Permanent Establishment Fixed Place PE Agency PE. Sunil D. Shah

Transcription

1 Permanent Establishment Fixed Place PE Agency PE Sunil D. Shah 6 August 2011

2 Fixed Place PE

3 Agenda Basic concept Place of Business Should it be fixed? Geographical Fixed Place PE Carrying on business through Fixed Place PE Exclusions Subsidiary as Fixed Place PE 3

4 Basic concept

5 Basic concept Article 5(1) - general definition of PE The term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on Tests to be satisfied Physical test: The existence of place of business, i.e. a facility such as premises or in certain instances, machinery or equipment; Permanence test: This place of business must be fixed, i.e. it must be established at a distinct place with certain degree of permanence; Functionality test: The carrying on of the business of enterprise through this fixed place of business. In the case of Visakhapatnam Port Trust [144 ITR 146] the AP High Court observed: the words "permanent establishment" postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country 5

6 Place of business

7 Place of business Generally covers any premises, facilities or installations used for carrying on the business In some cases, even machinery, equipment or certain amount of space but should be tangible equipment Need not be owned by the enterprise Need not be used exclusively by the enterprise May be situated in the business facilities of another enterprise But it must be at the disposal of the enterprise Painter spending around two years time in large office building of its main client, performing most important functions of his business (i.e. painting) constitute a PE 7

8 Galileo International - (2008) 114 TTJ 289 (TDel) USA India Server Travel Agent Provides support services and Equipments Galileo Inc. Services of Distributor Distributor Background Galileo Inc. (Galileo), a US resident, developed a fully automatic reservation and distribution system i.e. CRS CRS performs comprehensive information, reservation, ticketing on a worldwide basis All input and output managed, processed and stored through Master Computer System (MCS) in USA Distribution Agreement (DA) entered into by the Galileo with Distributor to market and distribute CRS services to Travel Agents (TA) in India MCS connected to TAs in India through telecom service provider TAs used CRS for booking air tickets / hotel rooms, etc. Whether Galileo had any PE in India? 8

9 Galileo International - (2008) 114 TTJ 289 (TDel) USA India Server Travel Agent Provides support services and Equipments Galileo Inc. Services of Distributor Distributor Decision Galileo held to be constituting a PE as: It had complete control over the computers installed. They could not be shifted even within subscriber s premises Configuration of computers and connectivity provided either directly or through Distributor gives rise to Fixed PE in India Computers were connected to global CRS through which reservation and booking of tickets were done Part of the function operated in India directly contributed to earning of revenue. These activities are not preparatory or auxiliary in nature Contention that fixed place must have productive character was not accepted. Some contribution made in carrying on business as a whole is sufficient PE still exist if enterprise setting up machine also operates and maintains them for its own account, whether by itself or by agent 9

10 The Queen v. William A. Dudney (Canada) Canada USA Canada Pancan Personnel OSG Mr. Dudney Hired as independent contractor Impart training Pancan Personnel Background OSG was a Canadian company Mr. Dudney was a US Tax resident, hired by a company (OSG) as an independent contractor to train personnel of PanCanadian Petroleum Limited (PanCan) Although Dudney worked 300 days in one year at a client's offices in Canada, he had restricted access to the business premises, limitations on telephone usage, no Canadian business cards, no Canadian business licence, he maintained a US home office and his remuneration was forwarded to him in the US. Whether Mr. Dudney was taxable in Canada on his income earned in Canada. 10

11 The Queen v. William A. Dudney (Canada) Canada USA Canada Pancan Personnel OSG Mr. Dudney Hired as independent contractor Impart training Pancan Personnel Decision The Court opined that: The question to be asked is whether the person carried on his business at that location during the relevant period. The factors to be taken into account would include: actual use made of the premises that are alleged to be his fixed base, whether and by what legal right the person exercised or could exercise control over the premises legal control, the degree to which the premises were objectively identified with the person's business. This is not intended to be an exhaustive list that would apply in all cases, but it is sufficient for this case. Court concluded that Mr.Dudney did not have a fixed base of business in Canada 11

12 NATO (Germany) NATO Providing services at the airbase Germany Netherlands Contract to provide cleaning services at hanger Sub- contract German Co. Dutch Co. Background NATO entered into a contract with a German Company (German Co.) for providing cleaning services at the NATO airbase in Germany German Co. sub contracted the agreement to a Dutch company (Dutch Co.) which was engaged in business of cleaning buildings, machines, equipment Employees of Dutch Co had limited access to air base premises such as: Had identification cards Could use keys to recreation room Room with telephone, fax Cleaning activities carried out under direction of German Co. Issue Whether presence of Dutch Co's employees at NATO Airbase in Germany create a PE? 12

