(P.) & (2014) 362 ITR 134 (AAR)

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1 The expression "business connection" was not defined for the purpose of sec 9(1) of the Act before 31 st March, By the Finance Act, 2003, Explns. 1 and 2 were inserted in sec 9(1) w.e.f. 1 st April, Expln 2 contains an inclusive definition; it brings in the business activities specified in Clauses (a) to (c) within the fold of the expression "business connection" which has to be understood in its ordinary meaning. The Supreme Court in CIT v. R.D. Aggarwal & Co (1965) 56 ITR 20 (SC) has elucidated the meaning of the expression business connection as under: "The expression 'business connection' postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity". The Supreme Court for the purpose of Section 42 of the IT Act, 1922, observed that, '"business connection' involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection." The requirement of continuity of transactions to form 'business connection' between a nonresident and a resident was laid down by the Supreme Court in Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR 101 (SC). The Supreme Court observed, "an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of Section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection". In the light of above discussions, the AAR in Booz & Co (Australia) (P.) Ltd., in re (2014) 362 ITR 134 (AAR)summed up business connection (agency PE) as follows: A real and intimate relation must exist between the activities carried out outside India by the non-resident and the activities within India. Such relation must contribute, directly or indirectly, to earning of income by the nonresident in its business. A course of dealing or continuity of relationship, and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of business connection in India. Apart from the facts that the requirements of agency are satisfied, the facts fulfil the above essential features of business connection. On the basis of above and the fact pattern of the group entities and the Indian company, a PE of Australian group entities does exist in India. Therefore, income received by them from Indian company is taxable as business profits in India under Article 7 of the respective DTAAs. Where there is no DTAA, it is taxable under the provisions of the Income tax Act Annexure 1. In Wood v. Holden (Inspector of Taxes) (2006) 285 ITR 467 (CA), the Count of Appeals in England found that the real test is its location of the place, where control and management rests. In this case, company E was incorporated in Netherlands. Till E was acquired by CIL (UK), it was a Netherlands Company. The Revenue inferred that it became UK Company on mere acquisition of CIL shares which was not accepted. Both the resolutions and the consequential actions were taken in Netherlands. What E was doing, was a part of tax scheme under the supervision of PWC from their UK office. E was recognised by Netherlands Tax Authorities as a resident of Netherlands. The judge found that there were not enough materials to hold that the control and supervision of E was in UK. All the documentation pointed out that they were in Netherlands. Merely because PWC in UK was engaged to represent some or the other party did not justify the inference that the transactions were held in UK. The test of effective 1

2 management under DTAA is not different from the domestic law. In a transaction of purchase and sales of shares, where the decision to purchase and the decision to sell having taken place outside UK, there cannot be any basis for UK tax. 2. In Shaan Marine Services Pvt Ltd v. DIT (2014) TS-327-ITAT-2014 (Pune), the contention of the Revenue was that since the Cyprus Company was interposed to take benefit of India-Cyprus DTAA, the treaty benefits for shipping income from transportation of cargo shall be denied and the income must be taxed in India. The Tribunal held that the Revenue has attempted to rewrite contracts, which is not possible. It cannot be said that the Cyprus shipping company was merely a paper company and did not play any role in transporting cargo. The Cyprus shipping company was registered in and was a resident of Cyprus. It was engaged in shipping business. The shipping company was one member company having no employee or big office establishment as most of its work was outsourced to other entities. The place of effective management has been defined by OECD Model Convention as the place where key management and commercial decisions that are necessary for the conduct of entity s business as a whole are in substance made. All the documents like bill of lading, annual reports, etc., indicate that the Cyprus shipping company played a definite role in transporting cargo from India to UAE. The Cyprus shipping company did not have any establishment outside of Cyprus and hence, its effective management was situated in Cyprus only. 3. In the case of R & B Falcon Offshore Ltd vs. ACIT (2011) TII-02 (Del ITAT) (Intl), the Tribunal drawing from the OECD commentary stated that the mere office address cannot be considered as a PE, unless it is established that activities (other than preparatory and auxiliary activities) are carried out from such place for it to be considered as a PE. Since there was no evidence to show that any business was carried on except that the address had been mentioned in the agreement, it could not lead to an inference that the taxpayer had a fixed place PE by mentioning the office address in the agreement. In the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), 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. Further, where the business of a group cannot be carried on exclusively without intervention of another entity, normally that entity must be deemed to be the establishment of the group in that particular in that country; Aramex International Logistics (P) Ltd., In re (2012) 348 ITR 159 (AAR). 