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The expression "business connection" was not defined for the purpose of sec 9(1) of the Act before 31st

March, 2003. By the Finance Act, 2003, Explns. 1 and 2 were inserted in sec 9(1) w.e.f. 1st April, 2004.

Expln 2 contains an inclusive definition; it brings in the business activities specified in Clauses (a) to (c) within the fold of the expression "business connection" which has to be understood in its ordinary meaning. The Supreme Court in CIT v. R.D. Aggarwal & Co (1965) 56 ITR 20 (SC) has elucidated the

meaning of the expression “business connection” as under:

"The expression 'business connection' postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity".

The Supreme Court for the purpose of Section 42 of the IT Act, 1922, observed that , '"business

connection' involves a relation between a business carried on by a non-resident which yields profits and

gains and some activity in the taxable territories which contributes directly or indirectly to the earning of

those profits or gains. It predicates an element of continuity between the business of non-resident and the

activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business

connection." The requirement of continuity of transactions to form 'business connection' between a non-

resident and a resident was laid down by the Supreme Court in Anglo-French Textile Co. Ltd. v. CIT

[1953] 23 ITR 101 (SC). The Supreme Court observed, "an isolated transaction between a non-resident

and a resident in British India without any course of dealings such as might fairly be described as a

business connection does not attract the application of Section 42, but when there is a continuity of

business relationship between the person in British India who helps to make the profits and the person

outside British India who receives or realizes the profits, such relationship does constitute a business

connection".

In the light of above discussions, the AAR in Booz & Co (Australia) (P.) Ltd., in re (2014) 362 ITR 134

(AAR)summed up “business connection” (agency PE) as follows:

A real and intimate relation must exist between the activities carried out outside India by

the non-resident and the activities within India. Such relation must contribute, directly or indirectly, to earning of income by the non-

resident in its business. A course of dealing or continuity of relationship, and not a mere isolated or stray nexus

between the business of the non-resident outside India and the activity in India, would furnish a strong indication of “business connection” in India.

Apart from the facts that the requirements of agency are satisfied, the facts fulfil the above essential features of “business connection”.

On the basis of above and the fact pattern of the group entities and the Indian company, a PE of Australian group entities does exist in India. Therefore, income received by them from Indian company is taxable as business profits in India under Article 7 of the respective DTAAs. Where there is no DTAA, it is taxable under the provisions of the Income tax Act

Annexure

1. In Wood v. Holden (Inspector of Taxes) (2006) 285 ITR 467 (CA), the Count of Appeals in England found that the real test is its location of the place, where control and management rests. In this case, company E was incorporated in Netherlands. Till E was acquired by CIL (UK), it was a Netherlands Company. The Revenue inferred that it became UK Company on mere acquisition of CIL shares which was not accepted. Both the resolutions and the consequential actions were taken in Netherlands. What “E” was doing, was a part of tax scheme under the supervision of PWC from their UK office. “E” was recognised by Netherlands Tax Authorities as a resident of Netherlands. The judge found that there were not enough materials to hold that the control and supervision of “E” was in UK. All the documentation pointed out that they were in Netherlands. Merely because PWC in UK was engaged to represent some or the other party did not justify the inference that the transactions were held in UK. The test of effective

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management under DTAA is not different from the domestic law. In a transaction of purchase and sales of shares, where the decision to purchase and the decision to sell having taken place outside UK, there cannot be any basis for UK tax.

2. In Shaan Marine Services Pvt Ltd v. DIT (2014) TS-327-ITAT-2014 (Pune), the contention of the Revenue was that since the Cyprus Company was interposed to take benefit of India-Cyprus DTAA, the treaty benefits for shipping income from transportation of cargo shall be denied and the income must be taxed in India. The Tribunal held that the Revenue has attempted to rewrite contracts, which is not possible. It cannot be said that the Cyprus shipping company was merely a “paper company” and did not play any role in transporting cargo. The Cyprus shipping company was registered in and was a resident of Cyprus. It was engaged in shipping business. The shipping company was one member company having no employee or big office establishment as most of its work was outsourced to other entities. The “place of effective management” has been defined by OECD Model Convention as the place where key management and commercial decisions that are necessary for the conduct of entity‟s business as a whole are in substance made. All the documents like bill of lading, annual reports, etc., indicate that the Cyprus shipping company played a definite role in transporting cargo from India to UAE. The Cyprus shipping company did not have any establishment outside of Cyprus and hence, its “effective management” was situated in Cyprus only.

3. In the case of R & B Falcon Offshore Ltd vs. ACIT (2011) TII-02 (Del ITAT) (Intl), the Tribunal

drawing from the OECD commentary stated that the mere office address cannot be considered as a PE,

unless it is established that activities (other than preparatory and auxiliary activities) are carried out from

such place for it to be considered as a PE. Since there was no evidence to show that any business was

carried on except that the address had been mentioned in the agreement, it could not lead to an inference

that the taxpayer had a fixed place PE by mentioning the office address in the agreement.

In the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), the words “Permanent

Establishment” postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. Further, where the business of a group cannot be carried on exclusively without intervention of another entity, normally that entity must be deemed to be the establishment of the group in that particular in that country; Aramex International Logistics (P) Ltd., In re (2012) 348 ITR 159 (AAR).

4. The AAR in Booz & Co (Australia) (P.) Ltd., In re (2014) 362 ITR 134 (AAR) concluded that

under the DTAA, one of the sine qua non of a “fixed place” PE is that the fixed place of business through

which the business is carried on should be “at the disposal of the entity”. Trading operations generally

require a fixed place which the taxpayer uses on a continuous basis. However, taxpayers rendering

services usually do not require a place to be at their constant disposal and, therefore, “disposal test” is

generally more complex in such cases. In some jurisdictions, the “disposal test” is satisfied by mere fact

of using a place. In other jurisdictions, it is stressed that something more is required than a mere fact of

uses of place. Various factors have to be taken into account to decide a fixed place PE, which inter alia,

includes a right of disposal over the premises. No straight jacket formula that is applicable to all cases

can be laid down. Generally, the establishment must belong to the foreign enterprise and involve an

element of ownership, management and authority of the establishment.With regard to “disposal test”, the

AAR quoted the decision in the case of Rolls Royce Plc., v. DIT (2011) 339 ITR 147 (Del) wherein the

taxpayer availed certain support services from its UK subsidiary that had an Indian office. The taxpayer‟s

employees frequently visited the Indian office. A fixed place PE was found to exist because the Indian

office was “available” to all the taxpayer‟s employees. The taxpayer paid all of the subsidiary‟s expenses

in maintaining this Indian Office. Further, in Seagate Singapore International Headquarters (P.) Ltd., In re

(2010) 322 ITR 650 (AAR), an independent service provider maintained stock of goods on behalf of the

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taxpayer. The service provider supplied stock to the taxpayer‟s customers on a just-in-time basis. It was

held that the taxpayer‟s restricted right to access the premises of the service provider satisfied the

requirement of “disposal test”. Similarly, in Motorola Inc., v. DCIT (2005) 95 ITD 269 (Del), in Ericsson‟s

case, it was held that mere use of the subsidiary‟s offices by the parent‟s employees, without anything

more, was not sufficient to create a fixed PE, because the employees had no right to enter the space at

will and could do so only with the subsidiary‟s permission. An opposite conclusion was reached in

Motorola‟s case as the parent‟s employees worked for both the parent as well as the subsidiary. Hence,

the parent must have had the right to enter and use the subsidiary‟s office. On the other hand, in Western

Union Financial Services Inc., v. ADIT (2007) 104 ITD 34 (Del), the taxpayer was engaged in the money

transfer business and had appointed agents in India for liaison and related activities. On its premises, the

agent had displayed that it was an agent of the taxpayer. It was held that, on facts, the taxpayer had no

right to enter and make use of the agent‟s premises. Hence, the taxpayer was no fixed place PE of the

taxpayer.

In the case of Renoir Consulting Ltd v. DDIT (2014) 45 taxmann.com 112 (Mum), it was held that there

was a fixed place PE because the foreign taxpayer‟s regular interaction between parties requiring his

continued presence in India over indefinite contract period was needed for implementation of project. On

the other hand, in the case of Consolidated Premium Iron Ores Ltd (1959) 265 F.2d. 320, it has been

held that possession of a mailing address in a State – without any office, telephone listing or bank

account – will not constitute a PE (source: Philip Baker‟s Double Taxation Conventions).

5.The AAR has in Golf in Dubai, LLC v. ADIT, In re (2008) 306 ITR 374 (AAR) held that conducting of golf tournament in India for a week‟s duration does not lead to existence of a fixed base PE in India. A drilling rig which, although anchored while in operation, had been moved to a new site every few months, would not constitute a PE. Similarly, a remotely operated vessel which was used to instruct and repair submarine pipelines will not constitute a PE because a moving vessel is not a fixed place of business (DCIT v. Subsea Offshore Ltd (1998) 66 ITD 296 (Mum ITAT)). In Tekniskil (Sendirian) Bhd. v. CIT (1996) 222 ITR 551 (AAR) it was held that mere supply of skilled labour to work in a country did not give rise to a PE of the country supplying the labour.

In re., 237 ITR 798 (AAR), the AAR observed that a dealer selling merchandise from a mobile van

or a moving caravan may constitute a fixed place of business.

6. In the case of Rolls Royce Plc. v. DIT [2011] 339 ITR 147(Delhi) the taxpayer (RRPlc) supplied aero engines and spare parts to Indian customers. The taxpayer had a UK incorporated subsidiary. Rolls Royce India (RRI) having office in India, provided support services to RRPlc. RRPlc reimbursed RRI for all of the costs incurred in India in the provision of its support services, including the salaries and expenses of its employees, the cost of operating its office premises. RRI received service fees from RRPlc in the amount of a fixed percentage of the reimbursed expenses. RRPlc's employees visited India frequently and occupied and used RRIL's premises during these visits. It was held that RRPlc had a fixed place PE in India because RRI's premises were 'available' to all of RRPlc's employees and RRPlc paid all of RRI's expenses in maintaining its premises.

The “disposal test” requires that the place of business from which the business is carried on should be at the disposal of the taxpayer [pls see Booz and Company (Australia) Pvt Ltd., In re (2014) 362 ITR 134 (AAR)]. In Renoir Consulting Ltd v. DDIT (2014) TS-211-ITAT-2014 (Mum) it was held that premises of the client for the hotel where the employees stayed could be regarded as a fixed place PE. In this case, whether the hotel rooms could be legally or contractually used by non-resident‟s employees and consultants for business purposes was not ascertainable. Even if such use was proscribed, but was factually used, it could be considered as a PE. The use of hotel rooms and Indian company‟s premises could be only for business purposes.

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7. In the case of Seagate Singapore International Headquarters (P) Ltd., in re. [2010] 322 ITR 650 (AAR) Seagate was engaged in the business of manufacture and supply of Hard Disk Drive (HDD) to Original Equipment Manufacturers (OEM). Seagate entered into an agreement with Independent Service Provider (ISP) to stock HDD on Seagate's behalf and deliver the same to the OEM on a 'just-in time' basis. On the receipt of purchase order from OEM, Seagate supplied HDD to ISP who in turn supplied the goods to OEM. The payment for the supply of HDD was directly made by OEM to Seagate, and the services rendered by the ISP were remunerated by Seagate on an arm's length basis. In the aforesaid scenario, it was ruled that Seagate's restricted right to access the premises of the ISP satisfied the requirement of "disposal test".

8, In Western Union Financial Services Inc. v. ADIT [2007] 104 ITD 34 (Delhi), the taxpayer (US parent) engaged in money transfer business, appointed agents in India for liaison and related activities. The agents operated from their premises with the display to demonstrate the agency of Western Union Financial Services. The Delhi ITAT observed that the taxpayer had a 'businessconnection' in India. It, however, held that there was no PE in India because the taxpayer had no right to enter and make use of the agents' offices.

