Recently, in the case of Production Resource Group1, the Authority for Advance Rulings (AAR) held that the payments received for providing technical equipment and lighting services for commonwealth games in India constitutes a fixed place Permanent Establishment (PE) in India.
The AAR also held that such payments cannot be taxed as royalty or Fees For Technical Services (FTS) under the India-Belgium Tax Treaty (Treaty).
- The taxpayer, a Belgian company, is engaged in the business of providing technical equipment and services for events including lighting, sound, video and LED technologies.
- It entered into a service agreement with the Organising Committee of the Commonwealth Games (OCCG) for furnishing on a turnkey basis, lighting and searchlight services during the opening and closing ceremonies of the Delhi Commonwealth Games (CWG) for a consideration of USD 3.5 million.
- The employees and equipment of the taxpayer were in India for an aggregate period of 66 days for preparatory services, installation and dismantling of equipment.
- Whether the aforesaid payments received by the taxpayer for rendering lighting and searchlight services to OCCG would be taxable in India according to the provisions of the Indian Income Tax Act (ITA).
- If the answer to above is yes, whether the aforesaid payments would be taxable in India as per the provision of the India-Belgium Tax Treaty read along with the Protocol and the India-Portugal Tax Treaty.
- The services provided by the taxpayer undertaken on a turnkey basis does not fall within the purview of the expression "rendering of any managerial, technical or consultancy services'' appearing in Section 9(1)(vii) of the ITA as it indicates the service recipient's desire for a continued provision of the services and not merely an end result.
- Furthermore, the services are standard services and not technical services as it involves providing only routine and mechanical processes. The taxpayer relied on Madras High Court's decision in the case of Skycell Communication Ltd2, wherein it was held that standard cellular services provided to the public at large would not be considered as technical services.
- Protocol to Article 12 of the India-Belgium Tax Treaty read together with the India-Portuguese Tax Treaty provides that mere rendition of technical, consultancy or managerial services is not enough to attract this Article as it necessitates the taxpayer to transmit the technical knowledge in such a fashion that OCCG would be able to utilise them in the future, independent of the taxpayer.
- It was also submitted that the equipment, resources, know-how and other things required for providing turnkey services have not been transferred by the taxpayer who still continues to own it. In light of the above, the payments under consideration are not under the purview of Article 12 of the treaty.
- With regards to PE in India, the taxpayer relied on the decision of the Andhra Pradesh High Court in the case of Visakhapatnam Port Trust3, wherein it has been held that a fixed place of permanent nature of foreign enterprises should be such that it results in virtual projection of the business of the foreign enterprise on Indian soil. The taxpayer argued that it does not have any office, branch, establishment, or other fixed place of business in India. The taxpayer also argued that it does not have the right to use the premises of OCCG in relation to the rendition of contracted services. Accordingly, there was no virtual projection of its business in India and hence it does not create a PE in India.
- The taxpayer also argued that all the crucial aspects of PE such as the place of business, the power of disposition, permanence, location, business activity and business connection were absent in the present case. Furthermore, the taxpayer was of the view that having an insurance cover for its equipment and other assets in no certain terms leads to the constitution of PE in India.
- It was also argued that project/installation PE also does not trigger as the period of contract in India was less than the threshold limit of 6 months as provided under Article 5(2)(j) of the treaty.
- The taxpayer also argued that decision of the Supreme Court in the case of Formula One World Championship Ltd (FOWC)4 was not applicable to facts of the present case as the taxpayer did not have full control over the space provided (i.e. stadium where the event was held).
- The nature of work of the taxpayer is highly technical and sophisticated which is covered by intellectual property such as copyrights, patents, trademarks, designs, brand names, logos, data and confidential information.
- As per the agreement, the taxpayer agreed to provide intellectual property in the final product to OCCG. Based on this, the Revenue Authorities contended that intellectual property created by way of specific design, patent, plan or process which is not known to others have been transferred to the organisers and hence the same constitutes royalty as per the provision of the ITA and treaty.
- The taxpayer had a comprehensive physical presence on the stadium since the taxpayer had installed its equipment at various sites before and throughout the stadium which included the laying of cables and erecting structures throughout the operation of the CWG. Also, the taxpayer was required to provide services throughout the period of the contract and not only during the opening and closing ceremony. The taxpayer was also required to abide by the relevant regulations and obtain all the required authorisations, permits and licenses to perform the aforesaid services.
