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2009 (9) TMI 26 - AAR - Income TaxPE / Business Profit DTAA Held that - The more crucial question that needs to be considered now is whether the work place set up by the sub contractor to carry out the works entrusted to him by the applicant can be treated as the work place and the permanent establishment of the applicant. - it cannot be concluded that the business of the applicant is being carried on through the sub contractor s workshop - the concept of PE conveys the idea that the enterprise s presence has to be visible through an establishment in the other country - at the present juncture it is not possible to hold that the applicant has or will have a PE in India. Hence, its business profits arising from the periodical payments made by TPT as a consideration for the contract cannot be subjected to tax under the Income-tax Act, 1961 in view of Article 7.1 of DTAA between India and Germany.
Issues Involved:
1. Taxability of income earned by a non-resident company in India. 2. Computation of total income of the non-resident company. 3. Existence of a Permanent Establishment (PE) in India. 4. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Germany. 5. Classification of designing services as Fees for Technical Services (FTS). Detailed Analysis: 1. Taxability of Income Earned by a Non-Resident Company in India: The applicant, a German-based company, sought a ruling on whether its income from activities in India would be taxable under the Income-tax Act, 1961. The contract awarded to the applicant involved various activities, including the design, supply, and supervision of installation of navigational equipment. The applicant subcontracted most of the work to an Indian company, Asia Navigation Aids (ANA). The applicant contended that it had no Permanent Establishment (PE) in India, as its supervisory activities would last less than 60 days. Consequently, under the DTAA between India and Germany, the applicant argued that its business profits should not be taxed in India. 2. Computation of Total Income of the Non-Resident Company: Given the ruling on the first issue, the question of computing the applicant's total income under the Income-tax Act, 1961, became moot. The ruling did not require addressing this issue as the applicant was not liable to be taxed in India. 3. Existence of a Permanent Establishment (PE) in India: The Revenue argued that the subcontractor's activities should be considered part of the applicant's PE in India. However, the ruling clarified that the sub-contractor's workshop could not be treated as the applicant's PE. The decision referenced the OECD Commentary on Article 5 and the case of CIT vs. Vishakhapatnam Port Trust, emphasizing that the sub-contractor's independent activities did not constitute a PE for the applicant. The ruling concluded that the applicant did not have a PE in India, as its activities did not meet the six-month duration test specified in Article 5 of the DTAA. 4. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Germany: The ruling highlighted that under Article 7 of the DTAA, business profits of an enterprise from one contracting state are taxable in the other state only if the enterprise has a PE in that state. Since the applicant did not have a PE in India, its business profits could not be taxed in India. The ruling also noted that the applicant could benefit from the DTAA provisions, which take precedence over domestic tax laws. 5. Classification of Designing Services as Fees for Technical Services (FTS): The Revenue contended that the designing services provided by the applicant should be classified as FTS under the Indo-German DTAA. However, the ruling rejected this contention, stating that designing as a prelude to fabrication and installation does not constitute technical services under Article 12.4 of the DTAA. Furthermore, the ruling referenced Explanation (2) to clause (vii) of Section 9(1) of the Income-tax Act, 1961, which excludes consideration for construction, assembling, or similar projects from being classified as FTS. The ruling also mentioned the Supreme Court decision in Ishikawajima [288 ITR 408], which supported the applicant's position. Ruling: The ruling concluded that the applicant was not liable to be taxed under the Income-tax Act, 1961, based on the current factual situation. Consequently, the second question regarding the computation of total income was not addressed. The ruling was pronounced on September 11, 2009.
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