9. In the case of Fugro Engineers BV v. ACIT (2008) 26 SOT 78 (Del), Fugro (the taxpayer), a

resident of Netherlands, carried out 3 works for ONGC, C Ltd and G Ltd in India. The said work involved test of materials on Indian soil or Indian territorial waters on-board Indian ship or on the equipment mobilized by the taxpayer from Singapore. The taxpayer‟s works for all 3 parties were carried out in India and the duration lasted for 91 days for all 3 projects. Thus there was a projection of the foreign taxpayer in India. The only question was whether presence of 91 days in India could lead to a PE. The revenue authorities relying on OECD Commentary observed that the place of business (equipment) was fixed as there was a link between the place of business (equipment) and geographical point (India). The Tribunal held that it is not necessary that the equipment constituting the place of business has to be actually fixed to the soil on which it stands. The words “through which” must be given a wide meaning so as to apply any situation where activities are carried out in a particular location, which is at the disposal of the enterprise. Thus, an enterprise engaged in paving a road will be considered to be carrying on its business through the locations where the activities takes place. However, where the place of activity is moved, there may be some difficulty in determining whether there is a single place of business. But since no length of time is prescribed in Article 5(1) of India-Netherlands Treaty, if a place of business is available to the taxpayer for a period in which its independent work can be completed, it would constitute a PE in India. The Tribunal further held that clauses (a) to (h) of Article 5(2) were not at all applicable as there was no mine, oil or gas well, quarry or any other place of extraction of natural resources. On the other hand, the Uttarakhand High Court in the case of DIT v. R & B Falcon Offshore Ltd.(2014) 44 taxmann.com 400 dealt with the computation period of a rig being operated in India to determine the existence of a PE under the India-USA tax treaty. The High Court held that the period during which the rig was unused on account of maintenance and repairs should be excluded from the threshold period of 120 days in any 12 months period for determining the existence of such PE. Accordingly, the High Court held that the period during which a rig in India is merely „ready for use‟ but not actually used, shall not be considered to determine the existence of a PE.

10. In Amadeus Global Travel Distribution SA (2011) 11 taxmann.com 153 (Delhi ITAT), the Hon'ble ITAT concluded on facts that the computers installed in agents offices were supplied by Amadeus / AIPL and they exercised a great degree of control over these computers in as much as the computers cannot be used without the permission of Amadeus/AIPL and they can't even be shifted from one place to another without permission. It was because of this control that the ITAT concluded that fixed place PE exists within the meaning of Art. 5(1) of India-Spain treaty

11. In DIT v. Morgan Stanley & Co. [2007] 292 ITR 416 (SC), Morgan Stanley India was set up

to support the main office functions of the US company in equity and fixed income research,

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account reconciliation and providing information-technology-enabled services such as back-office operation, data processing and support centre. A service PE was recognised where service was rendered through employees deputed to India. At the same time, it was held that mere “stewardship* activity / shareholders‟ services” will not be a service PE because mere protection of own interest against competition by ensuring quality and confidentiality will not constitute a service PE. 12. InAramex International Logistics (P.) Ltd., In re [2012] 348 ITR 159 (AAR),where the products of Aramex group were sent to a common destination in India and the distribution was undertaken by the Indian subsidiary, the issue was whether subsidiary could be a PE? Is it not something which enables a non-resident company to carry on a part of its whole business in a particular country? When a business cannot be carried on exclusively in so far as it relates to customers in India like in the present case, without intervention of another entity, a subsidiary, normally that entity must be deemed to be the establishment of the group in that particular country. The position may be different when the entity is an independent entity uncontrolled by the group unless it satisfies the other requirements mentioned in Article 5(2) of the DTAA. But in a case where a 100% subsidiary is created for the purpose of attending to the business of the group in a particular country, e.g., in India, the Indian subsidiary must be taken to be a PE of the group in India. In this case, the Indian subsidiary was treated as a dependent agency PE because on facts it was not found an independent entity. 13. In AREVA T & D India Ltd, In re [2012] 346 ITR 456 (AAR) the French holding company proposed to enter into an information technology sharing services agreement with its subsidiary in order to provide support services in the area of information technology. It informed that the support services would be worldwide network for data transfer between all group companies which would connect to all global applications of the French company and intranet and internet traffic, messaging system for all e-mail communication between the subsidiaries, vendorsand customers. Further the quarterly invoice in this regard were to include the share in the aggregate amount of cost incurred in providing the whole of the services, i.e., direct and indirect cost incurred under the agreement including the expenses paid to 3rd parties, cost of personnel, travel and equipment related to the services. The AAR went on to presume that for providing IT support services under both wide area network and messaging system some hardware/equipment in India was to be utilized such as local loop lines, undersea cable infrastructure, a gateway consisting of a link and router all of which would belong to and be controlled by a service provider. Such hardware utilized in India is held to constitute a PE in India. Referring to article 5 (1) the AAR held that a place of business means all tangible assets (e.g. premises, facilities, machinery or equipment or installations) used for carrying on the business, whether or not they are exclusively used for business purpose. It further referred to para 17 of the Model Commentary that states that a PE may exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel are restricted to setting up, operating, controlling and maintaining such equipment. Hence even existence of a computer server amounts to existence of a PE within a jurisdiction. The AAR also made reference to the UN Commentary (2001) para 3 for place of disposition test to hold that the equipments in the present case are found to be at the disposal of the foreign enterprise for the purpose of the business activities. 14. In Delmas, France v. ADIT [2012] 14 ITR (Trib) 1 (Mumbai), the Revenue claimed that the business was carried out through agent‟s fixed place in India so it applied article 5(1). It also held that the taxpayer's case was covered under article 5(5) of the DDTAA on the allegation that the taxpayer's agent in India issuing the bill of lading has the authority to conclude contracts which are legally binding on the taxpayer. The Mumbai Tribunal held that in this scenario article 5(1) or article 5(2) lack application for failing to meet the subjective criterion, viz., "right to use the place" inasmuch as it is a sine qua non for existence of a fixed base PE. To constitute a fixed base PE under article 5(1) a place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities, and that such "place has to be owned, rented or otherwise at the disposal of the taxpayer. A mere occasional factual use of place does not suffice. Whereas in the business agency model the business of the foreign enterprise is carried on by the agent and the foreign principal does not have the powers, as a matter of right, to use the agent's place

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for carrying on its business place of disposition test for which reason article 5(1) lack application and in that case article 5(5) would take charge. 15. In the case of Convergys Customer Management Inc v. ADIT (2013) 34 taxmann.com 24 (Del ITAT), the Tribunal held that Indian subsidiary, which was practically projection of business of American company in India carrying out its business under control and guidance of American company without assuming any significant risk in relation to such functions, would be considered as fixed place PE of American company. In this case, Convergys Customer Management Group (CMG) procured IT enabled call centre / back office support services from its subsidiary, Convergys India Services (CIS) on principal-to-principal basis. CMG contended that it did not have a PE in India; whereas the Assessing Officer concluded that CMG had a PE in India (Fixed Place PE under Article 5 (1) and 5(2)(c) and (d), Dependent Agent PE under Article 5(4) read with Article 5(5) and a Service PE under Article 5(2)(i)). The CIT (A) held that CMG had a Fixed Place PE in India under Article 5(1) and 5(2)(a) because (1) premises of CIS were at the disposal of CMG from where CMG‟s business was carried on; (2) CIS did not have economic or functional independence; and (3) management of risk related to delivery of service was carried out in India through employees visiting / seconded on key positions. On further appeal, the Tribunal upheld the order of the CIT(A) that CMG has a Fixed Place PE in India under Article 5(1) on the ground that (a) employees of CMG frequently visited CIS for supervision, direction and control over operations of CIS; (b) such employees had a fixed place of business at their disposal; (c) CIS was practically a projection of CMG in India; (d) CIS carried on business under guidance and control of CMG without assuming significant risks; (e) CMG provided some hardware and software free of cost to CIS; (f) CMG does not have a Dependent Agent PE in India as conditions in Article 5(4) are not satisfied. 16. In the case of GFA Anlagenbau GmbH v. ACIT (2014) TS-383 (Hyd)the Tribunal held that supervisory services provided by the German Company through its employees at the project sites of an Indian Company in India did not constitute PE in India both under the Income tax Act (sec 92F(iiia) refers to fixed place from which the business of the enterprise is wholly or partly carried on) as well as the India-Germany tax treaty because the foreigncompany did not itself own or operate project sites independently. Further, such services were not provided in connection with building, construction or assembly activities of the foreign company. The Tribunal further observed that though Article 5(2)(i) of India-German tax treaty talks about supervisory activities, supervisory services provided by the German Company themselves do not constitute a PE of the German company since these services were not provided in connection with building, construction or assembly activities of the German Company. The Tribunal held that though the technicians deputed to India stayed more than 180 days, it cannot be said that their place of stay can be a “fixed place of business” for the German Company. The AO has brought nothing on record to show that the technicians were operating from a fixed place in the custody of the German Company to supervise the activities. 17. In Motorola Inc. v. DCIT [2005] 95 ITD 269 (Delhi) (SB)Motorola and Ericsson carried out certain telecommunications work in India through its Indian subsidiary. In each case, the parent, from time to time as required, sent employees to India, where they used the subsidiary's Indian offices. In Ericsson appeal, the Special Bench of the DelhiITAT held that mere use of the subsidiary's offices by the parent's employees, without anything more, was not sufficient to create a fixed PE, because the employees did not have any right of disposal over the subsidiary's space, that is, they had no right to enter the space at will, and could do so only with the subsidiary's permission. However, the same Bench reached the opposite conclusion in the Motorola's appeal on the ground that the parent's employees worked for parent as well as subsidiary and because they worked for the subsidiary, they must have had the right to enter and use the subsidiary's offices. The Tribunal referred to the OECD Commentary which refers to a “fixed place” as a link between the place of business and a specific geographical point. It has to have a certain degree of permanency. In order to constitute a “fixed place of business”, the foreign enterprise must have at its disposal certain premises or parts thereof. 18. The Andhra Pradesh High Court in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP)observed that the expression “PE” used in the tax treaty postulates the existence of substantial element of enduring or permanent nature of a foreign enterprise in another country, which can be attributed to “fixed place of business” of that country. The High

