SERVICE PE AKIL HIRANI Managing Partner M AJMUDAR & C O. M AJMUDAR & C O. 96 Free Press House, Free Press Journal Road, Nariman Point, Mumbai-21, INDIA

SERVICE PE

AKIL HIRANIManaging Partner

MMAJMUDAR & AJMUDAR & CCOO..

96 Free Press House, Free Press Journal Road, Nariman Point, 96 Free Press House, Free Press Journal Road, Nariman Point, Mumbai-21, INDIAMumbai-21, INDIA

Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Other offices: Bangalore, New Delhi, Chennai and Hyderabad Other offices: Bangalore, New Delhi, Chennai and Hyderabad

E-mail: E-mail: [email protected]@majmudarindia.comwww.majmudarindia.comwww.majmudarindia.com

INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS

Synopsis

Service PE under the OECD Model Tax Convention and the UN Model Tax Convention

Service PE under DTAAs between India and other countries

When is a service PE deemed to be concluded?

MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS

Service PE under the OECD Model Tax Convention and UN Model Convention

OECD Model Tax Convention – No specific provision for service PE

UN Model Convention – Does not use the expression “service PE” – Article 5(3)(b) of the UN Model Convention reads as follows:

The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continues (for the same or a connected project) within the country for a period or periods aggregating more than six (6) months within any twelve (12) month period.


Service PE under the OECD Model Tax Convention and UN Model Convention (contd.)

Rationale of Service PE Clause – to tax the enterprise of the home country for its economic activities in the host country beyond a threshold limit

No Clause on ‘fees for technical services’ in the UN Model Convention

Service PE in DTAAs between India and other countries

Service PE is included in the DTAAs between India and the following countries:

Australia – Article 5(3) Canada – Article 5(2)(l) China – Article 5(2)(k) United States of America – Article 5(2)(l) United Kingdom – Article 5(2)(k) Switzerland – Article 5(2)(l) Singapore – Article 5(6) Norway – Article 5(2)(l) Indonesia – Article 5(5) Nepal – Article 5(2)(h)


Requirements to establish service PE

Services to be rendered by the employees or “other personnel” engaged by the enterprise for a specified period within the host state

“other personnel” – generally does not include non-individuals – no clarity in the UN and OECD commentaries

DTAA between UK and Singapore – service PE is triggered if services rendered through a non-person,

for e.g., a company


Requirements to establish service PE (contd.)

Time period


Country Services provided to a non-related enterprise

Services provided to a related enterprise

Australia More than ninety (90) days within any twelve (12) month period

One (1) day

Canada More than ninety (90) days within any twelve (12) month period

One (1) day

Singapore more than ninety (90) days within any fiscal year

More than thirty (30) days in a fiscal year

China More than one hundred and eighty-three (183) days

Not provided

Norway Six (6) months within any twelve (12) month period

Not provided





Swiss Confederation More than ninety (90) days in any twelve (12) month period

More than thirty (30) days in a twelve (12) month period

United Kingdom More than ninety (90) days in a twelve (12) month period

More than thirty (30) days in a twelve (12) month period

United States of America

More than ninety (90) days in a twelve (12) month period

One (1) day





Nepal more than one hundred and eighty-three (183) days in any

twelve month period

Not provided

Thailand period or periods aggregating to more than one hundred and eighty-three (183) days

Not provided

Sri Lanka period or periods aggregating to more than one hundred and eighty-three (183) days

Not provided

Indonesia more than ninety-one (91) days in any twelve (12) month period

Not provided

Other issues

Definition of a “month” – Section 3(35) – General Clauses Act, 1897 – as per British calendar

Not a problem as most DTAAs give exact number of days



Nature of services

UN Model Convention – uses the term “furnishing of services, including consultancy services.”

