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Permanent Establishment

Contents

By: Gaurav Singhal

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Contents

  • Taxability of Business Income
  • Provisions of the Act
  • DTAA (OECD / UN)

› Concept of PE

› Fixed Place PE

  • Status of LOs

› PE exclusions

› Agency PE

› Service PE

› Installation / Construction PE

› Case Studies (7)

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अर्थस्य मुलं राज्यम् |

“Artha is Necessary for Prosperity of a Kingdom”

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- Chanakya Sutra

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Taxability of Business Income

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Provisions of the Act

Sec. 5: T.I. a NR includes all income from whatever source derived which —

  • is received / deemed to be received in India
  • accrues or arises / is deemed to accrue or arise in India

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Provisions of the Act

S. 9(1): Incomes deemed to accrue / arise in India

  • All income accruing or arising
    • through / from any business connection in India
    • through / from any property in India
    • through / from any asset or source of income in India
    • through transfer of a capital asset situate in India.

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Provisions of the Act

Business Connection

  • Relation between business activities of NR and India / Indian person should be intimate, real, continuous – R.D. Agarwal & Co. (SC)
  • Continuity of activity of NR with Indian party. An isolated transaction is not enough
  • Inclusive definition: Similar lines as Agency PE

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Provisions of the Act

Sec. 44DA:

  • Income of a NR – Royalty / FTS effectively connected with PE
  • Computation under the Heads PGBP
  • No deduction if:
    • expenditure not incurred for business of such PE
    • Sum paid to HO / oth. office (except reimbursement)

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DTAA – OECD / UN

  • Article 7(1)
    • Business profits to be taxed in the Resident state
  • Article 7(2)
    • Source state can also tax, if the assessee has a PE in the source state.
    • To the extent attributable to the PE

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So What IS

a ‘Permanent Establishment’?

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Permanent Establishment

Base Rule PE

  • Article 5(1)
    • Fixed place of business
    • Through which business is carried out
    • Geographical location

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Permanent Establishment

  • Article 5(1): Basic Rule
    • For the purpose 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

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Permanent Establishment

Place

  • Mere Presence vs. ‘At Disposal’
  • Ownership
  • Within premises of another co.

Delhi Branch

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Permanent Establishment

Fixed Place

  • Permanence
  • Length of time
  • Interruptions in normal course �(seasonal business, holidays)
  • Oil rigs, Ships

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Permanent Establishment

Business carried on

  • Element of business
  • In / through / by the fixed place
  • Social facilities – Not a PE of an enterprise
  • Productive character?

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Permanent Establishment

  • Fixed Place of Doing Business
    • Area in Customs Depot
    • Machinery, etc.
    • Automated business – Vending machines
  • ‘Through which’

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Status of LOs

Business carried on

  • Liaison offices
    • FEMA – Conditions
    • Real operations – PE implications

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Permanent Establishment

  • Article 5(2): Illustrative or inclusive list
    • Place of management
    • Office / workshop
    • Branch / factory / mine etc.
    • Mine, an oil or gas well, a quarry or any other place of extraction of natural resources

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PE – Exclusions

  • Article 5(4)
    • Storage, display, delivery
    • Maintenance of a stock for processing
    • Solely for purchasing
    • Preparatory / Auxiliary

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PE – Exclusions

  • Notwithstanding the preceding provisions of this Article, the term “PE” shall be deemed not to include:
    • Use of facilities solely for storage, display or delivery of goods belonging to the enterprise;
    • Maintenance of a stock of goods belonging to the enterprise solely for the purpose of storage, display or delivery;
    • Maintenance of a stock of goods belonging to the enterprise solely for the purpose of processing by another enterprise;
    • Maintenance of a fixed place of business solely for purchasing goods / collecting information, for the enterprise;

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PE – Exclusions

  • Notwithstanding the preceding provisions of this Article, the term “PE” shall be deemed not to include:
    • Maintenance of a fixed place of business solely for carrying on, for the enterprise, any other activity;
    • Maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e),

provided that such activity or, in the case of sub-paragraph f), the overall activity of the fixed place of business, is of a preparatory or auxiliary character.

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BEPS Impact: P&A exemption

  • Article 5(4): Preparator and Auxiliary (P&A) activities
    • Difficult to distinguish P&A and non-P&A activities due to changes in business models.
    • Decisive criteria: Whether activity of fixed place of business in itself forms an essential and significant part of activity of the enterprise as a whole.