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Court held that mere supervisory activities would not form a PE. However, at that time the Indian German DTAA was different from the current treaty. But still the present article 5(1) of India-German tax treaty defines “permanent establishment” to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. If the services are rendered from a place which is not owned by the foreign enterprise or is not at its disposal, then a view can still be taken that there is not permanent establishment. However, care should be taken that the stay of foreign technicians does not exceed 6 months in India to avoid litigations. 19. However, in the case of Steel Authority of India Ltd v. ACIT (2006) 10 SOT 351 (Del), the Delhi Tribunal was dealing with supervisory services provided by the German Company to an Indian Company for the modernisation of a steel plant in India and held that the building site or construction, installation or assembly project need not be that of the foreign company and the supervisory activities carried out in connection therewith constituted a PE, if they continued for a period exceeding 6 months. Therefore, even if the installation or assembly project did not belong to the taxpayer and it has been providing supervisory services for installation purposes and such services has been provided for a period exceeding 6 months, the supervisory activities by themselves would constitute PE. 20. In the case of CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP),the taxpayer exported a large amount of iron ore. In order to expedite the operations, the taxpayer entered into a contract with a German company, which undertook to supply and deliver a Bucket Wheel Reclaimer as per drawings and to delegate one engineer – erector for supervising the total erection and one special filter for installation of electrical equipment. The period of contract was 13 and half months. The Tribunal found that (a) the actual installation or assembly work was not undertaken by the German company; (b) payment in respect of sub-contract had nothing to do with the assembly, erection or installation of the Bucket Wheel Reclaimer; (c) the Germany company merely supervised the installation; (d) the taxpayer did not recover any money from the German company in respect of any part of erection job; (e) the activity which was carried on by the German company in relation to supply and delivery of the Bucket Wheel Reclaimer. Merely supervision of installation would not lead to a PE in India as the activity was in relation to supply and delivery of Bucket Wheel Reclaimer. 21. Similarly, in the case of DCIT v. Subsea Offshore Ltd (1998) 66 ITD 296 (Mum),the taxpayer entered into contracts with ONGC and Cairn Energy. The taxpayer brought its own vessels in the territorial waters of India for inspection of oil pipelines, etc., which stayed in Indian territorial waters for 2 ½ months. The question before Mumbai Tribunal was whether taxpayer‟s income was taxable in India. The taxpayer, a resident of UK, received certain sums from ONGC for undertaking the work of inspection and repairing of submarine pipeline work used for exploration of oil and gas, extraction and production with the help of a vessel. The Tribunal pointed out that there was no dispute that the income was business income and, therefore, Article 7 of India-UK Tax Treaty was applicable. However, the income would be taxable only if the taxpayer had a PE in India. The Tribunal pointed out that the vessel of the taxpayer was in India only for 2 ½ months, which could not be said to be enduring period of time nor it could be said that there was a virtual projection of the business of the taxpayer into the soil of India. 22. In the Advance Ruling P. No. 11 of 1995, the taxpayer, a Singapore Company, entered into 2 contracts with ABC for providing services related to burial of pipelines offshore India. The job executed by the taxpayer in the nature of a turnkey sub-contract because the main contract by the ONGC was awarded to XYZ. The contracts of the taxpayer being in the nature of turnkey sub-contract, all marine vessels, personnel and equipment were provided by it. The duration of the contracts was 7 days and 39 days, respectively. The AAR referring to Article 5 of India-Singapore Tax Treaty observed that PE meant a fixed place of business through which the business of the enterprise is wholly or partially carried on. Article 5(2)(f) laid down that a PE would include a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Under Article 5(3), a building site or construction, installation or assembly project constitutes a PE only if continues for a period of more than 183 days in any year. The scope of work carried on by the taxpayer was installation and assembly project relating to burial of pipelines in the sea bed. Such activities were covered by Article 5(3) and not by Article 5(2)(f). Under Article 5(3), such work or project could be treated as a PE only if lasted for more than 183 days in any year. The duration of the contracts was 7 days and 39 days only. Therefore, there was no PE in India.

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23. In CIT v. BKI/HAM v.o.f [2012] 347 ITR 570(Uttarakhand) the non-resident entered into a sub-contract for dredging and back filling works with Hyundai Heavy Industries in respect of the second Basin Hazira Trunk Pipeline Project being in the nature of a construction project. The sub-contract which was spilled over 2 assessment years but the non-resident had its entire duration of less than 6 months.In this case the non-resident maintained an office at Bombay.The High Court held that a perusal of Article 5(1) of the Netherlands treaty indicates that a "PE" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2) of the treaty includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a warehouse in relation to persons providing storage facilities for others, premises used as a sales outlet, an installation or structure used for exploration of natural resources provided that the activities continue for more than 183 days. Article 5(3) provides that a building site or construction, installation or assembly project constitutes a PE only where such site or project continues for a period of more than 6 months. Article 5(3) provides a specific provision which covers the provision of article 5(2) of the treaty. The specific provision would prevail over the general provision. Consequently, no PE was constituted in India within the meaning of article 5 and no part of the revenue earned by the taxpayer was taxable in India. 24. In the case of R & B Falcon Offshore Ltd vs. ACIT (2011) TII-02 (Del ITAT) (Intl), the Tribunal held an installation or a structure could become a PE only if it is actually used for exploration or exploitation of natural resources for a period of more than 120 days. The activity of repairs and mobilization of the rig were not for exploration or exploration of natural resources. That activity was a preparatory activityso as to make the rig fit for exploitation of natural resources. The rig could be said to be used for exploitation of mineral oil only when it was positioned at the appointed place for the exploitation of mineral oil. It was the admitted position that if the time was reckoned from its positioning at the appropriate place, the period was less than 120 days. Therefore, the taxpayer did not have any PE in terms of Article 5(2)(j) of the DTAA. Hence, the period of repairs and mobilization of the rig could not consider for the purpose of calculating 120 days required for constituting an installation PE. 25. In Global Industries Asia Pacific Pte. Ltd., In re [2012] 343 ITR 253 (AAR) the non-resident undertook installation contract for IOCL where the activities of installation run for 41 days. It also executed a sub-contract for L & T project for provision of services and the facilities in connection with the exploration, exploitation or extraction of mineral oil where the non-resident's presence in India was 168 days. The AAR held that project for installation would have a PE only if it continues for a period of more than 183 days in the financial year in view of article 5(3) of the DTAA. Since it did not exceed the period there was no PE. 26. In Cal Dive Marine Construction (Mauritius) Ltd., In re[2009] 315 ITR 334 (AAR), the AAR interpreted article 5 of India-Mauritius Treaty in the context of contract for laying pipelines under the sea and constructing the structures inclusive of pre-commissioning of the pipelines and held that the preliminary work performed by the applicant outside India cannot be taken into account for the purpose of identifying the starting point of time of 9 months contemplated by article 5(2)(i). The AAR in particular held that occasional short visits of the contractor's personnel for negotiations or doing some paper work in connection with the project or for taking soil samples, broadly speaking, will not trigger the starting limit as these would constitute preliminary activity and not core activity. The AAR held that the requirement of a fixed place and carrying on business through that place under article 5(1) connotes the idea of certain degree of permanence attached to it. Moreover, the activities must be considerable and regular. A passing, transient or casual activity, though carried out from a particular place does not fall within the scope of article 5(1). If the fixed place is in the nature of a building site or place connected with construction or assembly project, the minimum duration was fixed under the Treaty. A construction, installation or assembly project cannot be treated as a PE unless it continues for a period of more than 6 months even thought it might otherwise fulfill the definition contained in article 5(1) or 5(2). 27. Further,in DCIT v. J. Ray McDerrmott Eastern Hemishphere Ltd. [2013] 1 ITR (Trib)-OL 141 (Mumbai), the taxpayer executed 3 contracts of duration less than 9 months. The Mumbai Tribunal held that for determining the duration in article 5(2)(i) of India-Mauritius Treaty duration in respect of each contract should be taken into consideration separately. Since the duration in respect of each contract was less than 9 months from the actual date of commencement of

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preparatory work till the actual date of completion the mandate of article 5 was not applicable [pl. also see JDIT v. Krupp Uhde GmbH (2010) 1 ITR (Trib) 614 (Mum), TiongWoon Project & Contracting Pte Ltd, In re (2011) 338 ITR 386 (AAR) and J. Ray McDermott Eastern Hemisphere Ltd v. JCIT (2010) 130 TTJ 121 (Mum)]. In these cases, it is to be seen that whether the several projects are independent projects and there is no inter-connection and inter-dependence amongst them and none of them should appear to be an extension of another. 28. InTiong Woon Project and Contracting Pte. Ltd, In re[2011] 338 ITR 386 (AAR), the taxpayer undertook multiple installation and erection projects and claimed that these can be a PE only if each of the 4 installation projects continues for a period of more than 183 days individually in any previous year in terms of article 5(3) of the DTAA with Singapore. The Authority ruled that all these were independent projects and there is no interconnection and interdependence amongst them. None of them was an extension of another. It thus held that the duration test for installation and assembly projects provided under article 5(3) of the DTAA cannot be applied for those projects that do not pass the test of cohesiveness, interconnection and interdependence. 29. Further in Global Industries Asia Pacific Pte Ltd, In re [2012] 343 ITR 253 (AAR)the AARheld that for a PE to exist under article 5(3) of the Indo Singapore treaty, the question would relate to the duration of installation and not the site. 30. In National Petroleum Construction Company v. ADIT [2012] 20 ITR (Trib) 545 (Delhi) segregation of contract revenues into offshore and onshore activities was made and agreed upon between ONGC and the taxpayer at the stage of awarding the contract and the total contract consideration under the contract had been earmarked towards each of the activities like design and engineering, material procurement, fabrication and installation. The contract provided separate payments to the taxpayer on the basis of work of design, engineering, procurement and fabrication. These operations had been carried out and completed outside India. Every progress under the contract was inspected and finally accepted by ONGC or its authorised agents outside India, and only then, the taxpayer received the payments from ONGC according to the specified milestones executed outside India. Different phases of the contract were as under:

The taxpayer fabricated the platform in Abu Dhabi and after fabrication the platform was brought to India with the help of its barges and then the possession was handed over to ONGC ;

Before sailing the platform after fabrication, it was certified by ONGC through its approved surveyor ;

The insurance policy was to be taken by the taxpayer, the ONGC was the joint beneficiary and if there was a loss suffered in the course of transportation the payee of the insured amount would be ONGC ;

The Delhi Tribunal held that the contract was not in the nature of a turnkey contract in which case the income attributed to PE in India could not extend to offshore activities carried outside India and had to be therefore confined to incomes from activities carried out from the PE. It held that the taxpayer did not have a PE in respect of erection and fabricating the platform in Abu Dhabi and the taxpayer only had a PE in respect of installation and commissioning. Erection and fabrication were not attributable to the PE in India. All the activities prior to installation and commissioning were carried out in the UAE and thus having regard to article 7 of the DTAA, no income could be attributed to the PE in India.Thus, the profits attributed to the PE in India, only activities in respect of installation and commissioning were held chargeable to tax. The profits attributable to the supplies, i.e., erection and fabrication of the platforms could not be brought to tax in India. 31. In Samsung Heavy Industries Co. Ltd. v. ADIT [2011] 11 ITR (Trib) 513 (Delhi) the taxpayer along with L&T entered into contract with the ONGC to carry the work of "surveys (pre-engineering,pre-construction/pre-installation and post construction), design, engineering, procurement, fabrication, anti-corrosion and weight coating, load out, tie down/sea fastening, tow out/sail out, transportation, installation, modifications at existing facilities, hook-up testing, pre-commissioning, start up and commissioning of entire facilities" on turnkey basis at the ONGC's western offshore site. The taxpayer and L&T signed an MOU which defined the division of work between them. The taxpayer filed a profit statement of its Mumbai project office in which it showed the contract revenue was 14.56% of the total revenue of the contract for work done in India. The taxpayer claimed that the consideration for supply of offshore supply and services