13 NATO (Germany) NATO Contract to provide cleaning services at hanger German Co. Decision The German Federal Tax Court held that Dutch Co. cleaning aircraft on the premises of a NATO air base in Germany is not deemed to have created a permanent establishment in Germany Providing services at the airbase Germany Netherlands Sub- contract Dutch Co. If a foreign enterprise is just conducting its business on the premises of a German enterprise when fulfilling its service obligations, the activity is not sufficient to create a PE in Germany. To create a permanent establishment, it must also be a lessee or, without having a separate lease agreement in place, at least be in the position of a de facto lessee, which comes close to such a lease agreement 13

14 Should it be fixed?

15 What does fixed mean? Place of business must be fixed Place of business may be treated as fixed due to: Geographical location; or Duration / time Existence of a link between the place of business and a specific geographical location would be sufficient Certain degree of permanency or regularity required Something more than casual or occasional Duration of the place of business gives some indication but not conclusive Whether a place of business is fixed has to be judged against the background of all the circumstances 15

16 Duration of PE The place of business must have been designed to serve the enterprise with a certain degree of permanence, temporary presence may not result in PE No specific duration has been provided under the OECD and UN MC However, OECD commentary suggests that a duration of six months could be considered to be a minimum period for creation of a fixed base PE Whether the place of business meets this test of permanence must be judged against the background of all the circumstances constituting each individual case If the enterprise carries on its operations on a regular basis and in its place of business, a PE must be taken to exist, irrespective of the minimum period 16

17 P no.24 of 1996 (1999) 237 ITR 798 (AAR) Business to carry out under water operations Operations carried out from vessel Original contract entered with Korean company Korean Company subcontracted to Indian Company which further sub contracted to Indian Company Non resident applicant Netherland India Background The business of a non-resident applicant was to carry out under water operations These operations were connected with oil wells and oil exploration, for purpose of extracting oil or providing for transport of the oil produced These operations were carried out from a fixed base on board a diving vessel Indian Company 17

18 P no.24 of 1996 (1999) 237 ITR 798 (AAR) Business to carry out under water operations Operations carried out from vessel Non resident applicant Netherland Decision Expression fixed place envisages the possibility of locating, identifying or pointing out to a definite place as the place from which a business is carried on It does not import a requirement that place of business should be stationary and not moving Original contract entered with Korean company Korean Company subcontracted to Indian Company which further sub contracted to Indian Company Indian Company India The vessel is mobilised and brought into certain territorial waters to enable the applicant to carry on their business within that territory The applicants could be described as carrying on business through a fixed place of business in that territory Contra: Subsea Offshore Ltd. 66 ITD 296 (TDel) Vessel for inspection and repair of pipelines 18

19 Fugro Engineers BV Vs. ACIT, Dehradun, (2009) 122 TTJ 0655 (TDEL) Agreements for Geotechnical & Geo-physical investigations 19 Fugro Engineers BV ONGC & Cairn Energy Netherland India Background Fugro, a company incorporated in Netherlands, entered into contracts for undertaking following activities: Geo-technical investigation at specified drilling locations under a contract with ONGC for 13 days; Geo-physical and geo-technical investigation under a contract with Cairn Energy for 41 days; and Geo-technical investigation and geo-technical services on a vessel owned by ONGC for 37 days. Fugro contended that as the time spent for above contracts individually and on a consolidated basis did not exceed 183 days, no PE was constituted as per India-Netherlands Tax Treaty Issue before the Tribunal was whether the taxpayer constituted a PE by virtue of its presence in India

20 Fugro Engineers BV Vs. ACIT, Dehradun, (2009) 122 TTJ 0655 (TDEL) Agreements for Geotechnical & Geo-physical investigations Fugro Engineers BV ONGC & Cairn Energy Netherland India Decision Taxpayer would not be governed by Article 5(2)(i) as the services did not involve any installation or structure used for exploration of natural resources Operations carried onboard as Indian vessel in Indian soil and territorial waters would constitute a PE Vessel / work sites would constitute a fixed place of business as it could complete the work out of these places of business OECD Model Tax Convention does not prescribe any specified length of time for a fixed place of business for constituting a PE Place of business, even for a short period would constitute a PE, if independent activities are completed during such period Held that the taxpayer had a fixed place PE in India as per the provisions of the India- Netherlands Treaty 20