“furnishing services, including managerial services” – used in the DTAAs signed by India with Australia and United Kingdom

“furnishing of services” – used in the DTAAs signed by India with China, Canada, Nepal, Singapore, Switzerland and United States of America – no impact – “furnishing of services” is sufficiently wide to cover all kinds of services, including consultancy and managerial



DTAAs signed by India with the following countries specifically exclude certain categories of services from the Service PE Clause:

United Kingdom – excludes services covered under Article 13 of the DTAA (Royalties and fees for technical services)

Singapore – excludes supervisory activities in relation to building sites, etc., covered under Article 5(4) and services in relation to exploration covered under Article 5(5)

Australia – excludes services in respect of which payments or credits that are royalties as defined in Article 12

Canada – excludes services covered under Article 12 (Royalties and fees for included services)

China - excludes technical services as defined in Article 12

(Royalties and Fees for Technical Services) MMAJMUDAR & AJMUDAR & CCO.O.INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS

Other issues

Definition of a “month” – Section 3(35) – General Clauses Act, 1897 – as per British calendar


“Services within a country”

Some treaties use “within” and some use “in” – dictionary meaning is the same


In re P. No. 28 of 1999

A (Indian company) and B (US company) formed a JV in India (AB) to manufacture automobiles

XYZ – wholly owned subsidiary of B

Provides services to B’s group companies


In re P. No. 28 of 1999 (contd.) AB and XYZ executed a management services

agreement – XYZ is to provide executive personnel (finance, service, marketing, etc.)

XYZ contended that it worked as an employment agency – however, AAR noted that the personnel were not employees of AB – AB paid XYZ for the services and not the personnel

XYZ assumes responsibility for suitability and competence of personnel for the tasks assigned to them


In re P. No. 28 of 1999 (contd.) XYZ is responsible to replace the personnel

if they resign

XYZ has to provide substitutes if these personnel are assigned to another project - AB can ask XYZ to provide additional personnel, if required

AAR ruled that Service PE exists

In Re. P. No. 28 of 1999, [2000] 242 ITR 208 (AAR)


Metapath’s Case

Metapath – telecom software company

Joint Venture in India with Bharti Cellular

Two (2) Expatriates sent to India to assist with the setup and establishment of the JV

Stayed in India for one (1) year


Metpath’s Case (contd.)

Employed by both Metapath UK and Metapath India – salaries paid by UK – expenses paid by India

CIT (Appeals) held that Service PE was in fact concluded as the expatriates were rendering services in India to the Indian JV.

Issue raised in appeal but the Delhi High Court did not deal with the issue of Service PE in the judgment

DCIT v. Metapath Software International, Inc., [2006] 9 SOT 305 (NULL)


Morgan Stanley’s Case

MS and Co., Inc. outsourced some of its functions to MSAS

MS and Co., Inc. also provided some personnel who were overseeing the outsourced activities and they were also providing managerial services


Morgan Stanley’s Case (contd.) Secondment arrangement

MS and Co., Inc. bore the risk of the employee’s activities

The employees were assured of their original jobs when they returned to the US

Employees were under MS and Co., Inc’s control

AAR ruled Service PE existed

Appeal to Supreme Court


Morgan Stanley’s Case (contd.) Supreme Court differentiated between

“stewardship activities” and “deputationist” Stewardship – protect MS and Co., Inc’s

interest – not a service to MSAS – no Service PE

Deputationist – day-to-day management of MSAS – Service PE concluded

However, no income attributable to Service PE as MSAS was remunerated on an arm’s length basis


Morgan Stanley’s Case (contd.) Pointers

Widely acclaimed as the right decision for the wrong reasons

Co-relation between Article 5(1) and 5(2) – Whether the services are related to the foreign enterprise’s business

Attribution – MSAS was not reckoned as Service PE – Service PE would be some sort of a fictional entity

Avoid “lien”, “risk” and “control” DIT v. Morgan Stanley, [2007] 292 ITR 416 (SC)


Golf in Dubai’s Case

Golf in Dubai LLC – organizes golf tournaments internationally

Conducted two (2) golf tournaments in India

Hired golf courses – received sponsorships from India and abroad


Golf in Dubai’s Case (contd.)

AAR

“furnishing of services” – bilateral concept Requires service provider and service

recipient No such service recipient exists – hence

no Service PE In any event – time threshold not breached

In Re. Golf in Dubai, LLC, (2008) 219 CTR (AAR) 513


Lucent Technologies’ Case

Lucent – hardware and software for mobile phones

Indian customers – after sales services, installation, etc., through Lucent India

Expatriates from Lucent Affiliate


Lucent Technologies’ Case (contd.)

