TAXABILITY OF A PROJECT OFFICE OR BRANCH OFFICE OF A FOREIGN ENTERPRISE IN INDIA

In our last article published in the August, 2020 issue of the BCAJ, we discussed various aspects relating to taxability of a Liaison Office (LO) in India, including the recent decision of the Supreme Court in the case of the U.A.E. Exchange Centre.

In addition to a Liaison Office (LO), Project Offices (PO) and Branch Offices (BO) of foreign enterprises have also been important modes of doing business in India for many foreign entities.

Issues have arisen for quite some time as to under what circumstances a PO / BO has to be considered as a Permanent Establishment (PE) of a foreign enterprise in India and then be subjected to tax here.

In this article, we discuss various aspects relating to taxability of a PO / BO in India, including the recent decision of the Supreme Court in the case of Samsung Heavy Industries Ltd.

BACKGROUND

The determination of tax liability of a foreign enterprise has been a contentious subject in the Indian tax regime for a very long time. And whether a foreign enterprise has a PE in India has been a highly debatable issue, though it is very fact-intensive. The ITAT and the courts have been taking different views based on the facts of each case.

A Project Office means a place of business in India to represent the interests of the foreign company executing a project in India but excludes a Liaison Office. A Site Office means a sub-office of the Project Office established at the site of a project but does not include a Liaison Office.

A foreign company may open project office(s) in India provided it has secured from an Indian company a contract to execute a project in India, and (i) the project is funded directly by inward remittance from abroad; or (ii) the project is funded by a bilateral or multilateral international financing agency; or (iii) the project has been cleared by an appropriate authority; or (iv) a company or entity in India awarding the contract has been granted term loan by a public financial institution or a bank in India for the project.

A Branch Office in relation to a company means any establishment described as such by the company.

As per Schedule I read with Regulation 4(b) of the FEM (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016 [(FEMA 22(R)], a BO in India of a person resident outside India is permitted to carry out the following activities:

(i)  Export / import of goods.

(ii) Rendering professional or consultancy services.

(iii) Carrying out research work in which the parent company is engaged.

(iv) Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

(v) Representing the parent company in India and acting as buying / selling agent in India.

(vi) Rendering services in Information Technology and development of software in India.

(vii) Rendering technical support to the products supplied by parent / group companies.

(viii) Representing a foreign airline / shipping company.

Normally, a branch office should be engaged in the same activity as the parent company. There is a difference between the PO / BO and LO, both in terms of their models and, more importantly, their permitted activities. As per the FEMA 22(R), an LO is permitted to carry out very limited activities and can only act as a communication channel between the source state and the Head Office; whereas a PO / BO is permitted to carry out commercial activities, but only those specified activities as per the RBI Regulations.

Thus, under FEMA 22(R) a PO is allowed to play a larger role as compared to an LO in India. Further, the scope of permitted activities of a BO provided in Schedule I of FEMA 22(R) is much larger than the scope of permitted activities of an LO provided in Schedule II of FEMA 22(R).

In National Petroleum Construction Company vs. DIT (IT) [2016] 66 taxmann.com 16 (Delhi), the Delhi High Court, after referring to the definitions of LO and PO in the Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000, held that ‘It is apparent from the plain reading of the aforesaid definitions that whereas a liaison office can act as a channel of communication between the principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity, a project office can play a much wider role. Regulation (6)(ii) of the aforesaid regulations mandates that a “project office” shall not undertake or carry on any other activity other than the “activity relating and incidental to execution of the project”. Thus, a project office can undertake all activities that relate to the execution of the project and its function is not limited only to act as a channel of communication.’

WHETHER A PO / BO CONSTITUTES A PE IN INDIA?

As mentioned above, as per the prevailing FEMA regulations a PO / BO can carry out activities which may not be limited to acting as a communication channel between the parent company and Indian companies.

An issue that arises for consideration is whether just because the scope of the permitted activities of a PO / BO is much wider as compared to an LO under FEMA 22(R), would that be an important consideration in determining the existence of a PE of a foreign enterprise in India?

Due to the difference in scope of activities to be carried out by an LO and a PO / BO, the assessing officers many a times take a stand that the PO / BO is a PE of a foreign enterprise as they are permitted to carry out commercial activities as compared to an LO. This perception leads to the conclusion of a PO / BO being a PE in India.

In order to decide whether a PO / BO constitutes a PE in the source state, the actual activities carried out by them in India need to be minutely analysed irrespective of the fact whether such activities were carried out in violation of FEMA regulations and RBI approval.