21 Geographical Fixed Place PE

22 Geographical and Commercial Coherence Both geographical and commercial coherence are necessary, the fact that activities may be carried on within a limited geographical area should not result in that area being considered as a single place of business Painter works successively for series of unrelated contracts for a number of unrelated clients in a large building geographic coherence but no commercial coherence result is No PE Painter working on a single contract undertakes work throughout a building for single client geographic and commercial coherence result is PE A consultant working at different branches in separate locations pursuant to a single project for training the employees of a Bank commercial coherence but no geographic coherence result is no PE A consultant moves from one office to another within the same branch location pursuant to a single project for training the employees of a Bank both commercial coherence and geographic coherence result is PE 22

23 Carrying on business through Fixed Place PE

24 Carrying on business For a place of business to constitute a PE the enterprise using it must carry on its business wholly or partly through it The activity need not be of a productive character Furthermore, the activity need not be permanent in the sense that there is no interruptions of operations, but operations must be carried out on a regular basis Where tangible property such as facilities, industrial, commercial or scientific (ICS) equipment, buildings, or intangible property such as patents, procedures and similar property are let or leased to third parties through fixed place of business maintained by an enterprise of a contracting state in the other state, this activity will, in general render the place of business a PE No need for human intervention German pipeline case (Federal Tax Court of 30 October 1996, docket no. II R 12/92) 24

25 Knights of Columbus (Canada) USA Canada Commission based agent Customer Knights of Columbus Sale of insurance products of Knights Customer Sale of insurance products Commission based agent Customer Customer Background Knights of Columbus ( Knights ) is an insurance company, resident of USA Knights sold its insurance products in Canada through commission-based Canadian sales agents The agents would solicit insurance applications from Canadian customers and submit such applications to Knights in the USA for consideration A limited form of temporary insurance was provided while the application for permanent coverage was under consideration Sale agents generally worked out of home offices and visited homes of prospective applicants in soliciting insurance applications The Crown argued that Canadian sales agents constituted PE of the Knights 25

26 Knights of Columbus (Canada) USA Knights of Columbus The Crown argued that agents home offices were PE of the Knights since the agents carried on the business of Knights through these premises Canada Commission based agent Sale of insurance products of Knights Sale of insurance products Commission based agent Decision Court concluded that agents did not constitute PE as: The Knights did not have sufficient control or disposal over the home offices to constitute "geographical PE" The agents carried on their own agency businesses through such locations and not the business of Knights Customer Customer Customer Customer Thus, since the agents were not bound solely to the business of the Knights, nor did the Knights have sufficient control over the offices of the agents, the agency could not be said to constitute a PE 26

27 Exclusions

28 Exclusions An enterprise shall not be deemed to have a PE merely by reason of: Use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; Maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; Maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; Maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; or Maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise 28

29 Motorola Inc (2005) 95 ITD 269 (Del) (SB) Outside India India Telecom operator Supply contract for hardware and software Installation agreement WOS Motorola Marketing services agreement Motorola India Background Motorola Inc ( Motorola ) executed contract with telecom operator for supply of advanced network equipment for use in fixed / mobile telecommunication networks Motorola had wholly owned subsidiary (WOS) in India Equipment was supplied from overseas whereas the installation was carried out in India by the WOS Contracts executed: Equipment supply contract between Motorola and telecom operator; Installation contract between WOS and telecom operator; Marketing / Business Promotion agreements between Motorola and WOS Whether Motorola constituted PE in India 29

30 Motorola Inc (2005) 95 ITD 269 (Del) (SB) Outside India India Supply contract for hardware and software WOS Motorola Marketing services agreement Decision WOS of non-resident constitutes PE in India if reasonable inference can be drawn that WOS was a virtual projection of the supplier in India Held to have a fixed base PE as: Motorola s employees could, as a matter of right, visit WOS s premises Motorola s employees were also employees of WOS There was a projection of Motorola in India in the form of place of business of WOS Telecom operator Installation agreement Motorola India However, specifically excluded from the purview of PE, as the services (market survey, industry analysis, economy evaluation, providing product and service information to potential customers, Corporate Finance and Accounting Services, etc.) were held to be preparatory and auxiliary in nature 30

31 Morgan Stanley and Co. (2007) 292 ITR 416 USA India Group Company MSCo. MSAS IT enabled services and back office operation Background Morgan Stanley (MSCo.), incorporated in USA, engaged in financial advisory services, corporate lending and securities and underwriting MSAS is an Indian group company rendering support services such as IT support, account reconciliation, research, etc. and infrastructure unit functions in MSCo. / Group s global operations MSAS did not undertake any revenue generating function and client s interaction was entirely by MSCo. employee / personnel MSCo. staff was deputed to MSAS for several months / years for control / supervision Whether MSCo. constituted PE in India? 31