4. The AAR in Booz & Co (Australia) (P.) Ltd., In re (2014) 362 ITR 134 (AAR) concluded that under the DTAA, one of the sine qua non of a fixed place PE is that the fixed place of business through which the business is carried on should be at the disposal of the entity. Trading operations generally require a fixed place which the taxpayer uses on a continuous basis. However, taxpayers rendering services usually do not require a place to be at their constant disposal and, therefore, disposal test is generally more complex in such cases. In some jurisdictions, the disposal test is satisfied by mere fact of using a place. In other jurisdictions, it is stressed that something more is required than a mere fact of uses of place. Various factors have to be taken into account to decide a fixed place PE, which inter alia, includes a right of disposal over the premises. No straight jacket formula that is applicable to all cases can be laid down. Generally, the establishment must belong to the foreign enterprise and involve an element of ownership, management and authority of the establishment.with regard to disposal test, the AAR quoted the decision in the case of Rolls Royce Plc., v. DIT (2011) 339 ITR 147 (Del) wherein the taxpayer availed certain support services from its UK subsidiary that had an Indian office. The taxpayer s employees frequently visited the Indian office. A fixed place PE was found to exist because the Indian office was available to all the taxpayer s employees. The taxpayer paid all of the subsidiary s expenses in maintaining this Indian Office. Further, in Seagate Singapore International Headquarters (P.) Ltd., In re (2010) 322 ITR 650 (AAR), an independent service provider maintained stock of goods on behalf of the 2

3 taxpayer. The service provider supplied stock to the taxpayer s customers on a just-in-time basis. It was held that the taxpayer s restricted right to access the premises of the service provider satisfied the requirement of disposal test. Similarly, in Motorola Inc., v. DCIT (2005) 95 ITD 269 (Del), in Ericsson s case, it was held that mere use of the subsidiary s offices by the parent s employees, without anything more, was not sufficient to create a fixed PE, because the employees had no right to enter the space at will and could do so only with the subsidiary s permission. An opposite conclusion was reached in Motorola s case as the parent s employees worked for both the parent as well as the subsidiary. Hence, the parent must have had the right to enter and use the subsidiary s office. On the other hand, in Western Union Financial Services Inc., v. ADIT (2007) 104 ITD 34 (Del), the taxpayer was engaged in the money transfer business and had appointed agents in India for liaison and related activities. On its premises, the agent had displayed that it was an agent of the taxpayer. It was held that, on facts, the taxpayer had no right to enter and make use of the agent s premises. Hence, the taxpayer was no fixed place PE of the taxpayer. In the case of Renoir Consulting Ltd v. DDIT (2014) 45 taxmann.com 112 (Mum), it was held that there was a fixed place PE because the foreign taxpayer s regular interaction between parties requiring his continued presence in India over indefinite contract period was needed for implementation of project. On the other hand, in the case of Consolidated Premium Iron Ores Ltd (1959) 265 F.2d. 320, it has been held that possession of a mailing address in a State without any office, telephone listing or bank account will not constitute a PE (source: Philip Baker s Double Taxation Conventions). 5.The AAR has in Golf in Dubai, LLC v. ADIT, In re (2008) 306 ITR 374 (AAR) held that conducting of golf tournament in India for a week s duration does not lead to existence of a fixed base PE in India. A drilling rig which, although anchored while in operation, had been moved to a new site every few months, would not constitute a PE. Similarly, a remotely operated vessel which was used to instruct and repair submarine pipelines will not constitute a PE because a moving vessel is not a fixed place of business (DCIT v. Subsea Offshore Ltd (1998) 66 ITD 296 (Mum ITAT)). In Tekniskil (Sendirian) Bhd. v. CIT (1996) 222 ITR 551 (AAR) it was held that mere supply of skilled labour to work in a country did not give rise to a PE of the country supplying the labour. In re., 237 ITR 798 (AAR), the AAR observed that a dealer selling merchandise from a mobile van or a moving caravan may constitute a fixed place of business. 6. In the case of Rolls Royce Plc. v. DIT [2011] 339 ITR 147(Delhi) the taxpayer (RRPlc) supplied aero engines and spare parts to Indian customers. The taxpayer had a UK incorporated subsidiary. Rolls Royce India (RRI) having office in India, provided support services to RRPlc. RRPlc reimbursed RRI for all of the costs incurred in India in the provision of its support services, including the salaries and expenses of its employees, the cost of operating its office premises. RRI received service fees from RRPlc in the amount of a fixed percentage of the reimbursed expenses. RRPlc's employees visited India frequently and occupied and used RRIL's premises during these visits. It was held that RRPlc had a fixed place PE in India because RRI's premises were 'available' to all of RRPlc's employees and RRPlc paid all of RRI's expenses in maintaining its premises. The disposal test requires that the place of business from which the business is carried on should be at the disposal of the taxpayer [pls see Booz and Company (Australia) Pvt Ltd., In re (2014) 362 ITR 134 (AAR)]. In Renoir Consulting Ltd v. DDIT (2014) TS-211-ITAT-2014 (Mum) it was held that premises of the client for the hotel where the employees stayed could be regarded as a fixed place PE. In this case, whether the hotel rooms could be legally or contractually used by non-resident s employees and consultants for business purposes was not ascertainable. Even if such use was proscribed, but was factually used, it could be considered as a PE. The use of hotel rooms and Indian company s premises could be only for business purposes. 3

