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SERVICE PE
AKIL HIRANIManaging Partner
MMAJMUDAR & AJMUDAR & CCOO..
96 Free Press House, Free Press Journal Road, Nariman Point, 96 Free Press House, Free Press Journal Road, Nariman Point, Mumbai-21, INDIAMumbai-21, INDIA
Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Other offices: Bangalore, New Delhi, Chennai and Hyderabad Other offices: Bangalore, New Delhi, Chennai and Hyderabad
E-mail: E-mail: [email protected]@majmudarindia.comwww.majmudarindia.comwww.majmudarindia.com
INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Synopsis
Service PE under the OECD Model Tax Convention and the UN Model Tax Convention
Service PE under DTAAs between India and other countries
When is a service PE deemed to be concluded?
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Service PE under the OECD Model Tax Convention and UN Model Convention
OECD Model Tax Convention – No specific provision for service PE
UN Model Convention – Does not use the expression “service PE” – Article 5(3)(b) of the UN Model Convention reads as follows:
The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continues (for the same or a connected project) within the country for a period or periods aggregating more than six (6) months within any twelve (12) month period.
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Service PE under the OECD Model Tax Convention and UN Model Convention (contd.)
Rationale of Service PE Clause – to tax the enterprise of the home country for its economic activities in the host country beyond a threshold limit
No Clause on ‘fees for technical services’ in the UN Model Convention
Service PE in DTAAs between India and other countries
Service PE is included in the DTAAs between India and the following countries:
Australia – Article 5(3) Canada – Article 5(2)(l) China – Article 5(2)(k) United States of America – Article 5(2)(l) United Kingdom – Article 5(2)(k) Switzerland – Article 5(2)(l) Singapore – Article 5(6) Norway – Article 5(2)(l) Indonesia – Article 5(5) Nepal – Article 5(2)(h)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Requirements to establish service PE
Services to be rendered by the employees or “other personnel” engaged by the enterprise for a specified period within the host state
“other personnel” – generally does not include non-individuals – no clarity in the UN and OECD commentaries
DTAA between UK and Singapore – service PE is triggered if services rendered through a non-person,
for e.g., a company
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Requirements to establish service PE (contd.)
Time period
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Country Services provided to a non-related enterprise
Services provided to a related enterprise
Australia More than ninety (90) days within any twelve (12) month period
One (1) day
Canada More than ninety (90) days within any twelve (12) month period
One (1) day
Singapore more than ninety (90) days within any fiscal year
More than thirty (30) days in a fiscal year
China More than one hundred and eighty-three (183) days
Not provided
Norway Six (6) months within any twelve (12) month period
Not provided
Requirements to establish service PE (contd.)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Country Services provided to a non-related enterprise
Services provided to a related enterprise
Swiss Confederation More than ninety (90) days in any twelve (12) month period
More than thirty (30) days in a twelve (12) month period
United Kingdom More than ninety (90) days in a twelve (12) month period
More than thirty (30) days in a twelve (12) month period
United States of America
More than ninety (90) days in a twelve (12) month period
One (1) day
Requirements to establish service PE (contd.)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Country Services provided to a non-related enterprise
Services provided to a related enterprise
Nepal more than one hundred and eighty-three (183) days in any
twelve month period
Not provided
Thailand period or periods aggregating to more than one hundred and eighty-three (183) days
Not provided
Sri Lanka period or periods aggregating to more than one hundred and eighty-three (183) days
Not provided
Indonesia more than ninety-one (91) days in any twelve (12) month period
Not provided
Other issues
Definition of a “month” – Section 3(35) – General Clauses Act, 1897 – as per British calendar
Not a problem as most DTAAs give exact number of days
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Requirements to establish service PE (contd.)
Nature of services
UN Model Convention – uses the term “furnishing of services, including consultancy services.”
“furnishing services, including managerial services” – used in the DTAAs signed by India with Australia and United Kingdom
“furnishing of services” – used in the DTAAs signed by India with China, Canada, Nepal, Singapore, Switzerland and United States of America – no impact – “furnishing of services” is sufficiently wide to cover all kinds of services, including consultancy and managerial
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Requirements to establish service PE (contd.)
