Global Tax Alert | 29 May 2014
Mumbai Tribunal holds existence of fixed place PE on account of protracted presence of employees executing a consultancy project in India
This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Authority (Tribunal) in the case of Renoir Consulting Ltd.1 (Taxpayer) on whether a Mauritian company had a permanent establishment (PE) in India under the provisions of the India–Mauritius Double Taxation Agreement (treaty), on account of the presence of its employees in India for a long duration of time to carry out a performance enhancement assignment spanning over 50 weeks under a contract entered into with an Indian company. On the facts, the Tribunal concluded that the premises of the client or the hotel where the employees stayed could be regarded as a fixed place through which the business of the Taxpayer was carried on. Accordingly, a fixed place PE of the Taxpayer existed in India.
The Taxpayer is a nonresident company registered in Mauritius. It received income in India by way of a contract for services executed in India with Godrej Philips India Ltd. (GPI), an Indian company. The services included planning and implementing Performance Index Program which ultimately would result in implementing of and improving the management performance quotient of GPI by enhancing parameters, reducing costs, improving the work methods and services, and providing efficient management control.
The Taxpayer seconded its employees comprising consultants and principal consultants to work on the GPI project in India. The duration of the project was 50 weeks and it required 874 man days of consultants and 81 days of principal consultants' time in India. There was no office available for these personnel to work from in India. It was asserted by the Taxpayer that the hotel rooms used by its employees were only for residence and were not used as an office. As the project was primarily for the improvement of sales, meetings with GPI were held at different venues. Hence, the Taxpayer argued that there was no place of business of the Taxpayer in India.
Some of the treaties entered into by India provide for establishment of a PE of the foreign enterprise (FE) in India under a service PE clause. Under this rule, an FE can constitute a PE in India, without having an office or other permanent place of business in India if its employees furnish services in India exceeding a certain threshold period. However, in the present case, the examination was required under the India-Mauritius treaty which does not have a service PE clause. Thus, the determination was required under the fixed place PE rule.
Positions of the parties
The Taxpayer argued that it was managed by the Board of Directors in Mauritius, whose consultants gave directions to its principal consultants seconded on the project. These principal consultants, in turn, looked after the assignments in India, further directing consultants seconded on the GPI project. Thus, the place of management of the Taxpayer was situated in Mauritius where the entire decision-making powers were located.
The Taxpayer also argued that its employees in India were only carrying out preparatory and auxiliary services by only gathering and collating the data being transmitted to the Head Office (HO) in Mauritius and then acting on instructions received from its HO.
The Tax Authority determined that a PE exists based on the fact that the contract with GPI was executed and implemented in India. Furthermore, the hotel rooms where the Taxpayer's employees stayed in India must be regarded as their place of work for carrying out their activity in India. This must, thus, be construed as a fixed place PE and the income received from GPI should be taxed in India.
The finding of the Tax Authority was upheld by the First Appellate Authority. The Second Appellate Authority, the Tribunal, found the matter as indeterminable and, hence, restored the matter to the Tax Authority, along with a direction to determine the ancillary issue of allowable expenditure on the basis that the contextual inquiry may throw some light on the business operations of the Taxpayer.
In the set-aside proceedings, the Tax Authority and the First Appellate Authority were of the view that a PE exists in India within the meaning of the India-Mauritius treaty.
The Taxpayer appealed to the Tribunal after the unfavorable ruling by the First Appellate Authority.
Elements to be considered for determining a fixed place PE
The Tribunal determined that the matter was principally factual.
A PE seeks to compromise and harmonize the taxing jurisdiction between the source state and residence state for the purpose of taxation of business profits. Therefore, it must be understood with a view to arriving at the degree of economic penetration as per the applicable treaty that justifies a nation treating a foreign person in the same manner as a domestic person.
The fixed place PE concept has the following elements:
- • There must be a fixed place of business.
- • This must be located in a certain territorial area.
- • The use of the fixed place must last for a certain period of time.
- • The taxpayer must have a certain right of use over the fixed place of business.
- • The activities performed through the fixed place of business must be of a business character.
Therefore, to decide whether a PE existed, one has to undertake a factual and functional analysis of the activities undertaken by the Taxpayer.
The word “permanent” in the term PE does not, in any manner, signify or denote that the right to use the place should be perpetual, but that there must be a certain degree of permanence. Even a right which is not legal in its nature may, therefore, be of no adverse consequence. In the instant case, whether the hotel rooms could be legally or contractually used for business purposes was not ascertained. Even if such use was proscribed, but was factually used, it could be considered as a PE.