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BEPS Impact: P&A exemption

  • Preparatory activities are carried on in contemplation of essential / significant part of activity of enterprise as a whole. Often carried on during a relatively short period
  • Example of abuse: Warehousing by an online seller
  • MLI seeks to address this using 2 alternative

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BEPS Impact – Option A

  • Notwithstanding the provisions of a CTA, the term PE shall be deemed not to include:
    1. Activities listed in CTA (prior to MLI) that will not constitute a PE, whether or not contingent on being of P&A character
    2. Maintenance of a fixed place of business solely for carrying on, for the enterprise, any activity not described in sub-para a.
    3. Maintenance of a fixed place of business solely for any combination of activities above

provided that such activity / overall activity of the fixed place of business, is of a P&A character.

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BEPS Impact – Option B

  • Notwithstanding the CTA provision, the term PE shall be deemed not to include:
    1. Activities listed in CTA (prior to MLI) that will not constitute a PE, whether or not contingent on being of P&A character (except to the extent that relevant provision of the CTA provides explicitly)
    2. Maintenance of a fixed place of business solely for carrying on, for the enterprise, any activity not described in sub-para a), provided that this activity is of a P&A character
    3. Maintenance of a fixed place solely for any combination of activities mentioned above, provided that overall activity resulting from this combination is of a P&A character

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BEPS Impact: P&A exemption

  • Impact of these options
  • Reasons for allowing Option 2:
    • For States which consider that some activities (covered in SAE) are intrinsically P&A.
    • To provide greater certainty these activities should not be subject to the condition that they be of a P&A character.

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BEPS Impact: P&A exemption

Fragmenting P&A activities

  • Abuse of P&A exemption by fragmentation of core / substantial functions being carried out in Source State:
    • Fragmenting of business processes between various places of business, such that each such sub-set can be argued to be a P&A
    • In an advanced variant, these activities are fragmented between offices (in Source State) of group companies.

Example, foreign banks with offices (in source state) collecting info on loan applicants

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BEPS Impact: Fragmenting P&A

Fragmenting P&A activities – MLI draft

Specific activity exemption shall not apply to a fixed place that is maintained by an enterprise, if the same enterprise (E1) or a closely related enterprise (E2) carries on business activities at the same place (P1) or at another place (P2) in the same Contracting Jurisdiction and:

    • P1 or P2 constitutes a PE for E1 or E2, or
    • Overall activity resulting from combination of activities carried on by two enterprises at P1, or by E1 or E1 at the two places, is not of a P&A character

provided that business activities carried on by the two enterprises at P1, or by E1 or E2 at the two places, constitute complementary functions that are part of a cohesive business operation.

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Construction / Installation PE

  • Article 5(3): A building site / construction / installation project constitutes a PE only if it lasts more than 12 months.
    • Includes construction of roads / bridges, renovation, laying pipelines, installation of complex machines
    • On-site planning and supervision also covered

If desired, CS can expressly include ‘supervisor activities in connection therewith’

    • Duration test to apply to each individual site / project

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Construction / Installation PE

  • A building site to be regarded as a single unit, even if based on several contracts, provided it forms a coherent whole commercially and geographically.
  • Coherence
    • Each particular spot to be regarded as a part of a single project
    • A site forms single unit, even if orders placed by several persons
    • Immaterial that work force is not present in one location
    • Time spent on unconnected sites: Not to be considered

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Construction / Installation PE

  • Start
    • Date on which the contractor begins work
    • Includes preparatory work, eg installation of planning office, demolition, clearing
    • End
    • Until work completed / permanently abandoned
    • Includes removing material / equipment & cleaning up the site
    • Temporary interruptions – PE does not cease to exist
    • seasonal interruptions, shortage of materials, labour difficulties

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Construction / Installation PE

  • Sub-contracting
    • Time spent by sub-contractor(s) to be included in duration of the general contractor
    • Sub-contractor forms a PE for itself at the site if its activities exceed specified period

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BEPS Impact: Splitting contracts

  • For determining whether period(s) referred to in a PE provision after which specific projects / activities shall constitute a PE has been exceeded:
    • where an enterprise carries on activities at a place that constitutes a building site, (etc.), and these activities are carried on for duration(s) that exceed 30 days without exceeding the time limit referred to in relevant CTA provision; and
    • where connected activities are carried on in at that site during different periods, each exceeding 30 days, by one or more closely related enterprises,

these different periods shall be added to aggregate period of time during which the first enterprise has carried on activities at that site.

