance etc.; Further, AAR observes that for carrying out its aforesaid business and related activities, applicant was provided 'lockable' office space as well as on-site space, AAR  remarks that  Thus it has, at its disposal, space which is lockable”, implying that it has access to and control over this space as long as there is a space placed at its disposal with exclusive right of access, controlled by it and used for its business, it would form a PE”; AAR holds that there was a clear link between the place of business and an identifiable geographical point from where its business would be done; Further, rejects applicant’s stand that no PE was established on the premises of OCCG as the project undertaken by it was not an enduring one and was for a short duration only, AAR clarifies that the establishment need not be enduring or permanent, but the context in which a business is undertaken is relevant; Also rejects applicant's stand that it provided services only on the opening and closing ceremonies of the Commonwealth Games Delhi, 2010 (i.e. only 2 days), AAR remarks that the activities performed by applicant  were part of the turnkey project, and hence to say that it provided services only during the opening and closing services is incorrect”, holds that applicant's situation was comparable to Formula One case; AAR concludes that the applicant had indeed met each of the criterion for establishing a PE, viz. place of business, power of disposition, permanence of location, business activity and business connection which cumulatively and collectively are the sine qua non of a PE; However, AAR rejects taxability as Royalty or Fees for included services ('FIS'), rules that the consideration received by applicant can only be held to be taxable in India as Business Profits, as per the provisions of Article 7 of the DTAA as also under section 9(1)(i) of the Income tax Act, having accrued and arisen from its business connection and source in India. - [Production Resource Group, Belgium - A.A.R. No 1330 of 2012 -  [TS-626-AAR-2017] – Date of Judgement : 08.11.2017]

Section 9(1)(i) : Income deemed to accrue or arise in India - Business connection - Liaison Offices In India is not permanent establishment - Income directly or indirectly attributable to these branches or offices was not taxable in India

Delhi High Court confirms ITAT's order for Assessment years 1994-95 and 1995-96, holds that assessee’s (a Japanese company) liaison office (‘LO’) in India, doesn't constitutes its PE and accordingly assessee's  income from business turnover/imports in India not taxable under India-Japan DTAA; Notes that Revenue could not demonstrate that assessee’s LO was PE within the meaning of Article 5 of DTAA, clarifies that  it was not enough for the Revenue to show that the assessee had an office, factory or a workshop etc.”; Observes that RBI had accepted the functioning of assessee’s LO for over three decades and that assessee was adhering to the conditions imposed by RBI, one of which was to not carry any business or trading activity in the LO; Holds that merely keeping books of accounts, apportioning some portion of telephone expenses to LO or having a common manager for LO and Project Office (PO) was not sufficient to conclude that LO was being used to carry on the business, relies on co-ordinate bench ruling in National Petroleum Company Construction;  With respect to assessee's POs in India, High Court observes that POs were treated as separate taxable units under section 44BBB and hence  the said POs cannot also be treated as PEs for the purpose of the DTAA. [In favour of assessee] (Related Assessment years : 1994-95 and 1995-96) – [DIT v. Mitsui And Co. Ltd. . [TS-310-HC-2017(DEL)] – Date of Judgement : 27.07.2017 (Del.)]

NOTE

Article 5 of India-Japan DTAA provides as under:

(1) For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

(2. The term permanent establishment includes especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

Assessee received BPO services from its Indian entity, it did not constitute fixed place PE in India hence cannot be assessed – DTAA-India-UK. [Article 5]

Assessee received BPO services and back office operations from its Indian entity. Back office services did not constitute permanent establishment in India. As assessee had no right to occupy premises but was merely given access for purposes of works, disposal test was not satisfied and, therefore, assessee did not have fixed place PE in India, hence cannot be assessed. (Related Assessment year : 2004-05) – [DCIT v. Vertex Customer Management Ltd. (2016) 178 TTJ 580 : 158 ITD 365 (ITAT Delhi)]

Permanent Establishment - Continuous period of stay of its employees in India which had to be taken into consideration and not entire contract period– DTAA-India-Germany

The assessee filed the return of income wherein amount received from Indian companies for providing technical consultancy services was offered to tax under Article 12(2) of the DTAA at 10%. The Assessing Officer taxed at 30% and in respect of two contracts at 20%. On appeal the Tribunal held that ;in order to determine as to whether assessee, a German company, rendering services in field of exploration, mining and extraction to Indian companies, had PE in India, it was continuous period of stay of its employees in India which had to be taken into consideration and not entire contract period. Since assessee had deputed one of its employees to India and he did not stay in India for more than 180 days, it could not be concluded that assessee had PE in India. Therefore, provisions of Section 115A would not be applicable to assessee. (Related Assessment year : 2002-03) – [Rheinbraun Engineering Und Wasser GmbH v. DCIT (2016) 158 ITD 359 (ITAT Mumbai)]

Business profits of non-resident US enterprise, not having any permanent establishment in India would not be taxable under section 44BB as per article 7 of DTAA

The assessee-company was a non-resident US enterprise, providing cost-to-cost services as mentioned under section 44BB, under a tripartite contract. Assessee claimed that the payments received by it were outside the scope of section 44BB as cost-to-cost services were provided under the contract; and that as per article 7 of DTAA, a non-resident engaged in the business of providing services and facilities, as mentioned in section 44BB, will come within the purview of section 44BB, only if it has a permanent establishment in India and in instant case assessee did not have permanent establishment in India. section 44BB.

