Article 5 and 22 of India-Saudi Arabia DTAA – Only solar days of services rendered in India should be considered to examine constitution of service PE; question of virtual PE does not arise in the absence of services rendered virtually.

7. 
TS-451-ITAT-2017(Bang)

Electrical Material Center Co. Ltd. vs.
DDIT

A.Y.: 2010-11      Date of Order: 28^th September, 2017

FACTS       

– The Taxpayer was a company resident of Saudi
Arabia. It received income from an Indian company for rendering certain
services through four engineers who were sent to India. All the engineers in
aggregate spent more than 360 individual man days in India. However, their
collective stay in India was 90 days. The Indian company paid the Taxpayer for
services provided by the engineers in India.

–  While filing the return of income in India,
relying on the Madras High Court ruling in the case of Bangkok Glass
Industry Co. Ltd. vs. ACIT¹, the Taxpayer claimed that income
from services to the Indian company were in the nature of FTS, and since
India-Saudi Arabia DTAA did not have any specific Article dealing with FTS,
such income was not taxable in India. The Taxpayer further relied on the
decision of the Mumbai Tribunal in the case of Clifford Chance² and
contended that only solar days should be considered for the purpose of
determining the existence of a service PE. Accordingly, as the presence of
engineers in India was less than 182 solar days, no service PE was created.

– According to the Assessing Officer (“AO”),
the income of the Taxpayer was taxable in India as “royalty” under the Act as
well as the DTAA; and a PE is created if the aggregate man days of stay of the
engineers in India (i.e., 360 individual man days) exceed the threshold period
in the DTAA. He relied on the decision of the Bangalore Tribunal in ABB FZ –
LLC vs. DCIT³ to contend that the physical presence of the
employee was not essential since services could be rendered through various
virtual modes. The DRP confirmed the order of the AO.

________________________________________________

1   [2015
(4) TMI 503]

2   76
TTJ 0725

3     IT (TP) A No. 1103/bang/2013

HELD

Service PE

–  In Clifford Chance (supra), the Mumbai
Tribunal has held that only solar days are to be considered, and not man days.
As the presence of the Taxpayer in India, through its engineers, was only 90
solar days (i.e., less than 182 days), there was no service PE.

–  The decision of the Bangalore Tribunal (supra)
on virtual PE was distinguishable on facts because, in the present case,
payment was made only for the services rendered through the engineers in India
and no service was rendered through virtual modes like e-mail, internet, video
conferencing, etc.

Taxability
of income under other provisions of DTAA

–   In the absence of the FTS Article, income
should be considered as “other income” under Article 22 of India-Saudi Arabia
DTAA, which will be taxable only in the country of residence of the Taxpayer,
i.e., Saudi Arabia.