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goods was received outside India, the sale was completed outside India and was not attributable to the PE and therefore no part of the income for the offshore supply or offshore services was received in India. The Delhi Tribunal held that the contract obtained by the taxpayer from the ONGC was a composite contract starting right from surveys of pre-engineering, pre-construction/pre-installation; design engineering procurement, etc. till the startup and commissioning of the entire facilities. All the activities to be carried out in respect of the contract were to be routed through the project office only. The insurance with respect to the entire project had been in fact obtained by the taxpayer and the policy was not shown to be restricted only to the activities of the taxpayer outside India. It thus held that the "PE" of the taxpayer had come into existence on the opening of the Mumbai project office which acted as a channel between the taxpayer and ONGC.The Tribunal explained that Article 5.1 of the DTAA between India and Korea having application to the case of the taxpayer describes that for the purpose of the DTAA, the term "PE" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5.2 enlarges the meaning of "PE" in addition to what has been stated in article 5.1. Article 5.3 which uses the words "likewise encompasses" further enhances the term "PE" to these entities. Therefore, it will be wrong to interpret article 5.3 as an exclusionary clause or one restricting scope of application of article 5.1 or article 5.2. Article 5.3 only extends the scope of PE and it cannot be read in isolation. Otherwise also, if the PE of a non-resident entity exists under articles 5.1 and 5.2, it is not necessary that it should also fall within the scope of article 5.3 to make it liable to be taxed in the source country. 32. The most obvious example of an associated company as a PE will be where the company acts as dependent agent for its associate. There is no reason why as an associated company should be treated any differently from any other person: it will give rise to an agency PE, if it is a dependent agent within Article 5(5) and not an independent agent under Article 5(6). In P. No. 8of 1995 (1996) 223 ITR 416 (AAR), a Swiss company proposed to establish an Indian subsidiary to provide consultancy services: examining the proposed agreements between the companies, the AAR concluded that it would be a dependent agent and PE. In this case, the Indian subsidiary provided clerical and secretarial assistance to complete documentation of tenders and contracts and supply information in respect of global tenders and submitted and signed tenders on behalf of the non-resident on terms and conditions accepted by it. The Indian subsidiary at all times acted only on the instructions of the foreign parent. The Tribunal in the case of eFunds Corporation v. ADIT (2010) 40 SOT 65 (Del ITAT) held that in order to constitute PE, place of business need not be owned, rented or otherwise under possession or control of enterprise; the only requirement is that place should be fixed in the context of nature of business being carried out and also no time period test is prescribed for permanence as permanence of establishment has to be determined in the context of nature of business being carried on. eFunds Corporation i.e., the taxpayer, was a US company. It had a wholly owned subsidiary eFunds India. The taxpayer entered into contract with its clients for providing certain IT enabled services and then, the same contract was either assigned or sub-contracted to eFunds India for execution.Therefore, both the taxpayer and eFunds India were under legal obligation to provide services to the clients of the taxpayer. From Functions performed, Assets used and Risks assumed (FAR analysis) by the taxpayer and eFunds India, it was clear that eFunds India was not having requisite software and database needed for providing IT enabled services independently. Therefore, to that extent they were made available by the taxpayer to eFunds India free of charge. Further, eFunds India did not bear any significant risk as ultimate responsibility lay with the taxpayer. It was also noted that sales team of the taxpayer undertook marketing efforts for its affiliates including eFunds India. eBay India was substantially controlled and influenced in functional matters by the taxpayer (such as through secondment of employees to key positions). On these facts, it was concluded that the taxpayer had business connection in India and since the entire activities of the taxpayer in India were carried out by eFunds India (an agent) and the said agent had not been remunerated on arm‟s length price basis, it was to be held that the taxpayer had PE in India in respect of back office operation and software development services being carried out by its subsidiary. Therefore, the taxpayer‟s income was liable to tax in India in respect of operations performed by the subsidiary company on its behalf.

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33. Similarly, in the case of Aramex International Logistics Pvt Ltd., In re (2012) 348 ITR 159 (AAR)the AAR observed that where a wholly owned subsidiary is created for purpose of attending business of a group in a particular country, that subsidiary must be taken to be a PE of that group in that particular country. The Applicant, a Singaporean company was engaged in business of door-to-door express shipments by air and land. It entered into an agreement with its Indian subsidiary AIPL to look after movement of packages within India, both inbound and outbound. Under the agreement the applicant was responsible for transportation of packages outside India and AIPL has to transport packages within India. The Applicant charged fee from Indian subsidiary in connection with invoicing and payment function performed by it outside India for Indian subsidiary. It was found that wholly owned subsidiary of AX group, which is facilitating the overseas express shipment business carried on by the said group in India through the applicant, a Singapore company, by securing orders, collecting articles, transporting them and delivering the same to addresses in various countries through the group entities is PE of applicant in India within the meaning of art. 5 of Indo-Singapore DTAA and, therefore the receipts by applicant from outbound and inbound consignments attributable to PE in India are taxable in India. 34Binding Test

If the action of the agent who is found to be a dependent agent after applying the dependency test, like securing orders, legally bind the foreign enterprise to perform the contract in India and the final decision to perform or not does not lies with the principal, the agent can be considered to be a PE of the foreign enterprise in India. The aspect of conclusion of contracts would have to be seen from the point of view of performing all the actions necessary for the conclusion of contracts, though the actual signing of the contract may be performed by the foreign enterprise outside India.

The Supreme Court in the caseof DIT v. Morgan Stanley & Co. Inc(2007) 292 ITR 416 (SC) held that the unit in India which performed the back office services would not constitute an Agency PE for Morgan Stanley Inc in India.Morgan Stanley did not have the authority to enter into contracts or bind Morgan Stanley Inc with any contracts in India.

Dependency test The dependency Test is to corroborate whether the agent is dependent legally and economically on the foreign enterprise for the conduct of business. The agent who is found to be a dependent agent after applying the dependency test and who performs any of the three requisite functions for attracting the Agency PE as mentioned above would be considered as the PE of the foreign enterprise in India. In TVM Ltd v. CIT (1999) 237 ITR 230 (AAR), the operation of Article 5(5) and 5(6) was quite nicely illustrated. A Mauritius company was established to develop and operate a television channel. An Indian company was established with the same shareholders to solicit advertising for the channel: the Indian company had no authority to bind the Mauritius company. The AAR concluded that the Indian company was not independent of Mauritius company; however, it was not a dependent agent as it had no authority to conclude contracts binding on the Mauritius company. Of course, the profit of Indian company would be taxable in India and the AE provisions would have to be applied to ensure that the Indian company earned an arm‟s length remuneration.

Legal dependence The legal dependence is reflected by the facts of arrangement or agreement between the foreign enterprise and the agent. If the risk and return of the business done by the agent fully accrue to the agent, then the agent can be deemed to be an independent agent. The act of the agent with autonomous decisions in the normal course of business and remuneration for the services at arm‟s length by the foreign enterprise would strengthen the claim of the agent as an independent agent.

Economic dependence The agent if earns the major portion (say more than 75%) income from other than the relevant foreign enterprise, it would cement the fact that, the agent does not act „wholly and exclusively on behalf of the foreign enterprise‟. Economic independence signifies the business relationship with its principal (the foreign enterprise) and the consequent dependency for the functioning of business of the agent. For example, if the foreign enterprise is the only customer the agent serves as part of its

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agency business, then it would be deemed that the agent is economically dependent on the foreign enterprise. If the agent‟s activities are not wholly or exclusively devoted to the foreign enterprise and the agent‟s services are being remunerated at arm‟s length, then the agent would be considered as an independent agent.

The official commentary on the OECD Model further states that a person will only have independent status if it is independent both legally and economically and it acts in the ordinary course of the business when acting on behalf of the enterprise. If an agent acts almost exclusively for one enterprise it may be difficult for him to show that he is independent, and in some DTAAs which India has entered into (for example UK) it is expressly provided that in such a case the agent will be deemed not to have an independent status. The OECD Model recognizes that an overseas subsidiary company is a separate legal entity from its parent and. as such cannot automatically be regarded as a PE. However, if the subsidiary functions as a non-independent agent / entity on behalf of its parent, it will constitute a PE.

The ITAT in the case of Western Union Financial Services Incv. ADIT (2007) 104 ITD 34 (Del)framed three requisites for establishing an agent as an independent agent:

He should be acting in the ordinary course of his business;

His activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as an agent;

The transactions between the foreign enterprise and the agent should be at arm's length.

The concept of “ordinary course of business” was given a wider meaning by the Tribunal by stating that the Non-Banking agents like Department of Posts and tour operators appointed by Western Union Financial Services Inc for money transfer business, though not directly engaged in such money transfer business, performs those money transfer functions which are conducive to their main business. Hence agents can be considered as acting in the ordinary course of their business. Further, the tax authorities could not provide any material to prove that the compensation to the agents by Western Union Financial Services Inc had to be higher and that the compensation was not at arm‟s length(Legal dependence). The activities of the agents like Department of posts are so large and wide that it cannot be said that they are dependent on Western Union Financial Services Inc for their earnings or revenues. Hence the agents are to be treated as independent agents (Economic dependence).

35. The ITAT in the case of Western Union Financial Services Incv. ADIT (2007) 104 ITD 34 (Del)framed three requisites for establishing an agent as an independent agent:

.He should be acting in the ordinary course of his business;

His activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as an agent;

The transactions between the foreign enterprise and the agent should be at arm's length. The concept of “ordinary course of business” was given a wider meaning by the Tribunal by stating that the Non-Banking agents like Department of Posts and tour operators appointed by Western Union Financial Services Inc for money transfer business, though not directly engaged in such money transfer business, performs those money transfer functions which are conducive to their main business. Hence agents can be considered as acting in the ordinary course of their business. Further, the tax authorities could not provide any material to prove that the compensation to the agents by Western Union Financial Services Inc had to be higher and that the compensation was not at arm‟s length(Legal dependence). The activities of the agents like Department of posts are so large and wide that it cannot be said that they are dependent on Western Union Financial Services Inc for their earnings or revenues. Hence the agents are to be treated as independent agents (Economic dependence). 36. In Reuters Limited Construction House v. JCIT (2012) 14 ITR (Trib) 48 / 142 TTJ 57 (Mum), the income of the non-resident‟s worldwide business in distribution of financial information was from an agent in India. Such agency was treated by the Tribunal as a dependent agency PE

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because even though the agents acted independently in ordinary course of business, it devoted its activities wholly or mostly wholly on behalf of the foreign enterprise, it would be considered as PE of the foreign enterprise irrespective of whether it concluded contracts binding on its principal or not. Thus, the non-resident was liable to tax on income attributable to the activities of such dependent agency in India as PE of the non-resident. Similarly in the case of Delmas, France v. ADIT (2012) 14 ITR (Trib) 1 / 144 TTJ 273 (Mum), the non-resident French Company was having a dealership in a business through an agent in India. The issue was whether it was a dependent agency so as to constitute a PE. The Tribunal held that provisions of dependent agent PE, as set out in Article 5(5) of Indo-French DTAA, can never come into play in cases in which business is carried out by the foreign enterprise through an independent agent. Even when an agent is wholly or almost wholly dependent on the foreign .enterprise, he will still be treated as an independent agent unless additional condition of transaction being not at arm's length is fulfilled. Further, even if the agent had the authority to conclude contracts it was not a decisive test because he could do so as an independent agent as well. The onus of establishing PE is on the taxing authorities. Since provisions of Article 5(5) override provisions of Article 5(1) and 5(2), no PE under Article 5(1) and (2) can be said to come into existence, so far the agency situations are concerned, until conditions of Article 5(5) are also satisfied. In Amadeus Global Travel Distribution SA v. DCIT [2011] 11 taxmann.com 153 (Delhi ITAT), it was held by ITAT that: (a) AIPL is totally dependent on Amadeus Global. The entire business of AIPL is to provide data and software services together with relative of 'Amadeus products' to the subscribers in India. (b) Thus AIPL can be said to have and having exercised an authority to conclude contracts on behalf of Amadeus Global. What Amadeus Globalcould have done directly by entering into an agreement with the subscribers was done through AIPL. The subscribers‟ agreements were entered into by AIPL under an authority available to it in view of the distribution agreement. What could have been done directly is now done indirectly through the offices of AIPL under an authority granted to it. 37. In the case of Galileo International Inc v. DCIT (2009) 116 ITD 1 (Del ITAT), the distributor in India through which Galileo International Inc, USA provided airline reservation system services, was held to be a dependent agent of Galileo International Inc and hence, an Agency PE for Galileo International Inc in India.The distributor was found to have the authority to bind Galileo International Inc in relation to the contract made by the distributor with the travel agents for the usage of the airline reservation system (Binding Test).The distributor could do the business of providing the airline reservation services only with the full support and control from Galileo International Inc (Legal dependence).The distributor was found to provide the airline reservation services only on behalf of Galileo International Inc in the course of its business (Economic dependence). Rolls Royce India (Subsidiary of Rolls Royce Plc) was held to be an Agency PE for Rolls Royce Plc in India because Rolls Royce India was found to have habitually securing orders wholly for Rolls Royce Plc from the Indian customers [pls see Rolls Royce Plc v. DDIT (2008) 19 SOT 42 (Del)]. 38. In the case of ADIT v. OySisu AB (2013) 38 taxmann.com 81 (Mum Trib),OySisu AB (the taxpayer), a Finland company, executed a contract with Nhava Sheva Port Trust ('NSPT') for the supply of tractors and trailers which included manufacture, transportation and delivery of equipment to NSPT. The tractors supplied to NSPT were manufactured in Finland by the taxpayer and were transported to India. No assembling activities in relation to supply of tractors were carried out in India. The taxpayer engaged Usha Sales for rendering certain specific services in India, like attending the meetings, clearing tractors dispatched to the Indian Port and representing it for the tax refund dues before the revenue authorities for which it paid an agreed commission to Usha Sales. Under the main contract the taxpayer was also required to supply 136 trailers and related spares to NSPT. In this respect the taxpayer placed a joint bid along with Indian company Braith Waite, as NSPT desired to place a single contract for both the above activities, i.e., for the supply of tractors and trailers. The taxpayer entered into a sub-contract with Braith Waite for manufacturing these trailers in India. In fact, the trailers were supplied by Braith Waite directly to NSPT and the payments relating to trailers were made to Braith Waite by NSPT. The AO held that the taxpayer had PE in India in the form of Usha Sales and, hence, he attributed certain percentage of revenue from sale of tractors and trailers taxable in India. The

