Case Law Details
Yogesh S. Limaye
Objective
a) A reader should be able to come to his / her own conclusion by applying the legislative enactments and judicial pronouncements to the facts of the case. While re-producing any portion of legislative enactment or judicial pronouncement, it is para phrased and emphasis is supplied by way of underline.
Structure-:
b) The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.
Part – I – case in brief
| Part – I – case in brief | PART – II – case explained elaborately. | ||
| Background | Citation of the case | ||
| Entering the subject | Facts of the case | ||
| Issues and Answer | Legislative Background | ||
| Impact analysis | Analysis of ITAT | ||
| Author’s opinion | |||
Background
c) IT is very normal for multinational companies [MNC] to render services within the group. With the growth of information technology, MNCs are very aggressive to use the same in effectively and efficiently handling their affairs.
d) This case is a landmark judgement whereby ITAT- Bangalore in the case of ABB FZ-LLC v. DCIT decided on June 21, 2017 has recognised the existence of virtual reality or in simple terms, the way business is conducted in real life.
e) It has taken an ambulatory approach in interpretation as to whether an entity has a virtual existence on soil of India i.e. through Permanent establishment.
Entering the Subject-:
f) The question considered by the ITAT was how to determine the PE of a non resident entity in India. Article 5 of India-UAE DTAA is relevant in this regard.
The most striking and decisive paragraph of the order is as follows
49. Therefore it is clear that furnishing of services including consultancy services by assessee to ABB Ltd for the project in India or with connected Project was for a period 3 months after commencing its activities in January 2010. Thus it fulfil are the prerequisite of service PE and in our view service PE do not require permanent establishment as well. In the present age of technology where the services, information, consultancy, management etc., can be provided with various virtual modes like e-mail, internet, videoconference, remote monitoring, remote access to desktop, etc., through various software, therefore, the argument of fixed place of business, raised by the ld. Senior Advocate for the assessee that three employees were rendered services only for 25 days cannot be sustained, as the services can be rendered without the physical presence of employees of the assessee.
57. Thus respectfully following the path shown by the Apex Court (supra), in our view, the requirement of fixed place of business is not applicable to the clauses (2), (4) mid (5). Clause (i) of Article 5(2) which provides the service PE, is not dependent upon, the fixed place of business as is only dependent upon the continuation of the activity for the same project or connected project for a period / periods aggregating to more than 9 months within 12. Accordingly we hold that assessee is having the service PE in India, However the determination of this issue will only have any hearing on the issues under considerations if on examination of facts we come to conclusion that the activities of the assessee do not fall in any of the Article of DTAA.
[Emphasis supplied by way of underline]
Issues and Answer
| Q | Whether Presence of an employee in that country for requisite number of days is mandatory so as to form a PE ? |
| A | No. |
Impact Analysis
g) If this interpretation of the ITAT is accepted, the need for personal presence of employees of foreign entity becomes irrelevant.
h) Thus practically all the services rendered in the digital form will arise in the source country.
i) The article 5 of India-UAE treaty is the same as that of USA and UK.
j) In such a case, in addition to IGST on import of services, one will have to pay income tax on import of such services.
k) Ironically speaking, at least credit of IGST paid on import of services is available as set-off against output liability under GST law.
l) The judgement involves some more issues as well. As a sample, refer following paragraphs
25. Though the appeal of assessee is liable to be dismissed on the ground of assessee was not resident of UAE , however we deem it appropriate to deal with all the grounds raised before us in both the appeals in the following paragraphs collectively as these are interrelated.
m) But we will restrict ourselves to the question of determination of PE.
PART – II – case explained elaborately
Citation of the case
ITAT BENGALURU BENCH ‘A’ in the case of ABB FZ-LLC v. DCIT (International Taxation), Circle- 1
(1), Bengaluru
[ASSESSMENT YEARS 2010-11 & 2011-12]
JUNE 21, 2017
IT (TP) APPEAL NOS. 1103 (BANG.) OF 2013 & 304 (BANG.) OF 2015,
[2017] 83 taxmann.com 86 (Bengaluru – Trib)
Facts of the case
The assessee is a non-resident company incorporated in United Arab Emirates. It claims to be engaged in the business of providing regional service activities for the benefit of ABB legal entities in India, Middle East and Africa. In pursuance of the regional headquarter service agreement between the assessee company and ABB Limited, the assessee company has rendered services to ABB Limited during F.Y.2009-10 and 2010-11. The assessee has received from its associated enterprises an amount of Rs. 1,78,42,63SI- and Rs.6,68,13,781/- in the F.Y.2009-10 and 2010-11 respectively.
