Permanent Establishment Cost Reimbursements Attribution of Profits Methods of Attribution of Profits
OECD Model Convention: Fixed place of Business Through which Business is wholly or partly carried on PE includes: Place of Management Branch Office Factory / work shop Mine, oil or gas well, quarry or similar locations
PE also includes: Construction PE: A building site, construction assembly or installation project or supervisory activities in connection therewith – exceeding a specified period Service PE: Furnishing of services – employees or other persons engaged - exceeding a specified period Dependant Agent PE: Operated through a Dependant agent who: Habitually concludes contracts Maintains stock for delivery
PE Excludes a fixed place used for: Storage or display facilities Maintenance of stock for storage / display/ processing by another enterprise Purchase or collection of information Any activity of a preparatory or auxiliary character Independent Agent
UN MC Article 7 Clause (1) Business profits from the Country of Source are taxable only if the enterprise has a PE in the Source Country Source Country - India Resident Country - Australia Australian Company earning Business income from India Income of the Australian Company is taxable in India- only if the company has a PE in India.
Source of Income Resident and Ordinarily resident Resident and Not Ordinarily resident Non Resident Indian Income: Taxability Income earned and received or deemed to be earned and received in India Yes Income earned or deemed to be earned outside India but received in India Yes Income earned or deemed to be earned in India but received outside India Yes Foreign Income: Taxability Income earned and received or deemed to be earned and received outside India from a business controlled from India Yes No Income earned and received or deemed to be earned and received outside India from a business controlled from outside India YesNo
Nature of IncomeCondition Business Income When there is business connection in India (Please refer to the definition of the term Business Connection- discussed below) Property incomeProperty or asset source is in India Income from transfer of a capital asset When the capital asset is in India Income from Salaries Where services are rendered in India Indian citizen, working for the Government of India rendering services outside India Dividend IncomeDividend payable/paid by an Indian Company Interest, Royalty and Fees for Technical Services If the income is received from: -Government of India -A resident assessee except where such payment is for business outside India -A non resident assessee where the payment pertains to business in India
Business Connection – Sec 9(1)(i)explanation includes any person: Habitually concludes contract Regularly maintains stock in India Regularly secures orders in India Excludes activity through an independent agent in the ordinary course of his business.
The assessee is a US Company (USCO) engaged in Manufacturing of Process Control Instruments Providing engineering, research and technology based and allied services The company enters into a cost allocation agreement with one of its group company (ICO) for providing certain specific services.
According to agreement USCO shall provide: Guidelines for relevant safety, health and security support to employees on travel Assistance in relation to environmental policies Overall operations assistance and HR support Assistance on key projects Finance, internal audit, treasury and tax Corporate secretarial and legal support
Issues for Consideration: Would the income of USCO be liable for taxation in India If yes- what would be the nature of the income What would be the rate of TDS u/s 195- in case such income is taxable in India
No income can be taxed in India if services are rendered abroad. There is no PE for USCO- hence Article 7 does not apply There is no service which makes available the technical knowledge within the meaning of Article 12 (FTS) Therefore the assessee is not liable for tax in India and no withholding tax shall apply on the transaction Invensys Systems Inc vs DIT Chennai – AAR 6 th August 2009
Assessee is a US company engaged in maintained comprehensive financial and regulatory databases of publicly listed companies The database is located at the US A client from anywhere in the world is required to download a client interface software to access the database Subscription fees are paid online or through wire transfer
An Indian company intends to use the facilities of accessing the database of the US Co The USCO does not have a branch or an agent in India
Issues for Consideration What would be the nature of the income received from Indian clients- Royalty vs Business Income Does any income of the US Co accrue or arise in India Is the Indian client required to deduct TDS at the time of payment If yes- what would be the rate of TDS
The right that a customer gets is a right to use copy- righted database and not copy-right in the database. Hence income cannot be considered as Royalty. The USCO is engaged in the business of sharing databases for a consideration. Hence income of the company is taxable under Article 7 (business income). The company does not have a PE in India hence business income is not taxable. No withholding tax need to be deducted and the assessee is not required to file his returns in India FACTSET RESEARACH SYSTEMS INC. Vs DIT Delhi AAR dated 30 th June 2009