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CIT(A) held that Usha Sales was an independent agent and, therefore, the taxpayer could not be deemed to have a PE in India for the supply of 38 tractors to NSPT. The taxpayer could not be subjected to tax for work done outside India. So far as supply of 136 trailers was concerned, for which the taxpayer had entered into a subcontract with Braith Waite for manufacturing the trailers in India, the CIT held that the taxpayer had an installation PE and therefore, it had a PE in India within the meaning of Article 5(3)(a) and 5(3)(b) of the India-Finland tax treaty. Thus, the CIT(A) held that an element of profit had accrued to the taxpayer on the amount sub-contracted to Braith Waite. The Tribunal held that from the records it was found that there was a consistent non-appearance on the part of the taxpayer. The taxpayer till relevant date had not been able to convince that Usha Sales was not a PE of the taxpayer and was an independent branch by itself. In an income-tax proceeding, it is the duty of the taxpayer to convince with material and evidence, to the satisfaction of the AO, which exercise the assessee had failed to do. Since, in the two rounds, the taxpayer had not been able to convince the AO, order of the AO was to be sustained and the order of the CIT(A) was to be set aside. 39. In the case of eBay International AG v. ADIT (2013) 140 ITD 20 (Mum) held that eBay International AG (eBay AG) operates India specific websites which provide an online platform to facilitate purchase and sale of goods and services to sellers in India. The server is located outside India. eBay AG enters into a contract with the seller to facilitate sale by providing an online platform for which the seller is liable to pay user fee and registration charge. eBay AG entered into an agreement with eBay India Pvt. Ltd (eBay India) and eBay Motors India Pvt Ltd (eBay Motors) for acquiring support services viz., marketing and promotional support and payment processing and collection. eBay India and eBay Motors play no role in the conclusion of contracts with sellers. However, they collect fees from Indian sellers and remit to eBay AG. The CIT(A) held that the Indian entities were a PE of eBay AG. The Tribunal held that (a) as eBay India and eBay Motors were exclusively assisting eBay AG in carrying on business in India, they would be considered as dependent agents of eBay AG. However, as eBay India and eBay Motors at no stage negotiated or entered into contracts for and on behalf of eBay AG, they cannot be considered as dependent agent PE under Article 5(5)(i) to (iii) of India-Switzerland DTAA; (b) Further, these concerns cannot be treated as the PEs of the taxpayer in terms of article 5(2)(a) of the DTAA because a “Place of Management” ordinarily refers to a place where overall managerial decision of the enterprise are taken. As eBay India and eBay Motors are not taking any managerial decisions and are simply rendering marketing services, it cannot be said that they form a place of management PE under Article 5(2)(a) of the Treaty (Note: This decision goes somewhat contrary to the law laid down in JCIT v. Reuters Ltd. [2011] 7 ITR (Trib) 422 (Mumbai) where the two clauses (5) and (6) are held independent of each other). Where assessee, an American company, had entered into software supply agreement with Indian group company on principal to principal basis and had not deputed any personnel to India, it could not be said to have an agency PE in India as per Indo-US DTAA - DDIT (IT) v. Reliance Infocom Ltd. [2013] 39 taxmann.com 140 (Mumbai - Trib) 40. In ADIT v. Daimler Chrysler AG [2012] 52 SOT 93 (Mumbai), the taxpayer entered into a JV and set up Mercedes-Benz India Pvt Ltd (MBIL) for the manufacture/ assembly and sale of cars in India. At the time of formation of the JV, the taxpayer held 51% of the shareholding in MBIL. The taxpayer made direct sales of completely built up (CBU) cars to the customers in India, for which MBIL rendered certain assistance services. The taxpayer claimed to have no office or place of business in India and hence, in the absence of a PE in India, sale of CBU cars directly to customers in India was not offered to tax in the return. Upon perusal of the general agency agreement between the taxpayer and "M" it was clear that delivery of goods took place outside India and the payment was also being made for purchase of goods outside India and there was no business activity carried out by the taxpayer regarding sale of CBU cars directly to the customers in India. The Tribunal held that income on sale of CBU cars by the taxpayer in India would not give rise to business connection in India. MBIL does not constitute a PE of the taxpayer in India under article 5(2) of the India-Germany DTAA. Merely acting for a non-resident principal would not by itself render an agent to be considered as PE for the purpose of allocating profits taxable in the hands of the principal. There should be some definite activity of the PE to which profits can he attributed. Unless it is so established, merely calling a person as agent acting on behalf of foreign non-resident would not make him an agency PE and protanto part of the profits

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of the non-resident is not liable to be taxed in India. The JV Company merely provided certain assistance services vis-a-vis direct sales of cars from outside India and no more than that. If and when clients approach JV Company (DCIL) or their agents evidencing to buy CBUs from the taxpayer the JV passes on communication both sides. 41. In DCIT v. Perfetti SPA [2008] 113 TTJ 701 (Delhi), the taxpayer supplied machinery and raw materials to its subsidiary company on cost-to-cost basis for which contract was executed in Italy and moreover, it was not having any control over the said company nor was the said company acting as an agent of taxpayer in India in the absence of which the Delhi Tribunal held that it could not be said that subsidiary company was a PE of the taxpayer in India. Article 5(6) of India-Italy Treaty importantly provides "the fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of other Contracting State or which carries on business in that or other State (whether through a PE or otherwise)" shall not of itself constitute either company a PE. Thus it is necessary for the Assessing Officer to establish by evidence that the non-resident taxpayer has complete control over business activities of the Indian subsidiary in order to establish a PE in India of such non-resident. 42. In Nortel Networks India International Inc (2014) TS-355 / TII-71 (Del ITAT), the taxpayer, Nortel Networks India International Inc, a tax resident of the USA, is a group concern of Nortel Group, which is a leading supplier of hardware and software products for GSM cellular radio telephones system. Nortel Networks India Pvt Ltd, a subsidiary of the Nortel Group, entered into a contract with Reliance Infocom for supply of hardware equipment. Immediately after signing this contract, it was assigned by the Indian subsidiary to the taxpayer without any consideration. In terms of the said contract, the taxpayer supplied telecommunication hardware to Reliance Infocom. The equipments supplied by the taxpayer were purchased from Nortel Canada. Nortel Canada was not engaged in providing any services and was only engaged in liaison activities in India. The Assessing Officer (AO) noted that the profit and loss account of the taxpayer were unaudited and reflected huge gross losses. From these facts, the AO concluded that the taxpayer did not have any manufacturing or trading infrastructure. It did not have any financial or technological capability of its own. The taxpayer is only a paper company incorporated for the sole purpose of evading taxes in India. Nortel India was a fixed place of business and dependent agent PE of the taxpayer as well as it was business connection of the taxpayer in India. The AO observed that the taxpayer and Nortel Canada cannot be held as to separate entities. The Tribunal agreed with the authorities below and held that (a) the contract entered between the taxpayer and Reliance Infocom was a turnkey contract; indivisible contract for supply, installation, testing, commissioning, etc., (b) Nortel India had undertaken the responsibility for negotiating and securing the contracts. (c) The contract for installation and commissioning was also undertaken by Nortel India. (d) Thus, the taxpayer was getting its work executed through Nortel India. (e) The taxpayer was merely a shadow company of Nortel Group and for all practical purposes; all the facilities and services available to the Nortel Group of Companies are equally available to the taxpayer. (f) The hardware supplied by the taxpayer was installed by Nortel India and the contracts were pre-negotiated by Nortel India. Thus, Nortel India constituted a fixed place of the business and dependent agent PE of the taxpayer in India. 43. InBooz & Co (Australia) (P.) Ltd., in re (2014) 362 ITR 134 (AAR) following the decision in DIT v. Morgan Stanley & Co (2007) 292 ITR 416 (SC) concluded that in terms of a DTAA, a service PE is triggered, if services are provided in a source state and such services are provided through employees or other personnel. In case of deputation of employees, if the lien over such employees retained by the deputing company and the employees continue to be on the payroll of the deputing company, a service PE emerges. In the case of Golf in Dubai, In re (2008) 306 ITR 374 (AAR), Dubai LLC organized golf tournaments internationally. It conducted 2 golf tournaments in India and hired golf courses. It received sponsorship in India and abroad. The AAR held that “furnishing of services”, a bilateral concept, requires service provider and service recipient. In this case, no service recipient exists and hence there was no service PE. 44. In the case of Morgan Stanley & Co. Inc(2007) 292 ITR 416 (SC)Morgan Stanley India was set up to support the main office functions of the US company in equity and fixed income research, account reconciliation and providing information-technology-enabled services such as back-office operation, data processing and support centre. The Supreme Court observed

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thatMorgan Stanley sent its employees to its AE in India namely, Morgan Stanley Advantages Services Pvt. Ltd for undertaking “stewardship” activities which included activities performed to monitor the quality and confidentiality of the outsourcing work. Further, Morgan Stanley also sent its employees on deputation for different periods, even extending more than one year at the request of Morgan Stanley Advantages Services Pvt. Ltd. The deputed employees had a lien on his employment with Morgan Stanley by virtue of which Morgan Stanley retained control over the employee‟s terms and employment.Activities which will attract Service PE:The Supreme Court ruled that the “stewardship” activities constituted activities to protect the internal interests of Morgan Stanley in relation to the quality and confidentiality of work done and do not include „furnishing of services‟ to the Indian AE. Since no services were rendered through “stewardship” activities, there would be no Service PE for Morgan Stanley in relation to its employees performing “stewardship” activities.The Supreme Court noted that employees deputed by Morgan Stanley for more than the specified period of time as given in the Indo- US DTAA would attract Service PE in India and thus Morgan Stanley Advantages Services Pvt. Ltd. would be the Service PE for Morgan Stanley in India. It is interesting to note that the Indian company is referred as the Service PE by the Supreme Court and not the employees of the foreign enterprise. The reasons stated for the constitution of Service PE in India for Morgan Stanley are:

Morgan Stanley is responsible for the work of the deputed employees;

Morgan Stanley retains the lien over the deputed employees; and

“Stewardship” services are rendered to protect the interest of the customer / principal. Stewards are typically not involved in day-to-day management or in rendering the services undertaken by the service provider. Their function is essentially of quality control and ensuring confidentiality. Usually, the foreign enterprise does not receive fees from the recipient of such services and the costs of personnel performing these services are borne by the foreign enterprise / parent.