Also,Read gst on works contract.
34. The assessee during the assessment proceedings before the AO has mentioned that assessee is a non-resident company, incorporated in the UAE and in pursuance of the Regional Headquarter Services Agreement between the assessee company and ABB Ltd, the assessee company has rendered the services to ABB Ltd, during the financial year 2009-10 and received an amount of Rs.1 78,42,635/-,, in respect of the aforesaid services. Thereafter, it was submitted by the assessee that the assessee is not taxable in India in view of the DTAA Treaty between India and UAE, there is no clause for FTS and since the clause has been specifically executed for the treaty, therefore, it would fall in Article 22 (other income). It was further submitted that as the assessee is not having a Permanent Establishment in India, therefore, the sum received by the assessee is not to be taxed in India.
35. Vide letter dt. 17.05.2012, the assessee was asked to explain the nature of services rendered along with evidence, such as documents, e-mails, reports and copy of invoices, as proof of having rendered the sevices. In response thereto the assessee vide letter dt. 14.06.2012 filed a letter along with Annexures 1 and 2, named ‘Regional Headquarter Services Agreement’ and “Simple agreement’ document relating to entity in India in connection with rendering of services’. The response given by the assessee vide, letter dt. 14.06.2012, is reproduced hereinbelow, for the sake of clarity :
We refer to the captioned notice issued by your office for the assessment proceedings of the Company for A.Y 2010-11 and the subsequent discussion our authorised representatives M/s BSR & Co., Chartered Accountants had with your goodself on 6 June 2012 and 7 June 2012.
In this connection, we submit the following, in respect of the queries raised by your goodself:
| 1. | Question 1: Completed details of nature of services rendered/work carried out in India, with copy of Agreement/Contract/Memorandum of Understanding | |||||||||||
| A copy of the Regional Headquarter services agreement entered into between ABB FZ-LLC and ABB Limited is enclosed as Annexure 1. | ||||||||||||
| 2. | Question 2: In respect the services rendered/work carried out in India, submit sample of Reports/Documents/Job description Certificate furnished to the entry in India. | |||||||||||
| Seven so-called Group Functions at the ABB Regional Headquarters in Dubai are providing services to Group companies within the Region India, Middle East & Africa India and some smaller contries was added to this Region two years ago. The services rendered to the benefit of ABB Ltd., India, therefore stared as per January 1, 2010 (please see the agreement as per item 1 above). ABB Ltd. India is the largest ABB company in the Region, and therefore receives a lot of attention. Various service activities have been carried out by ABB FZ-LLC for the benefit of ABB Ltd. India. Please find enclosed in Annexure 2 some examples of documents related to the entity in India in connection with the sending of services. | ||||||||||||
| 3. | Question 3. In case where services were rendered/provided outside India the following details in respect of the payment received for FY 2009-10 in respect of AY 2010-11 be furnished: | |||||||||||
| In this regard, we wish to submit that services were rendered from both within India and outside India. Please note that most of the services have been rendered from outside India. Further, as sought for , please find the below the following | ||||||||||||
| Sl. No. | Date of payment | Amount | TDS | |||||||||
| 1 | 11 March 2010 | Rs. 17,842,635 | 1,784,264 | |||||||||
| The copy of the TDS certificate has already been filed vide our submission dated 6 June 2012. | ||||||||||||
| 4. | Question 4: Please clarify whether services rendered/work carried out in India was by way of deputing personal to India along with agreement/contract/MoU. | |||||||||||
| In this regard, we submit the following: | ||||||||||||
| SI. No. | Name and designation | No. of days of Stay in India | Place of stay | |||||||||
| 1. | Rajiv Malhotra-Regional Project Risk Manager | 3 | Bangalore | |||||||||
| 2. | Gary Foote-Regional OHS Manager | 6 | Bangalore and Vadodara | |||||||||
| 3. | Roman Schafer-Regional Market Development Manager | 16 | Banalore | |||||||||
| 5. | Question 5: Furnish sample copies of the invoices raised by the recipeint | |||||||||||
| The invoice copy is enclosed as Annexure 3. | ||||||||||||
| In the event that you require any further explanations/clarifications, kindly provide us with an opportunity to present our case and make submissions. | ||||||||||||
36. The various services to be rendered as per the Regional Headquarter Service agreement, were mentioned in the said agreement and some of the services are reproduced hereinabove while recording the submissions of ld DR.