4 7. In the case of Seagate Singapore International Headquarters (P) Ltd., in re. [2010] 322 ITR 650 (AAR) Seagate was engaged in the business of manufacture and supply of Hard Disk Drive (HDD) to Original Equipment Manufacturers (OEM). Seagate entered into an agreement with Independent Service Provider (ISP) to stock HDD on Seagate's behalf and deliver the same to the OEM on a 'just-in time' basis. On the receipt of purchase order from OEM, Seagate supplied HDD to ISP who in turn supplied the goods to OEM. The payment for the supply of HDD was directly made by OEM to Seagate, and the services rendered by the ISP were remunerated by Seagate on an arm's length basis. In the aforesaid scenario, it was ruled that Seagate's restricted right to access the premises of the ISP satisfied the requirement of "disposal test". 8, In Western Union Financial Services Inc. v. ADIT [2007] 104 ITD 34 (Delhi), the taxpayer (US parent) engaged in money transfer business, appointed agents in India for liaison and related activities. The agents operated from their premises with the display to demonstrate the agency of Western Union Financial Services. The Delhi ITAT observed that the taxpayer had a 'businessconnection' in India. It, however, held that there was no PE in India because the taxpayer had no right to enter and make use of the agents' offices. 9. In the case of Fugro Engineers BV v. ACIT (2008) 26 SOT 78 (Del), Fugro (the taxpayer), a resident of Netherlands, carried out 3 works for ONGC, C Ltd and G Ltd in India. The said work involved test of materials on Indian soil or Indian territorial waters on-board Indian ship or on the equipment mobilized by the taxpayer from Singapore. The taxpayer s works for all 3 parties were carried out in India and the duration lasted for 91 days for all 3 projects. Thus there was a projection of the foreign taxpayer in India. The only question was whether presence of 91 days in India could lead to a PE. The revenue authorities relying on OECD Commentary observed that the place of business (equipment) was fixed as there was a link between the place of business (equipment) and geographical point (India). The Tribunal held that it is not necessary that the equipment constituting the place of business has to be actually fixed to the soil on which it stands. The words through which must be given a wide meaning so as to apply any situation where activities are carried out in a particular location, which is at the disposal of the enterprise. Thus, an enterprise engaged in paving a road will be considered to be carrying on its business through the locations where the activities takes place. However, where the place of activity is moved, there may be some difficulty in determining whether there is a single place of business. But since no length of time is prescribed in Article 5(1) of India-Netherlands Treaty, if a place of business is available to the taxpayer for a period in which its independent work can be completed, it would constitute a PE in India. The Tribunal further held that clauses (a) to (h) of Article 5(2) were not at all applicable as there was no mine, oil or gas well, quarry or any other place of extraction of natural resources. On the other hand, the Uttarakhand High Court in the case of DIT v. R & B Falcon Offshore Ltd.(2014) 44 taxmann.com 400 dealt with the computation period of a rig being operated in India to determine the existence of a PE under the India-USA tax treaty. The High Court held that the period during which the rig was unused on account of maintenance and repairs should be excluded from the threshold period of 120 days in any 12 months period for determining the existence of such PE. Accordingly, the High Court held that the period during which a rig in India is merely ready for use but not actually used, shall not be considered to determine the existence of a PE. 10. In Amadeus Global Travel Distribution SA (2011) 11 taxmann.com 153 (Delhi ITAT), the Hon'ble ITAT concluded on facts that the computers installed in agents offices were supplied by Amadeus / AIPL and they exercised a great degree of control over these computers in as much as the computers cannot be used without the permission of Amadeus/AIPL and they can't even be shifted from one place to another without permission. It was because of this control that the ITAT concluded that fixed place PE exists within the meaning of Art. 5(1) of India-Spain treaty 11. In DIT v. Morgan Stanley & Co. [2007] 292 ITR 416 (SC), Morgan Stanley India was set up to support the main office functions of the US company in equity and fixed income research, 4

5 account reconciliation and providing information-technology-enabled services such as back-office operation, data processing and support centre. A service PE was recognised where service was rendered through employees deputed to India. At the same time, it was held that mere stewardship* activity / shareholders services will not be a service PE because mere protection of own interest against competition by ensuring quality and confidentiality will not constitute a service PE. 12. InAramex International Logistics (P.) Ltd., In re [2012] 348 ITR 159 (AAR),where the products of Aramex group were sent to a common destination in India and the distribution was undertaken by the Indian subsidiary, the issue was whether subsidiary could be a PE? Is it not something which enables a non-resident company to carry on a part of its whole business in a particular country? When a business cannot be carried on exclusively in so far as it relates to customers in India like in the present case, without intervention of another entity, a subsidiary, normally that entity must be deemed to be the establishment of the group in that particular country. The position may be different when the entity is an independent entity uncontrolled by the group unless it satisfies the other requirements mentioned in Article 5(2) of the DTAA. But in a case where a 100% subsidiary is created for the purpose of attending to the business of the group in a particular country, e.g., in India, the Indian subsidiary must be taken to be a PE of the group in India. In this case, the Indian subsidiary was treated as a dependent agency PE because on facts it was not found an independent entity. 