32 Morgan Stanley and Co. (2007) 292 ITR 416 USA India Group Company MSCo. MSAS IT enabled services and back office operation Decision There was nothing to show that MSCo. was carrying on business wholly or partly through MSAS MSAS was performing only back office services. Hence, no business of MSCo. carried on by MSAS and no Fixed Place PE was constituted Since back office operations are preparatory or auxiliary in nature, as per exclusionary clause, no Fixed Place PE constituted 32

33 Bloomberg (Russia) US Russia 33 Bloomberg Russia Office Background Bloomberg had an office in Moscow, which involved in information collection and drafting analytical material Such information were subsequently sent to Bloomberg Head Office in US Tax authorities held that activities of Bloomberg s Moscow office resulted in creation of a PE in Russia Bloomberg appealed to higher authority It argued that its Moscow office collects and processes news-related information and drafts news articles. These activities do not create a PE in Russia because they are preparatory and auxiliary to Bloomberg's principal activity Further, it is not a news agency because it sells analytical products and not news materials Gathering of information and preparation of news material constitutes Bloomberg's secondary nonprofit activity (news items available to anyone free of charge)

34 Bloomberg (Russia) US Russia Bloomberg Russia Office Decision Term preparatory activity includes an activity aimed at creating conditions to exercise the principal business activity and precedes the commencement of execution of the principal business activity Term "auxiliary activity" is an activity that ensures the continuation of the principal business activity For preparatory and auxiliary activities not to be considered as creating a PE in Russia: activities should not constitute major part of the foreign entity's business; and should not be identical to the activities practiced by that foreign legal entity; Bloomberg's principal profit-generating activity is granting right to use its specialized analytical computer programs involving assessment of financial products and electronic databases and news to clients 34

35 Bloomberg (Russia) US Russia 35 Bloomberg Russia Office Decision (contd...) Bloomberg is a specialized news agency as it sells information Principal activity of Bloomberg's Moscow office includes collection of news-related information and drafting of analytical materials (articles) for subsequent submission to the company's head office Activities of Moscow office are not limited only to collection of information, as such information is revised by Moscow office which also prepare articles on the basis of that information and subsequently included in Bloomberg's information databases Such information is then provided to client by Bloomberg in exchange for payment Maintenance of a fixed place of business in Russia for collecting, processing and resale of information is not preparatory and auxiliary to principal activity and hence resulted in creating a PE in Russia

36 Subsidiary as Fixed Place PE

37 Subsidiary as Fixed Place PE Article 5(7) as per OECD MC, A company which is a resident of one of the Contracting States controls or is controlled by a company, which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other Therefore, existence of a subsidiary company does not, by itself, constitute that company a permanent establishment of its parent company Any space or premises belonging to the subsidiary that is at the disposal of the parent company and which constitutes a fixed place of business through which the parent carries on its own business will constitute a PE of the parent However, where a subsidiary provides services to parent as a part of its own business, carried on, in a premise which is not at the disposal of the parent and is not the business of the parent that is carried on through that place, no PE is said to exist 37

38 efunds Corporation v. ADIT (2010) 134 TTJ 1 (Delhi) Offshore India Customers Service contracts Sub-contra act efunds Corporation, US 100% Idlx International BV, Netherlands 100% efunds International India Pvt. Ltd. Background efunds Corporation US (efunds US) has a wholly owned subsidiary Idlx International BV, Netherlands, which has a wholly owned subsidiary, efunds International India Pvt. Ltd. (efunds India) efunds US enters into contracts with customers for providing IT-enabled services Some of these contracts were sub-contracted to efunds India for execution The requisite software and database to perform such services were provided by efunds US to efunds India free of charge Corporate office of efunds India at Mumbai had an international division consisting of President s office and sales team 38

39 efunds Corporation v. ADIT (2010) 134 TTJ 1 (Delhi) Offshore India 39 Customers Service contracts Sub-contra act efunds Corporation, US 100% Idlx International BV, Netherlands 100% efunds International India Pvt. Ltd. Decision efunds US has a PE in India under Article 5(1) and under Article 5(2)(i) of the India-US tax treaty Key observations of Tribunal: In view of activities carried out such as software development and back office operations, premises of efunds India is PE of efunds US efunds US and efunds India are both under legal obligation to provide services to clients of efunds US and their businesses are inextricably linked efunds India did not have requisite software for providing services independently and such assets made available by efunds US free of charge efunds India does not bear significant risk Activities in India cannot be considered to be preparatory or auxiliary in nature as they are core income generating activities Information given in annual report mentions that efunds US has a sales outlet in India Philip Morris case

