In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Issue :

•     Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

•     In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

The assessee, a German company (herein GermanCo), was engaged in the business of providing technical know-how/licence, basic engineering services, and supervisory services in connection with construction or installation of specified machineries/assembly projects. The assessee rendered services to various Indian companies. A large part of the services was rendered on offshore basis. In connection with on-shore supervisory activities involving various projects, personnel of the GermanCo were present in India in aggregate for more than 6 months duration — though, presence in respect of each project was of less than 6 months. The GermanCo offered the amount for taxation as fees for technical services chargeable @ 10% on gross basis in terms of Article 12 (2) of India-Germany DTAA.

The Assessing Officer (AO) rejected the contention of the assessee and held that the GermanCo had PE in India. In view of the AO, for determining whether or not Supervisory PE emerged, duration of all the projects in a particular year had to be aggregated. In view of the AO, since the German Co had PE in India, the benefit of concessional rate of 10% provided in the treaty was not available and the amount had to be assessed under domestic law @ 30% by applying provisions of S. 115A of the Act.

On further appeal, the CIT(A) accepted GermanCo’s contention that offshore services are not chargeable to tax in India. The Department did not object to this aspect in further appeal before the Tribunal. The controversy before the Tribunal was therefore confined to taxation of onshore services.

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

(ii) since none of the project sites involved presence of more than 6 months, no PE emerged for GermanCo; (iii) in absence of PE, the fees for Supervisory activities was chargeable @ 10% in terms of Article 12 of DTAA.

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

    (a) The Tribunal referred to Construction and related PE provisions of India-Germany DTAA. It also referred to similar provisions of India’s treaties with China, USA, Canada and Italy. It concluded that unlike similar treaty provisions of India with China, USA, Canada and Italy, there is nothing in the language of India-Germany treaty to indicate that different sites on which work is carried on by the assessee can be considered together in determining whether or not the Construction/Supervisory PE has emerged for the German Co.

(b) Reference was made to commentary of Klaus Vogel and the book ‘Principles of International Taxation’ to conclude that each project site duration needs to be considered separately, particularly when different contracts have no effective interconnection with each other.

     
(c) The Tax Department contended that overall project duration needs to be considered for determining length of supervisory project of GermanCo. The Tribunal rejected the contention of the Revenue that the date of commencement or the duration of the project should be considered for determining trigger of supervision PE for the assessee. According to the Tribunal, such reckoning would lead to absurd results since there could be instances where contracts for construction of building, supply of plant and machinery, installation, commissiong in respect of a project may be awarded to independent parties and each party may have involvement of differing duration.

     
(d) After considering the language of the treaty, the Tribunal held that the intervening period caused on account of factors such as seasonal shortage of material, labour difficulties, time needed for material to dry, etc cannot be excluded.

    (e) One of the contentions of the taxpayer was that since income-tax is linked to a given assessment year, the threshold of construction PE needs to be considered for each year separately. The assessee claimed that Supervisory PE was not triggered if work during a given tax year involved period of less than 6 months though the overall project duration exceeded 6 months. The Tribunal rejected the contention and held that the prescribed period of 6 months has to be computed, irrespective of the tax years involved. For instance, where an activity starts in January and ends in July, total period is 6 months – though period falling in each of the two financial years is less than 6 months.