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Agency PE – Article 5(5)

    • Dependent agent, and
    • Any one of the following
    • Concludes contract
    • Secures orders
    • Deliver goods
    • Article 5(7)
    • Independent agent / Broker, and
    • ordinary course

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Agency PE – Article 5(5)

    • Dependence
    • Legal
    • Economic
    • Independent agent
    • Accountability only for result (not for manner of execution)
    • Not subjected to detailed instructions

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Agency PE – Article 5(5)

    • Authority to conclude contract
    • Habitually: Nature of business
    • Internal contracts
    • Signs in his own name (Development BEPS / MLI)
    • Exclusion: Preliminary & Auxiliary

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�

    • Routine approval by Principal
    • Soliciting; not signing
    • Mere participation in negotiation

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Base Erosion: Commissionnaire model

  • Commissionaire business model to be included to PE definition
  • Sales made by an agent in his own name for commission, of goods owned by another enterprise
  • (Issue on legal status, in Common law countries)

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Base Erosion: Contract Conclusion

  • Abuse by shifting place of contract conclusion
    • A Ltd. (NR) distribute products through its websites
    • B Ltd. (Resident, and WOS of A Ltd.) promotes sales in India by visiting large organisations (Customers)
    • Remuneration of B is partially based on revenues earned by A from Customers
    • B persuades Customers to purchase; Walks them through terms and conditions of contract (which B is not authorized to modify)

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Base Erosion: Contract Conclusion

  • Abuse by shifting place of contract conclusion (Cont’d)
    • Customer subsequently concludes contracts (say, Online) with A
    • B plays principle role leading to conclusion of contract. Such contracts are routinely concluded without material modification by A
    • While B is not authorised to modify T&C, it does not mean that conclusion is not direct result of activities B performs on behalf of enterprise

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BEPS Impact: Agency PE

  • MLI Draft

Where a person is acting on behalf of an enterprise and, in doing so, habitually concludes contracts / plays principal role leading to conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are:

    • In the name of the enterprise; or
    • For transfer of ownership of / for granting of right to use, property owned by that enterprise or that the enterprise has right to use; or
    • For provision of services by that enterprise,

that enterprise shall be deemed to have a PE…

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BEPS Impact: Agency PE

  • On Commissionaire model – Covered in ambit of PE

PE to be constituted irrespective of name of seller, situs, even existence of goods at the time of contract conclusion

  • On Contract Conclusion avoidance

Prevents strategies like negotiation of contracts in one state but concluded outside it

Impact on Low Risk Distributor

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Not covered by AP7 (as he takes title, even if for a moment)

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BEPS Impact: ‘Business Connection’

  • India Update: Budget 2018
    • Commissionaire arrangements targeted by AP 7 and MLI. Upon signing, definition of PE stands expanded
    • To align the domestic law, meaning of Business Connection to include business activity carried out through a person, who “habitually plays principal role leading to conclusion of contracts by that NR‟

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Base Erosion: Independence

  • Abusing the concept of independence
    • Meaning of independence: Legal and economic
    • Irrespective of exclusivity
    • Use of group structure to demonstrate lack of dependence on any one company within the group

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BEPS Impact: Independence

  • MLI Draft:

Para 1 shall not apply where person acting on behalf of a NR enterprise carries on business in Source State as an independent agent and acts for the enterprise in ordinary course of that business.

But where such person acts exclusively / almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be independent agent.

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Agency PE – Article 5(5)

  • Article 5(5)

Notwithstanding para 1 and 2 but subject to para 6, where a person is acting in a CS on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are:

a. in the name of the enterprise, or

b. for transfer of ownership of, or for granting of right to use, property owned by that enterprise or that the enterprise has the right to use, or

c. for provision of services by that enterprise, (cont’d)

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Agency PE – Article 5(5)

  • Article 5(5)

…that enterprise shall be deemed to have a PE in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business (other than a fixed place of business to which paragraph 4.1 would apply), would not make this fixed place of business a PE under the provisions of that paragraph.