40 Daimler Chrysler AG (2010-TII-99-ITAT-Mum-INTL) Background Daimler Daimler Chrysler AG (Daimler), tax resident of Germany, set up a joint venture, Daimler Chrysler India Private Limited (DCIL), with TELCO for manufacture / assembly and sale of cars in India 86% Germany India Daimler sold raw materials, parts and Completely Knocked Down (CKD) kits to DCIL during the year and had direct sales of Completely Built Up (CBU) cars to Indian customers, for which DCIL rendered certain assistance services DCIL 14% TELCO Daimler did not offer such income on the ground that in absence of any office or place of business in India, it did not have a PE in India However, the AO held that Daimler had a place of management, branch, office, and warehouse/sales outlet in India in the form of DCIL s premises and therefore, DCIL constituted a business connection of Daimler in India Further, DCIL also constituted a dependent agent of Daimler and hence it constituted PE in India 40

41 Daimler Chrysler AG (2010-TII-99-ITAT-Mum-INTL) Daimler 86% Germany India Decision Business Connection Daimler merely sold raw materials / CKD units to DCIL and there were no further activities carried out in India in that connection Accordingly, Tribunal held that mere sale of raw materials / components will not result in business connection and hence income from such transaction would not be liable to tax in India DCIL 14% TELCO Permanent Establishment Mere existence of subsidiary does not by itself make subsidiary as PE of parent company Daimler did not have right to use DCIL s premises DCIL did not constitute place of management of taxpayer in India as management of Daimler's business was by Board of Directors in Germany Sales of parts / CKD were made by Daimler to DCIL on principal-to-principal basis Accordingly, Daimler did not constitute a PE 41

42 Philip Morris GmbH Germany Italy Philip Morris GmbH supervise the contract Payment of Royalties Intertaba Spa License to produce and supply tobacco products with Philip Morris Trademark Italian Tobacco Administration Background Philip Morris GmbH (Philip Morris) is member of Philip Morris group of companies and tax resident of Germany Intertaba Spa is also a member Philip Morris Group and tax resident of Italy with business of manufacturing and distributing cigarette filters in Italy and abroad Philip Morris licensed its trademark to a third party, Italian Tobacco Administration (ITA) for which it receives royalties Intertaba Spa also supervises contract between Philip Morris and ITA and performed agency and promotional activities in relation to sales of Philip Morris products in dutyfree areas Whether Philip Morris had a PE in Italy? Matter was referred back to lower court on the grounds that the judgment of the second instance lacked adequate support 42

43 Philip Morris GmbH Germany Italy Philip Morris GmbH supervise the contract Payment of Royalties Intertaba Spa License to produce and supply tobacco products with Philip Morris Trademark Italian Tobacco Administration Decision Supreme Court set guidelines for determining PE: Italian company may constitute multiple PE of foreign companies belonging to same group and pursuing common strategy; supervision or control of performance of contract between resident entity and non- resident entity cannot be considered, in principle, to be an auxiliary activity under OECD Model and Italy Germany treaty; participation of employees of resident company in phase of the conclusion of contract between foreign company and another resident entity may fall within the concept of authority to conclude contracts; fact that non-resident company entrusted the resident company with management of some of its business operation makes the latter PE of the former 43

44 Agency PE 44

45 Agenda Basic concept Criteria to determine independent or dependent agent Dependent agent when PE Employee and subsidiary as an agent Commissionaires 45

46 Basic concept

47 Agency PE A person other than an agent of independent status; acting on behalf of an enterprise; habitually exercises in a Contracting State; an authority to conclude contracts in the name of the enterprise, such activities are not limited to preparatory or auxiliary nature; has no such authority, but habitually maintains a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise (UN Model only) 47

48 Agency PE The following persons acting in the ordinary course of their business shall not be regarded as constituting a PE of the foreign enterprise a broker; a general commission agent; or any other agent of an independent status However, such persons will not be considered an agent of an independent status if activities are devoted wholly or almost wholly on behalf of that enterprise; conditions made between enterprise and agent in their commercial and financial relations differ from those which would have been made between independent enterprises (Un Model only) 48

49 AAR No. 542 of 2001, In re (274 ITR 501) Rendering service of transporting packages throughout the world A Co. I Co. 60% Rendering service of transporting packages in India USA India Background American company (A Co.) held 60% shares in the Applicant company (I Co.) A Co. was engaged in the business of international integrated transportation services I Co. entered into an transportation agreement with A Co. for the movement of parcels / packages within and outside India Under the agreement I Co. was to provide services to A Co. for transportation of packages in India; and A Co. to provide services to I Co. for transportation of packages throughout the world I Co. and A Co. to pay each other for services rendered by them A Co. did not own / operate through any business premises in India Issue whether income earned by A Co. was taxable in India? 49

