HOME OFFICE AS PE

Background

Permanent Establishment (PE) confers taxation right
to host country to tax business profits. Once PE is constituted, business
profits are taxable at rate applicable to non-resident. Most common is the
creation of fixed place PE, Agency PE, Service PE, rules of which are designed
to cater to different forms of business. Increasingly, transactions entered
into by non-residents are scrutinised from PE perspective. Often, a foreign
enterprise appoints employees/agents in India to conduct its business. Such employees
use their home as office to work for foreign enterprise. Recently, the Chennai
Tribunal in case of Carpi Tech SA (TS-587-ITAT-ITAT-2016) held that residence
cum office of Indian director creates permanent establishment in India for
activities carried out in India for short period of time. This article proposes
to analyse some of the nuances of the decision.

Facts of the case:

–  The Taxpayer, a company resident in
Switzerland, undertook Geo Membrane waterproofing project for NHPC in India
(the NHPC project). The NHPC project lasted for less than 40 days.

–  Mr. V. Subramanian (Mr. V) is one of the
directors of the Taxpayer since its incorporation. He was designated as project
representative and/or project coordinator of the Taxpayer in India. He held a
Power of Attorney to undertake all activities on behalf of the Taxpayer.

–    I Co was engaged in the same business as the
Taxpayer. Further, I Co was also given a Power of Attorney to represent the
Taxpayer in its projects in India. Additionally, Mr. V is the Managing Director
of I Co.

–    Mr. V’s residential address is also used as
office address of I Co. Further, the same address is also used as communication
address by the Taxpayer in India for all its official purposes.

–   The Taxpayer was of the view that in the
absence of a PE under the India – Swiss DTAA (‘DTAA’), its income from NHPC
project was not taxable in India. Hence, it disclosed NIL income in its tax
return for the tax year under consideration.

The Tax Authority, based on the directions received
by the Dispute Resolution Panel (DRP) in India, held that the Taxpayer created
a PE in India in terms of Article 5 of the DTAA as below:

–  Fixed place PE at the residential-cum-office
address of Mr. V/ I Co

– Agency PE due to functions performed by Mr. V
/ I Co on behalf of the Taxpayer

The Taxpayer filed an appeal before the Chennai
Tribunal against the DRP order.

Issue before the Tribunal

Whether income of the Taxpayer from the NHPC
project was taxable in India under provisions of the DTAA?

Key arguments of the Taxpayer

–   Duration of the NHPC project was very short
(40 days). Such duration also does not meet six months threshold to create a PE
in India. Taxpayer’s earlier projects in India were undertaken three years back
and such previous projects may not be relevant for examining PE in the current
tax year.

–   Type of activities undertaken in India by Mr.
V on behalf of the Taxpayer (i.e. design, manufacture, supply and installation
of exposed PVC Geo composite Membrane) fell under installation PE provisions of
the DTAA. However, the threshold of six months is not fulfilled to create a PE.

–    Mr. V’s residential-cum-office address is
merely a mailing address. Mere existence of books of account and bank account
at Mr. V’s residence-cum-office cannot either conclusively or inferentially
point to emergence of a fixed PE.

–   Mr. V is an independent
agent of the Taxpayer. He is representing other unrelated companies also in
India in the ordinary course of his business and is not exclusively working for
the Taxpayer. The POA provided to Mr. V was a specific one and it did not
provide any continuous or general authority to Mr. V to act on behalf of the
Taxpayer. Hence, it does not create an Agency PE also.

Tribunal’s ruling

Fixed
PE

–   Residence-cum-office premises of Mr. V
created a fixed PE of the Taxpayer, due to the following reasons:

•    Business of the Taxpayer is conducted from
the address of Mr. V.

•   All correspondences related to participation
in bids, correspondence with customers, signing of contracts, execution of the
project and closure of the project etc. were initiated or routed through
the same address.

–   Authority of Advance Rulings (AAR) in the
case of Sutron Corporation (268 ITR 156) supports that residence of country manager
can create a fixed PE if the same was used as an office address by taxpayer.

–   Once Fixed PE test is satisfied, there is no
need to evaluate Construction PE clause under the special inclusion list.

–   In any case, services rendered by the
Taxpayer were more in the nature of repair and supply of material rather than
building site, construction, installation or assembly project to fall under the
Construction PE provisions. Hence, the 182 days threshold of Construction PE
was not relevant.

–   I Co also created a PE of the Taxpayer for
the following reasons:

•    Activities of I Co and the Taxpayer are
interlinked such that the role played by the director as an agent of the
Taxpayer and I Co (which rendered similar services) cannot be easily separated.
Further, I Co participates in the economic activities of the Taxpayer.

