19 Articles 5, 12 and 22 of India-UAE DTAA – The threshold of nine months for a service PE is to be calculated based on actual period for which services are rendered including the period during which services are rendered virtually and is not to be limited only to period during which the employees are physically present in India.

TS-256-ITAT-2017(BANG)

ABB FZ – LLC vs. DCIT

A.Ys: 2010-11 and 2011-12

Date of Order: 21^st June 2017

Facts

The Taxpayer, a company
incorporated in the UAE, was engaged in the business of providing regional
services for the benefit of its group entities in India, the Middle East and
Africa. During F.Y. 2009-10 and 2010-11, Taxpayer entered into a regional
headquarter service agreement with its group entity in India (ICo) to provide
managerial and consultancy services comprising Occupational Health and Safety
(OHS) service, Security Service, Project Risk Management Service and Market
Development Service. These services were rendered by the Taxpayer’s employees
either by visiting India or remotely from outside India through email, phone
calls, video conferencing, etc. During the year, the employees of
Taxpayer were present in India for a period of 25 days.

The Taxpayer claimed income was
not taxable in India on the ground that:

–   in the absence of FTS Article in India-UAE
DTAA, such income would fall under Article 22 – ‘Other Income’;

–   in terms of Article 22 of the India-UAE DTAA,
such income would be taxable in India only if the UAE company had a PE in
India;

–   the UAE company did not have any PE in India
(including a service PE) since the stay of its employees was only for 25 days
in aggregate during the given year which did not cross the 9-month threshold
under Article 5 – ‘Permanent Establishment’; and

–   accordingly, income from such services
agreement was not taxable in India.

Assessing Officer (AO)
contended that the income was taxable in India as “royalty” under the Act as
well as the India-UAE DTAA. Aggrieved by the draft order of AO, Taxpayer
appealed before the DRP, which subsequently upheld order of AO. Aggrieved, the
Taxpayer filed an appeal before the Tribunal.

Held

– In absence of a valid tax residency certificate
for the relevant financial year, it was held that Taxpayer was not eligible to
claim the benefit of India-UAE treaty. Tribunal, however proceeded to decide on
the merits of non-taxability of payments made by ICo to the Taxpayer as
follows:

–   The Taxpayer merely provided access to
industrial, commercial or scientific experience acquired by it to ICo. Such
information was not available in public domain and could not be acquired by ICo
on its own effort.

–   Performing specialised services for a party
is different from transferring of specialised knowledge or skill. The Taxpayer
provided information pertaining to industrial, commercial or scientific
experience and also permitted ICo to use such confidential information. Hence,
the consideration received by Taxpayer from ICo qualifies as ”royalty” under
the Act as well as the DTAA.

–   The requirement under the DTAA for creation
of service PE is that services including consultancy services should be
rendered by an enterprise through its personnel or other employees for a period
exceeding nine months within any 12 month period. It does not require that the
employees should also be present within India for a period exceeding
nine months.

–   Undisputedly, the Taxpayer was providing
“consultancy services” in India “through its employees. Further considering
that the services could easily be provided by the Taxpayer, remotely through
virtual modes like email, internet, video conferencing etc. without
physical presence of employees, the threshold of 9-month was to be treated as
being satisfied on the facts of the case. Thus, the Taxpayer constituted a
service PE in India under the DTAA.