ITAT held as follows:

Service PE clause covers “other personnel”

“Other personnel” – controlled by the foreign enterprise

Affiliate’s personnel controlled by Lucent Service PE concluded

Lucent Technologies International, Inc. v. DCIT, (2009) 120 TTJ (Delhi) 929


Worley Parsons’ Case

Worley Parsons – Australian company

Engaged by ONGC

Employees visited India to review documentation

Six projects in total


Worley Parsons’ Case (contd.) AAR – key issues:

Whether a single contract can be called “services” – as same counterparty and same purpose – all contracts together amount to the “services”

As contracts 2, 3 and 4 fall within the same financial year – they are to be reckoned together to determine number of days

Service PE concluded w.r.t. Contracts 2, 3 and 4 Worley Parsons Services Pvt. Ltd. v. DIT, [2009]

313 ITR 74 (AAR)


Attribution of Profits

Generally covered under Article VII

Involves a fair amount of estimation

Three (3) approaches:

Direct attribution – profits that the PE would have made if it was dealing with the enterprise on an arm’s length basis – most treaties have this clause

Indirect attribution – profits relevant to the portion of the work done by the PE – e.g., UK

Force of Attraction – US is a typical example


Attribution of Profits (contd.) Section 9(1) – “income accruing or arising, whether

directly or indirectly, through or from”

Explanation to Section 9(1) – income “reasonably attributable to the operations carried out in India”

Rule 10 of the Income Tax Rules, 1962 – when actual income cannot be accurately ascertained – three (3) methods

Presumptive Method – Rule 10(i) – percentage of turnover as may be considered reasonable


Attribution of Profits (contd.)

Proportionate Method – Rule 10(ii) – calculated on the basis that ratio of Indian turnover to global turnover should be equal to ratio of Indian profits to global profits

Discretionary Method – Rule 10(iii) – “in such other manner as the AO may deem fit”

Presumptive Method – taxation on a gross basis – Sections 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB


Confusing Judicial Guidance

In re P. No. 28 of 1999 (supra)

Question not expressly pressed before the authority

Obiter – Profits attributable to the services – fees received as consideration

Morgan Stanley (supra)

No further attribution because MSAS was remunerated at arm’s length – however, MSAS was not reckoned as the PE


Confusing Judicial Guidance (contd.)

Lucent Technologies (supra)

Question regarding attribution not raised in appeal before ITAT

Worley Parsons (supra)

“income therefrom will have to be computed in accordance with Article VII of the DTAA”


Case Study - A

Intra-group outsourcing transaction

ABC, Inc. – Outsources functions to subsidiary – ABC India (Private) Limited

Secondment arrangement – MD of ABC India is an ABC US employee – derives salary from both – TDS at both levels

Secondment arrangement includes indemnity from ABC US to ABC India for MD’s actions


Case Study - B


ABC, Inc. – sets up ABC India (Private) Limited – Outsourcing contract states that ABC, Inc. to provide personnel for carrying out the outsourcing work

Contracts with XYZ in India for providing staff (on loan basis) to ABC India (Private) Limited


Case Study - C


ABC, Inc. – sets up ABC India (Private) Limited – Outsourcing contract states that ABC, Inc. to provide personnel for carrying out the outsourcing work

Contracts with XYZ in India for providing staff (on loan basis) to ABC, Inc. – thereafter seconds loaned staff to ABC India


Case Study - D

US marketing firm – receives contract for a product in India

Engages a subcontractor (Indian company) on a principal-to-principal basis for executing part of the contract in India

Whether any Service PE exposure exists?


Case Study - E

UK company – establishes (76:24) JV in India

Sends employees to India to establish JV business

Employees stay in India as follows:

Mr. A – March 1 – April 1 Mr. B – March 1 – April 1 Mr. C – March 1 – April 1


Thank You

MMAJMUDAR & AJMUDAR & CCOO..

96 Free Press House, Free Press Journal Road, Nariman Point, 96 Free Press House, Free Press Journal Road, Nariman Point, Mumbai-21, INDIAMumbai-21, INDIA

Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Tel: +91 22 6630-7272, Fax: +91 22 6630-7252Other offices: Bangalore, New Delhi, Chennai and Hyderabad Other offices: Bangalore, New Delhi, Chennai and Hyderabad

E-mail: E-mail: [email protected]@majmudarindia.comwww.majmudarindia.comwww.majmudarindia.com

INTERNATIONAL LAWYERSINTERNATIONAL LAWYERS

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SERVICE PE AKIL HIRANI Managing Partner M AJMUDAR & C O. M AJMUDAR & C O. 96 Free Press House, Free Press Journal Road, Nariman Point, Mumbai-21, INDIA