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Global Tax Alert2 July 2014
India’s Hyderabad ITAT rules no supervisory PE in absence of construction or building site under India-Germany treatyExecutive summary
This Tax Alert summarizes a recent ruling of Hyderabad Income Tax Appellate Tribunal (ITAT) in the case of GFA Anlagenbau Gmbh1 on whether the supervisory activities carried out in India by the employees of a German company (FCo) in relation to the projects carried out in India, constitutes a permanent establishment (PE) for FCo in India. The ITAT held that in the absence of a fixed place of business in the form of building or construction site at the disposal of FCo, merely carrying out supervisory activities in India will not trigger a PE for FCo in India both under the Indian Tax Laws (ITL) as well as the India–Germany Double Taxation avoidance Agreement (the Treaty).
Detailed discussion
Background Fixed place PE is defined to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Further, the Treaty provides that PE includes a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months.
The OECD Model does not specifically include supervisory activities within the meaning of PE, whereas the UN Model includes “supervisory activities” within the meaning of PE in addition to construction, assembly or like projects.
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Additionally, if the foreign company carries on its business in India through a PE situated in India and the contract, in respect of which “fees for technical services” (FTS) is paid, is effectively connected with such PE, then in such case the same would be taxable on a net basis at a higher rate under the head business income.
FCo, a company incorporated in Germany, is engaged in the activity of supervision, erection, and commissioning of plant and machinery of steel and allied plants in India.
During the relevant tax year, FCo rendered technical and supervisory services to various Indian Companies.
FCo engaged experienced foreign technicians at the work sites and other places in India to carry out technical and supervisory activities and the receipts from such contracts were categorized as FTS. Period of stay of the technicians seconded for supervising one of the projects in India exceeded 183 days during the relevant tax year.
The Tax Authority contended that since FCo’s activities in India continued for a period exceeding six months, FCo has a PE in India under the Treaty. Further, services rendered in the nature of FTS were also effectively connected to the PE constituted and, hence, income from such services was taxable as business profits.
FCo claimed that the project sites of ICo cannot be considered as a fixed place of business for the same to be
regarded as fixed place PE in India. Even otherwise, since the period of stay of technicians seconded to only one project exceeded 183 days, income accruing from all projects cannot be held taxable as business profits in India but was taxable as FTS.
The dispute resolution panel, considering the terms of the contract, upheld the contentions of the Tax Authority. FCo then appealed to the ITAT.
ITAT’s ruling
Based on the following determinations, The ITAT held that FCo’s supervisory activities do not constitute a PE in India both under the ITL as well as the Treaty for the reasons outlined below.
Taxability under the ITLReliance was placed on the High Court decision in the case of Clouth Gummiwerke Akrineqesellschaft2 to conclude that supervisory activities carried out by the technicians in India are taxable as FTS under the ITL. Further, the supervisory activities carried out at project sites in India would not constitute a fixed place PE under the provisions of the ITL as FCo does not have the right to operate such sites independently.
Taxability under the TreatyFixed Place PEFCo carries out supervision of projects of ICo and it does not have any fixed place of business in India. Although the stay of technicians seconded to India on one of the projects exceeded six months, there was nothing to show that the
technicians were operating from a fixed place of business which was at the disposal of FCo.
Reliance was placed on the Special Bench decision in the case of Motorola Inc3 and Mumbai ITAT decision in the case of Airlines Rotables4 to conclude that FCo did not have a fixed place PE in India under the Treaty.
Supervisory PEThe ITAT noted that the rationale of the High Court decision in the case of Vishakapatnam Port Trust [144 ITR 146] which held that mere supervisory activities will not form a PE, could be adopted. However, the ITAT refrained from doing so as the Treaty language then was different as compared to the current treaty language, i.e., revised India-Germany treaty which specifically includes supervisory services within the meaning of PE which was absent earlier.
Supervisory activities by themselves cannot constitute a PE and it should be in connection with a building or construction site of FCo. In the present case, FCo merely provides supervisory activities and does not have a building or construction site or a fixed place at its disposal.
The sole fact that the technicians stayed in India while supervising the work of FCo in India cannot be considered that their place of stay can be regarded as “fixed place of business” for FCo.
Thus, the activities being technical in nature clearly falls under the FTS definition of the Treaty and the
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same is not effectively connected to a PE as FCo does not have a fixed place of business through which its activities are carried out.
Aggregation of projectsContracts in India cannot be aggregated in the absence of any link between them and should be individually assessed for the duration test. Reliance in this regard was placed on Mumbai ITAT’s decision in the case of Valentine Maritime.5
Implications
Existence of a PE has emerged as a contentious international tax issue for multinational enterprises doing business in India. The ITAT, in this decision, has ruled that mere supervisory work not connected with a building or construction site cannot constitute a PE. The ITAT
applied the principles of fixed place PE for the purpose of examining emergence of supervisory PE even in the context of UN model patterned treaty which specifically includes supervisory activities in connection with construction site as a specific trigger of PE.
Endnotes
1. [TS-383-ITAT-2014(HYD)].
2. [238 ITR 861 (AP HC)].
3. [95 ITD 269].
4. [131 TTJ 385]. See EY Tax Alert, Mumbai ITAT rules maintenance of stock by customer does not constitute a PE of the foreign enterprise in India, dated 1 June 2010.
5. [2010-TIOL-195-ITAT-MUM]. See EY Tax Alert Mumbai Tribunal rules on computation of ‘duration test’ for determining existence of ‘Construction PE, dated 23 April 2010.
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For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai• Sudhir Kapadia +91 22 6192 0900 [email protected]
Ernst & Young LLP (India), Hyderabad• Jayesh Sanghvi +91 40 6736 2078 [email protected]
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London• Nachiket Deo +44 20 778 30862 [email protected]
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore• Gagan Malik +65 6309 8524 [email protected]
Ernst & Young LLP, Indian Tax Desk, New York• Riad Joseph +1 212 773 4496 [email protected]
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