Deputation of personnel do not results in a permanent establishment in India: ITAT Mumbai

In a recent ruling in the case of  Tekmark Global Solutions LLC (Taxpayer) [[2010] 3 taxmann 38 (Mum. – ITAT)] the Mumbai Income Tax Appellate Tribunal (ITAT) held that as the deputed personnel do not work under the control and supervision of the Taxpayer, such personnel do not create a PE for the Taxpayer in India.

Background and facts of the case

• The Taxpayer had entered into an arrangement with an Indian company for deputation of personnel on a hire-out basis. It was agreed that the deputed personnel would work under the supervision and control of the Indian company. The deputed personnel would remain on the payroll of the Taxpayer. The Taxpayer would recover the costs of the deputed personnel from the Indian company.
• The Taxpayer sought benefits under the provisions of the India-USA tax treaty (Tax Treaty). Article 5(2)(l) of the Tax Treaty, which contains the Service PE rule, provides that furnishing of services in India by a US enterprise, beyond a specified number of days, would result in a PE for the US enterprise.
• The Tax Authority contended that the Taxpayer rendered services to the Indian company through the deputed personnel and, thus, created a Service PE in India under the Tax Treaty.
• The Taxpayer contended that it did not have a PE under the Service PE rule as it was merely deputing personnel to work under the supervision and control of the Indian company.
• The first level appellate authority upheld the Taxpayer’s contention and ruled in favour of the Taxpayer.
• The Tax Authority filed an appeal before the ITAT against the first level appellate authority’s ruling.

Ruling of the ITAT

• The Taxpayer has only offered personnel on deputation to work under the control and supervision of the Indian company in India. Such personnel were not provided to render any technical services to the Indian company.

• The deputed personnel were, for all practical purposes, employees of the Indian company and carried out work allotted by the Indian company. The Taxpayer had no control over the activities or work performed by the deputed personnel. The Indian company had the right to remove the deputed personnel from its services.

• As the deputed personnel were not subject to the control and supervision of the Taxpayer, the services rendered by such personnel to the Indian company would not create a Service PE for the Taxpayer under the Tax Treaty.

• The Taxpayer had only received a reimbursement from the Indian company of the deputation costs incurred. Hence, the Taxpayer did not earn any income from the activities carried on in India.

Comments

The deputation of personnel and the possible PE challenges that such an arrangement could create are significant issues faced by multinational enterprises in India, especially in the light of the Service PE rule that exists in a number of India’s tax treaties. The Supreme Court (SC) of India, in the case of Morgan Stanley & Co. [292 ITR 416], had held that where the activities of the multinational enterprise entail it being responsible for the work of the deputed personnel and the employees continue to be on the payroll of the multinational enterprise, a Service PE can emerge. In line with the SC ruling, the present ruling reinforces the position that merely because the deputed personnel are on the payroll of the foreign enterprise, a Service PE would not arise, as long as the personnel work under the direction and supervision of an Indian company.

NF