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15 Airlines Rotables Ltd v. Jt. DIT (Unreported)
ITA No. 3254/Mum./2006
Article 5, 7, 13 of India-UK DTAA
A.Y. : 1998-99. Dated : 21-5-2010
UK company had contractual obligation to provide repair and
overhaul support and components to an Indian aircraft operator—maintained stock
of components with Indian operator—consideration from Indian company for repair
and overhaul and use, or right to use, of component—repair and overhaul of
component only outside India. Held : (i) UKCo did not have PE in India; (ii)
even if PE, no profit could be attributed to that PE; (iii) stock maintained
with Indian company was not for delivery on behalf of UK companY—even if Indian
company assumed to be agent, no agency PE constituted.
Facts :
The taxpayer was a company incorporated in the UK (‘UKCo’),
and a tax resident of the UK. Principal business of UKCo was to provide spares
and component support to aircraft operators. UKCo entered into an agreement with
an Indian company (‘IndCo’) for providing certain support services for aircraft
operated by IndCo. Under the agreement, UKCo was required to repair or overhaul
a component when IndCo discovered that such components had become operationally
unserviceable. In such case, UKCo was also required to provide replacement of
the component. UKCo was also required to ensure that airworthiness directives in
respect of such component (whether replaced, repaired or overhauled) were fully
complied with. The consideration received by UKCo comprised two parts. One, for
repair and overhaul of the component. Two, for use or right to use, replacement
component. To ensure timely availability of the component, UKCo maintained stock
of replacement component at the operational bases of IndCo in India and also in
the UK at its depot. IndCo was forbidden from loaning, pledging, selling,
exchanging or encumbering any items from the stock.
Before the AO, UKCo contended that it did not have any PE in
India and hence, its business profits were not taxable in India. However, the AO
inferred that the stores staff of IndCo was acting as agent of UKCo and since
UKCo maintained stock of goods in India, in terms of Article 5.4(b) read with
Article 5.5 of India-UK DTAA, PE of UKCo came into existence. The AO estimated
10% of gross receipts of UKCo as profits attributable to PE.
The CIT(A) concurred with the view of the AO.
The Tribunal observed that in terms of Article 5(1) (i.e.,
the basic rule), a PE is said to exist in the other contracting state when an
enterprise of one of the contracting state has a fixed place of the business in
that contracting state through which the business of the enterprise is wholly or
partly carried out. There are three criteria embedded in this definition (i)
physical criterion (i.e., existence of physical location); (ii) subjective
criterion (i.e., right to use that place); and (iii) functionality criterion
(i.e., carrying out of business through that place). Only when these three
criteria are satisfied, a PE can come into existence.
Thus, it is necessary that for PE to exist not only should
there be a physical location through which the business of the foreign
enterprise is carried out, but also that such place should be at its disposal.
Held :
The Tribunal held that :
Even though
the stock of UKCo was stored at a specified physical location, it was under
the control of IndCo and UKCo did not have any place at its disposal in the
sense that it could carry out its business from that place. As the physical
location was under the control of IndCo, UKCo did not have any place at its
disposal. Thus, it cannot be said to constitute PE of UKCo in India.
-
Even if there is a PE,
only profit attributable to that PE can be taxed in India. Hence, as entire
repair and overhaul work was done outside India, no part of the profit could
be taxed in India.
-
A dependent agent PE
(‘DAPE’) under Article 5(4)(b) of India-UK DTAA can come into existence only
when business of UKCo is carried through that DAPE. It would be absurd to
contend that IndCo is dependant agent of UKCo, which the tax authorities have
not established. Even if IndCo is regarded as an agent, the maintenance of
stock by it was for IndCo’s business. Further, even if it is assumed that
IndCo is an agent, it would be an independent agent. Also, it maintained the
stock for stand by use and not for delivery on behalf of UKCo. Therefore, UKCo
does not have PE in India.
-
As part of the
consideration pertains to use, or right to use, of components, taxability
under Article 13(3)(b) (i.e., ‘equipment royalty’) should be examined.
Non-taxability under Article 7 would still require consideration of
application of Article 13. As these aspects had not been heard by the lower
authorities, the matter was remanded to the CIT(A) for limited adjudication
only on this aspect.
