Article 7, 12 of India-Germany DTAA – provision of consulting services for exploration, mining and extraction do not constitute PE in India under India-Germany DTAA.
Facts
The Taxpayer was a German company engaged in providing consulting services in relation to exploration, mining and extraction. During the relevant year, the Taxpayer had received remuneration from three Indian companies (ICo) for rendering Consultancy services in relation to exploration, mining and extraction projects undertaken by ICo. The Taxpayer offered the income from such services to tax as Fee for technical services (FTS) under Article 12 of India-Germany DTAA .
In the course of assessment, the AO observed that the project undertaken by ICo lasted for more than six months. Accordingly, the AO held that the services rendered by the Taxpayer being supervisory in nature, constituted a PE in India in terms of Article 5(2)(i) of India-Germany DTAA . Since income was effectively connected with the PE, the same had to be taxed as business income under Article 7. However, such business income had to be taxed on gross basis u/s. 44D (as subsisted for the relevant year).
However, the Taxpayer argued that the tenure of supervisory services should be considered independently and since the duration such services was less than 180 days, it did not create a PE in India. Even if a PE is triggered in terms of the specific provisions in the protocol to India-Germany DTAA such services would constitute FTS and not business income.
Held
The Taxpayer had rendered consultancy services and hence shall be governed by the provisions of in terms of Article 12 of the DTAA .
For the purpose of reckoning continuous stay for determination of PE, actual stay of employees should be considered and not the entire contract period1 .
While the Taxpayer had deputed one employee to India, that employee had not stayed in India for more than 180 days. Further, in two of the contracts, no supervisory charges were rendered.
Since Article 12(4), which deals with FTS, mentions ‘services of managerial’, technical or consultancy nature, payments received by the Taxpayer should be assessed in terms of Article 12 and not Article 7 of the DTAA .
Protocol to India-Germany DTAA provides that with respect to Article 7, income derived from a resident of a Contracting State from planning, project construction or research activities as well as income from technical services exercised in other State in connection with a PE situated in that other State, will not be attributed to PE. Hence, even if it is assumed that the Taxpayer had a PE in India, having regard to the Protocol, the income will not be treated as business income.
Accordingly, the payments received by the Taxpayer were to be taxed @10% and further, the provisions of section 115A of the Act were also not applicable.
