By GEETA JANI I DHISHAT B. MEHTA
Chartered Accountants
Article 5 of
India-Saudi Arabia DTAA – setting up Indian subsidiary for providing business
support services and marketing support services does not create permanent
establishment in India
Facts
The Applicant, a tax
resident of Saudi Arabia, is a state owned Oil Company in the business of oil
exploration, production, refining, chemicals, distribution and marketing.
Applicant is the world’s largest crude oil exporter and is making offshore
crude oil sales to Indian refineries on Free on Board (FOB) basis such that the
title passes outside India and payment is also made outside India.
To expand its India
operations and for having a long term presence in India, Applicant established
a subsidiary company in India (I Co) and entered into a service agreement with
I Co to provide procurement support services. Directors of I Co are also
employees and part of high management team of the Applicant.
During the year under
consideration, an Addendum was proposed to the Service Agreement (Proposed
Addendum) under which I Co proposed to provide business support and marketing
support functions to the Applicant at an arm’s length price (ALP). Broadly, the
services agreed to be provided by I Co under the Proposed Addendum included
procurement, sourcing and Logistic Support, Quality Inspection Support,
Business support/marketing support function, plant audits for identified
manufacturers and suppliers, market research, ascertaining quality of crude
oil, promoting awareness etc.
Based on the nature of
activities proposed to be undertaken by I Co, AAR ruling was sought on the
issue whether I Co would create a PE of the Applicant under the India-Saudi
Arabia Tax Treaty.
Held
AAR relied on the
decisions in Formula One (394 ITR 80) and eFunds (86 taxmann.com 240) to state
that I Co, would not create a PE for the Applicant.
Subsidiary PE:
– I Co, as a subsidiary of Applicant, does not
automatically become PE of Applicant, unless specific tests of PE are
satisfied. I Co has its own board of directors and is/will carry out its own
business in India. As held in case of Vodafone Holdings International BV (2012)
341 ITR 1 (SC) and AB Holdings Mauritius II (AAR/ 1129 of 2011), companies are
separate legal and economic entities for tax purposes and therefore parent and
subsidiary are distinct taxpayers.
– It is unlikely that parent would not at all
be involved in the decision making of its subsidiary whose activities have to
be in consonance with the overall goals of the holding company. Similarly, it
cannot be expected that directors of subsidiary would act with such
independence that the overall objective of holding company gets compromised.
Fixed Place PE:
– I Co is utilising its establishment to carry
out its own business in India, i.e., to provide support services to the
Applicant. Applicant’s business is
carried on in and from Saudi Arabia and is monitored by the Saudi Arabian
Ministry of Petroleum and Mineral resources together with Supreme Council of
Petroleum and Minerals. Hence, the question of any main or core business
activities of Applicant being carried on at I Co’s establishment does not
arise.
– I Co’s establishment is not placed at
disposal of the Applicant. There is no material on record to indicate that the
I Co is or will be manned by employees or personnel of the Applicant.
– Services provided by I Co are support
services for which it is remunerated at ALP and such services do not constitute
main business of the Applicant which is exploration, production, refining, and
distribution of crude oil.
– Accordingly, I Co’s premises does not
constitute a fixed place PE for the Applicant in India. The fact that I Co is
remunerated at ALP does not have a bearing on evaluation of fixed PE.
Service PE
– Applicant is not rendering any services to
any customer in India, either directly or through I Co. It is I Co which is
providing support services, that too to Applicant and not to the customers of
Applicant.
– It is incorrect to say that entire control
and management of I Co is under the Applicant by virtue of its employees who
are also directors of I Co. Also period
of their stay in India is irrelevant since they would be discharging their
duties as directors of I Co and not for the Applicant. Further, the
relationship of such directors with Applicant in past years is also not
relevant.
– Applicant, therefore, does not have any Service
PE in India.
Agency PE
– Service Agreement requires the parties to
perform as an independent contractor and not as an agent. The Proposed Addendum
expressly prohibits I Co from representing itself as agent of Applicant or
negotiating any business terms or conditions on behalf of Applicant.
– Activities like allocations, claims,
communication of customers’ concerns, and maintaining business relationships
does not mean concluding contracts or habitually obtaining orders on behalf of
the foreign enterprise. Even as per the agreements, I Co cannot enter into any
agreement of a binding nature on behalf of the Applicant.
– Furthermore, Agency PE provision of the
treaty, relating to ‘obtaining orders’ covers obtaining orders for sales and
not for procurement/purchase as in this case.
– Thus, I Co does not create any Agency PE for
Applicant.
Preparatory or auxiliary exemption
– PE exemption for preparatory or auxiliary
functions is irrelevant since there is no PE created in the first place.
– Nevertheless, I Co’s Services such as market
research, identifying new customers, etc. would be ‘preparatory’ in nature and
hence eligible for PE exclusion.
