Storage and Supply of goods in India through an independent third party gives rise to fixed place permanent establishment in India

Facts

• The applicant, a company incorporated in Singapore, is engaged in the business of manufacture and sale of Hard Disk Drives.
• The applicant supplies disks to original equipment manufacturers (OEM) in India. In order to minimise the delays in procurement of inputs, OEM proposed a Vendor Managed Inventory (VMI) model.Pursuant to the VMI model, the applicant would enter into agreements with Independent Service Providers (ISP) in India who will be required to stock Disks in India on behalf of the applicant and deliver the same to OEM in „just-in­time^? basis. The VMI model will operate as under:

– Based on purchase order raised by OEMs the applicant would ship goods to ISP in India;

– ISP would clear the goods from the customs by acting as Importer on Record and will store goods in a bonded warehouse operated and controlled by him. The ownership of the goods will remain with the applicant;

– On receipt of ^„pull request^? from OEM, ISP will immediately deliver the goods;

–  The applicant would raise invoice on OEM for such delivery of goods. The applicant receives payments for invoices outside India;

–  ISP would raise invoice on arms length basis on the applicant for services performed in India;

– ISP would also obtain Value Added Tax registration and pay applicable taxes and file returns in connection with delivery of goods to OEM.

The applicant has also proposed to enter into a Third Party Hub Agreement with YCH Logistics (India) Pvt. Ltd. (YCH), a private company in India for delivering the goods to Dell India Pvt. Ltd. on behalf of the applicant.

 Issue before the AAR

• Whether the applicant would have a Permanent Establishment (PE) in India under Article 5(1) or 5(8) of the India-Singapore Tax Treaty in relation to the activity of delivering goods through a customs bonded warehouse owned and operated by an ISP or YCH in India.
• If the applicant has PE in India and service provider is remunerated on an arm^?s length basis, would any further income be attributable to the PE of the applicant in terms of Article 7 of the India-Singapore Tax Treaty.

Contentions of the applicant

• There is no presence in India in the form of an office or a place of business. The applicant has no premises or facilities or installation owned, leased or kept at its disposal in India nor does it has any other kind of physical presence in India;
• Further, the applicant does not have employees based in India.
• The applicant has its goods stored in India in a warehouse owned and operated by ISP and the applicant has only a restricted right of entry into the warehouse for the purpose of inspecting the goods during business hours;
• Hence, the applicant does not have a fixed place PE or agency PE in India as ISP provides services as an independent service provider. Therefore, business profits derived on account of supplies of goods to the customers in India through the media of ISP or YCH are not liable to be taxed in India.

 Contentions of the Revenue

• Applicant has fixed place PE in India in the form of warehouse of the ISP or YCH under Article 5(1) of the India-Singapore Tax Treaty.
• Alternatively, the applicant has agency PE in India.

 Ruling of the AAR

• Article 5(1) envisages a distinct situs or an earmarked place with certain degree of permanence from where any business activity is carried on and it is not necessary that the fixed place should be owned or hired by the foreign enterprise;
• The fact that the fixed place of business is owned or possessed by the ISP or YCH does not detract from the position that the applicant has a distinct, earmarked and identified place which caters to its business;
• Moreover, the applicant^’s agent or representative has a right to enter the warehouse for the purposes of undertaking physical inventory, inspection, audit, repackaging etc.;
• In one sense it is the business place of warehouse / service provider and in another sense it is also the fixed place of business of the applicant from where the sales activities are carried on;
• The demarcated space in the warehouse of ISP constitutes the fixed place of business within the meaning of Article 5(1) of the India-Singapore Tax Treaty.
• The fact that a service provider instead of the applicant^’s employee carries on various operations leading to the delivery of products to the customers does not rule out the application of Article 5(1);
• Both the applicant and the warehouse / service provider act in cohesion to ensure the product delivery to the customers promptly;
• Merely outsourcing the product supply operations, it cannot be said that the applicant does not carry on any business in India from a fixed place;
• The business of the applicant is being carried on through the medium of the warehouse provider who can also be characterized as service provider;
• In view of the finding under Article 5(1), the AAR did not necessary to discuss whether the agency PE exists.
• For the purpose of computation of profits of the PE, the AAR held that it should be treated as a separate and distinct enterprise wholly independent of the enterprise of which it is a PE. The amounts paid to ISP / YCH and other expenses, if any, incurred should be deducted while calculating the profits attributable to the PE.

Conclusion

Depending on the facts, the activity of storage and supply of goods in India by a foreign enterprise may need examination to determine impact of the above ruling.

For the purpose of the computation of the profit, a PE should be regarded as separate and distinct enterprise wholly independent of the non-resident foreign company.

Source: M/s. Seagate Singapore International Headquarters Pvt. Ltd. AAR No. 831/2009 dated 25 February 2010