Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

August 2020

Articles 5 and 12 of India-Singapore DTAA – Seconded employee working under control and supervision of Indian company did not constitute service PE – Service PE under Article 5(6) and taxability as FTS under Article 12 cannot co-exist – Services provided did not fulfil ‘make available’ requirement under Article 12 of India-Singapore DTAA

By Dhishat B. Mehta | Bhaumik Goda
Chartered Accountants
Reading Time 4 mins

15.
TS–336–ITAT–2020 (Del.) DDIT vs. Yum
Restaurants Asia Pte Ltd. ITA No.
6018/Del/2012 A.Y.: 2008-09 Date of order: 16th
July, 2020

 

Articles 5 and 12 of India-Singapore DTAA – Seconded employee working
under control and supervision of Indian company did not constitute service PE –
Service PE under Article 5(6) and taxability as FTS under Article 12 cannot
co-exist – Services provided did not fulfil ‘make available’ requirement under
Article 12 of India-Singapore DTAA

 

FACTS

The assessee, a
resident of Singapore, was engaged in franchising of certain restaurant brands
in the Asia Pacific region (including India). It entered into a technology
license agreement with its Indian AE (I Co) for operation of restaurant
outlets. I Co in turn appointed a number of franchisees for operating restaurants
in India under brand names KFC and Pizza Hut.

 

Mr. V was an
employee of the assessee who had been deputed to India to work under the
control and supervision of I Co. Mr. V was working solely for I Co. However,
the assessee continued to pay remuneration to Mr. V. I Co reimbursed the amount
equivalent to the remuneration of Mr. V (after deducting tax) to the assessee.

 

The A.O. concluded
that Mr. V constituted service PE of the assessee in India. Hence, the amount
reimbursed by I Co to the assessee was in the nature of FTS and taxable in
India. The A.O. further concluded that the assessee had agency PE in India.

 

In the appeal,
after referring to relevant clauses of the Deputation Agreement and the
evidence furnished by the assessee, the CIT(A) held that Mr. V was not an
employee of the assessee. Hence, he did not have any right / lien over his
employment. Consequently, there was no service PE of the assessee.

 

HELD

Service PE

  •  The deputation
    agreement between the assessee and I Co mentioned that the assessee was not
    responsible for, or assumed the risk of, the work of assignees; assignees would
    work under the control, direction and supervision of I Co; and the assessee
    released assignees from all rights and obligations, including lien on employment,
    if any.
  •  CIT(A) had given
    the following findings:
  •  An employee of I
    Co leading the business development team had resigned. Mr. V was deputed to
    India as his substitute. Upon expiry of the deputation period, Mr. V was
    inducted as an employee of I Co.
  •  During the
    deputation period, I Co had reimbursed the remuneration paid by the assessee on
    cost-to-cost basis. I Co had also deducted the applicable tax. Mr. V had paid
    tax in India on his remuneration.
  •  All the facts and
    circumstances indicate that Mr. V was an employee of I Co and the assessee had
    merely acted as a conduit for payment of remuneration to Mr. V in Singapore
    since his family was in Singapore.
  •  Other evidence,
    such as attending board meetings of I Co, signing financial statements of I Co
    as its director, etc., also showed that Mr. V was involved in the day-to-day
    management of I Co.
  •  Revenue had also
    not controverted the findings of the CIT(A). Thus, the deputation of Mr. V did
    not constitute service PE of the assessee in India.
  •  Even if a service
    PE of the assessee in India was constituted, no income can be attributed to the
    service PE because for computing profit attributable to PE, expenses incurred
    (in this case, remuneration paid to Mr. V) should be deducted. Having regard to
    reimbursement of remuneration on cost-to-cost basis, the income of the PE would
    be ‘Nil’.

 

FTS
taxability

  •  Having regard to
    provisions of Article 5(6) read with Article 12 of the India-Singapore DTAA,
    service PE and taxability as FTS cannot co-exist.
  •  Even otherwise,
    services did not fulfil the ‘make available’ condition under Article 12 of the
    India-Singapore DTAA.
  •  Mr. V worked as
    an employee of I Co and paid taxes on his remuneration. Taxing the same again
    as FTS would result in double taxation of the same income.

 

Agency PE

  •  The A.O. did not
    establish under which limb of definition of agency PE in Article 5(8) of
    India-Singapore DTAA the agency PE of the assessee was constituted in India.

 

Note: The Tribunal distinguished the Delhi High
Court decision in the case of Centrica India Offshore Pvt. Ltd. [2014] 364 ITR 336 as not applicable to the facts under
consideration. The exact basis of this conclusion is not clear. 

Download PDF

You May Also Like

Articles 11, 12 of India-Netherlands DTAA; section 9 of the Act – Guarantee charges paid by Indian company to non-resident AE were not: ‘interest’ under Article 11 as there was no debt and income was not ‘from debt-claim’; FTS under Article 12(5) as although provision of guarantee was a financial service, it was not consultancy service contemplated in Article 12(5

Reassessment – Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible material to show escapement of income from taxation – Agricultural income disclosed in return and accepted – Subsequent advisory by IT Department that claims of agricultural income should be investigated – Notice based solely on advisory – Not valid