50 AAR No. 542 of 2001, In re (274 ITR 501) Rendering service of transporting packages throughout the world A Co. I Co. 60% Rendering service of transporting packages in India USA India Decision AAR observed that compensation to I Co. by A Co. was wide enough to include not only charges for services but also compensation of all employees of I Co., maintenance & repair expenses incurred by I Co. This indicated vested interest of A Co. in I Co. Hence, I Co. was not considered as an independent contractor but an agent of A Co. Business operations of A Co. and I Co. were inter-connected and I Co. assumed the role of an Agent In case of outbound consignments, I Co. was acting for and on behalf of A Co., booking orders, collecting parcels, etc. and in case of inbound consignments, it was involved in clearance and delivery of parcels for A Co. I Co. treated as PE of A Co. and hence, income of A Co. was taxable in India 50

51 Independent and Dependent Agent

52 Independent vs Dependent Agent Factors to determine independent or dependent agent Economic / legal independence Transactions on arm s length basis Ordinary course of business Activities - wholly or almost wholly on behalf of that enterprise 52

53 Independent vs Dependent Agent Economic / legal independence Considerations to be borne in mind when determining whether an agent may be considered to be independent Extent of obligations vis-à-vis enterprise Reliance on special skill and knowledge of agent Responsibility to his principal for results of his work but not subject to significant control with respect to manner in which work is carried out Limitations on scale of business which may be conducted by agent not relevant to determine the legal independence of an agent Substantial information to principal in connection with business conducted under the agreement not in itself a sufficient criterion for determination that agent is dependent unless the information is provided in the course of seeking approval from principal for the manner in which the business is to be conducted Whether he acts exclusively for principal 53

54 Independent vs Dependent Agent Ordinary course of business One would examine the business activities customarily carried out within the agent s trade as Broker, Commission agent or Other independent agent or Other business activities carried out by that agent Agent can be said to be acting in the ordinary course of his business if: He is carrying on his own business His activities are incidental to his main business His activities are an integral part of his business Agent cannot be acting in ordinary course of his own business if he performs activities which economically belong only to the sphere of foreign enterprise 54

55 Dependent Agent as PE

56 Criteria for Dependent Agent to be regarded as PE Dependent Agent has and habitually exercises an authority to conclude contracts on behalf of the non resident habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non resident (not in OECD Model Convention) 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 (not in OECD Model Convention and UN Model Convention) 56

57 Dependent agent as a PE Habitually exercises: The extent and frequency of activity necessary to conclude that the agent is habitually exercising contracting authority will depend on the nature of the contracts and the business of the principal No precise frequency test 57

58 Dependent agent as a PE Authority to conclude contracts: Participation in negotiations Exact functions performed on behalf of the enterprise Powers to negotiate up to a point of actually concluding contracts Mere one-off contract or a single contract may not lead to an agency PE Mere existence of authority to conclude contracts may not lead to PE 58

59 Dependent agent as a PE Authority to conclude contracts: Signing of contracts Can the PE be denied if the contract is signed by any person other than an agent It is not necessary that agent should sign the contracts A person who is authorised to negotiate all elements and details of a contract which in a way binding on the enterprise can be said to exercise authority in the State even if the contract is signed by any other person / in other state If the principal is a mere rubber stamp or approval is only a formality Place of signing of contract PE is constituted in a Contracting State where business activity of the agent is carried Place of signing of the contract is not necessarily relevant The underlying realities should confirm that the agent has performed the core part of his activity in the other state with binding power on behalf of the principal 59

60 Dependent agent as a PE Habitually maintains stock of goods: Maintenance of stock of goods for delivery to constitute a PE, even if the agent has no authority to conclude contracts Habitually secures orders: Securing orders in India wholly and mainly for non-resident / related entities to constitute a PE 60

61 Galileo International - (2008) 114 TTJ 289 (TDel) USA India Server Travel Agent Provides support services and Equipments Galileo Inc. Services of Distributor Distributor Background Galileo Inc. (Galileo), a US resident, developed a fully automatic reservation and distribution system i.e. CRS CRS performs comprehensive information, reservation, ticketing on a worldwide basis All input and output managed, processed and stored through Master Computer System (MCS) in USA Distribution Agreement (DA) entered into by the Galileo with Distributor to market and distribute CRS services to Travel Agents (TA) in India MCS connected to TAs in India through telecom service provider TAs used CRS for booking air tickets / hotel rooms, etc. Whether Galileo had any PE in India? 61

62 Galileo International - (2008) 114 TTJ 289 (TDel) USA India Server Travel Agent Provides support services and Equipments Galileo Inc. Services of Distributor Distributor Held Galileo availed the services of Distributor to promote the use of CRS in India Distributor was authorized and habitually entered into contracts with the TAs in terms of the authority granted by Galileo who bound itself in respect of the bookings made by the Distributor Distributor should be treated as an agent of Galileo in India Distributor undertook installation of CRS system at TAs computers, provided connectivity, configured the computer to enable it to access CRS, trained the TAs, etc. only for Galileo and hence both are interdependent Distributor is functionally and financially dependent on Galileo and therefore, it is a dependent agent and constituted an Agency PE of Galileo 62

63 Dassault Systems K.K. (229 CTR 105) (AAR) Outside India India Copyright owner Standardised product sold through independent, third party, non-exclusive reseller network Distributor (VAR) End user Background Applicant, a company incorporated in Japan, was engaged in the business of providing Products Lifecycle Management (PLM) software solutions and services Applicant markets the licensed software products mostly through a distribution channel comprising of Value Added Resellers (VAR), who were the independent third party resellers It entered into a General VAR Agreement (GVA) with the VARs to authorise them to act as the reseller of products Product is sold to VAR for a consideration based on the standard list price after deducting agreed discount VAR in turn will sell such product to the endusers at a price independently determined by them VAR was prohibited from opening or using the product 63

64 Dassault Systems K.K. (229 CTR 105) (AAR) Outside India India Copyright owner Standardised product sold through independent, third party, non-exclusive reseller network Distributor (VAR) End user Decision Business of VAR is not confined to dealings only with the applicant and its products It is common that a distributor carries out some functions and obligations similar to those of an agent Business of the VAR is not controlled by the applicant except to the extent necessary to promote its own business VAR does not negotiate or conclude contracts with the end-users on behalf of the applicant Acceptance of the order placed by the end-user and procured by VAR is left to the discretion of the applicant Existence of an agent of independent status does not give rise to a PE 64

65 Ericsson Radio Systems A.B., Sweden (95 ITD 269) (Del) (SB) Outside India India Ericsson Marketing agreement Subsidiary Tripartite agreements Sale of GSM system Cellular operators Background Ericsson had entered into supply contracts with 10 cellular operators in India for sale of hardware and software called GSM system Cellular operators also entered into contracts with a branch in India of a group company of Ericsson (first 3 months) and thereafter with a subsidiary in India of a group company of Ericsson (next 9 months) for installation of GSM system Ericsson also had marketing contracts with the branch / subsidiary for 3 / 9 months Tripartite overall agreements were also entered into between Ericsson, branch / subsidiary in India and the cellular operators for proper coordination of supply and installation contracts Acceptance Test would be carried out by the installation contractor which shall be binding on Ericsson 65

66 Ericsson Radio Systems A.B., Sweden (95 ITD 269) (Del) (SB) Ericsson Held As the branch / subsidiary had no authority to conclude contracts on behalf of Ericsson, there was no agency PE Marketing agreement Outside India Sale of GSM system India Subsidiary Tripartite agreements Cellular operators 66

67 Airlines Rotables Ltd. v. JDIT (ITA No.3254/Mum/06) (Mumbai Tribunal) Repairs and overhauling of aircraft components Providing replacement components during repairs and servicing of faulty components Airline Rotables Limited (ARL) Jet Airways Limited (JAL) UK India Background Arrangement for repairing and overhauling of the faulty components and providing replacement components in the intervening period To ensure adequate availability of components, Airline Rotables Limited ( ARL ) maintains stock of the replacement components at its main depot in UK and at the operational base of Jet Airways Limited ( JAL ) Whenever component is sent for repairs to UK, JAL has the right to use the replacement component from the said stock Stock at UK is under direct control of ARL while stock at the operational base of JAL is in the possession of JAL as a bailee Stock to remain the property of ARL 67

68 Airlines Rotables Ltd. v. JDIT (ITA No.3254/Mum/06) (Mumbai Tribunal) Repairs and overhauling of aircraft components Providing replacement components during repairs and servicing of faulty components Airline Rotables Limited (ARL) UK India Held JAL did not constitute an agency PE of ARL ARL was not carrying out any business in India through JAL JAL had no authority to conclude contracts on behalf of ARL Having found that ARL did not have a PE in India, Tribunal ruled that no part of its business profits could be taxed in India under Article 7 Jet Airways Limited (JAL) 68

69 Employee or Subsidiary as an agent

70 Employee as an agent Employment contract could be characterised as a specific assignment, in which the agent (i.e. the employee) normally has a high degree of dependence upon the principal Employer has the right to instruct the employee in almost all aspects concerning the business activity Responsibility of the employee towards the employer; employer s power to give detailed instructions, exercise control over the employee and impose extensive sanctions on him could suffice the dependence test for agency PE 70

71 Subsidiary as an agent Article 5(7) of OECD Model Convention The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other Summary Existence of a subsidiary by itself does not constitute a PE Subsidiary company could constitute a PE for its parent company if the conditions for fixed place PE or agency PE are satisfied 71