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Agency PE – Article 5(5)

  • Article 5(5)

Para 5 shall not apply where the person acting in a CS on behalf of an enterprise of the other CS carries on business in the first- mentioned State as an independent agent, and acts for the enterprise in the ordinary course of that business.

Where, however, a person acts exclusively / almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent within the meaning of this paragraph with respect to any such enterprise.

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Agency PE – Article 5(5)

  • Article 5(5)

Closely Related Enterprise: If, based on all relevant facts, one has control of the other or both are under the control of same persons / enterprises.

A person shall be considered to be closely related to an enterprise if one possesses directly / indirectly > 50% of beneficial interest in the other (or, in case of a company > 50% of aggregate vote and value shares or of beneficial equity interest) or if another person possesses directly / indirectly > 50% of beneficial interest, etc. in the person and the enterprise or in the two enterprises.

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Service PE

    • Absent in OECD model
    • Furnishing of services by employees
    • Permanence – 12 months**

(Exception for AE, eg. One-day PE in US DTAA)

    • Making personnel available & providing technical assistance
    • Secondment arrangement: Providing services vs. Providing personnel (See discussion under Morgan Stanley – SC)

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Electronic Commerce

  • Can mere use in e-commerce operations, of computer equipment in a country, could constitute a PE?
    • Relevant factor: Distinction between computer equipment, and data and software which is used by / stored on, that equipment.
    • Internet web site is a combination of software and electronic data, and not a tangible property. It has no location that can constitute a place of business.
    • Server on which the site is stored, is a piece of equipment with a physical location that could constitute a fixed place of business of the enterprise that operates that server.

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Electronic Commerce

  • Distinction: Enterprise operating the server vs. enterprise that carries on business through the web site.
  • Typically, server and its location are not at disposal of the enterprise (to which the website belongs), irrespective of:
    • Computation of fees (to ISP), based on disk space to store software / data required by the site
    • Ability of the enterprise to determine that its site should be hosted on a particular server at a particular location

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Electronic Commerce

  • If the enterprise has the server at its own disposal – because it owns / leases and operates the server, the place where that server is located could constitute its PE (if other requirements of the Article are met).
  • Can business be said to be wholly / partly carried on at a location where the enterprise has equipment (server) at its disposal
  • Presence of personnel is not necessary, when no personnel are in fact required to carry on business activities at that location

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Electronic Commerce

  • E-commerce operations which would generally be regarded as P&A (as per OECD MCC):
    • Providing communications link
    • Advertising of goods or services
    • Relaying information through a mirror server for security and efficiency purposes
    • Gathering market data for the enterprise

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Attribution of profits

    • Principles as per the Income-tax Act – Section 9
    • Income arising through business connection
    • In the case operations not in India, only such part of income as attributable to India
    • Expln 3: …only so much of income as is reasonably attributable
    • Rule 10 – Presumptive / Global Formulatory / Discretionary

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Attribution of profits

    • Principles as per DTAAs – Article 7
    • Para 1: Profits taxed in other state only so much of them as is directly or indirectly attributable to, that PE where directly or indirectly attributable means appropriate to the part played by the PE in those transactions
    • Para 2: Incapable of determining attributable profits, estimate on reasonable basis

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Attribution of profits

CBDT circular no. 5 dated 28 September, 2004

    • Arm’s length principle
    • Separate enterprise approach

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Formula One World Championship

    • Facts
    • FOWC, a UK tax resident, held all commercial rights in Formula One World Championship
    • It granted to Jaypee Sports through a Race Promotion Contract (RPC), the right to host, stage and promote F1 Grand Prix, for USD 40 million

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Formula One World Championship

    • Facts
    • Budh International Circuit constructed, laid out and prepared in a form and manner approved by FOWC
    • For duration of the event as well as 2 weeks prior to it and a week succeeding it, FOWC had full access through its personnel. Team contracted with it (racing as well as spectator) and it could dictate persons authorized to enter reserved areas
    • Jaypee created the circuit for F1 and other events; yet, during the F1 Championship, no other event was possible

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Formula One World Championship

    • Question
    • Whether FOWC have a PE in India in terms of Article 5 of the DTAA

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Formula One World Championship

    • Held
    • Evident that though FOWC's access / right to access was not everlasting, at the same time, it had exclusive circuit access for up-to 6 weeks at a time during F1 Championship season
    • This nature of its business activity, i.e. racing meant that it was a shifting / moving presence. Teams competed in the race in a given place and after its conclusion, moved on to another locale where a similar race is conducted

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Formula One World Championship

    • Held
    • With this kind of activity, both the exclusive nature of access and period for which it is accessed, makes the presence of a kind contemplated under article 5(1), i.e. it is fixed.
    • Presence is not ephemeral, fleeting or sporadic. The fact that RPC-2011's tenure is of 5 yrs, meant that there was a repetition.
    • As long as presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to nature of business. Held that the circuit itself constituted a fixed place of business.

