TS-626-AAR-2017
Production Resource Group
Date of Order: 8th November, 2017
Taxpayer, a non-resident company was engaged
in the business of providing technical equipment as well as services including
lighting, sound, video and LED technologies for various events. Taxpayer entered into a Service Agreement
with the Organizing Committee of the Commonwealth Games, India (OCCG), to
furnish lighting and searchlight services during the opening and closing
ceremonies of the Commonwealth Games India, 2010 on a turnkey basis.
As part of the arrangement, Taxpayer was
also required to undertake installation, maintenance, dismantling and removal
of the lighting equipment. Taxpayer was required to be available on call or in
person to service, rectify or repair any equipment supplied under the agreement.
Additionally, it was also required to undertake all related activities, such as
obtaining authorizations, permits and
licenses; engaging personnel with the requisite skills, ensuring their
availability; procure and/ or supply all necessary equipment; subcontracting;
and shipping and loading, insurance etc.
For carrying on the above activities,
Taxpayer was provided with an office space by OCCG. Taxpayer was also provided
an on-site space for storing its tools and equipment inside the Stadium where
the Games were held, under a lock. While
the agreement was entered into for a period of around 114 days, Taxpayer’s
employees and equipment are present in India only for a period of 66 days for
preparatory activities such as installation and dismantling of equipment.
Taxpayer sought an advance ruling on issue
of taxability of its income from OCCG under the DTAA.
Held
On the issue of Fixed place PE:
It was held that Taxpayer had a fixed PE in
India for the following reasons:
– The provision of lockable space for storing
the tools and equipment inside the Stadium implies that Taxpayer had access to
and control over such space to the exclusion of other service providers engaged
by OCCG including OCCG itself.
– Provision of empty workspace to the taxpayer
implies that such workspace is placed at the disposal and under access, control
of Taxpayer. Also, in the facts, the business had to be carried out on site.
For evaluating fixed place PE, it is immaterial if the place of business is
located in the business facilities of another enterprise.
– Given the expensive equipment, time lines,
precision and the highly technical nature of the work involved, it is
inconceivable that the space provided to taxpayer along with the required
security would not be at taxpayer’s disposal, with exclusive right to access
and control. Thus, the space is used not merely for storage alone, but having
regard to the nature of business of the Taxpayer, the usage is for carrying out the business itself.
– For a fixed PE to emerge, the fixed place
need not be enduring or permanent in the sense that it should be in its control
forever. The context in which a business is undertaken, is relevant. In the
present case, the duration for which the fixed place was at disposal of
Taxpayer was sufficient for the Taxpayer to carry on its business. Further,
there was a continuous effort by the taxpayer till the games were over. Hence,
permanence test was also satisfied. Reliance, in this regard, was placed on the
SC decision in the case of Formula One World Championship Ltd.
(TS-161-SC-2017).
– Additional factors of arrangement which
support that disposal test is satisfied are:
• Subcontracting of some
activities by the Taxpayer was indicative of the fact that the Taxpayer had an
address, an office, from which it could call for and award subcontracts.
• Without any premises under
its control, hiring and housing key technical and other personnel, who would
need regular and ongoing instructions during the entire period would be
difficult.
• Taxpayer entered into
various contracts for the purpose of its business in a contracting state, and
employed technical and other manpower for use at its site. The site was thus,
an extension of the foreign entity on Indian soil. Reference in this regard was
place on decision in the case of Vishakhapatnam Port Trust (1983) 144 ITR 146.
• Taxpayer Undertook
comprehensive insurance of its equipment. No insurance company would insure any
equipment, structures etc. against any risk of fire, damage or theft,
unless the place where the equipments are stored was safe, in exclusive custody
and at the disposal of the person who applies for the insurance. Goods are not
ordinarily insured when lying at a third person’s premises. This also suggests
that the place where the tools and equipment were stored was at the disposal of
the Taxpayer.
• It was mandatory for the
Taxpayer to acquire all authorisations, permits and licenses. This indicates
that Taxpayer had a definite place at its disposal, as it could otherwise not
be made liable for any default in the absence of the same.
• The act of carrying out
fabrication, maintenance and repair of equipments, and operating the same at
the opening and closing ceremonies would not have been possible if the premises
were not under Taxpayer’s control.
On the issue of Royalty
– There is a vital distinction between a
consideration received for assigning the rights for the use of the final
product on the one hand (i.e. equipment in this case) and the consideration for
assigning rights to use the IP i.e. the knowhow, technical experience, skill,
processes and methodology etc.
– It is usual for parties to assign exclusive
rights to the client to use the equipment, but to keep intact the element of
uniqueness and novelty in experiencing the lighting display. But how this
experience was created remains a trade secret with the creator of the same.
– In the present case, Taxpayer had merely
granted a right to use the equipment and not the right to use any IP in the
equipment, hence payment made by OCCG to the Taxpayer does not amount to
Royalty.
On the issue of FTS
– Services rendered by taxpayer were not
standard in nature since they were one of a kind and were customised for use by
a particular customer. Provision of services of lighting, search lights, LED
technology along with technical personnel to operate the same did not involve
mere pressing of a button and receiving the service but were complex activities
and could not be availed without the assistance of highly trained technical
personnel.
– Having regard to the MFN clause, the make
available condition in the FIS article of India Portugal DTAA will need to be
read into India-Belgium DTAA.
– Since the services rendered by the Taxpayer
to OCCG does not make available
technical knowledge or skill, payment for such services does not qualify as FTS
under the India-Belgium DTAA.