72 Daimler Chrysler AG (2010-TII-99-ITAT-Mum-INTL) Background Daimler Daimler Chrysler AG (Daimler), tax resident of Germany, set up a joint venture, Daimler Chrysler India Private Limited (DCIL), with TELCO for manufacture / assembly and sale of cars in India 86% Germany India Daimler sold raw materials, parts and Completely Knocked Down (CKD) kits to DCIL during the year and had direct sales of Completely Built Up (CBU) cars to Indian customers, for which DCIL rendered certain assistance services DCIL 14% TELCO AO held that DCIL constituted a dependent agent of Daimler and hence it constituted PE in India 72

73 Daimler Chrysler AG (2010-TII-99-ITAT-Mum-INTL) Decision Daimler Activity of DCIL were twofold (i) manufacture of cars using CKD packs and other components (ii) acting as communication exchange in respect of direct sale of CBUs by Daimler directly to clients in India 86% Germany India Even though DCIL received commission for helping the sale of CBUs, acting as communication conduit was not their main business DCIL 14% TELCO Negotiations of price, specifications, deal etc. were concluded by Daimler and DCIL had no role to play from the sale or in any activity in promoting the sale Mere acting as post office between Daimler and the client will not render DCIL as a dependent agent 73

74 Commissionaires

75 Zimmer (France) UK France Zimmer Ltd Sale Zimmer SAS Customer Commissionaire for Zimmer Ltd. Sale of Zimmer Ltd. Product to French customer Background Zimmer Ltd. is a U.K. based company and Zimmer SAS is a French company Zimmer Ltd. sold its products in France under a distribution agreement with its French subsidiary, Zimmer SAS In 1995, Zimmer SAS was converted from a distributor to a commissionaire, acting in its own name but on behalf of Zimmer Ltd. Zimmer SAS had the authority to accept orders from clients, present quotes and documentation in bid processes, negotiate price discounts and agree on payment conditions for which no prior authorization was required from Zimmer Ltd. Zimmer SAS did not engage in any activities other than selling Zimmer Ltd s products under the commissionaire agreement French tax authorities assessed Zimmer Ltd to French income tax on the grounds that it was carrying out business in France through a dependent agent, Zimmer SAS 75

76 Zimmer (France) 76 UK France Zimmer Ltd Sale Zimmer SAS Customer Commissionaire for Zimmer Ltd. Sale of Zimmer Ltd. Product to French customer Decision French Supreme Court however held that Zimmer SAS was not PE of Zimmer Ltd. Court was of the opinion that two criteria need to be met to be a PE: Dependence of Zimmer SAS on Zimmer Ltd. Authority of Zimmer SAS to bind Zimmer Ltd. Zimmer SAS was not dependent on Zimmer Ltd. It was an independent entity acting in its own name The Supreme Court interpreted the concept of commissionaire under French Commercial Code as under: Commissionaire acts in its own name on behalf of principal Contracts concluded by a commissionaire, cannot directly bind the principal to the cocontracting parties of the commissionaire No direct connection is created between commissionaire s clients and its principal Thus the Court concluded that since Zimmer SAS was a commissionaire for Zimmer Ltd., it could not be a PE

77 Dell (Norway) Background Ireland Norway Dell Products Dell AS Dell Products, incorporated in Netherlands, but is resident in Ireland for tax purposes Dell As is resident in Norway Both companies belong to the same group; both subsidiaries of Dell Computer Corp. Dell AS sells products in Norway as a commissionaire for Dell Products Norwegian tax authorities claimed that De;; AS acted as PE for Dell Products and hence Dell Products was also taxable in Norway Customers 77

78 Dell (Norway) Dell Products Decision Though under Norwegian law, contract entered into by commissionaire and customer does not make the principal a party to contract, Court found that in the given case, Dell Products was bound by contracts entered into by Dell AS Ireland Norway Dell AS Customers Court also found that Dell AS was dependent representative under treaty because: Dell AS could sell goods only under requirements set by Dell Products; Dell Products had full access to the economic records of Dell AS including premises; Dell AS had only one principal and was in practice dependent on the commissionaire agreement for its business; Companies' boards shared some members Thus, it held that PE was created when Dell As acted as commissionaire for Dell Products 78

79 Q & A

80 This material and the information contained herein prepared by Deloitte Haskins & Sells(DHS) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s) and accordingly is not intended to constitute professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. This material is intended only for the use of the entity/person to whom it is addressed and the others authorized to receive it on their behalf. None of DHS or its affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this material. The recipient is strictly prohibited from further circulation of this material Deloitte Haskins & Sells