Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

(2009 TIOL 30 ITAT Mum.)

S. 40(a)(i), S. 44C. Article 5(2)(i) of India-Malaysia Double Tax Avoidance Agreement, Article 5(2)(j) and 5(2)(k) of India-UK Double Tax Avoidance  A.Y. : 2000-01. Dated : 5-12-2008

Issues :

India-Malaysia Treaty

•     Manning services provided by a Malaysian company are not taxable in India.

•     Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

India-UK Treaty

1. There is no tax implication for supervisory activity in India if the duration of such activity is less than the threshold of Supervisory PE — though the duration of such activity exceeded Service PE threshold of the treaty.

Issue 1 :

Manning services provided by a Malaysian company are not taxable in India :

Facts :

The assessee, a tax resident of Netherlands, is engaged in design and construction of oil and gas products, oil refining, chemicals and petro-chemicals. The assessee was awarded a contract in India by Indian Oil Corporation Ltd. (‘IOCL’) for engineering, procurement and construction of the Sulphur Block for the Haldia Refinery Project on turnkey basis. For the purpose of executing the contract, the assessee set up a project office in Mumbai and a site office in Haldia.

The assessee awarded a sub-contract in favour of its subsidiary company, namely, Stock Comprimo (Malaysia) Sdn. Bhd. (hereinafter called as ‘Malaysian company’). Under the agreement the Malaysian company was required to supply personnel to the assessee company for the purpose of execution of its project at Haldia.

The assessee did not deduct tax at source in respect of the payment to Malaysian company. Relying on AAR ruling in the case of Tekniskil (1996) 222 ITR 551, it was argued that the Malaysian company supplied the personnel; that, personnel supplied by the Malaysian company to the assessee were working under the direction, supervision and control of the assessee and, therefore, it could not be said that services were rendered by the Malaysian company in India.

The Assessing Officer (AO), however, held that :

(a) Malaysian company deputed its own technical personnel;

     
(b) the deputed personnel continued to be Malaysian company’s employees;

     
(c) through the employees, Malaysian company rendered project supervisory services in India;

(d) Since duration of such services exceeded 6 months threshold of Construction PE, Malaysian company was liable to tax in India. Since the assessee failed to deduct tax at source with regard to payment made, the same was disallowable in computation of PE income in terms of S. 40(a)(i) of the Act. The CIT(A) accepted the assessee’s contention that :

(a) Malaysian company merely rendered services of supplying the personnel;

     
(b) since India-Malaysia treaty does not have FTS article, such amount is not taxable in India in absence of PE or presence of Malaysian company in India.

Held :

1. The ITAT noted that the following features of the service agreement between Malaysian company and the assessee supported that the role of Malaysian company was limited to supply of personnel and the Malaysian company did not have responsibility of performing supervisory activities in India.

(a) Malaysian company was engaged in the business of supplying skilled and unskilled personnel. In order to execute the contract, the assessee sought personnel from Malaysian company.

(b) Malaysian entity had no role to play after the personnel were supplied. It was not involved in carrying out supervision over the personnel supplied.

     
(c) The assessee was responsible for imparting/conducting training to the personnel and to equip them to carry out the desired work.

     
(d) Personnel performed and worked under the directions and control of the assessee.