DTAAs signed by India with the following countries specifically exclude certain categories of services from the Service PE Clause:
United Kingdom – excludes services covered under Article 13 of the DTAA (Royalties and fees for technical services)
Singapore – excludes supervisory activities in relation to building sites, etc., covered under Article 5(4) and services in relation to exploration covered under Article 5(5)
Australia – excludes services in respect of which payments or credits that are royalties as defined in Article 12
Canada – excludes services covered under Article 12 (Royalties and fees for included services)
China - excludes technical services as defined in Article 12
(Royalties and Fees for Technical Services) MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Other issues
Definition of a “month” – Section 3(35) – General Clauses Act, 1897 – as per British calendar
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
“Services within a country”
Some treaties use “within” and some use “in” – dictionary meaning is the same
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
In re P. No. 28 of 1999
A (Indian company) and B (US company) formed a JV in India (AB) to manufacture automobiles
XYZ – wholly owned subsidiary of B
Provides services to B’s group companies
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
In re P. No. 28 of 1999 (contd.) AB and XYZ executed a management services
agreement – XYZ is to provide executive personnel (finance, service, marketing, etc.)
XYZ contended that it worked as an employment agency – however, AAR noted that the personnel were not employees of AB – AB paid XYZ for the services and not the personnel
XYZ assumes responsibility for suitability and competence of personnel for the tasks assigned to them
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
In re P. No. 28 of 1999 (contd.) XYZ is responsible to replace the personnel
if they resign
XYZ has to provide substitutes if these personnel are assigned to another project - AB can ask XYZ to provide additional personnel, if required
AAR ruled that Service PE exists
In Re. P. No. 28 of 1999, [2000] 242 ITR 208 (AAR)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Metapath’s Case
Metapath – telecom software company
Joint Venture in India with Bharti Cellular
Two (2) Expatriates sent to India to assist with the setup and establishment of the JV
Stayed in India for one (1) year
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Metpath’s Case (contd.)
Employed by both Metapath UK and Metapath India – salaries paid by UK – expenses paid by India
CIT (Appeals) held that Service PE was in fact concluded as the expatriates were rendering services in India to the Indian JV.
Issue raised in appeal but the Delhi High Court did not deal with the issue of Service PE in the judgment
DCIT v. Metapath Software International, Inc., [2006] 9 SOT 305 (NULL)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Morgan Stanley’s Case
MS and Co., Inc. outsourced some of its functions to MSAS
MS and Co., Inc. also provided some personnel who were overseeing the outsourced activities and they were also providing managerial services
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Morgan Stanley’s Case (contd.) Secondment arrangement
MS and Co., Inc. bore the risk of the employee’s activities
The employees were assured of their original jobs when they returned to the US
Employees were under MS and Co., Inc’s control
AAR ruled Service PE existed
Appeal to Supreme Court
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Morgan Stanley’s Case (contd.) Supreme Court differentiated between
“stewardship activities” and “deputationist” Stewardship – protect MS and Co., Inc’s
interest – not a service to MSAS – no Service PE
Deputationist – day-to-day management of MSAS – Service PE concluded
However, no income attributable to Service PE as MSAS was remunerated on an arm’s length basis
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Morgan Stanley’s Case (contd.) Pointers
Widely acclaimed as the right decision for the wrong reasons
Co-relation between Article 5(1) and 5(2) – Whether the services are related to the foreign enterprise’s business
Attribution – MSAS was not reckoned as Service PE – Service PE would be some sort of a fictional entity
Avoid “lien”, “risk” and “control” DIT v. Morgan Stanley, [2007] 292 ITR 416 (SC)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Golf in Dubai’s Case
Golf in Dubai LLC – organizes golf tournaments internationally
Conducted two (2) golf tournaments in India
Hired golf courses – received sponsorships from India and abroad
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Golf in Dubai’s Case (contd.)
AAR
“furnishing of services” – bilateral concept Requires service provider and service
recipient No such service recipient exists – hence
no Service PE In any event – time threshold not breached
In Re. Golf in Dubai, LLC, (2008) 219 CTR (AAR) 513
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Lucent Technologies’ Case
Lucent – hardware and software for mobile phones
Indian customers – after sales services, installation, etc., through Lucent India
Expatriates from Lucent Affiliate
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Lucent Technologies’ Case (contd.)