Income Tax Act – Sec 44C: For a non resident assessee head office expenses cannot exceed the lower of: 5% of adjusted total income or Amount of expenditure attributable to Indian Operations
DTAA – Article 7 clause (3): In determination of profits of a PE Expenses incurred for the purposes of PE shall be allowed Such expenses can be incurred either in the Country of Source or elsewhere
Does Sec 44C apply only to Head Office Expenses Can expenses incurred by other branches be fully allowed Where DTAA applies would be provisions of Sec 44C be valid – Sec 90(2) Can the non resident take shelter under Article 24
. US – Head Office Indian Branch - PE Singapore Branch Expenses incurred for Indian PE
Explanation (iv) to Sec 44C defines Head Office expenses. Accordingly it means: Rent, rates, repairs or insurance of ANY PREMISES OUTSIDE INDIA Salary, perquisites or travelling expense of any employee of ANY OFFICE OUTSIDE INDIA
Sec 44C applies to branch expenses incurred outside India and such expenses shall fall within the ceiling of 5%
Where there is a DTAA the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Does it mean Sec 44C does not have any relevance in case of non residents from Countries with which India has a DTAA ? May be Yes
India – Italy Treaty: In the determination of the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere
Indo – Brazil Treaty: In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, in accordance with the provisions of and subject to the limitations of the taxation laws of the Contracting State concerned.
TreatyPrima Facie Applicability of - Sec 44C India – BrazilYes India – AustraliaYes India – ChinaYes India – GermanyYes India – South AfricaYes India – USYes India – UKYes India – CanadaYes India – MauritiusNo India – ItalyNo India – JapanNo
The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. Is it possible to take shelter under Article 24(2) against Sec 44C -
Assessee is a Canadian Resident Has a Construction PE in India Head Office has apportioned Rs 100 lacs as attributable expenses to the PE Adjusted Gross Total Income (AGTI) of the PE is Rs 500 lacs AO restricts the expenses to 5% of AGTI ie Rs 25 lacs Assessee claims shelter under Article 24 – non discrimination. Discuss
Reasonable allocation of expenses permitted Subject to the limitations of Domestic Law Excludes the following payments to Head Office: Royalties, fees for usage of patents, know-how, copyrights etc, Management fees or fees for specific services Interest (other than banking enterprises) The above, if received by the PE, shall also not be included as Income of the PE
Profits to be attributed to a permanent establishment shall be determined on the basis of an apportionment of the total profits of the enterprise to its various parts, Nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; The method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.
The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.
Article 24(2) is a specific provision Article 7 is a general provision Restriction on allowability of Head Office u/s 44C is to be ignored in the light of Article 24(2) Revenue appeal dismissed Metchem Canada Inc vs DCIT – Mumbai ITAT Dated 30 th September 2005
Applicant is a Singapore based real estate group company (Sco) One of its group companies is located in India (Ico) Sco identifies overseas clients who intend to purchase property in India. These prospective clients are referred to Ico
Ico earns its commission (agency ) from selling properties to overseas clients Ico pays a flat fee of 30% of the commission earned to Sco – as referral fees
Issues for Consideration: What is the nature of income earned by Sco Would there be any withholding tax on the remittance to S Co If yes what is the rate of the Withholding tax
Assessees argument: Nature of Income – Business Income No PE in India Services Rendered outside India Hence no income arises in India Departments contention: 30% payout is very high Income in the nature of Royalty as well as FTS
Conclusion: For income to be taxed as royalty – it should be received for imparting technical knowhow or IPR For the purpose of FTS- the make available condition is not fulfilled. It also does not meet the description of management and consultancy services
Income to be considered as Business Income No PE in India Hence no income arises in India and therefore no withholding tax apply on the transaction Cushman and Wakefield (S) PTE Ltd AAR dtd 4 th July 2008
Explanation 3 to Sec 9(1)(i) Where a business is carried on in India through a business connection Only so much of income as is attributable to the operations carried out in India Shall be deemed to accrue or arise in India
Article 7(1) of DTAA: If the enterprise carries on business in the Other Contracting State through a PE The profits of the enterprise may be taxed in the other State but Only so much of them as is attributable to that PE.