InMorgan Stanley & Co (Supra), a service PE was recognised where service was rendered through employees deputed to India. At the same time, it was held that mere “stewardship* activity / shareholders‟ services” will not be a Service PE because mere protection of own interest against competition by ensuring quality and confidentiality will not constitute a Service PE.Similarly, in the case of DIT v. E-Funds I.T. Solutions (2014) 42 taxmann.com 50 (Del), the Court held that in order to constitute a Service PE, services must be performed in respect of the activities in India and mere stewardship services performed by deputed employees to insure quality do not create a Service PE. In this case, -Fund India performed back office operations in respect of the ATM, Management Services, Electronic Payments, Decision Support services, RiskManagement and Professional Services rendered by the foreign company. The issue involved was whether e-Fund India ('Indian Subsidiary') would be deemed as PE of assessee in India and how much income could be attributed and taxed in the hands of the foreign parent in India. The High Court said that in order to constitute a Service PE the employees or other personnel of the foreign parent should have performed services in India for an associated enterprise / related party (i.e.,e-Fund India) and not the services for e-fund India's domestic activities. Thus, there was no Service PE. 45. In Advance Ruling P. No. 28 of 1999 (1999) 105 Taxman 218 (AAR), A (an Indian company) and B (a US company) formed a joint venture AB (JV) in India to manufacture motor cars and automobiles. XYZ, a wholly owned US subsidiary of US Company (B) provided services to B‟s group companies. AB and XYZ executed a management services agreement under which XYZ was to provide executive personnel (finance, service, marketing, etc.). XYZ contended that it worked as an employment agency; however, the AAR noted that the personnel were not employees of AB (Indian JV). AB paid XYZ for the services and not the personnel. XYZ assumed responsibility for suitability and competence of personnel for the tasks assigned to them. XYZ was responsible to replace the personnel if they resigned. XYZ has to provide substitutes, if these personnel were assigned to another project. AB can ask XYZ to provide additional personnel, if required. On these facts, the AAR ruled that service PE exists in India. 46. In the case of DCIT v. Metapath Software International Ltd (2006) 9 SOT 35 (Del), Metapath (UK), a telephone software company formed a JV in India with Bharti Cellular. 2 expatriates were sent to India to assist with the set up and establishment of the Indian JV. They stayed in India for one year. They were employed by both Metapath UK and Metapath India.

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However, their salaries were paid by UK Company and their expenses were paid in India. The CIT(A) held that there was service PE as the expatriates were rendering services in India to the Indian company. 47. In the case of Lucent Technologies International Inc v. DCIT (2009) 120 TTJ 929 / 28 SOT 98 (Del),Lucent USA had supplied telecommunication hardware and software to its Indian customer, Escotel. Lucent USA‟s subsidiary company, Lucent India, undertook work of installing, commissioning, testing and bringing up to operational stage hardware and software supplied by Lucent USA.Lucent USA claimed that it was not liable to pay tax on amount received from Indian customer as it had no PE in India. It was observed that Escotel had entered into contracts with both, Lucent USA and Lucent India and, thus, it had made both of them responsible for turnkey completion of project, individually and severely. It was also noted that employees of the affiliates of Lucent USA had been employed through Lucent India in order to provide services of installation, commissioning, and testing of hardware and software sold by Lucent USA to Escotel. The said employees stayed in India for more than 90 days within 12 month period from April, 1996 to March, 1997. The Delhi Tribunal observed that Service PE as per article 5(2)(l) of India-US DTAA also covers“other employees / personnel” over whom the foreign enterprise exercised control. The affiliate‟s personnel were controlled by Lucent USA and, therefore, it could be said that Service PE of Lucent USA in the form of Lucent India did exist in terms of Article 5(2)(l) of India-USA Tax Treaty. 48. In the case of Worley Parsons Services Pvt Ltd v. DIT (2009) 313 ITR 74 (AAR), Worley Parsons, an Australian company, was engaged by ONGC India. Worley‟s employees visited India to review documentation. There were six projects in total. The key issue before the AAR was whether a single contract can be called “services” - as same counterparty as same purpose – all contracts together amount to services. Since contracts 2, 3 & 4 fell within the same financial year, they are to be reckoned together to determine number of days. With respect to contracts 2, 3 & 4 service PE was constituted in India. 49. In the case of Linklaters & Paines v. DCIT (2014) TII-72 / TS-329 (Mum), the UK based partnership firm engaged in practice of law rendered services to its clients for their projects in India. The services were rendered from outside India as well as in India. The partners and the staff members of the foreign firm visited India to render professional services. The taxpayer‟s work included structuring of various projects, attending meetings with various project sponsors, negotiating the floating rate issues and advising on any information required on projects in India. The foreign partnership firm did not have any branch office or any other similar form of presence in India. The taxpayer contended that it did not have any PE in India under Article 5(2)(k) of India-UK tax treaty because it was rendering services in India, whereas for the said Article it was necessary to furnish services in India. The tribunal held that the expression „rendering‟ also extends to „to give or make available; provide‟ and „to furnish‟. The expression „rendering‟ and „furnishing‟ are somewhat interchangeable in normal course of business and it will be too hyper technical approach to narrow down the meaning of the expression „furnishing‟ to exclude rendering of professional services. The ITAT also relied on Article 5(3)(b) of the UN Model Convention Commentary which is materially similar to Article 5(2)(k) of India-UK Treaty which extends beyond the scope of PE under the basic rule. Thus, it held that the services rendered by the taxpayer constituted Service PE and were within the ambit of Article 5. Accordingly, profits from services rendered by the taxpayer were taxable under Article 7 of the treaty. 50. In the case of JC Bamford Investments Rocester v. DDIT (2014) TII-94 (Del) JCBE (UK) entered into Technology Transfer Agreement (TTA) with JCBI to license the know-how and related technical documents consisting of all drawings and designs with an exclusive right to manufacture and market Excavator Loader in the territory of India. The AO held thatJCBE‟s employees seconded to JCBI on assignment basis in India resulted into service P.E of JCBE in India in terms of Article 5(2)(k)(i) of the India-UK DTAA. Thus, royalty paid by JCBI to JCBE in respect of rights under the TTA and International Personnel Assign Agreement (IPAA) was effectively connected with the said service PE of JCBE in India and, therefore, taxable as business profits under Article 7 in terms of Article 13(6) of India-UK treaty. The Tribunal categorized employees of JCBE on deputation to India on assignment basis in the first category (i.e., in relation to TTA and IPAA activities) and those doing stewardship activities and inspection

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and testing in the second category. JCBI thus constituted a service PE of JCBE in India because of the employees of the first category; 51.Under what circumstances deputation and secondment create PE

Service PE arises when an employee of a multinational enterprise renders services in the host country beyond a specified period of time and where such employee deputed continues to be on the payroll of the home country or continues to have the lien on its employment with the multinational enterprise only. In order to mitigate the risk of PE, one needs to carefully examine the difference between legal and economic employer. A legal employer (1) has right to appoint and terminate, (2) is not responsible for errors / omission or for the work performed by the secondees, and (3) does not supervise, control, issue instructions or directions to the secondees. Whereas the economic employer (I) enjoys the fruits of labour, (2) has the authority to inspect and control the seconded employees, (3) bears the responsibility or risk for the results, (4) pays remuneration calculated on the time spent by the seconded employees, (5) can impose disciplinary sanctions and (6) has the right to terminate the secondment. In the case of economic employer, the work is performed at a place which is under the control of the user (economic employer).Thus, in order to avoid service PE, it is better to terminate the employment of the seconded / deputed employees.

India's observations on OECD Model Commentary

• Does not agree that a. service PE will be created only if services are performed in the source State - furnishing, of services is sufficient for creation of a service PE

• Taxation rights may exist in a state even when services are furnished by the non-residents from outside that State

• Performance of services through physical presence of individuals in the other contracting state should not be a requirement

• Tax should be levied on the gross fee payable for the services rendered and not on the profit element

• Does not agree that there should be a minimum level of presence in a State before taxation of services is allowed

• Taxation principle applicable to the profits from sale of goods may not apply to the income from furnishing of services

• The AAR in Booz & Co. Group, In re (2014) 362 ITR 134 concluded that provision of technical and

professional employees to the Indian affiliate company results in a PE of the relevant Group entities in India. The

AAR, having regard to the interdependency amongst the Group entities and the nature of services rendered, held that

a PE exists for the Group entities in India.

52. Auxiliary services cannot be PE

Refer Annexure [Reference No.53]

53. Whether search engines and websites create a PE

The concept of a PE evolved because of traditional commerce, in which a physical presence was required in the source country, if any significant level of business was to be carried on. However, with the development of internet and e-commerce, the correlation between the size of a business

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and its physical presence has virtually vanished. Para 42.2 of the OECD Commentary on Article 5 states that “the server on which the website is stood and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a “Fixed Place of business” of the enterprise that operates that server. However, it is equally necessary that the said server at the disposal of the enterprise so as to constitute a fixed place of business. For example, if the website is hosted on the server on an Internet Service Provider (ISP) and the enterprise carrying the portal business has no access to such server, then the location of server should not create any fixed place of business for such enterprise.

Refer Annexure [Reference No.54 to 56]

54. Whether liaison office (LO)/ Rep office can be treated as PE

A non-resident can open a liaison office in India with the permission of the Reserve Bank of India. Liaison offices are not PEs inasmuch as they are not permitted to conduct business activities. If a liaison office is engaged in the activities which creates a “business connection” in India and is not confined to mere purchases of goods for exports out of India, it may create a PE.

Whether a liaison office would create a “business connection” in India or would constitute a PE in India will depend upon the facts of the case. There cannot be a compartmentalised definition to hold that a liaison office creates a business connection or constitutes a PE. Liaison office will not constitute Permanent Establishment if it confines its activity solely to liaison work [pls seeWestern Union Financial Services Inc v. ADIT (2007) 291 ITR (AT) 176 (Del)]. In this case, the US Company engaged in business of money transfer service, collecting monies in its offices abroad, made arrangements for disbursement through its representatives / agents in India. This was done on instructions through a main-frame computer accessed by the agents. The agents were paid commission at an agreed percentage for their services. There were four agents namely, Postal Department, Commercial Banks, Non-banking Financial Institutions and Tour Operators. The Tribunal found that the non-resident‟s liaison office was not undertaking any activity. None of the four agents were dependent agents. The software “voyager”used in the main-frame computers for identification of numbers allotted for each transfer could not be treated as PE unless it falls under Article 5(2)(j) of India-US treaty covering an installation only for exploration of natural resources.

The expression “business connection” in India as per sec 9(1)(i) of the Income tax Act means (i) existence of a close, real, intimate relationship and commonness of interest between the non-resident and the Indian Establishment (i.e., LO); (ii) control of management of finances or substantial holding of equity shares or of sharing of profits by the non-residents from the Indian establishment; (iii) a continuity of activity or operation of the non-resident with the Indian establishment (LO). But where activities of LO are confined or related to the purchase of goods in India for the purpose of export out of India, even if it constitutes a business connection, no income shall be deemed to accrue or arise in India as per the Explanation 1(b) to section 9(1)(i). But the real test is whether the activities carried out from any office are such that those do not cross the bar/threshold placed by Article 5(3) of the DTAA. The approval from the RBI does not give immunity to a taxpayer that its office cannot be treated as a PE as RBI has not found that its activities have exceeded in relation to what it was permitted. The test is not the approval or detection of default by the RBI or any other authority but whether such activities crossed the threshold of Article 5(3).

Where LO is engaged in collection of specifications and requirements of the customers, supplies them to the head office and on the instructions of the head office, provides details of purchase price, further technical details, availability of product and lead time to the prospective buyers, and thereafter the sales are clinched, purchase orders are obtained, sent to the head office out of India on the basis of which the head office would place the orders to the suppliers, and LO would also follow up the payments and offer after sale services to the customers, it would create a business connection in India. Likewise, where LO assists the taxpayer not only in purchase of goods from the manufactures in India, but also carries out activities relating to ensuring selection of quality material,

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quality testing, conveying requisite designs, picking out competitive sellers, ensuring quality, ensuring policy of the assessee and complying on behalf of the taxpayer with the local regulations, such a LO would constitute a business a connection in India.

