AAR on taxability of income from execution of contract in India by German company, having no PE in India

A recent ruling of the Authority for Advance Rulings (AAR) [2009-TIOL-23-ARA-IT] in the case of Pintsch Bamag (Taxpayer). The issue before the AAR was whether the sub-contractor’s workplace and work duration should be considered in determining the existence of a permanent establishment (PE) of the Taxpayer, under the India-Germany Tax Treaty (Tax Treaty).

Considering the facts of the case, the AAR observed that the work carried out by the sub-contractor was independent of any control by the Taxpayer. Thus, the time spent by the sub­contractor should not be considered in determining the time threshold under the Tax Treaty. Since the time proposed to be spent by the Taxpayer was within the time threshold specified under the Tax Treaty for creating a PE, the AAR held that the Taxpayer’s activities will not constitute a PE under the Tax Treaty and, thus, it was not taxable in India.

Facts of the case

• The Taxpayer, a company incorporated in Germany, was awarded a contract by an Indian customer to design, fabricate, install and maintain navigational equipment for a shipping channel.
• The Taxpayer sub-contracted most of the work to an unrelated Indian concern. However, the sub-contracting agreement did not absolve the Taxpayer of any liabilities under the contract with the Indian customer. The Taxpayer also furnished a performance guarantee to the Indian customer.
• The Taxpayer carried out the contract for design of essential equipment and supply of critical components to the sub-contractor, from Germany. Such material and equipment was provided at the workplace of the sub­contractor, who carried out the manufacturing activities therein.
• The time schedule for execution of the main contract was 16 months. However, the process of supervision was for less than 60 days. The supervision work was carried out by the Taxpayer’s employees.
• Under the Tax Treaty, the term PE is defined to include a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding 6 months.

Issues before the AAR