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Facts – RR PLC

    • RR PLC is a UK resident co.
    • Rolls Royce India Ltd. – a subsidiary company in UK providing liaison services to Indian customers of RRPLC
    • RRIL was remunerated at cost plus 14.51%, held to be at ALP by TPO
    • sss

Rolls Royce PLC (H Co)

UK

Rolls Royce India Ltd (S Co)

LO of S Co

India

Customers

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Facts – RR PLC

  • RRPLC did not file its return
  • AO conducted survey operations and alleged that it had a PE in India as RRIL was a projection of Assessee and attributed 75% to 100% profits for different Ays
  • CIT(A) upheld AO‘s order but reduced the rate of attribution to 75% in all cases

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Revenue’s arguments before the HC

    • LO in India is a projection of Appellant’s business
    • RRIL’s premises in India constituted a fixed place PE
    • Activities were not in the nature of ‘P&A’ activities
    • Appellant’s employees visited and occupied LO’s premises

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Decision of the HC

    • Key considerations
    • Employees of appellant used to visit Indian office and used to direct / supervise the employees of RRIL
    • Appellant‘s business connection – Marketing / supply of equipment carried out by LO of RRIL
    • R&D expenses should not be reduced from operating profits as attribution has been done

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Decision of the HC

    • Final decision
    • Rejected appellant's argument to remand back the PE matter to ITAT
    • Upheld ITAT‘s order – Constituted that RRPLC had a PE in India
    • Also, R&D expenses should not be excluded from global profits and attribution of income should be @ 35%

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Fact – RR Singapore

    • Appellant Co. based in Singapore
    • Principal activities:
    • Sale of spare parts for oil field equipments
    • Repair / overhauling services for such equipments

Rolls Royce Singapore Pvt. Ltd.

Singapore

India

Customers

ANR Pvt. Ltd.

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Fact – RR Singapore

    • ANR – Executive agent in India
    • Change in Commission from 5% of Invoice value to USD 40,000 p.a.
    • ANR - An Independent entity having several clients apart from the Appellant

Rolls Royce Singapore Pvt. Ltd.

Singapore

India

Customers

ANR Pvt. Ltd.

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Fact – RR Singapore

    • Offshore income from supply of spare parts not offered to tax, basis that it had no PE in India
    • AO sought to tax such income basis that the appellant had a PE in India

Rolls Royce Singapore Pvt. Ltd.

Singapore

India

Customers

ANR Pvt. Ltd.

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Fact – RR Singapore

    • Appellant filed its tax return:
    • Showing income from maintenance services as FTS (Art. 12) and paid tax @ 20%
    • Not declared income on supply of equipments

Rolls Royce Singapore Pvt. Ltd.

Singapore

India

Customers

ANR Pvt. Ltd.

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Issues before the HC

    • Whether Appellant has a BC in India?
    • Whether Appellant has a PE in India?
    • Rate of Attribution of income to the alleged PE?
    • Whether Payment to alleged PE at Arm’s Length Price?
    • TP analysis?

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Issues before the HC

    • DAPE
    • Commission to ANR at ALP
    • Attribution of profits

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Issues – DAPE

Taxpayer’s Arguments

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    • ANR – Independent agent
    • ANR’s activities not devoted wholly to Appellant
    • ANR had other clients too
    • ANR – an existing co., not created by Appellant, had its own infrastructure and business

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Revenue’s Arguments

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    • ANR – Dependent
    • Restricted to undertake competitive products
    • Work exclusively for Appellant
    • Devoted wholly to Appellant
    • Excessive control over ANR

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Issues – Is Commission at ALP

Taxpayer’s Arguments

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    • Fee of USD 40,000 p.a. reasonable
    • Appellant did not dictate contract terms to ANR- Fee
    • ANR – a third party
    • ANR – not Appellant’s subsidiary

