The concept of ‘fixed establishment’ under GST in India is an important one as it impacts service providers and those receiving services and having operations across multiple units located across different States. Its importance stems from the fact that where a person is said to have a fixed establishment in a particular State and can be regarded to have supplied services therefrom, such person could be called upon by Revenue Authorities to register the said establishment in that State.
Doubts can arise as to whether or not a person has a fixed establishment at a location considering the complexity that can arise from nature of operations as well as the very definition of the term under GST. Under Section 2(50) of the Central Goods and Services Tax Act 2017 (“CGST Act” in short), (50) “fixed establishment” has been defined to mean a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs.
Presence of human and technical resources to be permanent for fixed establishment
The issue of fixed establishment had come up for discussion in Gunter Berkholz Vs Finanzamt (Tax Office) Hamburg-Mitte-Altstadt (Case 168/84 Judgement of the Court (Second Chamber) dated 4th July 1985). This was in the context of Article 9(1) of the Sixth Council Directive (77/388/EEC), of 17 May 1977. This article went thus – ‘The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides’. This provision is very similar to the one we have under Section 2(71) of CGST Act dealing with location of the supplier of services.
The Court of Justice of The European Union on a reference for Preliminary Ruling was called upon to indicate whether or not maintenance and repair of gaming machines installed on two ferry boats plying between a German Island and Denmark constituted a fixed establishment. For the record, the assessee’s staff were not permanently deployed on the ferry boats and only a proportion of their working time was spent on carrying out repair and maintenance operations.
The Court was of the view that services could not be deemed to be supplied at an establishment other than the place where the supplier had established his business unless that establishment was of a certain minimum size and both the human and technical resources necessary for the provision of the services were permanently present. It did not appear that the installation on board a sea-going ship of gaming machines, which were maintained intermittently, was capable of constituting such an establishment.
Therefore, an installation for carrying on a commercial activity, such as the operation of gaming machines, on board a ship sailing on the high seas outside the national territory could be regarded as a fixed establishment within the meaning of that provision only if the establishment entailed the permanent presence of both the human and technical resources necessary for the provision of those services.
This view was later on relied in Commissioner of Customs & Excise Vs DFDS A/S (Case C-260/95 Judgement of The Court (Fifth Chamber) dated 20th February 1997). The issue here was whether or not a travel agent whose business was established and incorporated in Denmark and was having a subsidiary in United Kingdom could be said to operate from the fixed establishment/subsidiary in United Kingdom. The English subsidiary was into selling package tours for travellers on behalf of its holding company under an agency agreement executed between the two entities. The Court held the view that tax/VAT would be payable in the State where subsidiary is set up if that company had the human and technical resources characteristic of a fixed establishment.
Mere leasing of cars not resulting in fixed establishment in the absence of office or place of storage
The question of fixed establishment once again came up in terms of leasing of cars by an assesesee in Belgium while the registered place of business was in Netherlands. This was in ARO Lease BV Vs Inspecteur van de Belastingdienst Grote Ondernemingen, (Tax Inspector For Large Businesses) Amsterdam (Case C-190/95 Judgment of the Court (Sixth Chamber) dated 17th July 1997). While ARO did not have an office in Belgium, ARO’s customers in Belgium entered into contact with ARO through self-employed intermediaries established in Belgium, who were paid a commission for their services. The Belgian customers generally chose the car themselves from a dealer established in Belgium. The dealer delivered the car to ARO, which paid the purchase price. ARO then made the car available to the customer under a leasing agreement. The vehicles were registered in Belgium. The Belgian intermediaries were not involved in the performance of the agreements. Those agreements provided that the cost of maintaining the car and the Belgian road tax due fell on the customer. Repairs and assistance in the event of damage to the car, were to be paid for by ARO, which had taken out insurance against such risks as the owner of the car.
At the end of the agreed lease term, ARO would inform the customer of the price for which the car could be bought. If the car could not be sold immediately, it was temporarily stored on ARO’s behalf and at ARO’s risk at the premises of a dealer in Belgium, since ARO did not have storage premises of its own in Belgium.
The Belgian Tax Authorities were of the view that the mere presence in Belgium of a fleet of cars owned by ARO meant that ARO had a fixed establishment in Belgium from which it supplied cars under leasing agreements requiring ARO to pay VAT in Belgium. The European Court analysed the business model. The services supplied in the leasing of vehicles, consisted principally in negotiating, drawing up, signing and administering the relevant agreements and in making the vehicles concerned, physically available to customers while these remained the property of the leasing company.
It was of the view that consequently, when a leasing company did not possess in a Member State either its own staff or a structure which had a sufficient degree of permanence to provide a framework in which agreements could be drawn up or management decisions could be taken to enable the services in question to be supplied on an independent basis, it could not be regarded as having a fixed establishment in that State for the purpose of Article 9(1) of the said Sixth Council Directive.
Neither the physical placing of vehicles at customers’ disposal under leasing agreements nor the place at which they were used could be regarded as a clear, simple and practical criterion, to base decision making on the existence of a fixed establishment. The fact that customers chose their vehicles themselves from Belgian dealers had no bearing on the place of establishment of the supplier of services. The self-employed intermediaries who brought interested customers into contact with ARO could also not be regarded as permanent human resources of ARO. Finally, the fact that the vehicles concerned were registered in Belgium, where road tax was also payable, related to the place where they were used, and that factor, was irrelevant for the purposes of applying Article 9(1) of the Sixth Directive in terms of concept of fixed establishment unless ARO had actually any office or premises to store cars there.