•    I Co and the Taxpayer were carrying out
identical nature of work in India. Their names and letter heads were also
similar.

•    I Co was the face of the Taxpayer in India.
I Co held POA and was the authorised representative of the Taxpayer for the
NHPC project.

•    I Co incurred all expenses in India to
execute the NHPC project which were later reimbursed by the Taxpayer. I Co
appointed vendors to render services locally and made payments to them.

Agency PE

–   Mr. V was held to be acting as a dependent
agent of Taxpayer, based on the following:

•    Mr. V was holding a POA on behalf of the
Taxpayer and was also the project coordinator/representative for NHPC project.

•    The Taxpayer was relying on the skills and
knowledge of Mr. V. His role was critical to all the aspect of the contract
through the stage of signing to its execution.

•    Mentioning Mr. V’s address on the website as
well as letterheads of the Taxpayer were indicating the fact that Mr. V was the
face of the Taxpayer in India and was representing the Taxpayer in all
practical matters.

•    No evidence was provided to prove that Mr. V
was an independent agent. On the other hand, he was acting exclusively or
almost exclusively for the Taxpayer. Hence, to that an extent, the same is not
in furtherance of his ordinary course of business.

–      The role of Mr. V for the Taxpayer and I Co
was such that it cannot be separated. There existed a unison of interest to a
great extent, while as an independent agent there would be required an
objectivity in execution of the tasks of the non-resident company.

–      Activities performed by I Co and Mr. V cannot
be said to be of preparatory or auxiliary character to qualify for PE
exclusion.

–   I Co represented by Mr. V or Mr. V himself
created a PE of the Taxpayer in India.

Analysis of The Tribunal decision:

In summary, the Tribunal held that Mr V. as also I Co
constituted PE in India based on following reasoning:

–   Residence-cum-office premises of Mr. V
created a fixed PE of the Taxpayer on account of its usage for business purpose
of Taxpayer.

–   Fixed place PE can be constituted even if its
activities in India are for 40 days.

–  Once fixed place PE is constituted there is
no need to analyse Construction PE. In any case, repair and supply of material
does not fit within Construction PE.

–   I Co created PE of Taxpayer on account of
similarity of activities, identical nature of work and reimbursement of all
expenditure incurred in India by I Co.

–   Mr V. created agency PE as it held POA on
behalf of Taxpayer; Taxpayer relied upon the skills of Mr V; Mr V worked
exclusively or almost exclusively for Taxpayer.

Aforesaid aspects have
been analysed in the ensuing paragraphs-

Place of disposal test:

–   Indian jurisprudence as also OECD Commentary
has considered satisfaction of disposal test as pre-requisite for constitution
of fixed place PE. Disposal test postulates that foreign enterprise has right
or control over premises which constitutes fixed place PE. In this case,
Tribunal has not specifically provided any positive observation on satisfaction
of disposal test. Perhaps Tribunal has presumed satisfaction of disposal test
given the dependence of Taxpayer on Mr V. and use of premises of Mr V for official
purpose/communication.

–    OECD’s revised proposal concerning the
interpretation & application of Article 5 (Permanent Establishment) of the
OECD Model Tax Convention (2011) stated that home office can constitute PE in
limited situations. OECD revised proposal stated that home office of employee
should not lead to an automatic conclusion of PE and would be dependent on
facts of each case. It is further stated that where a home office is used on a
regular and continuous basis for carrying on business activities for an
enterprise and it is clear from the facts and circumstances that the enterprise
has required the individual to use that location to carry on the enterprise’s
business (e.g. by not providing an office to an employee in circumstances where
the nature of the employment clearly requires an office), the home office may
be considered to be at the disposal of the enterprise.

–   Incidentally, disposal test is also not dealt
with by AAR in Sutron Corporation (supra) which is relied upon by
Tribunal.

Duration
Test:

–     A fixed place PE can exists only if place of
business has certain degree of permanence. There is no standard time threshold
provided by treaty and thus duration test involves subjectivity. Much depends
upon individual facts and nature of operations of Taxpayer.

–   Conventionally, it is understood that six
months’ time period should be satisfied for constitution of PE. However, there
are special situations where nature of a business of a foreign enterprise
requires it to be carried on only for a short period of time, then in such
cases a shorter period will suffice duration test.