RELEVANT PROVISIONS OF THE INCOME-TAX ACT, 1961 (the ITA) and the (DTAAs) relating to PEs

Definition under the ITA

Section 92F(iiia) defines a PE as follows: ‘permanent establishment’, referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.’

Section 94B defines a PE as a ‘permanent establishment’ and includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Similarly, Explanation (b) to section 9(1)(v), Explanation (c) to sections 44DA, 94A(6)(ii) and 286(9)(i) defines a PE by referring to the definition given in section 92F(iiia).

It is important to note that under the ITA a PE is defined in an inclusive manner. It has two limbs, i.e. (a) it has to be a fixed place of business, and (b) through such fixed place the business of the enterprise is wholly or partly carried on.

Definition of Fixed Place PE and exceptions under the OECD Model Conventions

Since the publication of the first ambulatory version of the OECD Model Convention in 1992, the Model Convention was updated ten times. The last such update which was adopted in 2017 included a large number of changes resulting from the OECD / G20 Base Erosion and Profit Shifting (BEPS) Project and, in particular, from the final reports on Actions 2 (Neutralising the Effects of Hybrid Mismatch Arrangements), 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), 7 (Preventing the Artificial Avoidance of Permanent Establishment Status), and 14 (Making Dispute Resolution Mechanisms More Effective), produced as part of that project.

Article 5(1) of the OECD Model Convention 2017 update defines the term ‘permanent establishment’ as follows:

‘1. For the purposes of this Convention, the term ‘‘permanent establishment’’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Article 5(2) of the OECD Model Convention 2017 provides that the term ‘permanent establishment’ includes, especially, (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Thus, on a plain reading of Articles 5(1) and 5(2), a branch or an office is normally considered as a PE under a DTAA.

The updated Article 5(4) provides that the term PE shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity;

(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that such activity or, in the case of sub-paragraph (f), the overall activity of the fixed place of business is of a preparatory or auxiliary character.

Paragraph 4.1 of Article 5 provides for exception to paragraph 4 as under:

‘4.1 Paragraph 4 shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting State, and

(A) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of this Article, or

(B) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character, provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.’

It is important to note that the UN Model Convention 2017 contains a modified version of Article 5 to prevent the avoidance of PE status which is on the same lines as Articles 5(4) and 5(4.1) of the OECD MC mentioned above, except that in Articles 5(4)(a) and 5(4)(b) of the UN MC 2017, the word ‘delivery’ is missing. This is due to the fact that the UN MC does not consider activity of ‘delivery’ of goods as of preparatory or auxiliary character.

Determination of existence of PE in cases of non-carrying on of ‘business’ or ‘core business’ of the assessee

On a proper reading and analysis of Article 5(1), it would be observed that it contains two limbs and to fall within the definition of a fixed place PE both the limbs have to be satisfied. Therefore, in case of a PO / BO, normally the first limb is satisfied, i.e., there is a ‘fixed place of business’ in India but if the second limb ‘through which the business of an enterprise is wholly or partly carried on’ is not satisfied, then a fixed place PE cannot be said to be in existence.

The Tribunal and courts have, based on the facts of each case, often held that if the actual activities of a PO / BO did not tantamount to carrying on the business of an enterprise wholly or partly, then a fixed place PE cannot be said to have come into existence.

Recently, the Supreme Court in the case of DIT vs. Samsung Heavy Industries Limited (SHIL) [2020] 117 taxmann.com 870 (SC) after in-depth analysis of the facts held that the Mumbai Project Office of SHIL cannot be said to be a fixed place of business through which the ‘core business’ of the assessee was wholly or partly carried on. Relying on a number of judicial precedents of the Supreme Court in the cases of CIT vs. Hyundai Heavy Industries Co. Ltd., [2007] 7 SCC 422; DIT (IT) vs. Morgan Stanley & Co. Inc., [2007] 7 SCC 1; Ishikawajima-Harima Heavy Industries Ltd. vs. DIT, [2007] 3 SCC 481; and ADIT vs. E-Funds IT Solution Inc. [2018] 13 SCC 294, the Court in paragraphs 23 and 28 held as follows:

‘23. A reading of the aforesaid judgments makes it clear that when it comes to “fixed place” permanent establishments under double taxation avoidance treaties, the condition precedent for applicability of Article 5(1) of the double taxation treaty and the ascertainment of a “permanent establishment” is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. What is equally clear is that the maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5. Also, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment.

28. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us.’

In the context of a fixed place PE, in the SHIL case the Supreme Court mentioned and summarised the aforesaid aspect in the decision in the case of Morgan Stanley & Co. Inc. (Supra) as under:

‘17. Some of the judgments of this Court have dealt with similar double taxation avoidance treaty provisions and therefore need to be mentioned at this juncture. In Morgan Stanley & Co. Inc. (Supra), the Double Taxation Avoidance Agreement (1990) between India and the United States of America was construed. …..Tackling the question as to whether a “fixed place” permanent establishment existed on the facts of that case under Article 5 of the India-US treaty – which is similar to Article 5 of the present DTAA – this Court held:

“10. In our view, the second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement / application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT-enabled services such as data processing support centre and technical services, as also reconciliation of accounts. In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view we are in agreement with the ruling of AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5(1) is not attracted.”

14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5(3). Under Article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Article 5(3)(e) of the DTAA. Therefore, in our view in the present case MSAS would not constitute a fixed place PE under Article 5(1) of the DTAA as regards its back office operations.’

The Supreme Court further mentioned about the decision in the case of E-Funds IT Solution Inc. (Supra) as follows:

‘22. Dealing with “support services” rendered by an Indian Company to American Companies, it was held that the outsourcing of such services to India would not amount to a fixed place permanent establishment under Article 5 of the aforesaid treaty, as follows:

“22. This report would show that no part of the main business and revenue-earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score.”’

In view of above discussion, to constitute a fixed place PE it is particularly important to determine what constitutes the ‘Business’, ‘Core Business’ or the ‘Main business’, as referred to by the Supreme Court, of the assessee foreign enterprise. This determination is going to be purely based on the facts and hence an in-depth functional and factual analysis of the activities being actually performed by the PO / BO would be required to be carried out in each case.

The term ‘business’ is defined in an inclusive manner in section 2(13) of the ITA as follows: ‘Business’ includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

Article 3(1)(h) of the OECD MC provides that the term ‘business’ includes the performance of professional services and of other activities of an independent character.

From an overall analysis of the decisions, it appears that if the activities of the PO / BO are purely in the nature of back office activities or support services which enables the assessee foreign enterprise in turn to render services to their clients abroad or performing mere coordination and executing delivery of documents, etc., then the same would not be considered as the core or main business of the assessee, and accordingly a PO / BO performing such activities would not constitute a fixed place PE in India.

It is not quite clear as to whether to constitute Core or Main business of the assessee foreign enterprise there has to be revenue-earning activity in India, i.e., having customers or clients in India to whom goods are sold or for whom services are rendered, invoiced and revenue generated in India, is necessary for the same to be constituting a fixed place PE in India and consequently be taxable in India.

RELIANCE OF RELEVANT DOCUMENTS

Since the determination of a fixed place PE is predominantly an in-depth fact-based exercise, the ITAT and the courts have to rely on various relevant documents.

It has been observed that in the application to the Reserve Bank of India (RBI) for obtaining approval of PO / BO, the relevant Board resolution of the foreign enterprise to open a PO / BO, the approval given by the RBI, the accounts maintained by the PO / BO in India, etc., are very relevant for arriving at the determination of the existence of a PE in India.

The ITAT in SHIL vs. ADIT IT [2011] 13 taxmann.com 14 (Delhi), largely relied upon (a) SHIL’s application to RBI for opening the PO; (b) SHIL’s Board Resolution for opening the PO; and (c) RBI’s approval for opening the PO. In respect of the Board Resolution, the ITAT focused on its first paragraph alone and in paragraph 71 of the order observed as follows:

‘71. There is a force in the contention of Learned DR that the words “That the Company hereby open one project office in Mumbai, India for co-ordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation Limited (ONGC), India” used by the assessee company in its resolution of Board of Directors meeting dated 3-4-2006 makes it amply clear that the project office was opened for coordination and execution of the impugned project. In the absence of any restriction put by the assessee in the application moved by it to the RBI, in the resolutions passed by the assessee company for the opening of the project office at Mumbai and the permission given by RBI, it cannot be said that Mumbai project office was not a fixed place of business of the assessee in India to carry out wholly or partly the impugned contract in India within the meaning of Article 5.1 of DTAA. These documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through the project office only.’

All these gave a prima facie impression that the PO was opened for coordination and execution of the entire project and was thus involved in the core business activity of SHIL in India.