37. In the reply dt. 14.06.2012, it was mentioned that only three employees were sent to India for 25 days and AO had asked the assessee as to which branch of ABB Ltd the services were provided and when it was provided. Rather a vague reply was submitted stating that the services were provided either during visits to ABB Ltd (India) or mainly outside India over the phone.
Legislative Background
Section 90 of the Income Tax Act, which deals with agreement with foreign countries or specified territories reads as under:
“90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, –
| (a) | for the granting of relief m respect of- | |||
| (i) | income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or | |||
| (ii) | income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or | |||
| (b) | for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be. or | |||
| (c) | for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or | |||
| (d) | for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, | |||
and may, by notification in the Official Gazette, make such provisions as’ may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the .Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.
Explanation 1,- For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.
Explanation 2,- For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government.”
Section 9 of the Act deals with income deemed to accrue or arise in India, which reads as under:
(1) The following incomes shall be deemed to accrue or arise in India:-
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of Income in India, or through the transfer of a capital asset situate in India.
Section 9(1) of the Act reads as under:
(vi) income by way of royalty payable by-
| (a) | the Government; or | |
| (b) | a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or | |
| (c) | a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: |
Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trademark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April 1997, and the agreement is approved by the Central Government:
Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any light (including the granting of a license) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.
Explanation (2) reads as under:
Explanation 2. – For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for-
| (i) | the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; | ||
| (ii) | the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trademark or similar property; | ||
| (iii) | the use of any patent, invention, model, design, secret formula or process or trademark or similar property; | ||
| (iv) | the imparting of any information concerning technical, industrial commercial or scientific knowledge experience or skill; | ||
| [(iva) | the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB,] | ||
| (v) | the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or videotapes for use in connection with- television or tapes for use in connection with radio broadcasting,-‘but not including ‘consideration for the sale, distribution or exhibition of cinematographic films; or | ||
| (vi) | the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). | ||
| (vii) | income by way of fees for technical services payable by— | ||
| (a) | the Government; or | ||
| (b) | a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for. the purposes of making or earning any income from any source outside India ; or | ||
| (c) | a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: . . | ||
[Provided ‘ ...(not relevant)…………….]
[Explanation 1 )……………. (not relevant.) )……………. ]
Explanation [2].—For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.]
Section 5 provides as under
Scope of total income
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—
| (a) | is received” or is deemed to be received- in India in such year by or on behalf of such person ; or | |
| (b) | accrues or arises or is -deemed lo accrue or arise to him in India during such year; or | |
| (c) | accrues or arises to him outside India during such year : |
Provided that, in the case of a person not ordinarily resident in India within, the meaning of sub-section (6)-of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India,
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
| (a) | is received or is deemed to be received in India in such year by or on behalf of such person ; or | |
| (b) | accrues or arises or is deemed to accrue or arise to him in India during such year. |
includes all income from whatever source derived which—
Explanation 1. — Income accruing or arising outside India shall, not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2—-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen– or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
Articles dealing with resident, permanent establishment, business profit, royalty. any other income , residual clause etc. (DTAA Articles 1,3, 4, 5, 7, 12, 22, 25 & 29 ) in DTAA agreements entered into with foreign country namely UAE reads as under
ARTICLE 1
PERSONAL SCOPE
This Agreement shall apply to persons who are residents of one or both of the Contracting States.
ARTICLE 3
GENERAL DEFINITIONS
1. In this Agreement, unless the context otherwise requires :
| (a) | the term “India” means the territory of India and includes the territorial sea and air space above it. as well as any other maritime zone in which India has sovereign rights, other rights and jurisdictions, according to the Indian law and in accordance with international law ; | |
| (b) | the term “U.A.E,” means the United Arab Emirates and when used in a geographical sense, means all the territory of the United Arab Emirates including its territorial sea in which the U.A.E. laws relating to taxation apply and any area beyond its territorial sea within which the United Arab Emirates has sovereign rights of exploration or the exploitation or resources of the seabed and its sub-soil and superjacent water resources in accordance with international law ; | |
| (c) | the terms “a Contracting State’.’ and “the other Contracting State” mean U.A.E. or India as the context requires : | |
| (d) | the term “tax” means “Indian, tax” or “U.A.E. tax” as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Agreement applies or which, represents a penalty imposed relating to those taxes ; | |
| (e) | the term “person” includes an individual, a company, and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting State ; | |
| (f) | the term “company” means any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective Contracting States ; | |
| (g) | the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively, an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State; | |
| (h) | the term “national” means : |
| (i) | in the case of U.A.E. all individuals possessing the nationality of U.A.E. in accordance with U.A.E. laws and any legal person, partnership and other body corporate deriving its status as such from U.A.E. laws ; | |
| (ii) | in the case of India, any individual possessing the nationality of India and any legal person, partnership, or association deriving its status as such from the laws in force isi India ; |
| (i) | the term “international traffic” means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State except when’ the ship or-aircraft is operated solely between places in the other Contracting State | |
| (j) | the term “competent authority” means : |
| (i) | in the ease of U.A.E.,. the Minister of Finance and Industry of his authorised representative; and | |
| (ii) | in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative. |
As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning the taxes to which the Agreement applies.