Identifying the overall operations of the non resident Assigning weightage to each of the activities /operations Identifying the operations carried out by the Indian PE Apportioning profits based on proportionate weightage to the extent of business carried on by the PE
. US Based Service Provider - USP Indian Intermediary Service Provider - IIP Airlines and Hotels (AH) Travel Agents in India (TA) USP Provides Ticketing and Booking Software and training IIP Provides Hardware and access facilities to TAs Transaction Cycle
. US Based Service Provider - USP Indian Intermediary Service Provider - IIP Airlines and Hotels (AH) Travel Agents in India (TA) USP pays commission to IIP based on Indian Bookings AH pays commission to USP based on bookings Payment Cycle
Issues for Consideration: Does the USP have a business connection in India Is the income of the USP arising in India Does the facility of IIP constitute a PE in India If yes, what portion of the revenues are attributable to India
Analysis: The hardware and facilities provided by IIP constitute a Computer PE Income of USP accrues in India since: Bookings are done in India and Final subscribers were located in India Income accrues to the extent of collection of information and receipt of confirmation
Attribution of Profits: Majority of assets being the main frame computers located outside India The Computerised Reservation System was located outside India Transaction was processed outside India The entire risk of the transaction is with the USP Therefore only 15% of the revenues were attributable to India
USP was already paying more than 15% of its revenues to IIP. Hence no further income is attributable to Indian Operations Galileo International Inc vs DCIT New Delhi - Delhi ITAT (2007)
TransactionCitationAs per Revenue As per Court Contract of Purchasing Agent made in India Annamalai Timber Trust and Company vs CIT -Madras HC - 41 ITR 781 75%10% Negotiation, Procurement of Order and arranging LCs Ingersoll Rand Ltd vs ITO – Bombay ITAT- 4 ITD 654 10% Lending arrangement concluded in India – all other activities outside India C.G.Krishnaswami Naidu vs CIT – Madras HC – 62 ITR 686 100%Nil Conclusion of Purchase contracts in India Anglo French Textile Company Limited vs CIT – Supreme Court 23 ITR 101 10% Canvassing orders and securing import/ export licenses by subsidiary CIT vs Gulf Oil (Great Britain) Ltd – Bombay HC- 108 ITR 874 7.5%Nil
Where the AO is of the opinion that Income cannot be definitely ascertained The amount of income may be calculated using: Percentage / Presumptive Method Proportionate Turnover Method Any other suitable manner – Discretionary Method
A manufacturer in Germany has a branch in India. The Indian branch does the marketing and distribution for the German company. During the previous year the German company made a total profit of Rs 100 lacs (computed as per ITA) from sale of its products in India. No commission is paid to its branch.
In this case the AO may chose to avail the rights under Rule 10. Based on the overall activities of the Germany Company- the AO decides that the activities in India contribute to 20% of the total operations of the German Company Consequently proportionate profits of the German Company shall be taxable for the PE ie 20% of Rs 100 lacs = Rs 20 lacs
Walmart US has branches across 10 countries including India During the previous year the company made a total profit of Rs 500 lacs (as per ITA) across all its global operations The company has made a total turnover, across all its branches, of Rs 5000 crores. The Indian branch of the company made a turnover of Rs 1000 crores.
Profits taxable = Total Profits* Indian turnover in IndiaTotal Turnover = Rs 500 crores*1000 crores Rs 5000 crores = Rs 100 crores
Assessee is a steamer agent – resident of Netherlands having a branch in India The assessee had not provided details of its worldwide transactions However details of voyage in and out of India were provided as follows: Indian Port Receipts:Rs 100 lacs Total Port receipts :Rs 400 lacs (in and out of India) Indian Trade Profits:Rs 80 lacs
In this case, the AO came up with a unique formula (similar to proportionate method): Profits taxable = Total Indian Trade Profits* Indian Port Receipts in IndiaTotal Indian Port Receipts = Rs 80 lacs * Rs 100 lacs Rs 400 lacs = Rs 20 lacs Supreme Court in Netherlands Steam Navigation Co Ltd vs CIT 74 ITR 72 (AY 1952-33 based on ITA 1922 Rule 33)
Choice of Methods to be adopted Calculating world income as per Income Tax Act Treatment of extraordinary incomes and expenses of foreign branches and head office Accounts maintained in other languages Different methods of accounting adopted by the Indian PE and Head Office