Refer Annexure [Reference No 57 to 66]

55. In DDIT (International Taxation) v. Tekmark Global Solutions LLC [2010] 4 ITR (Trib) 1 (Mumbai) the agreement between the taxpayer and Indian party revealed that the taxpayer had agreed to provide personnel to Indian company as and when required. Agreement also provided that the deputed personnel will work under the supervision of Indian company. The non-resident taxpayer will not be held responsible for the work done or action taken by such deputed personnel. The Indian entity to arrange for the lodging, boarding and other related expenses of such deputed personnel and further the deputed personnel were to remain on the payroll of foreign company. Also the agreement provided that if the deputed personnel is found not suitable/efficient or is not of sound moral character then the Indian company will have right to send the personnel back to the non-resident company. Also there was no mention of any services being provided by the non-resident either in the agreement other than for providing personnel and not even any reference to furnishing of any services through the deputed personnel. The Mumbai Tribunal held that what the American company was selecting and offering personnel to work under the control and supervision of the taxpayer in India. It is not a part of any technical services to be rendered by the taxpayer to the Indian company. The deputed persons are, for all practical purposes, employees of the Indian company. They carry out work allotted to them by the Indian company. The taxpayer has no control over the activities or the work to be performed by the deputed persons. The Indian company has a right to remove the deputed persons from the services. What the taxpayer recovered was the actual salary payable to the deputed persons. On the basis of these facts the Bench held that when the services rendered are independent of and not under the control of the taxpayer, the deputed persons cannot be considered as constituting a PE of the taxpayer in India. Hence there is no PE of the taxpayer in India. The actual salary of the deputed personnel reimbursed by the Indian company is only reimbursement of salary payable by the Indian company advanced by the taxpayer to the employees. 56. In Centrica India Offshore Private Ltd., In re[2012] 348 ITR 45 (AAR) employees were seconded to India under secondment but the employment of the personnel remained under with the overseas entity. Under the Service Agreement, the Indian company was to act as an interface between the foreign company and the vendors in India. Compensation / service charge was paid on cost plus 15% thereof. On the same day, a separate secondment agreement was entered into through which employees of the foreign company were deputed in India. The reporting designation, supervision and control, accountability, right to terminate secondment remained with the foreign company. Salaries of the employees were paid by foreign company and the Indian subsidiary reimbursed the salaries. The foreign company paid employment cost and were reimbursed by the Indian company on actual basis. Secondment was treated as “economic employment” (employer and employee relationship) and, therefore, was made taxable as salaries in India by the Indian tax authorities. The foreign company was also taxed reimbursement as FTS. Thus, the transaction was taxed twice – once as salaries and secondly as FTS. On double jeopardy theory, the AAR held reimbursement as FTS. With regard to secondment arrangement, the AAR held that it gave rise to a service PE within the meaning of article 5(2)(k) of India-UK Tax Treaty or Article 5(2)(I) of India-Canada Treaty. The AAR ruled that (a) only employees knowing the process or policies were seconded; (b) employment cost was paid by the foreign company and the secondment agreement only provided for recovery. Therefore, there was no economic control of the foreign company on such employees; (c) the right to terminate was only with the foreign company; (d)the work performed was part of the foreign company‟s activities; (e) obligation to pay salary is different from obligation to compensate by the employer with an equal amount; (f) amounts recorded as reimbursement is not decisive but is a service fee and, therefore, taxable as service fee [Note: The Delhi High Court took a view and held that secondment of employees to an Indian company from its group companies in Canada and UK created a PE in India since the foreign company continued to be the real employers of the seconded employees. However, in the case of Temasek Holdings Advisors India (P) Ltd v. DCIT(2013) 60 SOT134 (Mum) the Mumbai Tribunal ruled that where the taxpayer rendered

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investment advisory services to its foreign AE, reimbursement of salary that was paid by the foreign AE to seconded employees would not be FTS.]; (g) when the employees continued to be on the payroll of the non-resident and the non-resident company has a lien over their employment, it constitutes a service PE. The AAR held that where seconded employees continued to be employees of overseas entities and they rendered services for their employer in India by working for a specified periodfor a subsidiary or associate enterprise of their employer, this will give rise to a service PE. 57. In the case of DDIT v. JC Bamford Excavators Ltd (2014) 43 taxmann.com 343 (Del ITAT), the taxpayer (JC Bamford) had granted rights to use IP (along with technical documents containing IPRs) to its wholly owned subsidiary in India and also sent 8 of its employees (assignees) on deputation to such subsidiary for purpose of providing technical assistance for effective utilization of IP. The assignees were also engaged in managing overall operations of Indian subsidiary. Apart from the assignees, certain other employees occasionally visited the premises of Indian subsidiary (occasional visitors) for testing and inspection of licensed products manufactured by Indian subsidiary company. The revenue authorities contended that assignees constituted service permanent establishment (Service PE) of the taxpayer. The other transactions in relation to royalty receipt (which included payment for testing and inspection) were effectively connected to service PE and thus taxable as business income under Article 7 of India-UK DTAA. On question of service PE, the Tribunal held that the assignees even after secondment remained employees of taxpayer and not of Indian company. Though Indian company had control over these assignees and could give directions to the assignees, the assignees did not enter into any employment agreement with Indian company. The assignees retained lien on their employment with taxpayer, such that after completion of 3 years of secondment, the employees would resume employment with taxpayer at level no less favourable than that they left prior to deputation. Hence, the Tribunal held that, the assignees-constituted Service PE of the taxpayer. 58. In JCIT v. Reuters Ltd.[2011] 7 ITR (Trib) 422 (Mumbai), the taxpayer provided Reuters products to its Indian subsidiary, Reuters India Ltd. (RIL) under certain specified agreements, i.e., Distributor Agreements (DA), Production Distribution Agreement (PDA) and License Agreement (LA). RIL then distributed the Reuters products to Indian subscribers independently in its own name. And before the Tribunal the only dispute was whether the taxpayer held a PE in India. The Mumbai Tribunal held that the fact that the Assessing Officer had considered the PE as an agency PE would not be a bar to consider the existence of a service PE of the taxpayer in India. As per the Bench the deputation of an employee of the taxpayer to the Indian company for rendering services was a prima facie material on record indicating existence of service PE of the taxpayer in India. As a matter of fact the Tribunal, on remand, called for a fresh consideration of the existence of a PE of the taxpayer in India within the meaning of article 5(2)(k) and 5(5) of the DTAA between India and the U.K. Thereafter the taxpayer filed a miscellaneous application in Reuters Ltd. v. JCIT [2012] 14 ITR (Trib) 48(Mum) wherein it was claimed that the conditions mentioned in article 5(4) of the DTAA should also be satisfied to constitute an agency PE. The Tribunal stressed that if the conditions mentioned in article 5(5) of the DTAA are satisfied than that would be sufficient to constitute RIPL as an independent agent of the taxpayer in India and conditions mentioned in article 5(4) of the DTAA need not be satisfied. In other words, article 5(4) does not govern article 5(5) and that they are both separate clauses. Even though the agent acts independently in the ordinary course of his business, if they devote their activities wholly or mostly wholly on behalf of the foreign enterprise, they would be considered as PE of the foreign enterprise irrespective of whether they conclude contracts binding on their principle or not. 59. Recently, in an interesting case in the case of GE Energy Parts Inc v. ADIT (2014) TS-400-ITAT (Del), the Delhi ITAT admitted employees‟ LinkedIn profiles as additional evidence for PE determination for deputed employees for the reason that the information regarding deputed employees of the foreign enterprise working for an Indian Company was not provided by the taxpayer. The Tribunal held that LinkedIn profiles akin to admission made by a person, since employees themselves give personal details, no third party is involved in creating LinkedIn profiles and such material has a direct nexus and bearing on determination of PE. This case has been stayed by the Delhi High Court.

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60. In U. A. E. Exchange Centre Ltd. v. Union of India[2009] 313 ITR 94 (Delhi), the only activity of the liaison offices in India was to download information which was contained in the main servers located in the UAE based on which cheques were drawn on banks in India whereupon the cheques were couriered or dispatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. It thus maintained a PE in India under the definition of "PE" in article 5(2)(c). However it sought exclusion under article 5(3)(e) inasmuch as the activity carried on by the liaison offices in India, has an "auxiliary" character. The Delhi High Court held that such activity is not anything but auxiliary in character. The court called it as an activity "aid" or "support" of the main activity. Hence, it was held to fall within the exclusionary clause in article 5(3)(e). InDIT v. Morgan Stanley & Co. [2007] 292 ITR 416 (SC), Morgan Stanley Advantages Services P. Ltd., (MSAS) an Indian company, was set up to support the main office functions of the USA company in equity and fixed income research, account reconciliation and providing information-technology-enabled services such as back-office operation, data processing and support centre. The Supreme Court also held that MSCo was not carrying any business activity in India. MSAS was rendering back-office operations in India, such functions were considered as "preparatory and auxiliary" in nature within the meaning of article 5(3)(e) of the Indo-US DTAA and would not, therefore, constitute a fixed place PE under article 5(1) as the second requirement of article 5(1) was not satisfied. However, deputationist services were held to be PE. 61. InITO v. Right Florists Pvt Ltd (2013) 143 ITD 445 (Kol ITAT), RFPL, a florists having franchises across India, advertised on search engines such as Google and Yahoo to generate income. RFPL made payments to Yahoo and Google for online advertisement without withholding tax at source. Advertising was done in the results generated by the search engines against agreed key words or by placing the advertising banners on websites. The Assessing Officer treated the search engines as PE in India and hence, payments made were taxable in India. Making reference to the report of a High Powered Committee on e-commerce transactions, the Tribunal observed that (a) in this virtual world, conventional PE tests fail as the search engines only has presence on the internet or by way of a website, which are not forms of physical presence. The Tribunal, relying on commentary on the Organization for Economic Co-operation and Development‟s (OECD) Model Convention held that a search engines presence only through its website would not in itself create a PE in India, since the website is not tangible. The Tribunal observed that a PE would not be created unless the servers on which websites are hosted were also located in the same jurisdiction (in India). Accordingly, Google‟s and Yahoo‟s presence in India through websites could not be said to have constituted a PE in India. The Kolkata ITAT held that a search engine having its presence only in the form of website cannot create a fixed place PE unless web servers are located in India. India‟s reservation on “Website PE” was not considered as relevant by the tribunal. 62. Similar view has also been taken under the OECD Commentary under which (i) website per se does not constitute tangible property and it does not have a location that can constitute a “fixed place of business”; and (ii) a server on which website is stored and through which it is accessible may constitute a “Fixed Place PE”. Government of India has expressed its reservation on this OECD view and stated that a website might constitute a PE in India in certain circumstances, though the same have not been stated. Since no circumstances have been stated, these reservations cannot be treated as actionable statements in treating the website as PE. 63. The Tribunal in the case of Yahoo India (P) Ltd. v. DCIT[2011] 46 SOT 105 (URO)/11 taxmann.com 431 (Mum.), decided the same in favour of the taxpayer as uploading and display of the banner advertisement on its portal was entirely the responsibility of Yahoo Holdings (Hong Kong) Ltd. and the taxpayer was only required to provide the banner advertisement to Yahoo Holdings (Hong Kong) Ltd. for uploading the same on its portal. The taxpayer, thus, had no right to access the portal of Yahoo Holdings (Hong Kong) Ltd. and there was nothing to show any positive act of utilization or employment of the portal of Yahoo Holdings (Hong Kong) Ltd. by the taxpayer. Therefore, the payment made by the taxpayer to Yahoo Holdings (Hong Kong) Ltd. was not in the nature of royalty but the same was in the nature of business profit, and in the absence of any PE of Yahoo Holdings (Hong Kong) Ltd. in India, it was not chargeable to tax in India. The taxpayer, thus, was not liable to deduct tax at source from the payment made to Yahoo Holdings