ITAT held as follows:
Service PE clause covers “other personnel”
“Other personnel” – controlled by the foreign enterprise
Affiliate’s personnel controlled by Lucent Service PE concluded
Lucent Technologies International, Inc. v. DCIT, (2009) 120 TTJ (Delhi) 929
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Worley Parsons’ Case
Worley Parsons – Australian company
Engaged by ONGC
Employees visited India to review documentation
Six projects in total
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Worley Parsons’ Case (contd.) AAR – key issues:
Whether a single contract can be called “services” – as same counterparty and same purpose – all contracts together amount to the “services”
As contracts 2, 3 and 4 fall within the same financial year – they are to be reckoned together to determine number of days
Service PE concluded w.r.t. Contracts 2, 3 and 4 Worley Parsons Services Pvt. Ltd. v. DIT, [2009]
313 ITR 74 (AAR)
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Attribution of Profits
Generally covered under Article VII
Involves a fair amount of estimation
Three (3) approaches:
Direct attribution – profits that the PE would have made if it was dealing with the enterprise on an arm’s length basis – most treaties have this clause
Indirect attribution – profits relevant to the portion of the work done by the PE – e.g., UK
Force of Attraction – US is a typical example
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Attribution of Profits (contd.) Section 9(1) – “income accruing or arising, whether
directly or indirectly, through or from”
Explanation to Section 9(1) – income “reasonably attributable to the operations carried out in India”
Rule 10 of the Income Tax Rules, 1962 – when actual income cannot be accurately ascertained – three (3) methods
Presumptive Method – Rule 10(i) – percentage of turnover as may be considered reasonable
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Attribution of Profits (contd.)
Proportionate Method – Rule 10(ii) – calculated on the basis that ratio of Indian turnover to global turnover should be equal to ratio of Indian profits to global profits
Discretionary Method – Rule 10(iii) – “in such other manner as the AO may deem fit”
Presumptive Method – taxation on a gross basis – Sections 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Confusing Judicial Guidance
In re P. No. 28 of 1999 (supra)
Question not expressly pressed before the authority
Obiter – Profits attributable to the services – fees received as consideration
Morgan Stanley (supra)
No further attribution because MSAS was remunerated at arm’s length – however, MSAS was not reckoned as the PE
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Confusing Judicial Guidance (contd.)
Lucent Technologies (supra)
Question regarding attribution not raised in appeal before ITAT
Worley Parsons (supra)
“income therefrom will have to be computed in accordance with Article VII of the DTAA”
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Case Study - A
Intra-group outsourcing transaction
ABC, Inc. – Outsources functions to subsidiary – ABC India (Private) Limited
Secondment arrangement – MD of ABC India is an ABC US employee – derives salary from both – TDS at both levels
Secondment arrangement includes indemnity from ABC US to ABC India for MD’s actions
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Case Study - B
Intra-group outsourcing transaction
ABC, Inc. – sets up ABC India (Private) Limited – Outsourcing contract states that ABC, Inc. to provide personnel for carrying out the outsourcing work
Contracts with XYZ in India for providing staff (on loan basis) to ABC India (Private) Limited
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Case Study - C
Intra-group outsourcing transaction
ABC, Inc. – sets up ABC India (Private) Limited – Outsourcing contract states that ABC, Inc. to provide personnel for carrying out the outsourcing work
Contracts with XYZ in India for providing staff (on loan basis) to ABC, Inc. – thereafter seconds loaned staff to ABC India
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Case Study - D
US marketing firm – receives contract for a product in India
Engages a subcontractor (Indian company) on a principal-to-principal basis for executing part of the contract in India
Whether any Service PE exposure exists?
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Case Study - E
UK company – establishes (76:24) JV in India
Sends employees to India to establish JV business
Employees stay in India as follows:
Mr. A – March 1 – April 1 Mr. B – March 1 – April 1 Mr. C – March 1 – April 1
MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS
Thank You
MMAJMUDAR & AJMUDAR & CCOO..
96 Free Press House, Free Press Journal Road, Nariman Point, 96 Free Press House, Free Press Journal Road, Nariman Point, Mumbai-21, INDIAMumbai-21, INDIA
Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Other offices: Bangalore, New Delhi, Chennai and Hyderabad Other offices: Bangalore, New Delhi, Chennai and Hyderabad
E-mail: E-mail: [email protected]@majmudarindia.comwww.majmudarindia.comwww.majmudarindia.com
INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS