Article 5(4), 7, 12 of India-Japan DTAA; S/s. 115A of the Act – On facts, supervision fee was not effectively connected with LO or other PEs. Also, minimum period for service PE was not met; and hence, supervision fee was taxable as FTS under Article 12 and not as business profit under Article 7.
Facts:
The taxpayer was a Japanese company. The taxpayer had established a Liaison Office (“LO”) in India to facilitate1 imports for certain projects that it has undertaken in India. The taxpayer established three project offices (“POs”) in connection with its three projects in India. The contracts for these projects were secured by the Head Office (“HO”) of the taxpayer. One of the projects was for Maruti Udyog Ltd (“MUL”). While in some of the contracts the taxpayer was to supply and install the equipment, under other contracts, MUL was to install the equipment and the taxpayer was merely to supervise the installation. For such supervision, it received supervision fee for supervising installation of equipment supplied by it.
According to the taxpayer, it did not have PE in India and hence, supervision fee could not be taxed as business profit under Article 7 of India-Japan DTAA but was taxable as FTS under Article 12(2).
However, according to the AO, LO and POs of the taxpayer constituted its PE; it was not necessary to have different PE for each project; and supervision period for all projects was to be aggregated to count the threshold period for a PE. The AO concluded that supervision fee received by taxpayer was effectively connected with PE and was taxable under Article 72 .
Held:
The Tribunal held as follows3.
Existence of PE for supervision activities.
• Article 12(5) is on the line of OECD Model Convention which provides that income should arise as a result of the activities of the PE and that only profits which are economically attributable to a PE are taxable. The state where the PE is located can tax the income only if a connection exists, between the income and the PE. Thus, Article 12(5) of the tax treaty does not have force of attraction principle.
• Article 7 will apply if the beneficial owner of the FTS carries on business in India (in which the FTS arises) through a PE and the contract in respect of which FTS is paid, is effectively connected with that PE. Though the taxpayer had PE in respect of two projects, supervision fee was not attributable to either PE.
• Under Article 12(5), to be ‘effectively connected’, apart from the economic connection with the PE, the connection must be real in substance and income producing activities should be closely connected. LO was only facilitating communication and nowhere involved in supervision. Mere existence of LO cannot result in taxpayer having supervisory PE in India.
Different projects and threshold period for service PE.
• Each purchase order was procured by head office of taxpayer through competitive bidding on global tender floated by MUL under different terms and conditions and none was linked to others.
• Different performance guarantees were given for different work.
• Installation and supervision under each purchase order was done independently. Also, no purchase order was dependent on completion of work under any other purchase order.
• Test of minimum period had to be determined for each site or installation project and period of supervision under each contract was less than the requirement of 180 days under Article 5(4).
• Therefore, no PE of taxpayer existed in India. Accordingly, supervision fee had to be taxed as FTS under Article 12 and not as business profit under Article 7 of India-Japan DTAA.