Application of the fixed place PE rule to the present case
The Tribunal noted that the Taxpayer's claim of the services being preparatory and auxiliary in nature was inconsistent with the method of operating followed which was based on the contract and the work performed by its employees in India. If the work performed in India was merely preparatory or auxiliary, then the principal consultants would not be required to come to India and as frequently (in this case, it was on a fortnightly basis).
Securing the GPI contract would require extensive execution and, thus, a presence in India. The project required constant interaction, at all levels, between the parties. The initial exchanges and interactions were to form the basis of the preliminary analysis and proposals, followed by a detailed study and its actual implementation. Since the project was executed on the basis of regular interactions between the parties, it required the Taxpayer's presence in India.
In the absence of evidence, the role of the top management can be confined to just providing strategic guidance and policy framework i.e., the normal role of the top management, if and to the extent required for the project at hand. The fixed place of business, as contemplated in the treaty, is not confined to a place where the top management of the company is located.
The contention that there is no fixed place because the personnel are operating from different places is without merit. It ignores the fact that the location, in case of a field job such as that of a salesman, necessarily has to be a shifting one; it, being fixed, in terms of its operating parameter(s). The continued physical presence in India at different locations which was warranted by the exigencies of the contract is undisputed.
The argument that no place of business is available for the Taxpayer's team is devoid of substance.
- • First, it is for the Taxpayer, with intimate knowledge of its affairs, to specify as to how and from where it performs its work.
- • If the personnel seconded on the contract have not functioned from GPI's premises, the same has, of itself, no bearing on the Taxpayer's case in as much as it is for them to specify the place from where they have functioned over their continued stay in India. Surely, they could not only be meeting the Taxpayer's employees or customers or visiting retail outlets all the time, neither could they, perform their work in vacuum.
- • In this context, the First Appellate Authority had inferred that the hotel where the Taxpayer's employees had stayed was also serving as their work place.
- • It would appear that the Taxpayer's employees and GPI's personnel who were assigned full-time on the project were required to work in tandem, complimenting each other. In fact, even working separately, again only implies availability of a separate place(s) at the disposal of the Taxpayer's team.
- • Secondly, it is apparent from the method of operating that regular interviews, interactions, meetings, training sessions and seminars etc., which are, admittedly and principally, at GPI's premises is as much a part of the work undertaken by the Taxpayer as is the independent collection, collation, analysis, and review of the data being sought from the organization during any phase of the project management. Thus, the fact that some place is at the disposal of the Taxpayer or its employees during the entire period of their stay in India is manifest and eminent and follows from the work nature (or profile) and the work method followed.
Thus, the Taxpayer had a PE in India during the relevant years.
A fixed place PE is triggered if an FE performs a business activity through a fixed place of business. In order to be able to actually use the place of business, the taxpayer must have some control over it or have it at its disposal. A challenging issue that has often arisen is whether the taxpayer should have the legal right to use the place of business or, more accurately, the right not to be denied the use of the fixed place of business. It is recognized that formal control is not what one should seek here but, rather, the power to use the place of business, since the focus is on the actual use of the place for business activities. As acknowledged by the Tribunal, this is a factual inquiry.
The OECD Commentary on Article 5 states that, while no formal legal right to use a particular place is required for that place to constitute a PE, the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of the enterprise. The 2012 OECD Discussion Draft seeks to clarify that the intensity of actual presence in a place will determine whether it is a place of business for the purposes of Article 5 and not a legal right to use it. In addition, it proposes to clarify that mere intermittent or incidental presence in a place is not sufficient to make it a place of business.
On the facts of the case, the Tribunal held that the Taxpayer had a factual right to carry out its business from either the client's premises or from the hotel, which could result in a fixed place PE. Foreign companies undertaking consultancy projects in India should review the impact of this ruling on their activities to assess whether the protracted presence of their employees in India could trigger a PE under an applicable treaty.
1. ITA No. 4323& 4125/Mum/2011, ITA No. 5298/ Mum/2009.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
- • Sudhir Kapadia
+91 22 6192 0900
Ernst & Young LLP (India), Hyderabad
- • Jayesh Sanghvi
+91 40 6736 2078
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
- • Nachiket Deo
+44 20 778 30862
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
- • Gagan Malik
+65 6309 8524
Ernst & Young LLP, Indian Tax Desk, New York
- • Tejas Mody
+1 212 773 4496
EYG no. CM4450