Revenue’s Arguments

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    • No TP analysis
    • No plausible reason to change commission from 5% of invoice value of sales to USD 40,000 p.a.
    • Uncontrolled Transaction

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Decision of the HC

    • Appellant has a DAPE in India
    • Matter of ANR rendering services also to clients other �than Appellant was remanded back to AO
    • Commission not on ALP basis
    • Attribution at the rate of 10%

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Key Considerations

    • ANR was agent of the Appellant which had other clients and earned commission from them as well
    • No TP analysis undertaken by the Appellant
    • Attribution of profits based on various judicial decisions

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Key Takeaways

    • PE – a dynamic concept
    • Attribution of profits – Contentious in practice
    • Documented TP policy is important to defend claims from Revenue authorities
    • Attribution vis-à-vis ALP
    • OECD commentary vs. Indian judicial precedents

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Morgan Stanley

    • Facts
    • ‘MSCO’ is a US based investment bank engaged in the business of providing financial advisory services, corporate lending and securities underwriting.
    • ‘MSAS’ a Indian co (and an AE of MSCo) was set up to support main office functions and to provide ITeS (back office operation, data processing, support centre) to MSCo.
    • MSAS entered into an agreement for providing such services to MSCo.

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Morgan Stanley

    • Facts
    • MSCO sends employees to MSAS to perform two types of activities – stewardship and work performed by deputationists.
    • Stewardship activities involve briefing of the MSAS staff to ensure that the output meets the requirements of the MSCo.
    • These activities include monitoring of the outsourcing operations at MSAS.
    • The object is to protect the interest of the MSCo.
    • Stewards are not involved in day to day management or in any specific services to be undertaken by MSAS.

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Morgan Stanley

    • Facts
    • In case of deputationists
    • On completion, repatriated to his parent job
    • He retains his lien when he comes to India
    • He lends his experience to MSAS in India, as an employee of MSCo

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Morgan Stanley

    • India-US DTAA: Article 5(2)(l)
    • 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:
    • Activities of that nature continue within that State for periods aggregating > 90 days within any 12-month period; or
    • Services are performed within that State for an Associated Enterprises <<No time limit>>

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Morgan Stanley

    • Question:
    • Does MSCo have a Fixed Place PE in India?
    • Does MSCo have a Service PE in India?

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Morgan Stanley

    • Held: on Fixed Place PE
    • Requirements of Art. 5(1) are; namely, firstly, there should be a fixed place of business and, secondly, business of the enterprise should be carried on wholly or partly through that place.
    • Nothing to show that MSCo’s business was carried on through MSAS’ place of business
    • Rendering of aforementioned services by MSAS which may be utilized by MSCo in running its business does not amount to carrying on business through the fixed place of business.

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Morgan Stanley

    • Held: on Fixed Place PE
    • Above mentioned back-office functions fall under exclusions of Article 5(3)(e) of the DTAA [P&A activities]

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Morgan Stanley

    • Held: On Service PE due to presence of deputationists
    • Employee of MSCo, when deputed to MSAS, does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo.
    • As long as the lien remains, the said company retains control over deputationist‘s terms and employment
    • Where activities of MNE entail it being responsible for work of deputationist, who continue to be on payroll of the MNE or they continue to have their lien on their jobs with the MNE, a service PE can emerge

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Morgan Stanley

    • Held – On Service PE due to presence of stewards
    • MSCo cannot be said to be rendering services to MSAS
    • MSCo is merely protecting its own interests in the competitive world, by ensuring the quality and confidentiality of MSAS services
    • Stewardship activity would not fall under Art. 5(2)(l)

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Morgan Stanley

    • Question
    • Does MSCo have a Fixed Place PE in India?
    • MSAS would not constitute a Fixed Place PE.
    • Does MSCo have a Service PE in India?
    • MSAS would be a Service PE in India, though only on account of services to be performed by deputationists and not on account of stewardship activities.

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Galileo – computer System

    • Facts
    • Assessee, a US resident, was engaged in maintaining and operating a global Computerized Reservation System (CRS).
    • CRS would receive, process, store and disseminate data about flight schedules, room availability, fare information and provision for booking capabilities, etc.
    • Assessee entered into a Participating Carrier Agreement (PCA) with various airlines for providing them with CRS services. It maintained and operated a huge Master Computer System (MCS) in USA

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Galileo – computer System

    • Facts
    • MCS was connected to airlines' servers to / from which data regarding flight schedules, seat availability, fare structures, etc., on a real-time basis was continuously sent and obtained.
    • To market and distribute the CRS services to the travel agents (TAs) in India, the assessee entered into a Distribution Agreement (DA) with an Indian company 'I'.
    • 'I', in turn, entered into a subscribers agreement with various TAs to provide them with access codes, equipment, communications link and support services.