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(Hong Kong) Ltd. for such services and the payment so made could not be disallowed by invoking the provisions of section 40(a) for non-deduction of tax. 64. However, in the case of Verizon Communications Singapore (P) Ltd v. ITO (2013) 39 taxmann.com 70 (Mad),though no arguments found existence of PE were advanced, the Madras High Court observed that “when it comes to the question of dealing with issues arising on account of more complex situation brought in by technological development by the use of and role of digital information, goods, etc., the foreign enterprise does not need physical presence at all in a country for carrying on a business.” Thus, the dispute with respect to website PE will continue to be litigated till the matter reaches the higher judicial fora. 65. In the case of DDIT v. Jebon Corporation India[2010] 125 ITD 340 / 1 ITR (Trib) 655 (Bang Trib.), the non-resident had a liaison office in India primarily for the purpose of identifying customers in India for its products. In this case, since the liaison office undertook price negotiations, obtained purchase orders from the customers and sent it to the Head Office, it was, on these facts, found to be a Permanent Establishment because the conclusion of contracts were inferred by the liaison office. However, where LO is maintained for the sole purpose of advertising, supply of information, scientific research or activities which are preparatory or auxiliary in character, such as downloading information on the basis of which cheques are drawn in bank in India and dispatched to the beneficiaries, it would not create a business connection in India. It would also not be a business connection under the DTAA. [DDIT v. Jebon Corporation India[2010] 125 ITD 340 / 1 ITR (Trib) 655 (Bang Trib.) andU.A.E. Exchange Centre Ltd. v. Union of India [2009] 183 Taxman 495 (Delhi)]. 66. In P. No. 28 of 1999, In re., (2000) 242 ITR 208 (AAR), a US company deputed personnel for development, management, financing and marketing of Indian company and these personnel were remunerated by the US company. The US Company had a liaison office in India. The AAR noticed that the personnel deputed were competent by themselves to perform the functions for which they were deputed under the service agreement. Their services were in the nature of technical and consultancy services. The non-resident in this case was not merely undertaking supply of services of nominated persons as liaison office, but had also given assurances of supply of all “inventions, ideas and improvements” apart from “proprietory documents involving confidentiality”. The AAR held that under Article 5 "permanentestablishment" includes the furnishing of services, other than included services as defined in Article 12 (royalties and fees for included services) within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any 12 month period; or (ii) the services are performed within that State for related enterprise within the meaning of Article 9(1) (associated enterprises). But sporadic or isolated activities of the kind referred to in Article 5(1) would not be sufficient to constitute a permanentestablishment and that there should be some degree of "continuity" or "durability" and a framework against which the services were rendered. Though the liaison office was claimed to be unconnected with the services, but since the provision of services were on continuous basis, the US Company had a PE in India within the meaning of Article 5(2)(1). The consideration received by the US Company for these services was, therefore, assessable not under Article 12 but as business profits under Article 7 read with Article 5(2)(1). 67. InUAE Exchange Centre LLC, In re (2004) 268 ITR 9 (AAR), the liaison office was engaged in downloading information regarding remittances through electronic media and transfer of amount from UAE to various places in India for a commission, by getting cheques printed by it in India and sending them to the address of the beneficiaries in India according to the instructions received. The services were treated as business income and in view of the continuity of such services; the liaison office was treated as PE of the non-resident. Thus, the income attributable to operations in India through such liaison office was taxable in India. The argument that the services were only auxiliary in nature and the liaison office did not play any role in the core activity in India except downloading data, preparing cheques and dispatch of the same was not accepted because these services were part performance of the contract and, therefore, were not mere auxiliary services. However, in Gutal Trading Est., In re (2005) 278 ITR 643 (AAR), where a Dubai non-resident company had no activity in India except a liaison office, which was not empowered to conclude contracts, but only received trade enquiries and negotiated for supply of

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imported goods, the liaison office was not held as a PE of the Dubai non-resident company. Similarly, in the case of Angel Garment Ltd., In re (2006) 287 ITR 341 (AAR), a liaison office was engaged solely for collecting information and samples for export of textiles from India. It also acted as a coordinating channel between the non-resident and the Indian exporters. Since,such activities being limited to purchase of goods in India for the purpose of export were exempted under Explanation 1(b) to sec 9(1)(i) of the Income tax Act, there was no business connection and / or permanent establishment in India. 68. In CIT v. Nike Inc.[2013] 217 Taxman 1 (Karn),the non-resident company dealing in sports apparels, opened a liaison office in India with object to identify manufacturers in India and orders were placed by taxpayer with manufacturers and goods were manufactured according to its specification which was requirement of buyers, whole object of this transaction was to purchase goods in India for purpose of export. The Karnataka High Courtheld that a non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or agency in India for the purpose, or the goods are subjected by him to any manufacturing process before being exported from India (Note: Procurement activity of apparels undertaken by Nike‟s Indian liaison office for export did not amount to carrying on of business).The Supreme Court has dismissed the Revenue‟s appeal against this decision. 69. In DDIT v. M. Fabricant and Sons Inc.[2012] 20 ITR (Trib) 118 (Mumbai) the non-resident company which dealt business in cut and polished diamonds and diamond studded Jewellery had set up a liaison office in India for sourcing purchases. The liaison office of thetaxpayer was performing the activities of sorting of diamonds, checking of the right quality of diamonds and carrying out price negotiation as per the instructions and specification of the taxpayer. The Mumbai Tribunal held that these activities of the liaison office are only part of the purchasing process of the diamonds and did not bring any physical or qualitative change in the goods purchased. Even otherwise, the function of the liaison office as mentioned above is prior to purchase of the diamonds and not subsequent to the purchases. Therefore, no quality change is brought by the liaison office while doing the operation of purchasing in India for export purposes. It is a case of purchase of goods through liaison office and all the activities carried out by the liaison office are basic and preliminary requirement of the purchasing process/operation. Selection of right goods and negotiation of price as per the instructions of the taxpayer are essential part of the purchasing activity. 70. The Delhi Tribunal in Metal One Corpn v. DDIT [2012] 52 SOT 304 (Del) held that although the taxpayer with a Liaison Office in India has a fixed place of business in India, there is no evidence on record that any substantive business activity has been carried on from this place. It is held to be carrying on preparatory or auxiliary work and no core activity and, therefore, there was no PE in India. 71. In Columbia Sportswear Co., In re (2011) 337 ITR 407 (AAR), a multinational wholesaler and retailer of outdoor apparel with operations in North America, Europe and Asia established a liaison office in Chennai again for undertaking liaison activities in connection with purchase of goods in India. Besides coordinating purchase of goods from India, the Indian liaison office also assisted the US counterpart in purchase of goods from Egypt and Bangladesh and engaged in quality monitoring and production monitoring of goods purchased from these countries. It is also engaged in vendor identification, review of costing data, vendor recommendation, quality control and uploading of material prices into the internal product data management system of the parent. It also monitored vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices.The AAR held that other than the actual business of selling, the rest of the activities of the applicant were conducted by the liaison office in India at best in part. In other words, a part of the business of the applicant was carried on in India by the liaison office. The liaison office would be a PE of the applicant within the meaning of article 5(1) of the DTAA with USA. The activities carried on by the liaison office could not said to be solely for the purpose of purchasing the goods or for collecting information for the enterprise. It was practically an involvement in all the activities connected with the business of the applicant except the actual sale of the products outside the country. Such an establishment would not be excluded by article 5(3)(d). Clauses (d) and (e) of article 5(3) read separately or together, would not take the liaison office out of the definition of "PE" contained in article 5(1) of the DTAA.

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72. Further, in Jebon Corporation India v. CIT[2013] 1 ITR-OL 151 (Karn), it was found that activities carried on by liaison office were not confined only to liaison work (communication channel) but liaison office performed functions such as identifying new customers, pursuit and follow-up of customer, price negotiation and finalization, securing orders, processing of orders, payment for material and post-sale support for which reason it was held by the Court that the liaison office had been carrying on commercial activities and constitute PE as defined under Article 5 of the India-South Korea tax treaty. The court further explained that Article 5(4) sets out what shall not be deemed to be a PE. Once the material on record clearly establishes that the liaison office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods and not being involved in signing any written contract would not absolve the liaison office from their liability to tax. The court held that merely because the buyers place orders directly with the head office and make payment directly to the head office and it is the head office which directly sends goods to the buyers, that would not be sufficient to hold that the work done by the liaison office is only liaisoning and it does not constitute a PE as defined in Article 5 of the DTAA. If the liaison office was merely engaged in purchase of manufactured semi-conductors in India, it should have been exempt under Explanation 1(b) of sec 9(1) of the I.T. Act and Article 7(4) of India-South Korea tax treaty. InNortel Networks India International Inc (supra) the Delhi Tribunal held the Indian liaison office (LO) pertaining to Nortel Canada constituted a fixed place PEof Nortel USA (the taxpayer) because (i) the liaison office of Nortel Canada was rendering all kinds of services to all the group companies including the taxpayer. (ii) The taxpayer through Nortel India and LO approach the customer, negotiated the contract, bagged the contract, supplied equipment, installed the same, undertook acceptance test after which the system was accepted. The equipment remained in the virtual possession of Nortel Group till the equipment was set up and acceptance test was done. (iii) Employees of Nortel Group visited India in connection with project in India. This indicates that the employees of Nortel Group companies carried out business of the taxpayer through the premises of LO or the premises of the subsidiary. Thus, the entire business activities of the taxpayer were managed by the subsidiary in India and the requisite supply made from abroad. (iv)The subsidiary not only acted as a service provider for the taxpayer, but at the same time acted as a sales outlet co-operating with after sales services and also provided assistance or services requested by the taxpayer. (v) The assignment agreement signed between Indian subsidiary, the taxpayer (US Company), the parent company (Nortel Canada) and Reliance Infocom indicates that the contract initially signed by the Indian subsidiary was assigned to the taxpayer and all the risks and responsibilities in this regard were assumed by the parent company. Accordingly, the activities of the taxpayer in India constituted PE under Article 5 of the India-US Tax Treaty. 73. In the case of Samsung Heavy Industries Co. Ltd. v, Addl. DIT (2013) 40taxmann.com165

(Del Trib), the taxpayer (Samsung),along with 'L&T' had entered into an agreement with ONGC

to carry on work for a project. Contract was a composite starting right from surveys of pre-

engineering, pre-construction/pre-installation, design, engineering, procurement, etc., till start-up

and commissioning of entire facilities. As a condition precedent, Samsung was required to open a

project office in India before commencement of activity of contractor. In return of income,

Samsung did not declare income out of revenue earned by it on activities allegedly carried

outside India on grounds that it did not have a PE in India for year under consideration as no core

business activity had been carried out through fixed place (Mumbai project office). The Tribunal

held that when scope of Mumbai project office had neither been restricted by Samsung itself nor

had it been restricted by RBI in any terms, Mumbai project office was to be treated as Samsung's

fixed place of business in India within meaning of article 5(1) of India-South Korea Tax Treaty.

The Tribunal further observed that when in terms of contract, all activities to be carried out in

respect of contract would be routed through - project office only, it could not be said that project

office had carried out only preparatory or auxiliary activities so as to bring PE of Samsung under

exclusionary article 5(4) of the tax treaty. The Tribunal, thus, concluded that PE of Samsung

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came into existence on opening of project office in Mumbai and therefore, revenue earned by

Samsung from outside India activities, to extent it was attributable to PE in India, would be

taxable in India.