Provision of Technical and professional employees to the Indian affiliate company (ICo) results in a Permanent establishment (PE) in India; Factors such as interdependency and nature of services rendered considered in arriving at the conclusion.
Facts:
The Booz & Co. Group (Group entities) is a global network of group companies. With the intention of optimising its global business network and expertise, entities within the Group provided as well as availed services from each other.
Accordingly, the Group entities received payments from ICo (Indian affiliate of Group) for provision of technical and professional personnel (personnel).
Features of the arrangement between the Group entities and ICo as appearing in the application and also emphasised by the tax authorities are as follows:
• All projects won by the Group were catered to by a common pool of personnel.
• ICo executed its projects through its own employees and to the extent required, procured the services of personnel of the relevant Group entity.
• The personnel were under the control and supervision of ICo in respect of ICo’s project. However they were bound by the employment agreement entered with, and overall control of, the relevant Group entity. Thus the relevant Group entity had the power to recall and replace its personnel.
• The relevant Group entity provided on-the-job training to such personnel, was answerable to third party claims for infringement of any rights by such personnel.
• The expertise of the relevant Group entities in giving consultancy in the fields that the Group operates, the brand equity the Group enjoys, the capabilities the Group has developed across the globe and services from the Group professionals and experts is needed for ICo to optimally function.
• The Group’s business is manpower-centric in which the only important asset is human resource.
The Group entities contended that in the absence of a Permanent Establishment (PE) of the relevant Group entity in India, the fee received from ICo cannot be taxed as business income in India but should be taxed as Fee for technical services (FTS).
The Tax Authorities contended that ICo is exclusively dependent on Group entities in getting the services of capable personnel as well as their on-the-job training, in order to achieve optimal efficiency. This dependency of ICo on the Group entities blurs the identity of individual entities and thus, ICo constitutes a dependent agent of the Group entities. Additionally, the number and high level of qualification of personnel deployed by the Group entities to ICo clearly establishes that ICo constitutes a service PE. The access given by ICo’s client/ICo to the personnel deployed to ICo in a given space also renders that place a fixed place PE of the relevant Group entities.
Held:
On Fixed Place PE:
Under a Double Tax Avoidance Agreement (DTAA), one of the sine qua non of a fixed place PE is that, the fixed place of business through which the business is carried on should be ‘at the disposal’ of the relevant Group entity.
Conducting trading operations generally requires a fixed place which the taxpayer uses on a continuous basis. However, taxpayers rendering service usually do not require a place to be at their constant disposal and therefore application of ‘disposal test’ is generally more complex in such cases.
In some jurisdictions the ‘disposal test’ is satisfied by the mere fact of using a place. In other jurisdictions, it is stressed that something more is required than a mere fact of use of place.
Various factors have to be taken into account to decide a fixed place PE which, inter alia, includes a right of disposal over the premises. No straight jacket formula applicable to all cases can be laid down.
Generally, the establishment must belong to the foreign enterprise and involve an element of ownership, management and authority over the establishment. Principles were derived from the following decisions on the ‘disposal test.’
• Rolls Royce Plc. [339 ITR 147]
• Seagate Singapore International Headquarters Pvt. Ltd. [322 ITR 650 (AAR)] –
• Motorola Inc. [147 Taxman 39 (SB)] –
• Western Union Financial services [104 ITD 34]
On Service PE:
In terms of the DTAA a service PE is triggered if services are provided in a source State and such services are provided through employees or other personnel. In case of deputation of employees, if the lien over such employees is retained by the deputing company and the employees continue to be on the payroll of the deputing company, a Service PE emerges.
Where a business of a group cannot be carried on exclusively without intervention of another entity, normally that entity must be deemed to be the establishment of the group in that particular country.
On Agency PE:
On the issue of Agency PE, the relevant question is ‘business connection’. The essential features of ‘business connection’ are as follows:
• A real and intimate relation must exist between the activities carried out outside India by nonresident (NR) and activities within India;
• Such relation must contribute directly or indirectly to earning of income by the NR in his business;
• A course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the NR outside India and the activity in India, would furnish a strong indication of ‘business connection’ in India.
Apart from the fact that the requirements of agency are satisfied, the facts fulfil the above essential features of ‘business connection’.
On the basis of the above, the AAR ruled that the fact pattern of the Group entities and ICo, a PE of the Group entities does exist in India. Therefore, incomes received by them from ICo are taxable as business profit under Article 7 of the respective DTAAs. Where there is no DTAA, it is taxable under the provisions of the Act.
