(i) Time spent by employees under control and supervision of independent service provider not to be considered for determining service PE.
(ii) Where consideration is for use of scientific work, etc. and no IPR in software is transferred, payment is royalties.
(iii) As DTAA does not have specific Article for taxation of FTS, it would be governed by other income Article.
Facts:
The applicant was a company incorporated in, and tax resident of, Sri Lanka. The applicant was engaged in providing technical feasibility studies, preparation of coastal zone management plan, port and other water-related engineering projects, etc. The applicant did not have any office or place of business in India.
Kolkata Port Trust had awarded a contract to a PSU. The PSU subcontracted the work to the applicant. Under the agreement with the PSU, the applicant was to provide services pertaining to software supplies, installations, modelling, field data collection, transfer of on-job training/technology, maintenance, monitoring, handover of software, designs and submissions of reports, etc. As per the applicant, on the basis of man-hours, substantial part of the services were rendered in Sri Lanka and only about 20% of the services were rendered in India. For rendering the services in India, the applicant deputed engineers to the project site at short intervals.
The applicant had outsourced part of the services to an Indian Company (‘IndiaCo’). Further, the applicant had also engaged a representative for assistance in connection with the contract.
The PSU treated the receipts of the applicant u/s. 9(1)(vii) of the Income-tax Act and deducted tax u/s. 195. The applicant had applied to the AO for nil withholding tax certificate u/s. 197, but subsequently withdrew its application and approached AAR raising the following questions:
(1) Whether on facts, the applicant had constituted PE in India in terms of Article 5 of DTAA read with the Protocol to, DTAA?
(2) Whether the consideration received by the applicant under the contract with the PSU was taxable in India under Article 7 of DTAA?
(3) If answer to the above question is no, whether the consideration received by the applicant under the contract with the PSU was taxable in India under any other article of DTAA?
The applicant contended as follows:
The contract is predominantly for services and supply of software is incidental to the contract. Thus, the payment is for obtaining limited rights for effective operation of the software and not for commercial exploitation of software. Hence, it cannot be considered royalty.
Consideration for provision of services is business receipts. The applicant did not have any fixed place of business, management or branch in India. Under Article 5(2)(i) of DTAA, a service PE is constituted if services are furnished for more than 183 days in any 12 months’ period. Due to MFN clause in DTAA, the period of 183 days is extended to 275 days as that is the period in Sri Lanka-Yugoslavia DTAA.
The Revenue contended as follows:
As DTAA did not have specific provision dealing with FTS, taxing under any other Article of DTAA would mean changing the character of the income. As such, FTS should be taxed u/s. 9(1)(vii) of the Income-tax Act.
As the software was not sold but licensed, the nature of consideration was royalty u/s. 9(1)(vi) of the Income-tax Act.
Presence in India of employees deputed by the applicant for less than 183 days was not ascertainable. Further, while subcontracting part of the work to IndiaCo and the representative, the applicant had given them instructions and thereby controlled them both. The applicant had also not substantiated that IndiaCo and the representative had not provided similar service to others. Hence, it cannot be concluded that they were not dependent agents. Therefore, the applicant has a PE in India.
Under contract between the PSU and the applicant, the applicant cannot outsource certain part of the work. Hence, u/s.s 190 to 194 of the Indian Contract Act, IndiaCo would constitute sub-agent. Therefore, the time spent by employees of IndiaCo should also be considered for determining service PE.
Ruling:
The AAR ruled as follows:
(i) IndiaCo is an independent service provider having expertise who has provided similar services to others. Indiaco has rendered services through its employees under its own control and supervision. Hence, employees of IndiaCo cannot be considered ‘other personnel’ under Article 5(2)(i) of DTAA. Therefore, duration of time spent by employees of IndiaCo is not to be considered for determining PE in India of the applicant.
(ii) The applicant did not sell any off-the-shelf product but provided scientific equipment for perpetual use. The tendered document envisages transfer of technology by means of field data collection and desk study of data to arrive at mathematical model by using software. Though the software is heart and soul of the transferred technology, no intellectual property rights in software are transferred. The consideration is for use of scientific work, model, plant, scientific equipment and scientific experience. Hence, it is royalties under Article 12 of DTAA.
(iii) As DTAA does not have specific Article for taxation of FTS, FTS would be governed by Article 22 (other income) and not as per Article 7.