13. In AREVA T & D India Ltd, In re [2012] 346 ITR 456 (AAR) the French holding company proposed to enter into an information technology sharing services agreement with its subsidiary in order to provide support services in the area of information technology. It informed that the support services would be worldwide network for data transfer between all group companies which would connect to all global applications of the French company and intranet and internet traffic, messaging system for all communication between the subsidiaries, vendorsand customers. Further the quarterly invoice in this regard were to include the share in the aggregate amount of cost incurred in providing the whole of the services, i.e., direct and indirect cost incurred under the agreement including the expenses paid to 3rd parties, cost of personnel, travel and equipment related to the services. The AAR went on to presume that for providing IT support services under both wide area network and messaging system some hardware/equipment in India was to be utilized such as local loop lines, undersea cable infrastructure, a gateway consisting of a link and router all of which would belong to and be controlled by a service provider. Such hardware utilized in India is held to constitute a PE in India. Referring to article 5 (1) the AAR held that a place of business means all tangible assets (e.g. premises, facilities, machinery or equipment or installations) used for carrying on the business, whether or not they are exclusively used for business purpose. It further referred to para 17 of the Model Commentary that states that a PE may exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel are restricted to setting up, operating, controlling and maintaining such equipment. Hence even existence of a computer server amounts to existence of a PE within a jurisdiction. The AAR also made reference to the UN Commentary (2001) para 3 for place of disposition test to hold that the equipments in the present case are found to be at the disposal of the foreign enterprise for the purpose of the business activities. 14. In Delmas, France v. ADIT [2012] 14 ITR (Trib) 1 (Mumbai), the Revenue claimed that the business was carried out through agent s fixed place in India so it applied article 5(1). It also held that the taxpayer's case was covered under article 5(5) of the DDTAA on the allegation that the taxpayer's agent in India issuing the bill of lading has the authority to conclude contracts which are legally binding on the taxpayer. The Mumbai Tribunal held that in this scenario article 5(1) or article 5(2) lack application for failing to meet the subjective criterion, viz., "right to use the place" inasmuch as it is a sine qua non for existence of a fixed base PE. To constitute a fixed base PE under article 5(1) a place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities, and that such "place has to be owned, rented or otherwise at the disposal of the taxpayer. A mere occasional factual use of place does not suffice. Whereas in the business agency model the business of the foreign enterprise is carried on by the agent and the foreign principal does not have the powers, as a matter of right, to use the agent's place 5

6 for carrying on its business place of disposition test for which reason article 5(1) lack application and in that case article 5(5) would take charge. 15. In the case of Convergys Customer Management Inc v. ADIT (2013) 34 taxmann.com 24 (Del ITAT), the Tribunal held that Indian subsidiary, which was practically projection of business of American company in India carrying out its business under control and guidance of American company without assuming any significant risk in relation to such functions, would be considered as fixed place PE of American company. In this case, Convergys Customer Management Group (CMG) procured IT enabled call centre / back office support services from its subsidiary, Convergys India Services (CIS) on principal-to-principal basis. CMG contended that it did not have a PE in India; whereas the Assessing Officer concluded that CMG had a PE in India (Fixed Place PE under Article 5 (1) and 5(2)(c) and (d), Dependent Agent PE under Article 5(4) read with Article 5(5) and a Service PE under Article 5(2)(i)). The CIT (A) held that CMG had a Fixed Place PE in India under Article 5(1) and 5(2)(a) because (1) premises of CIS were at the disposal of CMG from where CMG s business was carried on; (2) CIS did not have economic or functional independence; and (3) management of risk related to delivery of service was carried out in India through employees visiting / seconded on key positions. On further appeal, the Tribunal upheld the order of the CIT(A) that CMG has a Fixed Place PE in India under Article 5(1) on the ground that (a) employees of CMG frequently visited CIS for supervision, direction and control over operations of CIS; (b) such employees had a fixed place of business at their disposal; (c) CIS was practically a projection of CMG in India; (d) CIS carried on business under guidance and control of CMG without assuming significant risks; (e) CMG provided some hardware and software free of cost to CIS; (f) CMG does not have a Dependent Agent PE in India as conditions in Article 5(4) are not satisfied. 16. In the case of GFA Anlagenbau GmbH v. ACIT (2014) TS-383 (Hyd)the Tribunal held that supervisory services provided by the German Company through its employees at the project sites of an Indian Company in India did not constitute PE in India both under the Income tax Act (sec 92F(iiia) refers to fixed place from which the business of the enterprise is wholly or partly carried on) as well as the India-Germany tax treaty because the foreigncompany did not itself own or operate project sites independently. Further, such services were not provided in connection with building, construction or assembly activities of the foreign company. The Tribunal further observed that though Article 5(2)(i) of India-German tax treaty talks about supervisory activities, supervisory services provided by the German Company themselves do not constitute a PE of the German company since these services were not provided in connection with building, construction or assembly activities of the German Company. The Tribunal held that though the technicians deputed to India stayed more than 180 days, it cannot be said that their place of stay can be a fixed place of business for the German Company. The AO has brought nothing on record to show that the technicians were operating from a fixed place in the custody of the German Company to supervise the activities. 