- Based on various clauses of the agreement, OCCG was required to provide limited space and on-site space to the service provider. Furthermore, OCCG was also required to provide a suitable workplace for repairing fixtures, storage and empty key storage area. The taxpayer was also required to have personnel available for any maintenance and repair works at the site. Based on this, it was contended that the taxpayer had an office space/on-site space in India.
- The taxpayer was also responsible for ensuring that it had adequate insurance to cover all risks associated with the provision of the said services. This also meant that for managing the risks, it was necessary for the taxpayer to be available at the site throughout the tenure of the contract.
- The taxpayer had subcontracted certain tasks pertaining to lighting and designing. This led to the taxpayer having an office space or an on-site space pertaining to the sub-contractor.
- The time period for which it was operating in India cannot be a deciding factor for determination of PE in India as the entire business activity was completed in a short period of time. Revenue placed reliance on the decision of the Supreme Court in the case of FOWC4.
Ruling of the AAR
Taxability of payments as royalty
- The AAR held that the taxpayer has only assigned the rights in the final product (i.e. providing equipment and services including lighting, sound, etc.) and there is no assignment of the right to use know-how, technical experience, intellectual property, etc. comprised therein. These rights have simply been used by the taxpayer in preparing the final product.
- Accordingly, it was held that payments received for the supply and services do not constitute as royalty under the provisions of the ITA as well as the treaty.
Taxability of payments as FTS
- It was held that services rendered were not standard services since they were customised services for a particular customer. It was also held that services are not routine in nature but were technical services which required the assistance of highly trained technical personnel to furnish the same. Accordingly, it was held that services would qualify as FTS under the ITA.
- AAR held that services were not ''made available'' to OCCG in such a manner that it acquired the know-how or empowered OCCG to carry out such task in the future on its own. Accordingly, it was held that payments received for the services do not constitute as FTS as per the Protocol in the India-Belgium Tax Treaty read with India-Portugal Tax Treaty.
Taxability of payments by virtue of having PE in India
- The taxpayer had some space at its disposal which was lockable, implying that it had access to as well as control over such space. Furthermore, such space was not merely for storage alone, but given the nature of the business, space was also for carrying out the business itself.
- The taxpayer was subcontracting some of its activities which indicates that the taxpayer had an address/an office from which it could call for or award sub-contracts. AAR also held that it was difficult to assume that without premises under control, the taxpayer could have hired key technical and other personnel for the entire duration of the event.
- The taxpayer had insured its equipment's which also indicates having a fixed place of business since no insurance company would insure any equipment, structures against any risk unless the place was safe and at the disposal of the insurer (i.e. taxpayer in the present case).
- Apart from the above, the taxpayer
was also provided with a covered area and an empty workplace for
storing equipment along with the necessary security at all times,
implying that the taxpayer alone had exclusive access to such place
and that such place was solely at its disposal.
Based on the above, it was held that taxpayer had an office space in India which was available at its disposal.
- The taxpayer's argument that its business place in India was not enduring or permanent in nature was rejected. It was held that business place should not be in control forever but the same has to be looked in the context of business undertaken from such place. In the present case, the place of business was at the disposal of the taxpayer for as much time as its business required and hence it was held that permanence test was satisfied. AAR also relied on the decision of the Supreme Court in the case of FOWC4.
- In light of the above, it was held that the taxpayer met each of the criterion for establishing a PE, namely place of business, the power of disposition, the permanence of location, business activity, etc. Accordingly, the payment so received was chargeable to tax in India as business income in terms of Article 7 read with Article 5 of the treaty.
Yet another decision holding that supply of equipment's and services for an event in India constitute a PE. This decision is broadly in line with the decision of the Supreme Court of India in the case of FOWC, wherein a motor racing circuit was held to be a fixed place PE.
Given that various international events are taking place in India, it is imperative for the foreign companies to take note of these decisions and consider the impact of the same. There could be far-reaching tax implications in India for the companies conducting events in India if such events constitute a PE in India.
This ruling once again emphasised on the principle that the degree of permanence has to be checked with respect to the business requirements of the taxpayer and just because the business's presence in India was for a short duration may not absolve the companies from fixed place PE risk. It is interesting to note that there is no detailed discussion on whether this case can fit into the project PE clause and whether the principles of specific PE over general PE could have been applied.
1. A.A.R. No. 1330 of 2012
2. 251 ITR 53 (Mad)
3. (1983) 144 ITR 146
4. Civil Appeal Nos. 3849 to 3851 of 2017
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