Period of existence of two offices cannot be clubbed for determining the existence of PE

Direct Taxes (including International Taxation) | By ALOK PATNIA | Last updated on Oct 5, 2017

The Income Tax Appellate Tribunal of Delhi ruled in favor of the assessee for the dispute in regard to existence of a permanent establishment in India. Accordingly an entity will only deemed to have a permanent establishment in India in case the entity exists in India for more than 180 days. As the taxability is determined on the basis existence of a permanent establishment of an assessee, hence the head under which the income is taxed is determined only after assurance of existence of PE in India.Â While determining the existence of PE, the period of existence of two offices cannot be clubbed. Â

Period of stay of Independent Project offices shall not be aggregated to determine number of days of stay in India. If number of days of stay of each project office in India does not exceed 180 days, no PE shall be deemed to be in existence in India. Supervisory fees shall not be deemed to be connected with Liaison Office, being a PE in India, if such LO is nowhere involved in the supervisory activities. Hence, Supervisory fees shall be taxable as FTS under Article 12 and not as Business Income under Article 7 of India-Japan DTAA.

Facts:

The assessee, a Japanese company, had established Liaison office in India to facilitate import of equipments from Japan to Maruti Udhyog Ltd. (‘MUL’).
Assessee established three project offices in connection with Raichur Project, Basin Bridge Project and Paint and Assembly shop for MUL.
In some of the contracts assessee received supervision fees (Fees for Technical Services) from the MUL for supervising the installation of the machinery and equipments supplied by it.
The assessee contended that it did not have any PE in India to tax the supervision income as business income under Article 7 of India-Japan DTAA. Therefore, it would be taxable as FTS under Article 12(2) of such DTAA.
The Assessing Officer held that the assessee, admittedly, had a PE for supply of equipments in India in respect of projects and it was enough if the enterprise had a PE and it was not necessary that each project should have a separate PE.
The AO further contended that the supervision period of all the contracts had to be aggregated and the same would amount to more than six months or 180 days to constitute a PE in India.
Accordingly, the AO held that supervision fees received under contract was effectively connected with a PE and brought it to tax under section 115A.

The Tribunal held in favour of assessee as under:

The supply of equipment, installation and commissioning at MUL were carried out by the project office and the income arising out of such activities was offered to tax, which was not disputed.
The LO was only facilitating the communication of the assessee with MUL and was nowhere involved in the supervisory activities. Existence of the LO could not be a basis that assessee was having supervisory PE in India.
On the issue of aggregation of the time threshold of each project, the ITAT concluded that test of minimum period had to be determined for each site or installation project on following grounds:

Each purchase order was procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL and the terms and conditions of each purchase orders were different and not linked with others.
The performance guarantee given by the assessee was also different for different work.
The work of installation and supervision was done independently. One purchase order was not dependent on the completion of work of installation of some other purchase orders.
The equipment supplied by the assessee was used in different stages of production and at different sections of car manufacturing process.
Equipment supplied under one purchase order was not complemented to the equipment supplied in another purchase order.
Period of supervision under each contract was of less than the period of 180 days as contemplated in Article 5(4)of the DTAA.

Therefore, no PE existed in India. Accordingly, the supervisory fees had to be taxed as FTS under Article 12 and not as Business Income under Article 7 of India-Japan DTAA.

____________________________________________________________________________________________________

Feel free to write to us,at [info@taxmantra.com] or call us at +91 88208208 11.

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Facts:

The assessee, a Japanese company, had established Liaison office in India to facilitate import of equipments from Japan to Maruti Udhyog Ltd. (‘MUL’).
Assessee established three project offices in connection with Raichur Project, Basin Bridge Project and Paint and Assembly shop for MUL.
In some of the contracts assessee received supervision fees (Fees for Technical Services) from the MUL for supervising the installation of the machinery and equipments supplied by it.
The assessee contended that it did not have any PE in India to tax the supervision income as business income under Article 7 of India-Japan DTAA. Therefore, it would be taxable as FTS under Article 12(2) of such DTAA.
The Assessing Officer held that the assessee, admittedly, had a PE for supply of equipments in India in respect of projects and it was enough if the enterprise had a PE and it was not necessary that each project should have a separate PE.
The AO further contended that the supervision period of all the contracts had to be aggregated and the same would amount to more than six months or 180 days to constitute a PE in India.
Accordingly, the AO held that supervision fees received under contract was effectively connected with a PE and brought it to tax under section 115A.

The Tribunal held in favour of assessee as under:

The supply of equipment, installation and commissioning at MUL were carried out by the project office and the income arising out of such activities was offered to tax, which was not disputed.
The LO was only facilitating the communication of the assessee with MUL and was nowhere involved in the supervisory activities. Existence of the LO could not be a basis that assessee was having supervisory PE in India.
On the issue of aggregation of the time threshold of each project, the ITAT concluded that test of minimum period had to be determined for each site or installation project on following grounds:

Each purchase order was procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL and the terms and conditions of each purchase orders were different and not linked with others.
The performance guarantee given by the assessee was also different for different work.
The work of installation and supervision was done independently. One purchase order was not dependent on the completion of work of installation of some other purchase orders.
The equipment supplied by the assessee was used in different stages of production and at different sections of car manufacturing process.
Equipment supplied under one purchase order was not complemented to the equipment supplied in another purchase order.
Period of supervision under each contract was of less than the period of 180 days as contemplated in Article 5(4)of the DTAA.

Therefore, no PE existed in India. Accordingly, the supervisory fees had to be taxed as FTS under Article 12 and not as Business Income under Article 7 of India-Japan DTAA.

____________________________________________________________________________________________________

Feel free to write to us,at [info@taxmantra.com] or call us at +91 88208208 11.

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