17. In Motorola Inc. v. DCIT [2005] 95 ITD 269 (Delhi) (SB)Motorola and Ericsson carried out certain telecommunications work in India through its Indian subsidiary. In each case, the parent, from time to time as required, sent employees to India, where they used the subsidiary's Indian offices. In Ericsson appeal, the Special Bench of the DelhiITAT held that mere use of the subsidiary's offices by the parent's employees, without anything more, was not sufficient to create a fixed PE, because the employees did not have any right of disposal over the subsidiary's space, that is, they had no right to enter the space at will, and could do so only with the subsidiary's permission. However, the same Bench reached the opposite conclusion in the Motorola's appeal on the ground that the parent's employees worked for parent as well as subsidiary and because they worked for the subsidiary, they must have had the right to enter and use the subsidiary's offices. The Tribunal referred to the OECD Commentary which refers to a fixed place as a link between the place of business and a specific geographical point. It has to have a certain degree of permanency. In order to constitute a fixed place of business, the foreign enterprise must have at its disposal certain premises or parts thereof. 18. The Andhra Pradesh High Court in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP)observed that the expression PE used in the tax treaty postulates the existence of substantial element of enduring or permanent nature of a foreign enterprise in another country, which can be attributed to fixed place of business of that country. The High 6

7 Court held that mere supervisory activities would not form a PE. However, at that time the Indian German DTAA was different from the current treaty. But still the present article 5(1) of India- German tax treaty defines permanent establishment to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. If the services are rendered from a place which is not owned by the foreign enterprise or is not at its disposal, then a view can still be taken that there is not permanent establishment. However, care should be taken that the stay of foreign technicians does not exceed 6 months in India to avoid litigations. 19. However, in the case of Steel Authority of India Ltd v. ACIT (2006) 10 SOT 351 (Del), the Delhi Tribunal was dealing with supervisory services provided by the German Company to an Indian Company for the modernisation of a steel plant in India and held that the building site or construction, installation or assembly project need not be that of the foreign company and the supervisory activities carried out in connection therewith constituted a PE, if they continued for a period exceeding 6 months. Therefore, even if the installation or assembly project did not belong to the taxpayer and it has been providing supervisory services for installation purposes and such services has been provided for a period exceeding 6 months, the supervisory activities by themselves would constitute PE. 20. In the case of CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP),the taxpayer exported a large amount of iron ore. In order to expedite the operations, the taxpayer entered into a contract with a German company, which undertook to supply and deliver a Bucket Wheel Reclaimer as per drawings and to delegate one engineer erector for supervising the total erection and one special filter for installation of electrical equipment. The period of contract was 13 and half months. The Tribunal found that (a) the actual installation or assembly work was not undertaken by the German company; (b) payment in respect of sub-contract had nothing to do with the assembly, erection or installation of the Bucket Wheel Reclaimer; (c) the Germany company merely supervised the installation; (d) the taxpayer did not recover any money from the German company in respect of any part of erection job; (e) the activity which was carried on by the German company in relation to supply and delivery of the Bucket Wheel Reclaimer. Merely supervision of installation would not lead to a PE in India as the activity was in relation to supply and delivery of Bucket Wheel Reclaimer. 21. Similarly, in the case of DCIT v. Subsea Offshore Ltd (1998) 66 ITD 296 (Mum),the taxpayer entered into contracts with ONGC and Cairn Energy. The taxpayer brought its own vessels in the territorial waters of India for inspection of oil pipelines, etc., which stayed in Indian territorial waters for 2 ½ months. The question before Mumbai Tribunal was whether taxpayer s income was taxable in India. The taxpayer, a resident of UK, received certain sums from ONGC for undertaking the work of inspection and repairing of submarine pipeline work used for exploration of oil and gas, extraction and production with the help of a vessel. The Tribunal pointed out that there was no dispute that the income was business income and, therefore, Article 7 of India-UK Tax Treaty was applicable. However, the income would be taxable only if the taxpayer had a PE in India. The Tribunal pointed out that the vessel of the taxpayer was in India only for 2 ½ months, which could not be said to be enduring period of time nor it could be said that there was a virtual projection of the business of the taxpayer into the soil of India. 22. In the Advance Ruling P. No. 11 of 1995, the taxpayer, a Singapore Company, entered into 2 contracts with ABC for providing services related to burial of pipelines offshore India. The job executed by the taxpayer in the nature of a turnkey sub-contract because the main contract by the ONGC was awarded to XYZ. The contracts of the taxpayer being in the nature of turnkey subcontract, all marine vessels, personnel and equipment were provided by it. The duration of the contracts was 7 days and 39 days, respectively. The AAR referring to Article 5 of India-Singapore Tax Treaty observed that PE meant a fixed place of business through which the business of the enterprise is wholly or partially carried on. Article 5(2)(f) laid down that a PE would include a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Under Article 5(3), a building site or construction, installation or assembly project constitutes a PE only if continues for a period of more than 183 days in any year. The scope of work carried on by the taxpayer was installation and assembly project relating to burial of pipelines in the sea bed. Such activities were covered by Article 5(3) and not by Article 5(2)(f). Under Article 5(3), such work or project could be treated as a PE only if lasted for more than 183 days in any year. The duration of the contracts was 7 days and 39 days only. Therefore, there was no PE in India. 7

8 23. In CIT v. BKI/HAM v.o.f [2012] 347 ITR 570(Uttarakhand) the non-resident entered into a sub-contract for dredging and back filling works with Hyundai Heavy Industries in respect of the second Basin Hazira Trunk Pipeline Project being in the nature of a construction project. The subcontract which was spilled over 2 assessment years but the non-resident had its entire duration of less than 6 months.in this case the non-resident maintained an office at Bombay.The High Court held that a perusal of Article 5(1) of the Netherlands treaty indicates that a "PE" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2) of the treaty includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a warehouse in relation to persons providing storage facilities for others, premises used as a sales outlet, an installation or structure used for exploration of natural resources provided that the activities continue for more than 183 days. Article 5(3) provides that a building site or construction, installation or assembly project constitutes a PE only where such site or project continues for a period of more than 6 months. Article 5(3) provides a specific provision which covers the provision of article 5(2) of the treaty. The specific provision would prevail over the general provision. Consequently, no PE was constituted in India within the meaning of article 5 and no part of the revenue earned by the taxpayer was taxable in India. 24. In the case of R & B Falcon Offshore Ltd vs. ACIT (2011) TII-02 (Del ITAT) (Intl), the Tribunal held an installation or a structure could become a PE only if it is actually used for exploration or exploitation of natural resources for a period of more than 120 days. The activity of repairs and mobilization of the rig were not for exploration or exploration of natural resources. That activity was a preparatory activityso as to make the rig fit for exploitation of natural resources. The rig could be said to be used for exploitation of mineral oil only when it was positioned at the appointed place for the exploitation of mineral oil. It was the admitted position that if the time was reckoned from its positioning at the appropriate place, the period was less than 120 days. Therefore, the taxpayer did not have any PE in terms of Article 5(2)(j) of the DTAA. Hence, the period of repairs and mobilization of the rig could not consider for the purpose of calculating 120 days required for constituting an installation PE. 25. In Global Industries Asia Pacific Pte. Ltd., In re [2012] 343 ITR 253 (AAR) the nonresident undertook installation contract for IOCL where the activities of installation run for 41 days. It also executed a sub-contract for L & T project for provision of services and the facilities in connection with the exploration, exploitation or extraction of mineral oil where the non-resident's presence in India was 168 days. The AAR held that project for installation would have a PE only if it continues for a period of more than 183 days in the financial year in view of article 5(3) of the DTAA. Since it did not exceed the period there was no PE. 26. In Cal Dive Marine Construction (Mauritius) Ltd., In re[2009] 315 ITR 334 (AAR), the AAR interpreted article 5 of India-Mauritius Treaty in the context of contract for laying pipelines under the sea and constructing the structures inclusive of pre-commissioning of the pipelines and held that the preliminary work performed by the applicant outside India cannot be taken into account for the purpose of identifying the starting point of time of 9 months contemplated by article 5(2)(i). The AAR in particular held that occasional short visits of the contractor's personnel for negotiations or doing some paper work in connection with the project or for taking soil samples, broadly speaking, will not trigger the starting limit as these would constitute preliminary activity and not core activity. The AAR held that the requirement of a fixed place and carrying on business through that place under article 5(1) connotes the idea of certain degree of permanence attached to it. Moreover, the activities must be considerable and regular. A passing, transient or casual activity, though carried out from a particular place does not fall within the scope of article 5(1). If the fixed place is in the nature of a building site or place connected with construction or assembly project, the minimum duration was fixed under the Treaty. A construction, installation or assembly project cannot be treated as a PE unless it continues for a period of more than 6 months even thought it might otherwise fulfill the definition contained in article 5(1) or 5(2). 27. Further,in DCIT v. J. Ray McDerrmott Eastern Hemishphere Ltd. [2013] 1 ITR (Trib)-OL 141 (Mumbai), the taxpayer executed 3 contracts of duration less than 9 months. The Mumbai Tribunal held that for determining the duration in article 5(2)(i) of India-Mauritius Treaty duration in respect of each contract should be taken into consideration separately. Since the duration in respect of each contract was less than 9 months from the actual date of commencement of 8

9 preparatory work till the actual date of completion the mandate of article 5 was not applicable [pl. also see JDIT v. Krupp Uhde GmbH (2010) 1 ITR (Trib) 614 (Mum), TiongWoon Project & Contracting Pte Ltd, In re (2011) 338 ITR 386 (AAR) and J. Ray McDermott Eastern Hemisphere Ltd v. JCIT (2010) 130 TTJ 121 (Mum)]. In these cases, it is to be seen that whether the several projects are independent projects and there is no inter-connection and inter-dependence amongst them and none of them should appear to be an extension of another. 28. InTiong Woon Project and Contracting Pte. Ltd, In re[2011] 338 ITR 386 (AAR), the taxpayer undertook multiple installation and erection projects and claimed that these can be a PE only if each of the 4 installation projects continues for a period of more than 183 days individually in any previous year in terms of article 5(3) of the DTAA with Singapore. The Authority ruled that all these were independent projects and there is no interconnection and interdependence amongst them. None of them was an extension of another. It thus held that the duration test for installation and assembly projects provided under article 5(3) of the DTAA cannot be applied for those projects that do not pass the test of cohesiveness, interconnection and interdependence. 29. Further in Global Industries Asia Pacific Pte Ltd, In re [2012] 343 ITR 253 (AAR)the AARheld that for a PE to exist under article 5(3) of the Indo Singapore treaty, the question would relate to the duration of installation and not the site. 30. In National Petroleum Construction Company v. ADIT [2012] 20 ITR (Trib) 545 (Delhi) segregation of contract revenues into offshore and onshore activities was made and agreed upon between ONGC and the taxpayer at the stage of awarding the contract and the total contract consideration under the contract had been earmarked towards each of the activities like design and engineering, material procurement, fabrication and installation. The contract provided separate payments to the taxpayer on the basis of work of design, engineering, procurement and fabrication. These operations had been carried out and completed outside India. Every progress under the contract was inspected and finally accepted by ONGC or its authorised agents outside India, and only then, the taxpayer received the payments from ONGC according to the specified milestones executed outside India. Different phases of the contract were as under: The taxpayer fabricated the platform in Abu Dhabi and after fabrication the platform was brought to India with the help of its barges and then the possession was handed over to ONGC ; Before sailing the platform after fabrication, it was certified by ONGC through its approved surveyor ; The insurance policy was to be taken by the taxpayer, the ONGC was the joint beneficiary and if there was a loss suffered in the course of transportation the payee of the insured amount would be ONGC ; The Delhi Tribunal held that the contract was not in the nature of a turnkey contract in which case the income attributed to PE in India could not extend to offshore activities carried outside India and had to be therefore confined to incomes from activities carried out from the PE. It held that the taxpayer did not have a PE in respect of erection and fabricating the platform in Abu Dhabi and the taxpayer only had a PE in respect of installation and commissioning. Erection and fabrication were not attributable to the PE in India. All the activities prior to installation and commissioning were carried out in the UAE and thus having regard to article 7 of the DTAA, no income could be attributed to the PE in India.Thus, the profits attributed to the PE in India, only activities in respect of installation and commissioning were held chargeable to tax. The profits attributable to the supplies, i.e., erection and fabrication of the platforms could not be brought to tax in India. 31. In Samsung Heavy Industries Co. Ltd. v. ADIT [2011] 11 ITR (Trib) 513 (Delhi) the taxpayer along with L&T entered into contract with the ONGC to carry the work of "surveys (preengineering,pre-construction/pre-installation and post construction), design, engineering, procurement, fabrication, anti-corrosion and weight coating, load out, tie down/sea fastening, tow out/sail out, transportation, installation, modifications at existing facilities, hook-up testing, precommissioning, start up and commissioning of entire facilities" on turnkey basis at the ONGC's western offshore site. The taxpayer and L&T signed an MOU which defined the division of work between them. The taxpayer filed a profit statement of its Mumbai project office in which it showed the contract revenue was 14.56% of the total revenue of the contract for work done in India. The taxpayer claimed that the consideration for supply of offshore supply and services 9

10 goods was received outside India, the sale was completed outside India and was not attributable to the PE and therefore no part of the income for the offshore supply or offshore services was received in India. The Delhi Tribunal held that the contract obtained by the taxpayer from the ONGC was a composite contract starting right from surveys of pre-engineering, preconstruction/pre-installation; design engineering procurement, etc. till the startup and commissioning of the entire facilities. All the activities to be carried out in respect of the contract were to be routed through the project office only. The insurance with respect to the entire project had been in fact obtained by the taxpayer and the policy was not shown to be restricted only to the activities of the taxpayer outside India. It thus held that the "PE" of the taxpayer had come into existence on the opening of the Mumbai project office which acted as a channel between the taxpayer and ONGC.The Tribunal explained that Article 5.1 of the DTAA between India and Korea having application to the case of the taxpayer describes that for the purpose of the DTAA, the term "PE" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5.2 enlarges the meaning of "PE" in addition to what has been stated in article 5.1. Article 5.3 which uses the words "likewise encompasses" further enhances the term "PE" to these entities. Therefore, it will be wrong to interpret article 5.3 as an exclusionary clause or one restricting scope of application of article 5.1 or article 5.2. Article 5.3 only extends the scope of PE and it cannot be read in isolation. Otherwise also, if the PE of a non-resident entity exists under articles 5.1 and 5.2, it is not necessary that it should also fall within the scope of article 5.3 to make it liable to be taxed in the source country. 32. The most obvious example of an associated company as a PE will be where the company acts as dependent agent for its associate. There is no reason why as an associated company should be treated any differently from any other person: it will give rise to an agency PE, if it is a dependent agent within Article 5(5) and not an independent agent under Article 5(6). In P. No. 8of 1995 (1996) 223 ITR 416 (AAR), a Swiss company proposed to establish an Indian subsidiary to provide consultancy services: examining the proposed agreements between the companies, the AAR concluded that it would be a dependent agent and PE. In this case, the Indian subsidiary provided clerical and secretarial assistance to complete documentation of tenders and contracts and supply information in respect of global tenders and submitted and signed tenders on behalf of the non-resident on terms and conditions accepted by it. The Indian subsidiary at all times acted only on the instructions of the foreign parent. The Tribunal in the case of efunds Corporation v. ADIT (2010) 40 SOT 65 (Del ITAT) held that in order to constitute PE, place of business need not be owned, rented or otherwise under possession or control of enterprise; the only requirement is that place should be fixed in the context of nature of business being carried out and also no time period test is prescribed for permanence as permanence of establishment has to be determined in the context of nature of business being carried on. efunds Corporation i.e., the taxpayer, was a US company. It had a wholly owned subsidiary efunds India. The taxpayer entered into contract with its clients for providing certain IT enabled services and then, the same contract was either assigned or subcontracted to efunds India for execution.therefore, both the taxpayer and efunds India were under legal obligation to provide services to the clients of the taxpayer. From Functions performed, Assets used and Risks assumed (FAR analysis) by the taxpayer and efunds India, it was clear that efunds India was not having requisite software and database needed for providing IT enabled services independently. Therefore, to that extent they were made available by the taxpayer to efunds India free of charge. Further, efunds India did not bear any significant risk as ultimate responsibility lay with the taxpayer. It was also noted that sales team of the taxpayer undertook marketing efforts for its affiliates including efunds India. ebay India was substantially controlled and influenced in functional matters by the taxpayer (such as through secondment of employees to key positions). On these facts, it was concluded that the taxpayer had business connection in India and since the entire activities of the taxpayer in India were carried out by efunds India (an agent) and the said agent had not been remunerated on arm s length price basis, it was to be held that the taxpayer had PE in India in respect of back office operation and software development services being carried out by its subsidiary. Therefore, the taxpayer s income was liable to tax in India in respect of operations performed by the subsidiary company on its behalf. 10

11 33. Similarly, in the case of Aramex International Logistics Pvt Ltd., In re (2012) 348 ITR 159 (AAR)the AAR observed that where a wholly owned subsidiary is created for purpose of attending business of a group in a particular country, that subsidiary must be taken to be a PE of that group in that particular country. The Applicant, a Singaporean company was engaged in business of door-to-door express shipments by air and land. It entered into an agreement with its Indian subsidiary AIPL to look after movement of packages within India, both inbound and outbound. Under the agreement the applicant was responsible for transportation of packages outside India and AIPL has to transport packages within India. The Applicant charged fee from Indian subsidiary in connection with invoicing and payment function performed by it outside India for Indian subsidiary. It was found that wholly owned subsidiary of AX group, which is facilitating the overseas express shipment business carried on by the said group in India through the applicant, a Singapore company, by securing orders, collecting articles, transporting them and delivering the same to addresses in various countries through the group entities is PE of applicant in India within the meaning of art. 5 of Indo-Singapore DTAA and, therefore the receipts by applicant from outbound and inbound consignments attributable to PE in India are taxable in India. 34Binding Test If the action of the agent who is found to be a dependent agent after applying the dependency test, like securing orders, legally bind the foreign enterprise to perform the contract in India and the final decision to perform or not does not lies with the principal, the agent can be considered to be a PE of the foreign enterprise in India. The aspect of conclusion of contracts would have to be seen from the point of view of performing all the actions necessary for the conclusion of contracts, though the actual signing of the contract may be performed by the foreign enterprise outside India. The Supreme Court in the caseof DIT v. Morgan Stanley & Co. Inc(2007) 292 ITR 416 (SC) held that the unit in India which performed the back office services would not constitute an Agency PE for Morgan Stanley Inc in India.Morgan Stanley did not have the authority to enter into contracts or bind Morgan Stanley Inc with any contracts in India. Dependency test The dependency Test is to corroborate whether the agent is dependent legally and economically on the foreign enterprise for the conduct of business. The agent who is found to be a dependent agent after applying the dependency test and who performs any of the three requisite functions for attracting the Agency PE as mentioned above would be considered as the PE of the foreign enterprise in India. In TVM Ltd v. CIT (1999) 237 ITR 230 (AAR), the operation of Article 5(5) and 5(6) was quite nicely illustrated. A Mauritius company was established to develop and operate a television channel. An Indian company was established with the same shareholders to solicit advertising for the channel: the Indian company had no authority to bind the Mauritius company. The AAR concluded that the Indian company was not independent of Mauritius company; however, it was not a dependent agent as it had no authority to conclude contracts binding on the Mauritius company. Of course, the profit of Indian company would be taxable in India and the AE provisions would have to be applied to ensure that the Indian company earned an arm s length remuneration. Legal dependence The legal dependence is reflected by the facts of arrangement or agreement between the foreign enterprise and the agent. If the risk and return of the business done by the agent fully accrue to the agent, then the agent can be deemed to be an independent agent. The act of the agent with autonomous decisions in the normal course of business and remuneration for the services at arm s length by the foreign enterprise would strengthen the claim of the agent as an independent agent. Economic dependence The agent if earns the major portion (say more than 75%) income from other than the relevant foreign enterprise, it would cement the fact that, the agent does not act wholly and exclusively on behalf of the foreign enterprise. Economic independence signifies the business relationship with its principal (the foreign enterprise) and the consequent dependency for the functioning of business of the agent. For example, if the foreign enterprise is the only customer the agent serves as part of its 11