ARTICLE 4
RESIDENT
1. For the purposes of this Agreement the term ‘resident of a Contracting State’ means:
| (a) | in the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in India in respect only of income from sources in India; and | |
| (b) | in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and. controlled wholly in UAE. |
2. For the purposes of paragraph 1:
| (a) | The Republic of India, its political sub-divisions or local authority thereof shal1 be deemed to be resident of the Republic of India: | |
| (b) | The United Arab Emirates and its political, sub-divisions or local Governments shall be deemed to he resident of the United Arab-Emirates; | |
| (c) | Government institutions shall be deemed, according to affiliation, to he resident of the Republic of India or the United Arab Emirates. Any institution shall he deemed to be a Government institution which has been created by the Government of one of the Contracting States or of its political sub-divisions or local authority/Governments, which are wholly owned and controlled directly or indirectly by the Government” of the Contracting State or political sub-division or local authority/Governments which are recognized as such by mutual agreement of the competent authorities of the Contracting States; | |
| (d) | For the purposes of this article, Abu Dhabi Investment Authority is recognized as a resident of the United Arab Emirates.] |
[3] Where by reason of the provisions of paragraph (/), an individual is a resident of both Contracting State, then his status shall be determined as follows:
| (a) | he shall be deemed to be resident of the State in which he has a permanent home available to him ; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); | |
| (b) | if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; | |
| (c) | if he has an habitual abode in both States or in either of them, he shall be deemed to be a resident of the State of which he is a national.; | |
| (d) | if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. |
[4.] Where by reason of the provisions of paragraph (1), a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management: is situated.
ARTICLE 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Agreement, the term “permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially :
| (a) | a place of management; | |
| (b) | a branch ; | |
| (c) | an office ; | |
| (d) | a factory ; | |
| (e) | a workshop; | |
| (f) | a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; | |
| (g) | a farm or plantation ; | |
| (h) | a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; | |
| (i) | the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that ‘such activities continue for. the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. |
3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include :
| (a) | the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ; | |
| (b) | the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; | |
| (c) | the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; | |
| (d) | the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; | |
| (e) | the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. |
4. Notwithstanding the provisions of paragraphs (1) and (3), where a person – other than an agent of independent status to whom paragraph (5) applies – is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterprise,
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph,
ARTICLE 7
BUSINESS PROFITS
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in. each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State.)
4. Insofar as it has been, customary in a Contracting State to determine the profits’ to be attributed to a permanent establishment on the basis of an apportionment of the’ total profits of the enterprise to its various parts/nothing in paragraph (2) shall preclude that Contracting State from, determining the profits to be taxed by such an apportionment as may be customary ; the methods of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of preceding paragraphs; the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
(7) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.
ARTICLE 12
ROYALTIES
1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 10 per cent of the gross amount of such royalties.
3. The term “royalties” as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematography films, or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience but do not include royalties or other payments in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources.
4. The provisions of paragraphs (1) and. (2) shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
ARTICLE 22
OTHER INCOME
1. Subject to the provisions of paragraph (2), items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement, shall be taxable only in that Contracting State.
2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a Contacting State, carries ‘on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
ARTICLE 25
ELIMINATION OF DOUBLE TAXATION
1. The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement.
2. Where a resident of India derives income or owns capital which, in accordance with the provisions of this Agreement, may be taxed in U.A.E., India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in U.A.E. whether directly or by deduction; and as a deduction from the tax on the capital, of that resident an amount equal to the capital tax paid in U.A.E. Such deduction in either case shall, not, however, exceed that part of the income-tax or capital tax (as computed before the deduction is given) which is attributable, as the case may be, to the income or the capital which may be taxed in U.A.E. Further, when such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in U.A.E. shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from the surtax payable by it in India.