Having immovable property in another State for letting out without having own staff to provide services not constituting fixed establishment in that State
In Titanium Ltd Vs Finanzamt Österreich, formerly Finanzamt Wien, (Tax authority of Austria, formerly tax authority of the city of Vienna, Austria) (Case C-931/19 Judgement of The Court (Tenth Chamber) dated 3rd June 2021) the issue was whether or not letting out of property itself in a country was good enough to constitute an establishment. The request for preliminary Ruling before the Court arose on interpretation of Article 43 of Directive 2006/112/EC of 28 November 2006 and Articles 44 and 45 of Directive 2006/112, as amended by Council Directive 2008/8/EC of 12 February 2008.
While Article 43 is similar to old Article 9(1) discussed earlier and our provision on location of supplier of service, Article 45 went thus – ‘The place of supply of services connected with immovable property, including the services of estate agents and experts, and services for the preparation and coordination of construction work, such as the services of architects and of firms providing on-site supervision, shall be the place where the property is located.’ This is similar to the clause we have on place of supply with regard to immovable property related services under Section 12 and Section 13 of the Integrated Goods and Services Tax Act 2017 (“IGST Act”). Article 44 dealt with location of recipient and is similar to our provision regarding the same subject under Section 2(70) of CGST Act.
Article 11 to Implementing Regulation (EU) No 282/2011 clarified the concept of fixed establishment for the said Directive and this is similar to the definition we have on fixed establishment under CGST Act.
The assessee was a company whose registered office and management were located in Jersey and whose corporate purpose was property management, asset management and the management of housing and accommodation. That company let a property which it owned in Vienna to Austrian traders. In order to carry out those transactions, which were the company’s only activities in Austria, it appointed an Austrian real estate management company to act as intermediary to invoice rental payments and operating costs, to maintain business records and to prepare the VAT declaration data. Those services were carried out by the agent in separate premises which were not the property belonging to the company.
The assessee retained the decision-making power to enter into and terminate leases, to determine the economic and legal conditions of the tenancy agreements, to make investments and repairs and to organise their financing, to choose third parties intended to provide other upstream services and, finally, to select, appoint and oversee the real estate management company itself. Although the assessee had taken the view that it was not liable to pay VAT in respect of its activity of letting the property, on the ground that it did not have a permanent establishment in Austria, the tax authority’s view was that a property which was rented out constituted such a permanent establishment.
The Court was of the view that a property which does not have any human resource enabling it to act independently clearly does not satisfy the criteria established to be characterised as a fixed establishment within the meaning of both Directive 2006/112 and Directive 2006/112, as amended. Therefore, a property which is let in a Member State in the circumstance where the owner of that property does not have his or her own staff to perform services relating to the letting does not constitute a fixed establishment within the meaning of Article 43 of Directive 2006/112 and of Articles 44 and 45 of Directive 2006/112, as amended.
Fixed establishment – Can there be an inference from subsidiary set up in taxable territory?
The Court of Justice of the European Union in Dong Yang Electronics sp.zo.o. Vs Director of the Tax Administration Chamber, Wrocław, Poland (Case C-547/18 Judgment of The Court (Fifth Chamber)) dated 7th May 2020 (Under Directive 2006/112/EC Article 44) was of the view that a fixed establishment of a company established in a non-Member State may not be inferred by a supplier of services from the mere fact that the company has a subsidiary there i.e., in the Member State. This Ruling would be relevant where a question of fixed establishment of the service recipient is involved. The transaction here involved services of assembly of printed circuit boards and delivery of these PCBs to LG Poland but billing wherefor was on LG Korea who had initially supplied the materials and components necessary for assembly of PCBs. Transaction had been treated as non-VAT transaction in Poland based on assurances from LG Korea that it did not have a fixed establishment in Poland and that it did not employ staff, own immovable property or have technical resources there. This was despite there being legal requirements in Poland for non-member State entities to set up companies for engaging in economic activity.
The Court was of the view that consideration of economic and commercial realities formed a fundamental criterion for the application of the common system of VAT and therefore, the treatment of an establishment as a fixed establishment could not depend solely on the legal status of the entity concerned. While in India the place of supply provisions under IGST Act provide for most common eventualities where specific delivery of materials is involved, issues could arise where advisory services or online information services are involved. While the concept of recipient of service under Section 2(93) of CGST Act can be relied on to provide answers in such cases, the possibilities of disputes with tax authorities cannot be ruled out on concept of fixed establishment where there are related entities at client end and these entities are involved in the transaction with the service supplier.
Conclusion: The concept of Fixed Establishment is still continuing to see litigation in the European Union many years after the relevant clauses were introduced. Business practices are also evolving to bring in circumstances not initially foreseen. In India the GST law is comparatively new having been introduced only in 2017. Entities having operations across States could face scrutiny from Revenue Authorities on this concept where Registration has not been taken in all those locations. Rulings from Europe could serve as a valuable guide to resolve disputes especially where the concerned relevant clauses in our law are quite similar to the ones under review in the European Union.
While detailed copies of the cases indicated in this article can be accessed on the website of The Court of Justice of The European Union, readers having any doubts on this article could reach the author at [email protected]
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Well analyzed article.