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Galileo – computer System

    • Facts
    • The master computer system of the assessee in USA was connected to TAs in India through a communication network arranged by a separate organization ('SITA').
    • The assessee at its own cost, had obtained connectivity services from its Data Centre in USA to nodes of SITA in India.
    • The assessee paid remuneration to 'I' for acting as distributor, and also paid SITA for communication services.

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Galileo – computer System

  • Facts
    • The assessee was remunerated outside India by the airlines and it did not receive any remuneration from the travel agents.
    • Assessee contended that it did not have any PE in India and, therefore, the booking fee received by it from airlines outside India, being business profits, was not taxbale in India under Article 7(1) of DTAA

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Galileo – computer System

    • Question(s)
    • Since the assessee earned income on each segment booked through the computers installed in India, will the same constitute a Fixed Place PE?
    • Was 'I' a DAPE of the assessee?

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Galileo – computer System

    • Held
    • PE will exist if business of enterprise is carried on mainly through automatic equipment and activities of personnel being restricted to setting up, operating such equipment.
    • PE will still exist if the enterprise which sets up machine also operates and maintains them for its own account — whether operated by itself or by a dependent agent.
    • It was seen that CRS, which was source of revenue, was partially existent in the machines, namely, various computers installed at the premises of the subscribers.

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Galileo – computer System

    • Held
    • Computers so connected and configured were a part and parcel of entire CRS.
    • They could not be shifted from one place to another even within the premises of subscriber, leave apart shifting of from one person to another.
    • The assessee exercised complete control over the computers, which would amount to a Fixed Place PE of the enterprise.

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Galileo – computer System

    • Held
    • In the instant case, 'I' was totally dependent on the assessee in respect of rendering services to subscribers in India.
    • That part of activities of 'I' which earned its revenue by rendering services to subscribers was carried on solely for the assessee.
    • Though 'I' might be carrying on any other activities, like a full fledged travel agency business, yet the activity relating to CRS was only and only for the assessee.

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Galileo – computer System

    • Held
    • Hence, the assessee and 'I' were interdependent in that regard.
    • 'I' installed the computers, configured the computers for accessing the CRS and also provided connectivity through SITA nodes.
    • Thus, functionally as well as financially it was dependent entirely on the assessee.
    • 'I' was a dependent agent of the assessee

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Galileo – computer System

    • Held
    • What the assessee could have done directly by entering into an agreement with the subscribers, was done through 'I'.
    • 'I' was exercising authority to conclude contracts on behalf of the assessee
    • The phrase 'authority to conclude contracts on behalf of the enterprise' does not confine to an agent who enters into contract literally in the name of enterprise. It applies equally to an agent who concludes contracts that are binding on the enterprise even if not actually in the name of enterprise.

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Galileo – computer System

    • Held
    • 'I' was dependent agent of the assessee who habitually exercised the authority to conclude contracts on behalf of the assessee.
    • To that extent the assessee had a PE in India.

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Money transfer – Western Union

    • US Co. engaged in worldwide money transfer services. Has a LO in India
    • Entered into agreement with NBFCs, Commercial banks, etc.
    • Agents remunerated @ 25 / 30%
    • No control by US Co over hardware at agents premises

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Money transfer – Western Union

Questions:

    • Whether a fixed place PE is constituted due to:
    • Hardware installed at Agents’ premises
    • Presence of LO
    • Whether the Agents will trigger a DAPE in instant case?

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Money transfer – Western Union

    • Held
    • No fixed place PE, as no control of US Co over hardware.
    • LO not a fixed place PE either, as it carried out activities of P&A nature
    • No DAPE, as agents not authorized to conclude contracts
    • No profits attributed in absence of PE

Western Union Financial Services Inc. (Delhi Trib.)