3. Subject to the laws of the U.A.E. where a resident of the U.A.E. derives income which in accordance with the provisions of this Agreement may be taxed in India, the U.A.E, shall allow as a deduction from the tax on income of that person an amount equal to the tax on income paid in India. Such deduction shall not however, exceed that part of income-tax as computed before the deduction is given, which is attributable to the income which may be taxed in the U.A.E.
4. For the purpose of paragraph (3), the term ‘tax paid in India’ shall be deemed to include the amount of Indian tax which would have been paid if the Indian tax had not been exempted or reduced in accordance with the special incentive measures under the provisions of the Income-tax Act, 1961, which are designed to promote economic development in India, effective on the date of signature of (his Agreement, or which may be introduced in the future in modification of, or in addition to, the existing provisions for promoting economic development in India, and such other incentive measures which may be agreed upon from time to rime by the Contracting States.
5. Where, in accordance with any provision of the Agreement, income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may, nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.
ARTICLE 29
LIMITATION OF BENEFITS
1. An entity which is a resident of a Contracting State shall not be entitled to the benefits of this Agreement if the main purpose or one of the main purposes of the creation of such entity was to obtain the benefits of this Agreement that would not be otherwise available. The cases of legal entities not having bona fide business activities shall be covered by this Article.
Analysis by ITAT
46. If we examine the Article 5 of DTAA, then it is clear that the requirement of Article 5(1) of the treaty, namely, that there should be a fixed place of business and secondly, the business of the enterprise should he carried on wholly or partly through that place. The fixed place of business is necessary for a PE under Article 5(1) of the DTAA. But if we look into the Article 5(2), which is an inclusive provision, it includes various activities enumerated in clauses (a) to (1). Nature of places are specified in clauses (a) to (h), whereas in clause (i) of Article 5(2), reads as under :
“(i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within’any twelve-month period.”
47. Paragraph 3 of Article 5 specifies provides the circumstances in which the PE shall not include various activities. Paragraphs 4 and 5 are complementary and mentions of a person or agent of an. independent status who is working on behalf of the enterprises in a contracting state, the enterprises has been deemed to have a PE. Similarly, if an enterprise carrying on the business in the other State through broker, general commission etc., in ordinary course of business, and then the enterprise shall not be deemed to have a PE, However when the activities of such, a broker /agent are almost devoted wholly on behalf of that enterprise, then the agent will not be considered to have an independent status within the meaning of Article.
48. Now, if we read clause (2)(i) of Article 5 of the DTAA, then it is clear that for the purpose of service PE, the following ingredients are required to exist :
| (i) | That the enterprise furnishing services including consultancy services of the other contracting state ; | |
| (ii) | The said services were furnished through the ’employees or other personnel in the other contracting State ; | |
| (iii) | Such activities continued for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. |
49. Therefore it is clear that furnishing of services including consultancy services by assessee to ABB Ltd for the project in India or with connected Project was for a period 3 months after commencing its activities in January 2010. Thus it fulfil are the prerequisite of service PE and in our view service PE do not require permanent establishment as well. In the present age of technology where the services, information, consultancy, management etc., can be provided with various virtual modes like e-mail, internet, videoconference, remote monitoring, remote access to desktop, etc., through various software, therefore, the argument of fixed place of business, raised by the ld. Senior Advocate for the assessee that three employees were rendered services only for 25 days cannot be sustained, as the services can be rendered without the physical presence of employees of the assessee.
50. The clause 2 of Article 5 is by way inclusive definition in nature and the definition given in clause No 1 of Article 5 has been enlarged by clause 2, therefore Article 5(2) do not required to fulfil the requirement of Clause 1 of article 5 of DTAA. The Hon’ble Supreme court has decided the inclusive clauses in various judgments we would be reproducing some of the following Judgments to draw support for our reasoning. In Ramala Sahkari Chini Mills Ltd v. CCE [2010] 13 SCR 1152:
52. Thus we hold the Article 5(2) is’ independent clause and the condition of having fixed permanent place of business under article 5(1) is not attracted for Permanent Establishment under Article 5(2).
53. It is not disputed by the assessee that the assessee was providing the services of consultancy in the other contracting state i.e., in India. It is also not disputed that the enterprise was rendering these services through its employees. It is however, submitted by the Ld. Senior Advocate that the employees of the company remained in India only for 25 days and, therefore, the third condition of stay in India for more than 90 days, is not attracted.