However, the Supreme Court delved deeper and looked at various other factors which the ITAT had ignored or dismissed. In paragraphs 27 and 28, the Court, relying on the second paragraph of the Board Resolution which clarified that the PO was established for coordinating and executing delivery of certain documents, and not for the entire project, the fact that the accounts of the PO showed no expenditure incurred in relation to execution of the contract and that the only two people employed in the PO were not qualified to carry out any core activity of SHIL, concluded that no fixed place PE has been set up within the meaning of Article 5(1) read with Article 5(4)(e) of the India-Korea DTAA.

The above indicates that the determination of the existence of a fixed place PE of a foreign enterprise in India requires a deep factual and functional analysis and the same cannot be determined on mere prima facie satisfaction.

Even in the case of Union of India vs. U.A.E. Exchange Centre [2020] 116 taxmann.com 379 (SC) dealing with the question relating to a Liaison Office being considered as a fixed place PE in India, the Court relied on the approval letter given by the RBI. In paragraph 9 of the judgment. the Supreme Court mentioned that ‘keeping in mind the limited permission and the onerous stipulations specified by the RBI, it could be safely concluded, as opined by the High Court, that the activities in question of the liaison office(s) of the respondent in India are circumscribed by the permission given by the RBI and are in the nature of preparatory or auxiliary character. That finding reached by the High Court is unexceptionable.’

In Hitachi High Technologies Singapore Pte Ltd. vs. DCIT [2020] 113 taxmann.com 327 (Delhi-Trib.) the ITAT held that whether the assessee violated the conditions of RBI or FEMA is not relevant in determining the LO as a PE under the I.T. Act.

It appears that there is an increasing reliance by the ITAT and courts, inter alia, on the application and related documents and the approval of the RBI in considering whether an LO / PO / BO can constitute a fixed place PE in India.

INITIAL ONUS REGARDING EXISTENCE OF A FIXED PLACE PE IN INDIA

An important question arises as to whether the onus is on the assessee or the tax authorities to first show that a PO / BO is a fixed place PE in India.

The ITAT in the SHIL case (Supra) held that the initial onus was on the assessee and not the Revenue. However, the Supreme Court in the SHIL case reiterated the fact that the initial onus lies on the Indian Revenue, and not the assessee, to prove that there is a PE of the foreign enterprise in India before moving further to determine the Indian tax liability of that enterprise. While reversing the finding of the ITAT, the Supreme Court stated that ‘Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. (Supra).’

The Supreme Court in E-Funds IT Solution Inc. (Supra) stated that the burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE, is initially on the Revenue. The Court observed as follows:

‘16. The Income-tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents can be brought within any of the sub-clauses of Article 5.’

In view of above referred two Supreme Court decisions, it can be said that the initial onus is on the Revenue and not on the assessee.

PREPARATORY OR AUXILIARY ACTIVITIES TEST

As mentioned above, Article 5(4) of the OECD MC provides exclusionary clauses in respect of a fixed place PE provided the activities of a PE, or in case of a combination of activities the overall activities, are of a preparatory or auxiliary character. In this connection, the readers may refer to extracts of the OECD Commentary in this regard discussed in paragraph 4 of the article published in the BCAJ of August, 2020 in respect of Taxability of the Liaison Office of a Foreign Enterprise in India.

Further, in the context of activities of an ‘auxiliary’ character, in National Petroleum Construction Company vs. DIT (IT) (Supra) the Delhi High Court in paragraph 28 explained as follows:

‘28. The Black’s Law Dictionary defines the word “auxiliary” to mean as “aiding or supporting, subsidiary”. The word “auxiliary” owes its origin to the Latin word “auxiliarius” (from auxilium meaning help). The Oxford Dictionary defines the word auxiliary to mean “providing supplementary or additional help and support”. In the context of Article 5(3)(e) of the DTAA, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the Assessee. In the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character – an activity which aids and supports the Assessee in carrying on its main business.’

BEPS Report on Action 7 – Preventing the Artificial Avoidance of Permanent Establishment Status

When the exceptions to the definition of PE that are found in Article 5(4) of the OECD Model Tax Convention were first introduced, the activities covered by these exceptions were generally considered to be of a preparatory or auxiliary nature.

Since the introduction of these exceptions, however, there have been dramatic changes in the way that business is conducted. Many such challenges of a digitalised economy are outlined in detail in the Report on Action 1, Addressing the Tax Challenges of the Digital Economy. Depending on the circumstances, activities previously considered to be merely preparatory or auxiliary in nature may nowadays correspond to core business activities. In order to ensure that profits derived from core activities performed in a country can be taxed in that country, Article 5(4) is modified to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a ‘preparatory or auxiliary’ character.