–   The Tribunal relied upon decision of Fugro (supra)
wherein PE was constituted for 91 days of work carried on in India. As against
that there are other precedents which has held that no PE is constituted in
India in following situations:

•    a foreign enterprise in State S for 27 days
for one project and 68 days for another project [ABC, In re (1999) 237
ITR 798 (AAR)]

•    a vessel in India for 2.5 months [DCIT
vs. Subsea Offshore Ltd, (1998) 66 ITD 296 (Mum) ] or a sailing ship
crossing over to Indian waters for 10 days [Essar Oil Ltd vs. DCIT, (2006)
102 TTJ 614 (Mum)]

•    A foreign enterprise engaged in dredging and
which had its project office in India for 153 days [Van Oord Atlanta B. V.
vs. ADIT, (2007) 112 TTJ 229 (Kol)]

•  The performance of work under an agreement
had been accomplished by the occasional visits of the applicant’s personnel for
site visits and meetings. The nature of service was such that most of the
services were rendered outside India. The aggregate period spent in India by
the personnel was 24 days in the first year and 70 days in the next year. Two
or three employees of the applicant stayed in India for about a month [Worley
Parsons Services Pty. Ltd, In re (2009) 312 ITR 317 (AAR)]

•    The assessee was engaged in the business of
telecasting cricket events. Its employees and representatives (TV crew,
programmer and engineers, other technical personnel, etc.) cumulatively stayed
in India for less than 90 days [Nimbus Sport International Pte. Ltd. vs.
DDIT, (2012) 145 TTJ 186 (Del)]

•    The assessee was engaged in the activity of
supervision of plant and machinery for steel and allied plants in India. For
one project, it deputed foreign technicians to India who stayed in India for
220 days [GFA Anlagenbau Gmbh vs. DDIT, TS-383-ITAT-2014-HYD]

Interplay between fixed place PE and Construction
PE

–   The Tribunal held that once fixed place PE is
constituted there is no need to analyse Construction PE. In other words, the
Tribunal held that fixed place PE overrides Construction PE.

–   Aforesaid observations are not in sync with
following illustrative decisions of the Tribunal and AAR which has held that
Article 5(3) overrides article 5(1). In other words, there cannot be fixed
place PE unless time threshold specified under Construction PE is satisfied.

•    GIL Mauritius Holdings Ltd. vs. ACIT
(2012) 143 TTJ 103 (Del)

•    ADIT vs. Valentine Maritime (Mauritius)
Ltd. (2010) 3 taxmann.com 92 (Mum)

•    Sumitomo Corporation vs. DCIT (2007) 110
TTJ 302 (Del)

•    DCIT vs. Hyundai Heavy Industries Ltd.
(2010) 128 TTJ 4 (Del)

–   The Tribunal additionally held that repair
and supply of material does not fall within the purview of installation,
construction or assembly project. As against that OECD and UN Commentary on
Article 5 at para 17 observed that renovation involving more than maintenance
or redecoration would fall within Construction PE.

Agency PE

–  The Tribunal held that Taxpayer had Agency PE
in India on account of factors like Taxpayer reliance on Mr V’ skills, granting
of POA to Mr V and exclusive service to Taxpayer.

–   Mr V was dependent on the Taxpayer and he was
taxpayer’s Indian representative.

–   Whilst the aforesaid may be sufficient for
creation of dependent agent but for creation of dependent agent PE following
additional condition needs to be satisfied:

         •     agent has and habitually
exercises in that State, an authority to negotiate and enter into
contracts for or on behalf of the enterprise.

–   The Tribunal has not dealt explicitly with
satisfaction of aforesaid conditions of authority to enter contracts by Mr V or
by ICo.

Conclusion

Decision of the Tribunal is likely to create
litigation for foreign enterprise which has a minuscule presence in India and
is dependent upon Indian agent/employee for Indian business. The Tribunal has
considered overall presence of Taxpayer in India as also surrounding circumstances
like commonality of directors; active role paid by Mr V; holding of POA;
exclusive nature of arrangement with Mr V; similarity in names of Indian
company; reimbursement of all expenditure of Indian company by Taxpayer to
reach to the conclusion that Taxpayer has PE in India.

Similar was the decision of Aramex International
Logistics Pvt Ltd (2012) 22 taxmann.com 74 (AAR) wherein AAR held that
dependence of group company in conducting business in India creates PE. In this
case, Taxpayer a Singaporean Company engaged in business of door-to-door
express shipments by air and land entered into an agreement with its Indian
subsidiary (ICO) to look after movement of packages within India, both inbound
and outbound. AAR held that where a subsidiary is created for purpose of
attending business of a group in a particular country, that subsidiary must be
taken to be a permanent establishment of that group in that particular country.

It may be noted that none of the decisions have
dealt with base conditions which are the pre-requisites for constitution of PE.
It will be interesting to see how decisions will be dealt with by higher forums
where satisfaction of fundamental conditions of PE will be tested. _