54. As per our reading it is not the stay of the employees for more than 9 months, which is required to be there but it is fact of rendering of services or activities which was required to be rendered for a period of nine months. If we look into the reply submitted by the assessee in April 2012 and June, 2012, then it is clear that the assessee :
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| (a) | Has rendered the services through its three employees and their stay was for 25 days; and | |
| (b) | As is clear from the second reply, the assessee has rendered the services on various occasions from January to March 2010. |
55. The providing of services for a period of nine months is stipulated in the period of 12 months. In our view, once the activity of the assessee commenced only in the month of January, 2010, then the argument of completing 9 months service before March, 2010, is preposterous, implausible and against the common sense. It is not expected to complete 9 months between January, 2010 to March, 2010. The completion of 9 months activities by the enterprise was only conceived in a period of 12 months. However is not disputed ‘by the’ assessee before us that the enterprise / assessee continues to render the services with effect from January, 2010 and thereafter also in the subsequent assessment year.
56. In the light of the above, if we literal interpretation to clause 5(2)(i) of the DTAA, then it is clear that the services are required to be rendered by the enterprise through its employees or other personnel for a period of nine months within any 12 months period. We also draw strength from the law laid down by Hon’ble Supreme Court in the case of CIT v. Calcutta Knitwears [2014] 362 ITR 673/43 taxmann.com 446/223 Taxman 115 (Mag.)held-
’34. Thus, the language of a taxing statute should ordinarily be read understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative animation. A taxing statute should be strictly construed; common sense approach, equity, logic, ethics and morality have no role to play. Nothing is to be read in, nothing is to be implied; one can only look, fairly at the language used and nothing more and nothing less, (J. Srinivasa Rao v. Govt, of A.P. 2006(13) SCALE 27, Raja Jagdambika Pratap Narain Singh v. CBDT [1975]1 100 TTR 698 (SC)
35. It is also trite that while interpreting a machinery provision, the courts would interpret a provision in such a way that it would give meaning to the charging provisions and that the machinery provisions are liberally construed by the courts. In Mahim Patram (P.) Ltd. v. Union of India [2007] 3 SC’C 668 this Court has observed that:
“20. A taxing statute indisputably is to be strictly construed. [See J. Srinivasa Rao v. Govt, of Andhra Pradesh 2006 (13) SCALE 21). It is, however, also well-settled that the machinery provisions for calculating the tax or the procedure for its calculation are to be construed by ordinary rule of construction. Whereas a liability has been imposed on a dealer by the charging section, it is well-settled that the court would construe the statute in such a manner so as to make the machinery workable.
21. In J. Srinivasa Rao (supra), this Court noticed the decisions of this Court in Gursahai Saigal v. C77 [1963] 48 ITR 1 (SC)and Ispat Industries Ltd. v. Commissioner of Customs, Mumhai 2006 (202) ELT 561 (SC). In Gursahai Saigal (supra), the question which fell for consideration before this Court was construction of the machinery provisions vis-a-vis the charging provisions. Schedule appended to the Motor Vehicles Act is not machinery provision. It is a part of the charging provision, By giving a plain meaning to the Schedule appended to the Act, the machinery provision does not become unworkable. It did not prevent the clear intention of the legislature from being defeated. It can be given an appropriate meaning.”
36. A reference to the observations of this Court in J.K. Synthetics Ltd. v. CTO [ 1994] 4 SCC 276 would be apposite:
“13, It is well-known that when a statute levies a tax it does so by inserting a charging section by which a liability is created or fixed and then proceeds to provide the machinery to make the liability effective. It, therefore, provides the machinery ‘for the assessment of the liability already fixed by the charging section,, and then provides the mode for the recovery and collection of tax; including penal-provisions meant to deal’with defaulters. … Ordinarily the charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (Whitney v. Commissioners of Inland Revenue 1926 A C 37, CAT v. Mahaliram Ramjidas (1940) 8 ITR 442, Indian United Mills Ltd. v. Commissioner of Excess Profits Tax, Bombay,[1955] 27 ITR 20 (SC)and Gursahai Saigal, v. CIT] Punjab, [1963] I ITR 48 (SCI).”