BEPS concerns related to Article 5(4) also arose from what is typically referred to as the ‘fragmentation of activities’. Given the ease with which multinational enterprises may alter their structures to obtain tax advantages, it was important to clarify that it is not possible to avoid PE status by fragmenting a cohesive operating business into several small operations in order to argue that each part is merely engaged in preparatory or auxiliary activities that benefit from the exceptions of Article 5(4).

Article 13 of Multilateral Instrument (MLI) – Artificial avoidance of Permanent Establishment status through the Specific Activity Exemptions

MLI has become effective in India from 1^st April, 2020 and it will affect many Indian DTAAs post MLI because, wherever applicable, MLI will impact the covered tax agreements. Article 13 of MLI deals with the artificial avoidance of PE through specific activity exemptions, i.e., activities which are preparatory or auxiliary in nature, and provides two options, i.e. ‘Option A’ and ‘Option B’.

India has opted for ‘Option A’, which continues with the existing list of exempted activities from (a) to (e) in Article 5(4), but has added one more sub-clause (f) which states that the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) is covered in the exempt activities, provided all the activities mentioned in sub-clauses (a) to (e) or a combination of these activities must be preparatory or auxiliary in nature. Therefore, as per modified Article 5(4), in order to be exempt from fixed place PE, each activity on a standalone basis as well as a combination of activities should qualify as preparatory or auxiliary activity test.

INDIAN JUDICIAL PRECEDENTS

On the issue of whether a PO / BO constitutes a fixed place PE in India, there are mixed judicial precedents, primarily based on the facts of each case. In addition to various Supreme Court cases mentioned and discussed above, there are many other judicial precedents in this regard.

BO Cases

In a few cases, based on the peculiar facts of each case, the Tribunals and courts have held that a BO does not constitute a fixed place PE in India. In this regard, useful reference can be made to the following case: Whirlpool India Holdings Ltd. vs. DDIT IT [2011] 10 taxmann.com 31 (Delhi).

However, in the following case it has been held that a BO constitutes a fixed place PE in India: Hitachi High Technologies Singapore Pte Ltd. vs. DCIT [2020] 113 taxmann.com 327 (Delhi-Trib.).

In the case of Wellinx Inc. vs. ADIT IT [2013] 35 taxmann.com 420 (Hyderabad-Trib.), where it was contended by the assessee that the income of the BO is not taxable in India, the ITAT held that services performed by a branch office are on account of outsourcing of commercial activities by its head office, and income arising out of such services rendered would be taxable under article 7(3) of the India-USA DTAA.

PO Cases

Similarly, in the case of POs, based on the factual matrix the following cases have been decided in favour of assessees as well as the Revenue:

In favour of the assessees:

Sumitomo Corporation vs. DCIT [2014] 43 taxmann.com 2 (Delhi-Trib.);

National Petroleum Construction Company vs. DIT (IT) [2016] 66 taxmann.com 16 (Delhi);

HITT Holland Institute of Traffic Technology B.V. vs. DDIT (IT) [2017] 78 taxmann.com 101 (Kolkata-Trib.).

In favour of the Revenue:

Voith Paper GmbH vs. DDIT [2020] 116 taxmann.com 127 (Delhi-Trib.);

Orpak Systems Ltd. vs. ADIT (IT) [2017] 85 taxmann.com 235 (Mumbai-Trib.).

KEY POINTS OF JUDGMENT OF THE SUPREME COURT IN SHIL

The Supreme Court in this case has clearly established that facts are important in deciding about the existence of a fixed place PE in India, while principles of interpretations more or less remain constant. It is imperative that one must minutely look into the facts and actual activities to decide existence of a fixed place PE in case of a PO / BO.

The key points of this judgment can be summarised as under:

Even post-MLI, the Supreme Court ruling in SHIL’s case should help in interpretation on a fixed place PE issue.

CONCLUSION

The issue of existence of a fixed place PE in case of a PO / BO has been a subject matter of debate before the ITAT and courts for long. The ruling of the Supreme Court in SHIL’s case endorses the settled principles on fixed place PE in the context of a PO of a turnkey project. The Supreme Court reiterated that a fixed place PE emerges only when ‘core business’ activities are carried on in India. The Court brings forth more clarity on the existence of a fixed place PE or otherwise in case of a PO / BO and should instil confidence in multinationals to do business in India and bring much needed certainty in this regard.