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Global Tax Alert
2 July 2014
Indias Hyderabad ITAT
rules no supervisory PE in
absence of construction or
building site under India-
Germany treaty
Executive summary
This Tax Alert summarizes a recent ruling of Hyderabad Income Tax Appellate
Tribunal (ITAT) in the case of GFA Anlagenbau Gmbh
1
on whether the supervisory
activities carried out in India by the employees of a German company (FCo) in
relation to the projects carried out in India, constitutes a permanent establishment
(PE) for FCo in India. The ITAT held that in the absence of a fxed place of business
in the form of building or construction site at the disposal of FCo, merely carrying
out supervisory activities in India will not trigger a PE for FCo in India both under
the Indian Tax Laws (ITL) as well as the IndiaGermany Double Taxation avoidance
Agreement (the Treaty).
Detailed discussion
Background Fixed place PE is defned to mean a fxed place of business through
which the business of an enterprise is wholly or partly carried on.
Further, the Treaty provides that PE includes a building site or construction,
installation or assembly project or supervisory activities in connection therewith,
where such site, project or activities continue for a period exceeding six months.
The OECD Model does not specifcally include supervisory activities within the
meaning of PE, whereas the UN Model includes supervisory activities within the
meaning of PE in addition to construction, assembly or like projects.
Global Tax Alert 2
Additionally, if the foreign company
carries on its business in India
through a PE situated in India and
the contract, in respect of which
fees for technical services (FTS) is
paid, is effectively connected with
such PE, then in such case the same
would be taxable on a net basis at a
higher rate under the head business
income.
FCo, a company incorporated
in Germany, is engaged in the
activity of supervision, erection,
and commissioning of plant and
machinery of steel and allied plants
in India.
During the relevant tax year, FCo
rendered technical and supervisory
services to various Indian
Companies.
FCo engaged experienced foreign
technicians at the work sites and
other places in India to carry out
technical and supervisory activities
and the receipts from such
contracts were categorized as FTS.
Period of stay of the technicians
seconded for supervising one of the
projects in India exceeded 183 days
during the relevant tax year.
The Tax Authority contended
that since FCos activities in India
continued for a period exceeding
six months, FCo has a PE in India
under the Treaty. Further, services
rendered in the nature of FTS were
also effectively connected to the
PE constituted and, hence, income
from such services was taxable as
business profts.
FCo claimed that the project sites of
ICo cannot be considered as a fxed
place of business for the same to be
regarded as fxed place PE in India.
Even otherwise, since the period of
stay of technicians seconded to only
one project exceeded 183 days,
income accruing from all projects
cannot be held taxable as business
profts in India but was taxable as
FTS.
The dispute resolution panel,
considering the terms of the
contract, upheld the contentions
of the Tax Authority. FCo then
appealed to the ITAT.
ITATs ruling
Based on the following
determinations, The ITAT held that
FCos supervisory activities do not
constitute a PE in India both under
the ITL as well as the Treaty for the
reasons outlined below.
Taxability under the ITL
Reliance was placed on the High
Court decision in the case of Clouth
Gummiwerke Akrineqesellschaft
2
to
conclude that supervisory activities
carried out by the technicians in
India are taxable as FTS under
the ITL. Further, the supervisory
activities carried out at project sites
in India would not constitute a fxed
place PE under the provisions of the
ITL as FCo does not have the right
to operate such sites independently.
Taxability under the Treaty
Fixed Place PE
FCo carries out supervision of
projects of ICo and it does not have
any fxed place of business in India.
Although the stay of technicians
seconded to India on one of the
projects exceeded six months,
there was nothing to show that the
technicians were operating from a
fxed place of business which was at
the disposal of FCo.
Reliance was placed on the Special
Bench decision in the case of
Motorola Inc
3
and Mumbai ITAT
decision in the case of Airlines
Rotables
4
to conclude that FCo did
not have a fxed place PE in India
under the Treaty.
Supervisory PE
The ITAT noted that the rationale
of the High Court decision in the
case of Vishakapatnam Port Trust
[144 ITR 146] which held that mere
supervisory activities will not form a
PE, could be adopted. However, the
ITAT refrained from doing so as the
Treaty language then was different
as compared to the current treaty
language, i.e., revised India-
Germany treaty which specifcally
includes supervisory services
within the meaning of PE which was
absent earlier.
Supervisory activities by
themselves cannot constitute a
PE and it should be in connection
with a building or construction
site of FCo. In the present case,
FCo merely provides supervisory
activities and does not have a
building or construction site or a
fxed place at its disposal.
The sole fact that the technicians
stayed in India while supervising
the work of FCo in India cannot be
considered that their place of stay
can be regarded as fxed place of
business for FCo.
Thus, the activities being technical
in nature clearly falls under the
FTS defnition of the Treaty and the
3 Global Tax Alert
same is not effectively connected to
a PE as FCo does not have a fxed
place of business through which its
activities are carried out.
Aggregation of projects
Contracts in India cannot be
aggregated in the absence of any
link between them and should
be individually assessed for the
duration test. Reliance in this regard
was placed on Mumbai ITATs
decision in the case of Valentine
Maritime.
5
Implications
Existence of a PE has emerged
as a contentious international tax
issue for multinational enterprises
doing business in India. The ITAT, in
this decision, has ruled that mere
supervisory work not connected
with a building or construction site
cannot constitute a PE. The ITAT
applied the principles of fxed place
PE for the purpose of examining
emergence of supervisory PE
even in the context of UN model
patterned treaty which specifcally
includes supervisory activities in
connection with construction site as
a specifc trigger of PE.
Endnotes
1. [TS-383-ITAT-2014(HYD)].
2. [238 ITR 861 (AP HC)].
3. [95 ITD 269].
4. [131 TTJ 385]. See EY Tax Alert, Mumbai ITAT rules maintenance of stock by customer does not constitute a
PE of the foreign enterprise in India, dated 1 June 2010.
5. [2010-TIOL-195-ITAT-MUM]. See EY Tax Alert Mumbai Tribunal rules on computation of duration test for
determining existence of Construction PE, dated 23 April 2010.
4
Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
Sudhir Kapadia +91 22 6192 0900 sudhir.kapadia@in.ey.com
Ernst & Young LLP (India), Hyderabad
Jayesh Sanghvi +91 40 6736 2078 jayesh.sanghvi@in.ey.com
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
Nachiket Deo +44 20 778 30862 ndeo@uk.ey.com
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
Gagan Malik +65 6309 8524 gagan.malik@sg.ey.com
Ernst & Young LLP, Indian Tax Desk, New York
Riad Joseph +1 212 773 4496 riad.joseph1@ey.com
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