Maintenance of stock of goods by the foreign enterprise at the customer’s location for standby use may not give rise to PE

Facts

• Airlines Rotables Ltd. (“assessee”) is a company incorporated under the laws of United Kingdom (“UK”). The assessee is engaged in the business of providing spares and component support for aircraft operators.
• The assessee has entered into an agreement with Jet Airways Limited (“Airline”), for rendering certain support services.
• As per the terms of the agreement,

– When a part! component of the aircraft is not in a condition to be used, the assessee is required to repair and overhaul the component! part. The repair and overhauling of defective part! components is to be done outside India.

– In addition, the assessee is to provide replacement components on exchange basis till the original components are repaired and overhauled.

– To ensure that the replacement for the defective part! components is readily available, a consignment stock of the replacement parts! components is kept at the warehouse of Airline.

– The consignment stock lying in India would remain the property of the assessee at all times.

Issues before the Tribunal

• Whether the assessee had a Permanent Establishment (“PE”) in India on account of maintenance of consignment stock of goods at the warehouse of the Airline.

Ruling of the Tribunal

Fixed Place PE

• Under Article 5(1) of the double taxation avoidance agreement between India and UK (^„Tax Treaty”), a fixed place PE is said to exist in India when the assessee is said to have a fixed place of business through which the business is carried out – wholly or partly. There are three criterions embedded in this definition:

–  Physical criterion: Existence of physical location;

– Subjective criterion: Right to use that place. i.e. the physical location should be at the disposal of the assessee; and

– Functionality criterion: Carrying out of business through that place

It is only when the three conditions are satisfied that a fixed place PE can be said to have come into existence.

• The Tribunal held that mere existence of a physical location is not enough. The location should also be at the disposal of the assessee and it must be used for the business of the assessee as well. Although the consignment stock of the assessee was stored at a specific physical location, the storage facility was under the control of the Airline and the assessee did not have any place at its disposal enabling it to carry out its business from that location.
• The Tribunal held that the business of the assessee cannot be said to have been carried on at the location of Airline as the business with regard to the consignment of replacement stock was over when the consignment is given for standby purposes to the Airline.
• When the physical location at which consignment stock is kept does not project the business of the assessee, it cannot be said that such a location constitutes a PE of the assessee in India.

Agency PE

• There is no material to establish that the Airline or its staff constituted a dependent agent of the assessee. Airline will at best be an independent agent and custodian of the consignment stock.
• The consignment stock is not maintained by the Airline for delivery for or on behalf of the assessee. The delivery in the present case is for standby use and not for sale.
• Hence the assessee did not have an agency PE in India.

The tribunal held that the onus is on the revenue to demonstrate that a PE of the foreign enterprise exists in India.

Royalties for use of equipment in India

• The Tribunal held that merely because an amount is not taxable in India as business profits, it is not the end of the road so far as tax ability of the consideration for use of replacement components in India is concerned. Since the revenue authorities have failed to consider as to whether the consideration for use of the replacement components could be considered as royalty income i.e. ^„for use of industrial, commercial or scientific equipment^? under Article 1 3(3)(b) of the Tax Treaty, the matter was remanded back to the Commissioner of Income Tax (Appeals) for that purpose.

Conclusion

The Tribunal has held that a simple maintenance of stock of goods by the foreign enterprise at the customer^?s location for standby use may not constitute a PE, while keeping the issue open with regard to royalty on use of equipment.

Source: Airlines Rotables Limited, UK Vs JDIT (Appeal No. 3254 / Mumbai / 2006)