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Nokia – Special Bench

    • Facts
    • Nokia Finland (NNOY) engaged in manufacturing of GSM Equipments. It established LO in India in 1994, and a wholly owned subsidiary (NIPL) in 1995
    • NNOY sold GSM equipments manufactured in Finland, to Indian Telecom operators from outside India. It also entered into installation contracts when LO was in existence. However, after its incorporation, NIPL entered in installation contract in India
    • NNOY filed a NIL return for AY1997-98, by taking a position that it had no PE or BC in India

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Nokia – Special Bench

    • AO held
    • LO constituted a Fixed place PE, and NIPL constituted a DAPE
    • 30% of profit were attributed to PE towards supply of hardware
    • Value of installation contract is lower than prevalent cost
    • NNOY divided activity into different contracts to avoid tax
    • Co. manager of LO or MD of NIPL (received remuneration from
    • NNOY) signed contract on behalf of NNOY
    • Before signing of contract, expats came and stayed in India, carried out networking planning and participated in negotiation – which is not possible without a fixed place

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Nokia – Special Bench

    • ITAT (SB) – Majority view

Fixed Place PE

    • PE is formed only if the place is at disposal of F. Co. (as held by SC in Formula One)
    • Providing admin. support services (telephone, fax, conveyance) cannot be equated with fixed place
    • Activity of signing, networking and negotiation were P&A in nature, and covered by Art. 5(4)
    • Country manager not signed any supply contract, signed contracts were executed on P2P basis

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Nokia – Special Bench

    • ITAT (SB) – Majority view

Fixed Place PE

    • The facts that the Country manager was representing NNOY and was receiving salary therefrom, were relevant for ‘Service PE’ and not for ‘Fixed place PE’
    • No ‘Service PE’ clause in India-Finland DTAA
    • Hence, no Fixed place PE of NNOY

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Nokia – Special Bench

    • ITAT (SB) – Majority view

Agency PE

    • No offshore supply in India
    • NIPL neither negotiated nor concluded any contact
    • Installation activity on technical support of NIPL carried out on P2P basis, independently with customer
    • NIPL bears it‘s own risk
    • Installation contract singed by NIPL not to be reckoned as DAPE

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Nokia – Special Bench

    • ITAT (SB) – Majority view

Virtual Projection

    • Meaning of ‘Virtual projection’ to be evaluated in context of PE
    • A virtual projection by itself, will not lead to an inference of a PE, without having a fixed place
    • When ‘disposal test’ is not satisfied, a ‘virtual projection’ is not to
    • be considered as a factor for constituting a PE

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Nokia – Special Bench

    • ITAT (SB) – Minority view
    • When subsidiary's survival for carrying on its business activities is entirely connected with, and dependent on business of its parent, then such subsidiary is merely an alter ego or virtual projection, of its parent
    • Virtual projection results in PE as long as it is of enduring and permanent character, and attributed to a fixed place of business
    • OECD commentary cannot come in way, when a judicial precedent takes different conclusion than OECD

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Nokia – Special Bench

    • ITAT (SB) – Minority view
    • OECD MCC cannot negate the ratio in PVAL Kulandagan (SC)
    • An ‘Indirect PE’ (as referred to by Philip Baker) is a situation where legal independence in relegated into insignificance, and legally independent entity are treated as hypothetical PE
    • Disposal test is applicable to direct PE only and cannot be extended to indirect PE

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Nokia – Special Bench

    • NIPL being a ‘virtual projection’, shall constitute a PE, as:
    • Installation work having specific approval from NNOY
    • Work of NIPL is under control of NNOY
    • Operational personnel are expats on deputation, secondement from NNOY

[2018] 94 taxmann.com 111 (Delhi - Trib.) (SB) - Nokia Networks OY

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धमथस्य मुलमर्थ: ||

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“Money is the root of Dharma”

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- Chanakya Sutra

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Gaurav Singhal

Qualifications: B.Com (H), CA, LL.B.

Mobile : +91 98111 30097

E-mail : gaurav.singhal@sakshamventures.com

gs@headsup.in

  • Gaurav has worked for more than 10 years, with organizations such as BMR Associates, KPMG and Ernst & Young. He has an experience of 21+ yrs, specializing in Corporate and International Taxation.
  • He is a co-founder of Saksham Ventures, a ‘Knowledge enterprise’ and Heads Up Consulting, a professional services firm.
  • He is a regular speaker in various seminars organized by various forums such as IFA, ICAI, etc.. He is frequently invited by companies and law firms, to train their employees on domestic and international taxation.

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