Article 13 of the india-uK DTAA, S. 9(1)(vii) of the act – (i) profits
to the extent of the activities carried on through Service PE should be taxable
as business profits under the DTAA; (ii) additional income satisfying make
available condition which is not attributable to PE in india should be taxed as
FTS under the DTAA; (iii) Source rule exclusion applicable to FTS under the act
does not apply as services are utilised for business or earning income from a
source in india
Facts
Taxpayer, a UK tax
resident, was engaged
in the business of event
management and talent representation activities in sports events. The taxpayer
entered into a memorandum of understanding (mou) with Board of Control for
Cricket in india (indian entity) for assistance in establishment,
commercialisation and operation of indian Premier league (‘event’). The services under the MoU, inter
alia, included advising and assisting indian entity in connection with the following aspects.
Structure of the league.
League rules and regulations.
Franchisee agreements.
Legal implementation budget.
Media rights agreements.
Trading and auction of the
players.
Hospitality guidelines in
relation to the league.
Provision of legal handbooks.
On the basis of the mou, a
service agreement was entered into between taxpayer and the indian entity for
holding the cricket event in india. For this purpose, the taxpayer had deputed
its employees and other third party freelancers for undertaking on-ground
implementation, event management and supervision activities in india. However,
due to some reasons, the venue for the event was shifted from india to South
africa and the remaining services were rendered outside india. During the year under
consideration, the length of stay of taxpayer’s employees and freelancers
exceeded 90 days in india. Accordingly,
Service Permanent establishment (Pe)
of the taxpayer was established in india.
The taxpayer contended that:
–
Amount attributable to the services rendered in South africa were not
taxable in india as they were not attributable to PE in india;
–
Once income was attributable to Service Pe, it cannot be taxed under
fee for technical Services (FTS) as both
are mutually exclusive;
–
Even if FTS article is applied, the services do not make available any
technical knowledge or skill, etc.; and
– Income attributable to such
services is not taxable in india under the DTAA.
Taxpayer argued that even u/s.
9(1)(vii) of the act, the amount was protected by source rule exclusion as the
services were utilised by indian entity for the business outside india.
However, the ao Held that even
the amount received by the taxpayer,
which was not attributable to the service Pe, was also taxable in india
as FTS under the act, as well as under the DTAA.
Upon filing of objections against
order of AO, the Dispute resolution Panel (DRP) directed that the balance
consideration be taxed as FTS on a protective basis and regarded as business
income to be attributed to the PE on substantive basis. Aggrieved, the
taxpayer, as well as the AO, preferred an appeal before ITAT.
Held 1: Attribution to PE
– As per article 7, income which
is attributable to a PE is taxable in the state in which PE is situated. Further, as per FTS article, income which is
effectively connected with a PE is taxable as business income and FTS article
ceases to apply.
– For income from services which
are in the nature of FTS, to be regarded as “effectively connected” with the
Pe, one of the following conditions should be established:
i. PE should be engaged in the performance of
such services or it should be involved in actual rendering of such services, or
ii. PE should arise as a result of its own
activities, or
iii. PE should,
at least, facilitate, assist or aid in the performance of such services,
irrespective of the other activities that the PE performs.
– Also, the
term “effectively connected”
should not be understood to mean
the opposite of “legally connected” but something in the sense of “really
connected”. Therefore, the activities
mentioned in the contract should be connected to the PE not only in the form
but also in substance.
– In the contract under
consideration, activities carried by the taxpayer outside india were not
concerned with the functioning of the PE but were carried out by the head
office of the Taxpayer itself. Thus the activities carried on outside india
cannot be treated as being effectively connected with the PE in india and hence
will be taxable as FTS under the DTAA.
–
The contention of the taxpayer
that the contract with indian
entity itself was
effectively connected with the PE in india and hence, the whole of
the revenue involved in the contract should be considered as effectively
connected is incorrect.
Held 2: Make available condition
– Technology is considered “made
available” only when the service recipient is enabled to absorb and apply the
technology contained therein. In order
to satisfy the make available test, the technical knowledge, experience, skill
etc. must remain with the service recipient even after the rendering of the
services has come to an end and the service receiver is at liberty to use the
acquired technical knowledge, skill, know-how and processes in his own right.
–
In the present case, indian entity is enabled to absorb and apply the
information and advice provided by the taxpayer for conducting sporting events.
The documentation and material provided enables indian entity to use the
know-how and documentation independent of the services of the taxpayer in the
future. Furthermore, it may not be
appropriate to say that in the absence of the taxpayer, the indian entity, on
its own, cannot hold/organise the event.
–
Thus, the services provided by
the taxpayer to indian entity satisfy the ‘make available’ condition. Hence,
income from such services was taxable as FTS under the DTAA.
Held 3: source rule exclusion
– In this case, it was an
established fact that indian entity was carrying on business in india and not
outside india.
–
The source of income of the indian entity was in india, and not outside
india.
– The source of income of indian
entity could not be regarded as being outside india merely because performance
of the event was outside india. Thus,
the consideration for services outside india is taxable as FTS even
under the act.