Held : As per article 7 of DTAA, section 44BB is applicable only if non-resident US enterprise has Permanent Establishment in India. Article 7 of DTAA requires a non-resident US enterprise to have a permanent establishment in India for being taxed in India, even if it received any remuneration in connection with any matter provided in section 44BB. There is no finding of the Assessing Officer and the Appellate Commissioner that the assessee was having or not any permanent establishment in India for the relevant year. However, the Division Bench of the High Court in the case of Enron Oil & Gas Expat Services Inc. [IT Appeal No. 7 of 2009 granted relief to the assessee for assessment year 2000-01 on the basis of the fact recorded that the assessee had not permanent establishment in India. Following said decision, the appeals are to be dismissed. [In favour of assessee] – [CIT, Dehradun v. Enron Oil & Gas Expat Services Inc. Dehradun (2013) 213 Taxman 44 : 29 taxmann.com 419 (Uttarakhand)]

Outsourcing of services such as back-office operations to a captive service provider will not per se create a permanent establishment of the parent in India

In DIT v Morgan Stanley and Co Inc, an Indian company "MSAS" provided BPO services (on a cost- plus basis) to "M", its US group company. M's staff was also sent on deputation on request of MSAS to work under MSAS' direction and control. The staff continued to be on M's payroll and MSAS was to reimburse the compensation cost of M without profit element. Performance appraisal, promotion, discipline etc. was to be carried out in consultation with M. M also sent its staff to India for stewardship and other similar activities to ensure high standards of quality by MSAS [which provided BPO services (on a cost plus basis) to M] and to protect business interests of its (M's) shareholders.

The Supreme Court applied Article 5(2)(l) of the India-US Tax Treaty [equivalent to Article 5(3)(b) of the UN Model] in relation to the presence of the deputationists. The SC laid down the twin conditions for establishing a Service PE under Article 5(2)(1) of the India-US Tax Treaty i.e. firstly, the foreign enterprise should have a fixed place of business in India and secondly, the business of enterprise should be carried on wholly or partly through that fixed place. Thereafter, the Supreme Court held that in order to decide whether the foreign enterprise has a PE in India, one has to undertake a functional and factual analysis of each of the activities undertaken by the foreign enterprise in India in the background of the above two limbs. In this backdrop, the Supreme Court held that carrying out of back office operations by the Indian subsidiary does not result in formation of PE for the US parent company engaged in front office operations. – [DIT (International Taxation), Mumbai v. Morgan Stanley and Co. Inc. (2007) 292 ITR 416 : 210 CTR 419 : 201 Taxation 160 : 162 Taxman 165 (SC)]

Even in cases of a composite contract, an artificial division has to be made between profits earned in India and outside India, if the same is clearly divisible - Held profits attributable to fabrication work done at Korea cannot be brought to tax in India but income attributable to the installation work done in India is taxable in India

The question of attribution of profits in case of a turnkey contract came up again for adjudication before the Supreme Court in the case of CIT v Hyundai Heavy Industries Co. Ltd. Korean Company entering into agreement with ONGC for designing, fabricating and commissioning of oil platform on Bombay High. Fabrication work carried out at Korea. Korean company establishing a permanent establishment in India after completion of the fabrication work carried out at Korea.

In this case, the Korean based taxpayer supplied material from Korea to Indian customer and also undertook responsibility for its installation and commissionsing in India under a separate contract. The tax authorites sought to tax the profits earned by the Korean company on offshore supplies, which the Supreme Court rejected. The Supreme Court ruled that the profits earned by Korean company on offshore supply cannot be attributed to the Indian installation PE as the same came into existence only after the sale transaction got completed. - [CIT v. Hyundai Heavy Industries Ltd. (2007) 291 ITR 582 (SC)]

Amount receivable by assessee in respect of offshore supply of equipment and offshore services was not liable to tax in view of article 7 of DTAA between India and Japan. Court held that, despite retrospective amendment to section 9(1) with effect from 01.06.1976 assessee would not be liable to tax in respect of such amount under Explanation to said section.

The Supreme Court held that incomes arising to a non-resident cannot be taxed as business income in India, without a PE. As the assessee did not have any permanent establishment in India, the incomes arising outside Indian territories could not be brought to tax.

Some important principles laid down by the Supreme Court in the context of EPC contracts are as follows –

· When payment for the offshore and onshore supply of goods and services was in itself clearly demarcated, then it could not be held to be a composite contract (which has to be read as a whole). · A contract must be construed keeping in view the intention of the parties and not the taxing provisions.

· In cases where different severable parts of the composite contract are performed in different places, the principle of apportionment can be applied. To summarize, the Supreme Court held that where a contract is clearly divisible (i.e. where the scope and consideration of each divisible portion is distinctly provided, where different parties are executing different portions of the contract, etc.), the tax implications of each divisible portion would have to be examined separately.

Accordingly, in case of composite contracts, where a significant portion of the contract revenues is in the nature of “FTS”, the same would not mean that the entire contract revenue (including the revenue from the supply of goods) should be construed as “FTS” (or vice versa). - [Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408 : 207 CTR 361 : 158 Taxman 259 (SC)]