37. It is the duty of the court while interpreting the machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the Courts ought not be hesitant in espousing a common sense interpretation to the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same (Whitney v. Commissioners of Inland Revenue 1926 A C 37, CIT v. Mahaliram Ramjidas [1940] 8 ITR 442 (PC), Indian United Mills Ltd. v. CIT [1955] 27 ITR 20 SC}. and Gursahai Saigal v. CIT [1963] 48 ITR 1 (SC)and CWT v. Sharvan Kumar Swamp & Sons [1994] 6 SCC 623; CIT v. National Taj Traders [1980] 121 ITR 535/[1979] 2 Taxman 546 (SC); Associated Cement Co.. Ltd. v. CTO [1981] 48 STC 466 (SC). Francis Bennion in Bennion on Statutory Interpretation, 5th Ed., Lexis Nexis in support of the aforesaid proposition put forth as an illustration that since charge made by the legislator in procedural provisions is excepted to be for the general benefit of litigants and others, it is presumed that it applies to pending as well as future proceedings.’
57. Thus respectfully following the path shown by the Apex Court (supra), in our view, the requirement of fixed place of business is not applicable to the clauses (2), (4) mid (5). Clause (i) of Article 5(2) which provides the service PE, is not dependent upon, the fixed place of business as is only dependent upon the continuation of the activity for the same project or connected project for a period / periods aggregating to more than 9 months within 12. Accordingly we hold that assessee is having the service PE in India, However the determination of this issue will only have any hearing on the issues under considerations if on examination of facts we come to conclusion that the activities of the assessee do not fall in any of the Article of DTAA.
59. ‘The agreement gives ‘ opportunity to ABB Ltd. of using the information pertaining to industrial / commercial / scientific experience belonging to Assessee, Can on the basis of material available on record it can be concluded that the assessee had rendered the services mentioned in the agreement? In our view it would not be possible for the assessee to render these activities or services merely with the help of three persons sent only for 25 days to India as the nature of activities scope and ambit of clauses in the agreement is very wide and it is not possible to render these services either through 3 employees or through phone call (moreover the assessee has not provided any evidence of actual rendering of services), therefore instead of providing the services by the assessee through it employees, the assessee had merely given the access to ABB Ltd various secret, confidential, IPRs information and other information acquired by it from its past experience to ABB Ltd. If the services were actually rendered by the assessee, (as claimed by the assessee) than it is essential that the assessee would have sent some of its officer on its payroll to actually execute the services at various branch offices of ABB Ltd. In our view the assessee is required to undertake collecting, analysing and delivering of security intelligence and information to the service recipient under “The Regional Headquarter Services” to ABB Ltd, then the deployment of manpower by the assessee was necessary and similarly the deployment of manpower is equally necessary in case of education in basic sector procedure and regulations to new employees of service recipient (ABB Ltd).
60. In the reply of the assessee to AO, it is by the assessee, that coaching and monitoring the OHS advisors of ABB Ltd in implementing and developing OHS plans’ and ‘ strategies, were rendered via visits, telephone calls, meeting trainings etc but no evidence was given by the assessee to AO or CIT or the Tribunal. In our view, these activities which were allegedly rendered by the assessee were in the form of sharing or permitting to use the special knowledge, expertise and experience of the assessee, (which the assessee had acquired from its parent company,) and was shared by it with ABB Ltd. squarely falls within the realm of ‘royalty’, as defined in Article 12(3) INDO -UAE DTAA and in the form of rendering the services. The visits of the officials of the assessee to ABB Ltd was only for the purposes of providing access for using the information pertaining to industrial / commercial / scientific experience belonging to Assessee and to help ABB Ltd to commercially exploiting it.
Author’s opinion
This judgement of ITAT reminds me of an observation by Jagannadha Rao, J. in his judgemen in CIT v Visakhapatnam Port Trust on 17 June, 1983 Equivalent citations: 1983 144 ITR 146 AP where he observes
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53. In our opinion, the words “permanent establishment” postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.
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Following are undisputed facts.
- Information technology has significantly changed the way the business is conducted.
- To a great extent, it has made physical presence of any person irrelevant.
- Sovereign authority to pass legislation is still decided having regard to geography.
- It is indeed a difficult exercise to reconcile the taxing statutes which are applicable to a particular geography vis-à-vis the way technology works for which geography is irrelevant.
- It is also an established fact that source based taxation and residence based taxation are realities of life and should co-exist.
An attempt is made to apply the above mentioned legislative principles to the facts of the case.
The concept of PE is of extreme importance because taxation of business profit of a foreign entity is wholly dependent on existence of PE in a country. Let’s understand the concept of PE
| ARTICLE 5 – PERMANENT ESTABLISHMENT | Popularly comments |
| 1. For the purposes of this Agreement, the term “permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. – Fixed Place PE. It is an exhaustive definition. Provisions relating to fixed place PE continues
2. The term “permanent establishment” includes especially :
(a) a place of management; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a farm or plantation ; (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; |
Fixed Place PE |
| (i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that ‘such activities continue for. the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. | Service PE |
| 3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include :
(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. |
Activity is at naïve stage. Common criteria – solely for the purpose of |
| 4. Notwithstanding the provisions of paragraphs (1) and (3), where a person – other than an agent of independent status to whom paragraph (5) applies – is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterprise, | Dependent PE |
| 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph, | Independent PE |
Madras HC in the case of Verizon Communications Singapore Pte Ltd. v. ITO [[2013] 39 taxmann.com 70 (Madras)] NOVEMBER 7, 2013 has made following observations while dealing with the issue of the physical presence of employees and its impact on source based taxation. Madras HC has said that presence of “physical presence” of employees is not relevant.
Ofcourse the judgement of Verizon Communications supra has to be read in the context of the issue before the bench. The issue before the bench was as to whether retrospective amendment to IT Act can be relied upon to interpret the meaning of royalty…
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Although in his reply, learned senior counsel appearing for the assessee pointed out to Article 5 on permanent establishment to contend that VSNL is not an agent and hence cannot be construed as a permanent establishment of the assessee, no arguments are advanced on this account. In any event, in a virtual world, the physical presence of an entity has today become an insignificant one; the presence of the equipment of the assessee, its rights and the responsibilities of the assessee, vis-a-vis the customer and the customers’ responsibilities clearly show the extent of the virtual presence of the assessee which operates through its equipment placed in the customer’s premises through which the customer has access to data on the speed and delivery of the data and voice sent from one end to the other. The Explanations inserted thus clearly point out that the traditional concepts relating to control, possession, location on economic activities and geographic rules of source of income recede to the background and are not of any relevance in considering the question under Section 9(1)(vi) read with Explanation 2. Thus, more so when it comes to the question of dealing with issues arising on account of more complex situations brought in by technological development by the use of and role of digital information, goods etc., the foreign enterprise does not need physical presence at all in a country for carrying on business. Hence, we do not think that we need to go in depth in this regard for the reason that we have already given herein before.
The most critical portion is reading of “service PE clause i.e. clause (2)(i) of Article 5 of the DTAA, which has been para-phrased as follows
| (i) | That the enterprise furnishing services including consultancy services of the other contracting state ; | |
| (ii) | The said services were furnished through the ’employees or other personnel in the other contracting State ; | |
| (iii) | Such activities continued for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. |
ITAT has interpreted that
1. Firstly, the criteria of period i.e. 9 out of 12 months is linked to “such activity” and not to “employees or other personnel”
2. Secondly, the criteria for “employees or other personnel” is that they should render the service.
3. Thirdly, the above two sub clauses are independent of each other.
The term “employees or other personnel” is broad enough to cover any staff whether an employee of the company or group of persons to whom the work is allotted. Alternatively, if the work is sub-contracted, there is always the catch of dependent agent.
If one decides to interpret in above manner, sub clause (ii) of clause (2)(i) of Article 5 will become redundant.
Even BEPS Action plan on digital economy suggests that there should be a specific definition of virtual PE so as to tax the transactions by source country.
OECD has published various reports on Base Erosion and Profit Sharing. One of such report was published in October 2015 namely “Addressing the Tax Challenges of the Digital Economy – ACTION 1: 2015”.
The OECD has recommended several options to tackle the direct tax challenges including –
(i). modifying the existing PE rule to include an enterprise which maintains a significant digital presence in another country’s economy; or
(ii). creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website; or
(iii). Impose a final Withholding tax (WHT) on certain payments for digital goods or services provided by a foreign e-commerce provided; or
(iv). Imposition of Equalisation levy on consideration for certain digital transactions.
As of today, the Indian revenue authorities have adopted the last approach by imposing Equalisation Levy on the resident Indian or non-resident having a PE in India who have to make payments to non-residents in the advertisement space above a threshold limit.
In view of above, in my opinion, the criteria of “employees or other personnel” have to be read as those having a personal [physical] presence in that contracting state till the definition of PE is amended to include virtual PE as referred to in (i), (ii) above.
NF
Author Bio
ITAT took a view [refer para 20 to 25 of order] that the assessee is not eligible for DTAA benefit. In such a case, ITAT should have referred domestic provisions of IT Act to determine taxability or otherwise.
After determining that the assessee can not get benefit of DTAA, it can-not resort to article 5 of the same DTAA to analyse the position.